If you are in any doubt about this prospectus, you should consult your stockbroker, bank manager, solicitor, professional accountant or other professional adviser. Shanghai Fudan-Zhangjiang Bio-Pharmaceutical Co., Ltd. * (a joint stock limited company incorporated in the People’s Republic of China) LISTING ON THE GROWTH ENTERPRISE MARKET OF THE STOCK EXCHANGE OF HONG KONG LIMITED BY WAY OF PLACING OF H SHARES Number of Placing Shares : 198,000,000 H Shares, including 18,000,000 H Shares to be converted from Domestic Shares Offer Price : not more than HK$1.40 per H Share and expected to be not less than HK$1.13 per H Share Nominal Value : RMB0.10 per H Share Stock Code : 8231 Sponsor Guotai Junan Capital Limited Financial Adviser Barits Securities (Hong Kong) Limited Joint Lead Managers Barits Securities (Hong Kong) Limited Guotai Junan Securities (Hong Kong) Limited Co-Lead Manager Nomura International (Hong Kong) Limited Co-Managers CAF Securities Company Limited Core Pacific-Yamaichi International (H.K.) Limited First Shanghai Securities Limited Grand Cathay Securities (Hong Kong) Limited Hantec Capital Limited Kingsway SW Securities Limited Phoenix Capital Securities Limited Shenyin Wanguo Capital (H.K.) Limited Shun Loong Securities Company Limited Tai Fook Securities Company Limited Toyo Securities Asia Limited Wintech Securities Ltd The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this prospectus, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this prospectus. A copy of this prospectus, having attached thereto the documents specified in the paragraph headed “Documents delivered to the Registrar of Companies and available for inspection” in Appendix VI to this prospectus, has been registered by the Registrar of Companies in Hong Kong as required by section 342C of the Companies Ordinance of Hong Kong. The Securities and Futures Commission and the Registrar of Companies in Hong Kong take no responsibility as to the contents of this prospectus or any of the other documents referred to above. The Offer Price (as defined in this prospectus) is expected to be fixed by agreement between Shanghai Fudan-Zhangjiang Bio-Pharmaceutical Co., Ltd. (the “Company”), the Selling Shareholders (as defined in this prospectus) and the Joint Lead Managers (on behalf of the Underwriters (as defined in this prospectus)) at or before the Price Determination Time (as defined in this prospectus), which is currently scheduled at or before 6:00 p.m. on Monday, 5th August, 2002. If the Company, the Selling Shareholders and the Joint Lead Managers (on behalf of the Underwriters) are unable to reach an agreement on the Offer Price by that time, or such later time and/or date as agreed by the Company (for itself and the selling Shareholders) and the Joint Lead Managers (on behalf of the Underwriters), the Placing will not become unconditional and will not proceed. The Company is incorporated, and its businesses are located, in the People’s Republic of China. Potential investors in the Company should be aware of the differences in the legal, economic and financial systems between the PRC and the Hong Kong Special Administrative Region of the PRC and that there are different risk factors relating to investment in PRC-incorporated companies. Potential investors should also be aware that the regulatory framework in the PRC is different from the regulatory framework in Hong Kong and should take into consideration the different market nature of the shares of the Company. Such differences and risk factors are set out in the sections headed “Risk factors” and “Appendix III — Summary of relevant PRC and Hong Kong laws and regulations” to this prospectus. The obligations of the Underwriters under the Underwriting Agreement to subscribe for and/or purchase of, and to procure applicants for the subscription for and/or purchase of, the Placing Shares, are subject to termination by the Joint Lead Managers (on behalf of the Underwriters) upon the occurrence of any of the events set forth under “Grounds for Termination” in the section headed “Underwriting” in this prospectus at any time prior to 12:00 noon on the business day prior to the date on which dealings in the H Shares commence on the Stock Exchange. Such events include, but are not limited to, acts of government, strikes, lock-outs, fire, explosion, epidemic, terrorism, flooding, civil commotion, acts of war, acts of God, riots, public disorder, escalation of hostilities in Hong Kong, the PRC or any jurisdiction relevant to the Group, accidents or interruption or delay in transportation. It is important that you refer to that section for further details. * For identification purpose only IMPORTANT A A A A A 1 S A 31st July, 2002
Transcript
If you are in any doubt about this prospectus, you should consult your stockbroker, bank manager, solicitor, professional accountant or otherprofessional adviser.
CAF Securities Company Limited Core Pacific-Yamaichi International (H.K.) LimitedFirst Shanghai Securities Limited Grand Cathay Securities (Hong Kong) LimitedHantec Capital Limited Kingsway SW Securities LimitedPhoenix Capital Securities Limited Shenyin Wanguo Capital (H.K.) LimitedShun Loong Securities Company Limited Tai Fook Securities Company LimitedToyo Securities Asia Limited Wintech Securities Ltd
The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this prospectus, make no representation asto its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of thisprospectus.
A copy of this prospectus, having attached thereto the documents specified in the paragraph headed “Documents delivered to the Registrar of Companies and available for inspection”in Appendix VI to this prospectus, has been registered by the Registrar of Companies in Hong Kong as required by section 342C of the Companies Ordinance of Hong Kong. TheSecurities and Futures Commission and the Registrar of Companies in Hong Kong take no responsibility as to the contents of this prospectus or any of the other documents referredto above.
The Offer Price (as defined in this prospectus) is expected to be fixed by agreement between Shanghai Fudan-Zhangjiang Bio-Pharmaceutical Co., Ltd. (the “Company”), the SellingShareholders (as defined in this prospectus) and the Joint Lead Managers (on behalf of the Underwriters (as defined in this prospectus)) at or before the Price Determination Time (asdefined in this prospectus), which is currently scheduled at or before 6:00 p.m. on Monday, 5th August, 2002. If the Company, the Selling Shareholders and the Joint Lead Managers(on behalf of the Underwriters) are unable to reach an agreement on the Offer Price by that time, or such later time and/or date as agreed by the Company (for itself and the sellingShareholders) and the Joint Lead Managers (on behalf of the Underwriters), the Placing will not become unconditional and will not proceed.
The Company is incorporated, and its businesses are located, in the People’s Republic of China. Potential investors in the Company should be aware of the differences in the legal,economic and financial systems between the PRC and the Hong Kong Special Administrative Region of the PRC and that there are different risk factors relating to investment inPRC-incorporated companies. Potential investors should also be aware that the regulatory framework in the PRC is different from the regulatory framework in Hong Kong and shouldtake into consideration the different market nature of the shares of the Company. Such differences and risk factors are set out in the sections headed “Risk factors” and “Appendix III— Summary of relevant PRC and Hong Kong laws and regulations” to this prospectus.
The obligations of the Underwriters under the Underwriting Agreement to subscribe for and/or purchase of, and to procure applicants for the subscription for and/or purchase of, thePlacing Shares, are subject to termination by the Joint Lead Managers (on behalf of the Underwriters) upon the occurrence of any of the events set forth under “Grounds for Termination”in the section headed “Underwriting” in this prospectus at any time prior to 12:00 noon on the business day prior to the date on which dealings in the H Shares commence on the StockExchange. Such events include, but are not limited to, acts of government, strikes, lock-outs, fire, explosion, epidemic, terrorism, flooding, civil commotion, acts of war, acts of God,riots, public disorder, escalation of hostilities in Hong Kong, the PRC or any jurisdiction relevant to the Group, accidents or interruption or delay in transportation. It is important thatyou refer to that section for further details.
* For identification purpose only
IMPORTANT
A
AAA
A
1
S
A
31st July, 2002
GEM has been established as a market designed to accommodate companies to which a highinvestment risk may be attached. In particular, companies may list on GEM with neither a track recordof profitability nor any obligation to forecast future profitability. Furthermore, there may be risksarising out of the emerging nature of companies listed on GEM and the business sectors or countries inwhich the companies operate. Prospective investors should be aware of the potential risks of investingin such companies and should make the decision to invest only after due and careful consideration. Thegreater risk profile and other characteristics of GEM mean that it is a market more suited toprofessional and other sophisticated investors.
Given the emerging nature of companies listed on GEM, there is a risk that securities traded onGEM may be more susceptible to high market volatility than securities traded on the Main Board andno assurance is given that there will be a liquid market in the securities traded on GEM.
The principal means of information dissemination on GEM is publication on the Internet websiteoperated by the Stock Exchange. Listed companies are not generally required to issue paidannouncements in gazetted newspapers. Accordingly, prospective investors should note that they need tohave access to GEM website in order to obtain up-to-date information on GEM-listed issuers.
CHARACTERISTICS OF GEM
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1
2002
Price Determination Time at or before (Note 2) . . . . . . . . . . . . . . . . . . . 6:00 p.m. on Monday, 5th August
Deposit of H Share certificates into CCASS on or before (Note 3) . . . . . . . . . . . . . . . Monday, 12th August
Dealings in H Shares on the GEM to commence on . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 13th August
Notes:
1. All times refer to Hong Kong local time.
2. The Price Determination Time is expected to be on 6:00 p.m. on Monday, 5th August, 2002. If, for any reason, the Offer Price is not agreed
between the Company and the Joint Lead Managers, the Placing will not become unconditional and will lapse.
3. Placees of the Placing Shares will receive their Placing Shares via CCASS. The share certificate(s) for the Placing Shares to be distributed
via CCASS is/are expected to be issued and deposited into CCASS on Monday, 12th August, 2002 for credit to the respective CCASS
participants’ or investor participants’ stock accounts designated by the Underwriters, the placees or their agents, as the case may be.
4. For details of the structure and conditions of the Placing, see the section headed “Structure and conditions of the Placing” of this
prospectus.
5. If there is any change to the above expected timetable, the Company will make appropriate announcements to inform investors.
EXPECTED TIMETABLE
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A(
AA
You should rely only on the information contained in this prospectus to make your investment decision.The Company has not authorised anyone to provide you with information that is different from what iscontained in this prospectus. Any information or representation not made nor contained in this prospectusmust not be relied on by you as having been authorised by the Company, the Sponsor, Barits, the SellingShareholders, the Underwriters, the directors of any of them, or any other person involved in the Placing.
This summary aims to give you an overview of the information contained in this prospectus. As this isa summary, it does not contain all the information that may be important to you. You should read the wholedocument before you decide to invest in the H Shares.
There are risks associated with any investment. Some of the particular risks in investing in the H Sharesare set out in the section headed “Risk factors” of this prospectus. You should read that section carefullybefore you decide to invest in the H Shares.
BUSINESS
The Company is a R&D company that is principally engaged in the R&D of categories I and II drugs andrelated technologies.
During the Track Record Period, the Company, through its new drug screening and evaluation R&Dplatform, was engaged in the R&D of active compounds of Chinese medicine technologies to finance its R&Dprograms. It transferred the technologies of four category II Chinese medicines to a wholly-owned subsidiary ofShanghai Pharmaceutical and China General. Both Shanghai Pharmaceutical and China General are theCompany’s Initial Management Shareholders. Revenue from such transfers accounted for approximately 79.3%and 78.8% of the Group’s revenue for each of the two years ended 31st December, 2001, respectively. Besides,the Company manufactures and sells medical diagnostic reagents to hospitals and drug distributors in the PRCin order to obtain short term funding for its R&D programs.
The Company focuses its research efforts on the discovery and development of category I bio-pharmaceutical drugs, which are new pharmaceutical products that have not been approved for sale globally, andcategory II bio-pharmaceutical drugs which are new pharmaceutical products that have not been approved for salein the PRC but have been approved for sale overseas. At present, most of the Company’s in-house developedbio-pharmaceutical drugs and technologies are still under the development stage. Although, currently, medicaldiagnostic products are the only category of products manufactured by the Company, in the long run, theCompany plans to produce and sell by itself its principal in-house developed category I bio-pharmaceutical drugs.
The Company was established as a limited liability company in the PRC in 1996 with Fudan University asone of its founders. Over the years, because of the potential growth of the bio-pharmaceutical industry in Chinaand its commitment to R&D, the Company has attracted capital investments from state-owned enterprises andlisted companies in the PRC, such as Shanghai Pharmaceutical, China General and ZJ Hi-tech Park Co.. TheCompany was converted into and established as a joint stock limited company in November 2000. For details ofthe history and development of the Company, please refer to the paragraph headed “History and development”under the section headed “Business” in this prospectus.
The Company has developed four R&D platforms. Each platform, supported by separate teams of researchstaff, is designed to support the R&D of four distinct lines of bio-pharmaceutical drugs and related technologies,namely:
● R&D platform for genetic engineering drugs — develops human adapted peptide or protein drugs thatare made by expressing function specific genes or their re-engineered forms into cells via the use ofrecombinant DNA technology for the purpose of disease prevention or treatment;
● R&D platform for photodynamic therapy drugs — develops light-activitated drugs to treat a range ofdisease characterised by rapidly growing tissues, including the formation of abnormal blood vessels,such as cancer and age-related mascular degeneration;
● R&D platform for new drug screening and evaluation — utilises the latest bio-technologicaladvancements to significantly shorten the time required for new drug development. The Company alsoutilises this R&D platform to screen active compounds in Chinese medicines; and
SUMMARY
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● R&D platform for medical diagnostic products — designs medical diagnostic products. A major R&Dfocus of the Company is on design of HLA genotyping chip based on advanced DNA-basedtechnology and microelectronics engineering which could be applied for DNA matching before organtransplantation. The chip could also be applied for bone marrow donors identification, forensicindividual identification and parentage identification.
To complement its internal R&D capabilities, the Company has established collaborations and jointlaboratory with renowned universities and research institutes in the PRC for the R&D of new drugs andtechnologies. For details of such collaborations, please refer to the paragraph headed “Research anddevelopment” under the section headed “Business” in this prospectus.
The Company is strategically located at the State Biotechnology and Pharmaceutical Base (Shanghai) inShanghai Pudong-Zhangjiang Hi-Tech Park, one of the most prominent science parks in the PRC. Its strategiclocation enables the Company to capitalise on the latest trends and information in the bio-pharmaceutical industryin the PRC and to benefit from the policies of the PRC government in supporting the development of hightechnology enterprises.
Support from the Initial Management Shareholders
The Company has strong support from three of its Initial Management Shareholders.
Shanghai Pharmaceutical is one of the largest PRC pharmaceutical trading companies and has an extensivesales network that covers major cities in the PRC. Its A shares are listed on the Shanghai Stock Exchange andits total assets amounted to over RMB4 billion as at 31st December, 2001. In March 2000, the Company enteredinto a sales and distribution services agreement with Shanghai Pharmaceutical. Although no therapeutic anddiagnostic products of the Company are currently distributed by Shanghai Pharmaceutical, through the agreement,the Company could leverage on the established and extensive sales network of Shanghai Pharmaceutical todistribute its own products in future. In addition, pursuant to a R&D funding agreement entered into in November1999, Shanghai Pharmaceutical provided the Company with an upfront research fee of RMB10 million in 2000for the R&D of two new drugs, namely, parathyroid hormone derivatives (rhPTH) and recombinant tissue-typeplasminogen activator (r-tPA). Such research fee is non-refundable even if the R&D of the two subject new drugsare ultimately unsuccessful. In March 2002, the Company transferred the technology of r-tPA to an independentthird party. Please refer to the paragraph headed “Transfer of technologies” under the section headed “Business”of this prospectus for more information. The Directors expect that the R&D of rhPTH will be completed beforethe end of 2002.
China General, a state-owned enterprise, is the holding company of China National Medicines and HealthProducts Import & Export Corporation, one of the largest pharmaceutical trading companies in the PRC. The totalassets of China General and its subsidiaries in the PRC amounted to over RMB15.5 billion as at 31st December,2001. In September 2000, China General purchased technologies of three drugs, namely, FZ-00-01 (for liverfibrosis), FZ-00-04 (PTP inhibitor) and FZ-00-05 (for coronary heart disease) from the Company for RMB31million. To further strengthen its business relationship with China General, the Company entered into a R&Dfunding and technology agreement with China General in July 2002 pursuant to which China General may, butis not obliged to, invest upfront fees in the Company’s new drug R&D programs in return for certain rights inthese programs. Through the agreement, the Directors believe that the Group is well-positioned to obtain R&Dfunding from China General after the listing of the Company on GEM.
Fudan University is one of the leading universities in China. Established in 1905, it has an internationalreputation for academic excellence. Fudan University has 22 faculties and departments which offer acomprehensive range of studies, amongst which its life science studies are at a leading position in the academiccircle of the PRC. To leverage the expertise and resources of Fudan University in the field of bio-pharmacy, theCompany entered into an agreement with Fudan University in April 2002 for long-term technological support andcooperation with the university.
SUMMARY
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Please see the section headed “Relationship with the Initial Management Shareholders” in this prospectusfor more information.
Awards and accreditations
The Company has participated in a number of key bio-pharmaceutical related projects approved by the PRCgovernment, including the State High Technology Development Project (863 Project) (( )) for R&D of a new type of lymphotoxin. During the Track Record Period, the Group and itsmanagement obtained cash awards, grants and subsidies amounting to approximately RMB7.7 million andreceived numerous awards and certificates from organisations at the state and provincial levels. For further detailson the awards and accreditations received by the Group and its management, please refer to the paragraph headed“Awards and subsidies” under the section headed “Business” in this prospectus.
Proven revenue generating capability
While the Company is still at its start-up stage with most of its in-house developed bio-pharmaceuticaldrugs and technologies under the development stage, the Company is able to generate revenue from the R&D andtransfer of “me-too” drug technologies based on the active compounds identified through its R&D platform fornew drug screening and evaluations. During the Track Record Period, the Company sold to ShanghaiPharmaceutical and China General technologies of four category II Chinese medicines (FZ-00-01 (for liverfibrosis), FZ-00-04 (PTP inhibitor) and FZ-00-05 (for coronary heart disease) and �-glucosidase inhibitor) whichcontributed a total revenue of RMB36 million to the Group. In March 2002, the Company transferred itsrecombinant tissue plasminogen activator (r-tPA), a category II bio-pharmaceutical drug technology, to ShandongDong-E E-jiao Co., Ltd., an independent third party, the A shares of which are listed in the Shanghai StockExchange, PRC, for a total consideration of RMB15 million. Transfer of these “me-too” drug technologies notonly provides the Company with immediate revenue and financial support to its long term research projects, italso shifts the risks, including development, capital and market risks, associated with the commercialisation ofsuch “me-too” drugs and technologies to the transferees.
In the long run, the Directors expect that the Group’s revenue will grow substantially upon successfulcommercialisation (i.e. manufacture and sale) of its in-house developed category I bio-pharmaceutical drugs,which is expected to take place in 2004. Before such commercialisation, the Directors anticipate that transfer of“me-too” drugs or technologies will remain as the Company’s principal source of revenue.
COMPETITIVE EDGES
The Directors believe that a combination of the following factors differentiates the Group from otherbio-pharmaceutical companies:
Distinct business strategy of concentrating on the R&D of categories I and II bio-pharmaceuticaldrugs
Unlike many other bio-pharmaceutical companies in the PRC which are mainly engaged in the R&D,production and sales of imitative drugs or technologies, the Company is committed to develop itself as abio-pharmaceutical company that focuses on the R&D and commercialisation of categories I and IIbio-pharmaceutical drugs and related technologies.
Equipped with the capability to explore new drugs and technologies continuously
The Company has an exceptionally strong R&D team comprising 64 technical staff, of which 57 havereceived tertiary education or above. The Company’s R&D team has established the Company’s fourproprietary R&D platforms which equipped the Company with the capabilities to explore new drugs and
SUMMARY
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technologies continuously. The Company has registered one patent before its conversion into a joint stocklimited company and has 13 new drugs or technologies under patent applications which are evidence of theCompany’s R&D capabilities. The platforms have also enabled the Company to diversify its researchprograms, thereby preventing the Company from over-reliance on a single program.
Extensive collaboration with universities, hospitals and large corporations
Apart from R&D activities by its in-house R&D team, the Group also leverages the expertise,equipment and resources of renowned universities, research institutes and hospitals in order to complementits R&D capabilities. The Company has built extensive collaborations with them through co-developmentor other forms of alliances. The Company has strategic alliances with Shanghai Pharmaceutical, a largepharmaceutical corporation in the PRC, for sales and distribution of its pharmaceutical products and withChina General for R&D funding in the future.
Sound and astute management team
The Directors believe that the management’s ability to fuse technology and capital with marketdemand has been well evidenced by the track record of the Company. They realise that the ultimate valueof a R&D program is determined by its potential and extent of being commercialised. Their vision towardsthe future bio-pharmaceutical landscape in the PRC has shaped the unique positioning of the Company asa company focusing on R&D and commercialisation of categories I and II bio-pharmaceutical drugs andtechnologies and led the Company ahead of other similar scale players in the PRC. The success of theCompany’s management is evidenced by the Company’s participation in the State High TechnologyDevelopment Project (863 Project) ( ( )) for R&D of a new type of lymphotoxinand its list of applications for new drug patent.
BUSINESS OBJECTIVES AND STRATEGIES
The Group’s overall business objective is to become a top-class new bio-pharmaceutical drug or technologydeveloper in the PRC. To achieve such objective, the Group focuses on the R&D and commercialisation ofcategories I and II bio-pharmaceutical drugs based on its four proprietary R&D platforms. In addition, the Groupplans to build its own GMP-compliant factory and purchase additional production facilities in order to maximisethe business opportunities arising from the production of its in-house developed new drugs or technologies in thefuture.
The Directors have formulated the following business strategies by taking into consideration the Group’sbusiness objectives and competitive edges set out above:
R&D and product commercialisation as core businesses
Categories I and II bio-pharmaceutical drugs and technologies are valuable assets to largepharmaceutical enterprises which are eager to diversify their product range in order to maintain their profitgrowth and market share. To achieve such goal, large pharmaceutical enterprises often acquire new drugsand technologies from specialised and smaller scale pharmaceutical companies with stronger capability inthe R&D of new drugs. The strong R&D team of the Group and the extensive collaborations formed by theGroup with universities, hospitals and large corporations enable the Group to make use of more advancedR&D technologies, including genetic engineering recombinant technology and computer-assisted designtechnology, thereby shortening the time frame for R&D and commercialisation of new drugs andtechnologies as well as reducing the R&D costs. The Directors expect that as a result of China’s accessioninto the WTO and with the enactment and enforcement of more stringent regulations on patent protectionfor new drugs, demand for categories I and II bio-pharmaceutical drugs will increase and companies withdistinct R&D capability will be better positioned to capture any business opportunities arising therefrom.
SUMMARY
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A
Technology transfers and short-term financing
Due to the long time span and high capital requirement of bio-pharmaceutical R&D programs, the
Group needs a stable source of cash funding to maintain its operations. The Company will, where
appropriate, transfer its “me-too” drug technologies to pharmaceutical corporations in exchange for upfront
transfer fees and, where possible, with future revenue/profit sharing rights upon the commercial sales of the
drugs by the pharmaceutical corporations. The advantages of such transfers of technologies are that they
provide the Company with immediate funding and minimise the Company’s risks associated with the
commercialisation of “me-too” drugs. From a long term perspective, such strategy enables the Company to
focus its efforts in the R&D and commercialisation of category I bio-pharmaceutical drugs. The Companywill continue to engage in technology transfers of “me-too” drugs and manufacture and sales of medicaldiagnostic reagents as a mean of obtaining short-term financing.
Leveraging excessive production capacity and low production cost in the PRC
The Directors believe that there are currently many pharmaceutical factories in the PRC producingsimilar drugs resulting in excessive or wasted production capacities, leading to low production costs. Tocommercialise its in-house developed drugs and to capitalise on such favourable conditions, the Directorsintend to (i) where permissible under PRC laws and regulations, outsource the peripheral, capital and labourintensive activities in drug manufacturing to other pharmaceutical factories, but to retain its core R&Dactivities in-house; and (ii) acquire established drug manufacturing companies with sizable productioncapacity. However, the Group presently has no concrete plan for the production of its new drugs developedin-house.
Strategic alliances or joint ventures with synergistic parties
The Company has formed and will continue to form strategic alliances or joint ventures to utilise thestrengths and resources of strategic parties in the R&D of other bio-pharmaceutical areas or to achieve timeand cost savings for the Group. Such modes of cooperation would not only strengthen the ties between theCompany and its strategic parties, but would also lock in their commitment towards the R&D andproduction of the Company’s products.
Enhancement of ties with international bio-pharmaceutical corporations
As technological advancements in the global bio-pharmaceutical industry are primarily driven byoverseas corporations, in particular, those based in the U.S., the Company will strive to establishcollaboration with international bio-pharmaceutical corporations by way of co-development, alliances orequity participation. In addition, the Company plans to target the European and the U.S. markets for itspotential in-house developed category I bio-pharmaceutical drugs.
Standardisation of R&D and production processes
The Directors believe that standardisation of R&D and production processes is critical in order forthe Company to maintain long term competitiveness, especially after China’s accession into the WTO andthe resultant market liberalisation. The Company intends to make use of computer-assisted technologies andmodeling as well as strict compliance with the GMP standards to standardise its R&D and productionprocesses. Prior to completion of the Company’s new complex in May 2002, the Company’s operations werespread over several laboratories at different locations. The Company moved in the new complex in May2002 and the Directors believe that its new complex would greatly facilitate the standardisation plan of theCompany.
SUMMARY
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A
REASONS FOR THE PLACING AND USE OF PROCEEDS
The Directors consider that the net proceeds from the Placing are crucial in financing the Group’s business
strategies and helping the Group consolidate its positioning as a dominant R&D player with strong product
commercialisation capabilities in the PRC. Based on an indicative Offer Price of HK$1.13 (being the minimum
price of the stated range of the Offer Price between HK$1.13 and HK$1.40 per Placing Share), the net proceeds
from the Placing, after deducting related expenses, are estimated to amount to approximately HK$203.7 million.
The Company will not receive any proceeds, the net aggregate amount of which is approximately HK$18.5
million, from the sale of H Shares by the Selling Shareholders in the Placing. All of the proceeds from the sale
of H Shares by the Selling Shareholders, after payment of the Selling Shareholders’ share of the costs and
expenses of the Placing, will be turned over to the National Social Security Fund in accordance with the
requirements of the relevant PRC laws and regulations. It is intended that the resulting net proceeds of
approximately HK$185.2 million will be applied as follows:
Event
LatestPracticable
Date to31st December,
2002
1st January,2003 to
30th June,2003
1st July,2003 to
31st December,2003
1st January,2004 to
30th June,2004
1st July,2004 to
31st December,2004 Total
(HK$ million)
R&D and commercialisation ofgenetic engineering drugs- recombinant human lymphotoxin
- purchase of production andquality control facilities — — 23.7 — — 23.7
R&D and commercialisation ofphotodynamic therapy drugs
- Hemporfin 2.0 2.0 3.5 3.5 6.0 17.0
- deuteroporphyrin 1.0 1.5 3.0 3.5 6.0 15.0
R&D and commercialisation ofmedical diagnostic products
- HLA genotyping chips 2.0 11.0 — — — 13.0
- purchase of production facilities 14.5 — — — — 14.5
Enhancement of the Group’scapability on R&D and screeningof new drugs 4.0 4.0 4.0 4.0 4.0 20.0
Total 30.5 31.5 62.5 26.5 24.0 175.0
SUMMARY
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AA
The balance of the net proceeds of approximately HK$10.2 million will be used as general working capital
of the Group.
In the event that any part of the Company’s business plan does not materialise or proceed as planned or the
net proceeds from the Placing are not immediately required for the purposes stated above, the Directors will
carefully evaluate the situation and may reallocate the intended funds to other business plans and/or to new
projects of the Company and/or place them in interest bearing deposits with banks or financial institutions, so
long as the Directors deem it to be in the best interests of the Company and its shareholders taken as a whole.
In such event, the Company will make a separate announcement as required by the GEM Listing Rules.
Taking into account the Group’s internal resources and banking facilities available, the Directors consider
that the net proceeds from the Placing will be sufficient to finance the business plan of the Company as described
in the section headed “Business objectives” of this prospectus.
SUMMARY
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TRADING RECORD
The following table summarises the Group’s audited results for each of the two financial years ended 31stDecember, 2001. This summary should be read in conjunction with the accountants’report set out in Appendix Ito this prospectus.
Year ended 31st December,2000 2001
RMB’000 RMB’000RevenuesTurnover
Technology transfer revenue (note 1) 14,000 22,000Sales of diagnostic reagent and the provision
Profit before taxation 8,586 13,922Taxation (1,575) (2,166)
Profit after taxation 7,011 11,756Minority interests 588 70
Profit attributable to shareholders 7,599 11,826
Dividends — 7,950
Earnings per share (RMB) (note 4) N/A 0.0223
Pro forma earnings per share (RMB) (note 5) 0.011 0.017
SUMMARY
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A
7
7
7
7
7
7
7
Notes:
1. Technology transfer revenue represents revenue from the transfer of four Chinese medicine technologies to China General and
Shanghai Huashi Pharmaceutical Hi-Tech Industrial Development Co., Ltd., a wholly-owned subsidiary of Shanghai
Pharmaceutical.
2. Other revenues include the following items:
Year ended 31st December,
2000 2001
RMB’000 RMB’000
Interest income 75 47
Dividend income — 27
75 74
3. Other income includes the following items:
Year ended 31st December,
2000 2001
RMB’000 RMB’000
Amortisation of government grants and other non-refundable grants 1,982 6,250
Business tax rebate income — 1,200
Realised profit on disposal of available-for-sale investments 3,244 772
Surtaxes rebate income — 63
5,226 8,285
4. No earnings per share information is presented for the year ended 31st December, 2000 as the weighted average number of ordinary
shares outstanding during the year is not considered meaningful since the Company was only transformed from a limited liability
company into a joint stock limited liability company on 8th November, 2000.
The calculation of the earnings per Share for the year ended 31st December, 2001 is based on the profit attributable to shareholders
for the year and the weighted average of 530,000,000 shares in issue during the year ended 31st December, 2001 as if the Share
Subdivision as described in the paragraph headed “Procedures at the Company’s extraordinary shareholders’ meetings” in
Appendix V to this prospectus had taken place at the beginning of 2001. Diluted earnings per share has not been calculated for
the year ended 31st December, 2001 as there were no dilutive potential ordinary shares during the year ended 31st December, 2001.
5. The calculations of pro forma earnings per Share for the year ended 31st December, 2000 and 31st December, 2001 are based on
the profit attributable to shareholders for each year and on the assumption that 710,000,000 Shares of RMB0.10 each had been
in issue throughout the two years ended 31st December, 2001.
Pursuant to Rule 11.11 of the GEM Listing Rules, the Company is required to include the financialresults which must not have ended more than six months before the date of this prospectus. As thisprospectus includes the financial results of the Group covering only the period from 1st January, 2000 upto 31st December, 2001 which has ended more than six months before the issue date of this prospectus, theCompany has applied for and has been granted a waiver from strict compliance with Rule 11.11 of the GEMListing Rules by the Stock Exchange.
The Directors have confirmed that they have performed sufficient due diligence work on the Groupto ensure that, save as disclosed in this prospectus, up to the date of this prospectus, there has been nomaterial adverse change in the financial or trading position of the Group since 31st December, 2001 whichwould materially affect the information as shown in the accountants’ report as set out in Appendix I to thisprospectus.
SUMMARY
— 9 —
PLACING STATISTICS
Based onan indicative
Offer Price ofHK$1.13
per H Share
Based onan indicative
Offer Price ofHK$1.40
per H Share
Pro forma fully diluted earnings per Share (Note 1) HK1.56 cents HK1.56 centsMarket capitalisation of the H Shares (Note 2) HK$223.74 million HK$277.20 millionPro forma fully diluted price/earnings multiple (Note 3) 72.4 times 89.7 timesAdjusted net tangible asset value per Share (Note 4) HK$0.34 HK$0.40
Notes:
1. The calculation of the pro forma fully diluted earnings per Share is based on the audited profit attributable to shareholders of
approximately RMB11,826,000 (or approximately HK$11,052,000) for the year ended 31st December, 2001 and 710,000,000 Shares in
issue immediately after completion of the Placing.
2. The calculation of the market capitalisation of the H Shares is based on 198,000,000 H Shares in issue immediately after completion of
the Placing.
3. The calculation of the pro forma fully diluted price/earnings multiple is based on the pro forma fully diluted earnings per Share calculated
above.
4. The adjusted net tangible asset value per Share has been arrived at after making the adjustments to the audited net tangible assets of the
Company as at 31st December, 2001 referred to in the paragraph headed “Adjusted net tangible assets” under the section headed “Financial
information” of this prospectus and on the basis of 710,000,000 Shares in issue immediately after completion of the Placing.
RISK FACTORS
The Directors consider that the business of the Company is subject to a number of risk factors, which can
be summarised as follows:
Risks relating to the Company
● Reliance on technology transfer revenue and funding from the Initial Management Shareholders
during the Track Record Period
● Sustainability of profit
● Business conducted by an Initial Management Shareholder may compete with that of the Group
● Uncertainties regarding R&D of new drugs and technological approaches of the Company
● Future capital requirements and uncertainty of additional funding
● Reliance on strategic alliances with investors and co-development arrangements
● Limited control over collaborative arrangements
SUMMARY
— 10 —
1
● Intellectual property rights
● Product liability and insurance
● Renewal of permits and business licences
● Compliance with the GMP standards
● Reliance on key management and employees
● Reliance on the PRC market
● Dividends
● Implementation of the Company’s strategies in achieving its business objectives
Risks relating to the industry
● Medicare reforms in the PRC
● Competition
● Price control
Risks relating to the PRC
● Currency conversion in the PRC and exchange rate risk
● Political and social considerations
● Economic and legal considerations
● Different regulatory framework
● Securities laws and regulations
● Enforceability of judgments and arbitration
Risks relating to the statistics and statements made in this prospectus
● Accuracy of certain statistics and statements with respect to the bio-pharmaceutical industry
contained in this prospectus
SUMMARY
— 11 —
RESTRICTIONS ON THE TRANSFER OF DOMESTIC SHARES
Under the Company Law, transfer of Domestic Shares in the Company by the Promoters, Directors,
Supervisors and general manager of the Company is subject to the following restrictions:
(i) none of the Promoters may transfer its (or his) Domestic Shares during a period of three years from
the date of incorporation of the Company (whether such Domestic Shares are acquired on or
subsequent to incorporation), which is due to expire on 8th November, 2003;
(ii) none of the Directors, Supervisors nor general manager of the Company may transfer his Domestic
Shares during such time as he remains in office.
According to the advice of the Company’s PRC legal adviser, the restriction on the transfer of Domestic
Shares under the Company Law applies to the Domestic Shares directly held by the Promoters, Directors,
Supervisors and general manager of the Company.
Each of Shanghai Pharmaceutical, China General, ZJ Hi-tech Park Co., Fudan University, Pudong
Technology Investment, Li Jun (as Promoters), Wang Hai Bo, Su Yong, Zhao Da Jun and Fang Jing (as Promoters
and Directors) is subject to the transfer restrictions under the Company Law described above.
As there is a difference in length between the lock-up period imposed under the GEM Listing Rules and the
prohibition on transfer period under the Company Law, the above-named parties who are subject to both sets of
restrictions will not be able to dispose of their respective relevant securities until the expiry of the longer of the
two restriction periods.
If, after the date of this prospectus, any subsequent change in the restrictions on the transfer of Domestic
Shares under the Company Law should result in any of the above Shareholders being able to transfer its (or his)
Domestic Shares before the expiry of the lock-up period under the GEM Listing Rules, such party would remain
bound by its (or his) non-disposal undertaking to the Stock Exchange and the Company until the expiry of such
lock-up period.
SUMMARY
— 12 —
A
The following table sets out the shareholding structure of the Company immediately before and after thecompletion of the Placing.
Name of shareholder
Date on whichshareholding interest inthe Company was firstacquired
Li Jun 11th November, 1996 7,215,260 1.01% 636,000 0.09 3 years
Other public Shareholder
Pudong Technology Investment(Notes 6 and 7)
11th August, 1999 6,562,382 0.92% 628,646 0.10 3 years
512,000,000(Note 8)
72.11%
Holders of H Shares
Public Shareholders (Note 9) 198,000,000 27.89% Not applicable
Total 710,000,000 100%
Notes:
1. Each of the Initial Management Shareholders has undertaken to the Company and the Stock Exchange that it will not for a period of 12
months from the Listing Date, save as provided in GEM Listing Rules, dispose of (or enter into any agreement to dispose of) any of its
direct or indirect interest in the relevant securities.
2. Shanghai Pharmaceutical is a joint stock limited company incorporated in the PRC, the A shares of which are listed on the Shanghai Stock
Exchange, and one of the Promoters. It is principally engaged in the trading of pharmaceutical products. Its legal address is at No. 1399,
Jin Qiao Road, Pudong, Shanghai, PRC.
3. China General is a state-owned enterprise and is wholly-owned by the PRC government. It has an extensive scope of business, including
foreign trade, economic cooperation and other diversified businesses which include investment, storage and transportation, international
advertising and exhibitions, properties management, real estate development and information services. It is one of the Promoters. Its legal
address is at No. 2 Qiaojian Li, Haidian District, Beijing, PRC. It is offering 8,600,744 H Shares (to be converted from Domestic Shares)
for sale in the Placing.
SUMMARY
— 13 —
4. ZJ Hi-tech Park Co. is a joint stock limited company established in the PRC, the A shares of which are listed on the Shanghai Stock
Exchange, and one of the Promoters. It is principally engaged in property development and investment in technology projects and operates
the Shanghai Pudong-Zhangjiang Hi-tech Park. Its legal address is at No. 200 Langdong Avenue, Pudong New Area, Shanghai, PRC. It
is offering 6,956,364 H Shares (to be converted from Domestic Shares) for sale in the Placing.
5. Fudan University is a university and academic institution under the Ministry of Education of the PRC and one of the Promoters. Its legal
address is at No. 220, Nandun Road, Shanghai, PRC. It is offering 2,011,794 H Shares (to be converted from Domestic Shares) for sale
in the Placing.
6. Pudong Technology Investment is a state-owned enterprise and wholly-owned by Shanghai Pudong New Area State-owned Assets
Management Committee, a state-owned entity. It is principally engaged in the investment in technology projects and provision of economic
information consulting. It is one of the Promoters and its legal address is at No. 351, Guoshoujing Road, Zhangjiang Hi-tech Park, Pudong,
Shanghai, PRC. It is offering 431,098 H Shares (to be converted from Domestic Shares) for sale in the Placing.
7. Pursuant to the Regulations for the Reduction of State-owned Shares, the Selling Shareholders are required to convert from their Domestic
Shares, representing in aggregate 10% of the H Shares (excluding the H Shares to be converted from Domestic Shares) under the Placing,
into H Shares and sell such H Shares. The respective amount of Domestic Shares to be converted into H Shares by each of the Selling
Shareholders are stated in notes 3, 4, 5 and 6 above.
8. The 512,000,000 Domestic Shares in issue do not include the 18,000,000 Domestic Shares to be converted into H Shares and offered for
sale by the Selling Shareholders. Together with the 18,000,000 Domestic Shares, the total number of Domestic Shares in issue before the
Placing should be 530,000,000 Domestic Shares.
9. The 198,000,000 H Shares offered under the Placing are inclusive of 18,000,000 Domestic Shares to be converted into H Shares by the
Selling Shareholders and offered for sale under the Placing. All proceeds from the sale of H Shares by the Selling Shareholders, after
payment of the Selling Shareholders’ share of costs and expenses of the Placing, will be turned over to the National Social Security Fund
in accordance with the requirement of the Regulations for the Reduction of State-owned Shares.
SUMMARY
— 14 —
A
In this prospectus, unless the context otherwise requires, the following expressions have the following
meanings:
“Articles of Association” the articles of association of the Company, adopted on 23rd June,2002 and as amended from time to time
“associate(s)” having the meaning ascribed thereto under the GEM Listing Rules
“Barits” Barits Securities (Hong Kong) Limited, an investment adviser and adealer registered under the Securities Ordinance (Chapter 333 of theLaws of Hong Kong) and an approved sponsor for listing on GEM
“CCASS” the Central Clearing and Settlement System established and operatedby HKSCC
“China General” (China General Technology(Group) Holding, Ltd.), a company incorporated in the PRC withlimited liability and wholly-owned by the PRC government
“Companies Ordinance” the Companies Ordinance (Chapter 32 of the Laws of Hong Kong),as amended, supplemented or otherwise modified from time to time
“Company” (Shanghai Fudan-Zhangjiang Bio-Pharmaceutical Co., Ltd.), which was initially established as alimited liability company in the PRC on 11th November, 1996 andwas subsequently converted into and established as a joint stocklimited company on 8th November, 2000
“Company Law” or “PRC CompanyLaw”
the Company Law of the PRC ( ), as enacted bythe Standing Committee of the Eighth National People’s Congress( ) on 29th December, 1993 andbecoming effective on 1st July, 1994, as amended, supplemented orotherwise modified from time to time
“CSRC” China Securities Regulatory Commission (), a regulatory body responsible for the supervision and
regulation of the PRC national securities markets
“Director(s)” the director(s) of the Company
“Domestic Shares” ordinary shares issued by the Company, with a nominal value ofRMB0.10 each, which are subscribed for or credited as paid up inRMB by PRC nationals and/or PRC incorporated entities. Prior tothe Share Subdivision, each Domestic Share was of nominal valueRMB1.00 each
“Fudan University” a government sponsored education institution in the PRC directlyaffiliated to the Ministry of Education of the PRC
“GEM” the Growth Enterprise Market of the Stock Exchange
DEFINITIONS
— 15 —
AA
A
“GEM Listing Committee” the listing sub-committee of the board of Stock Exchange withresponsibility for GEM
“GEM Listing Rules” the Rules Governing the Listing of Securities on GEM
“GEM website” http://www.hkgem.com, being the Internet website operated by theStock Exchange for the purposes of GEM
“GMP” Good Manufacturing Practice, standards for the control ofPharmaceutical Production Quality ( ), which areguidelines and regulations stipulated by SDA from time to time forthe certification of pharmaceutical producers in the PRC
“Group” the Company and its subsidiary
“Guotai Junan Capital” or “Sponsor” Guotai Junan Capital Limited, an investment adviser under theSecurities Ordinance (Chapter 333 of the Laws of Hong Kong) andan approved sponsor for listing on GEM
“Guotai Junan Securities” Guotai Junan Securities (Hong Kong) Limited, an investment adviserand a dealer registered under the Securities Ordinance (Chapter 333of the Laws of Hong Kong)
“HKSCC” Hong Kong Securities Clearing Company Limited
“Hong Kong” or “HK” the Hong Kong Special Administrative Region of the PRC
“H Share(s)” overseas-listed foreign shares in the ordinary share capital of theCompany, with a nominal value of RMB0.10 each, which are to belisted on GEM and subscribed for and traded in Hong Kong dollars
“Initial Management Shareholder(s)” having the meaning as defined in the GEM Listing Rules and hereinrefers to Shanghai Pharmaceutical, China General, ZJ Hi-tech ParkCo., Fudan University, Wang Hai Bo, Su Yong, Zhao Da Jun andFang Jing
“Joint Lead Managers” Barits and Guotai Junan Securities
“Latest Practicable Date” 24th July, 2002, being the latest practicable date prior to the printingof this prospectus for ascertaining certain information contained inthis prospectus
“Listing Date” the date on which the H Shares commence trading on GEM
“Main Board” the securities market operated by the Stock Exchange under theRules Governing the Listing of Securities on the Stock Exchange(excluding the option market) and such stock market continues to bein parallel with GEM
DEFINITIONS
— 16 —
“Mandatory Provisions” The Mandatory Provisions for Articles of Association of Companiesto be Listed Overseas ( ) (as amended andsupplemented from time to time), for inclusion in the articles ofassociation of companies incorporated in the PRC to be listedoverseas (including Hong Kong), which were promulgated by theformer Securities Commission of the State Council and the formerState Commission for Restructuring the Economic System of thePRC, on 27th August, 1994 as amended, supplemented or modifiedfrom time to time
“MOFTEC” (the Ministry of Foreign Trade and EconomicCooperation of the PRC)
“Morgan-Tan” (Shanghai Morgan-TanInternational Center for Life Sciences, Co. Ltd.), a companyincorporated in the PRC with limited liability and held as to 62.50%by the Company, 31.25% by Shanghai Zhangjiang Hi-Tech ParkDevelopment Corp. ( ) and 6.25% by Mr.Tan Jia Zhen, an independent third party not connected with, theCompany, the Promoters, Directors, Supervisors, chief executive,substantial shareholders or management shareholders of theCompany or their respective associates other than the interest inMorgan-Tan. The business scope of Morgan-Tan includes the R&D,commercialisation and transfer of bio-pharmaceutical products andtechnologies
“Offer Price” the final price per H Share (exclusive of brokerage, Securities andFutures Commission transaction levy and Stock Exchange tradingfee) at which the H Shares are to be subscribed for and issuedpursuant to the Placing, to be determined as described in theparagraph headed “Pricing” under the section headed “Structure andconditions of the Placing” in this prospectus
“Placing” the conditional placing of 198,000,000 Placing Shares by theCompany and the Selling Shareholders at the Offer Price on andsubject to the terms and conditions described in this prospectus asfurther described in the section headed “Structure and conditions ofthe Placing” in this prospectus
“Placing Shares” the aggregate of 198,000,000 H Shares (including 18,000,000 HShares converted from 18,000,000 Domestic Shares held by theSelling Shareholders) being offered at the Offer Price under thePlacing
“PRC” or “China” the People’s Republic of China which, for the purposes of thisprospectus, excludes Hong Kong, Macau and Taiwan
“Price Determination Time” 6:00 p.m. on Monday, 5th August, 2002 (or such time and/or date asagreed by the Company and the Joint Lead Managers (on behalf ofthe Underwriters)), on which the Offer Price will be fixed for thepurpose of the Placing
DEFINITIONS
— 17 —
“Promoters” Shanghai Pharmaceutical, China General, ZJ Hi-tech Park Co.,Fudan University, Pudong Technology Investment, Wang Hai Bo, SuYong, Zhao Da Jun, Fang Jing and Li Jun
“Pudong Technology Investment” (Shanghai Pudong Technology InvestmentCo., Ltd.), a company incorporated in the PRC with limited liabilityand wholly-owned by Shanghai Pudong New Area State-ownedAssets Management Committee ( ), astate-owned entity
“Regulations for the Reduction ofState-owned Shares”
Provisional Administrative Measures for the Reduction of State-owned Shares and the Raising of the Social Security Fund( ) promulgated by the StateCouncil on 12th June, 2001
“R&D” research and development
“SDA” the State Drugs Administration of the PRC ( ),which was created in 1998 by combining the functions formerlyunder the Ministry of Public Health, the former PharmaceuticalAdministration and State Administration of Traditional ChineseMedicines
“SDI Ordinance” Securities (Disclosure of Interests) Ordinance (Chapter 396 of theLaws of Hong Kong)
“Securities Law” the Securities Law of the PRC ( ) enacted by theStanding Committee of the National People’s Congress( ) on 29th December, 1998 and whichbecame effective on 1st July, 1999, as amended, supplemented orotherwise modified from time to time
“Selling Shareholders” China General, ZJ Hi-tech Park Co., Fudan University and PudongTechnology Investment
“Shanghai Pharmaceutical” (Shanghai Pharmaceutical Co., Ltd.), a jointstock limited company incorporated in the PRC whose A shares arelisted on the Shanghai Stock Exchange, which is held as to 39.69%by Shanghai Pharmaceutical (Group) Corporation, a state-ownedenterprise, being its single largest shareholder
“Shareholder(s)” holder(s) of the Shares
“Share(s)” Domestic Shares and/or H Shares, as the case may be
“Share Option Scheme” the share option scheme conditionally approved and adopted by theCompany on 23rd June, 2002, the principal terms of which aresummarised in the paragraph headed “Summary of terms of the ShareOption Scheme” in Appendix V to this prospectus
DEFINITIONS
— 18 —
A
A
A
A
“Share Subdivision” the subdivision of each Share with a nominal value of RMB1.00 eachin the issued share capital of the Company to 10 Shares with anominal value of RMB0.10 each with effect from 20th January, 2002without changing the registered capital of the Company, details ofwhich are further described in the paragraph headed “Furtherinformation about the Company” in Appendix V to this prospectus
“SIPB” State Intellectual Property Bureau ( )
“SPAB” the State Pharmaceutical Administration Bureau of the PRC
“Special Regulations” the Special Regulations of the State Council on the OverseasOffering and Listing of Shares by Joint Stock Limited Companies( ), promulgated bythe State Council on 4th August, 1994, as amended, supplemented orotherwise modified from time to time
“Sponsor” Guotai Junan Capital
“State Council” the State Council of the PRC ( )
“State Taxation Bureau” the State Taxation Bureau of PRC ( )
“Stock Exchange” The Stock Exchange of Hong Kong Limited
“Supervisors” the members of the supervisory committee of the Company
“Track Record Period” the period comprising the two years ended 31st December, 2001
“Underwriters” the underwriters of the Placing named in the paragraph headed“Underwriters” in the section headed “Underwriting” of thisprospectus
“Underwriting Agreement” the underwriting agreement dated 30th July, 2002 made amongamongst others, the Company, the executive Directors, the SellingShareholders and the Underwriters
“U.S.” or “United States” the United States of America
“VAT” value added tax
“WTO” World Trade Organisation
“ZJ Hi-tech Park Co.” (Shanghai Zhangjiang Hi-TechPark Development Co., Ltd.), a joint stock limited companyincorporated in the PRC whose A shares are listed on the ShanghaiStock Exchange, which is held as to 54.90% by Shanghai ZhangjiangHi-Tech Park Development Corp., a state-owned enterprise, and as to9.61% by Shanghai Jiushi Co.
DEFINITIONS
— 19 —
AA
“HK$” and “cents” Hong Kong dollars and cents respectively, the lawful currency ofHong Kong
“RMB” Renminbi, the lawful currency of the PRC
“US$” U.S. dollars, the lawful currency of the U.S.
“sq.ft.” square feet
“sq.m.” square metres
“%” per cent.
DEFINITIONS
— 20 —
This glossary contains explanations of certain terms used in this prospectus in connection with the
Company and its business. The terminology and their meanings may not correspond to standard industry
meanings or usage of those terms.
“antibody” a kind of protein that is synthesized in lymphoid tissue in responseto the presence of an antigen and circulates in the plasma to attackthe antigen and render it harmless. The production of specificantibodies against antigens as diverse as invading bacteria andforeign red blood cells is the basis of both immunity and allergy.Antibody formation is also responsible for tissue or organ rejectionfollowing transplantation
“antigen” any substance that the body regards as foreign or potentiallydangerous and against which it produces an antibody. Antigens areusually proteins, but simple substances, even metals, may becomeantigenic by combining with and modifying the body’s own proteins
“assay” a specific biological test for a drug candidate during the screeningprocess
“biochips or DNA chips” a chip containing substrate with an array of single strands of DNA,each with a known sequence arranged on it. When a solutioncontaining a single strands of DNA with unknown sequence isapplied to the substrate, it reacts with some of the single DNAstrands on the substrate whose sequence are known. The signalindicates which unknown sequence hybridised with the knownsequence hybridised and yields a pattern that can help to determinethe sequence of DNA strands in the solution
“biotechnology” the use of micro-organisms, such as bacteria or yeast, or biologicalsubstances, such as enzymes, to perform specific industrial processesor to be used as therapeutic or diagnostic products
“bio-pharmaceutical products” pharmaceutical products applied for prevention, treatment ordiagnosis of diseases which are produced from biotechnologicalprocesses like genetic engineering, cell engineering or enzymeengineering
“combinatorial chemistry” a field of chemistry which leverages automation and miniaturizationto synthesize large populations of compounds at the same timeinstead of synthesising a single compound (as in traditional drugdiscovery) that can be screened efficiently. This increases theprobability of finding novel compounds of significant therapeuticand commercial value
“deuteroporphyrin derivative” a new porphyrin category tumor photodynamic therapeutic drugresearched and developed by the Company which is mainly used inthe treatment of superficial tumors and bladder cancer, stomachcancer and lung cancer
“DNA” deoxycibonudeic acid, which is the basic building unit of the gene
“erythropoietin” a factor that stimulates bone marrow stem cells to differentiate andmaturate into erythrocytes
GLOSSARY OF TECHNICAL TERMS
— 21 —
“genetic engineering” general term covering the use of various experimental techniques toproduce molecules of DNA containing new genes or novelcombinations of genes, usually for insertion into a host cell forcloning
“hemoglobin” a kind of protein in animal red blood cells dedicated for oxygen-carrying
“Hemporfin” a new monomer porphyrin photodynamic drug researched anddeveloped by the Company which is mainly used in thephotodynamic treatment of port wine stains and tumors
“high throughput screening (HTS)” in vitro screening of large numbers of compounds through the use ofautomated machinery, and highly automated systems which canscreen thousands of compounds per hour, identifying those with adesired chemical or biological response
“HLA genotyping chip” a type of biochip for inspecting whether the genes between the donorand recipient are compatible during the transplantation of bonemarrow and organs
“in vitro” literally, “in glass”; a biologic or biochemical process occurringoutside a living organism
“invivo screening methodology” a compound screening methodology by which sample animals aretested against different compounds via mouth, injection or otherrecipient methods to assess the effect of such compounds on relevantpharmacological benchmarks like gene expression and hormonesecretion so as to screen those compounds with pharmacologicalbio-activity
“lymphotoxin-� derivative” a new type of protein produced by genetic engineering technology,possessing same functions as lymphotoxin-� (a protein producedfrom activated lymphatic cells which can increase the immunity oforganic bodies and inhibit or kill tumor cells) but with lower toxicity
“me-too drug(s)” based on pharmaceutical product(s) which has/have already been asubject of research or developed or launched for sales bypharmaceutical company(ies) and/or research institute(s), with somemodification(s) in the structure or formulation has/have been madefor better effects on human beings
“medical diagnostic product(s)” mainly refers to the products used in the inspection and testing ofclinical diseases
“monoclonal antibody” highly specific antibody produced in large quantity by the clones ofa single cell
“mutant” a new type of protein obtained by changing partial sequence ofnatural existing proteins
GLOSSARY OF TECHNICAL TERMS
— 22 —
“pharmacokinetics” the study of how a drug is metabolised and includes the study of drugabsorption and distribution, the study of the chemical alternations adrug may undergo in the body, and the study of the means by whichdrugs are stored in the body and eliminated from it
“photodynamic therapy” a treatment for a range of diseases (characterised by rapidly growingtissue, including the formation of abnormal blood vessels, such ascancer and age-related macular degeneration) using photosensitivechemicals which destroy cancer cells when they are exposed to aparticular type of light
“receptor” a structure on the surface of a cell or inside a cell that selectivelyreceives and binds a specific substance
“recombinant” a kind of DNA molecule in which genes have been artificiallyrearranged and genetic material from another organism, sometimes,a member of another specie, has been inserted. Replication of thenewly combined DNA results in genetic changes in the organism.Recombinant DNA technology is being used to produce humaninsulin and growth hormone and is being investigated for many othermedical applications
GLOSSARY OF TECHNICAL TERMS
— 23 —
In evaluating an investment in the H Shares, potential investors should consider carefully all theinformation contained in this prospectus, including the risk factors as set out below.
RISKS RELATING TO THE COMPANY
Reliance on technology transfer revenue and funding from the Initial Management Shareholders duringthe Track Record Period
During the Track Record Period, the Group transferred technologies of four category II Chinese medicineto China General and to a wholly-owned subsidiary of Shanghai Pharmaceutical which constituted connectedtransactions of the Company. For each of the two years ended 31st December, 2001, these connected transactionsamounted to RMB14,000,000 and RMB22,000,000 respectively, representing approximately 79.3% and 78.8% ofthe total turnover of the Group for the respective periods.
In addition, several R&D programs of the Group had relied on and been financed through funding fromShanghai Pharmaceutical (including a non-refundable upfront research fee of RMB10 million for the R&D of twonew drugs made to the Company in 2000) and capital contributions from the Initial Management Shareholders in2000 which amounted to approximately RMB22.3 million.
The Company has entered into a R&D funding agreement with China General pursuant to which it may inthe future, among others, invest in the Company’s new drug R&D programs by sharing the risks and returns ofthe Company in new drug discovery and development. If China General invests in the Company’s future R&Dprogram, the Company will enter into a separate agreement with China General which will specify the subjectdrug or technology and the respective terms, including the amount of the R&D funding and the revenue sharingarrangement (if any) and has to comply with the requirements of the GEM Listing Rules. However, there is noassurance that China General will in the future eventually invest in any of the Company’s R&D programs by theprovision of R&D funding and/or acquisition of the resultant technology from the Group. Should China Generalnot invest in the Company’s future R&D programs, the Company’s business and financial condition may beadversely affected.
Sustainability of profit
A majority of the Group’s total revenue is generated on a project-by-project basis. As the Group’s revenuemay vary over time, the future profitability of the Group depends on its ability to secure new R&D funding ortechnology transfer agreements or its success in commercialisation of new drugs. In addition, the Group’searnings may also be affected by decreasing selling prices and profit margins, and the possible increase incompetition from both local and overseas competitors. There can be no assurance that the high rate of growth inthe Group’s earnings recorded during the Track Record Period will continue in the future.
During the Track Record Period, the Company was also engaged in the R&D of the active compounds ofcertain Chinese medicine technologies and generated most of its revenue through the transfer to a wholly-ownedsubsidiary of Shanghai Pharmaceutical and China General of four category II Chinese medicine technologies soas to fund its R&D programs. Both Shanghai Pharmaceutical and China General are the Company’s InitialManagement Shareholders. The transfer fees of these technologies were higher than the fees quoted by thirdparties at the time of such transfers. It is the business strategy of the Group to focus its research efforts on thediscovery and development of category I and II bio-pharmaceutical drugs and technologies, and not on the R&Dof Chinese medicines. If the Company is unable to develop and commercialise its bio-pharmaceutical drugssuccessfully, or if the Company eventually sells its bio-pharmaceutical drugs at lower profit margins as comparedwith its technology transfers, or if China General no longer pays transfer fees higher than those quoted by thirdparties for the Company’s drugs or related technologies, the Company may not be able to sustain its profitabilityas recorded during the Track Record Period.
RISK FACTORS
— 24 —
1
Business conducted by an Initial Management Shareholder may compete with that of the Group
Certain subsidiaries and associates of Shanghai Pharmaceutical, China General and ZJ Hi-tech Park Co.,being the three largest Shareholders and Initial Management Shareholders, are engaged in the manufacturingand/or sales of traditional, chemical or imitative drugs with minimal R&D capabilities. Please refer to theparagraph headed “Non-competition undertakings” under the section headed “Relationship with the InitialManagement Shareholders” of this prospectus for more information. As the Company focuses on the R&D ofcategories I and II bio-pharmaceutical drugs and related technologies, the Directors believe that the competition,if any, from the subsidiaries and associates of Shanghai Pharmaceutical, China General, ZJ Hi-tech Park Co. andthose companies which they hold interests in is minimal. This is because most of them are engaged in themanufacture and sales of traditional, chemical or imitative drugs without or with only minimal R&D capabilities,or are engaged in the R&D of chemical drugs, which do not compete with the R&D of categories I and IIbio-pharmaceutical drugs and technologies of the Group.
In addition, each of Shanghai Pharmaceutical, China General and ZJ Hi-tech Park Co. has signed anon-competition undertaking with the Company pursuant to which, among others, each of them agrees not to byitself and China General will procure its subsidiaries not to (i) perform any R&D activities (not applicable to ZJHi-tech Park Co.); and (ii) make any new investments and endeavour to ensure that its existing investment (otherthan in the Company) does not and will not compete with the Company. The non-competition undertaking byChina General, however, contains a provision which allows China General to compete with the Company with theprior consent of the Company. For further details on the non-competition undertakings, please refer to thesubsection headed “Non-competition undertakings” of the section headed “Relationship with the InitialManagement Shareholders” of this prospectus. Potential investors should be aware that if the Company approvesChina General or its subsidiaries to engage in bio-pharmaceutical R&D, which competes with the Group, theGroup’s business may be adversely affected.
Uncertainties regarding R&D of new drugs and technological approaches of the Company
The Company is principally engaged in the R&D and commercialisation of new drugs. In the past, theperiod from R&D, clinical trial to commercialisation of new drugs on average spanned over 10 years or above.Though such time span may not be indicative of the future development period amid the rapid advancements inbio-pharmaceutical technology and equipment, risks of failure are inherent in the development of products basedon new technologies. To maintain profitability, the Group, alone or with others, must successfully develop newdrugs, obtain required regulatory approvals and successfully manufacture, introduce and market such products.However, there are the possibilities that any new drugs based on new technologies will be found to be ineffectiveor toxic, or otherwise fail to obtain necessary regulatory approvals. Other risks include the possibility that thesenew drugs, even if safe and effective, may be difficult to manufacture on a large scale or will be uneconomicalto market or that proprietary rights of third parties may preclude the Group from marketing its new drugs. Otherthird parties may also market superior drugs or drugs equivalent to the Group’s products. As a result, there canbe no assurance that the Group’s R&D activities will always result in commercially viable products, and there canbe no assurance that the Group will be able to finally realise profit from such new drugs.
Further, the Group’s future success depends largely on its ability to maintain a competitive position withrespect to these technologies. Substantially all of the Group’s resources, including the net proceeds from thePlacing, have been, and will for the foreseeable future continue to be, dedicated to the development of the Group’stechnology and its application to commercialisation. Rapid technological developments in the bio-pharmaceuticalindustry may result in the Group’s new drugs or technologies becoming obsolete before the Group recovers anyexpenses it incurs in connection with the R&D of such new drugs.
Future capital requirements and uncertainty of additional funding
The Company’s comprehensive technological approach to developing new drugs requires capital to financeincreasing operating expenditures over the next several years as it expands its scientific infrastructure and its
RISK FACTORS
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R&D activities. The Company’s future capital requirements will depend on many factors, including, amongothers, progress of its R&D programs, the number and breadth of these programs, and the ability of the Companyto maintain and establish additional strategic alliance and co-development arrangements. No assurance can begiven that additional financing will be available when needed.
If the Company raises additional capital by issuing equity securities, ownership dilution to Shareholderswill result. If the Company raises additional capital through strategic alliance and co-development arrangements,the Company may be required to relinquish rights to certain of its technologies or product candidates, either ofwhich could have an adverse effect on the Company’s business, financial condition and results of operations. Inthe event that adequate funds are not available, the Company’s business would be adversely affected.
Reliance on strategic alliances with investors and co-development arrangements
The Company has formed strategic alliances and co-development arrangements with universities, hospitalsand research institutes which involve the outsourcing of part of the R&D process to them. There can be noassurance that the Company will be able to establish additional strategic alliances or co-developmentarrangements necessary to develop and commercialise products based upon the Company’s research programs.There is also no assurance that such strategic alliances or co-development arrangements will be on termsfavourable to the Company, or that the current or any future strategic alliances or co-development arrangementsultimately will be successful. If any of the Company’s strategic alliances or co-development arrangements failsto collaborate successfully in a timely manner, the development or commercialisation of the Company’s productcandidates or research programs would be delayed or terminated. Any such delay or termination could have anegative effect on the Company’s business, financial position and results of operations.
Limited control over collaborative arrangements
The Company has established collaborative arrangements with academic institutes and research companies.These academic institutes and research companies may have commitments to, or consulting or advisory contractswith, other entities that may limit their availability to the Company. As a result, the Company has limited controlover their activities and, except as otherwise required by its collaboration and consulting agreements, can expectonly limited amounts of their resources to be dedicated to the Company’s activities. Furthermore, there can beno assurance that any of these contracting entities will not conduct similar activities as the Group does nor therecan be any assurance that the Group will not face direct competition from any of them. Accordingly, theCompany’s business or operations may not benefit from such collaborative arrangements as the Directors expect.
Intellectual property rights
The Company’s commercial success depends largely on its ability to protect its proprietary drugs andtechnologies. Before its conversion into a joint stock limited company, the Company was already the registeredowner of 1 patent and the applicant of 7 patents under its name as a limited liability company. After itsconversion, the Company has applied to rename the owner and applicant of these patents to its existing name asa joint stock limited company. Also, the applications of 3 patents will be transferred from Professor Xu De Yuto the Company, pending completion of the procedures. Further, the Company is applying in its own name for theregistration of another 3 patents and 2 trademarks, in addition to the 6 trademarks that it owns. All theseapplications are still pending. There can be no assurance that the Company will eventually be granted patents forany of its pending patent applications or proprietary technologies under development. It may be possible for athird party to copy or otherwise obtain and use the Group’s intellectual property rights without authorisation.There can be no assurance that any steps taken by the Group will successfully prevent misappropriation orinfringement of its intellectual property rights. Furthermore, there can be no assurance that other companies willnot independently develop similar or alternative technologies, duplicate any of the Company’s technologies, or,if patents are issued to the Company, design around the patented technologies developed by the Company.
RISK FACTORS
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1
Product liability and insurance
Clinical trials, manufacturing, marketing and sale of any of the Company’s potential new drugs may exposethe Company to liability claims from the use of such pharmaceutical products. For details on current PRC lawsrelating to product liability and insurance, please refer to the paragraph headed “Product liability and insurance”under the section headed “Industry overview” of this prospectus. However, the Company currently does notmaintain any third party liability insurance to cover any claims in respect of personal injury or deterioration ofproducts sold by it. Details of the insurance policies maintained by the Company are set out in the paragraphheaded “Insurance” under the section headed “Business” of this prospectus. There can be no assurance that theCompany will be able to obtain third party liability insurance or, if obtained, that sufficient coverage can beacquired at a reasonable cost. Any inability to obtain sufficient insurance coverage at an acceptable cost orotherwise to protect against potential product liability claims could prevent or inhibit the commercialisation ofpharmaceutical and diagnostic products developed by the Company. A product liability claim or recall could havea material adverse effect on the business or financial condition of the Company.
Renewal of permits and business licences
As a pre-requisite for carrying on pharmaceutical manufacturing business in the PRC, all pharmaceuticalenterprises are required to obtain from various governmental authorities certain permits and business licences.Details of these permits and business licences are set out in the paragraph headed “Pre-requisite for entering intothe pharmaceutical industry in the PRC” under the section headed “Industry overview” of this prospectus.
The Company manufactures and sells medical diagnostics reagents, which are the only pharmaceuticalproducts currently manufactured and sold by the Group. Sale of medical diagnostic reagents accounted forapproximately RMB3.7 million and RMB5.9 million of the Company’s sales revenue for each of the two yearsended 31st December, 2001 respectively. The Company possesses all requisite permits and business licences forthe manufacture of its medical diagnostic products. However, these permits and business licences held by theCompany are subject to periodic renewal, reassessment by the relevant government authorities and the standardsof compliance required in relation thereto may from time to time be subject to changes.
If such renewals are not granted to the Company, it may have an adverse effect on the operation of theCompany’s business. There may be a possibility that the Company will not be able to carry on its business withoutsuch permits and business licences being granted. In addition, it may be costly for the Company to comply withany subsequent modification of, additions or new restrictions to, these compliance standards, which may directlyaffect the Company’s profitability.
Compliance with the GMP standards
Since 1988, the Ministry of Public Health of the PRC has started to require all pharmaceuticalmanufacturing enterprises in the PRC to comply with the GMP standards. Pursuant to the Notice RegardingRelevant Stipulations on Implementing Pharmaceuticals GMP GMP issued bythe SDA in 2001, pharmaceutical manufacturers in the PRC should comply with GMP standards by 30th June,2004. If any of these manufacturers fail to obtain the GMP certification in the stipulated time limit, its Approvalfor Drug Production will not be renewed and cannot continue its production of pharmaceutical products. Detailsof the GMP standards are set out in the paragraph headed “GMP” under the section headed “Industry overview”of this prospectus.
At present, production by the Company of its medical diagnostic reagents has not been accredited asGMP-compliant. It is the intention of the Directors that the Company’s production to fully comply with the GMPstandards before the Company’s planned production of recombinant human lymphotoxin - � derivatives (rhLT)in the second half of 2004. If the Company fails to obtain the GMP-compliant accreditation before such time limit,the Company’s business and profitability will be affected.
RISK FACTORS
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1
AA
1
Reliance on key management and employees
The Company’s success is, to a certain extent, attributable to the expertise and experience of themanagement, including the executive Directors, and their well-established relationships with reputableuniversities, hospitals and large corporations. Each of the executive Directors has entered into a new servicecontract with the Company for an initial term of three years commencing from 20th January, 2002 which willautomatically continue, based on later mutual agreement, upon expiry unless terminated in accordance with theterms of their respective service contracts. Should any of them cease to be involved in the Company’smanagement in the future, the Company’s operations and profitability may be adversely affected.
The Company is highly dependent on the principal members of its management and scientific staff. The lossof services of any of these employees could impede significantly the achievement of the Company’s developmentobjectives. Furthermore, recruiting and retaining qualified scientific personnel to perform R&D work in the futurewill also be critical to the Company’s success. There can be no assurance that the Company will be able to attractand retain such employees on acceptable terms.
Reliance on the PRC market
During the Track Record Period, all of the Company’s turnover was derived from the PRC market. If thereis any significant decline in the condition of the PRC economy, the Company’s sales and profitability will beadversely affected.
Dividends
The Group did not declare any dividend for the year ended 31st December, 2000 while dividends ofapproximately RMB8.0 million, financed by internal resources, were declared for the year ended 31st December,2001. The Directors do not intend to distribute any further dividend before the listing of the H Shares on GEM.However, the payment of the above dividends should not be used as a reference for the Company’s future dividendpolicy. Further details on the dividend policy of the Company are set out in the subsection headed “Dividends”under the section headed “Financial information” of this prospectus.
Implementation of the Company’s strategies in achieving its business objectives
The business plan of the Company as described in the section headed “Business objectives” of thisprospectus is based on circumstances currently prevailing and the bases and assumptions that certaincircumstances will or will not occur, as well as the risks and uncertainties inherent in various stages ofdevelopment. However, there is no assurance that the Company will be successful in implementing its strategiesor that its strategies, even if implemented, will lead to successful achievement of the Company’s objectives. Ifthe Company is not able to implement its strategies effectively, the Company’s business operations and financialperformance may be adversely affected.
RISKS RELATING TO THE INDUSTRY
Medicare reforms in the PRC
With reference to the “Opinion on Medical and Hygiene System Reform in Cities and Towns”( ) issued on 21st February, 2000, the medicare reforms in the PRC seek topromote the separation of the doctoring and medicine dispensing functions and the removal of hospitals’ incentiveto sell medicine. The Directors believe that the likely impact of such reforms will likely result in a change in thestructure of the distribution channel for medicine in the PRC whereby hospitals in the PRC will reduce theirpurchases for pharmaceutical products which may in turn affect the profitability of the Company.
RISK FACTORS
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1
1
Competition
There may be other companies or research institutes in the PRC or from overseas that are engaged in theR&D of category I and II drugs and technologies that the Group researches and develops or diagnostic reagentsthat the Group manufactures. Developments by the Group’s competitors may render the Group’s existing productsand products under development obsolete or non-competitive. Some of these competitors may be developing ortesting, or are currently selling products that compete directly or indirectly with the technologies or products ofthe Group or they may have stronger internal R&D capabilities or stronger R&D partnerships than the Group.Accordingly, the Group may not obtain patent protection, receive regulatory approval or commercialise productsbefore its competitors and the Group’s business and financial conditions may be adversely affected.
After its accession into the WTO, the PRC is required to reduce the rate of tariff imposed on importedpharmaceutical products from an average of approximately 12% to 6% or less, a level comparable to that adoptedby other members of the WTO. These reductions are likely to result in increased competition from overseasmanufacturers which are engaged in the production of similar products manufactured by the Company.Accordingly, the Company’s profitability may be adversely affected by the PRC’s accession into the WTO.
Price control
The prices of certain pharmaceutical products in the PRC are subject to the control of the relevant state andprovincial price administration authorities. In practice, the price control on some pharmaceutical products is toset a ceiling on the price of each subject product. The actual price for any given price-controlled product set bymanufacturers, wholesalers and retailers must be set below the price ceiling in accordance with the applicablegovernment price control rules. Only those pharmaceutical products which are included in the price control listsadministered at the state or provincial level are subject to price control. Details of the price control are set outin the paragraph headed “Price control” under the section headed “Industry overview” of the prospectus.
Hence, the Company may not be able to increase, at its discretion, the prices of certain of its products abovethe controlled price ceiling without prior governmental approval and does not have unfettered freedom tomaximise its profits. In the event that the costs of the Company’s products increase and application for priceincrease is not approved by the regulatory authorities, the Company’s profitability may be adversely affected.
RISKS RELATING TO THE PRC
Currency conversion in the PRC and exchange rate risk
Substantially all of the Company’s operating revenues are denominated in Renminbi. To pay dividends tothe shareholders outside the PRC, a portion of the Company’s Renminbi revenue must be converted into HongKong dollars. Pursuant to the Regulations on the Foreign Exchange Settlement, Sale and Payment( ) (the “Settlement Regulations”), foreign currencies required for the distribution ofprofits and payment of dividends may be purchased from designated foreign exchange banks upon presentationof board resolutions authorising the distribution of profits or dividends of the Company. With effect from 1stJanuary, 1994, the PRC government abolished its two-tier exchange rate system between Renminbi and foreigncurrencies and substituted it with a unified floating exchange rate system largely based on market supply anddemand. Under the new system, the People’s Bank of China publishes a daily exchange rate for Renminbi basedon the previous day’s dealings in the inter-bank foreign exchange market. In light of the introduction of thisunified floating exchange rate system, movements in the exchange rate of Renminbi against other currencies, suchas the U.S. dollars, are to a certain extent, subject to market forces.
On 20th June, 1996, the People’s Bank of China promulgated the Regulations on the SettlementRegulations, which came into effect on 1st July, 1996. The Settlement Regulations abolished the remainingrestrictions on convertibility of foreign exchange in respect of current account items while retaining the existingrestrictions on foreign exchange transactions in respect of capital account items. Despite such development, theRenminbi is still not freely convertible. Under the current foreign exchange control system in the PRC, there isno assurance that sufficient foreign currency will be available at a given exchange rate to satisfy the demand ofa particular enterprise in full. There can be no assurance that shortages in the availability of foreign currency willnot restrict the Company’s ability to obtain sufficient foreign currency to pay dividends on its H Shares or tosatisfy its other foreign currency requirements.
RISK FACTORS
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1
AA
1
A
A
Moreover, there is no assurance that Renminbi will not be subject to devaluation or depreciation due toadministrative or legislative intervention by the PRC Government or adverse market movements. As most of thesales of the Company’s products are settled in Renminbi and Renminbi is still not a freely convertible currency,a devaluation of Renminbi may adversely affect the value of the profits generated by the Company when they areconverted into U.S. dollars or Hong Kong dollars. The Company’s ability for any future dividend payment inHong Kong dollars may also be adversely affected.
Political and social considerations
Since 1978, the PRC Government has been undergoing a series of reforms, with emphasis on its politicalsystems. Such reforms have resulted in significant economic growth and social progress and many of the reformsare expected to be refined and improved. Other political and social factors may also lead to further readjustmentand refinement of the reform measures. There is no assurance that such reform measures introduced by the PRCGovernment will have a favourable effect on the operations of the Company. The Company’s operations andperformance may be adversely affected by changes in the PRC political and social conditions resulting fromchanges in the policies adopted by the PRC Government.
Economic and legal considerations
The economy of the PRC has gradually been transformed from a planned economy to a market economywith socialist characteristics. There is no certainty that the PRC Government’s pursuit for economic reforms willcontinue.
Since the open-door policy was adopted by the PRC in 1978, the trend of the PRC’s legislation has, on thewhole, significantly enhanced the protection afforded to foreign investors in the PRC. However, as the PRC legalsystem matures, there is no assurance that changes in its legislation or the related interpretation will not have anadverse effect on the business and prospects of the Company.
Different regulatory framework
As substantially all of the Company’s business is conducted in the PRC, the Company’s operations aregoverned principally by the laws of the PRC. As a PRC company offering and listing its H Shares outside the PRC,the Company is subject to the Special Regulations and to the Mandatory Provisions. The Mandatory Provisionscontain certain provisions that are required to be included in the articles of association of PRC companies to belisted abroad (including Hong Kong) and are intended to regulate the internal affairs of those companies. TheCompany Law and the Special Regulations, in general, and the provisions for the protection of shareholders’rights and access to information, in particular, are less developed than those applicable to companies incorporatedin Hong Kong, the United Kingdom, the U.S. and other developed countries or regions.
The Company Law is different in certain important aspects from company laws in Hong Kong, the U.S. andother common law countries or regions, particularly with regard to investors’ protection, including in such areasas derivative actions by minority shareholders and other minority protections, restrictions on directors, financialdisclosure, variations of class rights, procedures at general meetings and payments of dividends.
The limited nature of investor protection under the Company Law is compensated for, to a certain extent,by the introduction of the Mandatory Provisions and certain additional requirements that are imposed by the GEMListing Rules with a view to reducing the scope of differences between the Companies Ordinance and theCompany Law. The Mandatory Provisions and those additional requirements must be included in the articles ofassociation of all PRC companies applying to be listed in Hong Kong. The Articles of Association haveincorporated the provisions required by the Mandatory Provisions and the GEM Listing Rules. Despite theincorporation of those provisions, there can be no assurance that holder(s) of Shares will enjoy the sameprotections that they may be entitled to in other jurisdictions.
RISK FACTORS
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A
1AA
Securities laws and regulations
At present, the regulatory framework for the securities industry in the PRC is still at an early stage ofdevelopment. The CSRC is responsible for administering and regulating the national securities markets anddrafting relevant regulations for the regulation of the national securities markets. Regulations of the State Counciland the relevant implementing measures of the CSRC, such as provisions dealing with acquisitions of listed PRCcompanies and disclosure of information, apply to listed companies in general without being confined tocompanies listed on any particular stock exchange. Hence, it is possible that those provisions may be applicableto a joint stock limited company established in the PRC with shares listed on a stock exchange outside the PRC,such as the Company upon completion of the Placing.
On 1st July, 1999, the PRC Securities Law became effective. The Securities Law is the fundamental lawcomprehensively regulating the securities markets in the PRC and applies to the issuance and trading in the PRCof shares, company bonds and other securities designated by the State Council according to the PRC laws. TheCompany Law, the rules and regulations recently promulgated thereunder and laws relating to PRC companieswhose shares are offered overseas (including Hong Kong) provide, to a certain extent, a legal frameworkgoverning the corporate conduct of companies, such as the Company, and their directors and shareholders.Investors should note that the regulatory framework for the securities industry in the PRC is at an early stage ofdevelopment, any change of which is beyond the control of the Company.
Enforceability of judgments and arbitration
The PRC has not entered into treaties or arrangements providing for the recognition and enforcement ofjudgments of courts in Hong Kong or most other jurisdictions. Accordingly, it may be difficult to securerecognition and enforcement in the PRC of the judgments of courts in Hong Kong and most other jurisdictions.It should also be noted that under the Articles of Association, if a holder of Shares has a dispute with theCompany, a Director, a Supervisor, a manager, an officer, or has a claim arising out of the Articles of Association,or any rights or obligations conferred or imposed by the Company Law and regulations concerning the affairs ofthe Company, that person shall, unless otherwise provided in the Articles of Association, submit the dispute orclaim to the Hong Kong International Arbitration Centre or the China International Economic and TradeArbitration Commission for arbitration. The arbitral award shall be final and binding on all parties.
The PRC is a signatory to the United Nations Convention on the Recognition and Enforcement of ForeignArbitral Awards (the “New York Convention”) which has historically permitted reciprocal enforcement in the PRCof awards of arbitral bodies located in other New York Convention signatory countries. Following the resumptionof sovereignty over Hong Kong by the PRC on 1st July, 1997, the New York Convention no longer applies to theenforcement of Hong Kong arbitration awards in other parts of the PRC. A Memorandum of Understanding on thearrangement for reciprocal enforcement of arbitral awards between Hong Kong and China was signed on 21stJune, 1999. This new arrangement concerning mutual enforcement of arbitral award between the PRC and HongKong was approved by the Supreme People’s Court of the PRC and the Hong Kong Legislative Council, andbecame effective on 1st February, 2000.
RISKS RELATING TO THE STATISTICS AND STATEMENTS MADE IN THIS PROSPECTUS
Accuracy of certain statistics and statements with respect to the bio-pharmaceutical industry containedin this prospectus
Certain statistics and facts in this prospectus, such as statistics and statements relating to thebio-pharmaceutical industry, are derived from various public and private publications. Such information has notbeen independently verified by the Company, the Sponsor, the Underwriters or any of their respective advisersand may not be accurate, complete and/or up-to-date.
RISK FACTORS
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A
1
A
For the purpose of the listing of the H Shares on GEM, the Company has sought a number of waivers from
the Stock Exchange in relation to certain requirements under the GEM Listing Rules. Details of such waivers are
described below.
NON-EXEMPT CONTINUING CONNECTED TRANSACTIONS
Prior to the Placing, the Company has entered into a number of transactions with Shanghai Pharmaceutical,
China General, ZJ Hi-tech Park Co., and Fudan University (all Initial Management Shareholders) which include,
among other things, R&D funding and technology transfers. In connection with the application by the Company
for listing on GEM, the Company has entered into several other agreements with these Initial Management
Shareholders to regulate the future relationships between the parties. The Company has also entered into a
technological services agreement and an agreement for use of premises and sharing of facilities with Morgan-Tan,
its only subsidiary. These agreements (details of which are set out in the subsection headed “Non-exempt
continuing connected transactions” under the section headed “Relationship with the Initial Management
Shareholders” in this prospectus) include:
Transactions with Shanghai Pharmaceutical
1. Technology transfer agreement (new �-glucosidase inhibitor) with Shanghai Huashi Pharmaceutical
Hi-Tech Industrial Development Co., Ltd., a wholly-owned subsidiary of Shanghai Pharmaceutical;
3. Sales to Shanghai Pharmaceutical pursuant to the sales and distribution services agreement;
4. Joint research center agreement with Shanghai Pharmaceutical;
Transactions with China General
5. Technology transfer agreement (FZ-00-01, FZ-00-04 and FZ-00-05);
6. R&D funding and technology transfer agreement with China General;
Transactions with Fudan University
7. Technological co-operation agreement with Fudan University;
Transactions with Morgan-Tan
8. Use of premises and sharing of facilities agreement; and
9. Technological services agreement.
WAIVERS FROM STRICT COMPLIANCE WITH THE GEM LISTING RULES
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Upon the listing of the H Shares on GEM, the following continuing or future transactions will constitute
connected transactions under the GEM Listing Rules:
ItemNo. Transactions
Connectedperson
Revenue /expenditure
Cross referencewith the section
headed“Relationship with
the InitialManagement
Shareholders” ofthis prospectus(paragraph no.)
Waivers applied for:
1. Balance of transfer fee receivable fornew �-glucosidase inhibitor
ShanghaiPharmaceutical
Revenue 1(1)
2. Payment of technology transfer fee forr-tPA
ShanghaiPharmaceutical
Expenditure 1(2)
3. Sales to Shanghai Pharmaceuticalcommencing 2004
ShanghaiPharmaceutical
Revenue 1(3)
4. Capital contribution to the Joint Lab bythe Company
ShanghaiPharmaceutical
Expenditure 1(4)
5. Payment for technological cooperationand outsourcing services
Fudan University Expenditure 3(1)
6. Payment for technological andco-development services
Morgan-Tan Expenditure 4(1)
7. Revenue receivable for use of premisesand sharing of facilities
Morgan-Tan Revenue 4(2)
Waivers not applied for:
1. Revenue receivable from commercialsales of new �-glucosidase inhibitor
ShanghaiPharmaceutical
Revenue 1(1)
2. Payment of sales revenue receivableupon commercial sales of r-tPA
ShanghaiPharmaceutical
Expenditure 1(2)
3. Transfer fee receivable for transfer ofrhPTH technology (if transfer toShanghai Pharmaceutical)
ShanghaiPharmaceutical
Revenue 1(2)
4. Payment of transfer fee attributable toShanghai Pharmaceutical for transfer ofrhPTH to third party
ShanghaiPharmaceutical
Expenditure 1(2)
5. Payment of sales revenue receivableupon commercial sales of rhPTH
ShanghaiParmaceutical
Expenditure 1(2)
WAIVERS FROM STRICT COMPLIANCE WITH THE GEM LISTING RULES
— 33 —
ItemNo. Transactions
Connectedperson
Revenue /expenditure
Cross referencewith the section
headed“Relationship with
the InitialManagement
Shareholders” ofthis prospectus(paragraph no.)
6. Revenue receivable from commercialsales of FZ-00-01, FZ-00-04 andFZ-00-05
China General Revenue 2(1)
7. R&D funding China General Revenue /Expenditure
2(2)
8. Revenue receivable from transfer oftechnologies by the Joint Lab before2004
ShanghaiPharmaceutical
Revenue 1(4)
The Company has applied for a waiver from strict compliance with the GEM Listing Rules in respect of the7 transactions under the heading “Waivers applied for” above on the ground that these transactions are or will beentered into on a continuing basis. The Company considers that disclosure and approval of them in fullcompliance with GEM Listing Rules would be impracticable and, in particular, add unnecessary administrativecosts to the Company. The Directors, including the independent non-executive Directors, are of the view that suchtransactions have been entered into in the ordinary and usual course of business and on normal commercial termsfor transactions of a similar nature and are fair and reasonable and in the interests of the Shareholders taken asa whole. Based on the documents and information provided by the Company, particularly in view of the featuresof the bio-pharmaceutical industry, the Sponsor concurs with the Directors’ view that the continuing connectedtransactions as set out above are in the ordinary and usual course of business of the Company and on normalcommercial terms or the terms of which for transactions of a similar nature are fair and reasonable so far as theinterests of the Shareholders taken as a whole are concerned.
As such, the Company has applied to the Stock Exchange for a waiver in respect of the transactions set outbelow for a period of three financial years expiring on 31st December, 2004 from strict compliance with thenormal approval and disclosure requirements related to connected transactions under GEM Listing Rules subjectto the following conditions:
● That such transactions, and the respective agreements (if any) governing such transactions, will beentered into:
(1) in the ordinary and usual course of business of the Company;
(2) either on normal commercial terms or, if there are not sufficient comparable transactions tojudge whether they are on normal commercial terms, on terms no less favorable than termsavailable from / to (as appropriate) independent third parties;
(3) on terms that are fair and reasonable so far as the Shareholders are concerned; and
(4) if applicable, with the annual aggregate value of each of such categories of connectiontransactions not exceeding the relevant annual caps (described below).
● Details of the transactions, including the date, the identity of the parties, a brief description of thetransactions and their purposes, the consideration, the nature of the parties’ relationship and theextent of interest of the connected persons, as set out in rule 20.34 (1) to (5) of GEM Listing Rules,shall be disclosed in the Company’s annual report.
WAIVERS FROM STRICT COMPLIANCE WITH THE GEM LISTING RULES
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● The Company’s independent non-executive Directors who are not involved in the management of theCompany shall review the transactions annually and confirm in the Company’s annual report andaccounts covering that year that:
(1) the transactions have been entered into by the Company and its subsidiary in the ordinary andusual course of their businesses;
(2) the transactions have been entered into on terms that are fair and reasonable so far as theShareholders are concerned;
(3) the transactions have been entered into on normal commercial terms or, where there is noavailable comparison, on terms no less favourable than those available to and from independentthird parties; and
(4) in accordance with the terms of the agreement governing such transactions.
● The auditors of the Company shall review annually the transactions, details of which shall be set forthin the Company’s annual report and accounts and as well as provide the Directors with a letter statingthat:
(1) the transactions have been approved by the Directors;
(2) the transactions have been entered into in accordance with the pricing policies of the Companyand its subsidiary;
(3) the transactions have been entered into in accordance with the terms of the agreement governingsuch transactions; and
(4) the transactions have not exceeded the relevant annual limits (described below) as agreed withthe Stock Exchange.
● For the purpose of the above review by the Company’s auditors, each of the counterparties to thecontinuing connected transactions has undertaken to the Company that it will provide the auditorswith access to its accounting records as well as its subsidiaries’ and associates’ accounting records,where possible.
● The aggregate value of such connected transactions shall not exceed the annual limits set out below:
Revenue
Transactions Proposed annual limit(in RMB)
Shanghai Pharmaceutical
1. Technology transfer agreement
● payment of balance of transfer fee for new �-glucosidaseinhibitor for 2002 only
1 million (for 2002)
2. Sales to Shanghai Pharmaceutical pursuant to the sales anddistribution agreement commencing 2004
40 million (for 2004)
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Morgan-Tan
3. Use of premises and sharing of facilities and servicesagreement
2 million
Expenditure
Transactions Proposed annual limit(in RMB)
Shanghai Pharmaceutical (rhPTH and r-tPA)
1. R&D funding agreement
● payments of technology transfer fee for r-tPA 3.0 million (for 2002)1.5 million (for 2003)
Fudan University
2. Technological cooperation agreement (for 2002 to 2004) 5 million
Morgan-Tan
3. Technological services agreement 7.4 million (for 2002)4.0 million (for 2003)4.0 million (for 2004)
Others
Transactions
Joint Lab
● Capital contribution by the Company to the Joint Labfor 2002 to 2004 only
2.25 million
● The Company shall promptly notify the GEM Listing Division of the Stock Exchange if it knows or
has reason to believe that the independent non-executive Directors and/or the auditors will not be able
to confirm the matters set out in Rules 20.27 and/or 20.28, as required under Rule 20.29 of the GEM
Listing Rules respectively, in which case the Company may have to re-comply with Rules 20.26(3)
and (4) of the GEM Listing Rules and any other conditions the GEM Listing Division of the Stock
Exchange considers appropriate in respect of the relevant non-exempt continuing connected
transactions;
● In the event that any of the annual limits is to be greater than the higher of HK$10,000,000 or 3%
of the net tangible assets of the Company in any year, the non-exempt continuing connected
transaction(s) and the annual limit(s) are subject to review and reapproval by independent
Shareholders at the annual general meeting of the Company following the initial approval and at each
subsequent annual general meeting so long as the relevant non-exempt continuing connected
transaction(s) continue(s). The independent non-executive Directors will be required to opine in the
annual report of the Company as to whether or not the Company should continue with the
agreement(s) for the relevant non-exempt continuing connected transaction(s) as required under Rule
20.30 of the GEM Listing Rules.
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The Stock Exchange has granted waivers as the case may be for a period from one year to three years ending31st December, 2004 as described above. This means that the Company has to comply strictly with therequirements of Chapter 20 of the GEM Listing Rules in respect of the non-exempt continuing connectedtransactions if such transactions continue after the expiry of the waivers unless the Company obtains similarwaivers from the Stock Exchange in relation thereto.
In the event that any of the annual limit(s) is/are exceeded or if the Company enters into any newtransactions or agreements with any connected persons (within the meaning of the GEM Listing Rules) in thefuture, the Company will comply with the provisions of Chapter 20 of the GEM Listing Rules dealing withconnected transactions unless it applies for, and obtains, a separate waiver from the Stock Exchange.
ESCROW ARRANGEMENTS
Under Rule 13.16(1) of the GEM Listing Rules, every initial management shareholder shall place in escrow,with an escrow agent and on such terms as are acceptable to the Stock Exchange, all its relevant securities fora period of (a) 12 months from the listing date or (b) where that shareholder’s relevant securities represent nomore than 1% of the issued share capital of the Company as at the listing date, 6 months from the listing date,and under Rule 13.17(1) of the GEM Listing Rules, every significant shareholder shall place in escrow, with anescrow agent and on such terms as are acceptable to the Stock Exchange, all its relevant securities for a periodof six months from the listing date.
The Directors consider that Rule 13.16(1) and Rule 13.17(1) of the GEM Listing Rules are not applicableto the Domestic Shares held by the Promoters and the Initial Management Shareholders since the Domestic Sharesheld by the Promoters and the Initial Management Shareholders are not represented by any form of physical scripor title documents. This means that the Promoters and the Initial Management Shareholders may not be able tocreate any pledge or charge by deposit of the title documents of their respective Domestic Shares or any partthereof. This also means that the subject matter for custody to be held by the escrow agent required under Rule13.16(1) and Rule 13.17(1) of the GEM Listing Rules does not physically exist in any form available for custodypurposes.
Under the relevant laws and regulations of the PRC, the Domestic Shares held by the Initial ManagementShareholders are subject to the following legal restrictions:
1. Article 147 of Company Law provides that promoter’s shares in a joint stock limited liabilitycompany established under the PRC Company Law are not transferable within three years after theestablishment of such company; and
2. Article 75 of Law of Guarantee of the PRC (promulgated on 30th June, 1995) provides that onlyshares which are transferable may form lawful security for the purposes of pledge or charge in thePRC.
As the Company was converted into and incorporated as a joint stock limited company on 8th November,2000, the Domestic Shares held by the Initial Management Shareholders are subject to the restrictions imposedby the Company Law and Law of Guarantee of the PRC and are therefore not transferable for three years until8th November, 2003.
As the Domestic Shares held by the Promoters are not transferable, they cannot constitute lawful securityfor pledge or charge in the PRC. The Company has therefore applied for a waiver from strict compliance withRule 13.16(1) of the GEM Listing Rules from the Stock Exchange, and the Stock Exchange has granted a waiverfrom strict compliance with Rule 13.16(1) in relation to the escrow arrangement requirement. However, if Articles147 of the PRC Company Law and Article 75 of the Law of Guarantee are released or removed prior to 8thNovember, 2003, the Initial Management Shareholders would have to respectively comply with the escrowarrangement requirement under the GEM Listing Rules.
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WAIVER ON STATING PROPERTY ASSETS AT REVALUED AMOUNTS
Under Rule 18.35 of the GEM Listing Rules, where a listed issuer has caused any property assets to be
valued (in accordance with Rule 8.01 of the GEM Listing Rules), and included such a valuation in the prospectus
relating to the initial public offer of shares in the listed issuer, the property assets shall be stated in the issuer’s
financial statements at such valuation (or subsequent valuation) less the aggregate amount provided or written off
for depreciation and diminution in value unless:
(i) such property assets fall to be treated as investment properties; and
(ii) the ordinary course of business of the listed issuer and the group includes property development and
the properties which have been valued are in the course of development or are held for future
development and have been classified as such in the accounts of the listed issuer or the group.
In addition, listed issuers are required to state, by way of a note in the financial statements, the additional
depreciation charged against the profit and loss account as a consequence of complying with Rule 18.35 of the
GEM Listing Rules.
In order to comply with Rule 8.01 of the GEM Listing Rules, the property assets of the Group were revalued
as at 31st May, 2002, by the Group’s property valuer, Vigers Hong Kong Ltd., for the purpose of inclusion in this
prospectus. According to the valuation report as at 31st May, 2002, which is set out in Appendix II to this
prospectus, the valuation of the Group’s office situated at No. 308 Cailun Road, Zhangjiang Hi-Tech Park,
Shanghai, the PRC (the “Property”) was stated at RMB26,000,000. As stated in the unaudited consolidated
management accounts of the Group for the five months ended 31st May, 2002, the net book value of the Property
as at 31st May, 2002 was approximately RMB25,780,000. Accordingly, a surplus of approximately RMB220,000
was recorded from the revaluation of the Property as at 31st May, 2002.
If the Group was to fully comply with Rule 18.35 of the GEM Listing Rules, the Group would carry a
revaluation surplus of approximately RMB220,000 in respect of the Property which represents approximately
0.1% of the adjusted net tangible assets of the Group of approximately RMB257,115,000 (as calculated in the
subsection headed “Adjusted net tangible assets” based on the minimum indicative Offer Price of HK$1.13 per
Placing Share under the section headed “Financial information” of this prospectus).
The holding of land and buildings is not a core business activity of the Group. As the Property is not
classified by the Group as an investment property nor is the Group engaged in property development, the
Directors are of the view that the costs and efforts associated with complying strictly with Rule 18.35 of the GEM
Listing Rules, which primarily relate to costs of retaining the services of a professional property valuer to carry
out property revaluations regularly, will outweigh the benefits that can be derived and will therefore not be in the
best interests of the Shareholders.
The Company has applied to, and obtained from, the Stock Exchange a waiver from strict compliance with
Rule 18.35 of the GEM Listing Rules so that the Company can, following its listing, continue its practice to state
the value of the Property in its financial statements at cost less provision for accumulated depreciation and
impairment in value of such land and buildings. As a result, the revaluation surplus will not be reflected in the
Group’s financial statements.
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FINANCIAL PERIOD REPORTED ON
Pursuant to Rule 11.11 of the GEM Listing Rules, the Company is required to include the financial
results which must not have ended more than six months before the date of this prospectus. As this
prospectus includes the financial results of the Group covering only the period from 1st January, 2000 up
to 31st December, 2001 which has ended more than six months before the issue date of this prospectus, the
Company has applied for and has been granted a waiver from strict compliance with Rule 11.11 of the GEM
Listing Rules by the Stock Exchange.
The Company has obtained from the Stock Exchange a waiver from strict compliance with the
requirement of Rule 11.11 of the GEM Listing Rules on the basis of the Directors’ confirmation that they
have performed sufficient due diligence on the Group to ensure that up to the date of this prospectus and
save as disclosed in this prospectus, there has been no material adverse change in the financial or trading
position of the Group since 31st December, 2001 and there is no event which would materially affect the
information shown in the accountants’ report set out in Appendix I to this prospectus.
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DIRECTORS’ RESPONSIBILITY FOR THE CONTENTS OF THIS PROSPECTUS
This prospectus, for which the Directors collectively and individually accept full responsibility, includesparticulars given in compliance with the Companies Ordinance and the GEM Listing Rules for the purposes ofgiving information with regard to the Group. The Directors, having made all reasonable enquiries, confirm that,to the best of their knowledge and belief:
(a) the information contained in this prospectus is accurate and complete in all material respects and notmisleading;
(b) there are no other matters the omission of which would make any statement in this prospectusmisleading; and
(c) all opinions expressed in this prospectus have been arrived at after due and careful consideration andare founded on bases and assumptions that are fair and reasonable.
The H Shares are offered solely on the basis of the information contained and representations made in thisprospectus. No person is authorised in connection with the Placing to give any information or to make anyrepresentation not contained in this prospectus, and any information or representation not contained herein mustnot be relied upon as having been authorised by the Company, the Selling Shareholders, the Underwriters, anyof their respective directors or any other person involved in the Placing.
CONSENT OF CSRC
CSRC has given its approval to the Placing, the making of applications by the Company to list the H Shareson GEM and the Share Subdivision. In granting such approval, CSRC accepts no responsibility for the financialsoundness of the Company nor the accuracy of any of the statements made or opinions expressed in thisprospectus.
FULLY UNDERWRITTEN
This prospectus is published solely in connection with the Placing, which is sponsored by Guotai JunanCapital. The H Shares are fully underwritten by the Underwriters pursuant to the Underwriting Agreement. Forfull information about the Underwriters and the underwriting arrangement, please refer to the section headed“Underwriting” of this prospectus.
FIXING OF THE OFFER PRICE
The Placing Shares are being offered at the Offer Price which will be determined in Hong Kong dollars bythe Joint Lead Managers, on behalf of the Underwriters, the Company and the Selling Shareholders on or beforethe Price Determination Time. For full information relating to the fixing of the Offer Price, please refer to thesection headed “Structure and conditions of the Placing” of this prospectus.
PLACING SHARES TO BE OFFERED IN HONG KONG ONLY
No action has been taken in any jurisdiction other than Hong Kong to permit the offering of the PlacingShares or the distribution of this prospectus in any jurisdiction other than Hong Kong. Accordingly, thisprospectus may not be used for the purposes of, and does not constitute, an offer or invitation in any jurisdictionor in any circumstance in which such offer or invitation is not authorised to any person to whom it is unlawfulto make an unauthorised offer or invitation.
This prospectus shall not be deemed as a public offer of the Placing Shares, whether by way of sale orsubscription, in the PRC. The Placing Shares are not being offered and may not be offered or sold directly or
INFORMATION ABOUT THIS PROSPECTUS AND THE PLACING
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indirectly in the PRC to or for the benefit of, natural or legal persons of the PRC. According to the laws andregulatory requirements of the PRC, the Placing Shares shall only be offered or sold to natural or legal personsin Taiwan, Hong Kong or Macau or any country or areas other than the PRC by means of this prospectus orotherwise.
APPLICATION FOR LISTING ON THE GEM
The Company has applied to the GEM Listing Committee for the listing of, and permission to deal in, theH Shares and any H Shares which may be issued pursuant to the exercise of options granted under the ShareOption Scheme.
No part of the Company’s share or loan capital is listed or dealt in on any other stock exchange. At present,the Company is not seeking or proposing to seek listing or permission to deal in on any other stock exchange.
PROFESSIONAL TAX ADVICE RECOMMENDED
Potential applicants for the Placing Shares are recommended to consult their professional advisers if theyare in doubt as to the taxation implications of the subscription for, holding, purchase or disposal of or dealingin the H Shares or exercising their rights thereunder. It is emphasised that none of the Company, the Directors,the Sponsor, the Underwriters, their respective directors or any other person involved in the Placing acceptsresponsibility for any tax effects on, or liabilities of, holders of H Shares resulting from the subscription for,holding, purchase or disposal of or dealing in, the H Shares.
REGISTRATION OF SUBSCRIPTION, PURCHASE AND TRANSFER OF THE H SHARES
The Company has instructed Computershare Hong Kong Investor Services Limited, its Hong Kong shareregistrar and transfer office, and Computershare Hong Kong Investor Services Limited has agreed, not to registerthe subscription, purchase or transfer of any H Shares in the name of any particular holder unless and until theholder delivers a signed form to the share registrar in respect of the H Shares bearing statements to the effect thatthe holder:
(i) agrees with the Company and each Shareholder, and the Company agrees with each Shareholder, toobserve and comply with the Company Law, the Special Regulations and the Articles of Association;
(ii) agrees with the Company, each Shareholder, Director, Supervisor, manager and officer of theCompany, and the Company acting for itself and for each Director, Supervisor, manager and officerof the Company agrees with each Shareholder, to refer all differences and claims arising from theArticles of Association or any rights or obligations conferred or imposed by the Company Law orother relevant laws and administrative regulations concerning the affairs of the Company toarbitration in accordance with the Articles of Association, and any reference to arbitration shall bedeemed to authorise the arbitration tribunal to conduct hearings in open session and to publish itsaward, and such arbitration shall be final and conclusive;
(iii) agrees with the Company and each Shareholder that the H Shares are freely transferable by the holdersthereof; and
(iv) authorises the Company to enter into a contract on his behalf with each Director and officer of theCompany whereby such Directors and officers undertake to observe and comply with their obligationsto Shareholders as stipulated in the Articles of Association.
STAMP DUTY
Dealings in the H Shares registered on the Company’s H Share register of members maintained in HongKong will be subject to Hong Kong stamp duty.
INFORMATION ABOUT THIS PROSPECTUS AND THE PLACING
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STRUCTURE OF THE PLACING
Details of the structure of the Placing, including its conditions, are set out in the section headed “Structureand conditions of the Placing” of this prospectus.
H SHARES WILL BE ELIGIBLE FOR ADMISSION INTO CCASS
If the GEM Listing Committee grants the listing of, and permission to deal in, the H Shares as mentionedin this prospectus on GEM and the Company complies with the stock admission requirements of HKSCC, the HShares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS witheffect from the date of commencement of dealings in the H Shares on GEM or on any other date HKSCC chooses.Settlement of transactions between participants of the Stock Exchange is required to take place in CCASS on thesecond business day after any trading day.
All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Proceduresin effect from time to time.
All necessary arrangements have been made for the H Shares to be admitted into CCASS.
DEALINGS AND SETTLEMENT
Dealings in the H Shares are expected to commence on Tuesday, 13th August, 2002.
H Shares will be traded in board lots of 2,000 H Shares each.
The GEM stock code for the H Shares is 8231.
The Company will not issue any temporary documents of title.
Dealings in the H Shares on GEM will be effected by participants of the Stock Exchange whose bid andoffer quotations will be made available on GEM website and the Stock Exchange’s teletext page informationsystem.
Delivery and payment for H Shares dealt on GEM will be effected two trading days following thetransaction date (“T+2”). Dealings in H Shares on GEM are settled by physical delivery of share certificatesagainst payment with a valid instrument of transfer and bought and sold notes correctly stamped in accordancewith the Stamp Duty Ordinance (Chapter 117 of the Laws of Hong Kong). For an investor in Hong Kong who hasdeposited his H Shares in his stock account in CCASS or through a CCASS participant, settlement will be effectedin CCASS in accordance with the General Rules of CCASS and CCASS Operational Procedures in effect fromtime to time. Settlement of transactions between participants of the Stock Exchange is required to take place inCCASS on the second business day after any trading day. Only certificates for H Shares registered on the H Shareshare registrar will be valid for delivery in respect of transactions effected on GEM.
If you are unsure about the procedures for dealings and settlement arrangement on the Stock Exchange onwhich H Shares are listed and how such arrangements will affect your rights and interests, you should consultyour stockbroker or other professional advisers.
EXCHANGE RATE CONVERSION
For purposes of this prospectus, unless otherwise indicated, the following exchange rates have been used,where applicable, for purposes of illustration only and do not constitute a representation that any amounts havebeen, could have been or may be exchanged, at these or any other rates on such date or any other date:
HK$7.74 = US$1.00HK$100 = RMB107
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Name Address Nationality
Executive Directors
Wang Hai Bo ( ) Unit 10FBNo. 4, 322 LaneGu Shan RoadPudong New AreaShanghaiThe PRC
Chinese
Su Yong ( ) Unit 602No. 9, 322 LaneGu Shan RoadPudong New AreaShanghaiThe PRC
Chinese
Zhao Da Jun ( ) Unit 1203No. 1, 515 LaneXin Shi Road SouthShanghaiThe PRC
Chinese
Non-executive Directors
Yu Qing Hua ( ) Unit 1002No. 28, 355 LaneDong Ming RoadPudong New AreaShanghaiThe PRC
Chinese
Zhang Li Qiang ( ) Unit 304230 LaneWo Long AreaHui Zhong AvenueChao Yang DistrictBeijingThe PRC
Chinese
Fang Jing ( ) Unit 102No. 4, 1000 LaneHang Zhou RoadYang Pu DistrictShanghaiThe PRC
Chinese
DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE PLACING
The information presented in this section and identified as having been extracted from publicly availabledocuments has not been prepared or independently verified by the Company, the Sponsor or any of theirrespective advisers or affiliates in connection with the Placing.
MARKET POTENTIAL FOR PHARMACEUTICAL PRODUCT DEVELOPERS
The pharmaceutical industry is internationally regarded as one of the highest growth industries which ischaracterised by high level of technology, high capital investment and high economic efficiency.1
As at late June 2001, there were over 3,600 enterprises engaged in the production of pharmaceuticalproducts in the PRC, which altogether manufacture about 1,500 types of pharmaceutical materials, over 4,000types of reagents as well as over 8,000 types of Chinese medicines.2 The Directors are of the view that a majorityof these enterprises are of small scale and survive by manufacturing imitative pharmaceutical products with moreor less the same medical effects of those original pharmaceutical products developed by other drug manufacturers,which accounted for about 98% of the entire domestic pharmaceutical product market. Due to the lack of capitalbacking necessary to finance long term R&D, such enterprises in general have minimal or no new drugdevelopment capability. Besides, it is the Directors’ opinion that the R&D of universities and academicorganisations in China focuses mainly on theoretical research on biotechnology as an academic discipline and donot have the capabilities and financial resources to engage in commercialisation of their research.3
Following China’s accession into the WTO, due to the pressure to improve efficiency and to raise economiesof scale in terms of all aspects of business, spanning from R&D, manufacturing to marketing and sales, theDirectors believe that competition, will intensify, resulting in more intensive consolidation and merger andacquisition activities in the PRC pharmaceutical industry.4 As a major WTO accession requirement, the Directorsexpect that more stringent intellectual property protection will be introduced and enforced.4 As a result, themarket for drug makers relying on imitative pharmaceutical products is likely to be squeezed and the demand fornew drugs by large scale pharmaceutical corporations via in-house R&D or acquisition will intensify.4
Up to 1995, China and the U.S. recorded a huge difference in the proportion of gross medical expenses tonational GDP and the level of medical expense per capita.4
China has an existing population of over 1.3 billion which grows at a rate of about 7 million per annum.Based on such factors and citizens’ increasing awareness of the importance of health care, the Directors anticipatethat the level of medical expenses will rise continuously, implying a tremendous potential of the PRCpharmaceutical market.4
DEVELOPMENT OF BIO-PHARMACEUTICAL INDUSTRY IN THE PRC5
Significant progress in the biotechnology sector has been made in PRC in recent years. Cultivation of animproved hybrid rice, cloning of transgenetic goats, genotyping chips, protein functionality, and its participationin the Human Genome Project are good examples of biotechnology related developments in the PRC. HumanGenome Project is a project coordinated by the United States Department of Energy and the National Institutesof Health to identify of all the approximate 30,000 genes in human DNA and to determine the sequences of thethree billion chemical pairs that make up human DNA.
New technologies such as biotechnology pharmaceuticals and modification of traditional Chinese medicineshave been put to use in traditional industries, thereby generating enormous revenues and financial benefits forPRC pharmaceutical companies. There are now around 70 listed PRC pharmaceutical companies.
Support from the government5
As reported at both the 4th Annual Session of the National Peoples Congress of the PRC in March 2001 andat the 2001 Fortune Global Forum, the Chinese government has indicated that it shall improve the relevant law
INDUSTRY OVERVIEW
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and regulations as to facilitate the development of bio-tech industry and the PRC government shall put in placea structure that will encourage both the introduction of advanced technologies and know-how and investments.Accordingly, business opportunities in the PRC bio-pharmaceutical industry for both domestic enterprises andforeign investors are likely to grow dramatically over the next few years.
According to the High and New Technology Production State Catalogue issued by the Ministry of Scienceand Technology and the Ministry of Finance and the State Administration of Taxation, bio-engineering technologyand pharmaceuticals industries are hi-tech industries supported and encouraged by the PRC government.Enterprises engaged in the bio-engineering technology and pharmaceutical industries will also enjoy preferentialtreatments such as government grants or subsidies, tax deduction and duties exemption.
A number of bio-pharmaceutical enterprises are located in high-tech industrial parks and developmentzones. These development zones and industrial parks often set up investment funds for start-up enterprises andnew investors, and offer investment incentives such as rental discounts or delayed rent collection and taxexemptions or reductions. There are currently 53 official high-tech development zones in China, mainly locatedin costal regions. These zones recorded an aggregate export volume of US$3.2 billion in the first half of 2000,a 50% growth in comparison to the same period in 1999 (this figure excludes the output of one agriculturalhigh-tech zone).
Sources:
1. The source of information is as follows:
a. An article namely “ “ ” ” dated 25th June, 2001 from the web-site of the State Economic & Trade Commission of
the PRC, i.e., www.setc.gov.cn
b. An article namely “ ” from the web-site of www.liuboyu.com
c. An article namely “ : (2001-05-22)” from the web-site of www.medboo.com
2. An article namely “ “ ” ” dated 25th June, 2001 from the web-site of the State Economic & Trade Commission of the PRC,
i.e., www.setc.gov.cn
3. The source of information is as follows:
a. An article namely “ “ ” ” dated 25th June, 2001 from the web-site of the State Economic & Trade Commission of
the PRC, i.e., www.setc.gov.cn
b. An article namely “ ” from the web-site of www.liuboyu.com
c. An article namely “ : (2001-05-22)” from the web-site of www.medboo.com
d. An article namely “ ” from the web-site of www.dr.dr120.com
e. An article namely “2002 ” from the web-site of Industrial Technology Intelligence Services
4. The source of information is as follows:
a. An article namely “ “ ” ” dated 25th June, 2001 from the web-site of the State Economic & Trade Commission of
the PRC, i.e., www.setc.gov.cn
b. An article namely “ : (2001-05-22)” from the web-site of www.medboo.com
c. An article namely “2002 ” from the web-site of Industrial Technology Intelligence Services
5. An article namely “Investing in Biotechnology in the PRC” of China Law & Practice July/August 2001, by Virginia Chan and Gordon Chen
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REGULATIONS GOVERNING THE PHARMACEUTICAL INDUSTRY IN THE PRC
Regulatory authorities
In the PRC, the authority to monitor and supervise the administration of pharmaceutical products and
medical appliances and equipment is vested with SDA. SDA was established in August 1998 under the auspices
of the State Council to assume the supervision and administration functions previously undertaken by the Ministry
of Public Health of the PRC, the State Pharmaceutical Administration Bureau of the PRC and the State
Administration for Traditional Chinese Medicine of the PRC. The principal functions of SDA include: (i) the
formulation and enforcement of administrative rules and policies concerning the supervision and administration
of the pharmaceutical industry; (ii) the evaluation, registration and approval of new drugs, generic drugs,
imported drugs and Chinese medicines; and (iii) the granting of permits for the manufacture and import of
pharmaceutical products and medical appliances and for the establishment of enterprises engaged in the
manufacturing and trading of pharmaceutical products.
Classification of new medicines
According to New Pharmaceuticals Examination and Approval Procedures (the “New
Pharmaceuticals Products Procedures”) promulgated by SDA on 22nd April, 1999, new medicines are classified
into bio-pharmaceutical medicines, Chinese medicines and chemical medicines, with each being further classified
into five categories for the purposes of examination and approval. Please refer to the paragraph headed “R&D and
commercialisation procedures” under section headed “Business” in this prospectus for major procedures of the
new drug approval process.
Classification of bio-pharmaceutical medicines
The New Biological Products Examination and Approval Procedures (the “New
Biological Products Procedures”) promulgated by SDA on 22nd April, 1999 governs all working units and
individuals engaged in the research, production, management, testing, examination and approval, supervision and
administration of new biological products within the PRC. Under the New Biological Products Procedures, “new
biological product” include medicines derived from biological materials such as micro-organisms, cells, and all
types of animal and human tissues and liquids using ordinary biotechnology or genetic engineering,
cyto-engineering, protein engineering or zymotic engineering, for the purposes of prevention, treatment or
diagnosis of human illness.
Bio-pharmaceutical products are classified into five categories according to their degree of innovation:
Category I: bio-pharmaceutical products which have not been previously approved forsale in the PRC and overseas
Category II: bio-pharmaceutical products which have been approved for sale overseasbut have not been included in the PRC pharmacopoeia and not yet importedinto the PRC
Category III: ● new prescription medicine with biopharmaceutical products as itsmain component
● bio-pharmaceutical products which the technical processes havebeen significantly transformed
INDUSTRY OVERVIEW
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Category IV: ● bio-pharmaceutical products which has been included inpharmacopoeia outside the PRC
● bio-pharmaceutical products which has been approved for importinto the PRC
● bio-pharmaceutical products with new prescription and new methodof application
Category V: biopharmaceutical products with added applications
The classifications of Chinese medicines are set out below:
Classification of Chinese medicines
Category I:
1. Synthetic products from Chinese medicinal raw materials.
2. Newly discovered Chinese medicinal raw materials and their preparations.
3. Active ingredients and their preparations extracted from Chinese medicinal raw materials.
4. Active ingredients extracted from a complex prescription.
Category II:
1. Injections produced from Chinese medicinal raw materials.
2. New medicinal applications and their preparations from existing Chinese medicinal raw materials.
3. Active components and their preparations extracted from Chinese medicinal raw materials and theirderivatives.
4. Medicinal parts and their preparations extracted from animal bodies through artificial means.
5. Cluster of active ingredients extracted from complex prescription.
Category III:
1. New Chinese medicine complex prescription.
2. Complex prescriptions of Chinese medicine and chemical medicine based mainly on the therapy effectof the Chinese medicine.
3. Customised medicines and their preparations imported or introduced from overseas for cultivation.
Category IV:
1. Preparations to be used for changing their forms or the way of administration.
2. Animal or herbal medicines from domestic transplants or domesticated animals.
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Category V:
Newly discovered medical applications of existing drugs.
Regulations governing the manufacture of pharmaceutical products in the PRC
Under the relevant PRC laws and regulations, SDA must examine and approve all new pharmaceuticals.According to the New Biological Products Procedures and the New Pharmaceuticals Products Procedures, suchprocess is divided into two stages: clinical research and production (some drugs shall first pass the trialproduction). The initial assessment will be carried out by the provincial level drug administration authority andthe second assessment will be conducted by SDA. If the test results are satisfactory, SDA or its local counterpartwill issue a Certificate of New Drug ( ) and Approval for Drug Production ( ) which mustbe obtained before any new pharmaceutical is produced.
According to the Administration Methods of Pharmaceutical Products of the PRC, the Pharmaceutical Products-GMP (1998 revised) ( ) and the
Notice on the Guidelines on Good Manufacturing Products ( ), allenterprises engaged in the manufacture of pharmaceutical products shall obtain “Approval for Drug Production”( ) and apply for the business licence in the Administration Bureau of Industry and Commercethereafter.
In addition, SDA stipulates the time limit for enterprises to obtain the GMP Certificates for drugs. If amanufacturing enterprise fails to obtain the GMP Certificates before the time limit stipulated by SDA, itsPharmaceutical Manufacturing Enterprise Permit ( ) shall not be renewed. Without the suchpermit, the enterprise shall discontinue the production of pharmaceutical products.
Regulations governing the R&D of pharmaceutical products in the PRC
According to the Notice Regarding the Administration Methods of the Record Filing of PharmaceuticalR&D Institutions ( ) issued by SDA on 15th October, 1999, allinstitutions engaged in the R&D of pharmaceutical products which apply for the clinical trial and production ofpharmaceutical products shall follow such filing procedure accordingly. It was expected that the relevant filingprocedure would be popularised all over the PRC from the later half year of 2000. The notice is published fortrial implementation with no time limit for implementation.
Regulations governing the commercialisation of pharmaceutical products in the PRC
According to the New Medicines Protection and Technology Transfer Regulations, any holder of a new drug which does not manufacture such drug by itself nor
transfers such technology to others within two years from the date it obtains the Certificate of New Drug( ) will have the protection on such new drug withdrawn by SDA which will make such announcementaccordingly.
Protection of new medicines
In accordance with the New Pharmaceuticals Products Procedures, which became effective on 1st May,1999, new medicines are generally referring to those which have not been produced in the PRC. However, newforms, new methods of intake, new therapeutic functions or new complex prescription preparations of existingmedicines can also be considered as new medicines.
Application for new medicines shall be submitted together with a completed application form to theprovincial and State level SDA for preliminary and final approval. Final approval will be granted by state-levelSDA. Normally a Certificate of New Drug will be issued by the state-level SDA upon completion of the thirdstage clinical examination.
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An enterprise or manufacturer has to obtain certain valid permits and certificates and be in compliance withthe GMP requirement of SDA before it can commence commercial production of new medicines. Those validpermits and certificates include Pharmaceutical Manufacturing Enterprise Permit ( ), Certificateof New Medicine ( ) as well as Approval for Drug Production ( ).
In accordance with the New Medicines Protection and Technology Transfer Regulations, which were promulgated by SDA on 22nd April, 1999, the protection period
(including the period of trial production) of new medicines ranges from 6 to 12 years, depending on the productcategory. During the protection period, no other manufacturer can produce imitative products under protection.SDA will also refuse to accept application for examination or approval of any imitative drugs. The protectionperiods for categories I and II new drugs are 12 years and 8 years, respectively.
Product liability and insurance
In addition to strict new drug approval process, certain PRC laws have been promulgated to protect therights of consumers and to strengthen the control of medical products in the PRC. Under the current PRC laws,manufacturers and vendors of defective products in the PRC may incur liability for loss and injury caused by suchproducts. Pursuant to the General Principles of the Civil Law of the PRC ( ) (the “PRCCivil Law”) promulgated on 12th April, 1986, a defective product which causes property damage or physicalinjury to any person may subject the manufacturer or vendor of such product to civil liability for such damageor injury.
On 22nd February, 1993, the Product Quality Law of the PRC ( )(the “Product Quality Law”) was promulgated to supplement the PRC Civil Law aiming to protect the legitimaterights and interests of the end-users and consumers and to strengthen the supervision and control of the qualityof products. The Product Quality Law had been updated by the Sixteenth Meeting of the Standing Committee ofthe Nineth National People’s Congress ( ) on 8th July, 2000. Pursuant to theProduct Quality Law, manufacturers who produce defective products may be subject to criminal liability and havetheir business licences revoked.
On 31st October, 1993, the Law of the PRC on the Protection of the Rights and Interests of Consumers( ) (the “Consumers’ Protection Law”) was promulgated which provides furtherprotection to the legal rights and interests of customers in connection with the purchase or use of goods andservices. At present, all business operations must observe and comply with the Consumers’ Protection Law whenthey provide their goods and/or consumer services.
GMP
Since 1988, GMP has been laid down by the Ministry of Public Health of the PRC and amended by SDAto regulate the pharmaceutical industries in the PRC so as to minimise production errors and drug contamination,and to assure product quality for bio-pharmaceutical products available for sale in the PRC. GMP imposes strictcompliance procedures, which includes the design of production facilities, the qualification of the personnelinvolved, the handling of plant, machinery, hygiene and raw materials, materials packaging and labelling,production management, documentation of production processes, quality control, sales records, customercomments and complaints.
Pursuant to the “Notice Regarding Relevant Stipulations on Implementing Pharmaceuticals GMP”GMP issued by SDA in 2001, pharmaceutical manufacturers in the PRC
should comply with GMP standards by the time limit stipulated by SDA and in any case not later than 30th June,2004. If these manufacturers have not obtained GMP certification in the stipulated time limit, their Approval forDrug Production will not be renewed and cannot continue their production of pharmaceutical products. In 1999,
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the Pharmaceutical Products - GMP (1998 revised) ( ) was issued by SDA which
came into effect on 1st August, 1999. It sets out various requirements with respect to the manufacturing process
such as the standards for production facilities, equipment, raw materials, production management and quality
control that a pharmaceutical manufacturer needs to meet before a GMP certification is issued.
Trademarks of pharmaceutical products
Apart from Chinese herbal medicines and Chinese beverage medicines, all pharmaceutical products for
domestic sales in the PRC must have a trademark registered with a trademark registration authority in the PRC.
The Company has a total of 6 trademarks for its pharmaceutical products, details of which are set forth under
“Intellectual property rights” in Appendix V to this prospectus.
Environmental protection
Pharmaceutical producers must comply with environmental laws and regulations stipulated by the State and
the local environmental protection bureau. Those laws and regulations comprise provisions in respect of the
prevention and treatment of sewage and exhaust fumes, and the prevention of industrial pollution. The local
authority is also authorised to impose fines on any persons and enterprises for violation of the relevant provisions.
Regulations governing the sale of pharmaceutical products in the PRC
Under the Measures on the Administration of Distribution of Pharmaceuticals issued
on 15th June, 1999, a pharmaceutical manufacturing enterprise in the PRC can only engage in the trading of the
pharmaceutical products produced by itself. A pharmaceutical manufacturing enterprise is also prohibited from
selling its manufactured products directly to any person, entity or medical clinic other than those that hold a
pharmaceutical manufacturing enterprise permit , a pharmaceutical trading enterprise permit
or a medical institution permit .
Import restriction and price control
Import restriction
SDA is responsible for the control of imported medicines in their respective administrative areas. The PRC
has a registration system for imported medicines. Foreign producers or sales agents must apply to PRC drug
control authorities for the Certificate of Registration of Imported Medicine ( ) before they can
export medicine for sale into the PRC market. Import duties on pharmaceutical products will drop from an average
of approximately 12% to 6% or less as part of China’s accession to WTO.
Price control
Because the domestic pharmaceutical industry is characterised by low R&D investment and sluggishinnovation, price competition has been the main battle ground among suppliers. Hospitals, which dispense mostmedicines in China, have relied on the sale of drugs to patients and their beverage over suppliers to maximisetheir own revenue. As a result, the PRC authorities have attempted to influence the costs of medicines by creatinga list of drugs for which reimbursement is available and by instituting price controls in 1996.
The wholesale price of a pharmaceutical product is determined by adding a further profit margin into theex-factory price ceiling. The retail price is then determined by adding a further profit margin to the wholesaleprice.
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A
HISTORY AND DEVELOPMENT
The Company, which was formerly known as , was established on 11thNovember 1996, by Fudan University, Shanghai Pudong New Area Economic and Trade State Asset ManagementCompany Limited ( ) (“Shanghai Pudong Asset Management”), ShanghaiZhangjiang New High Technology Development Promotion Centre ( ) (“ShanghaiZhangjiang Promotion Center”) and Li Jun. The registered capital of the Company at the time of establishmentwas RMB5.295 million.
During its early years, in order to obtain an additional source of revenue to finance its long term R&Dprograms, the Company started to manufacture and sell medical diagnostic reagents to hospitals and drugdistributors in the PRC commencing in the first half of 1997.
In December 1997, in recognition of the potential of the Company in the field of bio-pharmacy, ZJ Hi-techPark Co. invested approximately RMB13.72 million in the Company by way of equity, becoming a then 45.73%equity holder. The introduction of such new investor, together with the capitalisation of its capital reserves andundistributed profits and increase of capital investment from Shanghai Pudong Asset Management, raised theCompany’s registered capital to RMB30 million.
In May 1998, the Company applied to the SIPB for a series of trademark registrations in respect of its seriesof products and innovations as detailed in the section headed “Intellectual property rights” in Appendix V to thisprospectus.
In August 1998, Morgan-Tan, being the Company’s sole subsidiary, was established with registered capitalof RMB8 million and was held as to 62.50% by the Company, 31.25% by Shanghai Zhangjiang Hi-Tech ParkDevelopment Corp. and as to 6.25% by Mr. Tan Jia Zhen. Mr. Tan is an Academician for Chinese Academy ofSciences and a Foreign Academician for American Academy of Sciences. Please see the paragraph “Morgan-Tan”under the “Business” section for more information.
On 27th November, 1998, the Company was recognised as the New High Technology Enterprise of theShanghai Municipality ( ) by the Science and Technology Commission of the ShanghaiMunicipality ( ).
On 4th May, 1999, after obtaining approval from the Ministry of Personnel of the PRC ( ), theCompany became one of the Postdoctoral Stations of New High Technology Enterprise in Pudong, Shanghai. InAugust of the same year, in line with the state’s policy for the treatment of state-owned assets, Shanghai PudongAsset Management, a wholly state-owned enterprise, transferred all of its then 45.73% interest in the Companyto Pudong Technology Investment, another wholly state-owned enterprise. Subsequently, Pudong TechnologyInvestment, a venture capital type company, sold its then 43.44% interest in the Company to ShanghaiPharmaceutical, a company listed in the PRC, to realise profit from this investment.
In June 2000, the senior management of the Company, namely, Wang Hai Bo, Su Yong, Zhao Da Jun andFang Jing subscribed for new capital at a consideration of approximately RMB10.96 million and held in aggregate26.08% interest in the then registered capital of the Company. Together with additional new capital investmentsby Shanghai Pharmaceutical and Fudan University, the registered capital was increased to RMB42 million. In thesame year, the Company was recognised as the New High Technology Enterprise of the Shanghai Municipality( ) for the third time in three consecutive years.
In September 2000, the Company completed the studies of and transferred the technologies of threecategory II Chinese medicines, FZ-00-01 (for liver fibrosis), FZ-00-04 (PTP inhibitor) and FZ-00-05 (forcoronary heart disease) to China General for a total consideration of RMB31 million.
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AA1
A
In September 2000, China General, acquired certain equity interests of the Company from some of the then
equity holders (including all the equity interests held by Shanghai Zhangjiang Promotion Center) and further
subscribed for new equity, thereby holding 26.52% interest in the then registered capital of the Company. The
introduction of China General as a new investor and the increase of equity investment from Fudan University
increased the Company’s registered capital to RMB52.27 million. Since then, two of the three largest equity
holders (ie. Shanghai Pharmaceutical and ZJ Hi-Tech Park Co.) are companies listed on the Shanghai Stock
Exchange.
In October 2001, the Company transferred to Shanghai Huashi Pharmaceutical Hi-Tech Industrial
Development Co., Ltd., a wholly-owned subsidiary of Shanghai Pharmaceutical, the technology in respect of
�-glucosidase inhibitor, a category II Chinese medicine, for a total consideration of RMB5 million.
In March 2002, the Company agreed to transfer the technology relating to recombinant tissue plasminogen
activator (r-tPA), a category II bio-pharmaceutical drug, to Shangdong Dong-E E-jiao Co., Ltd.
( ), an independent third party, for a total consideration of RMB15 million.
In order to prepare for the listing of the Company, the Company applied for conversion from a limited
liability company into a joint stock limited company and such application was approved by the People’s
Government of the Shanghai Municipality ( ) on 26th October, 2000. The Company was formally
converted into a joint stock limited company on 8th November, 2000. As of 8th November, 2000, the registered
capital of the Company was RMB53 million.
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SHAREHOLDING STRUCTURE
The shareholding structure of the Group immediately after the Placing is as follows:
4.31% 2.58% 2.15% 1.01% 0.92% 0.80%
19.66% 18.45% 14.92% 7.31%
62.50%
27.89%
31.25%
54.9%
Zhao Da JunSu YongFudanUniversity
The Company(incorporated in the PRC)
(R&D of bio-pharmaceuticaldrugs and technologies)
Morgan-Tan (5)
(incorporated in the PRC)(R&D, technology transfer and
commercialization ofbio-pharmaceutical products)
Wang Hai Bo
ShanghaiPharmaceutical (1)
(incorporated in thePRC)
(Trading ofpharmaceutical
products)
China General (2)
(incorporated in thePRC)
(Foreign trade andeconomic cooperationand other diversified
businesses)
ZJ Hi-techPark Co.(3)
(incorporatedin the PRC)
(Property developmentand technology projectinvestment and operatesthe Shanghai & Pudong
Zhangjiang Hi-TechPark)
Li Jun
PudongTechnology
Investment (4)
(incorporatedin the PRC)
(Investment intechnology
projects andprovision ofeconomic
informationconsulting)
Fang Jing
The Public
Shanghai ZhangjiangHi-Tech Park
Development Corp.(3)
(incorporated in the PRC)(Investment in technology
projects)
Notes:
1. Shanghai Pharmaceutical is a joint stock limited company established in the PRC, the A shares of which are listed on the Shanghai Stock
Exchange. Its largest shareholder is Shanghai Pharmaceutical (Group) Corporation, a state-owned enterprise, which holds 39.69% in the
issued share capital of Shanghai Pharmaceutical.
2. China General is wholly-owned by the PRC government.
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A
3. ZJ Hi-tech Park Co., a joint stock limited company established in the PRC, the A shares of which are listed on the Shanghai Stock
Exchange. Its largest shareholder is Shanghai Zhangjiang Hi-Tech Park Development Corp., a state-owned enterprise, which holds 54.90%
in its issued share capital.
4. Pudong Technology Investment, a state-owned enterprise, which is wholly-owned by Shanghai Pudong New Area State-owned Assets
Management Committee, a state-owned entity.
5. The remaining 6.25% interest in Morgan-Tan is held by Mr. Tan Jia Zhen. Please refer to the subsection headed “Morgan-Tan” under the
section headed “Business” in this prospectus for further details on Morgan-Tan.
MANAGEMENT STRUCTURE
The key management structure of the Company is set out below:
Genetic engineeringdrugs centre
Medical diagnosticcentre
New drug screeningand evaluation
centre
Photodynamictherapy drugs
centre
Accounting andfinance department
Investmentdepartment
(responsible forevaluation of returnson pharmaceutical
projects)
Corporatedevelopmentdepartment
Administrationdepartment
Vice General ManagerLiu Yanjun
Executive DirectorVice General Manager
Su Yong
Chief Financial Officerand Company Secretary
Xu Yulan
Executive DirectorVice General Manager
Zhao Dajun
Chief (General)Engineer
Yu Zhengwei
Chairman and GeneralManager
Wang Hai Bo
Board of DirectorsSecretary to the
board of DirectorsZhou Ai Guo
COMPANY OVERVIEW
The Company is a R&D company that is principally engaged in the R&D of categories I and II drugs and
related technologies.
During the Track Record Period, the Company, through its new drug screening and evaluation R&D
platform, was engaged in the R&D of active compounds of Chinese medicine technologies to finance its R&D
programs. It transferred the technologies of four category II Chinese medicines to a wholly-owned subsidiary of
Shanghai Pharmaceutical and China General. Both Shanghai Pharmaceutical and China General are the
Company’s Initial Management Shareholders. Revenue from such transfers accounted for approximately 79.3%
and 78.8% of the Group’s revenue for each of the two years ended 31st December, 2001 respectively. Besides,
the Company manufactures and sells medical diagnostic reagents to hospitals and drug distributors in the PRC
in order to obtain short term funding for its R&D programs.
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A1
The Company focuses its research efforts on the discovery and development of category I bio-
pharmaceutical drugs, which are new pharmaceutical products that have not been approved for sale globally, and
category II bio-pharmaceutical drugs which are new pharmaceutical products that have not been approved for sale
in the PRC but have been approved for sale overseas. At present, most of the Company’s in-house developed
bio-pharmaceutical drugs and technologies are still under the development stage. Although, at present, medical
diagnostic products are the only category of products manufactured by the Company, in the long run, the
Company plans to produce and sell by itself its principal in-house developed category I bio-pharmaceutical drugs.
The Company was established as a limited liability company in the PRC in 1996 with Fudan University as
one of its founders. Over the years, because of the potential growth of the bio-pharmaceutical industry in China
and its commitment to R&D, the Company has attracted capital investments from state-owned enterprises and
listed companies in the PRC, such as Shanghai Pharmaceutical, China General and ZJ Hi-tech Park Co.. The
Company was converted into and established as a joint stock limited company in November 2000. For details of
the history and development of the Company, please refer to the paragraph headed “History and development”
under the section headed “Business” in this prospectus.
The Company has developed four R&D platforms. Each platform, supported by separate teams of research
staff, is designed to support the R&D of four distinct lines of bio-pharmaceutical drugs and technologies, namely:
● R&D platform for genetic engineering drugs — develops human adapted peptide or protein drugs that
are made by expressing function specific genes or their re-engineered forms into cells via the use of
recombinant DNA technology for the purpose of disease prevention or treatment;
● R&D platform for photodynamic therapy drugs — develops light-activitated drugs to treat a range of
disease characterised by rapidly growing tissues, including the formation of abnormal blood vessels,
such as cancer and age-related mascular degeneration;
● R&D platform for new drug screening and evaluation — utilises the latest bio-technological
advancements to significantly shorten the time required for new drug development. The Company also
utilises this R&D platform to screen active compounds in Chinese medicines; and
● R&D platform for medical diagnostic products — designs medical diagnostic products. A major R&D
focus of the Company is on the design of HLA genotyping chip based on advanced DNA-based
technology and microelectronics engineering which could be applied for DNA matching before organ
transplantation. The chip could also be applied for bone marrow donors identification, forensic
individual identification and parentage identification.
During the Track Record Period, the Company derived most of its revenue from the sale of its research
results to pharmaceutical corporations by way of technology transfer. A minor contribution to its revenue was
from the sale of medical diagnostic products to hospitals and drug distributors in the PRC. Although, at present,
medical diagnostic products are the only category of product manufactured by the Company, in the long run, the
Company plans to produce and sell by itself its in-house developed category I bio-pharmaceutical drugs.
To complement its internal R&D capabilities, the Company has established collaborations and joint
laboratory with renowned universities and research institutes in the PRC for the R&D of new drug and
technologies. For details of such collaborations, please refer to the paragraph headed “Research and
development” under the section headed “Business” in this prospectus.
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R&D PLATFORM FOR GENETIC ENGINEERING DRUGS
Genetic engineering drugs refer to those human adapted peptide or protein drugs that are made byexpressing function specific genes or their re-engineered forms into cells via the use of recombinant DNAtechnology for the purpose of disease prevention or treatment.
Among the Group’s four R&D platforms, this platform is considered as the backbone of the Group’s R&Dcapability. Whilst dedicated for the R&D of genetic engineering drugs, this platform creates synergistic value inconjunction with other R&D platforms by sharing the technology and knowledge originated from it. To date, theGroup has successfully established two expression systems to support the R&D of protein drugs on the geneticengineering R&D platform.
The Company is currently conducting R&D on a number of new drug programs under this R&D platform.Among the various new drug programs, it has successfully made distinctive advancements in the R&D of fiveproducts as set out below.
A. Products developed under the expression system for proeukaryotic fusion protein
Recombinant human lymphotoxin-� derivatives (rhLT)
Lymphotoxin (LT) is an important member of the Tumour Necrosis Factor (TNF) family, a specificprotein that causes destruction of tumours. Unlike TNF�, which exerts its tumour destruction functionsthrough the biological effects of two specific receptors, TNFR55 and TNFR75, but at the same time producesevere toxic side effects, the Company’s rhLT regulates the biological effects of TNF55 and TNF75 andproduces its tumour destruction functions mainly through TNF55, but with a lower toxicity. In both in vivoand in vitro testings, it is found that the tumour destruction effect of the Company’s rhLT to be similar tothat of TNF�, but with conspicuously lower toxicity side effects, which makes it seems to be more suitablefor clinical antineoplastic treatments than TNF�.
This product, when approved by SDA, will be a category I bio-pharmaceutical drug to be used for thetreatment of lung cancer. The pre-clinical pharmacology studies of rhLT were completed and SDA formallyaccepted the Company’s application of rhLT as a new drug in February 2001. On 12th June, 2002,SDA approved the Company’s rhLT to enter the clinical trial phase. In April 2002, the TechnologicalInformation Research Centre of the Drugs Administration Bureau of the Shanghai Municipality( ) confirmed that by April 2002, the Company was the first enterprise inthe world that had been approved to enter into the phase of clinical trial for rhLT.
Recombinant human parathyroid hormone derivatives (rhPTH)
Natural human parathyroid hormone regulates both the osteogenic cells and osteoclast cells, andstimulates the remodeling of bone sclerotin. The Company re-engineers the genes of natural parathyroidhormone by recombinant technology to form a new type of protein that can be used for the treatment ofosteoporosis or loss of bone issue.
This product will be a category I bio-pharmaceutical drug upon approval by SDA.
The re-engineering of the gene of natural human parathyroid hormone for the treatment ofosteoporosis has been completed. The Company has developed its own conditions for high densityfermentation of rhPTH and the methods for testing bio-activities of rhPTH. The Company is currentlyconducting pre-clinical trials of the product.
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A
A
Recombinant tissue type plasminogen activator (r-tPA)
Recombinant tissue type plasminogen activator (r-tPA) is internationally recognised as the best drugfor the treatment of acute heart infarction. The pre-clinical pharmacology studies in respect of theCompany’s r-tPA have been completed and the Approval for Clinical Trial has been obtained from SDA.This product is a category II bio-pharmaceutical drug. Pursuant to a technology transfer agreement dated25th March, 2002, the Company transferred the r-tPA technology to an independent third party. Please referto “Transfer of technologies” of the “Business” section of this prospectus.
The Company received RMB10 million from Shanghai Pharmaceutical as R&D funding for rhPTHand r-tPA. For terms of the R&D funding, please refer to section headed “Relationship with the InitialManagement Shareholders” of this prospectus.
B. Products developed under the expression system for eukaryotic fusion protein
FZ-BM-009
This product is a category I bio-pharmaceutical drug to be used for the prevention and reduction ofgraft-versus-host disease (“GVHD”) caused by the non-compatibility between the donor and recipient,arising from stem cell or bone marrow transplantation. The function of the new drug is to inhibit the signalswhich stimulates the immunity reactions as a result of the transplantation. This product can reduce GVHDreactions stimulated by the immunity system arising out of transplantation. This product can also increasethe chance of success of stem cells or bone marrow transplants among family members (which has a lowerincompatibility), thus significantly reducing the expenses in transplants and the delays caused by seekingcompatible donors. As at the Latest Practicable Date, eukaryotic indicating system for this new drug hasbeen successfully established by the Company.
By late 2003, it is expected that pre-clinical work will be completed and application for clinical trialwill be filed for the product. It is expected that stage III of clinical trial will be completed and a Certificatefor New Medicine will be obtained by 2005.
New recombinant human erythropoietin (EPO)
While kidney disease progresses to kidney failure, patients must undergo dialysis treatments toremove wastes from their blood. EPO, a glycoprotein hormone generated in kidney and liver that circulatesin the bloodstream and travels to the bone marrow, stimulates the production and maturation ofoxygen-carrying red blood cells. It is used for treatment of anemia associated with chronic kidney failurein patients on dialysis.
Due to the remarkable difference in the recombinant EPO currently used and the EPO inherent inhuman bodies in their glycosyl nature and level, the long-term application of recombinant EPO can causethe patient to produce antibody to EPO, thus causing aplastic anemia. The Company is engaged in thedevelopment of a new type of recombinant EPO, its glycosyl nature is closer to the EPO inherent in humanbodies, and is thereby expected to reduce its side effects. This drug is a category I bio-pharmaceutical drugwhich will be used for the treatment of anemia associated with kidney disease.
By 2003, it is expected that pre-clinical work for the product will be completed and application toSDA for clinical trial will be filed. It is expected that stage III of the clinical trial will be completed by2005.
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A
R&D PLATFORM FOR PHOTODYNAMIC THERAPY DRUGS
Photodynamic therapy is a newly emerged field of medicine that uses light-activated drugs to treat a rangeof diseases characterised by rapidly growing tissue, including the formation of abnormal blood vessels, such ascancer, port wine stain and age-related mascular degeneration.
Photodynamic therapy consists of a two-step treatment process. It starts with the administration of the drug,or photosensitizer, by intravenous injection. Once the drug enters the bloodstream, it attaches itself to low-densitylipoproteins (a group of proteins found in blood plasma and lymph that are combined with fats or lipids), whichcarry the photosensitizer to the target cells. Once the necessary level of concentration of photosensitizer isattained, the second step is to activate the drug with a specific dose of light of a particular wavelength. Thisresults in the disruption of biochemical process in the target cells, causing the target cells to be destroyed whileleaving the surrounding cells intact.
The Group makes use of chlorophyll and hemin, some of the most fundamental materials in nature, as rawmaterials for the R&D of photodynamic therapy drugs. In view of the abundant and inexpensive source ofchlorophyll and hemin and the relatively short history of photodynamic therapy in both domestic and internationalmarkets, the Directors believe that this field has huge market potential and the Group is one of the pioneers inthe R&D of photodynamic therapy drugs in the PRC bio-pharmaceutical arena.
The Company has several new drug programs for photodynamic therapy drugs. Two of these photodynamictherapy drugs are under advanced stage of R&D and details of which are set out below:
Hemporfin
Hemporfin is a category I bio-pharmaceutical drug which is a photosensitizer to be applied in thetreatment of abnormal blood vessel diseases such as port wine stain, age-related mascular degeneration andcorneal neovascularization. Hemporfin is recognised as the simpliest and most effective drug for thetreatment of abnormal blood vessel diseases.
The Company has a co-operative agreement dated 1st February, 2000 with Professor Xu De Yu for theco-development of Hemporfin and deuteroporphyrin derivative. Please see the paragraph headed “Researchand development — Photodynamic therapy drugs” under the section headed “Business” of this prospectusfor more information. The Company is also co-developing Hemporfin with the Chinese People’s LiberationArmy General Hospital (“PLA”) pursuant to a co-development agreement dated 1st April, 2001. Under theco-development agreement, PLA undertakes the pre-clinical pharmacodynamics research and clinical trialof Hemporfin.
As at the Latest Practicable Date, testing on the effectiveness of Hemporfin has been conducted andapplication for clinical trial is expected to be filed with SDA by late 2002.
Deuteroporphyrin derivatives
This product is a category I bio-pharmaceutical drug to be used for the treatment of cancer or tumor.As the drug can be partially activated by light, it is able to kill tumor tissues selectively, with a substantiallylower side toxicity effect than the level induced by other tumor treatment drugs in the market.
In order to maximise the expertise of Shanghai Institute of Materia Medica, Chinese Academy ofScience in the field of photodynamic therapy, the Company has outsourced to it the pre-clinicalpharmacology studies of this new product pursuant to a co-development agreement in September 2001.
Pre-clinical studies of the product is in the process and clinical trial is expected to commence by2003.
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A
R&D PLATFORM FOR NEW DRUGS SCREENING AND EVALUATION
This platform utilises the latest bio-technological advancements such as computational chemistry,
combinatorial chemistry, automation and high throughput screening to establish drug screening and evaluation
model series of different levels to screen compounds that have the potential to be developed into new drugs. The
Company also uses this R&D platform to screen and evaluate active compounds from Chinese medicines. At
present, the platform has established and is under the process of establishing new drug screening and evaluation
models for several targeted diseases. This platform significantly shortens the time required for new drug
development and is critical to procure a continuous pipeline of new drugs for the Group.
The Company has several R&D programs utilising technologies under this platform, the major programs of
which are set out below:
Screening and evaluation models for inhibitors
Screening and evaluation system for �-glucosidase inhibitor
In the market, this inhibitor has been developed into a pharmaceutical product mainly to be used in
controlling high blood glucose symptoms of diabetes sufferers after meals and maintaining the stability of blood
glucose, thereby reducing the occurrence of associated diseases in diabetes. It is the top priority glucose-reducing
medicine for oral administration in clinical application. The Company has established the testing methods for the
in-vitro level of the inhibitor and its bio-activity in overall animal level and formed a highly efficient screening
and evaluation system. The Group has successfully utilised such system for screening certain effective substances
in a Chinese medicine for clinical trial application as a category II Chinese medicine. Besides, the active
compound of another Chinese medicine has also been successfully screened and application will be made for
clinical trial of this compound as a category II Chinese medicine.
Screening and evaluation system for pancreatic lipase inhibitor
In the market, the inhibitor has been developed into a pharmaceutical product mainly used in the treatment
of obesity and hyperlipidemia. The Company has now established the in-vitro screening methodology of
pancreatic lipase and successfully utilised such system in the screening of certain effective compounds.
Preliminary pharmacology evaluation and research on the manufacture process of the active compound of a
category II Chinese medicine is under process.
Screening and evaluation system for cyclooxigerade (COX-2) selective inhibitor
The Company’s COX-2 selective inhibitor is used for the treatment of all non-specific inflammations but
with no side effects associated with some traditional anti-inflammation drugs. By selectively inhibiting the
activities of COX-2 but not those of COX-1, the Company’s research indicates that this new drug can have the
functions of avoiding unfavorable reactions (such as side effects to the gastrointestinal tract) caused by those
unselective anti-inflammatory agents, such as aspirins, that inhibit the activities of both COX-1 and COX-2.
At present, the Company has established the testing methodology to screen and evaluate the bio-activities
of this new drug on enzyme and cell levels. In addition, the Company has also established the high throughput
screening system for this new drug in order to facilitate the screening of large quantity of compounds in database.
The Directors anticipate that by late 2002, the screening methodology of this new drug will be completed and one
or two effective chemical components will be selected for further R&D.
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A
Screening and evaluation system for recipient regulator
Screening and evaluation system for new generation of lymphotoxin
Based on the Company’s experience in the genetic engineering of rhLT (recombinant human lymphotoxin),the Company is developing through its screening and evaluation R&D platform a new generation of lymphotoxinwith a higher tumour destruction function but with an even lower toxic side effects as compared with the existingrhLT. For further details on the Company’s rhLT, please see the subsection headed “R&D platform for geneticengineering drugs” of this section of the prospectus. This new generation of lymphotoxin has greater control onthe biological effects of TNFR55 and TNFR75 by exerting greater affinity with TNFR55 and a lower affinity withTNFR75 to produce more complete tumour destruction functions but with low toxicity.
At present, the Company has successfully purified TNFR55 and TNFR75 through its eukaryotic cellexpression systems and has established the screening model for a new generation of lymphotoxin. The Companyis planning to use computer aid design and phage display ( ) technology to perform high throughputscreening to obtain a new general of lymphotoxin mutant.
The Company’s research on this new generation of lymphotoxin mutant is sponsored by the State HighTechnology Development Project (863 Project) ( (863 )).
Screening and evaluation system of PPAR� activator
The peroxisome proliferator-activated receptor (PPAR�) belongs to a member of type II nucleic which isa receptor super family and that mainly expresses within fatty cells. PPAR� is the drug target ofthiazolidinediones, TZDs, ( ). It is an important regulating factor in the disintegration of fattycells. Through numerous researches including one conducted by the University of California in the US, it isdiscovered that PPAR� plays an important role in the disease causing mechanism in obesity and insulin resistanceand is an important drug target in the treatment of metabolic diseases such as diabetes and obesity.
At present, the screening model of the protein level of the receptors has been established and theestablishment of screening and evaluation model on the cell level of reporting genes of the receptor is in progress.
Screening and evaluation system based on the mechanism of the actions of other pharmaceuticals
Screening and evaluation of antiarrhythmic drugs
Arrhythmia is the most common symptom among clinical cardiac diseases. Serious arrhythmia often leadsto changes in hemodynamics which directly endangers life. Antiarrhythmic drugs generally give rise topharmacological effect through effecting the fluidity of ionic passage and changing its cardiac electrophysiology.The Joint Lab (as detailed below) by making use of its screening and evaluation model has obtained a newcompound which will be developed into new K+ channel inhibitor, a category I bio-pharmaceutical drug for thetreatment of arrhythmia and artrial fibrillation superventriadar. Preliminary pre-clinical studies on the product’spharmacology were completed and intellectual rights for the product is under application. The product isundergoing the phase of pre-clinical study and it is expected that by 2003, application for clinical trial will befiled.
The Joint Lab
On 15th December, 2000, the Company entered into an agreement with Shanghai Institute of MateriaMedica under Chinese Academy of Sciences (“Shanghai Institute”) and Shanghai Pharmaceutical to set up a jointresearch centre (the “Joint Lab”) to perform new drug screening and evaluation. The objective of the Joint Labis to leverage Shanghai Institute’s strength in the research of small molecular compounds, ShanghaiPharmaceutical’s strength in marketing and sales as well as the Company’s strength in genetic engineering andhigh throughput screening for new drug research and development.
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Shanghai Institute is one of oldest institutes and the only comprehensive institute for drug research in theChinese Academy of Sciences, composed of both chemistry and biology fields by multidisciplinary cooperation.Since 1955, over 160 research achievements have been made in Shanghai Institute, of which 88 were awardedprizes in 1978-1997. Among them fourteen major national achievements and prizes were awarded including theNational Natural Science Prizes, National Invention Prizes or National Prizes on Advances in Science andTechnology. The others were awarded by the Chinese Academy of Sciences, Shanghai Municipal or otherprovincial authorities.
The Joint Lab has four R&D platforms engaging in a chain of new drug screening and evaluation modules.
The first R&D platform, which leverages the knowledge of Shanghai Institute in computational chemistryand computational biology, is for the design of new compound models with reference to identified drug targetsand conducts virtual screening of compound database. The activities of this platform are principally conductedin the laboratories of Shanghai Institute and in a national super computational centre set up by the ShanghaiMunicipal Government. Through Shanghai Institute, which has an agreement with the Shanghai MunicipalGovernment for use of the national super computer, the Joint Lab could take advantage of the advanced R&Dfacilities and the super computer of the super computational centre for new drug design and screening processes.
The second platform, by making use of the knowledge of pharmaceutical chemistry and combinatorialchemistry, is to establish a combinatorial chemistry database for compounds modelled or screened under the firstplatform. The activities under the second platform are principally carried out in the chemistry laboratory ofShanghai Institute.
The third platform is the new drug screening platform. It performs biological target screening on thecompounds obtained from the second platform to obtain active compounds for new drugs target. The activitiesunder this platform are principally conducted in a laboratory inside the national new drug screening centre anda laboratory under Shanghai Institute.
The fourth platform is the drug analysis and research platform, which aims to establish analyticalmethodology and to set quality and quantity standards for new drugs. The activities under this platform areprincipally conducted in Nuclear Mangnetic Resonation Laboratory of Shanghai Institute.
Terms of the agreement for the Joint Lab are set out in the paragraph “Non-exempt continuing connectedtransactions” under the section headed “Relationship with the Initial Management Shareholders”.
At present, COX-2 selective inhibitor, PPAR� activator and pancreatic lipase inhibitor and new K+ channelinhibitor as detailed above are all under development by the R&D platform of the Joint Lab.
R&D PLATFORM FOR MEDICAL DIAGNOSTIC PRODUCTS
A. Product under research and development
Human Leukocyte Antigen (HLA) genotyping chip
HLA or the white blood cell antigen which are involved in the protection of human body againstforeign substances and in antibody production, play an important role in the human immunity system andin the transplantation of human organs, bone marrow or stem cells. HLA genotyping is to make use of theDNA-based technology in the typing of HLA class I and class II genes and selected HLA-linked genes.
HLA genotyping chip is made of silicon, glass or nylon, the surface of which is coded and integratedwith genes, cell tissues or proteins by manipulating technology in the fields of microelectronics andmicro-electrical engineering.
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In a clinical context, HLA genotyping is critical to the establishment of bone marrow donor, DNA
matching before stem cell or organ transplantation, forensic individual identification and parentage
identification.
The Company commenced R&D on HLA genotyping chip in or around 1999. The Company has a
research agreement with the Immunology Institute of the Shanghai Municipality for the development of
HLA genotyping chip. Please see “Business — Research and Development — R&D of HLA genotyping
chip” for more information. The product has passed the appraisal by the experts of Shanghai Science and
Technology Committee. Application has been made to the SIPB for the patent registration of the product.
As at the Latest Practicable Date, the Group had entered into negotiations with several independent third
parties for licensing and/or purchasing the Group’s HLA genotyping chip. It is expected that large scale
prototype testing and trial production will be conducted in the second half of 2002.
SUMMARY OF MAJOR NEW DRUG PROGRAMS
A summary of the Group’s major new drug programs, their applications and their R&D progress is set out
in the table below:
1. R&D Platform for Genetic Engineering Drugs
Products Applications R&D Progress
I. Products developed under the expression system for proeukaryotic fusion protein
Clinical trial has been approved bySDA to commence (Note: thisproduct was transferred to anindependent third party in March2002)
II. Products developed under the expression system for eukaryotic fusion protein
1. FZ-BM-009 Prevention andreduction of graft-various-hostdisease caused by the incompatibilitybetween the donor and recipient instem cell or bone marrowtransplantation
Pre-clinical studies is beingconducted. Clinical trial is expectedto be completed by 2005
2. New recombinant humanerythropoietin (EPO)
Treatment of anemia associated withchronic kidneyfailure in patients on dialysis
Pre-clinical studies is beingconducted. Clinical trial is expectedto be completed by 2005
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2. R&D Platform for Photodynamic Therapy Drugs
Products Applications R&D Progress
1. Hemporfin Treatment of abnormal blood vesseldiseases such as port wine stain, age-related mascular degeneration andcorneal neovascularization
Pre-clinical trial is being conducted.Application for clinical trial isexpected to be filed by late 2002
2. Deuteroporphyrin derivatives Treatment of cancer or tumor Pre-clinical trial is being conducted.Clinical trial is expected tocommence by 2003
3. R&D Platform for New Drug Screening and Evaluation
Products Applications R&D Progress
I. Screening and evaluation models for inhibitors
1. Screening and evaluationsystem for �-glucosidaseinhibitor
Application for clinical trial inrespect of the active component of aChinese medicine has been filedand application for clinical trial inrespect of the active component ofanother Chinese medicine isexpected to be filed in late 2002
2. Screening and evaluationsystem for pancreaticlipase inhibitor
Treatment of obesityand hyperlipidemia
Pre-clinical studies is beingconducted
3. Screening and evaluationsystem for cyclooxigerade(COX-2) selective inhibitor
All non-specific inflammations Pre-clinical trial is being conducted
II. Screening and evaluation system for recipient regulator
1. Screening and evaluationsystem for new generationof lymphotoxin (LT)
Reducing the cell toxicityof lymphotoxin
Pre-clinical studies is beingconducted
2. Screening and evaluationsystem for PPAR� activator
Treatment of metabolic diseases suchas diabetes and obesity
Pre-clinical studies is beingconducted
III. Screening and evaluation system based on the mechanism of the actions of other pharmaceuticals
1. Screening and evaluationsystem for antiarrhythmicdrugs
Treatment of superventriadartachycardia
New K+ channel inhibitor isundergoing the phase of pre-clinicalstudy and it is expected that by 2003,application for clinical trial will befiled
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4. R&D Platform for Medical Diagnostic Products
Product Application R&D Progress
Human leukocyte antigen(HLA) genotyping chip
HLA genotyping is critical to theestablishment of bone marrowdonor registries, DNA matchingbefore stem cell or organtransplantation as well as in thestudies of HLA-associateddiseases susceptibility
The product has passed theappraisal by the experts ofShanghai Science and TechnologyCommittee and no approval fromSDA is required. It is expected thatlarge scale prototype testing andtrial production will be conductedin the second half of 2002.
TRANSFER OF TECHNOLOGIES
Strategy on technology transfers
From R&D, clinical trial to commercial production, the whole development process of a new drug involvesa normal time frame of 7 to 15 years. If a R&D company is to complete the whole development process, it isunavoidable that it has to bear development risk, capital risk or commercialisation risk. To minimise risks, thestrategy of the Company is to transfer those products which are expected to face huge competition uponcommercial launch or which are “me-too” drugs during the R&D process in return for an upfront transfer fee withor without profit sharing entitlement. Technology transfers have the advantages of shifting the associated risksin further developing the technology to the third party as well as providing an immediate cash flow and fundingfor other R&D programs. Although technology transfers would remain one of the Group’s alternatives to realiseshort term profits and maintain cashflow position, the long term strategy of the Group is to focus on the R&Dand commercialisation of its in-house developed category I bio-pharmaceutical drugs.
Technology transfer could take part along the development process as illustrated in the subsection headed“R&D and commercialisation procedures” under this section.
Historical technology transfers
Since the establishment of the Company in 1996, the Company has completed the following threetechnology transfers which contributed to the Group revenues of RMB31 million, RMB5 million and RMB10.5million respectively:
1. Pursuant to a technology transfer agreement dated 30th September, 2000 as amended by asupplemental agreement dated 10th September, 2001, the Company completed the pre-clinical testingof and transferred the technologies of three category II Chinese medicines which are all activecomponents extracted from Chinese medicinal raw materials, namely, FZ-00-01 (for liver fibrosis),FZ-00-04 (PTP inhibitor) and FZ-00-05 (for coronary heart disease drug) to China General. Forfurther details of these transfers, please refer to “China General” in the section headed “Relationshipwith the Initial Management Shareholders” of this prospectus.
2. By another technology transfer agreement dated 15th October, 2001, the Company transferred toShanghai Huashi Pharmaceutical Hi-Tech Industrial Development Co., Ltd., a wholly-ownedsubsidiary of Shanghai Pharmaceutical, the technology of �-glucosidase inhibitor, a category IIChinese medicine which is an active component extracted from Chinese medicinal raw materials. Thepre-clinical testing of �-glucosidase had been completed at the time of the transfer. For further detailsof the above technology transfer, please refer to the section headed “Relationship with the InitialManagement Shareholders” of this prospectus.
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3. Pursuant to another technology transfer agreement dated 25th March, 2002, the Company agreed to
transfer the technology relating to recombinant tissue type plasminogen activator (r-tPA), a category
II bio-pharmaceutical drug, to Shandong Dong-E E-jiao Co., Ltd. ( ) an
independent third party, for a total consideration of RMB15 million. However, pursuant to the R&D
funding agreement dated 2nd November, 1999 between the Company and Shanghai Pharmaceutical,
Shanghai Pharmaceutical is entitled to 30% of the income from the technology transfer of r-tPA to any
third party. At the time of the transfer, clinical trial for the drug had been approved by the SDA. For
further details of this transfer agreement, please refer to “Shanghai Pharmaceutical R&D funding
agreement (rhPTH and r-tPA)” in the section headed “Relationship with the Initial Management
Shareholders” of this prospectus.
RESEARCH AND DEVELOPMENT
In-house R&D team
As R&D and product commercialisation are vital to the Company’s business development, the Company is
committed to recruiting suitable professionals. As at the Latest Practicable Date, the Company’s R&D team
comprises 64 employees, which accounts for 64% of the Company’s total number of employees, and, of which
57 have received tertiary education or above. The team’s main functions are to:
● formulate and evaluate the strategic policies of the Company’s products to enhance their
marketability;
● keep the Company abreast of the latest developments and up-to-date information regarding both
global and domestic bio-pharmaceutical markets; and
● work closely with the major medical institutions in the PRC on the development of new products.
For each of the two years ended 31st December, 2001, the Company spent approximately RMB4.9 million
and RMB9.1 million respectively, in the development of new drug technologies, representing approximately
27.7% and 32.6% of the turnover of the Company for the respective financial year. The R&D expenditure consists
principally of the salary costs of technical staff involved and consumables used in the R&D activities.
Summary of major strategic alliances and co-development arrangements
Set out below is a summary of the major strategic alliances and co-development arrangements in respect
of the principal research projects currently undertaking or undertaken by the Company:
Date of agreement Project Partner(s)
Mode of
cooperation
Expected time
of completion
of subject R&D
Expected
further funding
required
Genetic engineering drugs
2nd November, 1999 R&D of parathyroid hormone
and recombinant tissue type
plasminogen activator
Shanghai
Pharmaceutical
R&D funding from
the partner in return
for pre-emptive right
upon transfer or
commercialisation
Before the end
of 2002
No further
funding required
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Date of agreement Project Partner(s)
Mode of
cooperation
Expected time
of completion
of subject R&D
Expected
further funding
required
26th November, 2001 Testing on the toxicology
and pharmacokinetics of
human lymphotoxin-�
derivatives
Shanghai Institute of
Pharmaceutical
Industry
Outsourcing of the
R&D activities to the
partner in
consideration of
RMB340,000
Completed Not applicable
30th September, 1999 Large-scale incubation
of eukaryote cells
East China
University of
Science and
Technology
Outsourcing of the
R&D activities to the
partner in
consideration of
RMB180,000
Completed Not applicable
Photodynamic therapy drugs
1st February, 2000 Research on Hemporfin and
Deuteroporphyrin derivatives
Professor Xu De Yu Technology transfers
and R&D services
from the partner in
exchange for a
monthly fee and
rights upon transfer
or commercialisation
Before the end
of 2005
Cannot be
estimated
1st April, 2001 Research on the
pharmacodynamics
of Hemporfin
Chinese People’s
Liberation Army
General Hospital
Co-development with
the partner and the
partner is entitled to
10% sharing of
proceeds upon
transfer or 7% sharing
of net profits for 5
years upon
commercialisation
Completed Not applicable
12th June, 2001 Pre-clinical pharmacology
and toxicology study of
Hemporfin
National Institute for
the Control of
Pharmaceutical
and Biological
Product,
PRC
Outsourcing of the
R&D activities to the
partner in
consideration of
RMB555,000
Completed Not applicable
7th September, 2001 Qualitative research on
Hemporfin
Staff Technical Union
of Shanghai Institute
for Drug Control
Outsourcing of the
R&D activities to the
partner in
consideration of
RMB200,000
Completed Not applicable
15th September, 2001 Research on the
pharmacology
of deuteroporphyrin
derivatives
Shanghai Institute of
Materia Medica,
Chinese Academy
of Sciences
Outsourcing of the
R&D activities to the
partner in
consideration of
RMB250,000
July 2002 Not applicable
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Date of agreement Project Partner(s)
Mode of
cooperation
Expected time
of completion
of subject R&D
Expected
further funding
required
Drugs developed under new drug screening and evaluation R&D platform
15th December, 2000 Establishment of a joint
research centre for new
drug screening
Shanghai
Pharmaceutical
Pre-emptive rights
and income sharing
rights granted to the
partner upon
technology transfer or
commercialisation
according to
investment ratio
On-going nature Cannot be
estimated
Shanghai Institute of
Materia Medica,
Chinese Academy of
Sciences
Income sharing rights
granted to the partner
upon technology
transfer or
commercialisation
according to
investment ratio
16th February, 2001 Research on qualitative and
quantitative standards of
FZ-CM-01
(a Chinese medicine)
Shanghai University
of Traditional Chinese
Medicine
Outsourcing of the
R&D activities to the
partner in
consideration of
RMB60,000
Completed Not applicable
6th March, 2001 Pharmacology and toxicity
study of FZ-CM-01
(a Chinese medicine)
National Key
Laboratory of New
Drug Safety
Evaluation
in Zhejiang Academy
of Medical Sciences
Outsourcing of the
R&D activities to the
partner in
consideration of
RMB580,000
Completed Not applicable
Medical diagnostic products
15th June, 2000 R&D of HLA
genotyping chip
Science and
Technology
Commission of the
Shanghai Municipality
Grant of RMB1.5
million from the
partner in return for
rights to invest not
more than 8% of the
funds required for
commercialisation and
upon making
investment, to share
in not more than 8%
of the income
Before mid-2003 RMB3.7 million
Immunology Institute
of the Shanghai
Municipality
Co-development with
the partner in return
for a 10% income
sharing rights upon
technology transfer or
commercialisation
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Date of agreement Project Partner(s)
Mode of
cooperation
Expected time
of completion
of subject R&D
Expected
further funding
required
31st July, 2001 R&D on biochip related
products and technology
10 strategic partners Formation of a joint
venture in which the
Company contributed
RMB1 million for
1.67% equity interests
On-going nature Cannot be
estimated
All outsourcing agreements mentioned above were standard qualitative and quantitative measurements that
are required to be performed as part of the application to SDA. All such outsourcing arrangements were entered
into after arm’s length negotiations with the relevant party, taking into account such factors as the scope and
extent of work involved, terms of comparable market transactions and the stage of development of the subject
technology.
Principal co-development agreements and R&D funding arrangements
Details of the principal co-development agreements and R&D funding arrangements of the Company are
summarised as follows:
R&D of parathyroid hormone (rhPTH) and recombinant tissue type plasminogen (r-tPA)
On 2nd November, 1999, the Company entered into an agreement with Shanghai Pharmaceutical for funding
of the R&D expenses of the Company’s two new drug development programs, namely, parathyroid hormone
(rhPTH) and recombinant tissue type plasminogen (r-tPA). For the principal terms of the R&D Funding
Agreement, please refer to “R&D funding agreement (parathyroid hormone (rhPTH) and recombinant tissue type
plasminogen (r-tPA)” in the section headed “Relationship with the Initial Management Shareholders” of this
prospectus.
R&D of photodynamic therapy drugs
By an agreement dated 1st February, 2000, the Company entered into an agreement with Professor Xu De
Yu for the R&D of photodynamic drugs and the setting up of the Company’s Photodynamic Therapy Laboratory,
with Professor Xu as the head. The Photodynamic Therapy Laboratory is to enhance and consolidate the capability
of the Company in the R&D and commercialisation of photodynamic therapy drugs. Professor Xu obtained a
bachelor’s degree from the Medical Faculty of Shanghai Second Military Medical University and subsequently
became a professor in Chemical Pharmacy of the same university. Presently, he is a part-time professor in the
Chemistry and Pharmacology Faculty of East China University of China. Professor Xu has been awarded the
National Youth Scientist with Outstanding Contribution ( ) by the Ministry of
Personnel and the National Cultural Celebrity Award ( ) by the American Biographic Institute.
Professor Xu is a veteran in the R&D of photodynamic therapy drugs in China. During the early 1980s,
Professor Xu pioneered the chemical and bio-activity research of chlorophyll and hemin and after over 20 years
of effort, he has successfully identified a series of compounds that have been proved by clinical trials to be safe
and effective for new drug development.
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Prior to entering into the above agreement, Professor Xu transferred to the Company his technologies onthree photodynamic drugs, which are pending patent registrations. In consideration of the technology transfers,the parties entered into the agreement dated 1st February, 2000, the principal terms of which are as follows:
1. Professor Xu shall be appointed as the head of the Company’s Photodynamic Therapy Laboratory( ) with a monthly remuneration of RMB8,000;
2. Professor Xu shall complete the R&D of two new photodynamic drugs for cancer treatment, namely,hemporfin and deuteroporphyrin derivatives, the pre-clinical studies and research on pharmacologyand toxicity of which were completed in 2000 and the patent registrations will be completed beforethe end of 2002; and
3. Professor Xu shall be entitled to 33% of the net income arising from the technology transfer of anyof the above two new photodynamic drugs. If the Company proceeds to commercialise any of the twonew photodynamic drugs, Professor Xu shall be entitled to 10% of income rights arising from salesof the commercialised products.
The patent application of the above two subject products are under preliminary review by the SIPB. Detailsof their latest R&D status are set out in the paragraph headed “R&D platform for photodynamic therapy drugs”.
R&D of HLA genotyping chip
HLA genotyping chip is a diagnostic product for use in determining the compatibility in transplantation ofhuman organs, bones marrow or stem cells. For further information, please refer to the subsection headed “R&DPlatform for Medical Diagnostic Products” of this section for more information.
The Company initially commenced research on HLA genotyping chip (the “HLA Project”) in or around1999. In May 2000, the Company together with Immunology Institute of the Shanghai Municipality(“Immunology Institute”) and National Human Genetic Research Southern Centre (“Southern Genetic ResearchCentre”) applied for sponsorship from the Science and Technology Commission of Shanghai Municipality. On15th June, 2000, the three parties entered into an agreement for the co-development of HLA genotyping chip.However, because of certain practical issues relating to implementation of the co-development agreement, theSouthern Genetic Research Centre withdrew from the agreement, which was confirmed by a confirmatory letterfrom the Southern Genetic Research Centre dated 29th December, 2001.
In August 2000, the Science and Technology Commission granted a cash grant of RMB1.5 million to theCompany and entered into a contract with the Company (“Project Agreement”) in respect of the HLA Project.
On 29th April, 2001, the Company and the Immunology Institute entered into another agreement tore-define the parties’ rights and obligations in the HLA Project.
The principal rights and obligations of the Science and Technology Commission and the ImmunologyInstitute in the development and commercialisation of HLA genotyping chip are summarised as follows:
1. The cash grant by the Science and Technology Commission shall be paid by 3 instalments, the lastinstalment was paid on 30th March, 2002;
2. The Science and Technology Commission, the Company and the Immunology Institute shall beentitled to the naming rights of the technology results and all other rights shall belong to theCompany;
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3. Upon commercialisation and with the consent of the Company, the Science and TechnologyCommission shall be entitled to invest not more than 8% of the funds required for thecommercialisation and upon making such investment, shall be entitled to share in not more than 8%of the sales income;
4. The Company shall pay RMB 320,000 as research fees to the Immunology Institute, such fees waspaid by 3 instalments; and
5. The Immunology Institute shall be entitled to 10% of the income from the technology transfer orcommercialisation.
The product has now completed the stage of laboratory research and has passed the appraisal by the expertsof Shanghai Science and Technology Committee. It is expected that large scale prototype testing and trialproduction will be conducted in the second half of 2002. Application has been made to SIPB for the patentregistration of the product.
Joint research centre
The Company has formed a strategic alliance with Shanghai Materia Medica Institute, Chinese Academy ofSciences and Shanghai Pharmaceutical by establishing and operating a joint research centre (the “Joint Lab”) forthe use of advanced technologies in the screening of new drugs. The Joint Lab, a non-legal person joint venture,was established by the parties pursuant to an agreement dated 15th December, 2000. Please refer to the subsectionheaded “Non-exempt continuing connected transactions — Shanghai Pharmaceutical” under the section headed“Relationship with the Initial Management Shareholders” for more detailed terms of establishment of the JointLab.
According to the agreement, the principal rights of each party to the technological results of the Joint Labare summarised as follows:
● ownership of the technological results of the Joint Lab, whether patentable or not, shall belong to thethree parties in proportion to their investments;
● Shanghai Pharmaceutical has options to purchase any technological results of the Joint Lab; and
● upon the transfer of any technologies of the Joint Lab to any other third party, the income from thetransfer shall be divided between the three parties according to the ratio of their investments.
The Joint Lab has four new drug development programs, namely:
● New K+ channel inhibitor FZ-CD-1
● Cyclooxigerade - 2 (Cox-2) selective inhibitor
● PPAR� activator
● Pancreatic Lipase inhibitor
Please refer to subsection headed “R&D platform for new drug screening and evaluation” of the “Business”section of this prospectus for further information of the programs.
The establishment of an unincoporated Joint Lab is a short to medium term arrangement. All parties to theJoint Lab have formed a consensus view of establishing a separate legal entity to take over the existing Joint Labarrangement in the near future.
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R&D AND COMMERCIALISATION PROCEDURES
All major and general procedures alongside the commercialisation of new drugs in the PRC, spanning from
R&D to commercial production, are depicted in the following flowchart:
6-12 months
3-5 months
Collect information
Define scope of work
Conduct researchin laboratory
Pre-clinical test
Apply to SDA for clinical trial
Clinical trial
Obtain Certificate ofNew Medicine
Obtain approval fromSDA for production
Commence commercialproduction
3 months
1 month
3-6 months
3-6 months
8-12 months
18-36 months
3-6 months
3-6 months
Technology transfer
Technology transfer
Technology transfer
AbandonConduct bioassay invivo and vitro
Scale up
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In general, no permit or approval is necessary for the Company to conduct R&D procedures of a new drugprior to the phase of pre-clinical test. A new drug has to fulfill the following criteria of the pre-trial test beforeit is admitted into the phase of clinical trial by SDA:
(1) the quality and quantity standards of the new drug have passed the testing of Biological ProductsEvaluation Institute ( ) of SDA;
(2) the new drug is proved to be safe for animal bodies;
(3) the new drug is proved to be effective in animals bodies; and
(4) the new drug has passed the assessment by experts who have been accredited by New DrugAssessment Centre ( ) of SDA.
According to the New Drug Examination and Approval Procedures , clinical trial of newdrugs comprised four phases, all of which are conducted in human bodies, instead of animal bodies as in thepre-clinical test:
● Phase I serves to affirm that the subject drug is safe and harmless to human bodies.
● Phase II is to prove the medical efficacy of the subject drug for the treatment of target diseases.
● Phase III is to prove that the subject drug is both safe and effective in a large sample of human bodiesapplication. The certificate for new drug will be granted by SDA after the above three stages ofclinical trial. In addition to the passing of all three stages of clinical trial, the Company has to proveto SDA that its facilities and equipment have fulfilled the GMP standards before the Certificate forNew Medicine can be granted by SDA. The Company can thereafter apply to SDA for the Approvalfor Production so as to commence production of the subject new drug on a commercial scale.
● Phase IV is to monitor the drug sold.
As shown in the above flowchart, the time span for a new bio-pharmaceutical drug to be commercialisedranges from 5 to 8 years. However, taking into consideration of possible failures in the R&D process or testing,which may consequently involve the restarting of part of the R&D and commercialisation process, the whole timespan for the commercialisation of a new bio-pharmaceutical drug can be as long as 15 years.
R&D AND PRODUCTION FACILITIES
Currently, the Group occupies a 3-storey complex located at No. 308, Cailun Road, Shanghai Pudong-Zhangjiang Hi-Tech Park, Pudong, Shanghai, the PRC as its office, and its R&D and production centre. The landuse rights of the property were acquired by the Group in June 2001 and are valid for fifty years from 1st August,2001 to 31st July, 2051. The complex has an approximate gross floor area of 6,700 sq.m., which was newlycompleted in May 2002. The building is divided into office area and R&D area. All operating units of the Groupare located at the office area while the Group’s four technology platforms are located at the R&D area. Prior tocompletion of the new office complex, the Company has three laboratories located in three different locations.Centralisation of the Company operations and R&D at the new complex serves to streamline the flow from R&Dto trial production and facilitate management supervision.
For future production of its in-house developed new drugs, the Group is considering alternatives such asbuilding its own production facilities, outsourcing production activities or acquiring established drugmanufacturing companies with sizable production capability.
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REVENUE MODEL
Technology transfer revenue is recognised over the fixed term of the technology transfer agreement or,where appropriate, as the related costs are incurred. Payments are recognised on specific milestone dates or uponthe performance of specific work in accordance with the terms of such agreements. Contract amounts aredetermined based on the estimated market value of the resultant drugs or technologies and upon mutualnegotiation between the Group and the transferee.
Revenue from the sales of medical diagnostic reagents is recognised when the products are delivered tocustomers. Please refer to the subsection headed “The Company’s medical diagnostic reagents” of this section formore information. Generally, customers are granted credit terms of 90 days. Pricing of the Group’s medicaldiagnostic reagents is made with reference to the prevailing market price of similar products in the market.
AWARDS AND SUBSIDIES
Awards and certificates
The Company has obtained grants and subsidies from the PRC government and participated in a number ofkey bio-pharmaceutical related projects approved by the PRC government, including the State High TechnologyDevelopment Project (863 Project) ( ( )), and has received numerous awards andcertificates from organisations at state and provincial levels, the more important of which are set out below:
Awards/accreditations to the management
Date ofaward Awards/accreditations Awarding organisations Principal criteria Recipient
1997 Award for OutstandingContributions to theDevelopment and Promotionof Science and Technology( )
State EducationCommission
Accredited to thosewho have outstandingcontributions to thedevelopment ofscience andtechnology in the PRCby the awardingorganisation
Mr. Zhao Da Jun(a Director)
1999 Cash Award of RMB1.09 million Shanghai Pudong New AreaAdministrative Commission( )
Accredited to thosewho have madeoutstandingcontributions to theR&D andcommercialisation of aresearch result
The management andtechnical staff of theCompany
Awards/accreditations to the Company
Date ofaward Awards/accreditations Awarding organisations Principal criteria
1998 Advanced Collective Certificate( )
The Economic and Trade Bureau ofShanghai Pudong New Area
Not specified
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Date ofaward Awards/accreditations Awarding organisations Principal criteria
1999 High and New Technology Enterprisefor Post-doctoral Research Work( )
Ministry of Personnel of the PRC( )
Awarded to those who have astrong, and solid expert team,up-to-standard R&D equipment,sufficient financial support andare undertaking R&D work at apioneer level in the PRC
2000 To undertake one of key andtechnological projects in the State’sNinth Five-year Plan( )
Ministry of Science and Technology Project in line with theobjectives of the State’s NinthFive-year Plan, one of which isthe development of around 10category I drugs so as topromote the domestic new drugindustry
2001 Government grant of RMB500,000 Shanghai Pudong New Area Scienceand Technology Bureau
Accredited as a high technologyorganisation by the relevantgovernment department ofPudong New Area
1998 to2001
Shanghai Municipal High and NewTechnology Enterprise( )
Science and Technology Commissionof the Shanghai Municipality
Engaged in one of thedesignated high technologybusinesses; at least 30% of staffwith bachelor’s degree or above;R&D expenses not less than 3%of total annual revenue; andover 50% of total revenueattributable to high technologybusinesses
2001 To undertake one programof a State High TechnologyDevelopment Project (863 Project)(( )) (a new type oflymphotoxin)
Ministry of Science and Technologyof the PRC
Project in line with 863program’s aim of enhancingChina’s internationalcompetitiveness and improvingChina’s overall capability ofR&D in high technology
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Grants and subsidies
Apart from awards and certifications, the Group has been granted a number of grants and subsidies by
prestigious funds and provincial or state medical and pharmaceutical organisations in the PRC. A majority of such
grants (non-repayable) and subsidies (wholly or partly repayable) are set out below:
Date Project Sponsor AmountScheduled
completion date(RMB)
Grants
25th December, 2001 Research on the anti-diabeticmechanism and materialfundamentals of Chinesemedicine
● Science and TechnologyCommission of theShanghai Municipality
700,000 End of 2003
25th December, 2001 R&D of photodynamictherapy drugs
● Science and TechnologyCommission of theShanghai Municipality
700,000 End of 2004
1st March, 2000 R&D of bispecificmonoclonal antibody asthrombolytic drug
● State Science andTechnology Commission
500,000 Completed
24th August, 2000 R&D of HLA complextyping genetyping chip
● Science and TechnologyCommission of theShanghai Municipality
1,500,000 Mid-2002
30th September, 2000 R&D of recombinant humanlymphotoxin-� derivative(rhLT)
● The Ministry ofScience and Technologyof the PRC
800,000 End of 2004
21st December, 2001 R&D of new typelymphotoxin
● The Ministry ofScience and Technologyof the PRC
1,470,000* End of 2004
Subsidies
25th December, 2001 R&D of anti-diabeticChinese medicine G10622
● Science and TechnologyCommission of theShanghai Municipality
1,000,000 End of 2003
30th June, 1999 R&D of recombinant humanparathyroid hormonederivatives (rhPTH)
● Fund of Biotechnologyand PharmaceuticalIndustry of the ShanghaiMunicipality
500,000 End of 2003
8th November, 1999 R&D of recombinant humanparathyroid hormonederivatives (rhPTH)
● Science and TechnologyCommission of ShanghaiPudong New Area
500,000 Completed
* The grant was awarded under the State High Technology Development Project (863 Project) ( ( )) and
would be paid in three instalments of RMB490,000 each in each of 2001, 2002 and 2003. As at the Latest Practicable Date,
RMB490,000 has been received by the Company.
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MORGAN-TAN
Morgan-Tan was established in August 1998 as a limited liability company with a registered capital of
RMB8 million. It is presently held as to 62.50% by the Company, 31.25% by Shanghai Zhangjiang Hi-Tech Park
Development Corp. and 6.25% by Mr. Tan Jia Zhen, a natural person, who has over 70 years of experience in
genetics and life science studies. He obtained his Ph. D. from the California Institute of Technology in 1936. Mr.
Tan is an Academician for Chinese Academy of Sciences and a Foreign Academician for American Academy of
Science. Mr. Tan specialises in the research of botanical genetic engineering and molecular genetics. Mr. Tan is
currently a professor in Fudan University. Mr. Tan is also a non-executive director of Morgan-Tan and participates
in formulating the R&D strategy of Morgan-Tan.
The purpose for the establishment of Morgan-Tan was to attract experts and professional outside the PRC
and develop innovative bio-pharmaceutical products, such as categories I and II drugs, to fulfil market demand
in a bid to make valuable contribution to the field of bio-pharmacy.
The business scope of Morgan-Tan includes the research and development of bio-pharmaceutical products,
their commercialisation or technology transfer and advisory services. As at the Latest Practicable Date,
Morgan-Tan had 8 staff responsible for the R&D activities.
On 7th March, 2000, the Company entered into a technological services agreement with Morgan-Tan for the
provision of technological and co-development services by Morgan-Tan to the Company. For details of the terms
of the technological services agreement, please refer to the paragraph headed “Morgan-Tan” in the section headed
“Relationship with the Initial Management Shareholders” of this prospectus. Morgan-Tan also shares laboratory
premises, research and other office facilities with the Company at the Company’s new complex at No. 308, Cailun
Road, Shanghai Pudong-Zhangjiang Hi-Tech Park. Please refer to the subsection headed “Morgan-Tan” under the
section headed “Relationship with the Initial Management Shareholders” of this prospectus for more information.
In addition to R&D of part of the recombinant human lymphotoxin-� derivatives (rhLT) project which was
outsourced by the Company to Morgan-Tan, Morgan Tan is also carrying out a number of R&D projects, including
ginkgolide ( ) and a medicine for prevention of asthma. Please refer to the subsection headed “R&D
platform for genetic engineering drugs” of this section for more information on the Company’s rhLT program.
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THE COMPANY’S MEDICAL DIAGNOSTIC PRODUCTS
Medical diagnostic products
During the Track Record Period, the Company derived a stable source of revenue from the sales of medicaldiagnosis reagents, which are the only pharmaceutical products produced by the Company. For the purpose of thisprospectus, technology transfer is not regarded as product sales. The Company produces a wide range of medicaldiagnostic reagents with various applications as listed in the table below.
Applications Product name
As testing reagent for diagnosis of heart relateddiseases
ALP KitLactate Dehydrogenase Kit�-HBDH KitCreatine kinase Kit
As testing reagent for diagnosis of diseasesrelated to kidney and metabolism
Urea kitUric Acid Kit
As testing reagent for diagnosis of diabeticdiseases
Glucose Kit
Glucose Reagent Kit (hexodinase Method)
As testing reagent for diagnosis of blood vesseldiseases like high blood fat
Cholesterol Kit
As testing reagent for diagnosis of liver relateddiseases
Aspartate Aminotransferase KitTotal Protein KitDirect Bilirubin KitAlanine Aminotransforase Kit
During the Track Record Period, the Group’s revenue from product sales was entirely attributable to thesales of products used for medical diagnosis as set out above. For each of the two years ended 31st December,2001, sales revenue recorded by the Group amounted to approximately RMB3.7 million and RMB5.9 millionrespectively.
Quality and inventory control for production of medical diagnostic reagents
The Company has adopted a set of stringent and comprehensive quality control procedures on all of its rawmaterials, packaging materials, semi-finished products and finished products. Such procedures are drafted withreference to requirements of the GMP standards. In the opinion of the Directors, the commitment to impose highstandard quality control measures throughout the production process is critical in maintaining the quality of theCompany’s medical diagnostic reagents. The Company has a quality control team of four staff dedicated to qualityadministration and quality control.
The Company has obtained an Approval for Production ( ) from SDA for the production of medicaldiagnostic reagents.
Materials used for production of medical diagnostic reagents are principally classified into primary rawmaterials and accessory raw materials, which have to be stored under room conditions. Raw materials whichcontain enzymes have to be refrigerated. Primary raw materials and accessory raw materials which containprecious heavy metals or highly toxic ingredients have to be handled by dedicated staff. All finished productshave to refrigerated before delivery to customers.
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The Company implements a stringent control on the provision of inventory. The Company will regularly
review the inventory level to avoid ageing inventory. Those finished products whose expiry dates have lapsed will
be destroyed. The Company also carries out stock take once a year to ensure the inventory condition and a
reasonable inventory level. For each of the two years ended 31st December, 2001, the amount written off and the
provision for inventories obsolescence amounted to approximately RMB19,000, and RMB7,000 respectively.
Purchases of raw materials
For each of the two years ended 31st December, 2001, the Company’s top five suppliers accounted for
approximately 61% and 27% in aggregate of the Company’s purchase of raw materials respectively. For each of
the two years ended 31st December, 2001, the Company’s single largest supplier accounted for approximately
32% and 11% of the Company’s purchase of raw materials respectively. None of the Directors, the Supervisors,
the Initial Management Shareholders or any Shareholder (which to the knowledge of the Directors owns more than
5% of the Company’s share capital) or any of their respective associates (as such terms are defined in the GEM
Listing Rules) has any shareholding interest in the Company’s five largest suppliers.
The Company’s purchases were principally settled by bank transfers or cheques in RMB and in general with
an average credit term of one month.
Sales and marketing of medical diagnostic products
During the Track Record Period, all of the Company’s medical diagnostic products were sold in the PRC.
Currently, the Company’s products are distributed and marketed via two major channels, its sales team and
distributors based in target provinces or municipals. For each of the two years ended 31st December, 2001, 83.2%
and 60.6% of medical diagnostic products were sold to hospitals and the balance to distributors. Set out below
is a summary of the turnover from the Group’s product sales and percentage to such turnover in its top five
markets in the PRC.
For the year ended 31st December,Province/ 2000 2001Municipality Turnover Percentage Turnover Percentage
The Company’s sales were principally settled by bank transfers or cheques in renminbi and in general
customers are granted credit terms of 90 days.
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BUSINESS LICENCE AND PERMIT
As mentioned in the section headed “Industry overview” in this prospectus, R&D, manufacture,commercialisation and sale of pharmaceutical products in the PRC are governed by relevant regulations and laws.The Group has obtained all the relevant licenses, permits and approvals in relation to its production,commercialisation and sale of pharmaceutical products in the PRC, the majority of which are set out below:
Issue date Licence/permit/certificate Issued by Expiry date
Drugs Administration Bureauof the Shanghai Municipality( )
31st December, 2005
10th May, 2002 Business Licence Industrial and Commercialand Administration Bureauof the Shanghai Municipality
Not specified
Various Approval for Drug Production State Drugs AdministrationBureau( )
Not specified
In relation to the R&D activities of the Group, the Company made the necessary filing with SDA in March2001 according to the Notice Regarding the Administration Methods of the Record Filing of Pharmaceutical R&DInstitutions ( ). Accordingly, the Company has complied withall the necessary administrative procedures for conducting R&D of pharmaceutical products in the PRC.
In addition, the Company plans to obtain the Drug GMP Certificate according to the requirement ofGMP-1998 revised before June 2004.
INTELLECTUAL PROPERTY RIGHTS
The brandnames, “Fudan Zhangjiang” ( ) and “Morgan Tan” ( ), and several logos have beenregistered for trademark registration protection. Patent applications have been filed in relation to a number ofin-house developed bio-pharmaceutical products, techniques and procedures and patent has already been grantedfor the Company’s technology relating to external pressure type hollow fibre column. Detailed information on theGroup’s trademarks and patents is set out in the paragraph headed “Intellectual property rights” in Appendix Vto this prospectus.
COMPETITION
Medical diagnostic products
The Company’s diagnostic products, which are being used as medical diagnostic reagents, face competitionfrom other diagnostic reagents with similar functions. The Directors believe that the Group competes in themarket through manufacturing products with better medical effects and brand recognition. In addition, the Groupalso maintains a competitive pricing policy to maintain its market position in the long run.
With respect to competition from overseas manufacturers, the Directors presently consider that there is nodirect competition between the Company’s diagnostic products and the overseas manufacturers’ products as theprices of overseas pharmaceutical products are in general higher than the prices of similar domestic products.Moreover, import of medicines into the PRC is strictly governed by the state regulatory authorities.
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Bio-pharmaceutical products to be launched
The Directors consider that in respect of its new therapeutic products to be launched, the Company
confronts competition from two types of domestic players, i.e. large pharmaceutical corporations and
university/research institute backed companies. However, in the opinion of the Directors, many large
pharmaceutical corporations, in particular, those that are state-owned, have limited new drug development
capabilities because of their prolonged practice of manufacturing imitative products. Besides, their outdated
policies, inflexible procedure and technology management make them slow to react to the ever more rapid
developments in the bio-pharmaceutical area. In respect of university/research institute controlled companies,
their R&D capabilities are driven by the policies set by their controlling universities or institutes, rather than by
market demand, which dampen their competitiveness.
After the accession into the WTO, China has to reduce the rate of tariff imposed on imported pharmaceutical
products from an average of approximately 20% to 6% in three to five years. These reductions are likely to result
in increased competition from overseas drug manufacturers. However, the Directors are of the view that as most
pharmaceutical companies have very specialised scope of new drug development, the room for growth of those
companies dedicated to R&D of new bio-pharmaceutical products is enormous. In addition, as the Company
focuses on the R&D of category I and II bio-pharmaceutical drugs that have not been approved for sale globally,
it is already competing with overseas R&D companies even before China’s accession into the WTO.
INSURANCE
In compliance with the relevant regulation of the PRC, statutes of Shanghai and state policies, the Company
has aging insurance, medical insurance and unemployment insurance for its employees. Apart from insurances for
its employees, the Company also maintains vehicle insurance for its vans and cars. However, the Company does
not maintain third party liability insurance for personal injuries or product quality of its medical diagnostic
reagents at present.
ENVIRONMENTAL PROTECTION
During the Track Record Period, the Company did not violate any environmental laws and regulations of
the PRC, and the Company’s production facilities have complied with applicable PRC standards relating to
environmental protection. The Company will continuously improve its environmental protection measures in
order to ensure continuing compliance with relevant regulations in future.
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Throughout the 24-month period immediately preceding the date of this prospectus, the Company hasactively pursued the business of R&D of bio-pharmaceutical products. The following is a summary setting out thestatement of active business pursuits of the Company for the two years ended 31st December, 2001 and thesubsequent period up to the Latest Practicable Date:
The following information, together with the information under the heading “History and development”,“Financial information” and “Industry overview” describe the activities and performance of the Company and theindustry and market environment in which the Company has been operating since 1st January, 2000.
Year ended 31st December, 2000
Corporate development
● The senior management of the Company, namely, Mr. Wang Hai Bo, Mr. Su Yong, Mr. Zhao Da Jun andMs. Fang Jing became equity holders of the Company and the Company’s then registered capital reachedRMB42 million.
● China General, a renowned PRC conglomerate, purchased equity interests from the outgoing equity interestholders and subscribed for new equity interests, thereby becoming one of the two largest equity interestholders.
● The conversion of the Company from a limited liability company into a joint stock limited company wasapproved by the People’s Government of the Shanghai Municipality ( ) in October 2000.
● The Company was recognised as a High and New Technology Enterprise of Shanghai Municipality( ) by the Science and Technology Commission of the Shanghai Municipality( ) for the third time in three consecutive years.
● The Company was appointed by the Ministry of Science and Technology to undertake one of thetechnological projects of the State Ninth Five-year Plan ( ).
● The Company’s “Liquid Diagnostic Reagents for Clinical Biochemistry” was accredited as Shanghai Highand New Technology Product Transformation Project ( ) by Shanghai High andNew Technology Product Transformation Accreditation Office ( ).
● The Ministry of Science and Technology granted Morgan-Tan an amount of RMB800,000 out of itsTechnological SME Technique Innovation Fund for Morgan-Tan’s R&D of recombinant human lymphotoxin- � derivative (rhLT).
● The State Science and Technology Commission of the PRC granted the Company an amount ofRMB500,000 for the R&D of bispecific monoclonal antibody as a thrombolytic drug.
● The Science and Technology Commission of the Shanghai Municipality ( ) granted theCompany a subsidy of RMB1.5 million for the R&D of HLA complex type genotyping chip.
Strategic R&D collaboration
● The Company, Shanghai Institute of Materia Medica, Chinese Academy of Science and ShanghaiPharmaceutical entered into an agreement in relation to the establishment of a joint research centreprincipally for computer-assisted design and screening of new medicine.
STATEMENT OF ACTIVE BUSINESS PURSUITS
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A
Product development
During the financial year 2000, the Company made a number of patent applications in relation to its new
products and technologies as set out in the table below:
Product/technology Progress as at the Latest Practicable Date
1. Process for producing recombinantlymphotoxin-� derivatives
Under formal review by SIPB
2. Parathyroid hormone derivatives and itsmethod of preparation
Under formal review by SIPB
3. Deuteroporphyrin derivatives, itsmethod of preparation and its freeze-dried form for intravenous injection
Under formal review by SIPB
4. Reagents for stabilisation of NADH andNADPH
Under formal review by SIPB
5. Method for amplification ofmulti-genes or gene fragments
Under formal review by SIPB
6. Double specific monoclonal antibodiesand its method of preparation
Under formal review by SIPB
7. Photodynamic therapy for tumor Under formal review by SIPB
8. External pressure type hollow fibrecolumn
Patented
Deployment of human resources
As at 31st December, 2000, the Company had a total of 71 full-time employees in the PRC. The breakdown
of employees by function is as follows:
Management 3Investment 1Accounting and finance 3Business development 3Administration and general affairs 7Corporate communication 1R&D 42Production 7Sales 4
Total 71
STATEMENT OF ACTIVE BUSINESS PURSUITS
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Year ended 31st December, 2001
Corporate development
● The Company was recognised as a High and New Technology Enterprise of Shanghai Municipality
( ) for the fourth time in four consecutive years.
● The Company was awarded a grant under the State High Technology Development Project (863 Project)
( ( )) for a total amount of RMB1,470,000 which would be paid in three
instalments of RMB490,000 each in each of 2001, 2002 and 2003.
Strategic R&D Collaborations
● The Company appointed Shanghai University of Traditional Chinese Medicine to compile on its behalf the
materials necessary for the application of FZ-CM-01, being a category II Chinese medicine.
● In respect of FZ-CM-01, the Company also appointed National Key Laboratory of New Drug Safety
Evaluation in Zhejiang Academy of Medical Science to perform research on its prolonged toxicity and
general pharmacology.
● The Company appointed National Institute for the Control of Pharmaceutical and Biological Product to
conduct pre-clinical research of Hemporfin, a photodynamic therapy drug of the category I classification.
● The Company and Shanghai Institute of Immunology of the Shanghai Municipality formed a strategic
alliance for the R&D of HLA genotyping chips.
● The Company appointed Chinese PLA General Hospital to undertake the pre-clinical pharmacodynamics
research and clinical trial of Hemporfin.
● The Company and 10 renowned corporations in the bio-pharmaceutical field jointly formed Shanghai
Biochip Co. Ltd. to pool together resources for the R&D of biochip related products and technology.
● The Company appointed Staff Technical Union of Shanghai Institute for Drug Control to carry out
quantitative research on the raw materials, reagents and stability of Hemporfin.
● The Company appointed Shanghai Institute of Pharmaceutical Industry to conduct tests on human
lymphotoxin-� derivatives, a genetic engineering drug and to provide supplemental information for its
application as a new drug.
● The Company obtained the Government Grant to Encourage the Development of Enterprises in Technology
Exploration in Pudong New Area ( ) amounting to
RMB500,000 by Shanghai Pudong New Area Science and Technology Bureau.
● The Company’s HLA genotyping chip was accredited by the Science and Technology Commission of the
Shanghai Municipality as meeting the international leading standard.
STATEMENT OF ACTIVE BUSINESS PURSUITS
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Product development
During the financial year 2001, the Company made a number of patent applications in relation to its new
products and technology as set out in the table below:
Product/technology Progress as at the Latest Practicable Date
1. Method of preparation and uses of�-glycosidase inhibitor that wasextracted from chinese herb
Preliminary review passed
2. Method for synthesis of 3-(or 8-)(1-methoxyethyl) 8-(3-)(1-hydroxyethyl)-deuteroporphyrin IX
Under preliminary review by SIPB
3. Method of preparation for semisyntheticdeuteroporphyrin derivatives and itsfreeze-dried form for intravenousinjection
Under formal review by SIPB
4. Technique and equipment for laboratoryand industry preparation of gaseoushydrogen bromide
Under formal review by SIPB
5. Microarray for HLA genotyping chips Under preliminary review by SIPB
Deployment of human resources
As at 31st December, 2001, the Company had a total of 96 full-time employees in the PRC. The breakdown
of employees by function is as follows:
Management 5Investment 2Accounting and finance 3Business development 4Administration and general affairs 7Corporate communication 1R&D 63Production 7Sales 4
Total 96
Recent business development
Corporate development
● The Company moved to its newly completed office complex located at No. 308, Cailun Road, Shanghai
Pudong-Zhangjiang Hi-Tech Park, Pudong, Shanghai.
STATEMENT OF ACTIVE BUSINESS PURSUITS
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Strategic R&D collaborations
● The Company entered into a long term technological cooperation agreement with Fudan University in order
to leverage the resources of Fudan University in new drug discovery and R&D.
● The Company entered into a technology transfer agreement with Shandong Dong-E E-jiao Co., Ltd.
( ) in respect of recombinant tissue type plasminogen activator (r-tPA), a category II
drug, for a total consideration of RMB15 million.
Product development
● The Company’s recombinant human lymphotoxin-� derivatives (rhLT), a category I genetic engineering
drug, has been approved by SDA to enter into the phase of clinical trial and the Technological Information
Research Centre of the Drugs Administration Bureau of the Shanghai Municipality
( ) confirmed that the Company is the first enterprise in the world with
such approval granted.
● The Company’s recombinant tissue type plasminogen activator (r-tPA), a category II genetic engineering
drug, has been approved by SDA to enter into the phase of clinical trial.
Development of human resources
As at the Latest Practicable Date, the Company had a total of 100 full-time employees in the PRC. The
breakdown of employees by function is as follows:
Management 5Investment 2Accounting and finance 3Business development 6Administration and general affairs 7Corporate communication 1R&D 64Production 7Sales 5
Total 100
STATEMENT OF ACTIVE BUSINESS PURSUITS
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COMPETITIVE EDGES
The Directors believe that a combination of the following factors differentiates the Group from otherbio-pharmaceutical companies:
Distinct business strategy of concentrating on the R&D of categories I and II bio-pharmaceuticaldrugs
Unlike many other bio-pharmaceutical companies in the PRC which are mainly engaged in the R&D,production, sales and marketing of imitative drugs or technologies, the Company is committed to developitself as a bio-pharmaceutical company that focuses on the R&D and commercialisation of categories I andII bio-pharmaceutical drugs and technologies.
Equipped with the capability to explore new drugs and technologies continuously
The Company has an exceptionally strong R&D team comprising 64 technical staff, of which 57 havereceived tertiary education or above. The Company’s R&D team has established the Company’s fourproprietary R&D platforms which equipped the Company with the capabilities to explore new drugs andtechnologies continuously. The Company has registered 1 patent before its conversion into a joint stocklimited company and has 13 new drugs or technologies under patent applications, which are evidence of theCompany’s R&D capabilities. The platforms have also enabled the Company to diversify its researchprograms, thereby preventing the Company from over-reliance on a single program.
Extensive collaboration with universities, hospitals and large corporations
Apart from R&D activities by its in-house R&D team, the Group also leverages the expertise,equipment and resources of renowned universities, research institutes and hospitals in order to enhance itsR&D capabilities. The Company has built extensive collaborations with them through co-development orother forms of alliance. The Company has strategic alliances with Shanghai Pharmaceutical, a largepharmaceutical corporation in the PRC, for sales and distribution of its pharmaceutical products and withChina General for R&D fundings in the future.
Sound and astute management team
The Directors believe that the management’s ability to fuse technology and capital with marketdemand has been well evidenced by the track record of the Company. They realise that the ultimate valueof a R&D program is determined by its potential and extent of being commercialised. Their vision towardsthe future bio-pharmaceutical landscape in the PRC has shaped the unique positioning of the Company asa company focusing on R&D and commercialisation of categories I and II bio-pharmaceutical drugs andtechnologies and led the Company ahead of other players of similar scale in the PRC. The success of theCompany’s management is evidenced by the Company’s permitted undertaking in the State HighTechnology Development Project (863 Project) ( ( )) for R&D of a new type oflymphotoxin and its long list of applications new drug patent.
BUSINESS OBJECTIVES AND STRATEGIES
The Group’s overall business objective is to become a top-class new bio-pharmaceutical technology/drugdeveloper in the PRC. To achieve such objective, the Group focuses on the R&D and commercialisation ofcategories I and II bio-pharmaceutical drugs based on its four proprietary R&D platforms. In addition, the Groupplans to build its own GMP-compliant factory and purchase additional production facilities in order to maximisethe business opportunities arising from the production of its in-house developed new technologies/drugs in thefuture.
BUSINESS OBJECTIVES
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The Directors have formulated the following business strategies by taking into consideration the Group’sbusiness objectives and competitive edges set out above:
R&D and product commercialisation as core businesses
Categories I and II bio-pharmaceutical drugs and technologies are valuable assets to largepharmaceutical enterprises which are eager to diversify their product range in order to maintain their profitgrowth and market share. To achieve such goal, large pharmaceutical enterprises often acquire new drugsand technologies from specialised and smaller scale pharmaceutical companies with stronger capability inthe R&D of new drugs. The strong R&D team of the Group and the extensive collaborations formed by theGroup with universities, hospitals and large corporations enable the Group to make use of more advancedR&D technologies, including genetic engineering recombinant technology and computer-assisted designtechnology, thereby shortening the time frame for R&D and commercialisation of new drugs andtechnologies as well as reducing the R&D costs. These also enable the Company to continuously developand launch categories I and II bio-pharmaceutical drugs and technologies in the future. The Directors expectthat as a result of China’s accession into the WTO and with the enactment and enforcement of morestringent regulations on patent protection for new drugs, demand for categories I and II bio-pharmaceuticaldrugs will increase and companies with a distinct R&D capability will be better positioned to capture anybusiness opportunities arising therefrom.
Technology transfers and short-term financing
Due to the long time span and high capital requirement of bio-pharmaceutical R&D programs, theGroup needs a stable source of cash funding to maintain its operations. The Company will, whereappropriate, transfer its “me-too” drug technologies to pharmaceutical corporations in exchange for upfronttransfer fees and future revenue/profit sharing rights upon the commercial sales of the drugs by thepharmaceutical corporations. The advantages of such transfers of technologies are that they provide theCompany with immediate funding and minimise the Company’s risks associated with the commercialisationof “me-too” drugs. From a long term perspective, such strategy enables the Company to focus its effortsin the R&D and commercialisation of category I bio-pharmaceutical drugs. The Company will continue toengage in technology transfers of “me-too” drugs and manufacture and sales of medical diagnostic reagentsas a mean of obtaining short-term financing.
Leveraging excessive production capacity and low production cost in the PRC
The Directors believe that there are currently many pharmaceutical factories in the PRC producingsimilar drugs resulting in excessive or wasted production capacities, leading to low production costs. Tocommercialise its in-house developed drugs and to capitalise on such favourable conditions, the Directorsintend to (i) where permissible under PRC laws and regulations, outsource the peripheral, capital and labourintensive activities in drug manufacturing, to other pharmaceutical factories, but to retain its core R&Dactivities in-house; and (ii) acquire established drug manufacturing companies with sizable productioncapacity. However, the Group presently has no concrete plan for the production of its new drugs developedin-house.
Strategic alliances or joint ventures with synergistic parties
The Company has formed and will continue to form strategic alliances or joint ventures to utilise thestrengths and resources of strategic parties in the R&D of other bio-pharmaceutical areas or to achieve timeand cost savings for the Group. Such modes of cooperation would not only strengthen the ties between theCompany and its strategic parties, but would also lock in their commitment towards the R&D andproduction of the Company’s products.
BUSINESS OBJECTIVES
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Enhancement of ties with international bio-pharmaceutical corporations
As technological advancements in the global bio-pharmaceutical industry are primarily driven byoverseas corporations, in particular, those based in the U.S., the Company will strive to establishcollaboration with international bio-pharmaceutical corporations by way of co-development, alliances orequity participation. In addition, the Company plans to target Europe and the U.S. markets for its potentialin-house developed category I drugs.
Standardisation of R&D and production processes
The Directors believe that standardisation of R&D and production processes is critical in order forthe Company to maintain long term competitiveness, especially after China’s accession into the WTO andthe resultant market liberalisation. The Company intends to make use of computer-assisted technologies andmodeling as well as strict compliance with the GMP standards to standardise its R&D and productionprocesses. Prior to completion of the Company’s new complex in May 2002, the Company’s operations werespread over several laboratories at different locations. The Company has moved in the new complex in May2002 and the Directors believe that its new complex would greatly facilitate the standardisation plan of theCompany.
BUSINESS PLAN
The Company will seek to achieve the following milestone events from the Latest Practicable Date to 31stDecember, 2004 to attain its business objectives and strategies. Investors should note that the following milestoneevents and their respective scheduled times for attainment are formulated on the bases and assumptions referredto in the subsection headed “Bases and assumptions” below. These bases and assumptions are inherently subjectto many uncertainties and unpredictable factors, in particular the risk factors set out in the section headed “Riskfactors” of this prospectus. The Company’s actual course of business may vary from the business objectives setout in this prospectus. There can be no assurance that the plans of the Company will materialise in accordancewith the expected time frame or the objectives of the Company will be accomplished at all. Should there be anymaterial change in the business plan, the Company will make relevant announcements as stipulated in the GEMListing Rules to inform its Shareholders.
R&D and commercialisation of genetic engineering drugs
Latest PracticableDate to31st December, 2002
1st January, 2003 to30th June, 2003
1st July, 2003 to31st December, 2003
1st January, 2004 to30th June, 2004
1st July, 2004 to31st December, 2004
Recombinant human lymphotoxin-� derivatives
● Complete stage I
clinical trial
● Conduct stage II
clinical trial
● Conduct stage III
clinical trial
● Complete stage III
clinical trial
● Obtain Certificate
of New Drug
● Complete trial
production
Recombinant human parathyroid hormone derivatives
● Complete
pre-clinical
R&D
● Conduct stage I
clinical trial
● Conduct stage II
clinical trial
● Complete stage II
clinical trial
● Commence stage
III clinical trial
BUSINESS OBJECTIVES
— 95 —
A
AA
111
Latest PracticableDate to31st December, 2002
1st January, 2003 to30th June, 2003
1st July, 2003 to31st December, 2003
1st January, 2004 to30th June, 2004
1st July, 2004 to31st December, 2004
Construction of GMP factory
— ● Obtain land use
right and factory
design
● Commence
construction
● Complete
construction
● Obtain GMP
certificate
● Purchase part of
the production and
quality control
facilities for
approximately
RMB23.7 million
● Complete purchase
of all production
and quality control
facilities
Note:
According to the New Pharmaceuticals Examination and Approval Procedures of the PRC law, the clinical trial of new drugs
is divided into four phases, all of which are conducted in human bodies:
Phase I: to confirm that the subject drug is safe and harmless to human bodies
Phase II: to prove the medical effectiveness of the subject drug for the treatment of target diseases
Phase III: to prove that the subject drug is both safe and effective in a large sample of human bodies
Phase IV: to monitor the toxicity and side effects of the drug sold
R&D and commercialisation of photodynamic therapy drugs (PDT)
Latest PracticableDate to31st December, 2002
1st January, 2003 to30th June, 2003
1st July, 2003 to31st December, 2003
1st January, 2004 to30th June, 2004
1st July, 2004 to31st December, 2004
Hemporfin
● Complete pre-
clinical R&D
● File application for
clinical trial
● Conduct stage I
clinical trial
● Conduct stage II
clinical trial
● Complete stage II
clinical trial
● Complete stage III
clinical trial
Deuteroporphyrin
● Commence
pre-clinical
R&D
● File application
for clinical trial
● Commence stage I
clinical trial
● Conduct stage II
clinical trial
● Conduct stage III
clinical trial
BUSINESS OBJECTIVES
— 96 —
R&D and commercialisation of human leukocyte antigen (HLA) genotyping chip
Latest PracticableDate to31st December, 2002
1st January, 2003 to30th June, 2003
1st July, 2003 to31st December, 2003
1st January, 2004 to30th June, 2004
1st July, 2004 to31st December, 2004
● Complete clinicaltrial
● Commencepurchase ofproductionfacilities forapproximatelyRMB14.5 million
● Complete purchaseof production andquality controlequipment
— — —
Enhancement of the Company’s capability on R&D and screening of new drugs
Latest PracticableDate to31st December, 2002
1st January, 2003 to30th June, 2003
1st July, 2003 to31st December, 2003
1st January, 2004 to30th June, 2004
1st July, 2004 to31st December, 2004
Lymphotoxin mutant
● Complete thescreening
● Constructscreening modeland apply it toobtainmolecules withcertain level ofbio-activity
- purchase of production andquality control facilities — — 23.7 — — 23.7
R&D and commercialisation ofphotodynamic therapy drugs
- Hemporfin 2.0 2.0 3.5 3.5 6.0 17.0
- deuteroporphyrin 1.0 1.5 3.0 3.5 6.0 15.0
R&D and commercialisation ofmedical diagnostic products
- HLA genotyping chips 2.0 11.0 — — — 13.0
- purchase of production facilities 14.5 — — — — 14.5
Enhancement of the Group’scapability on R&D and screeningof new drugs 4.0 4.0 4.0 4.0 4.0 20.0
Total 30.5 31.5 62.5 26.5 24.0 175.0
BUSINESS OBJECTIVES
— 99 —
AA
The balance of the net proceeds of approximately HK$10.2 million will be used as general working capital
of the Group.
In the event that any part of the Company’s business plan does not materialise or proceed as planned or the
net proceeds from the Placing are not immediately required for the purposes stated above, the Directors will
carefully evaluate the situation and may reallocate the intended funds to other business plans and/or to new
projects of the Company and/or place them in interest bearing deposits with banks or financial institutions, so
long as the Directors deem it to be in the best interests of the Company and its shareholders taken as a whole.
In such event, the Company will make a separate announcement as required by the GEM Listing Rules.
Taking into account the Group’s internal resources and banking facilities available, the Directors consider
that the net proceeds from the Placing will be sufficient to finance the business plan of the Company as described
in this section of this prospectus.
BUSINESS OBJECTIVES
— 100 —
BACKGROUND OF INITIAL MANAGEMENT SHAREHOLDERS
Shanghai Pharmaceutical
Shanghai Pharmaceutical is a company whose A shares are listed on the Shanghai Stock Exchange, the PRC,
which is held as to approximately 39.69% by Shanghai Pharmaceutical (Group) Corporation, a state-owned
enterprise. Shanghai Pharmaceutical retails and wholesales a variety of pharmaceutical products including
biopharmaceuticals, chemical and Chinese traditional medicines, and healthcare products. Shanghai
Pharmaceutical also invests in new medicine development and provides related services and has 13 types of
export and import permits and has a sales networking which covers nearly all of the cities of the PRC including
Hong Kong and Macau. Shanghai Pharmaceutical is one of the largest trading and industrial companies in the PRC
which has a relatively broad sales network and strong market developing power among the other competitors in
the same industry. For the financial year ended 31st December, 2001, its net profits amounted to approximately
RMB145 million and it has total assets of over RMB4.29 billion as at 31st December, 2001. Immediately after
completion of the Placing, Shanghai Pharmaceutical will hold approximately 19.66% interest in the Company.
China General
By the end of 2001, the China General group’s total assets in the PRC amounted to over RMB15.5 billion.
The China General group has so far built up stable economic and trade ties with over 100 countries and territories,
and it has set up branches and representative offices in nearly 30 countries and territories.
China General is owned by the PRC government and engaged in a very extensive scope of business,
including foreign trade and economic cooperation and other diversified business. The foreign trade and economic
cooperation includes import and export of technology, high-tech products, and various categories of mechanical,
electronic and instrumental products. It is also engaged in project finance, engineering projects, and undertakes
the implementation of China’s foreign economic and technical assistance projects and assistance materials. It is
also engaged in the import and export of medical equipment, instruments and health products.
Its diversified business includes investment, storage and transportation, international advertising and
exhibitions, properties management, real estate development and information services. It will hold 18.45% in the
share capital immediately after completion of the Placing.
ZJ Hi-tech Park Co.
ZJ Hi-tech Park Co., the third largest Shareholder, is principally engaged in property development and
technology project investment and operates the Shanghai Pudong-Zhangjiang Hi-tech Park, one of the most high
profile science parks in the PRC. Its A shares are currently listed on the Shanghai Stock Exchange with a market
capitalisation of over RMB6 billion as at the Latest Practicable Date, which is held as to 54.90% by Shanghai
Zhangjiang Hi-Tech Park Development Corp., a state-owned enterprise. For the financial year ended 31st
December, 2001, its net profits amounted to approximately RMB202 million and its total assets were over
RMB2.74 billion as at 31st December, 2001. Before the Company moved in the new office complex in May 2002,
the Company’s principal laboratories were all leased from the associates of ZJ Hi-tech Park Co..
RELATIONSHIP WITH THE INITIAL MANAGEMENT SHAREHOLDERS
— 101 —
A1
Fudan University
Founded in 1905, Fudan University is one of the leading universities in China and has an international
reputation for academic excellence. In April 2000, Fudan University and Shanghai Medical University merged to
form a more comprehensive university. Currently, Fudan University has 22 faculties and departments which offer
a comprehensive range of studies and has a leading academic position in life science studies in the PRC. It has
29 national key (outstanding) disciplines, 5 national key laboratories, 58 institutes and 61 research centres. Eight
of its undergraduate programs have been designated as the national centres for basic scientific research and
teacher training.
Currently, the total enrolment of Fudan University is more than 26,000 students. In the “Challenge Cup”,
which tests the student creativity of each university, Fudan was ranked first in 1995 and 1999. Fudan University
is an internationally recognised influential academic centre. Since 1996, faculty members of the science
departments have published nearly 10,000 academic articles, over 300 books and more than 300 research
achievements that have been evaluated by experts. The faculty has received over 200 awards, of which more than
30 have been national awards.
Fudan University has established exchange relationships with more than 200 overseas universities and
research institutions. Currently it has 100 laboratories with advanced instruments and large-scale equipment. The
university library has a collection of 4.3 million volumes and subscribes to over 25,000 journals and magazines.
Fudan University has invested in the Company since its establishment and is a promoter of the Company
upon its conversion into a joint stock limited company in November 2000. It held 4.31% of the share capital of
the company immediately after completion of the Placing.
RELATIONSHIP WITH THE INITIAL MANAGEMENT SHAREHOLDERS
— 102 —
NON-COMPETITION UNDERTAKINGS
Each of Shanghai Pharmaceutical, China General and ZJ Hi-tech Park Co., being the three largestShareholders and Initial Management Shareholders, hold interests in certain companies or entities which areengaged in the R&D, manufacturing and/or sales of drugs. The relevant information for each of such InitialManagement Shareholders is set out below:
Shanghai Pharmaceutical
Investee company Nature of businessShareholding
interests
Shanghai Tongyong Pharmaceutical Co., Ltd. ( ) Drug manufacturing 40%Jiangxi Nanhua Pharmaceutical Co., Ltd. ( ) Drug retailing 50%Shanghai Pharmaceutical (Sudan) Co., Ltd. ( ) Drug manufacturing 55%Shanghai Hefeng Pharmaceutical Co., Ltd. ( ) Drug manufacturing 50%Shanghai No. 9 Pharmaceutical ( ) Drug manufacturing 100%Shanghai Changzheng Fuming Pharmaceutical Co., Ltd.
( ) Drug manufacturing 51%Shanghai Changzheng Jinshan Pharmaceutical Co., Ltd.
( ) Drug manufacturing 65%Shanghai Fuda Pharmaceutical Co., Ltd. ( ) Drug manufacturing 70%Anhui Huashi Pharmaceutical Co., Ltd. ( ) Drug manufacturing 67%Shanghai Huashi Pharmaceutical Co., Ltd. ( ) (Note 1) Drug manufacturing 100%Shanghai Huashi Pharmaceutical Hi-Tech Industrial Development Co., Ltd.
( ) Drug introductionand R&D ofchemical andimitiative drugs
100%
China General
Investee company Nature of businessShareholding
interests
Hainan Tongmeng Pharmaceutical Co., Ltd. ( ) Drug manufacturing 49%Hainan Sanyang Pharmaceutical Co., Ltd. ( ) (Note 2) Drug trading 65%China Pharmaceutical Health Accessories Import and Export Corporation
( ) Drug trading 100%
ZJ Hi-tech Park Co.
Investee company Nature of businessShareholding
interests
Meilian Biotechnology Company ( ) R&D of geneticpattern
49.47%
Shanghai National Bio-pharmaceutical Base Pharmaceutical Selling Co., Ltd.( ) Sales of drugs 75%
Notes:
1. Yu Qing Hua, a non-executive Director and director of Shanghai Pharmaceutical, was nominated and appointed by Shanghai
Pharmaceutical as the chairman of the board of Shanghai Huashi Pharmaceutical Co., Ltd..
2. Zhang Li Qiang, a non-executive Director and a deputy general manager of China General Industry Company, was nominated and
appointed by China General to be the chairman of the board of Hainan Sanyang Pharmaceutical Co., Ltd..
3. Save for notes (1) and (2) above, the above Initial Management Shareholders have no board representation in the investee
companies listed above.
RELATIONSHIP WITH THE INITIAL MANAGEMENT SHAREHOLDERS
— 103 —
1
The Directors are of the view that given the focus of the Company is on categories I and IIbio-pharmaceutical drugs, the competition, if any, from the enterprises set out above is minimal since, prior toentering into the non-competition undertakings with the Company, Shanghai Pharmaceutical, ZJ Hi-tech Park Co.and China General and their respective subsidiaries and associates did not engage in the R&D of bio-pharmaceutical drugs and Chinese medicines which were similar or identical to the drugs which were the subjectsof R&D by the Group simultaneously. Besides, none of Shanghai Pharmaceutical and China General and theirrespective subsidiaries and associates is engaged in the manufacture and sales of medical diagnostic reagents.
However, in order to further protect the Group from such possible competition, each of ShanghaiPharmaceutical, China General and ZJ Hi-tech Park Co. has entered into a non-competition undertaking with theCompany. Upon executing the non-competition undertakings by Shanghai Pharmaceutical, ZJ Hi-tech Park Co.and China General, each of them, including the subsidiaries of China General, shall, among others, not performany R&D activities (not applicable for ZJ Hi-tech Park Co.) and not make any new investments in the R&D,production or marketing of identical or similar products that the Company is currently conducting or planning toconduct. Accordingly, the Directors believe that the businesses of Shanghai Pharmaceutical, ZJ Hi-tech Park Co.and China General do not compete with the business of the Group.
As at the Latest Practicable Date, none of the Initial Management Shareholders has indicated that theyintend to inject their pharmaceutical businesses or investments, if any, into the Company. Notwithstanding theconnected transactions disclosed in this prospectus and despite their board representations, the Group’smanagement and operations are independent of the management and operations of Shanghai Pharmaceutical,China General and ZJ Hi-Tech Park Co..
By way of a non-competition undertaking executed on 9th March, 2000, Shanghai Pharmaceutical hasundertaken to the Company that as long as it is a Shareholder, it will:
(1) not perform any R&D activities; and
(2) not make any new investments, which includes (i) not to make new investment in the production ofpharmaceutial products or the facilities for the production of pharmaceutical products; and (ii)endeavor to ensure that its existing investment (other than in the Company) does not and will notcompete with the Company;
in so far as such R&D activities or investments fall which the scope of Competing Businesses as definedbelow. Besides, pursuant to the undertaking, in the event that any R&D projects or investments of ShanghaiPharmaceutical compete in any way with the business of the Company, and if Shanghai Pharmaceutical intendsto dispose such R&D projects or investments, the Company shall be entitled to a right of first refusal to acquirethem.
By way of a non-competition undertaking executed on 9th March, 2000, ZJ Hi-tech Park Co. has undertakento the Company that as long as it is a Shareholder, it will not make any new investments, which includes (i) notto make new investment in the production of pharmaceutial products or the facilities for the production ofpharmaceutical products; and (ii) endeavor to ensure that its existing investments (other than in the Company)do not and will not compete with the Company, in so far as such investments fall within the scope of CompetingBusinesses as defined below. Besides, pursuant to the undertaking, in the event that any R&D projects orinvestments of ZJ Hi-tech Park Co. compete in any way with the business of the Company, and if ZJ Hi-tech ParkCo. intends to dispose such R&D projects or investments, the Company shall be entitled to a right of first refusalto acquire them.
By way of a non-competition undertaking executed on 6th March, 2002, China General has undertaken tothe Company that as long as it holds 15% or more equity interest in the Company, it will not, and it will procureits subsidiaries not to, except with the written approval by the Company:
(1) perform any R&D activities; and
RELATIONSHIP WITH THE INITIAL MANAGEMENT SHAREHOLDERS
— 104 —
(2) make any new investments, which includes (i) not to make new investment in the production ofpharmaceutical products or the facilities for the production of pharmaceutical products; (ii) not toinvest or further invest in projects not belonging to the Company; and (iii) endeavor to ensure, thatits existing investment (other than in the Company) does not and will not compete with the Company;
in so far as such investments or R&D activities fall within the scope of Competing Businesses as definedbelow. Besides, under the undertaking, in the event that any R&D projects or investments of China Generalcompete in any way with the business of the Company, and China General intends to dispose such R&D projectsor investments, the Company shall be entitled to a right of first refusal to acquire them.
The non-competition undertaking by China General contains a provision which allows China General tocompete with the Company provided that the consent of the Company has been obtained. The non-competitionundertakings by Shanghai Pharmaceutical and ZJ Hi-tech Park Co., do not contain a similar provision. Despitethe express provision to allow competition, the Directors are of the view that China General is unlikely to be ableto obtain the Company’s consent to compete because:
(1) China General has only one board seat out of a board of ten members;
(2) the other substantial shareholders/investors in the Company, such as Shanghai Pharmaceutical and ZJHi-tech Park Co., will oppose China General (or any other substantial shareholders/investors) fromcompeting with the Company.
The Company has undertaken that it will only give such consent if so approved by all independentnon-executive Directors.
“Competing Businesses” in all of the non-competition undertakings set out above refers to the R&D,production or marketing of identical or similar products that the Company is currently conducting or currentlyplanning to conduct.
TECHNOLOGICAL COOPERATION WITH FUDAN UNIVERSITY
In order to enhance the relationship with Fudan University after listing of the H Shares on GEM, theCompany has entered into a long term technological cooperation agreement with Fudan University on 18th April,2002 as varied by a supplemental agreement dated 17th July, 2002, the details of which are set out below underthe sub-section headed “Fudan University — Technological Cooperation Agreement” under the paragraph headed“Non-exempt continuing Connected Transactions” below.
NON-EXEMPT CONTINUING CONNECTED TRANSACTIONS
Each of Shanghai Pharmaceutical, ZJ Hi-tech Park Co., China General and Fudan University is an initialmanagement shareholder by reason of its board representation in the Board of Directors and hence each of themis a connected person of the Company. Some of these initial management shareholders have invested R&Dfunding in the Company for preferential rights to acquire new drug technologies and China General has enteredinto a R&D funding and technology transfer agreement with the Company. The Company has co-developmentarrangements with Fudan University for technological support of the Company’s R&D programs. Morgan-Tan,being a non-wholly owned subsidiary of the Company, is owned as to 31.25% by Shanghai Zhangjiang Hi-TechPark Development Corp., the controlling shareholder of ZJ Hi-tech Park Co., a substantial shareholder of theCompany and therefore is a connected person of the Company. It shares certain premises and facilities as wellas administrative services with the Company, and has entered into a technological services agreement with theCompany. These relationships will continue after the listing of the H Shares and constitute continuing connectedtransactions of the Company.
RELATIONSHIP WITH THE INITIAL MANAGEMENT SHAREHOLDERS
— 105 —
A
1. Shanghai Pharmaceutical
(1) Technology transfer agreement (new �-glucosidase inhibitor)
The agreement
On 15th October, 2001, the Company entered into a technology transfer agreement with ShanghaiHuashi Pharmaceutical Hi-Tech Industrial Development Co., Ltd. (“Shanghai Huashi”), a wholly-ownedsubsidiary of Shanghai Pharmaceutical, for the technology transfer of new �-glucosidase inhibitor, a newdrug developed by the Company. The new drug is for the treatment of diabetes and is classified underCategory II of the Chinese Medicine Classification.
The consideration
The total consideration for the transfer is RMB5 million, payable by three instalments as follows:
(1) RMB2 million to be paid within 2 weeks from the date of agreement;
(2) RMB2 million to be paid within 2 weeks after the filing of the application for clinical trial withSDA; and
(3) RMB1 million to be paid after obtaining approval of clinical trial from SDA.
Incoming sharing rights
In addition to the instalment payments and commencing from the year following the grant of Approvalfor Production by SDA, the Company shall be entitled to share the sales income of the new drug until theexpiry of the statutory new drug protection period, which is 8 years from the date of trial production, asset out below:
Sales Revenue% of revenue to the
Company
RMB50 million or less 5%Over RMB50 million but not more than RMB100 million 3%Over RMB100 million 2%
Balance payment
As at the Latest Practicable Date, RMB4 million has been received by the Company. The balance ofRMB1 million is expected to be received before 31st December, 2002. Shanghai Pharmaceutical hasconfirmed that the Company has fulfilled all obligations under the subject agreement. Accordingly, allrevenue under this agreement has been accounted for in the profit and loss account of the Company.Payment of the balance of the consideration by Shanghai Pharmaceutical will constitute connectedtransactions subject to the GEM Listing Rules.
Share of future sales revenue
Upon the commercial sales of the new �-glucosidase inhibitor by Shanghai Huashi, which theDirectors estimate to begin in early 2004, the Company will be entitled to share the sales income of the newdrug. However, as commercial sales of this new drug will only begin in 2004, the Company is not applyingfor a waiver for the share of future sales revenue at this stage. The Company will comply with GEM ListingRules when actual income from share of sales revenue occurs.
RELATIONSHIP WITH THE INITIAL MANAGEMENT SHAREHOLDERS
— 106 —
(2) R&D funding agreement (recombinant human parathyroid hormone derivatives (rhPTH) and
Pursuant to an agreement dated 2nd November, 1999, Shanghai Pharmaceutical paid RMB10 million
to the Company as its contribution towards the R&D funding of rhPTH and r-tPA, two new drug programs
in the process of development by the Company at the material time. These two drugs are classified under
Category II of the Biological Drug Classification of the PRC.
Principal rights
In exchange for the R&D funding, Shanghai Pharmaceutical is entitled to the following principal
rights:
● Pre-emptive rights to acquire the technologies of the two new drugs;
● 30% of the income from any technology transfer of the two new drugs to any third party;
● 30% of the net profits from sales of the two new drugs upon commercialisation of any of the
two new drugs by the Company itself; and
● preferential right as sales agent of the new drugs upon their commercialisation by the Company,
if the terms of sales offered by other parties being equal.
Transfer of r-tPA technology
Pursuant to a technology transfer agreement dated 25th March, 2002, the technology of r-tPA was
transferred to Shandong Dong-E E-jiao Co., Ltd. (“Shandong E-jiao”), an
independent third party, for a transfer fee of RMB15 million receivable at different stages of transfer before
the end of 2002. In addition, the Company is also entitled to a percentage of the sales revenue upon
commercial sales of the drug during the statutory new drug protection period (and if such statutory
protection is abolished, for 5 years) for a period of 8 years as follows:
Sales Revenue % of revenue to the Company
RMB20 million or less 5%Over RMB20 million but not
more than RMB100 million 3%Over RMB100 million 2%
Future payments to Shanghai Pharmaceutical of its share of the net profits from the commercial sales
of r-tPA and the future transfer and share of the net profits upon the commercial sales of rhPTH will
constitute connected transactions subject to GEM Listing Rules.
RELATIONSHIP WITH THE INITIAL MANAGEMENT SHAREHOLDERS
— 107 —
r-tPA: Balance payment
As stated above, the Company will receive from Shandong E-jiao the balance of the technology
transfer fee by different stage payments before the end of 2003. Pursuant to the agreement dated 2nd
November, 1999, Shanghai Pharmaceutical’s share of the transfer fee is RMB4.5 million (30% of the
technology transfer fee of RMB15 million) which has to be paid to Shanghai Pharmaceutical upon the
Company receiving the stage payments from Shandong E-jiao. The Directors expect to pay Shanghai
Pharmaceutical RMB3.0 million in 2002 and RMB1.5 million in 2003.
Share of future sales revenue
In addition, pursuant to the technology transfer agreement, the Company will be entitled to an annual
sales revenue equivalent to 2% to 5% of the total sales income of this drug, of which 30% will have to be
paid to Shanghai Pharmaceutical during the new drug protection period.
As the Directors expect that the commercial sales of this drug will only occur in 2004, the Company
is not applying for a waiver for the share of sales revenue of this new drug at this stage. The Company will
comply with the GEM Listing Rules when actual income from share of sales revenue occurs.
rhPTH: Payment upon future transfer
The Directors estimate that the rhPTH technology would be ready for technology transfer before the
end of 2003. If Shanghai Pharmaceutical exercises its pre-emptive rights under the agreement dated 2nd
November, 1999, the Company will comply with the GEM Listing Rules for transfer of the technology to
Shanghai Pharmaceutical. If Shanghai Pharmaceutical does not exercise its pre-emptive rights and if the
technology is to be transferred to a third party, Shanghai Pharmaceutical will be entitled to share the
transfer fee in accordance with the provisions of the agreement dated 2nd November, 1999.
Share of future sales revenue
In addition, pursuant to the future technology transfer agreement, if Shanghai Pharmaceutical does
not exercise its pre-emptive rights and the Company transfers the technology to a third party, the Company
will be entitled to an annual revenue equivalent to 2% to 5% total sales income upon commercial sales of
this drug, of which 30% will have to be paid to Shanghai Pharmaceutical. As the Directors expect that
commercial sales of this new drug will only be available commencing 2005, the Company is not applying
for a waiver for the share of possible future sales revenue of this drug at this stage. The Company will
comply with the GEM Listing Rules when income from share of sales revenue occurs.
(3) Sales and distribution services agreement
The agreement
In order to leverage the established and extensive sales network of Shanghai Pharmaceutical, the
Company entered into a sales and distribution services agreement with Shanghai Pharmaceutical on 9th
March, 2000 to govern the terms for the provision of sales and distribution services by Shanghai
Pharmaceutical. By a supplemental agreement dated 20th June, 2002, the parties agreed that the agreement
shall be for a fixed term until the end of 2004.
RELATIONSHIP WITH THE INITIAL MANAGEMENT SHAREHOLDERS
— 108 —
Principal terms
The principal terms of the agreement are summarised as follows:
● the sales and distribution services are to be provided to the Company on a non-exclusive basis
with the terms of sales and distribution of each specific products to be separately agreed in
accordance with the principles set out in the agreement;
● the pricing principle of the products to be sold to Shanghai Pharmaceutical is to be based by
the actual cost of production plus a pre-determined profit margin which will be determined on
a case-by-case basis. The actual cost of production shall be determined by a PRC registered
auditor to be approved by both the Company and Shanghai Pharmaceutical;
● the actual price may, subject to mutual agreement between the Company and Shanghai
Pharmaceutical, be adjusted from time to time based on the actual sales volume of the drug, the
quality of sales services provided by Shanghai Pharmaceutical and the share of promotion cost
between both parties.
Annual cap
As at the Latest Practicable Date, the Company has not sold any products through the sales network
of Shanghai Pharmaceutical. Any future sales transactions by Shanghai Pharmaceutical of the Company’s
bio-pharmaceutical products by Shanghai Pharmaceutical under the agreement are connected transactions
subject to GEM Listing Rules. The price of the Company’s products to be sold and distributed by Shanghai
Pharmaceutical will be the same price payable by any other distributors of the Company. The actual price
will be determined by mutual agreement and may be adjusted based on the actual sales volume of the drug,
the quality of sales services provided by Shanghai Pharmaceutical and the share of promotion costs between
both parties.
Based on the market potential of the new drugs in the pipeline, the Directors estimate that the annual
sales of the Company’s products will not exceed RMB40 million per annum commencing 2004.
(4) Joint Lab
The agreement
The Company has formed a strategic alliance with Shanghai Materia Medica CAS and Shanghai
Pharmaceutical by establishing and operating a joint laboratory (the “Joint Lab”) for the use of advanced
technologies in the screening of new drugs. The Joint Lab, a non-legal person joint venture, was establishedby the parties pursuant to an agreement dated 15th December, 2000. The Joint Lab is to combine thestrength of Shanghai Materia Medica CAS in small molecular compound research, the Company’s strengthin genetic engineering and high throughput screening and the strength of Shanghai Pharmaceutical inmarketing and sales.
Term and share of profits and loss
The Joint Lab is established for a term of 10 years. The liabilities of each party shall not exceed itsinvestment and each party shall be entitled to share the profits and loss of the Joint Research Center inaccordance with its investment.
RELATIONSHIP WITH THE INITIAL MANAGEMENT SHAREHOLDERS
— 109 —
Total investment and capital contribution
The total investment of the Joint Lab is RMB90 million. The Company, Shanghai Materia MedicaCAS and Shanghai Pharmaceutical shall contribute RMB27 million (comprising RMB9 million cash andRMB18 million intangible assets), RMB36 million (all intangible assets) and RMB27 million (all cash)respectively. The schedule of capital contributions by all three parties is set out below:
2000 2001-2009(RMB million per annum)
The CompanyCash 2.25 0.75Intangible assets 4.50 1.50
According to the agreement, the principal rights of each party to the technological results of the JointResearch Center are summarised as follows:
● ownership of the technological results of the Joint Lab, whether patentable or not, shall belongto the three parties in proportion to their investments;
● Shanghai Pharmaceutical has options to purchase any technological results of the Joint Lab; and
● upon the transfer of any technologies of the Joint Lab to any other third party, the income fromthe transfer shall be divided between the three parties according to their investment ratios.
Current new drug programs
The Joint Lab currently has 4 new drug development programs, namely: new K+ channel inhibitor,Lyclooxigerade-2 (Cox-2) selective inhibitor, PPAR� activator and Lipase inhibitor. Any income arisingfrom any future technology transfers or sales of these 4 new drugs upon their commercialisation will beshared between the parties in accordance with their investments. As none of the 4 new R&D drug programswill materialise prior to the conversion of the Joint Lab into a limited company (see below), the Companyis not applying for a waiver in respect of these potential transactions. If any programs of the Joint Lab turnout to materialise prior to the conversion of the Joint Lab into a limited liability company, the Companywill comply with the requirements of the GEM Listing Rules for any possible transactions with ShanghaiPharmaceutical.
Conversion to a limited liability company
The parties to the Joint Lab have agreed to convert the Joint Lab from a non legal person joint ventureinto a limited liability company. Conversion of the Joint Lab into a limited company will constitute aconnected transaction between the Company and Shanghai Pharmaceutical and has to comply with therequirements of the GEM Listing Rules. Subject to compliance with the GEM Listing Rules and uponconversion of the Joint Lab into a limited liability company, transactions between the Company andShanghai Pharmaceutical arising from sales or transfers of the new programs of the Joint Lab will cease.
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Capital contributions
Capital contributions by the Company and Shanghai Pharmaceutical to the Joint Lab before itsconversion into a limited company will constitute continuing connected transactions. The Directors proposean annual cap of RMB2.25 million in respect of the capital contributions by the Company and ShanghaiPharmaceutical to the Joint Lab respectively, for each of the three years ending 2004 to allow sufficient timefor the Joint Lab to be converted into a limited company.
China General is engaged in, among other things, the development of new medicines. It may invest in theCompany by providing up-front fees or R&D funding to the Company and may engage the Company to developa specific drug for it or may acquire technologies from the Company.
The agreement
By a technology transfer agreement dated 30th September, 2000, as varied by a supplementalagreement dated 10th September, 2001, the Company transferred to China General the technologies of threenew drugs, namely, FZ-00-01 (for liver fibrosis), FZ-00-04 (PTP inhibitor) and FZ-00-05 (for coronaryheart disease) for RMB31 million. The three new drugs are category II Chinese medicines.
Principal terms
In accordance with the terms of the agreements, the Company has the following principal residualrights and obligations relating to the three new drugs:
● The Company has undertaken to provide the necessary technological supports to China Generalupon its further development of the three new drugs, the costs of such support to be borne byChina General; and
● The Company shall be entitled to 10% of the net profits from sales of the three new drugs.
Share of future sales revenue
Pursuant to the agreements, the Company completed the technology transfers of the three new drugsin May 2001 and has received full payment of RMB31 million from China General. As such, the rights andobligations of the parties under the agreement have been performed subject only to payment by ChinaGeneral of the Company’s share of net profits upon commercialisation of the new drugs.
The Directors anticipate that commercial sales of these 3 drugs will not commence until 2005. As thewaiver to be granted by the Stock Exchange will not exceed 31st December, 2004, the Directors are notapplying for waivers of these possible continuous revenue at this stage.
(2) R&D funding and technology transfer agreement
China General may invest in the new drug development of the Company by providing up-front fees andR&D funding to the Company or may outsource the R&D of a specific new drug program to the Company. Toregulate the relationship between the parties in these respects, the Company entered into a R&D Funding andTechnology Transfer Agreement with China General on 22nd July, 2002 to set out the framework for future R&Dfunding from China General.
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Principal terms
The principal terms of the agreement are summarised as follows:
● Mode of co-operation
China General may invest in the Company’s new drug research and development programs bysharing the risks and returns of the Company in new drug discovery and development.
● Program specific R&D funding and option to purchase
Program specific R&D funding by China General shall not exceed 30% of the estimated marketprice upon transfer of the specific new drug program. If China General agrees to and has providedthe specific R&D funding to the Company in accordance with its terms of payment, it shall be entitledto an option to purchase the specific new drug program from the Company at any time.
● Technology transfers
The price of any transfer of technology to China General shall be:
● the price at which the same new drug technology or type of services is provided byindependent third parties under normal commercial terms in the ordinary course of theirbusinesses;
● if the above price is not available, then it shall be the price at which a willing buyer willoffer to purchase the new drug technology or services at the Shanghai Property RightsExchange.
● Technology transfers to third parties
If China General shall not exercise its first right of refusal, the Company shall be entitled totransfer the technology of any new drug program of the Company to any third parties. In such event,China General shall be entitled to share not more than 30% of the net income from such transfer,subject to the actual percentage of sharing to be negotiated and determined between the parties basedon the principles of fairness and impartiality.
● Product commercialisation and income sharing ratio
Upon commercialisation of a specific new drug program by the Company or jointly with others,China General shall be entitled to not more 30% of the income from sales of the new drug or services.
● Term
3 years commencing from 22nd July, 2002.
Future R&D funding and share of sales revenue
If pursuant to the agreement China General is to provide R&D funding to the Company, the fundingand the subsequent transactions including: (a) the subsequent technology transfer to China General (if itshall exercise the right of first refusal); (b) payment of transfer fee attributable to China General (if thetechnology shall be transferred to a third party); and (c) any income sharing arrangements (if any) allconstitute connected transactions under the GEM Listing Rules. The Company will enter into a separateagreement with China General which will specify the subject drug or technology and the terms, includingthe amount of the R&D funding and the revenue sharing arrangement (if any) and has to comply with therequirements of the GEM Listing Rules for these transactions.
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The Directors estimate that even if China General is to fund any R&D project prior to the end of thisyear, and considering the length of time for a R&D project to mature prior to transfer, the Directorsanticipate that no technology transfer for any R&D funding will not take place before 2005. As the waiverto be granted by the Stock Exchange will not exceed 31st December, 2004, the Directors are therefore notapplying for a waiver of these possible payments to China General at this stage.
3. Fudan University
(1) Technological co-operation agreement
Academic researches by Fudan University may provide the foundation of a new drug program of theCompany. As an academic institution, Fudan University is not engaged in commercialisation of new drugs andmay transfer technologies to or co-develop new drugs with the Company. To maximise the efficiency andeffectiveness of the Company’s R&D resources, the Company may also outsource aspects of a new drug discoveryor development program to the university.
The agreement
To regulate the relationship between Fudan University and the Company in the discovery anddevelopment of new drugs, the parties entered into a Technological Cooperation Agreement on 18th April,2002 which was supplemented by a supplemental agreement dated 17th July, 2002. The principal terms ofthe agreement are summarised as follows:
● Co-development
Upon circumstances that are within its power and ability, Fudan University shall give priorityto co-develop technologies with the Company for technologies required by the Company. FudanUniversity agrees not to and will not authorise any third party to produce, sell, use or implement theco-developed technological results for any commercial or profit making purpose, either by itself orwith any third party.
● Outsourcing of R&D
Upon circumtances that are within its power and ability, Fudan University shall give priority tothe research and development of specific research programs outsourced by the Company. It shall givepriority to the Company in the use of technological resources and in the conduct of its research forthe Company. Fudan University is entitled to receive a reasonable fee for the services provided, suchfees shall be at the same rate for the provision of similar services in an open and fair market.
● Ownership and other rights
Fudan University and the Company shall jointly own the technological results co-developed bythe parties.
Once the Company succeeds in further developing the technologies, Fudan University shalltransfer its ownership rights to the Company. Any such transfer shall be subject to the requirementsof the GEM Listing Rules. The price for the transfer of ownership shall be determined with referenceto the R&D fees payable to an independent third party engaged in R&D of similar technologies. Ifno such reference is available, the price shall be determined with reference to the actual cost of theR&D plus a reasonable profit of more than 30%. The actual cost shall be determined by a PRCregistered accountant agreed by both parties. Fudan University shall not have any ownership rightsin respect of technological results of R&D projects outsourced by the Company, except that FudanUniversity shall have the naming rights and rights to receive remuneration for the research.
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● Technological support
Fudan University shall continue to provide technological support in biotechnology to theCompany. Fudan University is entitled to receive a reasonable fee for the services provided, such feeto be at the same rate for the provision of similar services in an open and fair market.
● Non-competition
Fudan University has undertaken not to conduct any form of R&D in respect of R&D programscurrently undertaken or planned by the Company.
● Term
10 years commencing 17th July, 2002.
Annual cap
The fees payable by the Company to Fudan University are to be calculated at the same rate for similaroutsourcing or co-development services in an open and fair market, which is expected to be less than anannual sum of RMB5 million.
4. Morgan-Tan
(1) Technological services agreement
The agreement
The Company and Morgan-Tan entered into a technological services agreement dated 7th March, 2000which was supplemented by a supplemental agreement dated 22nd July, 2002, under which Morgan-Tanagrees to provide technological services to the Company and may co-develop a new product or technologywith the Company for a term until 31st December, 2004, which may be extended upon further agreementof both parties.
Principal terms
Under the agreement, irrespective of the mode of co-operation, the ownership of such products ortechnology will solely belong to the Company. If the R&D of a new product or technology is solely initiatedand completed by Morgan-Tan, the Company will be granted the first right of refusal for the acquisition ofsuch product or technology.
In return for the services, Morgan-Tan is entitled to a payment upon the transfer of products ortechnology to the Company, which will be determined either with reference to historical sale of similarproduct to independent third parties or cost plus not more than a 30% premium.
Annual cap
Pursuant to the agreement, Morgan-Tan has been providing technological services for the rhLT projectof the Company during the past three years, of which the R&D cost has accumulated to approximatelyRMB5.7 million as at the Latest Practicable Date and is expected to complete soon within this year. As such,the fees payable to Morgan-Tan would be approximately RMB7.4 million (RMB5.7 million plus 30%premium) or approximately RMB2.5 million per year. Based on the fees of this project, the Directorsestimate that any future technological services to be provided by Morgan-Tan would be around the samebudget per year and would not exceed an annual cap of RMB4 million. The Directors propose a cap ofRMB7.4 million for year 2002 and an annual cap of RMB4 million for each of 2003 and 2004 fortransactions under this agreement.
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(2) Use of premises and sharing of facilities and services agreement
Morgan-Tan, which is engaged in research and development of new drug technologies, shares laboratorypremises and research facilities with the Company. It also shares administrative services with the Company. Toregulate such transactions, the parties entered into an agreement on 22nd July, 2002 for the rental ofoffice/laboratory premises, use of R&D facilities and administrative services by Morgan-Tan for a term of 3 yearscommencing the date Morgan-Tan entered into possession of the rented premises. On 28th May, 2002.Morgan-Tan entered into possession of the rented premises. Particulars of such transactions are as follows:
● Rental of office/laboratory premises
Pursuant to the above agreement, Morgan-Tan is entitled to use approximately 500 sq.m. of the newheadquarters of the Company at No.308, Cailun Road, Shanghai Pudong-Zhangjiang Hi-tech Park, Pudong,Shanghai, as its laboratory and offices at an annual rent of RMB360,000. Such rental is payable byMorgan-Tan to the Company in arrears on a year basis. The annual rent is determined with reference to themarket rental for the provision of similar premises in the same area. Morgan-Tan shall share in the paymentof the management fees, water and electricity charges, for use of the premises, at a rate of RMB40,000 perannum for property management fee and RMB100,000 per annum for water and electricity consumptions.
● R&D facilities
Morgan-Tan is entitled to use certain R&D facilities of the Company in connection with its business.In consideration of its entitlement to use such R&D facilities, the Company is entitled to receive an annualfee of RMB600,000 for the provision of such facilities to Morgan-Tan. The rental is determined based onthe market rate for the provision of similar facilitates by the Company to independent third parties.
● Administrative services
In addition, Morgan-Tan shares administrative services with the Company including: (1) services ofthe administrative staff in managing Morgan-Tan; (2) services of the Company’s supporting staff, such assecretaries, office assistants and cleaners; and (3) use of office facilities. In consideration of the provisionof such services, Morgan-Tan shall pay an annual sum of RMB900,000 to the Company, such sum to be paidin arrears on a year basis. The amount payable by Morgan-Tan to the Company is determined with referenceto the market rate for the provisions of similar services by independent third parties in the same area.
● Annual cap
The fees payable by Morgan-Tan to the Company for use of the Company’s premises, facilities andadministrative services are expected not to exceed an annual sum of RMB2 million.
The transactions described above constitute non-exempt continuing connected transactions under Rule20.26 of GEM Listing Rules and are therefore subject to disclosure and, where applicable, approval byshareholders in accordance with the requirements of GEM Listing Rules. An application has been made to theStock Exchange for a waiver from strict compliance with Rules 20.35 and 20.36 of GEM Listing Rules in respectof a number of continuing transactions under the above agreements and the Stock Exchange has granted thewaiver subject to compliance by the Company of certain conditions. The Company has not applied for waiversin respect of a number of continuing transactions under the above agreements. Details of transactions for whicha waiver has been or has not been applied for and details of the waiver are set out in the paragraph “ConnectedTransactions” under the section headed “Waivers from compliance with GEM Listing Rules” in this prospectus.
RELATIONSHIP WITH THE INITIAL MANAGEMENT SHAREHOLDERS
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DIRECTORS
Executive Directors
Wang Hai Bo, aged 41, is an executive Director, the chairman and general manager of the Company. Hejoined the Company in November 1996. He graduated from Fudan University with a master’s degree in biologyand was an assistant professor there. He has published numerous articles, earning him awards such as the StateStar Fire Grade III Award ( ), Education Committee Grade II Award ( ) to TechnologyAdvancement Award of the Shanghai Province ( ). He is an authoritative figure in the field ofbiopharmaceutical products in the PRC specialising in genetic treatment, cell and gene immune treatment, andmodern Chinese medicine. He was previously the supervisor of Pudong Productivity Promotion Centre( ). Mr. Wang was also the former chief technology officer of Zhejiang Shenghua Biok BiologyCo. Ltd., a listed company in the PRC. He was appointed as an executive Director in November 1996.
Su Yong, aged 38, is an executive Director and deputy general manager of the Company. He joined theCompany in April 1997. He graduated from Zhejiang University with a Ph.D. in Tumorigenesis and from FudanUniversity with a master’s degree in Biochemistry. He has been working in the field of genetic engineering forover nine years. He was the chief engineer of Hangzhou Jiuyuan Gene Engineering Co., Ltd. and was responsiblefor technology development and production management. Mr. Su was the person in charge of the development ofgenetic engineering medicine (GM-CSF/IL-3 fusion protein), which was subsequently transferred to apharmaceutical factory under the Samsung group in Korea. Mr. Su was also responsible for the research andproduction of recombinant human granulocyte colong stimulating factor (rhG-CSF). Hangzhou Jiuyuan GeneEngineering Co., Ltd. was the first company to obtain the license for trial production of rhG-CSF in China andobtained the relevant approval from SDA. Mr. So has extensive expertise in new medicine screening andevaluation as well as overall planning and management. Presently, he is leading the work of three majortechnology platforms of the Company. He was appointed as an executive Director in January 2002.
Zhao Da Jun, aged 31, is an executive Director, deputy general manager and an authorised representativeof the Company. He joined the Company in November 1996. He graduated from Fudan University with a master’sdegree in Biology. Besides, he also holds a master’s degree in Business Administration from the University ofHong Kong. Mr. Zhao has been awarded the National Education Committee on Technology Advancement GradeII Award ( ) in 1997. He is responsible for the marketing and sales activities of the Companyin the PRC as well as overseeing the production and finance activities of the Company. He was appointed as anexecutive Director in January 2002.
Non-executive Directors
Yu Qing Hua, aged 56, is the vice chairman of the board of Directors and an associate director of ShanghaiPharmaceutical. He studied Chemical Pharmacology in East China University of Science and Technology. He wasthe general manager of Shanghai Pharmaceutical and was formerly a supervisor of Shanghai Pharmaceutical(Group) Co., Ltd. in charge of its strategic development, production and marketing functions. He was appointedas a non-executive Director in January 2002.
Zhang Li Qiang, aged 38, is the deputy general manager of China General Industry Company. He has amaster’s degree in Industrial Economic Management from Renmin University of China. He was appointed as anon-executive Director in September 2000.
Fang Jing, aged 33, is the vice president of the investment department of ZJ Hi-tech Park Co.. Shegraduated from Shanghai Finance College majoring in finance. She was the former financial controller of theCompany and was previously the assistant division head in the finance department of Shanghai Steel CordFactory. She was appointed as a non-executive Director in January 2002.
DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES
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Jiang Guo Xing, aged 49, is the chairman of Shanghai Fudan Microelectronics Company Limited, a
company listed on GEM. Mr. Jiang is a senior economist and graduated from Fudan University. He is the general
manager of Fudan Enterprise Development Company Limited, a wholly owned legal entity of Fudan University,
and was previously the deputy general manager of Shanghai Fuhwa Industrial Joint Stock Company Limited in
the PRC. Mr. Jiang has also been the managing director of Huayue Science and Technology Company Limited in
Hong Kong. He was appointed as non-executive Director in November 1996.
Independent non-executive Directors
Feng Zheng Quan, aged 58, is a professor at Shanghai University of Finance and Economics. He graduated
from Shanghai University of Finance and Economics with a master’s degree in Accounting. He also held a
Certified Public Accountants license in the PRC and was previously employed by Price Waterhouse in Canada and
two other accounting firms Da Hua Certified Public Accountants and Price Waterhouse Da Hua Certified Public
Accountants in the PRC. He has accumulated substantial experience in the fields of auditing and management
consulting and has published numerous articles in different accounting magazines. As Mr. Feng is also an
independent non-executive director of Shanghai Pharmaceutical and if there is any connected transaction between
the Company and of Shanghai Pharmaceutical in the future, Mr. Feng will not be considered as independent so
far as such transaction is concerned. To avoid any potential conflicts of interest, he will not act as a member of
the independent board committee and participate in formulating the recommendation to the Company’s
shareholders in respect of such transactions. He was appointed as an independent non-executive Director in
January 2002.
Pei Gang, aged 49, is a member of Chinese Academy of Sciences and the director of the Shanghai Institute
for Biological Sciences, China Academy of Sciences. In 1991, he graduated from the University of Northern
Carolina in the United States with a Ph.D. in Biochemistry and Biophysics. He was a researcher with the Shanghai
Cell Biology Research Laboratory of the Chinese Academy of Sciences ( ) between 1995
and 2000. He was appointed as an independent non-executive Director in February 2001.
Cheng Lin, aged 39, is a lecturer in the Shanghai University of Finance and Economics. Mr. Cheng holds
a bachelor’s degree from Northwestern Normal University, a master’s degree from Ningxia University
( ) and a doctorate degree in economics from Shanghai University of Finance and Economics
( ). He has published numerous articles in various financial and economics publications in the PRC.
Mr. Cheng was appointed as an independent non-executive in July 2002.
SUPERVISORS
Sun Xiao Min, aged 48, is a shareholder representative on and the chairman of the supervisory committee.
He is the executive director, deputy general manager and chief legal advisor of China General. He holds a
master’s degree in law from Beijing University. He was previously the general manager of the legal department
of a PRC Company.
Dai Yan Ling, aged 49, is shareholder representative on the supervisory committee. She is the chairman of
Pudong Technology Investment and the general manager of Shanghai Zhangjiang Venture Capital Co. Ltd. since
1999. She was formerly the vice director of Pudong New Area Economic and Trade Bureau and then moved to
Pudong New Area Science and Technology Bureau and has worked as the vice director of the Pudong
representative office of the Shanghai Municipal Government.
DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES
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Zhuang Xian Han, aged 34, is an employee representative on the supervisory committee and a manager ofthe new drug screening and evaluation center of the Company. He graduated from Zhejiang University with aPh.D. in Molecular Oncology Studies ( ). Mr. Zhuang was previously engaged in external clinical workand was responsible for the studies of pre-clinical pharmacology in respect of State Category I drug.
Wei Dong Zhi, aged 39, is an independent representative on the supervisory committee. He graduated fromEast China University of Science and Technology and holds a bachelor’s degree and a Ph.D. in engineering. Hewas a director in East China University of Science and Technology.
Wong De Zhang, aged 39, is an independent representative on the supervisory committee. He is theassistant manager of the Pudong branch of Fujian Industrial Bank. He graduated from Renmin University of Chinaand obtained a master’s degree in business administration from the Asia International Open University (Macau).He was the chief accountant of Shanghai Chengke Real Estate Development Company Limited and the Planningand Finance division of the Shanghai Electricity College. Later, he became an assistant director of audit and thefinancial controller of the Shanghai Electricity Hi-Tech United Company.
AUDIT COMMITTEE
Members of the audit committee
Feng Zheng Quan and Pei Gang, the independent non-executive Directors, have been appointed as membersof the audit committee of the Company. The audit committee was set up in compliance with the requirements asset out in rules 5.23 and 5.24 of the GEM Listing Rules with written terms of reference based upon the guidelinespublished by the Hong Kong Society of Accountants. Feng Zheng Quan has been appointed as the chairman ofthe audit committee.
Functions of the audit committee
Duties of the audit committee include reviewing the Company’s annual reports and accounts, half-yearlyreports and quarterly reports, as well as providing the audit committee’s advice and comments on these reportsand accounts to the Directors. In this regard, members of the audit committee must liaise with the Directors,senior management and qualified accountant of the Company and the audit committee must meet, at least oncea year with the Company’s auditors. The audit committee should also consider any significant or unusual itemsthat are, or may need to be, reflected in the reports and accounts and must give consideration to any matters thathave been raised by the Company’s accountant, compliance officer or auditors. The members of the auditcommittee are also responsible for reviewing and supervising the Company’s financial reporting and internalcontrol procedures.
COMPLIANCE OFFICER
Zhao Da Jun. For details, please refer to the paragraph headed “Directors — Executive Directors” above.
SENIOR MANAGEMENT
Liu Yan Jun, aged 37, is the vice general manager of the Company. He obtained a bachelor’s degree fromthe Navy medical department, Second Military Medical University, a master’s degree from Hepatobiliary Surgery,Second Military Medical University and a Ph.D. from Eastern hospital of Hepatobiliary Surgery, Second MilitaryMedical University. Mr. Liu was formerly a visiting scholar at the Sidney Kimmel Tumor Centre of CaliforniaUniversity in the United States. He was employed as an officer and associate professor of the research departmentwithin the Molecular Biology department, Cancer Institute, Second Military Medical University.
DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES
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Yu Zhen Wei, aged 56, is the chief engineer of the Company. He has obtained a doctoral degree in
Pharmacology from the Pharmacology Faculty (Cardiff) of the University of Wales in England. Mr. Yu was
employed as the officer of the research development department, the chief engineer of Nanjing Pharmaceutical
Co., Ltd. and the officer of the research department of IVAX HK LTD.
Zhou Ai Guo, aged 33, is the secretary to the board of Directors of the Company. He graduated from the
Transportation Management Engineering Faculty of Northern Jiaotong University in 1992 with a bachelor’s
degree in Engineering and obtained a master’s degree in Business Administration from the University of Hong
Kong in 2001. He has worked as an analyst in the Shanghai representative office of ABN Amro Asset Management
(Taiwan) Limited during which time he was responsible for preparing financial reports on listed companies on
the Shanghai Stock Exchange. He is currently working in the investment department of the Company as the
person-in-charge of the listing of the Company. Mr. Zhou joined the Company in January 2001.
QUALIFIED ACCOUNTANT AND COMPANY SECRETARY
Xu Yun Lan, aged 26, is the chief financial officer, Qualified Accountant, Company Secretary and an
authorised representative of the Company. She joined the Company in January 2002. She graduated from the
Shanghai Academy of Finance and Economics ( ) with a bachelor’s degree in Economics. She is a
certified accountant in the PRC and an associate member of The Association for Chartered Certified Accountants.
She worked in PricewaterhouseCoopers Zhong Tian CPAs Co., Ltd. as a senior auditor before joining the
Company in January 2002.
EMPLOYEES
Overview of number of employees
As at the Latest Practicable Date, the Company had a total of 100 full-time employees in the PRC. Thebreakdown of employees by function is as follows:
Management 5Investment 2Accounting and finance 3Business development 6Administration and general affairs 7Corporate communication 1R&D 64Production 7Sales 5
Total 100
Relationship with employees
The Company recognises the importance of training to its employees. Apart from on-the-job training, theCompany regularly provides internal and external training for its staff to enhance technical or product knowledge.
The Company has not experienced any significant problems with its employees or disruption to itsoperations due to labour disputes nor has it experienced any difficulties in the recruitment and retention ofexperienced staff. The Directors believe that the Company has a good working relationship with its employees.
DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES
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Benefit scheme
All of the employees are entitled to join the social insurance ( ), in respect of which the insurance
premium is borne by the Company and the employees in a specified proportion laid down by the relevant PRC
law. The Company has paid the required levels of social insurance in respect of its employees according to the
relevant regulations of the PRC.
Housing scheme
The Company has set up a housing scheme for its employees. The PRC legal adviser to the Company has
advised that the current arrangements of the Company in connection with the housing scheme do not violate
relevant rules and regulations in the PRC.
Share Option Scheme
The Company has conditionally adopted the Share Option Scheme. Employee(s) (as defined in the Share
Option Scheme) of the Company who are PRC nationals and have taken up options to subscribe for H Shares
under the Share Option Scheme will not be entitled to exercise the options until the H Shares Restrictions (as
defined in the Share Option Scheme) have been abolished or removed. The principal terms and condition of the
Share Option Scheme are set out in the section headed “Summary of Terms of the Share Option Scheme” in
Appendix V of this prospectus. As at the Latest Practicable Date, no share options have been granted under the
Share Option Scheme.
DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES
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SUBSTANTIAL SHAREHOLDERS
So far as the Directors are aware, immediately following completion of the Placing, the persons directly or
indirectly interested in 10% or more of the registered share capital of the Company will be as follows:
Name Number of Shares
Approximatepercentage of
interests in theregistered capital
of the Company
Shanghai Pharmaceutical (Note 1) 139,578,560 19.66%China General (Note 2) 130,977,816 18.45%ZJ Hi-tech Park Co. (Note 3) 105,915,096 14.92%
Note:
(1) Shanghai Pharmaceutical is a joint stock limited company established in the PRC, the A shares of which are listed on the Shanghai
Stock Exchange, and one of the Promoters. It is principally engaged in the trading of pharmaceutical products. Its legal address
is at No. 1399, Jin Qiao Road, Pudong, Shanghai, PRC. Shanghai Pharmaceutical is owned as to 39.69% by Shanghai
Pharmaceutical (Group) Corporation.
(2) China General is a state-owned enterprise. It has an extensive scope of business, including foreign trade, economic cooperation
and other diversified businesses. It is one of the Promoters. Its legal address is at No. 2 Qiaojian Li, Haidian District, Beijing,
PRC.
(3) ZJ Hi-tech Park Co. is a joint stock limited company established in the PRC, the A shares of which are listed on the Shanghai Stock
Exchange, and one of the Promoters. It is principally engaged in property development and investment in technology projects and
operates the Shanghai Pudong-Zhangjiang Hi-tech Park. Its legal address is at No. 200 Langdong Avenue, Pudong New Area,
Shanghai, PRC. ZJ Hi-tech Park Co. is owned as to 54.90% by Shanghai Zhangjiang Hi-Tech Park Development Corp..
SIGNIFICANT SHAREHOLDERS
So far as the Directors are aware, immediately following completion of the Placing, apart from the
Substantial Shareholders referred to above and the Initial Management Shareholders referred to below, no person
will be interested in 5% or more of the registered share capital of the Company.
SUBSTANTIAL, SIGNIFICANT AND INITIAL MANAGEMENT SHAREHOLDERS
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INITIAL MANAGEMENT SHAREHOLDERS
Immediately following completion of the Placing, the following persons will be regarded as the Initial
Management Shareholders for the purposes of the GEM Listing Rules:
Number of Shares
Approximatepercentage of
interests in theregistered share
capital of theCompany
Shanghai Pharmaceutical 139,578,560 19.66%
China General 130,977,816 18.45%
ZJ Hi-tech Park Co. 105,915,096 14.92%
Wang Hai Bo 51,886,430 7.31%
Fudan University 30,636,286 4.31%
Su Yong 18,312,860 2.58%
Zhao Da Jun 15,260,710 2.15%
Fang Jing 5,654,600 0.80%
UNDERTAKINGS
Escrow Arrangements
Pursuant to Rule 13.16(1) of the GEM Listing Rules, each of the Initial Management Shareholders is
required to place in escrow with an escrow agent and on such terms as are acceptable to the Stock Exchange its
relevant securities (as such term is defined in the GEM Listing Rules) of the Company for a period of twelve
months from the Listing Date or, in the case of an Initial Management Shareholder whose relevant securities
represent less than 1% of the issued share capital of the Company, for a period of six months from the Listing
Date.
The Domestic Shares held by the Initial Management Shareholders are promoters’ shares of the Company
and, in accordance with the relevant provisions of the PRC Company Law, promoters’ shares of a joint stock
limited company shall not be transferable within three years from the date of establishment of such company. In
addition, as promoters’ shares cannot be lawfully transferred within three years from the establishment of such
company and according to the relevant provisions of the PRC Security Law, they cannot constitute lawful security
for pledge or charge in the PRC.
Further, as the Domestic Shares held by the Initial Management Shareholders are not represented by any
form of physical scrip or title documents, this means that the subject matter for custody by the escrow agent do
not physically exist in any form available for custody purposes. The Initial Management Shareholders may not
be able to create any pledge or charge by deposit of the title documents of their respective Domestic Shares.
SUBSTANTIAL, SIGNIFICANT AND INITIAL MANAGEMENT SHAREHOLDERS
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A
A
In this regard, the Company has applied on behalf of the Initial Management Shareholders to the Stock
Exchange for a waiver from strict compliance with Rule 13.16(1) of the GEM Listing Rules. The Stock Exchange
has granted the waiver on the condition that if the relevant PRC laws and regulations are relaxed or removed
within twelve months, or where applicable, 6 months from the Listing Date, the Initial Management Shareholders
will have to respectively comply with the escrow arrangements under Rule 13.16(1) of the GEM Listing Rules.
Non-disposal undertakings
Each of the Initial Management Shareholders has severally undertaken to the Company and the Stock
Exchange to comply with the requirements of Rules 13.16(2) (non-disposal for a period of twelve months from
the Listing Date) and 13.19 (notification in the event of pledge or charge) in respect of its interest in its relevant
securities (as such term is defined in the GEM Listing Rules) in the Company. Each of such undertakings is
subject to the exception of further issue and/or sale of H Shares pursuant to the Share Option Scheme.
SUBSTANTIAL, SIGNIFICANT AND INITIAL MANAGEMENT SHAREHOLDERS
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The registered share capital of the Company immediately after completion of the Placing will be as follows:
Issued and to be issued, fully paid or credited as fully paid:
Number of Shares RMB
512,000,000 Domestic Shares in issue (Notes 1 & 3) 51,200,000198,000,000 H Shares to be issued and sold pursuant to the Placing (Notes 2 & 4) 19,800,000
710,000,000 71,000,000
Notes:
1. 18,000,000 H Shares converted from 18,000,000 Domestic Shares and offered for sale by the Selling Shareholders pursuant to the
Regulations for the Reduction of State-owned Shares have been excluded.
2. 18,000,000 H Shares converted from 18,000,000 Domestic Shares and offered for sale by the Selling Shareholders pursuant to the
Regulations for the Reduction of State-owned Shares have been included.
3. Pursuant to the resolutions of the shareholders’ meeting held on 20th January, 2002 and the approval dated 30th May, 2002 issued by the
CSRC, each Domestic Share in the issued capital of the Company at the time of the Share Subdivision was, and all Shares to be issued
by the Company would be, subdivided into 10 Shares of nominal value of RMB0.10 each.
4. Pursuant to a resolution of the shareholders’ meeting held on 20th January, 2002 and the approval dated 30th May, 2002 issued by the
CSRC, the Company is authorised to offer the H Shares and to apply for listing of the H Shares on GEM.
SHARE CAPITAL
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AAAA
Minimum public float
Under the GEM Listing Rules, the minimum level of public float to be maintained by the Company at all
times after listing is 25% of the share capital in issue from time to time, so long as no other securities (other than
H Shares) have been issued by the Company to the public in the meantime. In the event of any such issue of
securities (other than H Shares) to the public, then: (i) 100% of such H Shares must be held by the public; (ii)
the percentage of H Shares in public hands shall not be less than 10% of the Company’s total issued share capital;
and (iii) the minimum level of the public float of the aggregate of H Shares in issue and such other securities to
be issued to the public shall remain at 25% of the Company’s then total issued share capital.
Ranking
Domestic Shares and H Shares are both ordinary shares in the share capital of the Company. However, H
Shares may only be subscribed for by, and traded in Hong Kong dollars between legal or natural persons of Hong
Kong, Macau, Taiwan or any country other than the PRC. Domestic Shares must be subscribed for and traded in
Renminbi. All dividends in respect of H Shares are to be paid by the Company in Hong Kong dollars whereas all
dividends in respect of Domestic Shares are to be paid by the Company in Renminbi.
All the existing Domestic Shares are held by the Promoters. The Domestic Shares are not admitted for
listing on any stock exchange and no arrangement has been made for the Domestic Shares to be traded or dealt
with on any other authorised trading facility in the PRC.
Save as described above and in relation to the despatch of notices and financial reports to shareholders,
dispute resolution, registration of shares on different parts of the register of shareholders, the method of share
transfer and the appointment of dividend receiving agents, which are all provided for in the Articles of
Association and summarised in Appendix IV to this prospectus, the Domestic Shares and the H Shares will rank
pari passu with each other in all respects and, in particular, will rank equally for all dividends or distributions
declared, paid or made after the date of this prospectus. However, the transfer of Domestic Shares is subject to
such restrictions as PRC law may impose from time to time.
SHARE CAPITAL
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INDEBTEDNESS
Borrowings
As at the close of business on 31st May, 2002, being the latest practicable date for the purpose of this
indebtedness statement, the Group had total outstanding borrowings of approximately RMB1,850,000
representing loans from municipal government authorities. All of the loans are unsecured, interest free and
repayable on various dates ranging from 1st June, 2002 to 31st December, 2003.
Debt securities
As at 31st May, 2002, the Group had no material debt securities.
Mortgages and charges
As at 31st May, 2002, the Group had not pledged any of its assets as security of loans.
Contingent liabilities
As at 31st May, 2002, the Group had no material contingent liabilities.
Capital commitments
As at 31st May, 2002, the Group had no material capital commitments.
Disclaimer
Save as aforesaid and apart from intra-group liabilities, at the close of business on 31st May, 2002, the
Group did not have any outstanding loan capital issued or agreed to be issued, bank overdrafts, loans, debt
securities or other similar indebtedness, liabilities under acceptances or acceptances credits, debentures,
mortgages, charges, finance leases or hire purchase commitments, guarantees or other material contingent
liabilities.
Material changes
The Directors have confirmed that there has been no material change in the indebtedness, contingent
liabilities and commitments of the Group since 31st May, 2002.
FINANCIAL INFORMATION
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DISCLOSURE UNDER CHAPTER 17 OF THE GEM LISTING RULES
The Directors have confirmed that as at the Latest Practicable Date, they were not aware of any
circumstances which would give rise to a disclosure requirement under Rules 17.15 to 17.21 of the GEM Listing
Rules.
LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE
Net current assets
As at 31st May, 2002, being the latest practicable date for the purpose of this statement, the Group had net
current assets of approximately RMB21,514,000, comprising total current assets of approximately
RMB37,346,000 and total current liabilities of approximately RMB15,832,000. The current assets comprised
deferred taxation assets of approximately RMB269,000, inventories of approximately RMB1,484,000, trade
receivables of approximately RMB2,538,000, other receivables, deposits and prepayments of approximately
RMB4,984,000, amounts due from a related company of approximately RMB3,000,000, available-for-sale
investments of approximately RMB3,877,000, deposits in other financial institutions of approximately
RMB18,863,000 and cash and bank balances of approximately RMB2,331,000. The current liabilities comprised
trade payables of approximately RMB487,000, other payables and accruals of approximately RMB7,391,000,
deferred revenue of approximately RMB5,004,000, loans from municipal government authorities of
RMB1,450,000 and due to a shareholder of approximately RMB1,500,000.
Financial resources
Since the commencement of its business, the Group has been financing its operations and met its capital
expenditure requirements through equity funding, loans from municipal government authorities, and from
operating cash flows. As at 31st May, 2002, the Group had loans borrowed from the municipal government
authorities of RMB1,850,000 which is unsecured and interest free. The Group expects to meet its anticipated cash
needs, including capital commitment, repayment of borrowings and working capital, principally through the cash
generated from operations and the net proceeds of the placing.
Foreign exchange risk
Since most of the income and expenditure of the Group prior to 31st May, 2002 were received and paid in
local currencies in the countries and places where the Group operates, the directors do not consider that the Group
was significantly exposed to any foreign currency exchange risk.
FINANCIAL INFORMATION
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TRADING RECORD
The following table summarises the Group’s audited results for each of the two financial years ended 31stDecember, 2001. The summary should be read in conjunction with the accountants’report set out in Appendix Ito this prospectus.
Year ended 31st December,2000 2001
RMB’000 RMB’000RevenuesTurnover
Technology transfer revenue (note 1) 14,000 22,000Sales of diagnostic reagent and the provision
Profit before taxation 8,586 13,922Taxation (1,575) (2,166)
Profit after taxation 7,011 11,756Minority interests 588 70
Profit attributable to shareholders 7,599 11,826
Dividends — 7,950
Earnings per share (RMB) (note 4) N/A 0.0223
Pro forma earnings per share (RMB) (note 5) 0.011 0.017
FINANCIAL INFORMATION
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7
7
7
7
7
7
7
Notes:
1. Technology transfer revenue represents revenue from the transfer of four Chinese medicine technologies to China General and
Shanghai Huashi Pharmaceutical Hi-Tech Industrial Development Co., Ltd., a wholly-owned subsidiary of Shanghai
Pharmaceutical.
2. Other revenues include the following items:
Year ended 31st December,
2000 2001
RMB’000 RMB’000
Interest income 75 47
Dividend income — 27
75 74
3. Other income includes the following items:
Year ended 31st December,
2000 2001
RMB’000 RMB’000
Amortisation of government grants and other non-refundable grants 1,982 6,250
Business tax rebate income — 1,200
Realised profit on disposal of available-for-sale investments 3,244 772
Surtaxes rebate income — 63
5,226 8,285
4. No earnings per share information is presented for the year ended 31st December, 2000 as the weighted average number of ordinary
shares outstanding during the year is not considered meaningful since the Company was only transformed from a limited liability
company into a joint stock limited liability company on 8th November, 2000.
The calculation of the earnings per Share for the year ended 31st December, 2001 is based on the profit attributable to shareholders
for the year and the weighted average of 530,000,000 shares in issue during the year ended 31st December, 2001 as if the Share
Subdivision as described in the paragraph headed “Procedures at the Company’s extraordinary shareholders’ meetings” in
Appendix V to this prospectus had taken place at the beginning of 2001. Diluted earnings per share has not been calculated for
the year ended 31st December, 2001 as there were no dilutive potential ordinary shares during the year ended 31st December, 2001.
5. The calculations of pro forma earnings per Share for the year ended 31st December, 2000 and 31st December, 2001 are based on
the profit attributable to shareholders for each year and on the assumption that 710,000,000 Shares of RMB0.10 each had been
in issue throughout the two years ended 31st December, 2001.
Pursuant to Rule 11.11 of the GEM Listing Rules, the Company is required to include the financialresults which must not have ended more than six months before the date of this prospectus. As thisprospectus includes the financial results of the Group covering only the period from 1st January, 2000 upto 31st December, 2001 which has ended more than six months before the issue date of this prospectus, theCompany has applied for and has been granted a waiver from strict compliance with Rule 11.11 of the GEMListing Rules by the Stock Exchange.
The Directors have confirmed that they have performed sufficient due diligence work on the Groupto ensure that, save as disclosed in this prospectus, up to the date of this prospectus, there has been nomaterial adverse change in the financial or trading position of the Group since 31st December, 2001 whichwould materially affect the information as shown in the accountants’ report as set out in Appendix I to thisprospectus.
FINANCIAL INFORMATION
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MANAGEMENT DISCUSSION AND ANALYSIS
The following is a discussion of the results of operations of the Company for the two years ended 31stDecember, 2001. Such discussion should be read in conjunction with the accountants’ report set out in AppendixI to this prospectus.
Financial year ended 31st December, 2000
For the year ended 31st December, 2000, the turnover of the Group amounted to about RMB17.66 million,of which RMB14 million was derived from technology transfer and the balance of about RMB3.66 million fromthe sale of diagnostic reagents and the provision of related ancillary services. Accordingly, technology transferbecame the Company’s major source of revenue for that year, representing about 79.28% of total revenue. Thetechnology transfer revenue recognised in that year represented part of the total consideration of RMB31 millionin relation to the transfer of the Company’s several in-house developed bio-chip related products to ChinaGeneral. The cost of sales amounted to about RMB2.97 million, which was principally attributable to themanufacture of diagnostic products whilst the cost of the technology transfer prior to entering into sales contractwas recognised in the Company’s profit and loss account as the R&D cost.
The gross profit for 2000 was about RMB14.69 million by deducting cost of sales from turnover,representing a gross profit margin of about 83.18%. However, excluding RMB14 million of technology transferrevenue and RMB0.74 million cost of technology transfer from turnover and cost of sales, the gross profit marginwould drop to about 39.07%, which reflected the only average gross profit margin attributable to the sale ofdiagnostic reagents.
Other income of RMB5.22 million comprised the amortisation of government and other non-refundablegrants amounting to about RMB1.98 million and the profit from the disposal of investments amounting to aboutRMB3.24 million. In relation to total expenses, about 34.68% were R&D costs, which was in line with the R&Dfocus of the Company’s business strategy.
Had the whole of the government grants and non-refundable grants not been received, profit before taxationfor the year ended 31st December, 2000 would reduce by RMB1,982,000, from RMB8,586,000 to RMB6,604,000.
A profit attributable to shareholders of about RMB7.60 million was recorded for financial year 2000, whichimplied a net profit margin of about 43.04%.
Financial year ended 31st December, 2001
For the year ended 31st December, 2001, the turnover of the Group increased by about 58.08% to aboutRMB27.91 million. Such surge was principally attributable to the 57.14% increase in revenue from technologytransfer up to RMB22 million. Technology transfer revenue was the Company’s major source of revenue for 2001,representing about 78.82% of total revenue, a level similar to that of 2000. The technology transfer revenuerecognised in that year comprised (i) RMB17 million, being the balance of the total consideration of RMB31million in relation to the transfer of the Company’s several in-house developed bio-chip related products to ChinaGeneral; and (ii) RMB5 million, being the total revenue in relation to the transfer of the Company’s�-glucosidase, a catergory II drug, to Shanghai Pharmaceutical. The sale of diagnostic reagents and the provisionof related ancillary services accounted for about RMB5.91 million of revenue, which represented a 61.47% riseover such source of revenue for previous year. The reason for the rise was mainly due to the increase in sales ofdiagnostic reagent as compared with 2000 as a result of the launch of new bio-chemical reagent products —human chorionic gonadotropin (HCG) ( ) & human menopausal gonadotropin (HMG)( ). The cost of sales amounted to about RMB4.87 million, which was principally attributable tothe manufacture of diagnostic products, whilst the costs of the technology transfers prior to entering into salescontracts have been correspondingly recognised in the Company’s profit and loss account as the R&D cost.
FINANCIAL INFORMATION
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The gross profit for 2001 was about RMB23.04 million, representing a gross profit margin of about 82.55%
and an increase of about 56.84% over previous year’s figure. However, excluding RMB22 million of technology
transfer revenue and RMB0.8m cost of technology transfers from each of turnover and cost of sales, the gross
profit margin would drop to about 31.13%, a decline from the level of the previous year’s which was mainly due
to the drop of selling price of a bio-chemical reagant product � Urokinase ( ).
Other income of RMB8.29 million comprised the amortisation of government and other non-refundable
grants amounting to about RMB6.25 million, business tax rebate of about RMB1.20 million and the profit from
the disposal of investments amounting to about RMB0.77 million. In relation to total expenses amounting to about
RMB22.35 million, about 40.55% were attributable to R&D costs.
Had the whole of the government grants and non-refundable grants not been received, profit before taxation
for the year ended 31st Decemeber, 2001 would have been reduced by RMB6,250,000, from RMB13,922,000 to
RMB7,672,000.
The Group recorded a profit attributable to shareholders of about RMB11.83 million for the financial year
2001. Such profit implied a net profit margin of about 42.39% and represented a rise of about 55.66% over the
figure in 2000.
TAXATION
The Group is principally subject to PRC taxation.
Pursuant to the regulation of the State Tax Bureau and given the technological nature of the Company’s
business, the Company’s revenue from the transfer of technologies to China General which amounted to RMB14
million and RMB17 million for the financial years 2000 and 2001 respectively has been exempted from business
tax, the normal rate of which is 5%.
PRC enterprise income tax is calculated at 33% on the net operating income of the companies which have
operations in the PRC. In November 1998, the Company was designated as a High and New Technology
Enterprise ( ) by the Science and Technology Committee of the Shanghai Municipality
( ). Accordingly, the Company was entitled to full exemption of enterprise income tax for each
of the financial years 1998 and 1999 and subject to a concessionary rate of 15% for the financial year 2000 and
thereafter.
VAT, the principal indirect PRC tax, is charged on the selling price of finished products at a general rate
of 17% and, an input credit is available whereby input VAT previously paid on the purchase of raw materials can
be used to offset the output VAT on sales to determine the net VAT payable. Due to the High and New Technology
Enterprise ( ) designation of the Company, it enjoyed full exemption from VAT for the financial years
1998 and 1999. From the financial year 2000 and thereafter, the Company would be subject to the standard VAT
rate of 17%.
FINANCIAL INFORMATION
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PROPERTY INTEREST
Property interest held and occupied by the Company in the PRC
The Group owns a parcel of land with a 3-storey building erected thereon in the PRC for use as the Group’s
office, manufacturing and laboratory complex. Particulars of the Group’s property interests are set out in
Appendix II to this prospectus.
Property valuation
Vigers Hong Kong Ltd., the independent property valuer, had valued the property interests of the Group as
at 31st May, 2002. Details of the valuation report prepared by Vigers Hong Kong Ltd. are set out in Appendix
II to this prospectus.
DIVIDENDS
The Directors expect that in future, interim and final dividends (if any) will be paid in or about November
and July of each year. Interim dividends will normally represent approximately one-third of the expected total
dividends for each year. The declaration, payment and amount of dividends will be subject to the discretion of
the directors and will be dependent upon the Company’s earnings, financial condition, cash requirements and
availability, the provisions of relevant laws and all other relevant factors.
WORKING CAPITAL
The Directors are of the opinion that, after taking into account the financial resources of the Group,
including internally generated funds and the estimated net proceeds of the Placing, the Group has sufficient
working capital for its present requirements.
DISTRIBUTABLE RESERVES
As at 31st December, 2001, the distributable reserves of the Company were approximately RMB10.90
million.
In accordance with the Articles of Association, the Company declares dividends based on the lower of
retained earnings as reported in accordance with PRC accounting principles and that reported in accordance with
International Accounting Standard (“IAS”) after deduction of the current year’s appropriations to the reserves.
According to the statutory financial statements prepared in accordance with PRC accounting principles and the
financial statements prepared in accordance with IAS, the distributable reserves as at 31st December, 2001
amounted to approximately RMB10.90 million and RMB11.25 million respectively. Hence, the distributable
reserves as at 31st December, 2001 was approximately RMB10.90 million.
FINANCIAL INFORMATION
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ADJUSTED NET TANGIBLE ASSETS
The following pro forma statement of adjusted net tangible assets of the Group is based on the consolidatednet assets of the Group as at 31st December, 2001 as set out in Appendix I to this prospectus, adjusted as describedbelow:
Based onan indicative
Offer Price ofHK$1.13 per
H Share
Based onan indicative
Offer Price ofHK$1.40 per
H ShareRMB’000 RMB’000
Audited consolidated net assets of the Groupas at 31st December, 2001 67,031 67,031
Less: deferred development costs as at 31st December, 2001 (6,870) (6,870)
Less: capitalised cost of technical know-how as at31st December, 2001 (1,479) (1,479)
Audited net tangible assets value as at 31st December, 2001 58,682 58,682
Unaudited results of the Group for the five monthsended 31st May, 2002 30 30
Surplus arising on revaluation of leasehold landand building (Note 1) 220 220
Estimated net proceeds from the Placing (Note 2) 198,183 248,240
Adjusted net tangible assets value 257,115 307,172
Adjusted net tangible asset value per Share (Note 3),based on 710,000,000 Shares in issue immediatelyafter completion of the Placing RMB0.36 RMB0.43
Notes:
1. The Group’s leasehold land and building is stated at cost less accumulated depreciation in the accountants’ report. The surplus
arising on the revaluation of the Group’s leasehold land and building, representing approximately 0.1% of the adjusted net tangible
assets of the Group based on the minimum indicative Offer Price of HK$1.13, will not be incorporated in the financial statements
of the Group for the year ending 31st December, 2002. If the surplus of approximately RMB220,000 is being incorporated in the
Group’s financial statements for the year ending 31st December, 2002, the annual depreciation charge of the Group would increase
by no more than RMB11,000.
2. The estimated net proceeds from the Placing is based on 180,000,000 H Shares to be issued by the Company pursuant to the
Placing.
3. The adjusted net tangible asset value per Share is arrived at after the adjustments referred to in this section.
NO MATERIAL ADVERSE CHANGE
The Directors confirm that since 31st December, 2001, being the date to which the latest audited financialstatements of the Company were made up, there has been no material adverse change in the financial or tradingposition or prospects of the Company.
FINANCIAL INFORMATION
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UNDERWRITERS
Barits Securities (Hong Kong) LimitedGuotai Junan Securities (Hong Kong) LimitedCAF Securities Company LimitedCore Pacific-Yamaichi International (H.K.) LimitedFirst Shanghai Securities LimitedGrand Cathay Securities (Hong Kong) LimitedHantec Capital LimitedKingsway SW Securities LimitedNomura International (Hong Kong) LimitedPhoenix Capital Securities LimitedShenyin Wanguo Capital (H.K.) LimitedShun Loong Securities Company LimitedTai Fook Securities Company LimitedToyo Securities Asia LimitedWintech Securities Ltd
UNDERWRITING ARRANGEMENTS AND EXPENSES
Underwriting Agreement
Pursuant to the Underwriting Agreement, the Company and the Selling Shareholders are offering thePlacing Shares for subscription by way of the Placing subject to the terms and conditions of this prospectus.Subject to the granting of the listing of and permission to deal in all the H Shares to be issued and sold asmentioned in this prospectus by the GEM Listing Committee and to certain other conditions set out in theUnderwriting Agreement, the Underwriters have severally (and not jointly or severally and jointly) agreed tosubscribe for and/or purchase, or procure placees to subscribe for and/or purchase the Placing Shares.
Grounds for termination
The obligations of the Underwriters under the Underwriting Agreement will be subject to termination bynotice in writing from the Joint Lead Managers (for themselves and on behalf of the Underwriters) if, inter alia,any of the following events occur prior to 12:00 noon on the business day immediately preceding the date onwhich dealings in the H Shares commence on the Stock Exchange (expected to be on Tuesday, 13th August, 2002):
(a) it comes to the notice of the Joint Lead Managers:
(i) that any statement considered in the sole and absolute opinion of the Joint Lead Managers (onbehalf of the Underwriters) to be material contained in this prospectus becomes, when theprospectus is issued, or has become untrue, incorrect or misleading in any material respect; or
(ii) that any matter has arisen or has been discovered which would, had it arisen or been discoveredimmediately before the date of this prospectus, constitute a material omission therefrom andconsidered by the Joint Lead Managers in their sole and absolute opinion (on behalf of theUnderwriters) to be material; or
(iii) any breach of the warranties contained in the Underwriting Agreement considered by the JointLead Managers in their sole and absolute opinion (on behalf of the Underwriters) to be material;or
UNDERWRITING
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(iv) any material breach of any of the obligations imposed upon any party to the UnderwritingAgreement (other than on any of the Underwriters or the Sponsor) has occurred; or
(v) any material adverse change in the business or the financial or trading position of any memberof the Group which is considered in the sole and absolute opinion of the Joint Lead Managers(on behalf of the Underwriters) to be material in the context of the Placing;
(b) there develops, occurs or comes into effect:
(i) any event or series of events beyond the reasonable control of the Joint Lead Managers(including without limitation, acts of government, strikes, lock-outs, fire, explosion, epidemic,terrorism, flooding, civil commotion, acts of war, acts of God, riots, public disorder, escalationof hostilities involving Hong Kong, the PRC or any other jurisdiction relevant to the Group,accidents or interruption or delay in transportation); or
(ii) any event or series of events concerning or relating to or otherwise having an effect on, or anychange or prospective change (whether or not permanent) in Hong Kong, the PRC, or local,national, international, financial, economic, political, military, industrial, fiscal, regulatory ormarket conditions and matters (including any moratorium and/or suspension of commercialbanking activities or material restriction on trading in securities generally on GEM) and/or theoccurrence of any disasters; or
(iii) any new law or regulation or any change in existing laws or regulations or any change in theinterpretation or application thereof by any court or other competent authority in Hong Kong,PRC or any other jurisdictions relevant to the Group; or
(iv) the imposition of economic or other sanctions, in whatever form, directly or indirectly, by theUnited States or by the European Union (or any member thereof) or by any other country ororganisation on Hong Kong or the PRC; or
(v) a change or development occurs involving a prospective change in taxation or exchange control(or the implementation of any exchange control) in Hong Kong, the PRC or any otherjurisdictions relevant to the Group; or
(vi) any litigation or claim of material importance of any third party being threatened or instigatedagainst any member of the Group; or
(vii) a material change in the system under which the value of the Hong Kong currency is linked tothat of the currency of the United States; or
(viii) a material change in the exchange rate between the United States dollar, the Hong Kong dollarand the Renminbi,
which will or may, in the sole and absolute opinion of the Joint Lead Managers (for themselves and onbehalf of the other Underwriters), be materially adverse to the business, financial conditions or materiallyaffect the Group or its operation or its prospects or its financial position or have a materially adverse effecton the success of the Placing or which makes it inadvisable or inexpedient to proceed with the Placing onthe terms and in the manner contemplated by the prospectus.
Undertaking
Each of the Initial Management Shareholders has severally given non-disposal undertakings, details ofwhich are described in the section headed “Substantial, significant and initial management shareholders” of thisprospectus.
UNDERWRITING
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Fees and expenses
The Underwriters will receive an underwriting commission of 3.5% on the issue of all the Placing Shares,out of which they will pay any sub-underwriting commissions. The Sponsor will in addition receive a financialadvisory and documentation fee and Barits will receive a financial advisory fee in relation to the Placing. Theunderwriting commission, financial advisory and documentation fee, the GEM listing fee, the Stock Exchangetrading fee, the Securities and Futures Commission transaction levy, legal and other professional fees togetherwith applicable printing and other expenses relating to the Placing are estimated to be approximately HK$20.0million in total borne as to approximately HK$18.2 million by the Company and as to approximately HK$1.8million by the Selling Shareholders (based on an indicative Offer Price of HK$1.13 (being the minimum price ofthe stated range of the Offer Price between HK$1.13 and HK$1.40 per Placing Share)).
Sponsor’s, Barits’ and Underwriters’ interests in the Company
Save for their respective interests and obligations under the Underwriting Agreement and otherwisedisclosed in this prospectus, none of Guotai Junan Securities or Barits or any of their respective associates or anyof their respective directors and employees is interested beneficially or non-beneficially in any shares in anymember of the Group or has any right (whether legally enforceable or not) or option to subscribe for or tonominate persons to subscribe for any shares in any member of the Group.
Guotai Junan Capital, Barits and the Company have agreed that they will enter into a sponsors’ agreementpursuant to which Guotai Junan Capital and Barits will fulfill their continuing obligations as sponsors under theGEM Listing Rules for a period from the Listing Date and up to 31st December, 2004, subject to terms andconditions to be agreed between the relevant parties thereto.
No director or employee of Guotai Junan Capital or Barits who is involved in providing advice to theCompany has or may, as a result of the Placing, have any interest in any class of securities of the Company orany other member of the Group, including options or rights to subscribe for such securities but, for the avoidanceof doubt, excluding interests in securities that may be subscribed for or purchased by any such director oremployee pursuant to the Placing.
No director or employee of Guotai Junan Capital and Barits has a directorship in the Company or any othercompany in the Group.
Neither Guotai Junan Capital, Barits nor any of their respective associates has accrued any material benefitas a result of the successful outcome of the Placing, including by way of example, the repayment of materialoutstanding indebtedness or success fees, other than the following:
1. by way of underwriting and placing commission payable to Guotai Junan Securities and Barits foracting as the Underwriters under the Underwriting Agreement;
2. the financial advisory and documentation fee payable to Guotai Junan Capital as sponsor of thePlacing;
3. the financial advisory fee payable to Barits as financial adviser to the Company in connection withthe Placing;
4. by way of a sponsors’ agreement to be entered into between Guotai Junan Capital, Barits and theCompany as aforesaid pursuant to which Guotai Junan Capital and Barits will be appointed assponsors of the Company for the period from the Listing Date and up to 31st December, 2004, andthe Company shall pay an agreed fee to Guotai Junan Capital and Barits for their provision of suchservices; and
5. certain associates of Guotai Junan Capital and Barits, whose ordinary businesses involve the tradingof and dealing in securities, may be involved in the trading of and dealing in the securities of theCompany.
UNDERWRITING
— 136 —
A
A
61
PRICE PAYABLE ON SUBSCRIPTION
Investors subscribing for the H Shares at the Placing Price are also required to pay a 1.0% brokerage, a
0.005% Stock Exchange trading fee and a 0.007% Securities and Futures Commission transaction levy. Assuming
the Offer Price is HK$1.40 per Placing Share, the amount to be paid by investors will be HK$2,828.34 per board
lot of 2,000 H Shares.
PRICING
The Underwriters are soliciting from prospective investors indications of interest in acquiring the Placing
Shares in the Placing. Prospective investors will be required to specify the number of Placing Shares they would
be prepared to acquire either at different prices or at a particular price. This process, known as “book-building”,
is expected to continue up to, and to end on or about the Price Determination Time, currently scheduled at 6:00
p.m. on 5th August, 2002.
The Offer Price will be fixed by agreement between the Company, the Selling Shareholders and the Joint
Lead Managers (on behalf of the Underwriters) at or before the Price Determination Time, which is currently
scheduled at 6:00 p.m. on 5th August, 2002. If the Joint Lead Managers (on behalf of the Underwriters), the
Company and the Selling Shareholders are unable to reach an agreement on the Offer Price by the Price
Determination Time, currently scheduled at 6:00 p.m. on 5th August, 2002 (or such time and/or date as
agreed by the Company (for itself and the selling Shareholders) and the Joint Lead Managers (on behalf
of the Underwriters), the Placing will not become unconditional and will lapse.
The Offer Price will not be more than HK$1.40 per Share and is expected to be not less than HK$1.13 per
H Share unless otherwise announced as further explained below. Prospective investors should be aware that the
Offer Price to be determined at or before the Price Determination Time may be, but is currently not
expected to be, lower than the indicative Offer Price range stated in this prospectus.
If, based on the level of interest expressed by prospective professional, institutional and other investors
during the book-building process, the Joint Lead Managers (on behalf of the Underwriters and with the consent
of the Company and the Selling Shareholders) consider it appropriate (for instance, if the level of interest is below
the indicative Offer Price range), the indicative Offer Price range may be reduced below that stated in this
prospectus at any time prior to the Price Determination Time. In such a case, the Company shall, as soon as
practicable following the decision to make such reduction, and in any event not later than the business day
immediately preceding the date on which dealings in the H shares commence on the Stock Exchange (expected
to be on Tuesday, 13th August, 2002), cause there to be published on the GEM website notice of the reduction
of the indicative Offer Price range. Such notice will also include confirmation or revision, as appropriate, of the
working capital statement, the offer statistics, as currently set out in the paragraph headed “Summary” in this
prospectus and any other financial information which may change as a result of any such reduction.
The net proceeds from the Placing, assuming an Offer Price of HK$1.13 per H Share (being the minimum
price of the stated range of the Offer Price of between HK$1.13 and HK$1.40 per H Share) and after deducting
commissions and expenses, are estimated to be about HK$203.7 million. The net proceeds receivable by the
Company, after deducting the net proceeds payable to the National Social Security Fund pursuant to the sale of
H Shares by the Selling Shareholders, are estimated to be HK$185.2 million.
The Offer Price and level of interest for the Placing are expected to be published in the GEM website on
or before 12th August, 2002. If for any reason the Price Determination Time is changed, the Company will as soon
as practicable cause to be published on the GEM website notice of the change, and if applicable, the revised date.
STRUCTURE AND CONDITIONS OF THE PLACING
— 137 —
AA(
CONDITIONS OF THE PLACING
The Placing is conditional upon:
1. the GEM Listing Committee granting listing of, and permission to deal in, the H Shares to be issuedand sold as mentioned in this prospectus; and
2. the obligations of the Underwriters under the Underwriting Agreement becoming unconditional(including, if relevant, as a result of the waiver of any condition(s) by the Joint Lead Managers onbehalf of the Underwriters) and not being terminated in accordance with the terms of theUnderwriting Agreement or otherwise,
in each case, on or before the dates and times specified in the Underwriting Agreement (unless and to the extentsuch conditions are validly waived on or before such dates and times) and in any event not later than 12:00 noon,on the business day immediately preceding the date on which dealings in the H Shares commence on the StockExchange (expected to be on Tuesday, 13th August, 2002).
If these conditions are not fulfilled (or, where applicable, waived by the Joint Lead Managers (on behalfof the Underwriters)) on or before the day which is the 30th day after the date of this prospectus, the Placing willlapse and the Stock Exchange will be notified immediately. Notice of the lapse of the Placing will be caused tobe published by the Company on the GEM website on the next day following such lapse.
Share certificates for the Placing Shares will be issued on or about Monday, 12th August, 2002 and willbecome valid certificates of title upon their issue provided that (i) the Placing has become unconditional and (ii)the right of termination as described under the paragraph headed “Grounds for termination” of the section headed“Underwriting” in this prospectus has not been exercised prior thereto.
THE PLACING
The Placing comprises 198,000,000 H Shares, comprising 180,000,000 H Shares initially offered by theCompany and 18,000,000 H Shares (to be converted from 18,000,000 Domestic Shares) by the SellingShareholders by way of Placing.
The Placing will involve selective marketing of the Placing Shares to professional, institutional or otherinvestors, which are anticipated to have a sizeable demand for such H Shares. Professional investors generallyinclude brokers, dealers, companies (including fund managers) whose ordinary business involves dealing inshares and other securities and corporate entities which regularly invest in shares and other securities.
The Placing Shares will represent approximately 27.89% of the Company’s enlarged issued share capitalimmediately after completion of the Placing.
The Placing Shares are fully underwritten by the Underwriters on a several (and not joint or joint andseveral) basis and are subject to conditions set out in the section headed “Underwriting” of this prospectus.
The requisite PRC governmental approvals, including the approval of the CSRC, in respect of the Placing,have been obtained.
OVER-SUBSCRIPTION
Allocation of Placing Shares to professional, institutional and/or other investors will be based on a numberof factors, including the level and timing of demand and whether or not it is expected that the investor is likelyto acquire further H Shares, and/or hold or sell its H Shares, after the listing of the H Shares on the GEM. Suchallocation is intended to result in a distribution of the Placing Shares which would lead to the establishment ofa solid shareholder base for the benefit of the Company and its shareholders as a whole.
STRUCTURE AND CONDITIONS OF THE PLACING
— 138 —
A
AA
The following is the text of a report, prepared for the purpose of inclusion in this prospectus, received from
the auditors and reporting accountants of the Company, PricewaterhouseCoopers, Certified Public Accountants,
prepayments 3,821 1,142 3,748 1,137Amount due from a related company 21 — 4,000 — 4,000Amounts due from shareholders 22 44 — 44 —Amount due from a director 23 6 — 6 —Amount due from a subsidiary 24 — — 579 —Available-for-sale investments 17 4,941 5,863 4,941 5,863Deposits in other financial institutions 23,569 911 23,569 911Cash and bank balances 19,852 38,359 18,865 38,211
The following is the consolidated cash flow statements of the Group for the Relevant Periods, prepared on
the basis set out in section IV below:
Year ended 31 December,2000 2001
Note RMB’000 RMB’000
Operating activitiesCash generated from operations 31(a) 20,151 15,355Interest received 75 47Interest paid (118) —Tax paid (82) (3,251)
Net cash from operating activities 20,026 12,151
Investing activitiesPurchase of fixed assets (3,116) (14,487)Additions in deferred development costs (1,828) (846)Proceeds from disposal of fixed assets 97 790Proceeds from disposal and purchase of
available-for-sale investments 4,925 (2,186)Dividends received from available-for-sale investments — 27
Net cash received/(used) in investing activities 78 (16,702)
Financing activities 31(b)Additions in loans from municipal government authorities 200 400Repayment of short-term bank loans (5,000) —Capital injection 22,270 —
Net cash received in financing activities 17,470 400
Increase/(decrease) in cash and cash equivalents 37,574 (4,151)
Movement in cash and cash equivalentsAt beginning of the year 5,847 43,421Increase/(decrease) 37,574 (4,151)
At end of the year 43,421 39,270
Analysis of the balances of cash andcash equivalents
Cash and bank balances 19,852 38,359Deposits in other financial institutions 23,569 911
43,421 39,270
APPENDIX I ACCOUNTANTS’ REPORT
— 144 —
7
IV NOTES TO THE FINANCIAL INFORMATION
1. BASIS OF PRESENTATION
The summary of the consolidated results and the consolidated cash flows of the Group for the Relevant Periods as set out in Section I
and Section III and the summary of the consolidated balance sheet of the Group and the summary of balance sheet of the Company as at 31
December, 2000 and 31 December, 2001 as set out in Section II have been prepared based on the audited consolidated financial statements of
the Group and restate under the accounting policies as referred to note 2 below, after making such adjustments as are appropriate.
2. PRINCIPAL ACCOUNTING POLICIES
The principal accounting policies adopted by the Group in arriving at the Financial Information, which conform with IAS, are set out
below. The consolidated results and consolidated balance sheet of the Group and the balance sheet of the Company are prepared under the
historical cost convention, except that the available-for-sale investments are shown at fair value.
(a) Basis of consolidation
The consolidated financial statements include the financial statements of the Company and its subsidiary. A subsidiary is an entity
in which the Group has an interest of more than one half of the voting rights or otherwise has power to exercise control over the operations.
Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that
control ceases. All intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated;
unrealised losses are also eliminated unless cost cannot be recovered. Where necessary, accounting policies for subsidiaries have been
changed to ensure consistency with the policies adopted by the Group.
(b) Financial instruments
Financial assets and liabilities carried on the balance sheet include cash and bank balances, trade and other receivables and trade
and other payables. The accounting policies on recognition and measurement of these items are disclosed in the respective accounting
policies.
Disclosures about financial instruments to which the Group is a party are provided in note 35 below.
(c) Deferred income taxes
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets
and liabilities and their carrying values for financial reporting purposes. Currently enacted tax rates are used to determine deferred income
tax.
Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the
temporary differences can be utilised.
(d) Fixed assets and depreciation
Land use rights are stated at cost less accumulated amortisation. Other fixed assets include plant and machinery, furniture, fixtures
and computer equipment and motor vehicles are stated at historical cost less depreciation.
Depreciation is calculated on the straight-line method to write off the cost of each asset to its residual value over its estimated
useful life as follows:
Land use rights over the land use right period of 50 years
Plant and machinery 5 to 10 years
Furniture, fixtures and computer equipment 5 to 8 years
Motor vehicles 5 years
Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its
recoverable amount.
Gains and losses on disposal of fixed assets are determined by reference to their carrying amount and are taken into account in
determining operating profit.
APPENDIX I ACCOUNTANTS’ REPORT
— 145 —
77
(e) Construction-in-progress
Construction-in-progress represents properties under construction and is stated at cost. This includes cost of construction, plant
and equipment and other direct costs. Construction-in-progress is not depreciated until such time as the assets are completed and put into
operational use.
(f) Research and development
Research expenditure is recognised as an expense as incurred.
Costs incurred on development projects relating to the design and testing of the products for sales by the Group are recognised
as deferred development costs to the extent that such expenditure is expected to generate future economic benefits. Development costs
that have been capitalised are amortised from the commencement of the commercial production of the product on a straight-line basis over
the period of its expected benefit. The amortisation periods adopted do not exceed five years.
Costs incurred on development projects with an intention of outright sales as technology transfer are recognised as deferred
development costs to the extent that such expenditure is expected to generate future economic benefits. Upon entering into sales contracts,
development costs that have been capitalised are transferred to contracted work-in-progress and recognised as costs of sales in accordance
with the performance requirements and contractual terms as stated in the contracts.
Where an indication of impairment exists, the carrying amount of the deferred development costs is assessed and written down
immediately to its recoverable amount.
Other development expenditures are recognised as an expense as incurred. Development costs previously recognised as an expense
are not recognised as an asset in a subsequent period.
(g) Leases
Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating
leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a
straight-line basis over the period of the lease.
(h) Inventories
Inventories are stated at the lower of cost or net realisable value. Cost is determined by the weighted average method. The cost
of finished goods comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating
capacity). Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling
expenses, and taking into account the related amortisation of deferred development costs charged during the period.
(i) Trade receivables
Trade receivables are carried at original invoiced amount less an estimate made for doubtful receivables based on a review of all
outstanding amounts at the year end. Bad debts are written off when identified.
(j) Cash and cash equivalents
Cash and cash equivalents comprise cash and bank balances and short-term deposits in other financial institutions.
(k) Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable
that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made.
(l) Retirement benefit costs
Contributions to retirement schemes for employees in accordance with local rules and regulations are expensed as incurred.
APPENDIX I ACCOUNTANTS’ REPORT
— 146 —
(m) Investments
Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes
in interest rates, are classified as available-for-sale; these are included in non-current assets unless management has the express intention
of holding the investment for less than 12 months from the balance sheet date or unless they will need to be sold to raise operating capital,
in which case they are included in current assets.
Management determines the appropriate classification of its investments at the time of the purchase and re-evaluates such
designation on a regular basis.
All purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or
sell the asset. Cost of purchase includes transaction costs. Available-for-sale investments are subsequently carried at fair value. Realised
and unrealised gains and losses arising from changes in the fair value of available-for-sale investments are included in the consolidated
results in the period in which they arise.
(n) Deferred revenue
Deferred revenue represents the proportion of contract revenues from technology transfer received that is related to future
performance and the proportion of income relating to the unexpired period of the government grants and other non-refundable grants. The
government grants and other non-refundable grants are recognized as income on a systematic basis necessary to match them with the
related costs that they are intended to compensate.
(o) Technical know-how
Expenditure on acquired technical know-how is capitalised and amortised using the straight-line method over its estimated useful
life, ranging from 5 years to 10 years. Where an indication of impairment exists, the carrying amount of the acquired technical know-how
is assessed and written down immediately to its recoverable amount.
(p) Revenue recognition
(i) Sales of diagnostic reagent are recognised on the transfer of risks and rewards of ownership, which generally coincides
with the time when the goods are delivered to customers and the title has passed. The provision of related ancillary services
for the sales of diagnostic reagent, if any, are recognized upon customer acceptance of the performance of services. Sales
are shown net of sales taxes and discounts, and after eliminating sales within the Group.
(ii) Contract revenues from technology transfer are recognized over the fixed term of the contract or, where appropriate, as
the related costs are incurred. Milestone payments in connection with research and development or commercialisation
agreements are recognized when they are earned in accordance with the applicable performance requirements and
contractual terms. Payments received that are related to future performance are deferred and recorded as revenues as they
are earned over the specified future performance periods.
Subject to the terms as stated in the technology transfer agreements and the buyers’ success in commercialisation of the
technology being transferred, the company may receive additional royalty income or profit sharing income in the future.
Should there be any royalty income or sharing of profit, they will be recognized when the right to receive the income is
established.
(iii) Other revenues earned by the Group are recognised on the following bases:
Interest income — as it accrues (taking into account the effective yield on the asset) unless collectibility is in
doubt.
Dividend income — when the shareholder’s right to receive payment is established.
APPENDIX I ACCOUNTANTS’ REPORT
— 147 —
3. REVENUES AND TURNOVER
The Group is principally engaged in research, development and selling of self-developed bio-pharmaceutical know-how, carrying out
contracted research for customers, and manufacturing and selling of diagnostic reagent and the provision of related ancillary services. Revenues
recognized during the Relevant Periods are as follows:
Year ended 31 December2000 2001
RMB’000 RMB’000
TurnoverTechnology transfer revenue 14,000 22,000Sales of diagnostic reagent and the provision of related ancillary services 3,655 5,909
17,655 27,909
Other revenuesInterest income 75 47Dividend income — 27
75 74
17,730 27,983
4. OTHER INCOME
Year ended 31 December2000 2001
RMB’000 RMB’000
Amortisation of government grants and other non-refundable grants 1,982 6,250Business tax rebate income — 1,200Realised profit on disposal of available-for-sale investments 3,244 772Surtaxes rebate income — 63
5,226 8,285
5. OPERATING PROFIT
Operating profit is arrived at after charging the following items:
Year ended 31 December2000 2001
RMB’000 RMB’000
Amortisation of deferred development costs 556 556Amortisation of technical know-how 215 215Auditors’ remuneration 45 30Bad debts written off 1 —Provision for bad debts 153 318Cost of inventories sold 2,235 4,065
Depreciation of fixed assets 563 1,129Less: amount capitalized in deferred development costs (70) (70)
493 1,059Loss on disposal of fixed assets 73 199Operating lease rentals in respect of land and buildings 287 395Research and development expenditure (note (i)) 4,943 9,062Unrealised loss on available-for-sale investments 36 1,180Written off and provision for inventories obsolescence 19 7
Note (i): Research and development expenditure mainly represent the salary costs of technical staff involved and the consumables used
in the research and development activities which did not satisfy the criteria for capitalization as an asset. The salary costs of
technical staff are also included in the staff costs disclosed in Note 7 below.
APPENDIX I ACCOUNTANTS’ REPORT
— 148 —
77A
6. FINANCE COSTS
Year ended 31 December
2000 2001
RMB’000 RMB’000
Interest expense on short-term bank loan 118 —
7. STAFF COSTS
Year ended 31 December
2000 2001
RMB’000 RMB’000
Housing subsidies 1,005 942
Social security costs 42 178
Wages and salaries 3,484 5,011
Retirement benefit costs 229 497
Staff costs including directors’ and supervisors’ emoluments 4,760 6,628
Less: amount capitalized in the deferred development costs (451) (327)
4,309 6,301
The number of employees at the end of respective years in
the Relevant Periods 71 96
8. RETIREMENT BENEFIT COSTS
The employees of the Group participate in a retirement benefit plan organised by the municipal government whereby the Group is required
to make monthly contributions to the plan at a rate ranging from 22.5% to 25.5% of the employees’ basic salary for the Relevant Periods. The
Group has no obligation for the payment of retirement and other post-retirement benefits of employees other than the monthly contributions
described above. Expenses incurred by the Group in connection with the retirement benefit plan were RMB497,000 and RMB229,000 for the years
ended 31 December, 2001 and 31 December, 2000 respectively.
9. TAXATION
Year ended 31 December
2000 2001
RMB’000 RMB’000
Current tax 1,016 2,368
Deferred tax charge/(credit) 559 (202)
1,575 2,166
The Company is subject to the Income Tax Law of the PRC and the normal income tax rate applicable is 33%. As the Company is
recognised as a New and High Technology Enterprise and is operating and registered in the State level New and High Technology Development
Zone, it is entitled to a reduced Income Tax rate of 15%. Accordingly, the Company is subject to Income Tax at a rate of 15%.
The subsidiary is subject to the Income Tax Law of the PRC and the income tax rate applicable is 33%. No provision for income tax has
been made for the subsidiary for the Relevant Periods as it has no taxable income since the date of establishment and during the Relevant Periods.
APPENDIX I ACCOUNTANTS’ REPORT
— 149 —
The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the tax rate in the PRC applicable to
the Group as follows:
Year ended 31 December
2000 2001
RMB’000 RMB’000
Profit before taxation 8,586 13,922
Tax calculated at a tax rate of 15% 1,288 2,088
Effect of different tax rate in the subsidiary 235 28
Income not subject to tax — (4)
Expenses not deductible for tax purposes 52 54
Tax charge 1,575 2,166
10. DIVIDENDS
At the Annual General Meeting dated 23 June, 2002, it was resolved to distribute a dividend in respect of the year ended 31 December,
2001 amounting to RMB 7,950,000. This Financial Information do not reflect this dividend payable, which will be accounted for in shareholders’
equity as an appropriation of retained earnings in the year ending 31 December, 2002. There are no dividends declared in respect of the year ended
31 December, 2000.
11. EMOLUMENTS OF DIRECTORS, SUPERVISORS AND HIGHEST PAID INDIVIDUALS
(i) Details of emoluments paid to the executive directors and supervisors of the Company are as follows:
Year ended 31 December
2000 2001
RMB’000 RMB’000
Fees — —
Basic salaries and allowances 1,050 368
Bonus 90 61
Retirement scheme contributions 100 37
1,240 466
No directors’ emoluments were paid to the non-executive directors during the Relevant Periods.
All of the directors’ and supervisors’ emoluments are within the band of nil to RMB1,000,000 during the Relevant Periods. The
emoluments were paid to executive directors and supervisors as follows:
Director A 236 261
Director B 179 —
Director C 163 —
Director D 143 —
Director E 123 —
Supervisor A 129 148
Supervisor B 111 —
Supervisor C 110 —
Supervisor D 46 57
1,240 466
APPENDIX I ACCOUNTANTS’ REPORT
— 150 —
7
(ii) The five individuals whose emoluments were the highest in the Group are as follows:
Number of individuals
Year ended 31 December
2000 2001
Directors 5 1
Non-directors — 4
5 5
(iii) Details of the emoluments of the non-directors as mentioned above are as follows:
Year ended 31 December
2000 2001
RMB’000 RMB’000
Basic salaries and allowances — 790
Bonus — 108
Retirement scheme contributions — 52
— 950
The emoluments of each of the non-directors in each of the Relevant Periods were below RMB1,000,000.
(iv) During the Relevant Periods, no directors or any of the five highest paid individuals of the Company waived any emoluments and
no emoluments have been paid by the Group to the directors or any of the five highest paid individuals as an inducement to join
the Group, or as compensation for loss of office.
12. EARNINGS PER SHARE
No earnings per share information is presented for the year ended 31 December, 2000 as the weighted average number of ordinary shares
outstanding during the year is not considered meaningful since the Company was only transformed from a limited liability company into a joint
stock limited liability company on 8 November, 2000 as described in note 30 below.
The calculation of the earnings per share for the year ended 31 December, 2001 is based on the profit attributable to shareholders for the
year and the weighted average of 530,000,000 shares in issue during the year ended 31 December, 2001 as if the sub-division of the Company’s
shares as described in the paragraph headed “Procedures at the Company’s extraordinary shareholders’ meetings” in Appendix V to the Prospectus
had taken place at the begining of 2001. Diluted earnings per share has not been calculated for the year ended 31 December, 2001 as there were
no dilutive potential ordinary shares during the year ended 31 December, 2001.
APPENDIX I ACCOUNTANTS’ REPORT
— 151 —
7
13. FIXED ASSETS
(i) The fixed assets of the Group for the year ended 31 December, 2000 and 31 December, 2001 are as follows:
Year ended31 December 2000
Plant andmachinery
Furniture,fixtures and
computerequipment
Motorvehicles Total
RMB’000 RMB’000 RMB’000 RMB’000
Cost
At the beginning of the year 3,757 517 534 4,808
Additions 671 298 630 1,599
Disposals — (107) (168) (275)
At the end of the year 4,428 708 996 6,132
Accumulated amortisation
At the beginning of the year 556 75 113 744
Charge for the year 385 87 91 563
Disposals — (47) (58) (105)
At the end of the year 941 115 146 1,202
Net book value
At the end of the year 3,487 593 850 4,930
Year ended31 December 2001
Landuse rights
Constructionin progress
Plant andmachinery
Furniture,fixtures and
computerequipment
Motorvehicles Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Cost
At the beginning of the year — — 4,428 708 996 6,132
Additions 5,289 10,733 7,117 311 913 24,363
Disposals — — (20) — (1,154) (1,174)
At the end of the year 5,289 10,733 11,525 1,019 755 29,321
Accumulated amortisation
At the beginning of the year — — 941 115 146 1,202
Charge for the year 33 — 785 102 209 1,129
Disposals — — (1) — (184) (185)
At the end of the year 33 — 1,725 217 171 2,146
Net book value
At the end of the year 5,256 10,733 9,800 802 584 27,175
APPENDIX I ACCOUNTANTS’ REPORT
— 152 —
(ii) The fixed assets of the Company for the year ended 31 December, 2000 and 31 December, 2001 are as follows:
Year ended31 December 2000
Plant andmachinery
Furniture,fixtures and
computerequipment
Motorvehicles Total
RMB’000 RMB’000 RMB’000 RMB’000
Cost
At the beginning of the year 3,259 368 367 3,994
Additions 671 291 630 1,592
Disposals — (107) (168) (275)
At the end of the year 3,930 552 829 5,311
Accumulated amortisation
At the beginning of the year 509 67 93 669
Charge for the year 335 71 75 481
Disposals — (47) (58) (105)
At the end of the year 844 91 110 1,045
Net book value
At the end of the year 3,086 461 719 4,266
Year ended31 December 2001
Landuse rights
Constructionin progress
Plant andmachinery
Furniture,fixtures and
computerequipment
Motorvehicles Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Cost
At the beginning of the year — — 3,930 552 829 5,311
Additions 5,289 10,733 7,117 311 955 24,405
Disposals — — (20) — (1,154) (1,174)
At the end of the year 5,289 10,733 11,027 863 630 28,542
Accumulated amortisation
At the beginning of the year — — 844 91 110 1,045
Charge for the year 33 — 773 84 206 1,096
Disposals — — (1) — (184) (185)
At the end of the year 33 — 1,616 175 132 1,956
Net book value
At the end of the year 5,256 10,733 9,411 688 498 26,586
APPENDIX I ACCOUNTANTS’ REPORT
— 153 —
14. TECHNICAL KNOW-HOW — GROUP AND COMPANY
As at 31 December
2000 2001
RMB’000 RMB’000
Cost
At the beginning of the year and carried forward 2,464 2,464
Accumulated amortisation
At the beginning of the year 555 770
Charge for the year 215 215
At the end of the year 770 985
Net book value
At 31 December 1,694 1,479
15. DEFERRED DEVELOPMENT COSTS
Group Company
As at 31 December As at 31 December
2000 2001 2000 2001
RMB’000 RMB’000 RMB’000 RMB’000
Cost
At the beginning of the year 5,446 7,344 2,780 2,780
Additions 1,898 916 — 596
At the end of the year 7,344 8,260 2,780 3,376
Accumulated amortisation
At the beginning of the year 278 834 278 834
Charge for the year 556 556 556 556
At the end of the year 834 1,390 834 1,390
Net book value
At 31 December 6,510 6,870 1,946 1,986
16. INVESTMENT IN A SUBSIDIARY — COMPANY
As at 31 December
2000 2001
RMB’000 RMB’000
Unlisted shares, at cost 5,000 5,000
Provision (2,033) (2,150)
2,967 2,850
APPENDIX I ACCOUNTANTS’ REPORT
— 154 —
During the Relevant Periods, the Company held the following investment in a subsidiary:
NameCountry anddate of establishment
Registeredcapital
Attributableequity
interestPrincipal activities andplace of operation
%
Shanghai Morgan-Tan International
Center for Life Sciences, Co., Ltd.
( )
PRC
31 August, 1998
RMB8,000,000 62.5 Research and development
of a specialized bio-
pharmaceutical project known
as recombinant human
lymphotoxin derivatives in
PRC
17. AVAILABLE-FOR-SALE INVESTMENTS — GROUP AND COMPANY
As at 31 December
2000 2001
RMB’000 RMB’000
Listed shares in PRC 4,941 5,863
Unlisted shares in PRC — 856
Available-for-sale investments at fair values 4,941 6,719
Current 4,941 5,863
Non-current — 856
4,941 6,719
18. DEFERRED TAXATION ASSETS — GROUP AND COMPANY
As at 31 December
2000 2001
RMB’000 RMB’000
Deferred taxation assets
At beginning of the year 599 40
Charge for the year (559) 202
At end of the year 40 242
A potential deferred tax asset, which represents mainly timing difference arising from tax losses carried forward, has not been recognised
in the accounts as, in the opinion of the directors, it is uncertain that such asset will be realised in the foreseeable future. The Group has
unrecognised tax losses of RMB187,000 and RMB1,569,000 for the year ended 31 December, 2001 and 31 December, 2000 to carry forward
against future taxable income.
APPENDIX I ACCOUNTANTS’ REPORT
— 155 —
The movement in deferred tax assets and liabilities (prior to offsetting of balances within the same tax jurisdiction) during the Relevant
Periods is as follows:
Deferred tax liabilities Deferred revenue
RMB’000
At 1 January, 2000 (261)
Charge to profit and loss account (297)
At 31 December, 2000 (558)
Credit to profit and loss account 258
At 31 December, 2001 (300)
Deferred tax assets Provisions
Deferreddevelopment
costs Total
RMB’000 RMB’000 RMB’000
At 1 January, 2000 203 657 860
Charge to profit and loss account (47) (215) (262)
At 31 December, 2000 156 442 598
Credit/(charge) to profit and loss account 179 (235) (56)
At 31 December, 2001 335 207 542
19. INVENTORIES
Group Company
As at 31 December As at 31 December
2000 2001 2000 2001
RMB’000 RMB’000 RMB’000 RMB’000
Raw materials 1,054 717 728 717
Production supplies and consumables 79 114 79 114
Finished goods 337 380 337 380
1,470 1,211 1,144 1,211
No inventories are carried at net realisable value.
APPENDIX I ACCOUNTANTS’ REPORT
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7
20. TRADE RECEIVABLES — GROUP AND COMPANY
Details of the aging analysis are as follows:
As at 31 December
2000 2001
RMB’000 RMB’000
Current to 30 days 403 1,136
31 days to 60 days 267 —
61 days to 90 days 326 114
Over 90 days but less than one year 800 494
Over one year 1,262 1,637
3,058 3,381
Provision (839) (1,157)
2,219 2,224
Customers are generally granted credit terms of 90 days.
21. AMOUNT DUE FROM A RELATED COMPANY — GROUP AND COMPANY
The amount represents a trading balance due from Shanghai HuaShi Pharmaceutical Hi-Tech Industrial Development Co., Ltd (“Shanghai
Huashi”), a wholly-owned subsidiary of Shanghai Pharmaceutical Co., Ltd. (“SPCL”). The amount is unsecured and repayable under normal
trading terms. RMB1,000,000 and RMB2,000,000 have been settled subsequently in March 2002 and June 2002, respectively.
22. AMOUNTS DUE FROM SHAREHOLDERS — GROUP AND COMPANY
Amounts represent due from the following shareholders, which are unsecured, interest free and have been fully settled subsequently on
20 December, 2001:
As at 31 December
2000 2001
Name of shareholders RMB’000 RMB’000
Mr. Su Yong 33 —
Mr. Zhao Dajun 4 —
Mr. Li Jun 3 —
Ms. Fang Jing 4 —
44 —
23. AMOUNT DUE FROM A DIRECTOR — GROUP AND COMPANY
The balance represents an amount due from Mr. Wang Haibo who is also a shareholder of the Company. The amount is unsecured, interest
free and has been fully settled subsequently on 20 December, 2001. The maximum amount outstanding during the Relevant Periods was
RMB33,000.
APPENDIX I ACCOUNTANTS’ REPORT
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7
24. AMOUNT DUE FROM A SUBSIDIARY — COMPANY
The balance represents an amount due from a subsidiary and is unsecured and interest free.
25. TRADE PAYABLES — GROUP AND COMPANY
Details of the aging analysis are as follows:
As at 31 December
2000 2001
RMB’000 RMB’000
Current to 30 days 124 297
31 days to 60 days 17 —
61 days to 90 days 1 —
Over 90 days but less than one year 3 170
Over one year 309 156
454 623
26. DEFERRED REVENUE
Group Company
As at 31 December As at 31 December
2000 2001 2000 2001
RMB’000 RMB’000 RMB’000 RMB’000
Government grants (note (i)) 1,486 4,438 598 3,772
In accordance with your instructions for us to value the property interest of Shanghai Fudan-ZhangjiangBio-Pharmaceutical Co., Ltd. (the “Company”) and its subsidiaries (together referred to as the “Group”) in thePeople’s Republic of China (“the PRC”), we confirm that we have carried out inspections, made relevant enquiriesand obtained such further information as we consider necessary for the purpose of providing you with our opinionof the open market value of such property interest as at 31st May, 2002.
Our valuation of the property interest is our opinion of the open market value which we would define asintended to mean — “the best price at which the sale of an interest in a property would have been completedunconditionally for cash consideration on the date of valuation assuming:
(a) a willing seller;
APPENDIX II PROPERTY VALUATION
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A
(b) that, prior to the date of valuation, there had been a reasonable period (having regard to the nature
of the property and the state of the market) for the proper marketing of the interest, for the agreement
of price and terms and for the completion of the sale;
(c) that the state of the market, level of values and other circumstances were, on any earlier assumed date
of exchange of contracts, the same as on the date of valuation;
(d) that no account is taken of any additional bid by a prospective purchaser with a special interest; and
(e) that both parties to the transaction had acted knowledgeably, prudently and without compulsion.”
In valuing the property interest, which is held by the Group in the PRC, we have adopted a combination
of the market and depreciated replacement cost approaches in assessing the land portion of the property and the
buildings and structures standing on the land respectively. Hence, the sum of the two results represents the market
value of the property as a whole. In the valuation of the land portion, reference has been made to the standard
land price in Shanghai and the sales evidence as available to us in the locality. As the nature of the buildings and
structures cannot be valued on the basis of open market value, they have therefore been valued on the basis of
their depreciated replacement cost. The depreciated replacement cost approach considers the cost to reproduce or
replace in new condition the property appraised in accordance with current construction costs of reproducing and
repairing in the locality, with allowance for accrued depreciation as evidenced by observed condition or
obsolescence present, whether arising from physical, functional or economic causes. The depreciated replacement
cost approach generally furnishes the most reliable indication of value for property in the absence of a known
market based on comparable sales.
Our valuation has been made on the assumption that the owner sells the property interest on the open market
in its existing state without the benefit of a deferred terms contract, leaseback, joint venture, management
agreement or any other similar arrangement which would serve to increase the value of the property interest.
Furthermore, no account has been taken of any option right of pre-emption concerning or affecting the sale of the
property and no forced sale situation in any manner is assumed in our valuation.
We have been provided with title documents and lease and licence agreements relating to the property
interest. We have not searched the original documents to verify ownership or to verify existence of any lease or
licence amendment which do not appear on the copies of the lease and licence agreements handed to us. All title
documents and lease and licence agreements have been used for reference only.
In undertaking our valuation of the property, we have relied on the legal opinion provided by the Group’s
PRC legal adviser, Fangda Partners, (the “PRC Legal Opinion”).
From the PRC Legal Opinion, we understand that the current status of titles, grant of major approvals,
licences and documents of property are as follows:
(a) Contract for Grant of State-owned Land Use Rights yes(b) Real Property Ownership Certificate yes
We have inspected the exterior and, where possible, the interior of the property. However, we have not
carried out a structural survey nor have we inspected woodwork or other parts of the structures which are covered,
unexposed or inaccessible and we are therefore unable to report that any such parts of the property is free from
defect.
APPENDIX II PROPERTY VALUATION
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We have relied to a considerable extent on the information provided by the Group and have accepted advice
given to us on such matters as planning approvals or statutory notices, easements, tenure, particulars of
occupancy, lettings, site and floor areas and in the identification of the property interest in which the Group has
a valid interest. Dimensions, measurements and areas included in the valuation certificate are based on
information contained in the documents provided to us and are therefore only approximations. No on-site
measurement has been made.
No allowance has been made in our valuation for any charges, mortgages or amounts owing on the property
interest nor for any expenses or taxation which may be incurred in effecting a sale. Unless otherwise stated, it
is assumed that the property interest is free from encumbrances, restrictions and outgoings of an onerous nature
which could affect its value.
Unless otherwise stated, all monetary amounts stated are in Renminbi. The exchange rate used in valuing
the property interest as at 31st May, 2002 was HK$1=RMB1.06. There has been no significant fluctuation in
exchange rate between that date and the date of this letter.
We enclose herewith our valuation certificate.
Yours faithfully,For and on behalf of
VIGERS HONG KONG LTD.Raymond Ho Kai Kwong,
Registered Professional SurveyorMRICS, AHKIS
Director
Note: Raymond K.K. Ho, Chartered Surveyor, MRICS, AHKIS has extensive experience in undertaking valuations of properties in Hong Kong
and Macau and has over nine years’ experience in the valuation of properties in the PRC.
APPENDIX II PROPERTY VALUATION
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VALUATION CERTIFICATE
Property interest held by the Group in the PRC
Property Description and tenure Particulars of occupancy
Open market value inexisting state as at
31st May, 2002
A piece of land together with
an industrial building erected
thereon located at
308 Cailun Road
Zhangjiang Hi-Tech Park
Shanghai
The PRC
The property comprises a piece of
leveled site with a total site area of
approximately 8,520 sq.m., and a
3-storey industrial building is erected on
the site. The building is newly
completed in May, 2002.
The floor area of the building is
approximately 6,736 sq.m.
The land use rights of the property are
granted for a term of 50 years from 1st
August, 2001 to 31st July, 2051 for
industrial uses.
The property at present is
occupied by the Group for
office, manufacturing and
laboratory purposes.
RMB26,000,000
(equilvalent to
HK$24,528,000)
Notes:
1. Pursuant to a Real Property Ownership Certificate (Document No. Hu Fang Di Pu Zi (2001) No. 100851) dated 30th August, 2001 issued
by the Building and Land Administrative Bureau of Shanghai, the Company has obtained the land use rights of the property (Lot No. II
21-22/55-56) with a site area of 8,520 sq.m. for a term of 50 years from 1st August, 2001 to 31st July, 2051 for industrial use.
2. Pursuant to a Contract for Grant of State-owned Land Use Rights (Document No. Hu Pu (2001) Chu Rang He Tong No. 101) (referred
hereinafter as the “Contract”) dated 26th June, 2001 entered into between the Construction Bureau of Shanghai Pudong New District and
the Company, the Company purchased the land use rights of the property mentioned above at a land grant fee of RMB1,789,200.
3. Pursuant to a Land Requisitioned Agreement dated November 2000 entered into between (referred
hereinafter as “Zhangjiang”) and the Company, the Company agreed to pay RMB3.5 million land requisitioned fee to Zhangjiang for the
captioned property with a site area of approximately 14mu.
4. As advised by the Company, according to a document — The Regulations Governing the Improvement of Transforming High-New
Technology Outcome in Shanghai issued by the People’s Government of Shanghai City — the Company has been refunded a sum of
RMB1,663,956, being part of the land grant fee paid, because the property is used for the purposes sponsored by the above Regulations.
5. Pursuant to a Planning Permit, a Construction Permit and a Kick-off Permit, the government authorities have approved the construction
of the property. The scale of construction is approximately 6,736 sq.m.
6. The status of the title and grant of major approvals, consents and licences in accordance with the information provided by the Group and
the legal opinion of the Company’s PRC legal advisers (see paragraph 7 below) are as follows:-
(a) Real Property Ownership Certificate in relation to the land use rights Yes
(b) Contract for Grant of State-owned Land Use Rights Yes
(c) Land Requisition Agreement Yes
(d) Planning Permit Yes
(e) Construction Permit Yes
(f) Kick-off Permit Yes
7. We have been provided with a legal opinion on the property interest prepared by the Group’s legal advisers, which contains, inter alia,
the following information:
a. Party A had settled all land grant fee according to the schedule cited out in the Contract and obtained the land use rights of the
captioned land legally by grant.
b. The land use rights of the property are vested in the Company and can be transferred, sublet or mortgaged freely by the Company.
APPENDIX II PROPERTY VALUATION
— 170 —
A
11
c. The property is not subject to mortgage and any other encumbrances.
d. The Company obtained consents from relevant government authorities for the construction work of the property and will not have
any legal impediment to apply for Ownership Certificate of the building upon completion after effectively complying with the
relative registration regulations.
e. According to the Land Requisitioned Agreement, the total land requisitioned fee for the property is RMB3.5 million and
Zhangjiang agreed to provide some ancillary facilities to the Company, however failed. The Company completed the said
construction works of those ancillary facilities by itself and thus only settled portion of the Land Requisitioned Fee, i.e. RMB2.1
million. As a result, the Company and Zhangjiang agreed that the former should pay the later, immediately after the Company
finished the computation of the construction cost of the said works, the amount equals to the outstanding Land Requisitioned Fee
minus the construction cost for this portion of work.
8. According to the information provided by the Company, we are given to understand that the Company holds 100% interest of the property.
APPENDIX II PROPERTY VALUATION
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This appendix sets out summaries of certain aspects of the PRC legal and judicial system, its arbitrationsystem and its company and securities regulations. It also contains a summary of certain Hong Kong legal andregulatory provisions, including summaries of certain of the material differences between the PRC and HongKong company law, certain requirements of the Listing Rules and the additional provisions required by the StockExchange for inclusion in the articles of Association of the PRC issuers.
1. THE PRC LAWS AND REGULATIONS
(1) The PRC legal system
The PRC legal system is based on the PRC Constitution and is made up of written laws, regulationsand directives, local regulations and directives, and international treaties entered into by China. Decidedcourt cases do not constitute binding precedents, although they are used for the purposes of judicialreference and guidance.
The National People’s Congress of the PRC (the “NPC”) and the Standing Committee of the NPC areempowered by the PRC Constitution to exercise the legislative power of the State. The NPC has the powerto amend the PRC Constitution and enact and amend basic laws governing the State organs, civil andcriminal matters. The Standing Committee of the NPC is empowered to interpret Laws, and enact and amendlaws other than those required to be enacted by the NPC.
The State Council is the highest organ of state administration and has the power to enactadministrative rules and regulations. The ministries and commissions under the State Council are alsovested with the power to issue orders, directives and regulations within the jurisdiction of their respectivedepartments. All administrative rules, regulations, directives and orders promulgated by the State Counciland its ministries and commissions must not conflict with the PRC Constitution and the national laws. Inthe event that any such conflict arises, the Standing Committee of the NPC has the power to annul suchadministrative rules, regulations, directives and orders.
At the regional level, the people’s congresses of provinces and municipalities and their respectivestanding committees may enact local rules and regulations and the people’s governments may promulgateadministrative rules and directives applicable to their own administrative areas. These local regulations anddirectives cannot be in conflict with the PRC Constitution, the national laws, or the administrative rules andregulations promulgated by the State Council.
Rules, regulations or directives may be enacted or issued at the provincial or municipal level or bythe State Council or its ministries and commissions in the first instance for experimental purposes. Aftersufficient experience has been gained, the State Council may submit legislative proposals to be consideredby the NPC or the Standing Committee of the NPC for enactment at national level.
The power to interpret laws is vested by the PRC Constitution in the Standing Committee of the NPC.According to the Decision of the Standing Committee of the NPC Regarding the Strengthening ofInterpretation of Laws ( ) passed on 10th June, 1981, theSupreme People’s Court has the power to give general interpretation on the application of laws in judicialproceedings in addition to its power to issue specific interpretation for specific cases. The State Council andits ministries and commissions are also vested with the power to give interpretation of the rules andregulations which they have promulgated.
At the regional level, the power to give interpretations of the regional laws is vested in the regionallegislative and administration organs which promulgate such laws.
All such interpretations carry legal effect.
APPENDIX III SUMMARY OF RELEVANT PRC ANDHONG KONG LAWS AND REGULATIONS
— 172 —
22
(2) Judicial system
The people’s courts are the judicial organs of the PRC. Under the PRC Constitution and the Law ofOrganisation of the People’s Courts of the PRC ( ), promulgated on 1st July,1979 the people’s courts are made up of the Supreme People’s Court, the local people’s courts, militarycourts and other special people’s courts. The local people’s courts are divided into three levels, namely, thebasic people’s courts, the intermediate people’s courts and the higher people’s courts. The basic people’scourts are divided into civil, criminal, economic and administrative divisions. The intermediate people’scourts have divisions similar to those of the basic people’s courts and other special divisions (such as theintellectual property division), in accordance with needs. The judicial work of people’s courts at lowerlevels is subject to the supervision of people’s courts at higher levels. The people’s procuratorates also havethe right to exercise legal supervision over the civil proceedings of people’s courts of the same level andthe lower level. The Supreme People’s Court is the highest judicial organ of the PRC. It supervises theadministration of justice by the people’s courts at all levels.
The people’s courts adopt a two-tier final appeal system. A party may, before the taking effect of ajudgment or order, appeal against the judgment or order of the first instance of a local people’s court to thepeople’s court at the next higher level. Judgments or orders of the second instance at the next higher levelare final and binding. Judgments or orders of the first instance of the Supreme People’s Court are also finaland binding. If, however, the Supreme People’s Court or a people’s court at a higher level finds an errorin a final and binding judgment which has taken effect in any people’s court at a lower level, or thepresiding judge of a people’s court finds an error in a final and binding judgment which has taken effectin the court over which he presides, a retrial of the case may be conducted according to the judicialsupervision procedures.
The PRC civil procedures are governed by the Civil Procedure Law of the PRC( ) (the “Civil Procedure Law”) adopted on 9th April, 1991 which prescribesthe criteria for instituting a civil action, the jurisdiction of the people’s courts, the procedures to befollowed for conducting a civil action, the court procedures, and the procedures for enforcement of a civiljudgment or order. All parties to a civil action conducted within the PRC must comply with the CivilProcedure Law. A civil case is generally heard by a court located in the defendant’s place of domicile. Thejurisdiction may also be selected by express agreement by the parties to a contract provided that thepeople’s court having the jurisdiction is located at the plaintiff ’s or the defendant’s place of domicile, theplace of execution or implementation of the contract or the object of the action but it must not violate theregulations in respect of hierarchy and jurisdiction of the courts as stated in the Civil Procedure Law. Aforeign national or foreign enterprise is given the same litigation rights and obligations as a citizen or legalperson of the PRC. Should a court of a foreign country limit the litigation rights of the PRC citizens andenterprises, the PRC courts shall apply the same limitations to the citizens and enterprises of that foreigncountry. If any party to a civil action refuses to comply with a judgment or order made by a people’s courtor an award made by an arbitration organ in the PRC, the aggrieved party may apply to the people’s courtto enforce the judgment, order or award. There are time limits imposed on the right to apply for suchenforcement. If at least one of the parties to the dispute is an individual, the time limit is one year. If bothparties to the dispute are legal persons or other institutions, the time limit is six months. If a person failsto satisfy a judgment which the court has granted approval to enforce within the stipulated time, the courtwill, upon application of either party, mandatorily enforce the judgment.
A party seeking to enforce a judgment or order of a people’s court against a party who or whoseproperty is not within the PRC may apply to a foreign court with jurisdiction over the case for recognitionand enforcement of such judgment or order. A foreign judgment or ruling may also be recognised andenforced according to the PRC enforcement procedures by the people’s court in accordance with theprinciple of reciprocity or the international treaty with the relevant foreign country entered into or accededto by the PRC which provides for such recognition and enforcement unless the people’s court considers thatthe recognition or enforcement of such a judgment or ruling will violate the basic legal principles of thePRC or its sovereignty or security, or for reasons of social and public interest.
APPENDIX III SUMMARY OF RELEVANT PRC ANDHONG KONG LAWS AND REGULATIONS
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(3) Arbitration and enforcement of arbitral awards
The Arbitration Law of the People’s Republic of China ( ) (the “Arbitration Law”)was passed by the Standing Committee of the NPC on 31st August, 1994 and came into effect on 1stSeptember, 1994. It is applicable to, among other matters, trade disputes involving foreign parties wherethe parties have entered into a written agreement to refer the matter to arbitration before an arbitrationcommittee constituted in accordance with the Arbitration Law. Under the Arbitration Law, an arbitrationcommittee may, before the promulgation by the PRC Arbitration Association of arbitration regulations,formulate interim arbitration rules in accordance with the Arbitration Law and the PRC Civil ProcedureLaw. Where the parties have by agreement provided arbitration as the method for dispute resolution, thepeople’s court will refuse to handle the case if one party institutes legal proceedings in a people’s court.
The Listing Rules and the Mandatory Provisions require an arbitration clause to be included in thearticles of association of a company listed in Hong Kong and, in the case of the Listing Rules, also in acontract between the company and each director and supervisor, to the effect that whenever any dispute orclaim arises from the articles of association, or from any rights or obligations conferred or imposed by theCompany Law or other relevant laws and administrative regulations concerning the affairs of a companybetween (i) a holder of overseas listed foreign shares and the company; (ii) a holder of overseas listedforeign shares and the directors, supervisors, manager or other officers of the company; or (iii) a holder ofoverseas listed foreign shares and a holder of domestic shares, such parties shall submit that dispute orclaim for arbitration before either the China International Economic and Trade Arbitration Commission(“CIETAC”) or the Hong Kong International Arbitration Centre (“HKIAC”). If the party seeking arbitrationelects to arbitrate the dispute or claim at the HKIAC, then either party may apply to have such arbitrationconducted in Shenzhen according to the securities arbitration rules of the HKIAC. CIETAC is a foreignaffairs arbitration organ in the PRC. CIETAC is located in Beijing with branch offices in Shenzhen andShanghai.
Under the Arbitration Law and the PRC Civil Procedure Law, an arbitral award is final and bindingon the parties. If a party fails to comply with an award, the other party to the award may apply to thepeople’s court for enforcement. A people’s court may refuse to enforce an arbitral award made by anarbitration commission if there is any procedural or membership irregularity specified by law or the awardexceeds the scope of the arbitration agreement or is outside the jurisdiction of the arbitration commission.
A party seeking to enforce an arbitral award of a foreign affairs arbitration organ of the PRC againsta party who or whose property is not within the PRC, may apply to a foreign court with jurisdiction overthe case for enforcement. Similarly, an arbitral award made by a foreign arbitration body may be recognisedand enforced by the PRC courts in accordance with the principles of reciprocity or any international treatyconcluded or acceded to by the PRC. The PRC acceded to the Convention on the Recognition andEnforcement of Foreign Arbitral Awards (the “New York Convention”) adopted on 10th June, 1958 pursuantto a resolution of the Standing Committee of the NPC passed on 2nd December, 1986. The New YorkConvention provides that all arbitral awards made in a state which is a party to the New York Conventionshall be recognised and enforced by other parties to the New York Convention, subject to their right torefuse enforcement under certain circumstances, including where the enforcement of the arbitral award isagainst the public policy of the State to which the application for enforcement is made. It was declared bythe Standing Committee of the NPC simultaneously with the accession of the PRC that (i) the PRC will onlyrecognise and enforce foreign arbitral awards made within the territory of another party to the Conventionon the principle of reciprocity; and (ii) the PRC will only apply the New York Convention in disputesconsidered under the PRC laws to arise from contractual and non-contractual mercantile legal relations.Following the resumption of sovereignty over Hong Kong by the PRC on 1st July, 1997, the New YorkConvention no longer applies to the enforcement of Hong Kong arbitration awards in other parts of the PRC.A Memorandum of Understanding on the arrangement for reciprocal enforcement of arbitral awards betweenHong Kong and China has been signed on 21st June, 1999. The new arrangement is made in accordance with
APPENDIX III SUMMARY OF RELEVANT PRC ANDHONG KONG LAWS AND REGULATIONS
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A
the spirit of the New York Convention. To meet present day’s needs, it will allow awards made over 100China arbitral authorities with relevant experience to be enforced in Hong Kong. Under the agreedarrangement, Hong Kong arbitration awards will also be enforceable in China. This new arrangement hasbeen approved by the Hong Kong Legislative Council and the Supreme People’s Court of the PRC and hasbeen in effect since 1st February, 2000. While up to date, no report that any precedent has been in placein respect of enforcement in the PRC of a Hong Kong arbitral award obtained after 1st July, 1999 againstPRC Company or citizen. It is still unclear that when and how one can rely on the relevant PRC domesticprocedures to enforce Hong Kong arbitration award in the PRC.
(4) Taxation
(a) Taxes applicable to joint stock limited companies
(i) Taxation of joint stock limited companies
(1) Income tax
According to the Provisional Regulations of Income Tax for Domestic Companies( ) issued on 13th December, 1993 and stipulated by theState Council, all the Chinese companies, including State-owned companies, collectiveenterprises, private enterprises, joint stock limited companies and other companies(excluding joint ventures and foreign companies) are required to pay income tax at a rateof 33% on taxable income derived from their production of goods and business activities.
However, income taxes could be reduced pursuant to any promulgations of newregulations by the State Council.
(2) Value Added Tax (“VAT”)
Both the Provisional Rules of the People’s Republic of China on VAT( ) issued on 13th December, 1993 and the Detailed Rules forthe Implementation of the Provisional Rules of the People’s Republic of China on VAT( ) (issued on 25th December, 1993 and effective from1st January, 1994) stipulate that all units or individuals who are engaged in the sale ofgoods, the provision of processing, repairs and replacement services, and the importationof goods within the territory of the PRC are required to pay VAT. “General tax payers”,as certified by local tax bureaus, are generally required to pay VAT at the basic rate 17%“Small scale tax payers”, as certified by local tax bureaus, are required to pay 6% VAT.
(3) Business tax
Both the Provisional Rules of the People’s Republic of China on Business Tax( ) issued on 13th December, 1993 and effective on 1st January,1994 and the Detailed Rules for the Implementation of the Provisional Rules of thePeople’s Republic of China on Business Tax ( ) issuedon 25th December, 1993, stipulate that all units and individuals engaged in the provisionof taxable labor services, the assignment of intangible assets or sale of immovableproperties, within the territory of the PRC, are required to pay 3% to 20% business taxon their gross business turnover.
APPENDIX III SUMMARY OF RELEVANT PRC ANDHONG KONG LAWS AND REGULATIONS
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(b) Taxation of shareholders
(i) Tax on dividends
On 21st July, 1993 the State Tax Bureau, by a notice (the “Notice Relating toTaxes Applicable to Enterprises with Foreign Investments, Foreign Enterprisesand Foreign Nationals in Relation to Dividends and Gains obtained from the Holdingand Transferring of Shares”) ( ,
) (the “Tax Notice”) confirmed that dividends received byforeign investors from the PRC listed domestic shares, and overseas listed shares such as Hshares (H shares are shares issued outside China by Chinese companies and denominated in aforeign currency), were exempted from withholding tax, which would otherwise have beenapplicable at a rate of 20%.
On 31st October, 1993, the Amendments to the Individual Income Tax Law of the PRC( ) (the “Amendments”) were promulgated takingeffect from 1st January, 1994. The Amendments stipulate that all previously announced taxationlaws and regulations which contradict the Amendments shall be invalid. Under theAmendments, any foreign national who is not a resident of the PRC will be subject to awithholding tax on dividends received from H shares at a rate of 20%. On 26th July, 1994, theState Tax Bureau issued the (the“Notice”) under which dividends or other distributions received by foreign individuals whohold overseas shares (including H shares) and/or domestic listed foreign shares from a PRClisted company are, for the time being, exempted from individual income tax.
Accordingly, under current PRC laws and regulations, no withholding tax is payable inrespect of dividends or other distributions on H shares held by any foreign enterprise or foreignnational. If, however, the Tax Notice and the Notice are withdrawn, a 20%. withholding tax maybe applied on such dividends or distributions, subject to any tax reductions pursuant to anapplicable double taxation avoidance treaty.
(ii) Tax on the transfer of shares
Although the Implementing Rules of Individual Income Tax Law of the PRC( ) (the “Implementing Rules”), issued on 28th January, 1994,stipulate that gains realised on the sale of equity securities by an individual are subject toincome tax at the rate of 20% and empower the Ministry of Finance to draft detailed rules onthe mechanisms of collecting such tax, the Tax Notice exempted holders of H shares fromcapital gains tax on the disposal of H shares. On 20th June, 1994, the Ministry of Finance andthe State Tax Bureau jointly issued the Notice on the Temporary Non-Levy of Individual IncomeTax on Gains from Share Transfers ( ), exemptingindividuals from the payment of income tax on gains from the transfer of shares for the years1994 and 1995. On 9th February, 1996, the Ministry of Finance and the State Tax Bureau jointlyissued the Notice on the Temporary Non-Levy of Individual Income Tax on Gains from ShareTransfers for 1996 ( ), exempting individuals fromthe payment of tax on gains from the transfer of shares for the year of 1996. On30th March, 1998, the Ministry of Finance and the State Tax Bureau jointly issued theNotice on the Non-levy of Individual Income Tax on Gains from Share Transfers( ), exempting individuals from the payment oftax on gains from the transfer of shares since 1997.
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The exemption enjoyed by a foreign enterprise under the Tax Notice is not affected by theImplementing Rules and continues to apply.
(iii) Tax treaties
In the event that withholding tax is payable as referred to in (i) or (ii) above, foreignenterprises without an establishment or office in the PRC and non-PRC individual investorsresiding in countries which have entered into the avoidance of double-taxation treaties with thePRC may be entitled to a reduction of withholding tax imposed on the payment of dividends tosuch investors. The PRC is currently a party to the avoidance of double taxation treaties witha number of countries, including Australia, Canada, France, Germany, Japan, Malaysia, theNetherlands, Singapore, the United Kingdom and the U.S..
(iv) Stamp duty
By virtue of the Interim Regulations Concerning Taxation Issues for Joint Stock TrialEnterprises ( ) issued on 12th June, 1992 and the InterimRegulations of the PRC Concerning Stamp Duty ( ) issued on 6thAugust, 1988 and taking effect on 1st October, 1988, PRC stamp duty is imposed on the transferof the PRC listed domestic shares. However, H shares which are transferred outside the PRC areexempted from the payment of the PRC stamp duty.
(v) Estate, inheritance or gift tax
The PRC does not currently have any estate, inheritance or gift tax.
(5) Foreign exchange control
Major reforms have been introduced to the foreign exchange control system of the PRC since 1993.
On 28th December, 1993, the People’s Bank of China (“PBOC”), with the authorisation of theState Council, issued the Notice on Further Reform of the Foreign Exchange Control System( ) which came into effect on 1st January, 1994. Other mainregulations and implementation measures include the PRC Foreign Exchange Control regulations( ) effective on 1st April, 1996 and promulgated by the State Council on 29thJanuary, 1996 and the Regulations on the Foreign Exchange Settlement, Sale and Payments( ) which were promulgated by PBOC on 20th June, 1996 and took effect on 1st July,1996 and which contain detailed provisions regulating the settlement, sale and payment of foreign exchangeby domestic enterprises, individuals, economic organisations and social organisations in the PRC.
Under such new regulations, the previous dual exchange rate system for Renminbi was abolished anda unified floating exchange rate system, based largely on supply and demand, was introduced. The PBOCpublishes, on each business day, the Renminbi exchange rate against other major foreign currencies. Suchrate is to be set by reference to the Renminbi/major foreign currencies trading price on the previous dayon the inter-bank foreign exchange market.
In general, all organisations and individuals within the PRC, including foreign invested enterprises,are required to remit their foreign exchange earnings to the PRC. In relation to the PRC enterprises, theirrecurrent foreign exchange earnings are generally required to be sold to designated banks unlessspecifically approved otherwise. Foreign-invested enterprises, on the other hand, are permitted to retain
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certain percentage of their recurrent foreign exchange earnings and the sums retained may be deposited intoforeign exchange bank accounts maintained with designated banks. Capital foreign exchange must bedeposited into foreign exchange bank accounts maintained with designated banks and can generally beretained in such accounts.
At present, control on the purchase of foreign exchange is being relaxed. Enterprises which requireforeign exchange for their recurrent activities such as trading activities and payment of staff remunerationmay purchase foreign exchange from designated banks, subject to the production of relevant supportingdocuments.
In addition, where an enterprise requires any foreign exchange for the payment of dividends that arepayable in foreign currencies under applicable regulations, such as the distribution of profits by a foreigninvested enterprise to its foreign investment party, then, subject to the due payment of tax on suchdividends, the amount required may be withdrawn from funds in foreign exchange accounts maintained withdesignated banks, and where the amount of the funds in foreign exchange is insufficient, the enterprise maypurchase additional foreign exchange from designated banks upon the presentation of the resolutions of thedirectors on the profit distribution plan of that enterprise.
Despite the relaxation of foreign exchange control over current account transactions, the approval ofthe SAFE is still required before an enterprise may borrow a loan in foreign currency or provide any foreignexchange guarantee or to make any investment outside of the PRC or to enter into any other capital accounttransaction which involves the purchase of foreign exchange.
When conducting actual foreign exchange transactions, the designated banks may, based on theexchange rate published by the PBOC and subject to certain limits, freely determine the applicableexchange rate.
The China Foreign Exchange Trading System (“CFETS”) was formally established and came intooperations on 1st January, 1994, CFETS has set up a computerised network with sub-centres in severalmajor cities, thereby forming an interbank market in which designated PRC banks can trade and settle theirforeign currencies. The establishment of CFETS was originally intended to coincide with the eliminationof swap centres. The swap centres had, however, been retained as an interim measure and enterprises withforeign investment are currently required to enter into exchange transactions only through the swap centres,rather than through designated PRC banks, upon obtaining the approval of SAFE or its local office wherethe swap centres are located. According to a notice issued by the PBOC and SAFE on 25th October, 1998,all the swap centres were closed from 1st December, 1998.
The Notice Concerning Some Issues Relating to Exchange Control of Overseas Listed Enterprises wasjointly issued by CSRC and SAFE on 13th January, 1994. The Notice provides that:
— upon the approval of SAFE, an overseas listed enterprise may open a foreign exchange accountat a bank within the PRC to retain foreign currency proceeds received from overseas shareoffers;
— within 10 days after receiving the foreign currency proceeds of the share offer, the enterpriseshould transfer such proceeds into an approved PRC bank account;
— upon approval of SAFE the enterprise may remit abroad the foreign exchange from its foreigncurrency bank account to foreign investors outside the PRC for the purpose of payment ofdividends or other profit distribution; and
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— if 25% or more of share capital of the enterprise is held by foreign investors, such enterprisemay apply to MOFTEC for foreign investment enterprises status, and upon approval ofMOFTEC, the foreign exchange matters of such enterprises shall be handled in accordance withforeign exchange regulations governing foreign investment enterprises.
(6) Company law
On 29th December, 1993, the Standing Committee of the NPC promulgated the Company Law( ) which came into effect on 1st July, 1994. Before implementation of the CompanyLaw, the formation and regulation of joint stock limited companies were governed by the Standard Opinionfor Joint Stock Companies ( ) (the “Standard Opinion”) promulgated by the StateRestructuring Commission on 15th May, 1992. The Standard Opinion was superseded by the Company Law.The legal status of joint stock limited companies established pursuant to the Standard Opinion is preservedand these companies are required to conform to the provisions of the Company Law and apply forre-registration before 31st December, 1996. The Overseas Listing Special Regulations ( )were passed by the State Council on 4th August, 1994 pursuant to Articles 85 and 155 of the Company Law.On 27th August, 1994, the Mandatory Provisions, which must be incorporated in the articles of associationof all the PRC joint stock limited companies to be listed overseas, were jointly promulgated by theSecurities Committee and the State Restructuring Commission.
Set out below is a summary of the provisions of the Company Law, the Overseas Listing SpecialRegulations and the Mandatory Provisions:
(a) General
The Company Law governs two types of companies, namely companies incorporated in the PRCwith limited liability and companies incorporated in the PRC as joint stock limited companies. Bothtypes of companies have the status of an enterprise legal person.
The liability of shareholders of a limited liability company is limited to the extent of the amountof capital contributed by them and the company is liable to its creditors to the full amount of theassets owned by it. A joint stock limited company is a company having a registered share capitaldivided into shares of equal par value. The liability of its shareholders is limited to the extent of theamount of shares subscribed by them and the company is liable to its creditors to the full amount ofall the assets owned by it.
A company may invest in other limited liability companies and joint stock limited companies.Apart from investment companies and holding companies authorised by the State Council, the amountof a company’s aggregate investment in other joint stock limited companies and limited liabilitycompanies may not exceed 50% of its net assets. The Mandatory Provisions provide that a companymay, subject to the approval of the company’s supervisory department authorised by the StateCouncil, operate as a holding company.
(b) Incorporation
Under the Company Law, a joint stock limited company may be incorporated by either thepromotion method or public issue.
The method of promotion means that for the purpose of establishing a joint stock limitedcompany, all the shares to be issued by the company shall be subscribed by the promoters. Where acompany is established by means of public issue, not less than 35% of the shares to be issued by thecompany shall be subscribed by its promoters and the remaining shares to be issued shall be offeredto the public for subscription.
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The establishment of a joint stock limited company requires a minimum of five promoters withat least half of the promoters having a residence within the PRC. The establishment of a limitedliability company, as opposed to a joint stock limited company, requires a minimum of two and amaximum of fifty shareholders. A State-owned enterprise which is to be restructured into a joint stocklimited company by the public issue method may have less than five promoters.
Under the Overseas Listing Special Regulations, a State-owned enterprise or an enterprise withthe majority of its assets owned by the State can be restructured in accordance with the relevantregulations to become a joint stock limited company and may offer shares for subscription to overseasinvestors. If such a company is to be established by the promotion method, it may have less than fivepromoters and the company may issue H shares once incorporated.
(c) Procedures for establishment of companies
The establishment of a joint stock limited company must be approved by the relevantgovernmental departments authorised by the State Council or by the relevant provincial people’sgovernment.
Where a company is established by the promotion method, the promoters shall pay for theirshares in full immediately after they have completed their written subscriptions for the shares to beissued in accordance with the articles of association of the company. For shares to be issued throughcontributions of industrial property, non-patented technology and land use rights, the legal proceduresfor transferring these property rights shall be carried out in accordance with the law. When allsubscription payments by the promoters have been made, the promoters shall elect the board ofdirectors and the members of the supervisory committee. The board of directors of the company shallsubmit the supporting documents, such as the approval documents for the establishment of thecompany, its articles of association and the capital verification certificate, to the Administration ofIndustry and Commerce Bureau for registration of the company.
The value of the shares to be issued through contribution of industrial property rights andnon-patented technology shall not exceed twenty (20)% of the registered capital of the company.Where a State-owned enterprise is converted into a joint stock limited company, the State assets shallnot be under-valued in exchange for shares, be sold at prices below the prevailing market price, orbe allocated to any person without consideration. The promoters must submit to the relevant securitiesadministration authority of the State Council an application for public issue together with othersupporting documents including, among others, (i) the draft articles of association; (ii) theprospectus; (iii) the particulars of receiving banker; (iv) the name of underwriters and theunderwriting and placing agreement; (v) the approval document for the establishment of the company;(vi) the names of the promoters, the number of shares subscribed for by the promoters, the investmentmade and the capital verification certificate; and (vii) a business forecast report. The promoters mayproceed with the public offering of shares only after the approval of the relevant securitiesadministration authority has been obtained.
An inaugural meeting of the company shall be convened by the promoters within 30 days afterthe shares have been paid up in full. Matters required to be transacted at the inaugural meetinginclude, among others, the adoption of the company’s articles of association, the election of themembers of the board of directors, the election of members of the supervisory committee and thereview of the value attributed to the assets injected by the promoters into the company in return forits shares. The board of directors of the company is required to submit the requisite documents of thecompany to the Administration of Industry and Commerce Bureau for registration within 30 days afterthe inaugural meeting.
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The date of establishment of a company is the day when its business licence is issued by theAdministration of Industry and Commerce Bureau. A joint stock limited company established bymeans of public issue shall after its establishment, report to the relevant securities administrationauthority of the State Council on its share subscription for record.
(d) Responsibilities of promoters
Under the Company Law, the promoters of a company are liable for:
(i) joint liabilities for payment of expenses and liabilities incurred in connection with theestablishment of the company in the event of the company being established;
(ii) joint liabilities for repayment of the subscription monies to the subscribers together withinterest at bank rate for savings deposit for the same period of time, in the event of thecompany not being established; and
(iii) damages to the company for losses suffered by the company as a result of the default ofthe promoters in the course of the establishment of the company.
According to the Provisional Regulations Concerning the Issue and Trading of Shares( ) (the “Provisional Regulations”) promulgated by the State Council on22nd April, 1993, the promoters of a company are required to assume joint and several responsibilityfor the accuracy of the contents of the prospectus and to ensure that the prospectus does not containany misleading statement or omit any material information.
(e) Shares
(i) Registered capital
The registered capital of a company is the total amount of paid-up capital of the companyregistered with the Administration of Industry and Commerce Bureau. The minimum amount ofregistered capital of a joint stock limited company is RMB10,000,000. A company, the sharesof which are authorised by the relevant securities administration authority to list on a stockexchange, must have a registered capital of not less than RMB50,000,000. The registeredcapital of a company shall be divided into shares of equal par value.
(ii) Allotment and issue of shares
The issue of shares must be based on the principles of transparency, equality and fairness.The same class of shares must carry equal rights. Where shares are issued at the same time, theterms (including the subscription price) of allotment of each share must be identical to theothers of the same class. Any entity or individual subscribing for shares in a joint stock limitedcompany shall pay the same price for each share.
Shares may be issued at par or at a premium but may not be issued below the par value.Shares to be issued at a premium shall require the approval of the securities administrationauthority of the State Council.
The premiums generated from issuing shares at a premium shall be allocated to the capitalaccumulation fund of the company.
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(iii) Registered or bearer shares
Shares may be issued in registered form or bearer form. Shares issued by the company topromoters, State-designated investment institutions or legal persons shall be in registered formand shall state the name of the promoters, State-authorised investment institutions or legalpersons. Such shares may not be registered under any other name, or under the name of anominee. Shares issued to the public may be either registered or bearer shares. The OverseasListing Special Regulations and the Mandatory Provisions provide that shares issued to foreigninvestors and listed overseas shall be issued in registered form, denominated in Renminbi andsubscribed for in foreign currency.
Under the Overseas Listing Special Regulations and the Mandatory Provisions, sharesissued to foreign investors, including investors from the territories of Hong Kong, Macau andTaiwan and listed overseas are known as “overseas listed foreign shares”, and those sharesissued to investors within the PRC other than the territories specified above are known as“domestic shares”.
The State Council is empowered to prescribe detailed measures in connection with anyoffer of shares. A joint stock limited company may offer its shares to the overseas public withthe approval of the securities administration department of the State Council. In addition toproviding for the number of shares to be underwritten, an underwriting and placing agreementmay, subject to the prior approval of the Securities Committee, make provisions to set aside upto 15% of the overseas listed foreign shares in the underwriting and placing agreement as partof the total number of shares to be offered under the Overseas Listing Special Regulations.
A register of shareholders shall be maintained by the company in respect of shares issuedin registered form. Information such as the names and addresses of shareholders, number ofshares held by each shareholder and the dates on which the shareholders became holders of therelevant shares is required to be entered into the register.
Where bearer shares are issued, the company shall keep a record of the amount of bearershares issued, the number designated to each bearer share and the date of issue of each bearershare.
(f) Increase of share capital
Under the Company Law, a joint stock limited company may increase its share capital by meansof an issue of H shares subject to the following:
(i) share subscription for the previous issue must have been paid in full and at least one yearhas elapsed since the date of the immediately preceding share issue. However, under theOverseas Listing Special Regulations, if the company increases its capital by way of anissue of overseas listed foreign shares, the time period elapsed since the last share issuemay be less than 12 months;
(ii) the company must have made profits for the immediately three preceding years and itsdistributable profits must have been sufficient to pay dividends;
(iii) the financial and accounting statements of the company in the immediately threepreceding years must not have contained any false information; and
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(iv) the forecast profit rate of the company shall be no less than (or reach) the interest rate ofbank for savings deposit for the same period.
An issue of shares shall be approved by shareholders in general meeting. After the shareholders’approval has been obtained, the board of directors of the company shall also obtain the approval ofthe departments authorised by the State Council or that of the provincial people’s government. If acompany issues shares by way of an offer to the public, the approval of the relevant securitiesadministration authority of the State Council will also have to be obtained. Upon completion of thesubscription of H shares, the company must register the increase in its registered capital with theAdministration of Industry and Commerce Bureau and issue a public notice.
(g) Reduction of share capital
Subject to the minimum registered capital requirements, a joint stock limited company mayreduce its registered capital in accordance with the following procedures prescribed:
(i) the company shall prepare a balance sheet and a detailed inventory of its assets;
(ii) the reduction of registered capital must be approved by shareholders in general meeting;
(iii) the company shall inform its creditors of the intended reduction in capital within 10 daysand publish a public announcement of the intended reduction in a newspaper at least threetimes within 30 days after the resolution approving the reduction has been passed;
(iv) the creditors of the company are entitled within the statutorily prescribed time limit torequire the company to pay its debts or provide guarantees covering the debts within 30days from the date the creditor receives the notice or, where the notice has not beenreceived, within 90 days after the date on which the public announcement is made; and
(v) the company must apply to the Administration of Industry and Commerce Bureau forregistration of the reduction in registered capital.
(h) Repurchase of shares
A company may not purchase its own shares except in cases where a company effects acancellation of shares due to a reduction in registered share capital or a merger with another companywhich holds shares in the company or such other purpose permitted by law and administrativeregulations. The Mandatory Provisions provide that, upon obtaining the necessary approvals inaccordance with the articles of association of a company and that of the relevant supervisoryauthorities, the company may repurchase its issued shares for the foregoing purposes by way of ageneral offer to the shareholders of the company or purchase on a stock exchange or by way of anoff market contract.
Under the Company Law, within 10 days following a repurchase of a company’s own shares, acompany must, in accordance with the applicable law and administrative regulations, cancel theportion of the shares repurchased, register the change of its capital and issue a public announcementthereafter.
(i) Transfer of shares
Shares may be transferred in accordance with the relevant law and regulations.
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A shareholder may only effect a transfer of its shares on a stock exchange established inaccordance with law. Registered shares may be transferred either by endorsement by the shareholdersor by such other method specified by the applicable law and administrative regulations.
Promoters shall not transfer their shares in a company within three years after the establishmentof the company. Directors, supervisors and the manager of a company shall not transfer their sharesin the company during their term of office with the company and shall declare their shareholdings tothe company.
There is no restriction under the Company Law as to the percentage shareholding of a singleshareholder of a company.
(j) Shareholders
Under the Company Law and the Mandatory Provisions, the rights of a shareholder include therights to:
(i) attend and vote in person or to appoint a proxy to attend and vote on his behalf at generalmeetings of the company;
(ii) inspect the articles of association of the company, the minutes of shareholders’ meetingsand the financial report of the company and to put forward propositions and enquiriesrelating to the operation of the company;
(iii) transfer the shares held by it in accordance with law on a stock exchange established inaccordance with the relevant laws;
(iv) receive the surplus assets of the company in its winding up in proportion to itsshareholding; and
(v) may initiate legal proceedings in the people’s court if a resolution passed at ashareholders’ meeting or directors’ meeting has infringed the law or administrativeregulations or the legitimate interests of the shareholders.
A shareholder is liable to the company to the extent of the amount of shares he subscribed for.
A shareholder may enjoy such other rights and is required to assume such other obligations asspecified in the company’s articles of association.
(k) Shareholders’ general meetings
(i) Powers of shareholders in general meeting
The shareholders’ general meeting is the organ of authority of the company and mayexercise the following powers:
(1) to determine the company’s business policies and investment plans;
(2) to elect or remove directors and supervisors who are the representatives ofshareholders and to fix the remuneration and to decide upon such related mattersrelating to directors and supervisors;
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(3) to consider and approve the reports of board of directors and the supervisorycommittee;
(4) to consider and approve the company’s annual financial budget and accountingplans;
(5) to consider and approve the profit distribution plan and plans for recovery of losses;
(6) to approve the increase or reduction in the registered share capital of the company;
(7) to approve the issue of debentures by the company;
(8) to approve the merger, demerger, dissolution and liquidation of the company; and
(9) to approve amendments to the company’s articles of association.
(ii) Annual general meetings and extraordinary shareholders’ general meetings
Shareholders’ general meetings are divided into annual general meetings andextraordinary shareholders’ general meetings. Annual general meetings must be held once everyyear. Extraordinary shareholders’ general meetings are general meetings other than annualgeneral meetings and shall be convened within two months after the occurrence of any of thefollowing circumstances:
(1) the number of directors is less than two thirds of the number required under theCompany Law or the company’s articles of association;
(2) the company’s accumulated losses amount to one-third of its total paid up capital;
(3) upon requisition by holders of not less than 10% of the shares of the company; or
(4) the board of directors or the supervisory committee considers such a meetingnecessary.
(iii) Proceedings of shareholders’ general meetings
A shareholders’ general meeting shall be convened by the board of directors in accordancewith the Company Law and presided over by the chairman of the board of directors. Notice ofshareholders’ meeting shall be given not less than 30 days before the date of such meeting. Acompany which has bearer shares in issue shall make a public announcement of theshareholders’ general meeting at least 45 days prior to the meeting being held. Under theOverseas Listing Special Regulations and the Mandatory Provisions, 45 days’ notice of ashareholders’ general meeting is required to be given to shareholders specifying the matters tobe considered at and the date and place of the meeting.
Under the Overseas Listing Special Regulations and the Mandatory Provisions,shareholders who intend to attend a shareholders’ general meeting are required to provide thecompany with a written confirmation of their attendance 20 days prior to the meeting.Shareholders holding 5% or more of the voting rights of a company are entitled, under the
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Overseas Listing Special Regulations, to propose to the company, in writing, new resolutionsto be considered at an annual general meeting and the company shall include any proposedresolutions which are within the powers of a shareholders’ general meeting in the agenda of thatmeeting.
The Company Law does not specify any quorum requirement for a general meeting. TheOverseas Listing Special Regulations and the Mandatory Provisions provide that ashareholders’ general meeting may be held if shareholders holding 50% or more of the votingrights of a company have replied in writing 20 days prior to the proposed date of the meetingthat they intend to attend the meeting. In the event that the 50% level is not attained, ashareholders’ general meeting may be held if the company shall within 5 days after the last dayfor receipt of the replies notify shareholders by public announcement of the matters to beconsidered at and the place and date of the meeting.
Each shareholder present at a shareholders’ general meeting is entitled to one vote forevery share held. A shareholder may appoint a proxy to attend and vote on his behalf at ashareholders’ general meeting. Ordinary resolutions proposed at a shareholders’ generalmeeting must be passed by more than half of the votes cast by shareholders present in personor by proxy at the meeting. Resolutions on: (i) amendments to the company’s articles ofassociation; (ii) the merger, division or dissolution of the company; (iii) the increase andreduction of capital of and the issue of any class of shares, bonds and securities by the company;and (iv) other matters which the shareholders’ general meeting has resolved by way of ordinaryresolution as having a potentially material effect on the company and should be approved byspecial resolution of more than two-thirds of the votes so cast.
The Mandatory Provisions require class meetings to be held in the event of a variation orabrogation of the class rights of a class of shareholders. Holders of domestic shares and holdersof overseas listed foreign shares are deemed to be different classes of shareholders.
(l) Directors
(i) Board of directors
The board of directors of a joint stock limited company shall comprise between 5 and 19directors. The term of office of a director shall be prescribed by the company’s articles ofassociation but shall not exceed three years. A director may serve consecutive terms ifre-elected. The board of directors of a company may exercise the following powers:
(1) to convene shareholders’ meetings and to report on its work to the shareholders;
(2) to implement resolutions passed by shareholders in general meetings;
(3) to formulate on the company’s business plans and investment plans;
(4) to formulate the company’s annual budgets and accounts;
(5) to formulate profit distribution plans and plans for recovery of losses;
(6) to formulate plans for the increase or decrease in registered capital and plans forissue of debentures;
(7) to formulate plans for the merger, division or dissolution of the company;
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(8) to decide on the internal management structure of the company;
(9) to appoint or dismiss the manager, and at the recommendation of the manager,employ or dismiss deputy managers and financial controllers and to fix theirremuneration; and
(10) to formulate the management control system of the company.
In addition, the Mandatory Provisions provide that the board of directors is alsoresponsible for formulating proposals for amending the articles of association of the company.
(ii) Board meetings
Regular meetings of the board of directors of a company shall be held at least twice everyyear. Notice of regular board meetings shall be given at least 10 days before the date of themeeting. Notices of any other extraordinary board meetings shall be given in such manner andfor such notice period as may be determined by the board of directors.
A quorum for a board meeting shall be constituted by more than half of the directors. Adirector may attend a board meeting personally or may authorise in writing another director ashis representative to attend on his behalf. The power of attorney shall define the scope of therepresentative’s authority. All board resolutions must be passed by the affirmative votes of morethan half of the directors. All resolutions passed at a board meeting shall be recorded in theminutes of the relevant meeting and the minutes shall be signed by the directors who attendedthe meeting and the person who recorded the minutes.
If any board resolution contravenes any applicable laws and regulations or the company’sarticles of association and results in substantial damages to the company, any director whoparticipated in passing the resolution (except those who voted against the resolution and whosedissenting vote is recorded in the relevant minutes) shall be personally liable to the company.
(iii) Chairman of the board of directors
The board of directors shall appoint a chairman. The appointment of the chairman shallbe approved by more than half of the directors. The chairman is the legal representative of thecompany and may exercise the following powers:
(1) to preside over shareholders’ meetings and convene and preside over meetings ofthe board of directors;
(2) to examine the implementation of resolutions of the board of directors; and
(3) to sign the share certificates and debentures issued by the company.
(iv) Qualification of directors
The Company Law provides that the following persons are not eligible to act as directors:
(1) a person who has no civil capacity or has a restricted civil capacity;
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(2) a person who has been convicted of offences relating to bribery, corruption,misappropriation of property, or the sabotage of social economic order, where lessthan five years have elapsed since the date of completion of the sentence; or aperson who has been deprived of his political rights where less than five years haveelapsed since completion of such deprivation;
(3) a person who is a former director, factory manager or manager of a company orenterprise which has become bankrupt or has been liquidated due tomismanagement and who is personally liable for the bankruptcy or liquidation ofsuch company or enterprise, where less than three years have elapsed since the dateof the completion of the liquidation of the company or enterprise;
(4) a person who has been a legal representative of a company or enterprise thebusiness licence of which has been revoked due to unlawful operation by thecompany or enterprise and the person is personally responsible for such revocation,where less than three years has elapsed since the date of such revocation;
(5) a person who is liable for a relatively large amount of debt which has not beenrepaid when due; or
(6) a person who is a State civil servant.
Other circumstances under which a person is disqualified from acting as a director of acompany are set out in the articles of association and the Mandatory Provisions.
(m) Supervisory committee
A company is required to establish a supervisory committee comprising not less than threemembers. The supervisory committee is responsible for:
(i) examining the financial matters of the company;
(ii) supervising the directors and manager of the company to ensure that they carry out theirduties in compliance with the relevant laws and regulations and the company’s articles ofassociation;
(iii) requiring the directors and manager to rectify any action which adversely affects theinterests of the company;
(iv) proposing the convening of extraordinary shareholders’ general meetings; and
(v) carrying out other duties specified in the company’s articles of association.
A supervisor is also required to attend board meetings.
Under the Supplemental Amendments, resolutions of a supervisory committee are required tobe passed by the affirmative votes of two thirds or more of the supervisors.
Members of the supervisory committee shall comprise representatives elected by the workers ofthe company and representatives elected by shareholders in general meeting in an appropriateproportion specified in the company’s articles of association. A director, manager or financial
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controller of the company cannot become a supervisor. The term of office of a supervisor is threeyears and a supervisor may serve consecutive terms if re-elected. The circumstances under which aperson is disqualified from acting as a director of a company under the Company Law and theMandatory Provisions apply equally to a supervisor of the company.
(n) Manager and officers
The company shall have a manager who shall be appointed or removed by the board of directors.The manager is accountable to the board of directors and may exercise the following powers:
(i) to supervise the production, business and administration of the company and to organisethe implementation of resolutions of the board of directors;
(ii) to organise the implementation of the company’s business and investment plans;
(iii) to formulate plans for the establishment of the company’s internal management structure;
(iv) to formulate the basic administration system of the company;
(v) to formulate the company’s internal rules;
(vi) to recommend the appointment and dismissal of deputy managers and the financialcontroller and appoint or dismiss other administration officers (other than those requiredto be appointed or dismissed by the board of directors);
(vii) to attend board meetings; and
(viii) other powers conferred by the board of directors or the company’s articles of association.
The Overseas Listing Special Regulations provide that the officers of a company shall includeits financial controller, company secretary and other executives specified in the company’s articles ofassociation.
The circumstances under which a person is disqualified from acting as a director of a companyunder the Company Law and the Mandatory Provisions apply equally to managers and officers of thecompany.
(o) Duties of directors, supervisors, managers and officers
A director, supervisor, manager and an officer of a company are required under the CompanyLaw to comply with the relevant laws, regulations and the company’s articles of association, carry outtheir duties honestly, and protect the interests of the company. The Overseas Listing SpecialRegulations and the Mandatory Provisions provide that a director, a supervisor, a manager or anofficer of a company owes fiduciary duties to the company and is required to perform its dutiesfaithfully, protect the interests of the company and not to make use of its positions in the companyfor its own benefit. A director, supervisor, manager and an officer of a company is also under a dutyof confidentiality to the company and is prohibited from divulging the secret information of thecompany save as permitted by the relevant law and regulations or by the shareholders.
A director, supervisor, manager or an officer who contravenes any law, regulation or thecompany’s articles of association in the performance of his duties which resulted in any loss to thecompany shall be personally liable to the company.
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(p) Finance and accounting
A company is required to establish a financial and accounting system in accordance with therelevant laws and regulations as well as rules stipulated by the Ministry of Finance and the StateCouncil.
A company is required to prepare its financial statements at the end of each financial year,comprising its balance sheet, profit and loss account, a statement on financial status and changes offinancial status and a profit distribution statement. The financial statements shall be made availablefor inspection by the shareholders of the joint stock limited company at least 20 days prior to theannual general meeting of the company. A joint stock limited company established by the publicsubscription method must publish its financial statements by way of public announcement.
A company is required to make the following transfers from its after tax profit beforedistributing its profits to the shareholders of the company:
(i) 10% of its after tax profit to the statutory surplus reserve of the company provided thatno further transfer is required to be made if the accumulated statutory common reserveexceeds/reaches 50% of the registered capital of the company;
(ii) between 5% and 10% of its after tax profit to the statutory public welfare fund;
(iii) subject to the shareholders’ approval in shareholders’ general meeting and after transferof the requisite amount to the statutory surplus reserve, the amount from the after taxprofit of the company to the discretionary common reserve; and
(iv) any balance of the after tax profit after making up losses and transfers to the statutorysurplus reserve and statutory public welfare fund shall be distributed to the shareholdersin proportion to their respective shareholdings in the company.
When a company’s statutory surplus reserve is insufficient to make up for the company’s lossesfor the previous year, the profits of the company for the current year shall be applied to make up suchlosses before making allocations in accordance with the foregoing requirements to the statutorysurplus reserve and the statutory public welfare fund.
The common reserve of a joint stock limited company comprises the statutory surplus reserve,discretionary common reserve and the capital common reserve.
The capital common reserve of a company is made up of the premium over the nominal valueof the shares of the company and other amounts required by the relevant governmental financialauthority are to be treated as the capital common reserve.
The surplus reserve of a company shall be applied for the following purposes:
(i) to make up the company’s losses;
(ii) to expand the business operations of the company; and
(iii) to pay up the registered share capital of the company by the issue of H shares toshareholders in proportion to their existing shareholdings in the company or by increasing
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the par value of the shares currently held by the shareholders, provided that if thestatutory common reserve is converted into registered capital, the balance of the statutorysurplus reserve after such conversion shall not be less than 25% of the registered capitalof the company.
The statutory public welfare fund shall be applied for the collective welfare of the company’semployees.
(q) Appointment and retirement of auditors
The Overseas Listing Special Regulations require a company to employ an independent PRCqualified firm of accountants to audit the company’s annual financial statements and review otherfinancial reports.
The auditors are to be appointed for a term commencing from their appointment at an annualgeneral meeting to the close of the next annual general meeting.
If a company removes or ceases to continue to appoint its existing auditors, it is required by theOverseas Listing Special Regulations to give prior notice to the auditors and the auditors are entitledto make representations before the shareholders in general meeting. The auditors who resigned fromtheir office should make a statement to the shareholders stating whether or not the company hasundertaken any inappropriate transactions. The appointment, removal or non-renewal of appointmentof auditors shall be decided by the shareholders and shall be registered with the CSRC.
(r) Distribution of profits
Overseas Listing Special Regulations provide that the dividends and other distributions payableto holders of overseas listed foreign shares shall be declared and calculated in Renminbi and paid inforeign currency. Under the Mandatory Provisions, the payment of foreign currency to shareholdersshall be made through a receiving agent.
(s) Amendments to articles of association
Amendments to a company’s articles of association must be approved by more than two thirdsof the votes cast by shareholders present at the shareholders’ general meeting. Any amendment to theprovisions in a company’s articles of association in accordance with the Mandatory Provisions willonly be effective after the approval of the relevant department authorised by the State Council andthe Securities Committee are obtained. A company must change its registration particulars inaccordance with the applicable law if any amendments to its articles of association involvingregistration matters are adopted.
(t) Merger and demerger
The merger or demerger of a company shall be approved by the shareholders in general meetingand the relevant governmental authority. The merger of a company may be effected either by way ofabsorption followed by the dissolution of the company being absorbed or by the establishment of anew entity followed by the dissolution of the original entities.
All parties to a merger are required to sign a merger agreement and to prepare their respectivebalance sheets and inventory of assets. Each relevant party to a merger shall notify the creditors ofthe merger within 10 days and publicly announce the merger in the newspapers at least three times
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within 30 days after the resolution approving the merger has been passed. The creditors are requiredwithin the statutory prescribed time limit to request the company to repay any outstandingindebtedness or provide guarantees covering such indebtedness. Any company which is unable torepay its debts or provide such guarantees is prohibited from proceeding with the merger.
A company is required to prepare its balance sheet and inventory of assets prior to its demerger.Similar requirements on notification of the demerger to creditors, publication of notice of thedemerger and repayment of or provision of guarantees to creditors are applicable in the case of ademerger.
Any changes in the registrar’s particulars of the companies resulting from merger or demergershould be re-registered with the company registration authority in accordance with the law.
(u) Dissolution and liquidation
Under the Company Law, a company shall be dissolved and liquidated if any of the followingevents shall occur:
(i) the term of its operations stipulated in the company’s articles of association has expiredor on the occurrence of an event provided in the company’s articles of association whichtriggers the dissolution of the company;
(ii) the shareholders in general meeting have resolved to dissolve the company by specialresolution;
(iii) a merger or demerger of the company which requires the company to be dissolved;
(iv) the declaration of the insolvency of the company according to law by reason of its notbeing able to pay its debts when become due and payable; or
(v) the company has been ordered to close down as a result of violation of the law oradministrative regulations.
Where a company is dissolved in the circumstances referred to in (1) or (2) above, theshareholders in general meeting shall, within 15 days of the occurrence of the event, appoint themembers of the liquidation committee. If the liquidation committee is not established within thespecified time, the creditors of the company may apply to the people’s court to appoint the membersof the liquidation committee. The people’s court or the relevant supervising department shall organisea liquidation committee to conduct the liquidation. A liquidation committee shall compriseshareholders, the relevant department and the relevant professional personnel if the company isdissolved in the circumstances described in (4) or (5) above. A liquidation committee shall beresponsible for dealing with the assets of the company, preparing a balance sheet and an inventory ofthe company’s assets, notifying the creditors of the company’s dissolution, handling the outstandingbusiness of the company, discharging the outstanding indebtedness (including unpaid taxes) of thecompany, distributing the company’s surplus assets after repayment of all its indebtedness andrepresenting the company in all civil litigation.
A liquidation committee is required to notify the creditors of the dissolution of the companywithin 10 days after its establishment and issue a public announcement of the dissolution of thecompany at least three times within 60 days after its establishment. A creditor is required to lodge itsclaim with the liquidation committee within the statutory prescribed time limit.
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The company’s assets shall be applied to pay all expenses incurred in connection with theliquidation, the employees’ wages, employees’ insurance, tax and the indebtedness of the company.Any surplus assets after discharge of the company’s liabilities shall be distributed to the shareholdersin proportion to their respective shareholdings in the company. If the assets of the company areinsufficient to repay/ discharge its indebtedness, the liquidation committee shall apply to the people’scourt for a declaration of insolvency and shall transfer the liquidation proceedings to the people’scourt.
A company cannot engage in any new business operations during its liquidation.
On completion of the liquidation process, the liquidation committee is required to submit aliquidation report to the shareholders in general meeting and the relevant administrative departmentfor confirmation. The liquidation committee is also required to apply to the Administration ofIndustry and Commerce Bureau for the cancellation of the company’s registration and to make apublic announcement of the company’s dissolution following such cancellation.
Members of the liquidation committee are required to discharge their duties honestly and incompliance with laws. A member of the liquidation committee is liable to indemnify the company andits creditors in respect of any loss arising from his wilful or material default.
(v) Overseas listing
The shares of a company shall only be listed overseas after obtaining approval from the CSRCand the listing must be arranged in accordance with procedures specified by the Overseas ListingSpecial Regulations.
According to the Overseas Listing Special Regulations and the Mandatory Provisions, acompany’s plan to issue overseas listed foreign shares and domestic shares, which has been approvedby the Securities Committee, may be implemented by its board of directors separately within 15months after approval is obtained from the CSRC.
(w) Loss of shares certificates
In the event that share certificates in registered form are either stolen or lost, a shareholder mayapply, in accordance with the relevant provisions set out in the PRC Civil Procedure Law, to apeople’s court for a declaration that such certificates will no longer be valid. After such a declarationhas been made by the people’s court, the shareholder may apply to the company for the issue ofreplacement certificates.
A separate procedure regarding the loss of H share certificates is provided in the MandatoryProvisions, which has been incorporated into the Company’s Articles of Association, a summary ofwhich is set out in Appendix IV to this prospectus.
(x) Suspension and termination of listing
A company which is listed on a stock exchange may have its listing suspended by the securitiesadministration department of the State Council if any of the following events occurs:
(i) the registered capital of the company or the distribution of the company’s shares no longercomplies with the relevant listing requirements;
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A
(ii) the company has failed to disclose its financial position in accordance with the relevant
law and regulations or the financial report of the company contains false information;
(iii) the company has committed a material breach of the law; or
(iv) the company has incurred losses for each of the immediately preceding three years.
If the circumstances referred to in (2) or (3) above have occurred and investigation has established
that the consequences are serious, or if the circumstances referred to in (1) or (4) above have occurred and
the situation has not been rectified within the time stipulated and not fulfilling the listing requirements, the
securities administration department of the State Council may decide to terminate the listing of a company’s
shares.
The securities administration department of the State Council may also terminate the listing of a
company’s shares in the event that the company has resolved to be wound up or is ordered by the relevant
governmental authority to be dissolved, or the company is declared insolvent.
(7) Securities law and regulations
At present, the PRC has promulgated a number of regulations in relation to the issue and trading of
shares and disclosure of information.
In early 1993, the State Council established the Securities Committee and the CSRC. The Securities
Committee is responsible for co-ordinating the drafting of securities regulations, formulating securities
related polices, planning the development of securities markets, directing, coordinating and supervising all
securities related institutions in the PRC and administering the CSRC. The CSRC is the regulatory arm of
the Securities Committee and is responsible for the drafting of regulatory provisions of securities markets,
supervising securities companies, regulating public offers of securities by the PRC companies in the PRC
or overseas, regulating the trading of securities, compiling securities related statistics and undertaking
research and analysis. In 1998, the Securities Committee was canceled and its main functions were merged
into the CSRC due to the restructuring reforms of the State Council.
On 22nd April, 1993, the State Council promulgated the Provisional Regulations Governing the Issue
and Trading of Shares ( ) (the “Securities Provisional Regulations”). These
regulations deal with the application and approval procedures for public offerings of equity securities,
trading in equity securities, the acquisition of listed companies, deposit, settlement, clearing and transfer
of listed equity securities, the disclosure of information with respect to a listed company, investigation and
penalties and dispute settlement. These regulations specifically provide that the offer of shares by a PRC
company directly and indirectly outside the PRC requires the approval of the Securities Committee and also
provide that separate measures will be promulgated in relation to the issue of and trading in special
Renminbi-denominated shares. However, (i) if a PRC joint stock limited company proposes to issue
Renminbi denominated ordinary shares as well as special Renminbi-denominated shares, it has to comply
with the Securities Provisional Regulations; and (ii) provisions of the Securities Provisional Regulations in
relation to acquisitions of listed companies and disclosure of information are expressed to apply to
companies listed on a stock exchange in general without being confined to companies listed on any
particular stock exchange. Such provisions may, therefore, be applicable to joint stock limited companies
with shares listed on a stock exchange outside the PRC including, for instance, joint stock limited
companies with shares listed on the Stock Exchange.
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On 12th June, 1993, the CSRC promulgated the Implementation Measures (Provisional) on Disclosure ofInformation of the Public Issuing Share’s Company ( ) pursuant to theSecurities Provisional Regulations. Under these measures, the CSRC is responsible for supervising thedisclosure of information by companies which have offered shares to the public in the PRC. These measurescontain provisions regarding prospectuses and listing reports to be issued in connection with a publicoffering of shares in the PRC, publication of interim and final reports and announcement of materialtransactions or matters by companies which have offered shares to the public. Material transactions ormatters are those the occurrence of which may have a material effect on the share price of a company. Theyinclude changes to a company’s articles of association or registered capital, removal of auditors, mortgageor disposal of major operating assets or writing down the value of such assets where the amount beingwritten down exceeds 30% of the total value of such assets, revocation by a court of any resolution passedby the shareholders or the supervisors of a company and the merger or demerger of a company. Thesemeasures also contain disclosure provisions in relation to acquisition of listed companies which supplementthe requirements contained in the Securities Provisional Regulations.
On 2nd September, 1993, the Securities Committee promulgated the Provisional Measures ProhibitingFraudulent Conduct Relating to Securities ( ). The prohibitions imposed by thesemeasures include the use of insider information in connection with the issue of or trading in securities(insider information being defined to include undisclosed material information known to any insider, whichmay affect the market price of securities); the use of funds or information or through an abuse of power increating a false or disorderly market or influencing the market price of securities or inducing investors tomake investment decisions without knowledge of actual circumstances; and the making of any statement inconnection with the issue of and trading in securities which is false or materially misleading or in respectof which there is any material omission. Penalties imposed for contravening any of the provisions of themeasures include fines, confiscation of profits and suspension of trading. In serious cases, criminal liabilitymay be imposed.
On 4th July, 1994, the State Council promulgated the Special Regulations. These provisions dealmainly with the issue, subscription, trading and declaration of dividends and other distributions of foreigncapital stock listed aboard and disclosure of information, articles of association of joint stock limitedcompanies having foreign capital stock listed aboard.
On 25th December, 1995, the State Council promulgated the Regulations of the StateCouncil Concerning Domestic Listed Foreign Shares of Joint Stock Limited Companies( ). These regulations deal mainly with the issue, subscription,trading and declaration of dividends and other distributions of domestic listed foreign shares and disclosureof information of joint stock limited companies having domestic listed foreign shares.
On 29th December, 1998, the Securities Law of the PRC ( ) (the “Securities Law”)was passed by the Standing Committee of the NPC ( ). The Securities Law took effecton 1st July, 1999. This is the first national securities law in the PRC, and it is divided into 12 chapters and214 articles regulating, among other things, the issue and trading of securities, takeovers by listedcompanies, securities exchanges, securities companies and the duties and responsibilities of the StateCouncil’s securities regulatory authorities. The Securities Law is the fundamental law whichcomprehensively regulates activities in the PRC securities market. Article 29 of the Securities Law providesthat enterprises in the PRC which intend to directly or indirectly issue securities outside the PRC or to listtheir securities outside the PRC must obtain prior approval from the State Council’s regulatory authorities.Article 213 of the Securities Law provides that specific measures in respect of shares of companies in thePRC which are to be subscribed and traded in foreign currencies by person and organisation outside the PRCshall be separately formulated by the State Council. Currently, the issue and trading of foreign issued shares(including H shares and B shares) are still mainly governed by the rules ad regulations promulgated by theState Council and the CSRC.
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In order to further promote strict compliance of “companies listed outside China” (“Listed Company”)
with the relevant domestic and foreign laws and regulations, their conscientious performance of their
continuing obligations toward investors and their establishment of a good corporate image on domestic and
foreign capital markets, the State Economic and Trade Commission and the CSRC jointly issued the
Opinion on Further Standardising Operations and Reform of Companies Listed Outside China
( ) (“Standardising Opinion”) on 29th March, 1999. The
Standardising Opinion sets out regulations governing the relationship between the Companies and their
controlling entities (hereafter “controlling entities” refers to companies or enterprises with legal person
status that have a controlling interest in a listed company) and the operations of the administrative
organisations of the Listed Companies. The board of directors, management, the financial and marketing
organisations of a listed company must be independent from those of the controlling entity. No more than
two senior management personnel from the controlling entity (i.e. the chairman of the board, vice-chairman
of the board and executive directors) may concurrently hold the position of senior management personnel
in the company. The Standardising Opinion also requires a company to specify its decision-making process,
strengthen director responsibility, establish a sound external director and independent director system,
strengthen the functions of its supervisory board and secretary of the board of directors, explore methods
to motivate its senior management personnel and to intensify its internal reform. On 21st September, 1999,
CSRC promulgated the Examination, Approval and Supervision of Enterprises in China Applying to
List on the Hong Kong Growth Enterprise Market Guidelines ( ) (the
“Guidelines”) which set out the approval procedures with respect to the listing of PRC enterprises on the
GEM. Under the Guidelines, any State-owned or private enterprise may, through its sponsor acting on its
behalf, apply to CSRC for approval to list on the GEM, such application to be accompanied by documents
set out in the Guidelines. One precondition for such application being that the applicant must be a company
limited by shares and approved by a provincial level people’s government or the State Economic and Trade
Commission ( ). CSRC will determine whether to grant the approval within 10 days of
receipt of the specified documents unless objections are received by any one of the Ministry of Foreign
Trade and Economic Cooperation ( ), the SAFE, and, if State-owned shares are involved,
the Ministry of Finance ( ).
(8) Legal opinion
Fangda Partners, the Company’s legal advisor on the PRC laws, have sent to the Company a letter
confirming that they have reviewed the summary of relevant PRC laws and regulations contained in this
appendix and that, in their opinion, such summary is a correct summary of the relevant PRC laws and
regulations. A copy of this letter is available for inspection as referred to in paragraph (2) headed“Documents available for inspection” in Appendix VI to this prospectus. Any person wishing to obtaindetailed information on the PRC laws and regulations is recommended to seek independent legal advice.
2. HONG KONG LAWS AND REGULATIONS
(1) Company law
The Hong Kong law applicable to a company having share capital incorporated in Hong Kong is basedon the Companies Ordinance and supplemented by the common law.
The Company, which is a joint stock limited company established in the PRC seeking a listing of HShares on the GEM is governed by the Company Law which came into effect on 1st July, 1994 and all otherrules and regulations promulgated pursuant to the Company Law applicable to a joint stock limited companyestablished in the PRC issuing overseas listed foreign shares to be listed on the Stock Exchange.
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Set out below is a summary of certain material differences between the Hong Kong company lawapplicable to a company incorporated in Hong Kong and the PRC company law applicable to a joint stocklimited company incorporated and existing under the Company Law. This summary is, however, notintended to be an exhaustive comparison:
(a) Corporate existence
Under Hong Kong company law, a company having share capital is incorporated by theRegistrar of Companies in Hong Kong issuing a certificate of incorporation and upon itsincorporation, a company will acquire an independent corporate existence. A company may beincorporated as a public company or a private company. The articles of association of a privatecompany incorporated in Hong Kong are required by the Companies Ordinance to contain certainpre-emptive and other provisions. Any company which does not contain such provisions in its articlesof association is a public company.
Under the Company Law, a joint stock limited company may be incorporated by either thepromotion method or the public subscription method. A company established by the publicsubscription method will only acquire its corporate existence after it has completed its initial shareoffering to the public and a company may only issue further shares after a year has elapsed since itslast share issue. The Company Law requires a State-owned enterprise to be converted into a jointstock limited company by the public subscription method, if the promoters are less than five. TheSpecial Regulations, however, permit a State-owned enterprise to be converted into a joint stocklimited company by the promotion method and to offer H shares to the public on its establishment.
Under the Company Law, a company which is authorised by the relevant securitiesadministration authority to list its shares on a stock exchange must have a registered capital of notless than RMB50,000,000. Hong Kong law does not prescribe any minimum capital requirements fora Hong Kong company.
Under the Company Law, the shares allotted by a joint stock limited company in return forinjection of intellectual property rights and non-patented technology shall not exceed 20% of theregistered capital of a company. There is no such restriction on a Hong Kong company under HongKong law.
(b) Share capital
Under Hong Kong law, the authorised share capital of a Hong Kong company is the amount ofshare capital which the company is authorised to issue and a company is not bound to issue the entireamount of its authorised share capital. The Company Law does not have the concept of authorisedshare capital. The registered capital of a joint stock limited company is the amount of the issued sharecapital. Any increase in registered capital must be approved by the shareholders in general meetingand the relevant PRC governmental and regulatory authorities.
(c) Restrictions on shareholding and transfer of shares
Under the PRC law, the domestic shares in the share capital of a joint stock limited company(“domestic shares”) which are denominated and subscribed for in Renminbi may only be subscribedor traded by the State, the PRC legal persons and natural persons. The overseas listed foreign shares(“foreign shares”) issued by a joint stock limited company which are denominated in Renminbi andsubscribed for in a currency other than Renminbi may only be subscribed and traded by investors fromHong Kong, Macau and Taiwan or any country and territory outside the PRC.
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Under the Company Law, shares in a joint stock limited company held by its promoters cannotbe transferred within three years after the date of establishment of the company. Shares in a jointstock limited company held by its directors, supervisors and manager cannot be transferred duringtheir term of office.
There are no such restrictions on shareholdings and transfers of shares under Hong Kong law.
(d) Financial assistance for acquisition of shares
The Company Law does not contain any provision prohibiting or restricting a joint stock limitedcompany or its subsidiaries from providing financial assistance for the purpose of an acquisition ofits own or its holding company’s shares. The Mandatory Provisions contain certain restrictions on acompany and its subsidiaries providing such financial assistance similar to those under Hong Kongcompany law.
(e) Variation of class rights
Under Hong Kong company law, if the share capital of a company is divided into differentclasses of shares, special rights attaching to any class of shares may only be varied if approved bya specified proportion of the holders of the relevant class.
The Company Law does not contain any specific provision relating to variation of class rights.Under the Mandatory Provisions, class rights may not be varied or abrogated unless approved by aspecial resolution of shareholders in general meeting and by two thirds of the votes cast byshareholders of the affected class present in person or by proxy at a separate class meeting. For thepurpose of a variation of class rights, domestic shares and foreign shares are treated as separateclasses of shares except in the case of (i) an issue of shares by the joint stock limited company onceevery 12 months either separately or concurrently following the approval by a special resolution ofshareholders in general meeting not exceeding 20% of each of the issued domestic shares and foreignshares existing as at the date of such special resolution; and (ii) an issue of domestic shares andforeign shares in accordance with the plan of the company at the time of its establishment approvedby the Securities Committee and which are completed within 15 months from the date of the approval.The Mandatory Provisions contain detailed provisions relating to circumstances which are deemed toconstitute a variation of class rights.
(f) Directors
The Company Law, unlike Hong Kong company law, does not contain any requirements relatingto the declaration of interests in material contracts, restrictions on interested directors being countedtowards the quorum of and voting at a meeting of the board of directors at which a transaction inwhich a director is interested is being considered, restrictions on directors’ authority in making majordispositions, restrictions on companies providing certain benefits such as loans to directors andguarantees in respect of directors’ liability and prohibition against compensation for loss of officewithout shareholders’ approval.
The Mandatory Provisions contain requirements and restrictions in relation to the foregoingmatters similar to those applicable under Hong Kong law.
(g) Supervisory committee
Under the Company Law, the directors and managers of a joint stock limited company aresubject to the supervision of a supervisory committee but there is no mandatory requirement for theestablishment of a supervisory committee for a company incorporated in Hong Kong.
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The Mandatory Provisions provide that each supervisor owes a duty, in the exercise of hispowers, to act in good faith and honestly in what he considers to be in the best interests of thecompany and to exercise the care, diligence and skill that a reasonable prudent person would exercisein comparable circumstances.
(h) Derivative action by minority shareholders
Hong Kong law permits minority shareholders to start a derivative action on behalf of allshareholders against directors who have committed of a breach of their fiduciary duties to thecompany, if they control a majority of votes at a general meeting thereby effectively preventing acompany from suing the directors in breach of their duties in its own name. Although the CompanyLaw gives a shareholder of a joint stock limited company the right to initiate proceedings in thepeople’s court to restrain the implementation of any resolution passed by shareholders in generalmeeting or by the board of directors which violates any law or infringes the lawful rights and interestsof shareholders, the PRC law does not have a form of proceedings which is the same as a derivativeaction. The Mandatory Provisions, however, provide remedies to the company against directors,supervisors and officers in breach of their duties to the company. In addition, every director andsupervisor of a joint stock limited company applying for a listing of its foreign shares on the StockExchange is required to give an undertaking in favour of the company acting as agent for eachshareholder to comply with the company’s articles of association. This allows minority shareholdersto act against directors and supervisors in default.
(i) Protection of minorities
Under Hong Kong law, a shareholder who complains that the affairs of a company incorporatedin Hong Kong are conducted in a manner unfairly prejudicial to his interests may petition to court toeither wind up the company or make an appropriate order regulating the affairs of the company. Inaddition, on the application of a specified number of members, the Financial Secretary may appointinspectors who are given extensive statutory powers to investigate the affairs of a companyincorporated in Hong Kong. The PRC law does not contain similar safeguards. The MandatoryProvisions, however, contain provisions to the effect that a controlling shareholder may not exerciseits voting rights in a manner prejudicial to the interests of the shareholders generally or of some partof the shareholders of a company to relieve a directors or supervisor of his duty to act honestly in thebest interests of the company or to approve the expropriation by a director or supervisor of thecompany’s assets or the individual rights of other shareholders.
(j) Notice of shareholders’ meetings
Under the Company Law, notice of a shareholders’ general meeting must be given not less than30 days before the meeting or, in the case of a company having bearer shares, public announcementof a shareholders’ general meeting must be made at least 45 days prior to it being held. Under theSpecial Regulations and the Mandatory Provisions, 45 days’ written notice must be given to allshareholders and shareholders who wish to attend the meeting must reply in writing 20 days beforethe date of the meeting. For a company incorporated in Hong Kong, the minimum notice period ofa general meeting convened for passing an ordinary resolution and a special resolution is 14 days and21 days respectively; and the notice period for an annual general meeting is 21 days.
(k) Quorum for shareholder’s meetings
Under Hong Kong law, the quorum for a general meeting is provided for in the articles ofassociation of a company, which shall not in any event be less than two members. The Company Lawdoes not specify any quorum requirement for shareholders’ general meeting but the Special
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A
A
A
Regulations and the Mandatory Provisions provide that a company’s general meeting can be convenedwhen replies to the notice of that meeting have been received from shareholders whose sharesrepresent 50% of the voting rights in the company at least 20 days before the proposed date of themeeting, or if that 50% level is not achieved, the company shall within 5 days notify shareholders bypublic announcement and the shareholders’ general meeting may be held thereafter.
(l) Voting
Under Hong Kong law, an ordinary resolution is passed by a simple majority of votes cast bymembers present in person or by proxy at a general meeting and a special resolution is passed by amajority of not less than three fourths of votes cast by members present in person or by proxy at ageneral meeting.
Under the Company Law, the passing of any resolution requires one half or more votes held byshareholders present in person or by proxy at a shareholders’ general meeting except in cases ofproposed amendment to the articles of association, merger, demerger or dissolution of a joint stocklimited company which requires two thirds of votes held by shareholders present in person or byproxy at a shareholders’ general meeting.
(m) Financial disclosure
A joint stock limited company is required under the Company Law to make available at itsoffice for inspection by shareholders its annual balance sheet, profit and loss account, changes infinancial position and other relevant annexure 20 days before the annual general meeting ofshareholders. In addition, a company established by the public subscription method under theCompany Law must publish its financial statements. The annual balance sheet has to be verified byregistered accountants. The Companies Ordinance requires a company to send to every shareholdera copy of its balance sheet, auditors’ report and directors’ report which are to be laid before thecompany in its annual general meeting not less than 21 days before such meeting.
A joint stock limited company is required under the PRC law to prepare its financial statementsin accordance with the PRC accounting standards. The Mandatory Provisions require that thecompany must, in addition to preparing accounts according to the PRC standards, have its accountsprepared and audited in accordance with IAS or Hong Kong accounting standards and its financialstatements must also contain a statement of the financial effect of the material differences (if any)from the financial statements prepared in accordance with the PRC accounting standards.
(n) Information on directors and shareholders
There are no provisions in the Company Law concerning the public’s or a joint stock limitedcompany’s shareholders’ right to access information on its directors and shareholders. Under theMandatory Provisions, shareholders have the right to inspect and copy (at reasonable charges) certaininformation on shareholders and on directors similar to that available under Hong Kong law toshareholders of a company incorporated in Hong Kong.
(o) Receiving agent
Under both the PRC and Hong Kong law, dividends once declared become debts payable toshareholders. The limitation period for debt recovery action under Hong Kong law is six years whilethat under the PRC law such limitation period is two years. The Mandatory Provisions require the
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appointment of a trust company registered under the Hong Kong Trustee Ordinance (Chapter 29 ofthe Laws of Hong Kong) as receiving agent to receive on behalf of holders of foreign shares dividendsdeclared and all other monies owing by a joint stock limited company in respect of such foreignshares.
(p) Corporate reorganisation
Corporate reorganisation involving a company incorporated in Hong Kong may be effected ina number of ways, such as a transfer of the whole or part of the business or property of the companyin the course of being wound up voluntarily to another company pursuant to section 237 of theCompanies Ordinance or a compromise or arrangement between the company and its creditors orbetween the company and its members pursuant to section 166 of the Companies Ordinance whichrequires the sanction of the court. Under the PRC law, the merger or demerger of a joint stock limitedcompany has to be approved by shareholders in general meeting and the relevant governmentalauthorities.
(q) Arbitration of disputes
In Hong Kong, disputes between shareholders and a company incorporated in Hong Kong or itsdirectors may be resolved through the courts. The Mandatory Provisions provide that such disputesshould be submitted to arbitration at either the HKIAC or the CIETAC, at the claimant’s choice.
(r) Mandatory transfers
Under the Company Law, a joint stock limited company is required to make transfers equivalentto certain prescribed percentages of its after tax profit to the statutory common reserve and statutorypublic welfare fund. There are no such requirements under Hong Kong law.
(2) The GEM Listing Rules
The GEM Listing Rules provide additional requirements which apply to an issuer which isincorporated in the PRC as a joint stock limited company and seeking a primary listing or whose primarylisting is on the GEM. Set out below is a summary of the principal provisions containing such additionalrequirements which apply to the Company:
(a) Accountants’ report
An accountants’ report for a PRC issuer will not normally be regarded as acceptable unless therelevant accounts have been audited to a standard comparable to that required in Hong Kong. Suchreport will normally be required to conform to either Hong Kong or IAS.
(b) Process agent
The Company is required to appoint and maintain a person authorised to accept service ofprocess and notices on its behalf in Hong Kong throughout the period during which its securities arelisted on the GEM and must notify the Stock Exchange of his appointment, the termination of hisappointment and his contract particulars.
(c) Public shareholdings
If a PRC issuer do not have existing issued securities in public hands other than H shares (thatis, overseas shares of the Company which are listed on the Stock Exchange), the GEM Listing Rulesrequire that, the H shares must constitute not less than 25% of the issuer’s issued share capital unlessthe market capitalisation of the total existing issued share capital at the time of listing is overHK$4,000 million in which case, the prescribed minimum public shareholdings percentage is 20%.
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If at any time there are other existing issued securities of a PRC issuer in public hands other
than H shares, the GEM Listing Rules require that:
(i) all H shares must be held by the public;
(ii) the H shares held by the public must represent not less than 10% of the PRC issuer’s total
existing issued share capital; and
(iii) the aggregate amount of H shares and other existing securities in public hands must
constitute not less than 20% of the PRC issuer’s issued share capital unless the expected
market capitalisation of the total existing issued share capital at the time of listing of the
H shares is over HK$1,000 million in which case, the prescribed minimum public
shareholdings percentage is between 15 and 20%.
(d) Independent non-executive directors and supervisors
The independent non-executive directors of a PRC issuer are required to demonstrate an
acceptable standard of competence and adequate commercial or professional expertise to ensure that
the interests of the general body of shareholders will be adequately represented. The supervisors of
a PRC issuer must have the character, expertise and integrity and be able to demonstrate a standard
of competence commensurate with their position as supervisors.
(e) Restrictions on purchase and subscription of its own securities
Subject to governmental approvals and the provisions of the Articles of Association, the
Company may repurchase its own H Shares on the GEM in accordance with the provisions of the GEM
Listing Rules. Approval by way of special resolution of the holders of domestic shares and the holders
of H Shares at separate class meetings conducted in accordance with the Articles of Association is
required for shares repurchases. In seeking approvals, the Company is required to provide information
on any proposed or actual purchases of all or any of its equity securities, whether or not listed ortraded on the GEM. The Directors must also state the consequences of any purchases which will ariseunder either or both of the Hong Kong Code on Takeovers and Mergers and any similar PRC law ofwhich the Directors are aware, if any. Any general mandate given to the Directors to repurchase HShares must not exceed 10% of the total amount of existing issued H Shares of the Company.
(f) Continuing obligations and financial information
(i) Redeemable shares
The Company must not issue any redeemable shares unless the Stock Exchange issatisfied that the relative rights of the holders of the H Shares are adequately protected.
(ii) Pre-emptive rights
Except in the circumstances mentioned below, the Directors are required to obtain theapproval by a special resolution of shareholders in general meeting, and the approvals byspecial resolutions of the holders of domestic shares and H Shares (each being otherwiseentitled to vote at general meetings) at separate class meetings conducted in accordance with
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the Articles of Association, prior to: (i) authorising, allotting, issuing or granting shares orsecurities convertible into shares, or options, warrants or similar rights to subscribe for anyshares or such convertible securities; or (ii) any major subsidiary (if any) of the Companymaking any such authorisation, allotment, issue or grant so as materially to dilute thepercentage equity interest of the Company and its shareholders in such subsidiary.
No such approval will be required, but only to the extent that, the existing shareholdersof the Company have by special resolution in general meeting given a mandate to the Directors,either unconditionally or subject to such terms and conditions as may be specified in theresolution, to authorise, allot or issue, either separately or concurrently once every 12 months,not more than 20% of each of the existing issued domestic shares and H Shares of the Companyor, such shares are part of the Company’s plan at the time of its establishment to issue domesticshares and H Shares and which plan is implemented within 15 months from the date of approvalby the CSRC or such other competent share council securities regulatory authority.
(iii) Supervisors
The Company is required to adopt rules governing dealings by its supervisors in securitiesof the Company in terms no less exacting than those minimum standard of good practice, as setout in rules 5.40 to 5.59 of the GEM Listing Rules, issued by the Stock Exchange.
The restriction on the Company or any of its subsidiaries entering into a service contractof ten years or longer duration with a Director or proposed Director of the Company or itssubsidiary without the prior approval of the shareholders in a general meeting at which therelevant Director did not vote on the matter also applies to a service contract of such durationbetween the Company or its subsidiary with a Supervisor or proposed Supervisor.
(iv) Amendment to Articles of Association
The Company is required not to permit or cause any amendment to be made to its Articlesof Association which would cause the same to cease to comply with the mandatory provisionsof the GEM Listing Rules relating to such Articles of Association.
(v) Documents for inspection
The Company is required to make available at a place in Hong Kong for inspection by thepublic and shareholders free of charge, and for copying by shareholders at reasonable chargesthe following:
● a complete duplicate register of shareholders;
● a report showing the state of the issued share capital of the Company;
● the Company’s latest audited financial statements and the reports of the Directors,auditors and Supervisors, if any, thereon;
● special resolutions of the Company;
● reports showing the number and nominal value of securities repurchased by theCompany since the end of the last financial year, the aggregate amount paid for suchsecurities and the maximum and minimum prices paid in respect of each class ofsecurities repurchased (with a breakdown between Domestic Shares and H Shares);
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● a copy of the latest annual return filed with the Administration for Industry and
Commerce Bureau of the PRC; and
● for shareholders only, copies of minutes of meetings of shareholders.
(vi) Receiving agents
The Company is required to appoint one or more receiving agents in Hong Kong and pay
to such agents dividends declared and other monies owing in respect of the H Shares to be held,
pending payment, in trust for the holders of such H Shares.
(vii) Statements in share certificates
The Company is required to ensure that all its listing documents and share certificates
include the statements stipulated below and to instruct and cause each of its share registrars not
to register the subscription, purchase or transfer of any of its shares in the name of any
particular holder unless and until such holder delivers to such share registrar a signed form in
respect of such shares bearing statements to the following effect that the acquirer of shares:
● agrees with the Company and each shareholder of the Company, and the Company
agrees with each shareholder, to observe and comply with the Company Law, the
Special Regulations and the Articles of Association;
● agrees with the Company, each shareholder, Director, Supervisor, manager and
other officer of the Company and the Company acting for itself and for each
Director, Supervisor, manager and other officer agrees with each shareholder to
refer all differences and claims arising from the Articles of Association or any rights
or obligations conferred or imposed by the Company Law or other relevant laws and
administrative regulations concerning the affairs of the Company to arbitration in
accordance with the Articles of Association. Any reference to arbitration will be
deemed to authorise the arbitration tribunal to conduct its hearing in open session
and to publish its award. Such arbitration will be final and conclusive;
● agrees with the Company and each shareholder of the Company that shares in the
Company are freely transferable by the holder thereof; and
● authorises the Company to enter into a contract on his behalf with each Director and
officer whereby such Director and officer undertake to observe and comply with
their obligations to shareholders stipulated in the Articles of Association.
(viii) Compliance with the Company Law, the Special Regulations and the Articles of
Association
The Company is required to observe and comply with the Company Law, the Special
Regulations and the Articles of Association.
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(ix) Contract between the Company and its Directors, officers and Supervisors
The Company is required to enter into a contract in writing with every Director andofficer containing at least the following provisions:
● an undertaking by the Director or officer to the Company to observe and complywith the Company Law, the Special Regulations, the Articles of Association, theHong Kong Codes on Takeovers and Mergers and Share Repurchases and anagreement that the Company shall have the remedies provided in the Articles ofAssociation and that neither the contract nor his office is capable of assignment;
● an undertaking by the Director or officer to the Company acting as agent for eachshareholder to observe and comply with his obligations to shareholders stipulatedin the Articles of Association; and
● an arbitration clause which provides that whenever any differences or claims arisefrom that contract, the Articles of Association or any rights or obligations conferredor imposed by the Company Law or other relevant law and administrativeregulations concerning the affairs of the Company between the Company and itsDirectors or officers and between a holder of H Shares and a Director or officer ofthe Company, such differences or claims will be referred to arbitration at either theCIETAC in accordance with its rules or the HKIAC in accordance with its SecuritiesArbitration Rules, at the election of the claimant and that once a claimant refers adispute or claim to arbitration, the other party must submit to the arbitral bodyelected by the claimant. Such arbitration will be final and conclusive.
The Company is also required to enter into a contract in writing with every Supervisorcontaining statements in substantially the same terms.
(x) Subsequent listing
The Company must not apply for the listing of any of its foreign shares on a PRC stockexchange unless the Stock Exchange is satisfied that the relative rights of the holders of foreignshares are adequately protected.
(xi) English translation
All notices or other documents required under the GEM Listing Rules to be sent by theCompany to the Stock Exchange or to holders of the H Shares are required to be in the Englishlanguage, or accompanied by a certified English translation.
(g) General
If changes in the PRC law or market practices materially alter the validity or accuracy of anyof the basis upon which the additional requirements have been prepared, then the Stock Exchange mayimpose additional requirements or make listing of the equity securities of a PRC issuer, including theCompany, subject to special conditions as the Stock Exchange considers appropriate. Whether or notany such changes in the PRC law or market practices occur, the Stock Exchange retains its generalpower under the GEM Listing Rules to impose additional requirements and make special conditionsin respect of the listing of the Company.
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(3) Other legal and regulatory provisions
Upon the listing of the Company on the GEM, the provisions of the Securities Ordinance (Chapter 333of the Laws of Hong Kong), the Securities (Disclosure of Interests) Ordinance (Chapter 396 of the Lawsof Hong Kong), the Securities (Insider Dealing) Ordinance (Chapter 395 of the Laws of Hong Kong), theHong Kong Codes on Takeovers and Mergers and Share Repurchases and such other relevant ordinances andregulations as may be applicable to companies listed on the Stock Exchange will apply to the Company.
(4) Securities Arbitration Rules
The Articles of Association provide that certain claims arising from the Articles of Association or theCompany Law shall be arbitrated at either the CIETAC or the HKIAC in accordance with their respectiverules.
The Securities Arbitration Rules of the HKIAC contain provisions allowing an arbitral tribunal toconduct a hearing in Shenzhen for cases involving the affairs of companies incorporated in the PRC andlisted on the Stock Exchange so that PRC parties and witnesses may attend. Where any party applies fora hearing to take place in Shenzhen, the tribunal shall, wheresatisfied that such application is based on bonafide grounds, order the hearing to take place in Shenzhen conditional upon all parties including witnessesand the arbitrators being permitted to enter Shenzhen for the purpose of the hearing. Where a party, otherthan a PRC party, or any of its witnesses or any arbitrator is not permitted to enter Shenzhen, then thetribunal shall order that the hearing be conducted in any practicable manner, including the use of electronicmedia.
For the purpose of the Securities Arbitration Rules, a PRC party means a party domiciled in the PRCother than the territories of Hong Kong, Macau and Taiwan.
(5) Taxation in Hong Kong
(a) Dividends
Where a company is not chargeable to Hong Kong profits tax, any dividends paid by it topersons who carry on a business in Hong Kong are liable to profits tax, to the extent that suchdividends form part of the profits of such persons arising from their Hong Kong business.
(b) Profits tax
Hong Kong does not have any capital gains tax. Persons who carry on a trade, profession orbusiness in Hong Kong and derive income in Hong Kong from such trade, profession or business areliable to profits tax. Securities dealers carrying on a business in Hong Kong and making trading gainsfrom the sale and purchase of shares will be subject to profits tax. Currently, profits tax forcorporations is payable at the rate of 16% of their assessable profits.
Profits tax for individuals is levied on a progressive scale and the maximum rate is 15%.
(c) Stamp duty
The sale and purchase of shares is subject to stamp duty payable by both the seller and thebuyer. Duty is payable with reference to the amount of the consideration or, if higher, the fair valueof the shares being sold. In respect of every HK$1,000, or part thereof, of the consideration or, ifhigher, the fair value of the shares, the current rate of duty is HK$2 for the sale and purchase of
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shares. Stamp duty is usually shared between the buyer and the seller equally in respect of
transactions on the Stock Exchange. A fixed rate of duty of HK$5 is also payable in respect of every
instrument of transfer which is required to be registered on a register or branch register maintained
in Hong Kong.
(d) Estate duty
Properties situated in Hong Kong which pass or are deemed to pass upon the death of a person,
wherever domiciled or resident, are liable to estate duty based on the value of the property in
question. H Shares will constitute property situated in Hong Kong for estate duty purposes by virtue
of them being on the Hong Kong branch register of the Company. Hong Kong estate duty is imposed
on a progressive scale from 5% to 15% The rate of and the threshold for estate duty have, in the past,
been adjusted on a fairly regular basis. No estate duty is payable where the aggregate value of the
dutiable estate does not exceed HK$7.5 million, and the maximum rate of duty of 15% applies where
the aggregate value of the dutiable estate exceeds HK$10.5 million.
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Set out below is a summary of the principal provisions of the Articles of Association which were adopted
at the extraordinary shareholders’ meeting of the Company held on 23rd June, 2002. A copy of the full Chinese
text of the Articles of Association, together with a certified English translation thereof, is available for inspection
as mentioned in the paragraph headed “Documents Delivered to the Registrar of Companies and Available for
Inspection” in Appendix VII.
(1) DIRECTORS
(a) Power to allot and issue shares
There is no provision empowering the board of Directors to allot or issue shares.
In order to allot or issue shares, the board of Directors shall prepare a plan which shall be approvedby shareholders in general meeting by way of a special resolution and submit the plan to the relevantgovernment authorities for approval.
(b) Power to dispose of the Company’s or any of its subsidiaries’ assets
The board of Directors shall not, without the approval of shareholders in general meeting, dispose oragree to dispose of any fixed assets of the Company where the aggregate of:
(i) the value of the consideration for the proposed disposition; and
(ii) where any fixed assets of the Company have been disposed of in the period of four monthsimmediately preceding the proposed disposition, the amount or value of the consideration forany such disposition, exceeds 33% of the value of the Company’s fixed assets as shown in thelast audited balance sheet placed before the shareholders in general meeting. For the purposesof this provision, disposition includes an act involving a transfer of an interest in property otherthan by way of security.
The validity of a transaction for the disposition of fixed assets by the Company shall not be affectedby a breach of the above-mentioned restriction contained in the Articles of Association.
(c) Compensation or payments for loss of office
In the contract for emoluments entered into by the Company with a Director or Supervisor, provisionsshall be made for the right of the Director or Supervisor to receive, after obtaining the prior consent ofshareholders in general meeting, payments by way of compensation for loss of office or as considerationfor his retirement from office:
(i) in particular, such contract of emoluments shall make provision for the right of a Director orSupervisor, in connection with the takeover of the Company, subject to the approval of theshareholders in a general meeting, to receive compensation or other payment for loss of officeor as consideration for his retirement for office. A takeover of the Company means:
(aa) an offer made to all shareholders of the Company; or
(bb) an offer is made such that the offeror will become the controlling shareholder of theCompany (as defined in the Articles of Association);
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(ii) if the relevant Director or Supervisor does not comply with (i) above, any sum received by the
Director or Supervisor on account of the payment shall belong to those persons who have sold
their shares as a result of the offer, and the expenses incurred by the Directors or Supervisor
in distributing that sum pro rata amongst those persons shall be borne by him and not deducted
from the sum distributed.
(d) Loans to directors
The Company is prohibited from directly or indirectly making any loan to its Directors, Supervisors,
general manager or deputy general managers or other officers or those of its holding company, providing
any guarantee in connection with a loan made by any person to such a Director, Supervisor, general
manager, deputy general manager or other officer, or making a loan to or providing any guarantee in
connection with any loan made by any person to a person connected to such a Director, Supervisor, general
manager or deputy general manager or other officer.
A loan made by the Company in breach of the prohibition described above shall be forthwith
repayable by the recipient of the loan regardless of the terms of the loan. A guarantee for a loan provided
by the Company in breach of the prohibition described above shall be unenforceable against the Company
unless:
(i) the guarantee was provided in connection with a loan to a person connected with a Director,
Supervisor, general manager, deputy general manager or other officer of the Company or its
holding company and at the time the loan was advanced the lender did not know of the relevant
circumstances, or
(ii) the collateral provided by the Company has been lawfully disposed of by the lender to a bona
fide purchaser.
The following transactions are not subject to the foregoing prohibition:
(i) the provision of a loan or a guarantee for a loan by the Company to a company which is a
subsidiary of the Company;
(ii) the provision of a loan or a guarantee for a loan by the Company, under a service contract with
any of its Directors, Supervisors, general manager, deputy general managers or other officers
as approved by shareholders in general meeting and the provision of funds by the Company to
any of its Directors, Supervisors, general manager, deputy general managers or other officer to
meet expenditure incurred or to be incurred by him for the purposes of the Company or for the
purpose of enabling him properly to perform his duties; and
(iii) the Company may make a loan to or provide a guarantee in connection with a loan by another
person to any of its Directors, Supervisors, general manager, deputy general managers or other
officers or other connected persons where the ordinary course of its business includes the
making of loans or the giving of guarantees and provided that the making of such loans or the
giving of such guarantees is on normal commercial terms.
For these purposes, guarantee includes an undertaking or property provided to secure the performance
of obligations by the obligor.
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(e) Giving of financial assistance to purchase the Company’s or any of its subsidiaries’ shares
Subject to the Articles of Association:
(i) neither the Company nor any of its subsidiaries shall at any time or in any manner providefinancial assistance to a person who acquires or is proposing to acquire shares in the Company.The said person includes any person who has directly or indirectly incurred a liability as a resultof the acquisition of shares in the Company; and
(ii) neither the Company nor any of its subsidiaries shall at any time or in any manner providefinancial assistance to the person mentioned in the foregoing paragraph for the purposes ofreducing or discharging his liabilities.
The following transactions are not prohibited:
(i) the provision of financial assistance where the Company’s principal purpose for giving thatassistance is genuinely for the Company’s interest and not to give it for the purpose of acquiringthe Company’s shares or the giving of the assistance is but an incidental part of some broaderpurpose of the Company;
(ii) a distribution of the Company’s assets by way of dividend lawfully declared;
(iii) a distribution of dividends by way of bonus shares;
(iv) a reduction of share capital, repurchase of shares of the Company or a reorganisation of theshare capital effected in compliance with the Articles of Association;
(v) the provision of loans by the Company in the ordinary course of its business, provided that theCompany’s net assets are not thereby reduced or, to the extent that those assets are therebyreduced, the assistance is provided out of distributable profits; and
(vi) the provision of money by the Company for contributions to employees’ share schemes providedthat the Company’s net assets are not thereby reduced or, to the extent that those assets arethereby reduced, the assistance is provided out of distributable profits.
For these purposes,
(i) “financial assistance” includes, without limitation:
(aa) assistance given by way of gift;
(bb) assistance given by way of guarantee (including the provision of any undertaking orproperty to secure the performance of obligations by the obligor) or indemnity, (otherthan an indemnity in respect of the Company’s own default) or by way of release orwaiver;
(cc) assistance given by way of a loan or any other agreement under which the obligations ofthe Company are to be fulfilled before the obligations of another party to the agreementor by way of the novation of or the assignment of rights arising under such loan or suchother agreement; or
(dd) assistance given by the Company in any other manner when the Company is insolvent orhas no net assets or where its net assets would thereby be reduced to a material extent;and
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(ii) “incurring a liability” includes changing one’s financial position by making an agreement orarrangement (whether enforceable or unenforceable, and whether made on one’s own accountor with any other person) or by any other means.
(f) Disclosure of interests in contracts with the Company or any of its subsidiaries
(i) Where a Director, Supervisor or general manager or deputy general manager or other officer isin any way, directly or indirectly, materially interested in a contract. transaction or arrangementor proposed contract, transaction or arrangement with the Company other than his contract ofservice, he shall declare the nature and extent of his interest to the board of Directors at theearliest opportunity, whether or not the contract, transaction or arrangement or proposaltherefore is otherwise subject to the approval of the Directors.
(ii) Unless the interested Director or Supervisor or general manager or deputy general manager orother officer has disclosed his interest in accordance with the Articles of Association and thecontract, transaction or arrangement has been approved by the board of Directors at a meetingat which the interested Director, Supervisor, general manager, deputy general manager or otherofficer is not counted in the quorum and has refrained from voting, a contract, transaction orarrangement in which a Director, supervisor, general manager, deputy general manager or otherofficer is materially interested can be rescinded at the instance of the Company provided thatsuch rescission will not affect the validity of such contract, transaction or arrangement asagainst a bona fide party thereto acting in good faith. For these purposes, a Director, Supervisoror general manager or deputy general manager or other officer is deemed to be interested in acontract, transaction or arrangement in which a person connected to him is interested.
(iii) Where a director, supervisor, general manager, deputy general manager or other officer of theCompany gives the board of directors a general notice in writing stating that, by reason of thefacts stated in the notice, he is interested in contracts, transactions or arrangements of anydescription which may subsequently be entered into by the Company, then he shall be deemedto have made a disclosure for the purposes of the relevant provisions in the Articles ofAssociation so far as the content stated in such notice is concerned, if such notice shall havebeen given before the date on which the question of entering into the relevant contract,transaction or arrangement is first taken into consideration by the Company.
(g) Remuneration
The Company shall, with the prior approval of shareholders in general meeting, enter into a contractin writing with each Director or Supervisor for emoluments in respect of their services. In such a contract,the manner of determining any payments payable to a Director or Supervisor for loss of office when theCompany is being taken over shall also be specified. The said emoluments include:
(i) emoluments in respect of their services as Director, Supervisor or officer of the Company;
(ii) emoluments in respect of their services as Director, Supervisor or officer of any subsidiary ofthe Company;
(iii) emoluments otherwise in connection with services for the management of the Company or anysubsidiary thereof; and
(iv) payments by way of compensation for loss of office, or as consideration for or in connectionwith their retirement from office.
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Except under a contract entered into in relation to the above, no proceedings shall be brought by aDirector or Supervisor against the Company for anything due to him in respect of the matters specifiedabove.
(h) Retirement, appointment and removal
A person who is not a natural person may not serve as a Director, Supervisor, general manager, deputygeneral manager or other office of the Company.
The following persons may not serve as a Director, Supervisor, general manager, deputy generalmanager or officer of the Company:
(i) an individual who has no civil capacity or has restricted civil capacity;
(ii) persons who have committed the offences of corruption, bribery, trespass of propertymisappropriation of property or damaging the social economic order, and have been penaliseddue to the above offences, where less than five years have elapsed since the date of thecompletion of implementation of the penalty or persons who have committed crimes and havebeen deprived of their political rights due to such crimes, where less than five years haveelapsed since the date of the completion of the implementation of such deprivation;
(iii) persons who were former directors, factory chiefs or managers of a company or enterprisewhich has become insolvent and has been liquidated as a result of mismanagement and werepersonally liable for the insolvency of such company or enterprise, where less than three yearshave elapsed since the date of the completion of the insolvency and liquidation of such companyor enterprise;
(iv) persons who were legal representatives of a company or enterprise which had its businesslicence revoked due to a violation of the law and who were personally liable, where less thanthree years have elapsed since the date of the revocation of such business licence;
(v) persons who have failed to pay a relatively large debt when due and outstanding;
(vi) persons who have committed criminal offences and are still under investigation by lawadministration authorities;
(vii) persons who, according to the laws and administrative regulations, are not allowed to act asleaders of enterprises; and
(viii) persons who have been convicted of offences of violating provisions of the relevant securitieslaws and regulations or offences of fraud or acting in bad faith, where less than 5 years havelapsed since the date of conviction.
The validity of the conduct of Directors, general manager, deputy general manager or officers whohave acted on behalf of the Company with respect to third parties who have acted in good faith shall notbe affected due to any irregularity in the employment, election or qualification of such Directors, generalmanager, deputy general managers or officers.
The board of Directors shall consist of 10 Directors. The Directors shall be elected at shareholders’general meetings. A Director is not required to hold any shares in the Company.
The chairman and vice-chairman(s) of the board of Directors shall be elected or removed by more thanone half of all of the Directors.
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The term of office of the chairman, vice-chairman(s) and other Directors shall be 3 years commencingfrom the date of appointment, renewable upon reappointment or re-election.
(i) Borrowing powers
On condition of compliance with the laws and administrative regulations of the State, the Companyis entitled to raise capital and borrow money, including (without limitation) the issue of bonds, themortgaging or pledging of part or whole of the Company’s business or properties and other rights permittedby the laws and administrative regulations of the State.
(j) Liabilities
The Directors, Supervisors, general manager, deputy managers and officers of the Company owefiduciary duties and duties of diligence to the Company.
In addition to any rights and remedies provided for in relevant laws and administrative regulations,the Company is entitled to adopt the following measures where a Director, Supervisor, general manager,deputy manager or officer is in breach of his duties owed to the Company:
(i) to claim against such a Director, Supervisor, general manager, deputy general manager orofficer for loses incurred as a result of his breach;
(ii) to rescind any contract or transaction entered into between the Company and the Director,Supervisor, general manager, deputy manager or officer and a third party where such third partyhas knowledge or should have had knowledge of the breach of duty;
(iii) to demand an account of the profits made by the Director, Supervisor, general manager, deputygeneral manager or officer as a result of his breach;
(iv) to recover any monies received by the Director, Supervisor, general manager, deputy generalmanager or officer which should have been received by the Company, including, withoutlimitation, commissions; and
(v) to demand the return of the interest earned or which may have been earned on any moniesreferred to in (iv) above by the Director, Supervisor, general manager, deputy general manageror officer which should have been received by the Company.
A Director may be removed with the sanction of an ordinary resolution at a shareholders’ generalmeeting.
The board of directors shall carry out its duties in compliance with the laws and administrativeregulations, the Articles of Association and resolutions of the shareholders’ general meetings.
Each Director, Supervisor, general manager, deputy general manager and officer of the Companyshould abide by his fiduciary principles in the discharge of his duties, and not to place himself in a positionwhere his duty and his own interests may conflict. Such principles include (but are not limited to) theperformance of the following:
(i) to act honestly in what he considers to be in the best interest of the Company;
(ii) to exercise his powers within the scope specified and not to act ultra vires;
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(iii) to exercise the discretion vested in him personally and not allow himself to act under thedirection of another and, unless and to the extent permitted by law or the informed consent ofshareholders in general meeting, not to delegate the exercise of his discretion;
(iv) to treat shareholders of the same class equally and to treat shareholders of different classesfairly;
(v) except in accordance with the Articles of Association or with the informed consent ofshareholders in general meeting, not to enter into any contract, transaction or arrangement withthe Company;
(vi) not without the informed consent of shareholders in general meeting, to use the Company’sassets for his own benefit;
(vii) not to use his position to accept bribes or other illegal income and not to expropriate in anymanner the Company’s assets, including (without limitation) opportunities beneficial to theCompany;
(viii) not, without the informed consent of shareholders in general meeting, to accept commissions inconnection with the Company’s transactions;
(ix) to abide by the Articles of Association, faithfully perform his duties and protect the interestsof the Company, and not to use his position and powers in the Company to seek personal gain;
(x) not to compete with the Company in any way except with the informed consent of shareholdersgiven in general meeting;
(xi) not to misappropriate the Company’s funds or lend such funds to any other person, not to openany bank account in his own name or other name for the deposit of the Company’s assets andnot to provide security for debt of a shareholder of the Company or any other individuals withthe Company’s assets; and
(xii) without the informed consent of shareholders in general meeting, not to disclose confidentialinformation of the Company acquired while in office and not to use such information other thanin furtherance of the interests of the Company, save and except that disclosure of informationto a court or a governmental authority is permitted where (i) the disclosure is made undercompulsion of law; (ii) there is a duty to the public to disclose; or (iii) the personal interestsof the Director, Supervisor, general manager, deputy general manager or officer requiredisclosure.
A Director, Supervisor or general manager or deputy general manger or an officer of the Companyshall not direct persons connected to him to do what he is not permitted to do. A person is connected to aDirector, Supervisor, general manager, deputy general manager or an officer if he is:
(i) the spouse or minor child of such a Director, Supervisor, general manager, deputy generalmanager or officer;
(ii) a trustee for such a Director, Supervisor, general manager, deputy general manager or officeror any person referred to in (i) above;
(iii) a partner of such a Director, Supervisor, general manager, deputy general manager, manager orofficer or of any person;
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(iv) a partner of such a Director, Supervisor, general manager, deputy general manager or officer orof any person referred to in (i) and (ii) above;
(v) a company in which that a director, supervisor, general manager, deputy general manager orother senior officer, alone or jointly with one or more persons referred to in above (i), (ii) and(iii) or with any of other directors, supervisors, general manager, deputy general managers orother senior officers of the Company, have de facto control; or
(vi) a director, supervisor, general manager, deputy general manager or officer of a companyreferred to in (iv) above.
The fiduciary duties of a director, supervisor, general manager, deputy general manager and othersenior officer of the Company do not necessarily cease with the termination of his tenure. The duty ofconfidentiality in relation to trade secrets of the Company survives the termination of his term of office.Other duties may continue for such period as fairness may require depending on the time lapse between thetermination of his term of office and the occurrence of the matter in question and the circumstances and theterms under which the relationships between him and the Company are terminated.
Except in circumstances referred to in the Articles of Association, liabilities of a Director, Supervisor,general manager, deputy general manager or other officer arising from the violation of a specified duty maybe released by informed shareholders in general meeting.
In addition to obligations imposed by relevant laws, administrative regulations or the listing rules ofthe securities exchange on which the Company’s shares are listed, Directors, Supervisors, general manager,deputy general managers and officers in the exercise of their powers and the discharge of their duties shallowe the following obligations to the shareholders:
(i) not to cause the Company to go beyond the business scope specified by its business licence;
(ii) to act honestly in what they consider to be the best interest of the Company;
(iii) not to deprive in any way the Company of its assets, including (but not limited to) opportunitiesbeneficial to the Company; and
(iv) not to deprive shareholders of their personal rights and interests, including (but not limited to)rights to distributions and to vote, except in a Company reorganisation submitted in accordancewith the provisions of the Articles of Association and adopted at a shareholders’ generalmeetings.
Each of the Company’s directors, supervisors, general manager, deputy general managers and otherofficers owes a duty, in the exercise of his powers and discharge of his duties, to exercise the care, diligenceand skill that a reasonably prudent person would exercise under the similar circumstances.
(2) ALTERATIONS TO CONSTITUTIONAL DOCUMENTS
The Company may, in accordance with provisions contained in relevant laws, administrative regulations andthe Articles of Association, amend its Articles of Association.
The amendments to the Articles of Association involving the contents of the Mandatory Provisions shallbecome effective upon approvals by the company approval authorities of the State Council and the securitiesregulatory authority of the State Council. If there is any change relating to the registered particulars of theCompany, application shall be made for registration of the changes in accordance with law.
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(3) VARIATION OF RIGHTS OF EXISTING SHARES OR CLASSES OF SHARES
The Company may not vary or abrogate rights attached to any class of shares (“Class Rights”) unlessapproved by a special resolution of shareholders in general meeting and by more than a two thirds majority ofholders of shares of that class at a separate meeting conducted in accordance with the provisions of the Articlesof Association.
The following circumstances shall be deemed to be a variation or abrogation of the Class Rights of a class:
(i) to increase or decrease the number of shares of such class, or increase or decrease the number ofshares of a class having voting or distribution rights or other privileges equal or superior to the sharesof such class;
(ii) to effect an exchange of all or part of the shares of such class into those of another class or to affectan exchange or create a right of exchange of all or part of the shares of another class into the sharesof such class;
(iii) to remove or reduce rights to accrued dividends or rights to cumulative dividends of such class;
(iv) to reduce or remove a dividend preference or a liquidation preference attached to shares of such class;
(v) to add, remove or reduce conversion, options, voting, transfer or re-emptive rights or rights to acquiresecurities of the Company of such class;
(vi) to remove or reduce rights to receive payments from the Company in any particular currency;
(vii) to create a new class of shares having voting or distribution rights or privileges equal or superior tothe shares of such class;
(viii) to restrict the transfer of ownership of the shares of such class or to increase any such restrictions;
(ix) to allot and issue rights to subscribe for, or convert into, shares in the Company of such class oranother class;
(x) to increase the rights or privileges of another class;
(xi) to restructure the Company where the proposed restructuring will result in different classes ofshareholders bearing a disproportionate burden of such proposed restructuring; and
(xii) to vary or abrogate the provisions in the Articles of Association.
Shareholders of the affected class, whether or not having the right to vote at general meetings, shallnevertheless have the right to vote at class meetings in respect of matters concerning paragraphs (ii) to (viii), (xi)and (xii) above, but Interested Shareholder(s) (as defined below) shall not be entitled to vote at class meetings.
Resolutions of a class of shareholders shall require the approval of shareholders present representing morethan two thirds of the voting rights of that class voting in favour of such resolutions.
Written notice of a class meeting shall be given by the Company 45 days prior to the date of the meetingto notify all the registered shareholders holding shares of that class of the matters to be considered at the meetingand the date and place of the meeting.
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A shareholder who intends to attend the meeting shall deliver a written reply confirming his attendance atthe class meeting to the Company 20 days prior to the date of the meeting.
The Company can convene a class shareholders’ meeting, if the number of shares of the class carryingvoting rights represented by shareholders intending to attend represents more than one half of the total numberof such shares of the Company. If not, the Company shall make an announcement, within five days, once againnotifying the shareholders of the matters proposed to be considered and the date and place of the meeting. Oncean announcement has been so made, the Company may convene the class shareholders’ meeting.
Notice of class meetings need only be served on shareholders entitled to vote thereat.
Meetings of any class of shareholders shall be conducted in a similar way as closely as possible to theprovisions for general meetings of shareholders set out in the Articles of Association. The Provisions of theArticles of Association relating to the conduct of any meeting of shareholders shall apply to any class meeting.
In addition to holders of other class shares, domestic-investment shareholders and overseas-listed foreigninvestment shareholders are deemed to be shareholders of different classes.
Special procedures for voting by holders of different classes of shares do not apply to the followingsituations:
1. where the Company issues, upon the approval by special resolution of its shareholders in generalmeeting, either separately or concurrently once every twelve months, not more than 20% of each ofits existing issued Domestic-Invested Shares or Overseas-Listed Foreign-Invested Shares; or
2. where the Company’s plan (made at the time of its establishment) to issue Domestic-Invested Sharesand Overseas-Listed Foreign-Invested Shares is completed within 15 months from the date on whichapproval is given by the securities regulatory authorities of the State Council.
For the purposes of the class rights provisions of the Articles of Association, an “Interested Shareholder”is:
(i) in the case of a repurchase of shares by offers to all shareholders or public dealing on a stockexchange under Article 34 of the Articles of Association, a controlling shareholder within the meaningof Article 58 of the Articles of Association;
(ii) in the case of a repurchase of shares by an off-market contract under the Articles of Association, ashareholder to whom the proposed contract is related;
(iii) in the case of a restructure of the Company, a shareholder within a class who bears less than aproportionate amount of obligations imposed on the shareholders of that class or who has an interestdifferent from the interest of the other shareholders of that class.
(4) SPECIAL RESOLUTIONS — MAJORITY REQUIRED
Resolutions of general meetings are divided into ordinary resolutions and special resolutions.
To adopt an ordinary resolution, more than the one half votes represented by shareholders (includingproxies) present at the meeting must be exercised in favour of the resolution.
To adopt a special resolution more than the two thirds votes represented by the shareholders (includingproxies) present at the shareholders’ general meeting must be exercised in favour of the resolution.
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(5) VOTING RIGHTS (GENERALLY, ON A POLL AND RIGHT TO DEMAND A POLL)
At any meeting of shareholders, a resolution put to the vote of the meeting shall be decided on a show ofhands unless a poll is (before or after any vote by show of hands) demanded:
(i) by the chairman of the meeting;
(ii) by at least two shareholders present in person or by proxy and having the right to vote; or
(iii) by one or more shareholders present in person or by proxy and representing one tenth or more of allshares carrying the right to vote at the meeting.
Unless a poll is so demanded, a declaration by the chairman whether a resolution has on a show of handsbeen passed or not and an entry to that effect in the book containing the minutes of the meeting shall be conclusiveevidence of that fact without proof of the number or proportion of the votes recorded in favour of or against suchresolution. A demand for a poll may be withdrawn by the person who demanded it.
A poll demanded on the election of the chairman of the meeting or on a question of adjournment of themeeting shall be taken forthwith. A poll demanded on any other matters shall be taken at such time as thechairman of the meeting decides, and the meeting may proceed to consider and vote on other matters. The resultof the poll shall be deemed to be a resolution of the meeting at which the poll was demanded.
On a poll taken at a meeting, a shareholder (including a proxy) entitled to two or more votes need not casthis votes in the same way.
In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meetingat which the show of hands takes place or at which the poll is demanded shall be entitled to one additional vote.
(6) REQUIREMENTS FOR ANNUAL GENERAL MEETINGS
A shareholders’ general meeting shall either be an annual general meeting or an extraordinary generalmeeting. Shareholders’ general meetings shall be convened by the board of Directors. Annual general meetingsare held once every year within six months after the financial year end.
(7) ACCOUNTS AND AUDIT
(a) Financial and accounting system
The Company shall establish its financial and accounting systems and internal audit system inaccordance with the laws, administrative regulations and Chinese accounting standards formulated by thefinance regulatory authority of the State Council.
The board of directors of the Company shall place before the shareholders at every annual generalmeeting such financial reports as are required by the laws, administrative regulations or directivespromulgated by competent local governments and supervisory authorities to be prepared by the Company.
The financial statements of the Company shall, in addition to being prepared in accordance with theChinese accounting standards and regulations, be prepared in accordance with either internationalaccounting standards or that of the place outside China where the Company’s shares are listed. If there isany material difference between the financial statements prepared respectively in accordance with theaforesaid accounting standards. such difference shall be stated and explained in the financial statements.For the purposes of distribution of the Company’s after-tax profits in a financial year, the lower of theafter-tax profits as shown in the different set of financial statements shall be adopted.
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The financial reports of the Company shall be made available at the Company for inspection byshareholders 20 days before the annual general meeting. Every shareholder of the Company is entitled toa copy of the financial reports. The Company shall send by pre-paid post to every overseas-listedforeign-investment shareholder at least 21 days prior to the date of the meeting a copy of such report, suchcopy to be sent to the address of such shareholders as recorded on the register of shareholders.
The interim results or financial information that the Company announces or discloses shall becompiled according to both PRC accounting standards, rules and regulations, and international accountingstandards or accounting standards of the place at which shares of the Company are listed.
The Company shall disclose its financial reports four times in each financial year, that is, its interimfinancial reports within 45 days of the end of the first six months of a financial year, its quarterly reportwith 45 days from the end of the first three months and the first nine months and its annual financial reportswithin 3 months of its financial year end.
The Company shall not keep any other books of accounts other than those provided by law. TheCompany shall implement an internal audit system, and establish an internal auditing organisation orprovide internal auditing personnel to undertake the internal auditing and supervision over the Company’sincome and expenses and other economic activities under the leadership of the supervisory committee.
(b) Appointment and removal of Accountants Firm
The Company shall appoint an independent firm of accountants which is qualified under the relevantregulations of the State to audit the Company’s annual reports and review the Company’s other financialreports.
The first accountants firm of the Company may be appointed by the inaugural meeting prior to thefirst annual general meeting and the accountants firm so appointed shall hold office until the conclusion ofthe first annual general meeting.
If the inaugural meeting fails to exercise its powers as stipulated in the preceding paragraph thosepowers shall be exercised by the board of directors.
The accountants firm appointed by the Company shall hold office from the conclusion of the annualgeneral meeting of shareholder until the conclusion of the next annual general meeting of shareholders.
If there is a vacancy in the office of accountants firm, the board of directors may before the conveningof the shareholders’ general meeting appoint a firm of accountants to fill the vacancy, provided that if thereis another firm of accountants acting for the Company during the vacancy, that firm of accountants maycontinue to act.
The shareholders in general meeting may by ordinary resolution remove an accountants firm beforethe expiry of its term of office, notwithstanding the stipulations in the contract between the Company andthe firm, but without prejudice to the firm’s right to claim, if any, for damages in respect of such removal.
The remuneration of an accountants firm or the manner in which such remuneration is determinedshall be decided by the shareholders in general meeting. The remuneration of an accountants firm appointedby the board of directors shall be determined by the board of directors.
The Company’s appointment of, removal of and non-reappointment of an accountants firm shall beresolved upon by the shareholders in general meeting. The resolution of shareholders’ general meeting shallbe filed with the securities regulatory authorities of the State Council.
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Prior to the removal or the non-renewal of the appointment of the accountants firm, notice of suchremoval or non-renewal shall be given to the accountants firm and such firm shall have the right to makerepresentation to the shareholders’ general meeting. Where the accountants firm resigns its post, it shallmake clear to the shareholders’ general meeting whether there is any impropriety on the part of theCompany.
An accountants firm may resign its office by depositing at the Company’s domicile a resignationnotice which shall become effective on the date of such deposit or on such later date as may be stipulatedin such notice and such notice shall include the following:
(i) a statement to the effect that there are no circumstances connected with its resignation whichit considers should be brought to the notice of the shareholders or creditors of the Company;
(ii) a statement of any such circumstances.
Where a notice is deposited under the preceding subparagraph, the Company shall within 14 days senda copy of the notice to the relevant governing authority. If the notice contains a statement under the above(ii), a copy of such statement shall be placed at the Company for shareholders’ inspection. The Companyshould also send a copy of such statement by prepaid mail to every holder of Overseas-ListedForeign-Invested Shares at the address registered in the register of shareholders.
Where the accountants firm’s notice of resignation contains a statement of any circumstance whichshould be brought to the notice of the shareholders or creditors of the Company, it may require the boardof directors to convene a shareholders’ extraordinary general meeting for the purpose of receiving anexplanation of the circumstances connected with its resignation.
(c) Rights of the accountants firm
The accountants firm appointed by the Company shall have the following rights:
(i) to inspect at any times the books, records and vouchers of the Company, and to require thedirectors, general manager, deputy general managers and other senior officers of the Companyto provide any relevant information and explanation;
(ii) to require the Company to take all reasonable steps to obtain from its subsidiaries suchinformation and explanation as are necessary to enable it to discharge its duties;
(iii) to attend shareholders’ general meetings and to receive all notices of, and other communicationsrelating to, such meetings as which a shareholder of the Company is entitled to receive, and tospeak at any shareholders’ general meeting on any matter concerning its role as the accountantsof the Company.
(8) NOTICE OF MEETING AND BUSINESS TO BE CONDUCTED THEREAT
The shareholders’ general meeting is the organ of authority of the Company and shall exercise its functionsand powers in accordance with law.
The Company shall not enter into any contract with any person other than a Director, supervisor, generalmanager, deputy general manager or a member of the senior management whereby such person is entrusted withthe management of the whole or a material part of any business of the Company without the prior approval ofshareholders in general meeting.
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Shareholders’ general meetings are divided into annual general meetings and extraordinary generalmeetings. Under any of the following circumstances, the board of Directors shall convene an extraordinarygeneral meeting within two months of the occurrence of any one of the following events:
(i) when the number of Directors is less than the number provided for in the PRC Company Law or lessthan two thirds of the number prescribed in the Articles of Association;
(ii) when the unaccounted losses of the Company amount to one third of its issued share capital;
(iii) when shareholders holding 10% or more of the Company’s issued and outstanding shares carryingvoting rights requests in writing the convening of an extraordinary general meeting; and
(iv) when the board of directors considers necessary or upon the request of the supervisory committee.
To convene a general meeting, the Company shall give written notices 45 days before the date of themeeting, informing all registered shareholders of the matters proposed to be considered at the meeting and thedate and place of the meeting. Shareholders who arc attending the meeting shall return the written replies ofattendance to the Company to be received by the Company 20 days before the date of the meeting.
When the Company is to convene an annual general meeting, shareholders holding fifty per cent. or moreof shares carrying voting rights shall have the right to put forward new proposals in writing to the Company. TheCompany shall include in the agenda the matters which are within the scope of responsibilities of the generalmeeting.
The Company shall calculate, according to the written replies received 20 days before the date of themeeting, the number of shares carry voting rights that the shareholders attending the meeting represent. TheCompany can convene a shareholders’ general meeting if the number of shares carrying voting rights representedby shareholders intending to attend attain more of the one half of total number of shares carrying voting rights.If not, the Company shall make an announcement, within 5 days, once again notifying the shareholders of thematters proposed to be considered and the date and place of the meeting. Once an announcement has been somade, the Company may convene the general meeting.
An extraordinary general meeting may not decide on matters not specified in the notice.
A notice of meeting of shareholders shall:
(i) be in writing;
(ii) specify the place, the day and the time of the meeting;
(iii) state the matters to be discussed at the meeting;
(iv) provide such information and explanation as are necessary for the shareholders to exercise aninformed judgement on the proposals before them. Without limiting the generality of the foregoing,where a proposal is made to amalgamate the Company with another company, to repurchase sharesof the Company, to reorganise the share capital or to restructure the Company in any other way, theterms of the proposed transaction must be provided in detail together with copies of the proposedagreement, if any, and the reasons for and consequences of such proposal must be properly explained;
(v) contain a disclosure of the nature and extent, if any, of material interests of any Director, Supervisor,general manager, deputy general manager or officer in the transaction proposed and the effect of theproposed transaction on them in their capacity as shareholders in so far as it is different from theeffect on the interests of other shareholders of the same class;
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(vi) contain the text of any special resolution proposed to be passed at the meeting;
(vii) contain conspicuously a statement that a shareholder entitled to attend and vote is entitled to appointone or more proxies to attend and vote instead of him and that a proxy need not be a shareholder; and
(viii) specify the time and place for lodging proxy forms for the relevant meeting.
For the H share shareholders, notices of shareholders’ general meetings shall be served on the shareholders(whether or not they are entitled to vote at the meeting) by personal delivery or prepaid mail to their addressesregistered in the register of shareholders. For the holders of Domestic-Invested Shares, notices of shareholders’general meetings may also be given by way of public announcement.
The public announcement referred to in the preceding paragraph shall be published in one or morenewspapers designated by the securities regulatory authority of the State Council within the interval between 45to 50 days prior to the date of the meeting. Upon the publication of announcement, all holders ofDomestic-Invested Shares shall be deemed to have received notice of the relevant shareholders’ meeting.
The accidental omission to give notice of a meeting to, or the non receipt of notice of a meeting by, anyperson entitled to receive notice shall not invalidate the proceedings at that meeting.
Shareholders requisitioning an extraordinary general meeting of shareholders or class meeting shall abideby the following procedures:
(i) Two or more shareholders holding in aggregate 10% or more of the shares carrying the right to voteat the meeting sought to be held shall sign a written requisition in one or more counterparts in thesame form and contents, requiring the board of directors to convene a shareholders’ extraordinarygeneral meeting or a class meeting thereof and stating the matters to be considered at the meeting.The board of directors shall as soon as possible after receipt of the requisition proceeds to convenea shareholders’ extraordinary general meeting or a class meeting thereof.
The amount of shareholdings of the requisitioning shareholders referred to in the preceding paragraphshall be calculated as at the date of the deposit of the requisition.
(ii) If the board of directors fails to issue a notice of such a meeting within 30 days from the date ofreceipt of the requisition, the requisitioning shareholders may themselves convene such a meetingwithin 4 months of the receipt of the requisition by the board of directors. In so convening a meeting,the requisitioning shareholders should adopt a procedure as similar as possible as that ofshareholders’ general meetings to be convened by the board of directors.
The matters which require the sanction of an ordinary resolution at a shareholders’ general meeting shallinclude:
(i) the approval of work reports of the board of Directors and the supervisory committee;
(ii) the approval of plans formulated by the board of Directors for the distribution of profits and formaking up losses;
(iii) the removal of the members of the board of Directors and members of the supervisory committee,their remuneration and method of payment;
(iv) the approval of the Company’s budget and final accounts, balance sheets and profit and loss accountsand other financial reports; and
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(v) save as required by the laws and regulations of the PRC or by the Articles of Association, all other
matters other than those required to be adopted by special resolution.
The matters which require the sanction of a special resolution at a shareholders’ general meeting include:
(i) the increase or reduction of share capital and the issue of shares of any class or warrants and other
similar securities;
(ii) the issue of debentures of the Company;
(iii) the demerger, merger, termination and liquidation of the Company;
(iv) amendments to the Articles of Association; and
(v) any other matters considered by the shareholders’ general meeting, resolved by way of an ordinary
resolution, to be of a nature which may have a material impact on the Company and should be adopted
by a special resolution.
(9) TRANSFER OF SHARES
Unless otherwise provided in any laws or regulations, shares in the capital of the Company shall be freely
transferable and shall not be subject to any lien.
All fully paid-up H Shares can be freely transferred in accordance with the Articles of Association,
provided, however, that the board of directors may refuse to recognise any instrument of transfer without giving
any reason, unless the following conditions are satisfied:
(i) a fee (for each instrument of transfer) of 5 Hong Kong dollars or any higher fee as agreed by the
SEHK has been paid to the Company for the registration of any transfer instrument or any other
documents which is related to or will affect the ownership of or the change of the ownership of the
shares;
(ii) the instrument of transfer only involves H Shares;
(iii) the stamp duty chargeable on the instrument of transfer has been paid;
(iv) the relevant share certificates and upon the reasonable request of the board of directors any evidence
in relation to the right of the transferor to transfer the shares have been submitted;
(v) if it is intended to transfer the shares to joint owners, the maximum number of joint owners shall not
exceed 4;
(vi) the Company does not have any lien on the relevant shares.
If the Company refuses to register a transfer of shares, the Company shall, within 2 months following the
date of the formal application for the transfer, provide the transferor and the transferee with a written notice of
refusal to register such transfer.
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(10) POWER OF THE COMPANY TO PURCHASE ITS OWN SHARES
The Company may, with the approval in accordance with the procedures provided in the Articles ofAssociation and subject to the approval of the relevant governing authorities of the State, repurchase its issuedshares in the following circumstances:
(i) cancellation of its shares for the purpose of reducing its share capital;
(ii) merging with another company which holds shares in the Company;
(iii) other circumstances permitted by laws and administrative regulations.
The Company may, upon the approval of the relevant governing authorities of the State, repurchase itsshares in one of the following ways:
(i) making a pro rata general offer of repurchase to all its shareholders;
(ii) repurchasing shares through public dealing on a stock exchange;
(iii) repurchasing by an off-market agreement outside a stock exchange.
The Company may, with the prior sanction of shareholders obtained in accordance with the Articles ofAssociation, repurchase its shares by an off-market contract but the Company may rescind or vary such contractor waive any or part of its rights under a contract so entered into by the Company with the prior approval ofshareholders obtained in the same manner. A contract to repurchase shares as mentioned above includes but is notlimited to an agreement to become obliged to repurchase or acquire rights to repurchase shares of the Company.
The Company shall not assign a contract to repurchase its shares or any of its rights thereunder.
Unless the Company is in the course of liquidation, it shall comply with the following provisions in relationto repurchase of its issued shares:
(i) where the Company repurchases its shares at par value, payment shall be made out of the book surplusdistributable profits of the Company and/or out of the proceeds from any issue of new shares madefor the purpose of the repurchase;
(ii) where the Company repurchases its shares at a premium to the par value, payment up to their par valuemay be made out of the book surplus distributable profits of the Company and/or the proceeds fromany issue of new shares made for the purpose of the repurchase. Payment of the portion in excess ofthe par value shall be effected as follows:
(aa) if the shares being repurchased were issued at par value, payment shall be made out of the booksurplus distributable profits of the Company;
(bb) if the shares being repurchased were issued at a premium to the par value, payment shall bemade out of the book surplus distributable profits of the Company and/or the proceeds from anyissue of new shares made for the purpose of the repurchase, provided that the amount paid outof such proceeds shall neither exceed the aggregate of the premiums received by the Companyon the issue of the shares repurchased nor the current amount of the capital reserve fund accountof the Company (including the premiums on the new issues) at the time of the repurchase;
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(iii) payment by the Company for the following purposes shall be made out of the Company’s distributableprofits:
(aa) acquisition of rights to repurchase shares in the Company;
(bb) variation of any contract to repurchase shares in the Company;
(cc) release of any of the Company’s obligations under a contract to repurchase shares in theCompany;
(iv) After the Company’s registered capital has been reduced by the aggregate par value of the cancelledshares in accordance with the relevant regulations, the amount deducted from the distributable profitsfor paying up the par value portion of the repurchased shares shall be transferred to the Company’scapital reserve fund account.
(11) POWER OF ANY SUBSIDIARY OF THE COMPANY TO OWN SHARES IN ITS PARENTCOMPANY
The Articles of Association contains no restrictions preventing any subsidiary of the Company from holdingshares in its parent company.
(12) DIVIDENDS AND OTHER METHODS OF DISTRIBUTION
The Company may distribute dividends by way of cash or bonus shares.
Dividends or other payments declared by the Company to be payable to holders of Domestic-InvestedShares shall be declared and calculated in Renminbi, and paid in Renminbi; and those payable to holders ofForeign-Invested Shares shall be declared and calculated in Renminbi, and paid in the local currency at the placewhere such Foreign-Invested Shares are listed (if there is more than one place of listing, then the principal placeof listing as determined by the board of directors).
Foreign currency required by the Company for payment of dividends or other sum to holders ofForeign-Invested Shares shall be handled in accordance with the relevant foreign exchange control regulations ofthe State.
The Company shall appoint on behalf of holders of Overseas-Listed Foreign-Invested Shares receivingagents to receive on behalf of such shareholders dividends and other monies payable by the Company in respectof their shares.
The receiving agents appointed by the Company shall meet the requirements of the laws of the place oflisting or relevant rules of the securities exchanges.
The receiving agent appointed on behalf of holders of H Shares shall be a company registered as a trustcompany under the Trustee Ordinance of Hong Kong.
(13) PROXIES
Any shareholder entitled to attend and vote at a shareholders’ general meeting shall be entitled to appointone or more persons (whether or not a shareholder) as his proxy to attend and vote on his behalf. A proxy soappointed shall be entitled to exercise the following rights in accordance with the authorisation from thatshareholder:
(i) the shareholder’s right to speak at the meeting;
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(ii) the right to demand, whether on his own or together with others, a poll;
(iii) the right to vote by hand or on a poll, but a proxy of a shareholder who has appointed more than oneproxy may only vote on a poll.
Where that shareholder is a recognised clearing house within the meaning of the Securities and Futures(Clearing Houses) Ordinance (Cap.420 of the Law of Hong Kong), it may authorise such person or persons as itthinks fit to act as its representative (representatives) at any shareholders’ general meeting or any meeting of anyclass of shareholders provided that, if more than one person is so authorised, the authorisation must specify thenumber and class of shares in respect of which such person is so authorised. The person so authorised will beentitled to exercise the same power on behalf of the recognised clearing house as that clearing house (or itsnominees) could exercise if it were an individual shareholder of the Company.
The instrument appointing a proxy shall be in writing under the hand of the appointor or his attorney dulyauthorised in writing, or if the appointor is a legal person either under seal or under the hand of a director orattorney duly authorised. The instrument appointing a voting proxy shall be deposited at the Company’s domicileor at such other place as is specified in the notice convening the meeting not less than 24 hours prior to the timefor holding the meeting at which the proxy propose to vote or the time specified for the passing of the resolution.If such instrument is signed by another person under a power of attorney or other authorisation documents givenby the appointer, such power of attorney or other authorisation documents shall be notarised. The notarised powerof attorney or other authorisation documents shall, together with the instrument appointing the voting proxy, bedeposited at the Company’s domicile or at such other place as is specified in the notice convening the meeting.
If the appointer is a legal person, its legal representative or any person authorised by resolutions of its boardof directors or other governing body shall attend the shareholders’ meeting as the appointer’s representative.
Any form issued to a shareholder by the board of directors for the purpose of appointing a proxy shall besuch as to enable the shareholder, according to his free will, to instruct his proxy to vote in favour of or againstthe motions proposed and in respect of each individual matters to be voted on at the meeting. Such a form shallcontain a statement that in the absence of instructions from the appointer, the proxy may vote as he thinks fit.
A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding theprevious death or loss of capacity of the appointor or revocation of the proxy or of the authority under which theproxy was executed, or the transfer of the share in respect of which the proxy is given, provided that no noticein writing of such death, loss of capacity, revocation or transfer as aforesaid shall have been received by theCompany before the commencement of the meeting at which the proxy is used.
(14) CALLS ON SHARES AND FORFEITURE OF SHARES
There are no provisions in the Articles of Association relating to the making of calls on shares or for theforfeiture of shares.
(15) INSPECTION OF REGISTER OF SHAREHOLDERS AND OTHER RIGHTS OFSHAREHOLDERS
The Company shall keep a register of shareholders and enter therein the following particulars:
(i) the name (title), address (residence) and occupation or nature of each shareholder;
(ii) the class and number of shares held by each shareholder;
(iii) the amount paid up or payable on the shares held by each shareholder;
(iv) the share certificate numbers of the shares held by each shareholder;
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(v) the date on which each person was entered in the register as a shareholder;
(vi) the date on which any shareholder ceases to be a shareholder.
Unless there is evidence to the contrary, the register of shareholders is sufficient evidenceof shareholdingsin the Company.
The Company may, in accordance with the understanding or agreements between the securities regulatoryauthority of the State Council and the overseas securities regulatory organisations, maintain the register ofshareholders of Overseas-Listed Foreign-Invested Shares overseas and appoint overseas agent(s) to manage suchshare register. The original share register for holders of H Shares shall be maintained in Hong Kong.
Duplicates of the share register for holders of Overseas-Listed Foreign-Invested Shares shall be maintainedat the Company’s residence. The appointed overseas agent(s) shall ensure the consistency between the originaland the duplicate of the share register.
If there is any inconsistency between the original and the duplicate of share register for holders ofOverseas-Listed Foreign-Invested Shares, the original shall prevail.
The Company shall keep a complete register of shareholders.
The register of shareholders shall comprise of the following parts:
(i) register(s) of shareholders other than those specified in items (ii) and (iii) below kept at the domicileof the Company;
(ii) register(s) of holders of the Company’s overseas-listed foreign-investment shares kept at the placewhere the stock exchange on which such shares are listed is located;
(iii) register(s) of shareholders kept at other places as the board of directors thinks necessary for thepurpose of listing.
Different parts of the register of shareholders shall not overlap. No transfer of shares registered in any partof the register shall, during the continuance of that registration, be registered in any other part of the register.
The alteration or rectification of any part of the register of shareholders shall be carried out in accordancewith the laws of the place where such part of the register is maintained.
No changes which are required by reason of a transfer of shares may be made to the register of shareholderswithin 30 days prior to the date of a shareholders’ general meeting or 5 days prior to the record date for theCompany’s distribution of dividends.
When the Company decides to convene a shareholders’ general meeting, distribute dividends, liquidate orcarry out other activities which require the determination of shareholdings, the board of directors shall fix arecord date for the purpose of determining the shareholding. A person who is registered in the register asshareholders of the Company at the end of the record date shall be a shareholder of the Company.
Any person who objects to what is contained in the register of shareholders and wishes to register his nameon, or delete his name from, the register may apply to the court which jurisdiction to amend the register.
The right of the shareholders to information includes, but without limitation, the following:
(i) the right to a copy of the Articles of Association after payment of costs;
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(ii) the right to inspect and copy at reasonable charges;
(aa) all parts of the register of shareholders;
(bb) particulars of Directors, Supervisors, general manager, deputy general managers and officers asfollows:
(aaa) his present name and any former names and any aliases;
(bbb) his principal residential address;
(ccc) his nationality;
(ddd) his primary and all other part time business occupations; and
(eee) his identification document and its number;
(cc) the state of the Company’s share capital;
(dd) reports showing the number and par value of shares repurchased by the Company since the endof the last financial year, the aggregate amount paid by the Company for the shares repurchasedand the maximum and minimum price in respect of each class of shares repurchase; and
(ee) minutes of shareholders’ meetings.
(16) QUORUM FOR SHAREHOLDERS MEETINGS
The Company can convene a shareholders’ meeting if the number of shares carrying voting rightsrepresented by shareholders intending to attend attain one-half of the total number of shares carrying votingrights.
The Company can convene a class shareholders’ meeting, if the number of shares of the class carryingvoting rights represented by shareholders intending to attend attain one-half of the total number of such sharesof the class.
(17) RIGHTS OF MINORITY SHAREHOLDERS IN RELATION TO FRAUD OR OPPRESSION
In addition to the obligations imposed by laws and administrative regulations or the listing rules of the stockexchange on which shares of the Company are listed, a controlling shareholder, when exercising his rights as ashareholder, shall not exercise his voting rights to make a decision which is prejudicial to the interests of theshareholders generally or of some of the shareholders of the Company in respect of the following matters:
(i) to relieve a director or supervisor of his duty to act honestly in the best interests of the Company;
(ii) to approve the expropriation by a director or supervisor (for his own benefit or for the benefit ofanother person), in any guise, of the Company’s assets, including (without limitation) opportunitiesbeneficial to the Company;
(iii) to approve the expropriation by a director or supervisor (for his own benefit or for the benefit ofanother person) of the individual rights of other shareholders, including (without limitation) rights todistributions and voting rights, but not including a restructuring of the Company submitted to andapproved by shareholders’ general meeting in accordance with the Articles of Association.
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For the purposes of the preceding paragraph, a “controlling shareholder” means a person who satisfies anyone of the following conditions:
(i) he alone or acting in concert with others has the power to elect more than half of the directors;
(ii) he alone or acting in concert with others has the power to exercise or to control the exercise of 30%or more of the voting rights in the Company;
(iii) he alone or acting in concert with others holds 30% or more of the issued shares of the Company;
(iv) he alone or acting in concert with others in any other manner controls the Company in fact.
(18) PROCEDURE ON LIQUIDATION
The Company shall be dissolved and liquidated in accordance with law upon occurrence of any of thefollowing events:
(i) a resolution for dissolution is passed by a shareholders’ general meeting;
(ii) dissolution is necessary due to a merger or division of the Company;
(iii) the Company is legally declared insolvent due to its failure to repay debts due;
(iv) the Company is ordered to close down because of its violation of laws or administrative regulations.
A liquidation group shall be set up within 15 days of the Company being dissolved pursuant to the above(i), and the composition of the liquidation group of the Company shall be determined by an ordinary resolutionof shareholders in general meeting. If a liquidation group to carry out liquidation procedure is not set up withinthe specified time limit, the creditors may apply to the People’s Court to have it designate relevant persons toform a liquidation group in order to carry out liquidation procedure.
Where the Company is dissolved under the above (iii), the People’s Court shall in accordance withprovisions of relevant laws organise the shareholders, relevant organisations and relevant professional personnelto establish a liquidation group to carry out liquidation procedure.
Where the Company is dissolved under the above (iv), the relevant governing authorities shall organise theshareholders, relevant organisations and professionals personnel to establish a liquidation group to carry outliquidation procedure.
Where the board of directors proposes to liquidate the Company due to causes other than where theCompany has declared that it is insolvent, the board shall include a statement in its notice convening ashareholders’ general meeting to consider the proposal to the effect that, after making full inquiry into the affairsof the Company, the board of directors is of the opinion that the Company will be able to pay all its debts in fullwithin 12 months from the commencement of the liquidation.
Upon the passing of the resolution by the shareholders in general meeting for the liquidation of theCompany, all functions and powers of the board of directors shall cease.
The liquidation group shall act in accordance with the instructions of the shareholders’ general meeting tomake a report at least once every year to the shareholders’ general meeting on the group’s receipts and payments,the business of the Company and the progress of the liquidation, and to present a final report to the shareholdersgeneral meeting on completion of the liquidation.
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The liquidation group shall within 10 days of its establishment send a notice to creditors, and within 60 daysof its establishment make a public announcement in a newspapers at least three times. A creditor shall within 30days of receiving the notice, or for creditors who do not receive the notice, within 90 days of the date of the firstpublic announcement, report its creditors’ rights to the liquidation group.
When reporting creditors’ rights, the creditor shall provide an explanation of matters relevant to thecreditor’s rights and shall provide materials as evidence. The liquidation group shall carry out registration ofcreditors’ rights so reported.
During the liquidation period, the liquidation group shall exercise the following functions and powers:
(i) to sort out the Company’s assets and prepare a balance sheet and an inventory of assets respectively;
(ii) to notify all creditors by notice or public announcements;
(iii) to dispose of and liquidate any relevant unfinished business matters of the Company;
(iv) to pay all outstanding taxes;
(v) to settle claims and debts;
(vi) to deal with assets remaining after the Company’s debts having been paid in full;
(vii) to represent the Company in any civil proceedings.
The liquidation committee shall thoroughly examine the assets of the Company, and prepare an assets list.Upon completion, the liquidation committee shall draw up a proposal for liquidation and submit the same to theshareholders’ meeting and the relevant authority in charge for confirmation.
The Company’s assets shall be paid in the following order:
(i) liquidation expenses;
(ii) outstanding wages and social insurance premiums of staff and workers;
(iii) outstanding taxes, tax surcharges and contributions to funds payable; and
(iv) bank loans, Company bonds, and other debts of the Company.
The assets of the Company remaining after full repayment pursuant to the preceding paragraph shall bedistributed to its shareholders in proportion to the shareholdings of its shareholders.
During liquidation, the Company shall not engage in new business activities.
If the company is liquidated by reason of dissolution and the liquidation committee, having thoroughlyexamined the Company’s assets and having prepared a balance sheet and assets list, discovers that the Company’sassets are insufficient to pay its debts in full, it shall immediately apply to the People’s Court for a declarationof insolvency.
After the People’s Court has declared the Company insolvent, the company’s liquidation committee shallturn over any matters regarding the liquidation to the People’s Court.
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Following the completion of liquidation, the liquidation group shall present a report on liquidation and
prepare a statement of the receipts and payments during the period of liquidation and financial books and records
which shall be audited by Chinese registered accountants and submitted to the shareholder’s general meeting or
the relevant governing authority for confirmation.
The liquidation group shall also within 30 days after such confirmation, submit the documents referred to
in the preceding paragraph to the company registration authority and apply for cancellation of registration of the
Company, and publish an announcement relating to the termination of the Company.
(19) OTHER PROVISIONS MATERIAL TO THE COMPANY OR ITS SHAREHOLDERS
(a) General provisions
The Company is a joint stock limited company of perpetual existence.
The major scope of operation of the Company, as set out in its business license and described in
Article 14 of the Articles of Association:
The Company may invest in other companies with limited liability or joint stock limited
companies and shall be liable to the companies in which it invests to the extent of its capital
contribution.
After obtaining approval from the government department authorised by the State Council for
the examination and approval of companies, the Company may, depending on the needs of its
management and business, operate by acting as a holding company in accordance with sub-article 2
of Article 12 of the PRC Company Law.
The Article of Association constitute a legal document regulating the relationship between the
Company and each of its shareholders and among the shareholders interest, actionable by a
shareholder against the Company and vice versa and by shareholders against each other in respect of
rights and obligations concerning the affairs of the Company arising out of the Articles of
Association. The shareholders may also bring actions against the Directors, Supervisors, managers
and other officers of the Company. For the purposes of the Articles of Association, actions include
court proceedings and arbitration proceedings.
(b) Shares and transfers
There must at all time be ordinary shares in the Company. The Company may, according to its needs
and subject to obtaining approval by the company approval authorities authorised by the State Council,create other classes of shares.
Shares issued by the Company to domestic investors for subscription in Renminbi are referred to as“Domestic-Invested Shares”. Shares issued by the Company to foreign investors for subscription in foreigncurrencies are referred to as “Foreign-Invested Shares”. Foreign-Invested Shares which are listed overseasare called herein “Overseas-Listed Foreign-Invested Shares”.
The foreign currencies referred to in the preceding paragraph mean the legal currencies (apart fromRenminbi) of other countries or regions which are recognised by the foreign currency control authority ofthe State and can be used to pay the Company for the share price.
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AA
Foreign investors referred to in the preceding paragraph mean those investors of foreign countries andregions of Hong Kong, Macau and Taiwan who subscribe for shares issued by the Company; domesticinvestors referred to in the preceding paragraph mean those investors within the territory of China(excluding investors of the regions referred to in the preceding sentence) who subscribe for shares issuedby the Company.
Domestic-Invested Shares issued by the Company shall be called “Domestic Shares”. Overseas ListedForeign-Invested Shares issued by the Company shall be called “H Shares”. H Shares are shares which havebeen admitted for listing on The Stock Exchange of Hong Kong Limited (the “SEHK”), the par value ofwhich is denominated in Renminbi and which arc subscribed for and traded in Hong Kong dollars.
Prior to the Placing, the Company has a registered capital of RMB53 million, divided into530,000,000 Domestic Shares of RMB0.10 each. Upon completion of the Placing, the registered capital ofthe Company will be RMB71 million, made up of approximately 512 million Domestic Shares and 198million H Shares.
The Company may increase its capital in the following ways:
(i) offering new shares to non-specially-designated investors for subscription;
(ii) placing new shares to its existing shareholders;
(iii) allotting bonus shares to its existing shareholders;
(iv) any other ways permitted by laws and administrative regulations.
The Company’s increase of capital by issuing new shares shall, after being approved in accordancewith the provisions of the Articles of Association, be conducted in accordance with the proceduresstipulated by the relevant laws and administrative regulations of the State.
The Company may reduce its registered capital in accordance with the provisions of the Articles ofAssociation.
When the Company reduces its registered capital, it shall prepare a balance sheet and an inventoryof assets.
The Company shall notify its creditors within 10 days of the date of the resolution for reduction ofits registered capital, and shall make a public announcement in a newspaper at least 3 times within 30 daysfollowing the date of such resolution. A creditors has the right, within 30 days of receiving the notice or,in the case of such notice not being received, within 90 days of the date of the first public announcement,to require the Company to repay its debts or to provide a corresponding guarantee for such debts.
The Company’s registered capital after reduction shall not be less than the statutory minimum amount.
(c) Shareholders
A shareholder of the Company is a person who lawfully holds shares and has his name recorded onthe register of shareholders. A shareholder enjoys rights, and is subject to obligations, according to the classand number of shares he holds. Holders of the same class of shares enjoy the same rights and subject to thesame obligations.
The register of shareholders shall be sufficient evidence, unless the contrary is shown, ofshareholdings in the Company.
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The ordinary shareholders of the Company shall enjoy the following rights:
(i) the right to dividends and other distributions in proportion to the number of shares held by him;
(ii) the right to attend or appoint a proxy to attend shareholders’ general meetings and to votethereat;
(iii) the right to supervise the Company’s business operations, and the right to present proposals andinquiries;
(iv) the right to transfer shares in accordance with the laws, administrative regulations and theArticles of Association;
(v) the right to obtain relevant information in accordance with the provisions of the Articles ofAssociation;
(vi) in the event of the termination or liquidation of the Company, to participate in the distributionof surplus assets of the Company according to the number of shares held by him;
(vii) other rights conferred by laws, administrative regulations and the Articles of Association.
The ordinary shareholders of the Company shall have the following obligations:
(i) to abide by the Articles of Association;
(ii) to pay subscription monies in accordance with the number of shares subscribed and the methodof subscription;
(iii) other obligations imposed by laws, administrative regulations and the Articles of Association.
A shareholder is not be liable to make any further contribution to the share capital other than the termsagreed.
Share certificates of the Company shall be in registered form.
Share certificates of the Company shall be signed by the Chairman of the Company’s board ofdirectors. Where the stock exchanges on which the Company’s shares are listed require the share certificatesto be signed by other senior officers of the Company, the share certificates shall also be signed by suchsenior officers. The share certificates shall take effect after being affixed with the Company’s seal or amachine-imprinted seal of the Company. The share certificates shall only be affixed with the Company’sseal under the authorisation of the board of directors. The signatures of the Chairman of the board ofdirectors or other senior officers of the Company on the share certificates may be printed in mechanicalform.
Any person who is registered shareholder or who requests to have his name (title) entered into theregister of shareholders may, if his share certificate (the “original certificate”) in respect of shares in theCompany is lost, apply to the Company for a replacement new share certificate in respect of such shares(the “Relevant Shares”).
If a shareholder of Domestic-Invested Shares loses his share certificate and applies for a replacementnew share certificate, it shall be dealt with in accordance with Article 150 of the Company Law.
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If a shareholder of Overseas-Listed Foreign-Invested Shares loses his share certificate and applies fora replacement new share certificate, it may be dealt with in accordance with the laws, the rules of the stockexchange and other relevant regulations of the place where the original register of holders ofOverseas-Listed Foreign-Invested Shares is maintained.
If a shareholder of H Shares loses his share certificate and applies for a replacement new sharecertificate, the issue of such certificate shall comply with the following requirements:
(i) the applicant shall submit an application to the Company in the form prescribed by the Companyaccompanied by a notarial certificate or a statutory declaration stating the grounds upon whichthe application is made and the circumstances and evidence of the loss of the original certificateand declaring that no other person is entitled to be registered as a shareholder in respect of theRelevant Shares.
(ii) before the Company decides to issue the replacement new share certificate, no statement madeby any person other than the applicant declaring that he shall be registered as a shareholder inrespect of the Relevant Shares has been received.
(iii) the Company shall, if it decides to issue a replacement new share certificate to the applicant,make an announcement of its decision at least once every 30 days for a period of 90 days in suchnewspapers as may be designated by the board of directors.
(iv) the Company shall have, prior to publication of its decision to issue a replacement new sharecertificate, delivered to the stock exchange on which its shares are listed a copy of theannouncement to be published. The Company may publish the announcement upon receiving aconfirmation from such stock exchange that the announcement has been exhibited in thepremises of the stock exchange. The announcement shall be exhibited in the premises of thestock exchange for a period of 90 days.
In the case of an application to issue a replacement new certificate being made without theconsent of the registered holder of the Relevant Shares, the Company shall deliver by mail tosuch registered shareholder a copy of the announcement to be published.
(v) if, by the expiration of the 90-day period referred to in above (iii) and (iv), the Company shallnot have received from any person notice of any disagreement to such application, the Companymay issue a replacement new share certificate to the applicant accordingly.
(vi) where the Company issues a replacement new share certificate under the Articles ofAssociation, it shall forthwith cancel the original share certificate and enter the cancellation andreplacement issue in the register of shareholders accordingly.
(vii) all expenses relating to the cancellation of an original share certificate and the issue of areplacement new share certificate by the Company shall be borne by the applicant. TheCompany may refuse to take any action until reasonable security is provided by the applicantfor such expenses.
(d) Directors, Supervisors, general manager, deputy general managers and other officers of theCompany
The board of Directors shall be accountable to the general meeting of the shareholders, and shallexercise the following functions and powers:
(i) to convene general meetings and report on its work to the shareholders;
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(ii) to implement the resolutions of general meetings;
(iii) to decide on the Company’s business plans and investment plans;
(iv) to formulate the Company’s proposed annual financial budget and final accounts;
(v) to formulate the Company’s profit distribution plan and plan for making up for losses;
(vi) to formulate proposals for the increase or reduction of the Company’s registered capital and theissue of corporate bonds;
(vii) to prepare plans for the merger, demerger or dissolution of the Company;
(viii) to decide on the establishment of the Company’s internal management structure;
(ix) to appoint or dismiss the Company’s general manager, and pursuant to the manager’snominations to appoint or dismiss the deputy general manager and financial officers of theCompany and to decide on their remuneration;
(x) to formulate the Company’s basic management system;
(xi) to formulate plans for the amendment of the Company’s Articles of Association;
(xii) to exercise other functions and powers conferred at general meetings and by the Articles ofAssociation.
Resolutions relating to the above, with the exception of items (vi), (vii) and (xii) above which shallrequire the consent of more than two thirds of the Directors, shall require the consent of more than half ofthe Directors.
Meetings of the board of directors shall be held at least twice in every year and shall be convenedby the Chairman of the board of directors. A quorum will be formed by more than half of the Directorsattending in person.
If a Director is unable to attend a board meeting, he may appoint another Director by a written powerof attorney to attend on his behalf. Such a power of attorney shall specify the scope of authorisation.
Directors attending board meetings shall exercise their powers as directors within their scope ofauthorisation. If a Director fails to attend a board meeting and does not appoint an attorney to attend, theDirector is deemed to have relinquished his rights to vote at that meeting.
Each director shall have one vote. Resolutions of the board of directors must be passed by more thanhalf of all the directors. Where the number of votes cast for and against a resolution are equal, the Chairmanshall have the right to cast an additional vote.
(e) Secretary of the Board of Directors
The Company shall have a secretary of the board of directors who shall be a senior officer of theCompany.
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The secretary of the board of directors shall be a natural person who has the requisite professionalknowledge and experience, and shall be appointed by the board of directors. His primary responsibilitiesare to ensure that:
(i) the Company has complete organisational documents and records;
(ii) the Company prepares and submits all reports and documents required by the competentauthorities entitled thereto in accordance with law;
(iii) the Company’s registers of shareholders are properly maintained, and that persons entitled tothe Company’s records and documents are furnished with such records and documents withoutdelay.
A director or other senior officer of the Company may hold the office of the secretary of the boardof directors concurrently. The accountant(s) of the certified public accountants appointed by the Companyshall not act as the secretary of the board of directors.
Provided that where the office of the secretary of the board of directors is held concurrently by adirector, and an act is required to be done by a director and the secretary separately, the person who holdsthe office of director and secretary may not perform the act in dual capacity.
(f) Supervisory Committee
The Company shall have a supervisory committee.
The supervisory committee shall be composed of 5 members, one of whom shall be the chairman ofthe supervisory committee.
The term of office of supervisors shall be 3 years, renewable upon re-election.
The chairman of the supervisory committee shall be elected and removed with the consent oftwo-thirds or more of all the supervisors. The term of office of the chairman shall be 3 years, renewableupon re-election.
The supervisory committee shall comprise of 2 independent supervisors and 2 representatives ofshareholders who shall be elected and removed by the shareholders’ general meeting and 1 representativeof the employees of the Company who shall be elected and removed by the employees of the Companydemocratically.
The directors, general manager, deputy general managers and financial officer of the Company shallnot act concurrently as supervisors.
The supervisory committee shall be accountable to the shareholders’ general meeting and exercise thefollowing functions and powers in accordance with law:
(i) to examine the Company’s financial situation;
(ii) to supervise the directors, general manager, deputy general manager and other senior officersto see whether they act in contravention of the laws, administrative regulations and the Articlesof Association in the performance of their duties;
(iii) to demand rectification from a director, general manager, deputy general manager or othersenior officer when acts of such persons are detrimental to the interests of the Company;
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(iv) to check the financial information such as the financial report, business report and plans forprofit distribution to be submitted by the board of directors to the shareholders’ general meetingand, should any queries arise, to appoint, in the name of the Company, public certifiedaccountants and practising auditors to assist in such check;
(v) to propose to convene a shareholders’ extraordinary general meetings;
(vi) to represent the Company in negotiation with or bring an action a director;
(vii) other functions and powers specified in the Articles of Association.
Supervisors shall be present at meetings of the board of directors.
(g) General Manager
The Company shall have one general manager, who shall be appointed and dismissed by the board ofdirectors. The Company shall have a certain number of deputy general managers, who will assist the generalmanager in his work and who shall be appointed and dismissed by the board of directors upon thenomination by the general manager. A director of the Company may act concurrently as the general manageror deputy general manager.
The general manager shall be accountable to the board of directors and exercise the followingfunctions and powers:
(i) to be in charge of the Company’s production, operation and management and to organise theimplementation of the resolutions of the board of directors;
(ii) to organise the implementation of the Company’s annual business plan and investment plan;
(iii) to draft plans for the establishment of the Company’s internal management structure;
(iv) to draft the Company’s basic management system;
(v) to formulate basic rules and regulations of the Company;
(vi) to propose the appointment or dismissal of the Company’s deputy general managers and thefinancial controller;
(vii) to appoint and dismiss management personnel other than those required to be appointed ordismissed by the board of directors;
(viii) other functions and powers conferred by the Articles of Association and the board of directors.
(h) Settlement of Disputes
The Company shall act according to the following principles to settle disputes:
(i) Whenever any disputes or claims arising between: holders of the Overseas-Listed Foreign-Invested Shares and the Company; holders of the Overseas-Listed Foreign-Invested Shares andthe Company’s directors, supervisors, general manager, deputy general manager or other seniorofficers; or holders of the Overseas-Listed Foreign-Invested Shares and holders of Domestic-
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Invested Shares, based on the Articles of Association or any rights or obligations conferred or
imposed by the Company Law or any other laws and administrative regulations concerning the
affairs of the Company, such disputes or claims shall be referred by the relevant parties to
arbitration.
Where a dispute or claim of rights referred to in the preceding paragraph is referred to
arbitration, the entire claim or dispute must be referred to arbitration, and all persons who have
a cause of action based on the same facts giving rise to the dispute or claim or whose
participation is necessary for the resolution of such dispute or claim, shall abide by the
arbitration, provided that such person is the Company or the Company’s shareholder, director,
supervisor, general manager, deputy general manager or other senior officer.
Disputes in relation to the definition of shareholders and disputes in relation to the
shareholders’ register need not be resolved by arbitration.
(ii) A claimant may elect arbitration at either the China International Economic and Trade
Arbitration Commission in accordance with its Rules or the Hong Kong International
Arbitration Centre in accordance with its Securities Arbitration Rules. Once a claimant refers
a dispute or claim to arbitration, the other party must submit to the arbitral body elected by the
claimant.
If a claimant elects arbitration at Hong Kong International Arbitration Centre, any party to the
dispute or claim may apply for a hearing to take place in Shenzhen in accordance with the
Securities Arbitration Rules of the Hong Kong International Arbitration Centre.
(iii) If any disputes or claims of rights are settled by way of arbitration in accordance with the above
(i), the laws of China shall apply, save as otherwise provided in laws and administrative
regulations.
(iv) The award of an arbitration body shall be final and conclusive and binding on all parties.
APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION
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1. FURTHER INFORMATION ABOUT THE COMPANY
(1) Incorporation
The Company was initially established as a limited liability company in the PRC under the PRC
Company Law on 11th November, 1996. On 8th November, 2000, the Company was converted into and
established as a joint stock limited company with China General, Shanghai Pharmaceutical, ZJ Hi-tech Park
Co., Pudong Technology Investment, Fudan University, Wang Hai Bo, Su Yong, Zhao Da Jun, Li Jun and
Fang Jing acting as Promoters. As the Company is established in the PRC, its corporate structure and
Articles of Association are subject to the relevant laws and regulations of the PRC. Summaries of the
relevant laws and regulations of the PRC and of the Articles of Association are set out in Appendices III
and IV, respectively.
The Company has established a place of business in Hong Kong at 3201, Alexandra House, 16 Chater
Road, Central, Hong Kong and was registered as an overseas company in Hong Kong under Part XI of the
Companies Ordinance on 12th July, 2002. Such application contains a notice of appointment of Or, Ng &
Chan, of 3201, Alexandra House, 16 Chater Road, Central, Hong Kong as the agent of the Company for the
acceptance of service of process in Hong Kong.
(2) Conversion into a joint stock limited company and approvals by PRC government authorities
The Company, which was initially established as a limited liability company, was converted into a
joint stock limited company on 8th November, 2000. In preparation for the listing of the H Shares on GEM
of the Stock Exchange, the Company obtained the following approvals from the relevant PRC government
authorities:
(a) On 26th October, 2000, the People’s Government of Shanghai Municipality approved the
establishment of the Company as a joint stock limited company (Hu Fu Ti Gai Shen
(2000) No. 033);
(b) On 8th November, 2000, the State Administration for Industry and Commerce issued the
business licence of the Company, whereupon the Company was established as a joint stock
limited company;
(c) On 24th November, 2000, the Commission of Foreign and Economic Trade of the Shanghai
Municipality approved the change of name of the Company upon its conversion into a joint
stock limited company (Hu Jing Mao Mao Fa Zi (2000) No. 1413);
(d) On 5th March, 2002, the Ministry of Finance issued an approval document (Cai Qi [2002]
No. 56) authorising the management of state-owned shares of the Company;
(e) On 30th May, 2002, the CSRC issued an approval document (Zheng Jian Guo He Zi
[2002] No.12) authorising the Company to issue overseas listed foreign-invested shares for
listing on GEM and the subdivision of the nominal value per share of the Company from
RMB1.00 per share into 10 shares of RMB0.10 each.
APPENDIX V STATUTORY AND GENERAL INFORMATION
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A
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(3) Registered capital
At the time of its conversion into and establishment as a joint stock limited company on 8thNovember, 2000, the Company’s initial registered capital was RMB53 million, divided into 53 millionDomestic Shares of par value of RMB1.00 each, all of which were held and fully paid up or credited as fullypaid up as follows:
PromotersApproximate %of shareholding
No. of DomesticShares held
Shanghai Pharmaceutical 26.335% 13,957,856China General 26.335% 13,957,856ZJ Hi-tech Park Co. 21.30% 11,287,146Wang Hai Bo 9.79% 5,188,643Fudan University 6.16% 3,264,808Su Yong 3.45% 1,831,286Zhao Da Jun 2.88% 1,526,071Li Jun 1.36% 721,526Pudong Technology Investment 1.32% 699,348Fang Jing 1.07% 565,460
Total: 100% 53,000,000
On 20th January, 2002, each Share with a par value of RMB1.00 each in the share capital of theCompany was subdivided into 10 Shares with a par value of RMB0.10 each and the registered capital ofthe Company remains unchanged. The par value of all Shares to be issued by the Company shall beRMB0.10 each.
Immediately after the Placing, the registered share capital of the Company will be RMB71 million,made up of approximately 512 million Domestic Shares and 198 million H Shares, all of which were fullypaid up or credited as fully paid up, representing approximately 72.11% and 27.89% of the registered capitalrespectively. Particulars of the shareholdings are as follows:
Holders of SharesApproximate %of shareholding
No. ofShares held
Domestic Shares
Shanghai Pharmaceutical 19.66% 139,578,560China General 18.45% 130,977,816ZJ Hi-tech Park Co. 14.92% 105,915,096Wang Hai Bo 7.31% 51,886,430Fudan University 4.31% 30,636,286Su Yong 2.58% 18,312,860Zhao Da Jun 2.15% 15,260,710Li Jun 1.01% 7,215,260Pudong Technology Investment 0.92% 6,562,382Fang Jing 0.80% 5,654,600
H SharesHolders of H Shares 27.89% 198,000,000
Total: 100.00% 710,000,000
Save as aforesaid, there has been no alteration in the share capital of the Company since itsestablishment.
APPENDIX V STATUTORY AND GENERAL INFORMATION
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(4) Procedures at the Company’s extraordinary shareholders’ meetings
(a) On 20th January, 2002, the Company convened an extraordinary general meeting, at which itwas resolved, among other resolutions, that:
(i) the application of the listing of H Shares be approved;
(ii) the Directors were authorised to amend the articles of association pursuant to the listingof H Shares;
(iii) each share in the Company of nominal value of RMB1.00 be sub-divided into 10 sharesof nominal value of RMB0.10 each;
(b) At an extraordinary general meeting of the Company held on 23rd June, 2002, the followingresolutions, among other resolutions, were passed pursuant to which:
(i) the Placing was approved;
(ii) the Articles of Association were adopted;
(iii) the offer of 198,000,000 H Shares by the Company and the Selling Shareholders by wayof the Placing was approved;
(iv) in accordance with the Regulations for the Reduction of State-owned Shares, the sale ofan aggregate of 18,000,000 state-owned shares by the Selling Shareholders was approved;
(v) the Share Option Scheme was adopted; and
(vi) a general mandate was given to the board of Directors to issue H Shares provided that thenumber of H Shares to be issued shall not exceed 20% of the H Shares then in issue andthat such mandate shall remain in effect until the earlier of the conclusion of the nextannual general meeting of the Company or 12 months from the date of the resolution.
2. SUBSIDIARIES AND INTERESTS IN OTHER LISTED COMPANIES
The Company’s subsidiary is referred to in the Accountants’ Report, the text of which is set out in AppendixI.
3. FURTHER INFORMATION ABOUT THE BUSINESS
(1) Summary of material contracts
The following contracts (not being contracts entered into in the ordinary course of business), exceptthe Underwriting Agreement, are in Chinese and were entered into by the Company or its subsidiary withinthe two years preceding the date of this prospectus and are or may be material:
(a) the Land Use Rights Contract dated 26th June, 2001 between Pudong New District DevelopmentBureau of Shanghai Municipality and the Company for the grant of the land use rights of a pieceof land located at Plot 51, Street 13, Zhangjiang, Pudong New Area, Shanghai;
(b) the Non-competition Agreement dated 6th March, 2002 between China General and theCompany regarding non-competition undertaking given by China General to the Company.Details of the agreement are set out in the subsection headed “Non-competition undertaking”under the section headed “Relationship with the Initial Management Shareholders”;
APPENDIX V STATUTORY AND GENERAL INFORMATION
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(c) the Technological Co-operation Agreement dated 18th April, 2002 for technological co-
operation between Fudan University and the Company and the outsourcing of R&D by the
Company to Fudan University. Details of the agreement are set out in the section headed
“Relationship with the Initial Management Shareholders — Continuing Connected Transactions
— Fudan University”;
(d) the R&D Funding and Technology Transfer Agreement dated 22nd July, 2002 between China
General and the Company relating to the terms and conditions for the provision of R&D funding
and the terms and conditions for technology transfer to China General and for payments to
China General upon product commercialisation, details of the agreement are set out in the
section headed “Relationship with the Initial Management Shareholders — Continuing
Connected Transactions — China General”;
(e) the Joint Research Center Agreement dated 15th December, 2000, for the establishment of a
joint research center by Shanghai Pharmaceutical, Shanghai Materia Medica, CAS and the
Company, details of which are set out in the section headed “Relationship with the Initial
(f) the Supplemental Agreement dated 20th June, 2002 between Shanghai Pharmaceutical and the
Company to amend the term of the Sales and Distribution Agreement dated 9th March, 2000 to
a fixed term until the end of 2004;
(g) the Agreement dated 22nd July, 2002 between Morgan-Tan and the Company for use of premises
and a hiring of facilities and services by Morgan-Tan with the Company for a term of three years
commencing from the date of Morgan-Tan entering into possession of the rented premises;
(h) the Supplemental Agreement dated 17th July, 2002 between the Company and Fudan University
to amend the Technological Co-operation Agreement dated 18th April, 2002 between the parties
to a fixed term of 10 years commencing 17th July, 2002;
(i) the Supplemental Agreement dated 22nd July, 2002 between the Company and Morgan-Tan to
amend the term of the Agreement dated 7th March, 2000 between the parties to a fixed term
until 31st December, 2004; and
(j) Underwriting Agreement dated 30th July, 2002 between, among others, the Company, the
Selling Shareholders and the Underwriters, the details of which are set out in the section headed
“Underwriting” of this prospectus.
APPENDIX V STATUTORY AND GENERAL INFORMATION
— 242 —
(2) Intellectual property rights
The Company is the registered owner of the following trademarks:
No. Trademark Application ClassRegistration
DateExpiry
DateRegistration
Number
1 PRC 42(Note 1)
21/12/1999 20/12/2009 1347469
2 PRC 42(Note 1)
21/12/1999 20/12/2009 1347493
3 PRC 5(Note 2)
28/10/1999 27/10/2009 1327751
4 PRC 5(Note 3)
28/10/1999 27/10/2009 1327793
5 PRC 5(Note 4)
14/10/1999 13/10/2009 1322706
6 PRC 5(Note 5)
7/11/1999 6/11/2009 1330261
In or about May 2002, the Company through a trademark agent applied to the PRC Trademarks Bureauto register the following trademarks, the registrations of which are pending and being processed by the PRCTrademarks Bureau:
Trademark Application Class
PRC 5(Note 6)
PRC 42(Note 7)
Notes:
1. R&D of modern bio-technological products; R&D of modern bio-technologies; R&D of modern bio-technologies (on behalf
of others); modern bio-technological consultation services.
APPENDIX V STATUTORY AND GENERAL INFORMATION
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2. ethical drugs; medical formulations; medical drugs; all kinds of injections, tablets, medicinal syrup, ointments; Chinese
patent medicines; capsules; medicines for tonic purposes.
3. ethical drugs; pharmaceutical formulation; pharmaceutical drugs; all kinds of injections, tablets, ointments, capsules;
4. ethical drugs; medical drugs; bio-pharmaceutical formulations; veterinary medicines; medicinal alcohol; medicines for
tonic purposes; vaccines; medical antiseptics; medical diagnostic reagents.
5. medical diagnostic reagents; chemical formulations for pregnancy diagnosis; medical micro-organism formulations;
medical enzymatic formulations; medical antiseptics; medical detergent; medical fermentum formulations; ethical trace
elements formulations; medicine tea; bacteria-toxin.
6. pharmaceutical formulations; chemical drug formulations; medical diagnostic reagents; medical micro-organism
formulations; medical enzymatic formulations; medical antiseptics; bio-pharmaceutical formulations; medical nutriment;
ethical trace elements formulations; medicine tea.
7. R&D of bio-pharmaceutical technologies; R&D of bio-pharmaceutical technologies (on behalf of others); bio-
pharmaceutical technologies consultation services; R&D of cosmetics; R&D of chemistry.
In addition, was the applicant or is the registered owner of No. 1 to
No. 8 of the following patents and has applied for renaming the owner and the applicant of the applications
of those patents. The Company is the applicant of patents No. 9 to No. 11:
No. PatentApplication
No.Date of
ApplicationPatent
Granted
1. External pressure type hollow fibre column 99202751.9 05/02/1999 Granted2. Renaturation equipment of modified protein 99101875.3 05/02/1999 Pending3. Process for producting recombined
4. Deuteroporphyvin derivative, its method ofpreparation and its intravenous injectionfreeze-dried preparation
00111734.3 25/02/2000 Pending
5. Stable composition of NADH and NADPH 00111788.2 02/03/2000 Pending6. A method for amplification of multi-genes or
genefragments00111790.4 02/03/2000 Pending
7. Double specific monoclonal antibodies in, itsmethod of preparation and the reteplase madefrom it
00111787.4 02/03/2000 Pending
8. Parathyroid hormone derivatives and itspreparing method
00111789.0 02/03/2000 Pending
9. The preparation and uses of �-glycosidaseinhibitor that was extracted from Chinese herb
01113191.8 29/06/2001 Pending
10. �ethod for synthesis of 3-(or8-)(1-methoxyethyl) 8-(3-)(1-hydroxyethyl)-deuteroporphyrin IX
01131939.9 17/10/2001 Pending
11. �icroarray for HLA genotypoing 01145581.0 29/12/2001 Pending
APPENDIX V STATUTORY AND GENERAL INFORMATION
— 244 —
Professor Xu De Yu ( ) has applied for registration of the following patents and has transferredhis interests in the following patents to the Company, pending completion of the registration procedures:
No. Patent Application No.Date of
ApplicationPatent
Granted
1. New Compounds for the treatment of tumorby making use of photodynamic therapy
99119879.4 28/10/1999 Pending
2. Technique and equipment for laboratory andindustry preparation of gaseous hydrogenbromide
01105206.6 11/01/2001 Pending
3. Method of preparation for semisyntheticdeuteroporphyrin derivatives and its freezedry form for intravenous injection
01105208.2 11/01/2001 Pending
4. FURTHER INFORMATION ABOUT DIRECTORS, SUPERVISORS, MANAGEMENT AND STAFF
(1) Particulars of Directors’ and Supervisors’ service agreements
(a) Service agreements
Each of the Directors and Supervisors has entered into a service agreement with the Companyfor a term of 3 years commencing from 20th January, 2002 except for Cheng Lin whose termcommenced on 10th July, 2002 until the next annual general meeting of the Company. Particulars ofthe service contracts of the Directors are the same in all material aspects. The salaries of the Directorsand the Supervisors will be determined each year by the Shareholders in the annual general meeting.The executive Directors shall be entitled to the welfare treatment provided under the relevant PRClaws and regulations.
(b) Directors’ salaries
The current basic annual salaries of the Directors for the year ending 31st December, 2002 areestimated as follows:
Executive Directors (RMB)
Wang Hai Bo 300,000Su Yong 180,000Zhao Da Jun 180,000
Feng Zheng Quan 20,000Pei Gang 20,000Cheng Lin 20,000
APPENDIX V STATUTORY AND GENERAL INFORMATION
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(c) Supervisors’ salaries
The current basic annual salaries of the Supervisors for the year ending 31st December, 2002are estimated as follows:
Sun Xiao Min —Dai Yan Ling —Zhuang Xian Han (employee representative) 108,000
Independent Supervisors
Wei Dong Zhi 20,000Wong De Zhong 20,000
(2) Directors’ and Supervisors’ remuneration
(a) Directors
The aggregate amount of salaries, other allowances and benefits in kind paid by the Companyto the Directors (not including independent non-executive Directors) for each of the two years ended31st December, 2000 and 2001 were approximately RMB844,000 and RMB261,000 respectively.
Each of the executive Directors is entitled to such discretionary bonus as determined by theBoard in its absolute discretion and the interested Director shall abstain from voting. The maximumaggregate amount of such discretionary bonus payable to all the executive Directors for any financialyear shall not be more than 3% of the audited consolidated profits after taxation and minority interestsbut before extraordinary items and such bonus of the Group for the relevant financial year.
Save as disclosed in this prospectus, no other emoluments have been paid or are payable, inrespect of the two years ended 31st December, 2001, by the Company to the Directors.
Under the arrangements currently in force, the Company estimates that the aggregateremuneration (including benefits in kind) of the Directors payable by the Company for the yearending 31st December, 2002 will be approximately RMB1,050,000.
(b) Supervisors
The aggregate amount of service fees, other allowances and benefits in kind paid by theCompany to the Supervisors for each of the two years ended 31st December, 2000 and 2001 wereapproximately RMB396,000 and RMB185,000 respectively.
Under the arrangements currently in force, the Company estimates that the aggregateremuneration (including benefit in kind) of the Supervisors payable for the year ending 31stDecember, 2002 will be approximately RMB190,000.
5. DISCLOSURE OF INTERESTS
(1) Disclosure of interests
(a) Immediately following completion of the Placing, the beneficial interests of the Directors in theshare capital of the Company which will have to be notified to the Company and the StockExchange pursuant to section 28 of the Securities (Disclosure of Interests) Ordinance (the “SDI
APPENDIX V STATUTORY AND GENERAL INFORMATION
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Ordinance”) (including interests in which they are taken or deemed to have), or which will berequired pursuant to section 29 of the SDI Ordinance to be entered in the register referred totherein, or are required pursuant to Rules 5.40 to 5.59 of the GEM Listing Rules to be notifiedto the Company and the Stock Exchange, will be as follows:
DirectorType of
interests
% ofbeneficial
interests inthe Company’s
share capital No. of Shares
Wang Hai Bo Personal 7.31% 51,886,430Su Yong Personal 2.58% 18,312,860Zhao Da Jun Personal 2.15% 15,260,710Fang Jing Personal 0.80% 5,654,600
(b) So far as the Directors are aware, immediately following the Placing the holders of 10% or moreof Shares then in issue will be as follows:
Name of owner
% ofbeneficial
interests inthe Company’s
share capital No. of Shares
Shanghai Pharmaceutical (Note 1) 19.66% 139,578,560China General (Note 2) 18.45% 130,977,816ZJ Hi-tech Park Co. (Note 3) 14.91% 105,915,096
Notes:
1. Shanghai Pharmaceutical is a joint stock limited company incorporated in the PRC whose A shares are listed on
the Shanghai Stock Exchange, which is held as to 39.69% by Shanghai Pharmaceutical (Group) Corporation, a
state-owned enterprise, being its single largest shareholder.
2. China General is a company incorporated in the PRC with limited liability and a state-owned enterprise.
3. ZJ Hi-tech Park Co. is a joint stock limited company incorporated in the PRC whose A shares are listed on the
Shanghai Stock Exchange, which is held as to 54.90% by Shanghai Zhangjiang Hi-Tech Park Development Corp.,
a state-owned enterprise, and as to 9.61% by Shanghai Jiushi Co.
(2) Disclaimers
Save as disclosed in this prospectus:
(a) none of the Directors or Supervisors has any interest in the equity or debt securities of theCompany or any associated company within the meaning of the Securities (Disclosure ofInterests) Ordinance (“SDI Ordinance”), which will have to be notified to the Company and theStock Exchange pursuant to section 28 of SDI Ordinance (including interests which he isdeemed to have under section 31 of, or Part 1 of the Schedule to, the SDI Ordinance) or whichwill be required, pursuant to section 29 of the SDI Ordinance, to be entered in the registerreferred to therein once the H Shares are listed or which will be required to be notified to the
APPENDIX V STATUTORY AND GENERAL INFORMATION
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A(
Company and the Stock Exchange pursuant to rules 5.40 to 5.59 of the GEM Listing Rulesrelating to securities transactions by director once the H Shares are listed. For this purpose, therelevant provisions of the SDI Ordinance will be interpreted as if they applied to theSupervisors;
(b) none of the Directors or the Supervisors nor any of the parties listed in paragraph 7(7) of thisAppendix is interested in the promotion of the Company, or in any assets which have, withinthe two years immediately preceding the issue of this prospectus, been acquired or disposed ofby or leased to the Company or its subsidiary;
(c) none of the Directors or the Supervisors nor any of the parties listed in paragraph 7(7) of thisAppendix is materially interested in any contract or arrangement subsisting at the date of thisprospectus which is significant in relation to the business of the Company or its subsidiary;
(d) save in connection with the Underwriting Agreement, none of the parties listed in paragraph7(7) of this Appendix:
(i) is interested legally or beneficially in any Shares in the Company or its subsidiary; or
(ii) has any right (whether legally enforceable or not) to subscribe for or to nominate personsto subscribe for securities in the Company or its subsidiary;
(e) save as referred to above, there are no existing or proposed service contracts (excludingcontracts expiring or terminable by the employer within one year without payment ofcompensation other than statutory compensation) between the Company or its subsidiary andany of the Directors or Supervisors;
(f) no amount or benefit has been paid or given within the two years preceding the date of thisprospectus to the Promoters nor is any such amount or benefit intended to be paid or given; and
(g) none of the Directors or their associates (as defined in the GEM Listing Rules of the StockExchange) or any Shareholder (which to the knowledge of the Directors owns more than 5% ofthe issued share capital of the Company) has any interest in any of the five largest suppliers andthe five largest customers of the Company or its subsidiary.
6. SUMMARY OF TERMS OF THE SHARE OPTION SCHEME
1. The following is a summary of the principal terms of the Share Option Scheme conditionally approvedby a resolution of the shareholders of the Company in a general meeting dated 23rd June, 2002.Adoption of the Share Option Scheme is conditional upon satisfaction of the conditions set out insub-paragraph 1(17) below.
(1) Who may join
The Board may, at its discretion, invite any full-time employees including any executivedirector of the Company or its subsidiaries, if any, (“Employees”) to take up options to subscribe forH Shares at a price calculated in accordance with sub-paragraph (4) below, except that Employeeswho are PRC nationals and have taken up any options to subscribe for H Shares shall not be entitledto exercise the options until (a) the current restrictions imposed by the relevant PRC laws andregulations restricting PRC nationals from subscribing for and dealing in H Shares or any laws orregulations with similar effects (“H Shares Restrictions”) have been abolished or removed; and (b)the CSRC or other relevant government authorities in the PRC have approved the new issue of HShares upon the exercise of any options which may be granted under the Share Option Scheme.
APPENDIX V STATUTORY AND GENERAL INFORMATION
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(2) Payment on acceptance of option offer
RMB1.00 is payable by the Employee to the Company on acceptance of the option offer.
(3) Terms and conditions of options
Any offer of options to any Employees who are PRC nationals must be made upon theconditions, among others, that no options so taken up by any such Employees shall be exercised until(a) the H Shares Restrictions have been abolished or removed; and (b) the CSRC or other relevantgovernment authorities in the PRC have been obtained for the exercise of any options which may begranted under the Share Option Scheme. Subject to the above, the Board may in its absolute discretionspecify such conditions as it thinks fit when making an offer to an Employee (including, withoutlimitation, as to the performance criteria to be satisfied by the Employee and/or the Company and/orits Subsidiaries, which must be satisfied before an option may be exercised), provided such conditionsshall not be inconsistent with any other terms and conditions of the Share Option Scheme. The Boardshall not grant any offer of options to any Employee without first ascertaining whether such Employeeis a PRC national subject to the H Shares Restrictions.
(4) Subscription price of H Shares
The subscription price for H Shares under the Share Option Scheme will be determined by theBoard and notified to each grantee and will be no less than the highest of:
(a) the closing price of the H Shares as stated in the Stock Exchange’s daily quotations sheeton the date of offer, which must be a business day;
(b) the average closing prices of the H Shares as stated in the Stock Exchange’s dailyquotations sheets for the five business days immediately preceding the date of offer; and
(c) the nominal value of a H Share.
(5) Maximum number of H Shares
(a) The maximum number of H Shares which may be issued upon exercise of all outstandingoptions offered to be granted or granted and yet to be exercised under the Share OptionScheme and any other schemes of the Group must not, in aggregate, exceed 30% of theH Shares of the Company in issue from time to time.
(b) The total number of H Shares available for issue under options which may be grantedunder the Share Option Scheme and any other option scheme of the Group must not, inaggregate, exceed 19,800,000 H Shares, being 10% of the number of H Shares of theCompany in issue as at the date of commencement of the listing of the H Shares on theStock Exchange unless Shareholders’ approval has been obtained pursuant to sub-paragraph (c) below. Options lapsed in accordance with the terms of the Scheme or anyother share option scheme of the Group shall be not be counted for the purpose ofcalculating the 10% limit.
(c) Subject to (a) above and without prejudice to (d) below, the Company may issue a circularto its shareholders to seek approval of shareholders in general meeting and whereapplicable, approval by holders of different classes of Shares at separate class meetingsto refresh such 10% limit. However, the total number of H Shares available for issueunder options which may be granted under the Share Option Scheme and other suchoption schemes of the Group in these circumstances must not exceed 10% of the numberof H Shares of the Company in issue as at the date of the approval to refresh the limit.
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Options previously offered to be granted or granted under the Share Option Scheme or anyother option scheme of the Group prior to the date of approval of the refreshed limit(including those outstanding, cancelled or lapsed in accordance with the Share OptionScheme or such other option scheme of the Group and those that have been exercised)shall not be counted for the purpose of calculating the refreshed limit.
(d) Subject to (a) above and without prejudice to (c) above, the Company may issue a circularto its shareholders to seek separate shareholders’ approval in general meeting and whereapplicable, approval by holders of different classes of Shares at separate class meetingsto grant options beyond the 10% limit or the refreshed limit provided that the options inexcess of the 10% limit or the refreshed limit are to be granted only to participantsspecified by the Company before such approval is sought.
(6) Maximum entitlement of each Employee
The total number of H Shares issued and which may fall to be issued upon exercise of theoptions granted under the Share Option Scheme and any other option scheme of the Group (includingboth exercised and outstanding options) to each Employee in any 12-month period shall not exceed1% of the issued H Shares in the share capital of the Company for the time being (“Individual Limit”).Any further grant of options in excess of the Individual Limit in any 12-month period up to andincluding the date of such further grant shall be subject to the issue of a circular to the shareholdersand the shareholders’ approval in general meeting of the Company with such Employee and hisassociates (as defined under the GEM Listing Rules) abstaining from voting. The number and terms(including the subscription price) of options to be granted to such Employee must be fixed beforeshareholders’ approval and the date of board meeting for proposing such further grant should be takenas the date of grant for the purpose of calculating the subscription price.
(7) Grant of options to connected persons
(a) Any grant of options under the Share Option Scheme to a director, chief executive orsubstantial shareholder of the Company or any of their respective associates (as definedunder the GEM Listing Rules) must be approved by independent non-executive directorsof the Company (excluding independent non-executive director who is the grantee of theoptions).
(b) Where any grant of options to a substantial shareholder or an independent non-executivedirector of the Company, or any of their respective associates, would result in the HShares issued and to be issued upon exercise of all options already granted and to begranted (including options exercised, cancelled and outstanding) to such person in the12-month period up to and including the date of such grant:
(i) representing in aggregate over 0.1% of the H Shares in issue; and
(ii) having an aggregate value, based on the closing price of the H Shares at the dateof each grant, in excess of HK$5 million;
such further grant of options must be approved by shareholders of the Company in generalmeeting. The Company must send a circular to the shareholders. All connected persons ofthe Company must abstain from voting at such general meeting, except that any connectedperson may vote against the relevant resolution at the general meeting provided that hisintention to do so has been stated in the circular. Any vote taken at the meeting to approve
APPENDIX V STATUTORY AND GENERAL INFORMATION
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the grant of such options must be taken on a poll. Any change in the terms of optionsgranted to a substantial shareholder or an independent non-executive director of theCompany, or any of their respective associates, must be approved by the shareholders ofthe Company in general meeting.
(8) Time of exercise of option
No Employees who are PRC nationals and have taken up any options to subscribe for H Sharesshall be entitled to exercise any such options until: (a) the H Shares Restrictions have been abolishedor removed and; (b) approvals have been obtained from the CSRC or other relevant governmentauthorities in the PRC for the exercise of any option which may be granted under the Share OptionScheme. Subject to the above, an option may be exercised in accordance with the terms of the ShareOption Scheme at any time during a period to be notified by the Board to each grantee provided thatthe period within which the option must be exercised shall not be more than 10 years from the dateof grant of the option.
(9) Rights are personal to grantee
An option is personal to the grantee and shall not be transferred, assigned, charged, mortgagedor encumbered and no grantee shall create any third party interest over or in relation to any option.
(10) Rights on ceasing employment, death, takeover, compromise or voluntary winding-up
Subject to the following and subject to the H Shares Restrictions having been abolished orremoved and approvals have been obtained from the CSRC and any other relevant governmentauthorities in the PRC for the exercise of any options which may be granted under the Share OptionScheme, an option may be exercised by the grantee (or his personal representative) after theoccurrence of the events as follows:
(a) Rights on ceasing employment
If the grantee of an option ceases to be an Employee for any reason other than death,misconduct or certain other grounds, the grantee may exercise the option up to the grantee’sentitlement at the date of cessation (to the extent not already exercised) within the period ofthree months following the date of such cessation, which date shall be the last actual workingday with the relevant company in the Group whether salary is paid in lieu of notice or not failingwhich the option will lapse.
(b) Rights on death
If the grantee of an option dies before exercising the option in full and none of the certainevents which would be a ground for termination of his or her employment has occurred, thepersonal representative(s) of the grantee shall be entitled within a period of twelve months fromthe date of death to exercise the option (to the extent not already exercised) in full or to theextent specified in the notice to exercise such option.
(c) Rights on take-over
If a general offer by way of take-over is made in the PRC and/or Hong Kong to all theholders of H Shares (or all such holders other than the offeror and/or any person controlled bythe offeror and/or any person acting in concert with the offeror) and, in case of a general offerin the PRC, such general offer obligation is not exempted by the CSRC and in the case of a
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general offer in Hong Kong, such offer becomes or is declared unconditional, the grantee (orhis or her personal representative(s)) shall be entitled to exercise the option (to the extent notalready exercised) at any time within 14 days of such offer becoming or being declaredunconditional, after which the option shall lapse.
(d) Rights on a compromise
If a general offer by way of a scheme of arrangement is made to all the holders of Sharesand the scheme has been approved by the necessary number of holders of Shares at the requisitemeetings, the grantee (or his or her personal representatives) may thereafter (but before suchtime as shall be notified by the Company) by notice in writing to the Company exercise theoption to its full extent or to the extent specified in such notice; and
(e) Rights on voluntary winding-up
In the event a notice is given by the Company to its members to convene a generalmeeting to consider approving a resolution for voluntary winding-up of the Company, theCompany shall give notice thereof to the grantee. The grantee (or his or her personalrepresentative(s)) may by notice in writing to the Company exercise all or any of the optionsat any time not later than five business days prior to the proposed general meeting of theCompany, such notice to be accompanied by a remittance for the full amount of the aggregatesubscription price for the H Shares in respect of which the notice is given, whereupon theCompany shall as soon as possible and, in any event, no later than the business day immediatelyprior to the date of the proposed general meeting referred to above, issue the relevant H Sharesto the grantee. A notice given by the Company to the holders of the Shares for the purposes ofconsidering, and if thought fit, approving a resolution for: (a) the merger or division of theCompany which shall lead to the dissolution of the Company; or (b) the dissolution of theCompany under the relevant provisions of the Company Law or the Articles of Association shallbe a notice to convene a general meeting to consider a resolution within the meaning of aresolution to voluntarily wind-up of the Company for the purposes of this provision.
(11) Effects of alterations to capital
In the event of a capitalisation issue, rights issue, sub-division or consolidation of Shares orreduction of capital whilst any option remains exercisable, such adjustment of the subscription priceor the number of H Shares subject to the Share Option Scheme and the subject matter of the optionsso far as unexercised, which shall be certified by an independent financial adviser or the auditors forthe time being of the Company as fair and reasonable will be made, provided that no such adjustmentshall be made so that a H Share would be issued at less than its nominal value or which would givea grantee a different proportion of the issued share capital of the Company as that to which he or shewas previously entitled and no alteration shall be made if any alteration in the capital structure of theCompany is the result of an issue of Shares as consideration in a transaction.
(12) Lapse of Option
(a) Subject to sub-paragraph (12)(b) below, an option shall lapse automatically and not beexercisable (to the extent not already exercised) on the earliest of:
(i) the expiry of the Option Period;
(ii) the expiry of the periods referred to in sub-paragraphs (10)(a), (b) and (c)respectively;
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(iii) subject to the scheme of arrangement becoming effective, the expiry of the periodreferred to in sub-paragraph 1(10)(d);
(iv) the date on which the grantee of an option ceases to be an Employee by reason ofthe termination of his or her employment on grounds including, but not limited to,misconduct, bankruptcy, insolvency and conviction of any criminal offence;
(v) the date of the commencement of the voluntary winding-up of the Company referredto in sub-paragraph 1(10)(e); or
(vi) the date on which the grantee commits a breach of sub- paragraph 1(9); or
(b) If a grantee who is a PRC national shall cease to be an Employee or shall die beforeceasing to be an Employee, or if a general offer by way of a takeover or by way of ascheme or arrangement or if a voluntary winding-up of the Company shall havecommenced before the conditions relating to H Shares Restrictions having been fulfilledor satisfied or before approvals by the CSRC or other relevant government authorities inthe PRC have been obtained for the exercise of any options which may be granted underthe Share Option Scheme, the option granted shall immediately lapse.
(13) Ranking of H Shares
The H Shares to be issued upon the exercise of an option will be subject to the Company’sArticles of Association for the time being in force and will rank pari passu with the existing issuedH Shares in on the capital of the Company as at the date of exercise and in particular will rank in fullfor all dividends or other distributions declared paid or made on or after the date of exercise of theoption other than any dividend or other distribution previously declared or recommended or resolvedto be paid or made if the record date therefor shall be before the date of exercise.
(14) Cancellation of Options granted
The Board may effect the cancellation of any options granted but not exercised on such termsas may be agreed with the relevant grantee as the Board may in its absolute discretion see fit and ina manner that complies with all applicable legal requirements for such cancellation. Where theCompany cancels any options granted but not exercised and offers to grant or grants new optionswhether to the same grantee or to another grantee, such offer or grant of new options may only bemade under the Share Option Scheme if there is available unissued options (excluding the cancelledoptions) within each of the 10% limit or refreshed limit as referred to in sub-paragraphs 1(5)(b) and(c).
(15) Period of Share Option Scheme
The Share Option Scheme will remain valid for a period of 10 years commencing on the dateof adoption of the Share Option Scheme (save that the Company, by resolution in general meeting orthe Board may at any time terminate the operation of the Share Option Scheme). After termination,no further options will be offered or accepted but the provisions of the Share Option Scheme shallin all other respects remain in full force and effect and options which are granted prior to suchtermination shall continue to be exercisable in accordance with their terms of issue.
(16) Alteration to Share Option Scheme
The Share Option Scheme may be altered in any respect by resolution of the Board except thatthe provisions of the Scheme relating to matters contained in rule 23.03 of the GEM Listing Rulesshall not be altered to extend the class of persons eligible for the grant of options or to the advantage
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of grantees or prospective grantees except with the prior approval of the shareholders of the Company
in general meeting (with participants and their associates abstaining from voting) and, where
appropriate, by separate resolution of the holders of different classes of Shares of the Company at
separate class meetings. No such alteration shall operate to affect adversely the terms of issue of any
option granted or agreed to be granted prior to such alteration except with the consent or sanction in
writing of such majority of the grantees as would be required of the Company’s shareholders under
the Company’s Articles of Association for the time being for a variation of the rights attached to the
Shares.
Any alteration to the terms and conditions of the Share Option Scheme, which are of a material
nature or any change to the terms of options granted, must first be approved by the shareholders of
the Company in general meeting, except where the alterations take effect automatically under the
existing terms of the Share Option Scheme. The amended terms of the Share Option Scheme or the
options must still comply with the relevant requirements of the GEM Listing Rules. Any change of
authority of the Board in relation to any alteration to the terms of the Share Option Scheme must first
be approved by the shareholders of the Company in general meeting.
(17) Conditions of the Share Option Scheme
The Share Option Scheme is conditional on: (a) the GEM Listing Committee of the Stock
Exchange granting approval of the Share Option Scheme and any options which may be granted
thereunder and the listing of and permission to deal in any H Shares which may be issued pursuant
to the exercise of options granted under the Share Option Scheme; and (b) the obligations of the
underwriters under the Underwriting Agreement becoming unconditional (including, if relevant, as a
result of the waiver of any such condition(s)) and not being terminated in accordance with the terms
of that agreement or otherwise. Application has been made to the GEM Listing Committee of the
Stock Exchange for the approval of the Share Option Scheme, the granting of the options under the
Share Option Scheme and the listing of and permission to deal in the H Shares which may be issued
pursuant to the exercise of the options granted under the Share Option Scheme.
2. Present status of the Share Option Scheme
(1) Approvals of the GEM Listing Committee required
The Share Option Scheme is conditional on, among other things, the GEM Listing Committee
of the Stock Exchange granting approval of such scheme, the subsequent grant of options by the
Company pursuant thereon and the listing of and permission to deal in any H Shares to be issued
pursuant to the exercise of any options which may be granted under the Share Option Scheme.
(2) Application for approvals
Applications have been made to the GEM Listing Committee of the Stock Exchange for the
approvals referred to in sub-paragraph (1) above.
(3) Grant of option
As at the date of this prospectus, no options have been granted or agreed to be granted under
the Share Option Scheme.
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7. OTHER INFORMATION
(1) Tax Indemnity and Estate Duty
Under the Underwriting Agreement, the Initial Management Shareholders and Pudong TechnologyInvestment have jointly and severally undertaken that they will indemnify and keep the Companyindemnified from and against, among other things, any and all taxation falling on the Company resultingfrom or by reference to any income, profits, gains, transactions, events, matters or things earned, accrued,received, entered into (or deemed to be so earned, accrued, received or entered into) or occuring on orbefore the date on which dealings in the H Shares commence on the Stock Exchange, subject to certainexceptions.
The Directors have been advised that no material liability for estate duty under the laws of the PRCwould be likely to fall upon the Company or any member of the Group.
(2) Litigation
Neither the Company nor its subsidiary is engaged in any litigation or arbitration of materialimportance and no litigation or claim of material importance is known to the Directors to be pending orthreatened by or against the Company that would have an effect on the Company’s results of operations orfinancial condition.
(3) Preliminary Expenses
The preliminary expenses of the Company were approximately RMB320,000 and had been paid by theCompany.
(4) Promoters
The Promoters of the Company are China General(1), Shanghai Pharmaceutical(2), ZJ Hi-tech ParkCo.(3), Pudong Technology Investment(4), Fudan University, Wang Hai Bo, Su Yong, Zhao Da Jun, Li Junand Fang Jing. Saved as disclosed in this prospectus, within the two years immediately preceding the dateof this prospectus, no cash, securities or other benefit has been paid, allotted or given or is proposed to bepaid, allotted or given to the promoters in connection with the Placing or the related transactions describedin this prospectus.
Notes:
1. China General is a limited company incorporated in the PRC on 18th March, 1998 with a registered capital of RMB700,000,000.
It has 16 directors namely, Tong Chang Yin ( ), Jin Ji Qi ( ), Chen Wei Gen ( ), Chen Ru En ( ), Zhang
Wen Yuan ( ), Sun Xiao Ming ( ), Li Dang, ( ), Jiang Xin Sheng ( ), Li Bin ( ), Sun Guang Qiang
( ), Xiao Gang ( ), Cao Guo Ying ( ), Wu Zi Hua ( ), Zhang Yi Ping ( ), Zhu Bo ( ) and Li Ren
Gui ( ). Its auditor is Reanda Certified Public Accountants ( ), and its principal bankers are Bank of
China and Bank of Communications.
2. Shanghai Pharmaceutical is a joint stock limited company incorporated in the PRC on 18th January, 1994 with a registered capital
of RMB316,207,158. It has 9 directors namely, Qian Jin ( ), Yu Qing Hua ( ), Zhang Jia Lin ( ), Jiang Bo Ren
( ), Wang Zhen ( ), Jiang Jian Qun ( ), Zhou De Fu ( ), Jin Le Hua ( ), Tang Rui Hua ( ). Its
auditor is Shu Lun Pan Certified Public Accountants Co., Ltd., and its principal banker is Industrial and Commercial Bank
Shanghai Branch.
3. ZJ Hi-tech Park Co., is a joint stock limited company incorporated in the PRC on 18th April, 1996 with a registered capital of
RMB467,565,000. It has 8 directors namely, Dai Hai Bo ( ), Zhang Gui Juan ( ), Lin Yu Feng ( ), Qian Ren Jie
( ), Mao De Ming ( ), Hua Ming ( ), Yu Ti Jian ( ) and Zhang Jian Wei ( ). Its auditor is Shu Lun Pan
Certified Public Accountants Co., Ltd., and its principal banker is Industrial and Commercial Bank Shanghai Branch.
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4. Pudong Technology Investment is a limited company incorporated in the PRC on 3rd June, 1999 with a registered capital of
RMB99,960,000. It has 3 directors namely, Dai Yan Ling ( ), Lin Qi Zhang ( ), Li Quan Sheng ( ). Its auditor
is Shanghai Zhong Hua Hu Yin Certified Public Accountants, and its principal banker is Bank of Shanghai.
(5) Sponsors
(a) Guotai Junan Capital has made an application on behalf of the Company to the GEM Listing
Committee for the listing of, and permission to deal in, the H Shares in issue and to be issued
as mentioned herein and any new H Shares which may fall to be issued upon the exercise of
options granted under the Share Option Scheme.
(b) After the listing, Guotai Junan Capital and Barits will receive normal professional fees in
connection with the advisory services to be provided to the Company for a term period covering
the remainder of the financial year ending 31st December, 2002 and the two financial years
thereafter.
(c) The Underwriters will receive underwriting commission pursuant to the Placing.
(6) No Material Adverse Change
Saved as disclosed in this prospectus, the Directors believe that there has been no material adverse
change in the financial or trading position or prospect of the Group since 31st December, 2001.
(7) Qualification of experts
The qualifications of the experts who have given opinions in this prospectus are as follows:
Name Qualification
Guotai Junan Capital Registered investment adviser and an approvedsponsor for listing on GEM
Barits Registered investment adviser, a dealer and anapproved sponsor for listing on GEM
PricewaterhouseCoopers Certified public accountants
Vigers Hong Kong Ltd. Property valuer
Fangda Partners PRC lawyers approved by the relevant authorities inthe PRC to advise on securities matters
(8) Binding Effect
This prospectus shall have the effect, if an application is made in pursuance hereof, of rendering all
persons concerned bound by all the provisions (other than the penal provisions) of sections 44A and 44B
of the Companies Ordinance so far as applicable.
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(9) Miscellaneous
(a) Saved as disclosed in this prospectus:
(i) within the two years preceding the date of this prospectus, no share or loan capital of theCompany or its subsidiary has been issued or agreed to be issued fully or partly paideither for cash or for a consideration other than cash;
(ii) no share or loan capital of the Company or its subsidiary is under option or is agreedconditionally or unconditionally to be put under option;
(iii) neither the Company nor its subsidiary has issued or agreed to issue any founder shares,management shares or deferred shares; and
(iv) since the date two years prior to the date of this prospectus, no commissions, discounts,brokerage or other special terms have been granted in connection with the issue or saleof any shares or loan capital of the Company or its subsidiary.
(b) The Company currently does not intend to apply for the status of a sino-foreign investment jointstock limited company and does not expect to be subject to the Sino-foreign Joint Venture Law.
(c) Saved as disclosed in this prospectus, none of the equity and debt securities of the Company islisted or dealt in any other stock exchange nor is any listing or permission to deal being orproposed to be sought.
(d) The Company has no outstanding convertible debt securities.
(10) Consent of experts
Guotai Junan Capital, as Sponsor, Barits, as the Company’s financial adviser,PricewaterhouseCoopers, as the Company’s independent auditors, Vigers Hong Kong Ltd., as theCompany’s property valuer, Fangda Partners, as the Company’s legal advisers on PRC law, have given andhave not withdrawn their respective written consents to the issue of this prospectus with the inclusion oftheir valuation certificates and/or opinion and/or the references to their names included herein in the formand context in which they are respectively included.
(11) Particulars of the Selling Shareholders
The name, address and description of each of the Selling Shareholders, namely, China General, ZJHi-tech Park Co., Fudan University and Pudong Technology Investment, being the shareholders offering HShares (which would have been converted from Domestic Shares into H Shares prior to the Placing) for saleunder the Placing, are as follows:
Name Address DescriptionH Shares offeredfor sale
China General No. 2 Qiaojian Li,Haidian District,Beijing,The PRC
a state-owned enterpriseengaged in foreign tradeand economic cooperationand other businesses
initially 8,600,744H Shares
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Name Address DescriptionH Shares offeredfor sale
ZJ Hi-tech Park Co. No. 200 LangdongAvenuePudong New Area,Shanghai,The PRC
a joint stock limitedcompany whose A sharesare listed on the ShanghaiStock Exchange and isprincipally engaged inland development andinvestment
initially 6,956,364H Shares
Fudan University No. 220 Nandun Road,Shanghai,The PRC
![Supporting Information[c] Department of Chemistry, Fudan University, 2005 Songhu Road, Shanghai 200438, P. R. China [d] State Key Laboratory of Organometallic Chemistry, Shanghai Institute](https://static.documents.pub/doc/80x56/5f0b286c7e708231d42f223c/supporting-c-department-of-chemistry-fudan-university-2005-songhu-road-shanghai.jpg)
