Asiapharm Group Annual Report 2008

Luye Pharma Group LTD.

Leading The

Edge

ANNUAL REPORT 2008

ANNUAL REPORT 2008

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contents 02 company profile 03 our presence in china 05 chairman's statement 08 board of directors 11 key management 13 group structure 15 newly aquired products 16 key products 18 five-year financial overview 19 growth driver 21 operation review and development 24 corporate information 25 corporate governance

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A Revitalised Identity, A Long-standing Commitment

At the heart of our business is an unwavering commitment to discover and develop new technologies and treatments that address a broad spectrum of important, rapidly growing areas of medical need. We have chosen to participate in a business with a high degree of relevance for the future of medicine, where technological and scientific superiority can advance the state of care and provide our Group with competitive advantage. As part of our continuing journey to grow as a company, we have adopted a new name, Luye Pharma Group Ltd., to better represent our aspiration to venture beyond borders and deliver products of exceptional quality in the service of healthcare.

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company profile

Established in 1994, we are today one of the leading specialty pharmaceutical groups in the PRC. We specialise in the research, development, production and sale of pharmaceutical drugs and new formulations for chemical drugs, the sale of R&D results and patents for new drugs, and the provision of research services on a contract basis. Our ultra modern facilities in Yantai and Nanjing are fully equipped with leading edge technology, fully integrated and GMP certified, enabling us to carry out all aspects of pre-clinical evaluation; from pharmaceutical to pharmacology research, drug safety evaluation and clinical trials; to the full production of our natural drugs. We currently employ approximately 150 researchers and have close collaborative relationships with renowned universities and research institutions to drive our R&D efforts, enabling us to stay at the forefront of specialty pharmaceutical developments. To reach our customers, we have established an extensive distribution network of 35 sales support offices, covering 30 provinces, municipals, and autonomous regions, reaching approximately 3,000 hospitals. This is further supported by a strong network of over 300 distributors and 500 sales and marketing personnel.

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Luye Pharma Group Ltd

our presence in china

Inner Mongolia

Shandong Luye Pharmaceutical Co., Ltd. Nanjing Kanghai Pharmaceutical Co., Ltd. Nanjing Sike Pharmaceutical Co., Ltd. Beijing WBL Peking University Biotech Co., Ltd.

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performance driven

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Luye Pharma Group Ltd.

chairman’s statement

A Steady Run

delivering positive results amidst trying times

Dear Shareholders, It is with great pleasure that I present to you Luye Pharma Group Ltd.’s (formerly known as Asiapharm Group Ltd.) (“the Group” or “Luye Pharma”) annual report for the financial year ended 31 December 2008 (“FY2008”). I would like to take this opportunity to share with our shareholders my views on the outlook of the pharmaceutical industry and the Group’s future development plans.

Year in Retrospect FY2008 has been a challenging year for global industries as the economic downturn and credit crunch impacted global economies, including the PRC. However, amidst such unfavorable operating conditions and the prospect of an economic slowdown, our experienced and competent management team was successful in executing our business strategies to achieve yet another year of growth.

In FY2008, we achieved outstanding results within the PRC pharmaceutical sector. Revenue grew 27.9% year-onyear (“y-o-y”) to RMB 651.0 million on contributions from our proprietary drugs. In tandem with the increase in revenue, profit before tax rose 26.3% to RMB 82.8 million while net profit attributable to ordinary equity holders of the company grew 6.8% y-o-y to RMB 62.1 million. Sales of the Group’s pharmaceutical drugs continue to be a key revenue generator. In FY2008, the Group actively sought to build on its existing presence to expand its domestic distribution network. In addition the Group actively pursued enhancements to its existing sales methodologies to streamline processes and increase operational efficiencies to ensure the sustainable development of the Group. Investment in research and development of new drugs remains an integral aspect of our business development strategy. In

line with the Group’s strategic placement we continue to retain R & D results for the development of our own unique proprietary drugs. Reflecting the continued recognition of the Group’s achievements in the development of new pharmaceutical drugs, Luye Pharma was awarded a “National Science Award for Scientific Development (2nd Class)” by the PRC national science institute. Our expansion initiative promulgated in 2006 for the international expansion of the Group’s core businesses continues to bear fruit. We have successfully established our presence within markets like Vietnam, Philippines, Pakistan and Singapore over the past two years and will continue to seek out new markets to further expand our distribution network. In FY2008, the Groups successfully initiated the sale of its proprietary anticholesterol drug Xuezhikang under the brand names HypoCol® and Lipascor®

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chairman’s statement (cont’d)

in Singapore and Malaysia. Reflecting the support for this product from the mass consumer market, inaugural sales contribution from HypoCol® reached RMB 13.2 million in FY2008. The Group continues to explore opportunities within the international markets. Our proprietary Oncology drug, CMNa® is currently undergoing clinical studies to comply with approval requirements from the South Korean authorities.

Outlook In view of the global financial crisis and its effect on the PRC economy, the central government has promulgated a broad array of economic stimulus plans such as the RMB 4.0 trillion stimulus package to spur domestic consumption. In addition, the PRC central government has also invested over RMB 850 billion for major revamps to its existing healthcare system. A major portion of the RMB 850 billion investments will go into strengthening several key aspects of healthcare in the PRC, including medical equipment and technology, generic drugs and pharmaceutical businesses. According to the National Development and Reform Commission, annual subsidies provided for the basic healthcare of rural and urban residents will be increased to RMB 120 per resident. While this RMB 100 billion initiative, along with the RMB 850 billion investments in healthcare restructuring, is expected to impact players within the healthcare and pharmaceutical industry significantly, we stand poised to face and overcome any potential challenges that may arise. Sales of our patented drugs remain a key driving force behind the Group’s business developments. In FY2008, the Group continued to place great emphasis on the development of our local and overseas distribution networks. Moving forward,

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Luye Pharma Group Ltd.

we will focus on the development of new proprietary drugs utilizing internationally recognized standards to complement our existing product portfolio and explore additional opportunities to further expand our distribution networks. Through these efforts, we will seek to further enhance the value of our products and increase the market penetration for our new products. Merger and acquisition (“M&A”) remains one of the Group’s key growth drivers. The Group will continue to source for suitable M&A opportunities with domestic and international pharmaceutical companies to complement and grow our current business with a view to generate better returns for our shareholders. On 6th March 2009, the Group successfully obtained the approval of shareholders at a Special General Meeting pertaining to several matters, including 1) the proposed name change of the Company to Luye Pharma Group Ltd. and 2) the acquisition and relocation of the Group’s facilities. Following the shareholders’ approval, the Company has changed its name from Asiapharm Group Ltd. to Luye Pharma Group Ltd. with effect from 17 March 2009. We firmly believe that the name change will better align various segments of the Group’s business under the Luye brand name. The change will also be beneficial in strengthening the Group’s brand equity and further streamline the Group’s dealings with external business partners. In FY2008, the Group received notification from the PRC government about the rezoning of land usage and the concessionary offer for a larger plot of land within Yantai, Shandong, PRC to relocate Luye’s existing production facilities. This offer came at an opportune

time where the Group’s current facilities has been fully developed and utilized and will be insufficient to meet the demands of the Group’s growing business. Based on preliminary estimates, the Group expects the new site to adequately meet the future expansion requirements of the Group. Building the international profile of the Group and our subsidiaries remains an integral aspect of our business strategy. While conditions across global markets continue to affect the business environment, the Group will continue to maintain sound fiscal policies and prudent investment strategies to enhance our technological capabilities, improve personnel management and achieve greater success in product development. This will enable the Group to better compete against other global pharmaceutical players and ensure the long-term benefits of our shareholders.

In appreciation The Group was able to remain resilient against the effects of the economic downturn and weakening of consumer demand to report yet another year of growth. Our success would not have been possible if not for the unyielding support of our stakeholders. Therefore, on behalf of the Group, I would like express my sincerest appreciation to all Luye employees, directors, shareholders, suppliers and business partners. As we enter yet another year ahead, I look forward to your continued support and the greater heights that we will scale together.

Liu Dian Bo Executive Chairman 20 March 2009

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board of directors

Mr Liu Dian Bo Executive Chairman

Mr Yuan Hui Xian Executive Director

Mr Yang Rong Bing Executive Director

Mr Liu Dian Bo is our Executive Chairman and one of the founders of our Group. He was appointed as our Director on 9 July 2003. As our Executive Chairman, Mr Liu Dian Bo is responsible for the overall management, operations and the charting and reviewing of corporate directions and strategies of our Group. Prior to founding our Group in 1994, Mr Liu Dian Bo was a teacher at Yantai Teacher’s College from 1985 to 1989. From 1989 to 1993, Mr Liu Dian Bo was the General Manager of Penglai Huatai Pharmaceutical Co., Ltd where he was overall in-charge of operations. From 1994 to 1999, Mr Liu Dian Bo was the Chairman cum General Manager of Yantai Luye. From 1999 to the incorporation of our Company in 2003, Mr Liu Dian Bo was the Chairman cum President of Shandong Luye Pharmaceutical Co., Ltd. (“Shandong Luye”). Mr Liu Dian Bo holds a medical diploma from the Yishui Special Medical College.

Mr Yuan Hui Xian is our Executive Director and one of the founders of our Group. Mr Yuan Hui Xian was appointed as our Director on 9 July 2003 and is in charge of our Group’s public relations. Mr Yuan is also the Executive Chairman of Nanjing Sike Pharmaceuticals Co., Ltd.. Prior to joining our Group in 1994, Mr Yuan Hui Xian was a doctor with Shengli, from 1980 to 1994, where he was in charge of radiation diagnosis. From 1994 to 1999, Mr Yuan Hui Xian was a Deputy General Manager with Yantai Luye. From 1999 to the incorporation of our Company in 2003, Mr Yuan Hui Xian was the VicePresident and executive director of Shandong Luye. Mr Yuan Hui Xian holds a medical diploma from the Shengli Oil Medical School. He has also received a post-graduate certificate in Economics from the China People’s University.

Mr Yang Rong Bing is our Executive Director and one of the founders of our Group. Mr Yang Rong Bing has been appointed as our Executive Director since 1 March 2007 and was previously our Non-Executive Director since 9 July 2003. He is currently the Executive Chairman of Nanjing Kanghai Pharmaceutical Co., Ltd.. Mr Yang Rong Bing is also currently the General Manager and an Executive Director of Wuhu Luye, a position he has assumed since March 2001. Mr Yang Rong Bing has also been a Non-Executive director of Shandong Luye since 2000. Prior to that, Mr Yang Rong Bing was with Jiangsu Xuzhou Bio-Chemical Pharmaceutical Factory from 1988 to 1993 where he worked his way up from a technician to assistant factory head. From 1993 to 1997, Mr Yang Rong Bing was a Deputy General Manager with Yantai Biotech. In 1994, Mr Yang Rong Bing joined Yantai Luye as a Deputy General Manager and from 1999 to 2000, he was the Chief Sales Executive and Executive Director of Shandong Luye. Mr Yang Rong Bing holds a Bachelor of Science degree from the Beijing Normal University.

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Luye Pharma Group Ltd.

board of directors

Mr Tan Soo Kiat Independent Non-Executive Director

Associate Professor Tan Chong Huat Independent Non-Executive Director

Dr Hong Hai Independent Non-Executive Director

Mr Tan Soo Kiat is our Independent NonExecutive Director and was appointed a Director on 31 March 2004. He is currently the Director of Corporate Advisory of Intergate Pte Ltd., a company engaged in the provision of corporate advisory services. Mr Tan Soo Kiat was formerly the Chief Operating Officer and Executive Director of Goodpack Limited (from July 1999 to November 2000 and was responsible for the financial functions of the company. He also assisted the managing director of the company in its dayto- day business operations. Mr Tan Soo Kiat was formerly a General Manager and Executive Director of Progen Holdings Ltd. (from July 1997 to April 1999), VicePresident (Finance) of Pacific Century Regional Developments Limited (from March 1996 to July 1997) and a Treasurer with the investment banking arm of DBS Bank (from April 1994 to March 1996). Mr Tan Soo Kiat has more than 14 years of experience in the banking and finance industry. Prior to working in Singapore, he was Senior Internal Auditor and Marketing/Loans Manager for Bank of Western Australia Ltd. in Australia (from June 1990 to April 1994) and Senior Internal Auditor for Challenge Bank Ltd. in Australia (from June 1988 to June 1990). Mr Tan Soo Kiat obtained a degree in Commerce (Accounting) from University of Otago, New Zealand in 1983. He is a chartered accountant with the Institute of Chartered Accountants of New Zealand. Mr Tan Soo Kiat is also an Independent Director of a number of companies listed on the Singapore Exchange.

Mr Tan Chong Huat is our Independent Director and was appointed on 31 March 2004. Currently, Mr Tan is Managing Partner of KhattarWong, a firm of advocates and solicitors. He also heads its Corporate and Securities department.

Dr Hong Hai is our Independent NonExecutive Director and was appointed on 1 August 2007. Currently, Dr Hong Hai is a Professor at Nanyang Business School, Nanyang Technological University in Singapore. He is a director of PTC Logistics Ltd, Singapore Deposit Insurance Corporation Ltd, China Merchant Pacific Holding Ltd and Starhill Global Reit Management Limited.

Mr Tan graduated with a degree and master degree in law respectively from National University of Singapore and University of London. He is an advocate and solicitor of the Supreme Court of Singapore, a solicitor in England and Wales, solicitor in Supreme Court of New South Wales, Australia, a Notary Public and a Commissioner for Oaths. He is also a member of the Singapore Institute of Arbitration, the Chartered Institute of Arbitrators, and an accredited arbitrator with China International Economic and Trade Arbitration Commission and a full member of Singapore Institute of Directors. He has extensive experience in corporate, banking and project finance law in Singapore and the region, and acted in numerous significant corporate transactions. He has been named a leading practitioner in many reputable professional publications, including Asia Pacific Legal 500, Asia Law Leading Lawyers.

He was previously Dean of NTU’s Business School (2004-07) and President and Chief Executive Officer of Haw Par Corporation Ltd (1990-2003). He is an Honorary Council Member of the Singapore Chinese Chamber of Commerce & Industry.

Mr Tan is an adjunct associate professor of the Law Faculty and the Business School, National University of Singapore and the Nanyang Business School, Nanyang Technology University.

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board of directors

Mr Kung Kuo Chuan Non-Executive Director

Mr Wang Xin Yu Non-Executive Director

Mr Kung Kuo Chuan is our Non-Executive Director and was appointed on 11 August 2008. Mr Kung is a co-founder and Partner of MBK Partners, a major private equity firm focused on making buyout investments in North Asia – Greater China, Korea, and Japan. Mr Kung is also a director of a number of MBK Partners’ portfolio companies in the region.

Mr Wang Xin Yu is our Non-Executive Director and was appointed on 11 August 2008. Currently, Mr Wang is a director of MBK Partners, a major private equity fund focused on making buyout investments in North Asia – Greater China, Korea, and Japan.

He was previously a Managing Director with The Carlyle Group (1998-2005) and an Engagement Manger with McKinsey & Company (1991-1998). Mr Kung holds a B.A. from Dartmouth College and an M.B.A. from Harvard Business School.

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Luye Pharma Group Ltd.

He was previously a Director with with UBS investment banking in Hong Kong, covering Asian industrial sectors. Before joining UBS, Mr Wang worked at JPMorgan investment banking for 4 years in New York and Hong Kong. He also worked for China Minmetals Group for 4 years as a financial analyst. Mr Wang holds a B.A. from University of International Business and Economics and graduated with honors, Beta Gamma Sigma in M.B.A. from University of Chicago.

key management

Mr Diao Hai Peng Vice-President

Mr Chong Chin Fan Chief Financial Officer

Dr Li You Xin Executive Vice-President of Research and Development

Mr Diao Hai Peng is our Vice-President and the General Manager of Nanjing Sike Pharmaceuticals Co., Ltd.. Prior to joining our Group in 1996, Mr Diao Hai Peng was a R&D technician with Xuzhou Biochemical Pharamaceutical Co., Ltd from 1988 to 1995. From 1995 to 1996, Mr Diao Hai Peng was a Sales Manager with Hainan Jizhong Medical Technology Development Co., Ltd.. Mr Diao Hai Peng joined Shandong Luye as a sales manager in 1996 and was promoted to Head of International Business in 2000. In 2002, he was further promoted to Vice-President, Sales and Marketing. In 2007, Mr Diao also assumed the position of General Manager of Nanjing Sike Pharmaceuticals Co., Ltd.. Mr Diao Hai Peng holds a Bachelor of Science degree from the Xiamen University.

Mr Chong Chin Fan is our Chief Financial Officer. Mr Chong Chin Fan joined our Group in February 2004 and is responsible for all financial and accounting matters of our Group. Prior to joining our Group, Mr Chong Chin Fan was the Group Financial Controller and Company Secretary of the Econ International Group from 1991 to 2004. After graduation in the United Kingdom in 1976 as a Certified Accountant, he worked in London from 1976 to 1978. He then joined KPMG Singapore from 1979 to 1981. In 1981, he joined Wah-Chang International Group, Singapore, as the Group Accountant and later became Group Accounting and Administrative Manager, a position he held until 1991. Mr Chong Chin Fan is a Certified Public Accountant and a Member of The Institute of Certified Public Accountants of Singapore, and is a Fellow Member of The Association.

Dr Li You Xin is our Vice-President in charge of group research and development center. Prior to his appointment in AsiaPharm, from year 1998, Dr Li You Xin served as the Scientific Director, Senior Scientist and Head of Polymer Chemistry and Parenteral Delivery System at Schwarz Pharma AG. Dr Li You Xin was also the Senior Scientist at Hoechst AG/Aventis responsible for researching and developing Polymer Chemistry and Drug Delivery Systems from year 1994 to year 1998. After obtaining his PH.D.S degree in Chemistry from Beijing University in 1988, Dr Li You Xin joined the PRC Institute of Chemistry Chinese Academy of Sciences, and later moved on to the Institute of Polymer and Institute of pharmaceutics and Biopharmacy, Philipps University in 1991; to conduct advanced research in polymer chemistry and parenteral delivery system with funding from the Alexander von Humboldt Foundation. To-date, Dr Li You Xin has published over 50 papers in biomaterials, drug delivery and gene transfection.

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key management

Ms Xue Yun Li Vice-President, Research and Development

Mr Fan Zhi Cheng Chief Engineer

Mr Li Shi Xu Senior Director of Manufacturing

Ms Xue Yun Li is our Vice-President, Research and Development at Shandong Luye. Responsible for the successful development of AsiaPharm’s key products, Sodium Aescinate for Injection (“Maitongna”) and Sodium Pantoprazole for Injection (“Nuosen”), she has played a decisive role in the modernisation of Traditional Chinese Medicine. Accredited with numerous professional and provincial accolades including the “Shandong Province Scientific Techniques Award “First Grade” and the “Yantai City Professional Technique Prominence Award” from 2003-2005, Ms Xue holds the patent for the new drug “Keweijia” which is used in the treatment of blood potassium deficiency. Prior to joining our Group, Ms Xue was the R&D Section Chief in Shenyang Liao He Pharmaceutical Co.. Ms Xue joined Shandong Luye as the Product Development Manager in 1994 as one of the pioneers of Shandong Luye. She subsequently held various positions such as Project Development Director and Vice-Head of Research and Development of Shandong Luye in her 11 years of exemplary performance with Shandong Luye. After graduating with a degree in Medicinal Chemistry from Jiamusi University in 1988, Ms Xue continued with her post-graduate education, and obtained her Masters in Business Administration from University of Greenwich in 2002.

Mr Fan Zhi Cheng is our Chief Engineer at Shandong Luye and is responsible for the drafting, construction and maintenance of our Group’s new and existing GMP standard production lines and facilities in Shandong and Nanjing. Mr Fan has in-depth understanding of the engineering and operational requirements of pharmaceutical companies, which he garnered from over 25 years of operational experience in the pharmaceutical industry. Prior to joining the Group in 1997, Mr Fan was Deputy Chief Engineer at Hohhot Specialty Medicines Company From 1982 to 1995. From 1995 to 1997, Mr Fan Zhi Cheng was Chief Engineer at China National Pharmaceutical Industry Corporation and as General Manager in its subsidiaries. Mr Fan joined us as Engineer in 1997 before being promoted to Chief Engineer. Mr Fan holds a Bachelor of Science degree.

Mr Li Shi Xu is our Senior Director of Manufacturing, and is responsible for the supervision of our manufacturing and warehousing operations at Shandong Luye. Prior to joining our Group in 1994, Mr Li was a Sales Executive at Yantai Traditional Chinese Medicine Station. Mr Li is a certified pharmacist and joined Shandong Luye in 1994 as an operation staff. Through his exemplary performance, Mr Li progressed on to hold various key appointments within our Group including Production Manager, Product Quality Controller and now heads our Manufacturing department as Senior Director of Manufacturing. Mr Li Shi Xu holds a degree in Traditional Chinese Medicine from the Chinese Pharmaceutical University.

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Luye Pharma Group Ltd.

group structure

Luye Pharma Group Ltd. ( formerly known as AsiaPharm Group Ltd.)

43% Beijing WBL Peking University Biotech Co., Ltd.**

AsiaPharm Investments Ltd.

AsiaPharm Biotech Pte. Ltd.

65%

Shandong Luye Pharmaceutical Co., Ltd.

75%

Solid Success Holding Limited

SmartMedicine Pte. Ltd.

36%

Steward Cross Pte. Ltd.**

25% Nanjing Sike Pharmaceutical Co., Ltd.

75%

Apex Group Holding Limited

25% Nanjing Kanghai Pharmaceutical Co., Ltd.

Kang Hai Pharmaceutical Technology Development Limited

Yantai Luye Drugs Trading Co., Ltd.

69% Shandong Luye Natural Drug Research and Development Co., Ltd. * All 100% owned, unless otherwise stated ** Associated Companies

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thoroughly inquisitive mindset

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Luye Pharma Group Ltd.

newly acquired products

New milestones in R&D

enhanced capabilities complementing new product acquisitions The collaborative nature of our R&D efforts coupled with strategic investment in technology give us a sharper competitive edge. Apart from capitalizing on the emphasis on healthcare in the PRC, we continue to explore opportunities to expand our existing distribution networks and R&D platform.

As a mitotic inhibitor, coupled with its liposome delivery system, Lipusu targets and inhibits rapidly growing cancer cells and is most commonly used to treat ovarian, breast and non-small cell lung cancer. Lipusu works by attaching itself to structural supports called microtubules, which form the framework inside living cells. In order to divide, cells must break down their internal framework, and the product stops this process by locking the support into place.

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key products

Tiandida

Tiandixin

Tiandida is a selective cytoprotective adjuvant used to reduce toxicities associated with certain cancer chemotherapy and radiotherapy. It can help to reduce the incidence of dry mouth problems in patients undergoing post-operative radiation treatment for head and neck cancer. In women with advanced ovarian cancer, who are receiving repeated doses of the chemotherapy drug cisplatin, Tiandida reduces the harmful effects of chemotherapy on the kidneys.

Tiandixin, an anti-tumour polysaccharide from the Shiitake mushroom, is one of the host-mediated anti-cancer drugs which have been shown to affect host immune systems. The product seems to enhance T-helper cell function, increase stimulation of interleukin, interferon, and normal killer cells. In addition to antitumour activity, it also possesses immuneregulatory effects, anti-viral activity, antimicrobial properties.

Hypocol

CMNa

(Standardized Red Yeast Rice Extract in Capsule) HypoCol capsule is scientifically prepared using the proprietary ingredient Red Yeast (known in Chinese as “Hong Qu”) of the species Monascus purpureus Went fermented on premium rice. The use of Hong Qu as traditional Chinese health food for circulatory health is well documented in the ancient Chinese Pharmacopoeia, “Ben Cao Gang Mu – Dan Shi Bu Yi”, first published during the Ming Dynasty (A.D. 1368 - A.D. 1644). This knowledge combined with thorough understanding of modern pharmacology and biotechnology led to the development of HypoCol capsule, an all-natural cholesterol balancing product of clinical proven efficacy. HypoCol is available over-thecounter at pharmacy stores and Chinese medical halls and is recommended for consumers who have mildly or moderately elevated levels of serum total cholesterol, who prefer to take natural products and who are concern with side effect of cholesterol-lowering drugs.

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Luye Pharma Group Ltd.

CMNa is a novel nitroimidazole radio-sensitizer, which targets hypoxic tumour cells, with high efficacy and low toxicity. In 2002, CMNa was approved as a Class One New Drug, by the SFDA, and listed as one of the Top 10 Medical Science News in China. Used as an adjuvant to radiotherapy, CMNa has been clinically proven to significantly enhance the sensitivity of tumour cells to radiotherapy. In addition, CMNa has demonstrated promising sensitizing effects with chemotherapy in other clinical trials.

key products

Maitongna

Lutingnuo

Nuosen

Since its market launch in 1995, sales of Maitongna, our main natural drug, have been increasing steadily. The main component of Maitongna is Sodium Aescinate, a natural active ingredient extracted from SuoLuoZi a fruit of the “Aesculus Chinensis Bge” tree. This natural drug is commonly used in the fields of orthopaedics and neurology to treat inflammation and swelling, resulting from ailments such as hydrocephalus, intracephalic hematoma, chronic venous insufficiency, burns, traumas, fractures and wounds.

Launched in February 2003, our fastest growing drug is a natural drug with new formulation, manufactured from a natural active ingredient, reduced glutathione synthetase, through the freeze dry process. It is a prescriptive drug used mainly in the field of hepatology, to treat liver aliments such as acute alcoholic hepatitis, alcoholic hepatic fibrosis and liver cirrhosis. It also reduces toxics from chemical treatments on patients with tumours.

Launched in 1999, Nuosen is a chemical drug with naew formulation, manufactured from Sodium Pantoprazole, through the freeze dry process. Nuosen was admitted to the\ “National Health Insurance List” in September 2004. This prescriptive drug is mainly used to treat gastroenterological ailments, such as duodenum ulcers, gastric ulcers and acute pathologic of gastric mucosa, compound gastric ulcer and acute haemorrhage of the upper digestive tract.

Okai

(Sodium Aescinate for Injection)

(Reduced Glutathione for Injection)

(Sodium Pantoprazole for Injection)

Sidinuo

(Elcatonin for Injection)

Olai

(Compound Sodium Tablet) Developed in-house and launched in March 2004, Okai is a tablet form of our main product, Maitongna. Its main components are Sodium Aescinate and Diethylamine Salicylate. It is principally used to treat inflammation, caused by dropsy and haematoma. It also relieves symptoms of the veins, caused by vein transfusion and phlebitis, helps to maintain the normal functions of the veins

Sidinuo is a synthesized peptide derivative of eel calcitonin, preapred in a sterile water solution. It inhibits osteoclasts, decreases bone resorption, prevents calcium loss of the bone while improving bone mineral density, increases the density of the bone cortex as well as the content of the bone calcium and mineral density. It is used in the field of orthopaedics to relieve pain resulting from oesteoporosis, hypercalcaemia and metastasis bone tumors. In 2004, we have secured manufacturing and distribution rights from the State Food and Drugs Administration of the PRC (SFDA) and was admitted to the “National Health Insurance List” in December 2004.

Developed in-house and launched in August 2002, Olai is newly-formulated over-the-counter (OTC) drug, with the main active ingredients - Sodium Aescinate and Diethylamine Salicylate. It is an antiinflammatory agent used to relief pain caused by dropsy and haematoma; and the symtomatic treatment of phlebitis. The product is available as a topical gel, with excellent transdermal absorption properties, and is non-staining formula.

(Compound Sodium Aescinate)

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five-year financial overview

Year ended 31 December (Rmb Million)

2004

2005

2006

2007

2008

Revenue

315.4

344.3

308.3

508.9

651.0

75.7

90.4

85.5

65.6

82.8

0.5

(0.2)

(4.6)

(8.0)

(20.7)

Profit After Taxation Before Minority Interest

76.2

90.1

80.9

57.6

62.1

Minority Interest

(4.4)

(0.5)

2.8

0.5

0.0

Profit Attributable to Shareholders

71.8

89.6

83.7

58.1

62.1

Profit Before Taxation And Minority Interest Taxation

5-Year Revenue

5-Year Profit After Tax and Minority Interests

(Rmb Million)

(Rmb Million)

700

651.0

600

83.7

80 70

508.9

500

89.6

90 71.8

57.6

60

400 315.4

62.1

50

344.3 308.3

300

40 4

200

3 100 0

18

2 2004

2005

2006

Luye Pharma Group Ltd.

2007

2008

0

2004

2005

2006

2007

2008

growth driver

Revenue By Sector

0.2% 0.0% 99.8%

0.4% 0.4% 99.2%

FY2007

FY2008

Sales of Pharmaceutical Drugs Sales of R&D/Patents Sales of Active Ingredients

Revenue by Specialisation

6.8%

8.0%

2.0%

5.7%

FY2007

45.8%

7.0% 52.0%

FY2008

16.0%

19.9%

16.1%

20.6%

Oncology Orthopedic Hepatology Gastroenterology Cardio Vascular Others

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solutions that work

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Luye Pharma Group Ltd.

operation review and development

quality

the key to our success FY2008 was a year of challenges and strategically important developments for Luye Pharma Group Ltd. (formerly known as Asiapharm Group Ltd.) as we continued to build on our successful business strategies and seek to further enhance our position as a leading specialty drugs manufacturer within the PRC pharmaceutical industry.

Overview and Financial Performance FY2008 was a year of challenges and strategically important developments for Luye Pharma Group Ltd. (formerly known as Asiapharm Group Ltd.) as we continued to build on our successful business strategies and seek to further enhance our position as a leading specialty drugs manufacturer within the PRC pharmaceutical industry.

Following our successful acquisitions in FY2007, we continued our efforts to amalgamate the acquired assets with our existing operations. Reflecting the success of our efforts, Group revenue rose 27.9% to RMB 651.0 million in FY2008 from RMB 509.0 million in FY2007, bolstered by sales of its proprietary pharmaceutical products such as Lipusu, Nuosen, Lutingnuo, CMNa and maiden contributions from recently acquired product Hypocol®.

In line with the continued revenue growth, selling and distribution expenses grew by 47.6% to RMB 364.3 million mainly attributable to the recruitment of a larger sales force and traveling and meeting expenses. Other expenses increased by 55.0% to RMB 45.6 million due mainly to an increase in R&D expenses as the Group continued to increase its focus on its own product development and a fair value adjustment of an available-for-sale investment of RMB 4.3 million as a result of a decrease in the value of our investments. Despite higher expenses and an increase in taxation due mainly to a deferred tax of RMB 8.4 million for withholding tax on retained profits of the PRC subsidiaries, the Group’s FY2008 net profit attributable to equity holders of the parent grew 6.8% to RMB 62.1 million from RMB 58.1 million in FY2007. Our financial position remains strong. As at 31 December 2008, our cash and cash equivalent balance stood at RMB 118.5 million.

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operation review and development

Segmental Contribution Sales of Group’s Pharmaceutical Drugs

Underscored by the Group’s strategic initiative to focus on the sale of its proprietary drugs, contribution from the sale of pharmaceutical drugs in FY2008 grew 28.7% to RMB 649.7 million from RMB 504.8 million. The commendable growth was achieved against the backdrop of a challenging operating environment brought about by tighter PRC regulatory policies to contain rising healthcare costs and a general slowdown in the global economic climate. Contributing to the growth was exceptional demand for key products Lipusu, Okai, Elcatonin, CMNa and Nuosen which recorded sales growth of 106.6%, 37.1%, 29.9%, 23.2% and 12.2% respectively. Export Sales of Active Ingredients

As part of the Group’s decision to reduce export sales of active ingredients due to its low margins and higher credit risks, export sales of active ingredients

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Luye Pharma Group Ltd.

decreased by RMB 0.5 million to RMB 1.6 million in FY2008 from RMB 2.1 million in FY2007. Sales of R&D Results

In line with the Group’s decision to retain economically viable research findings and divert more R&D resources for development of its own drugs, sales of R&D results declined to a negative amount of RMB 0.3 million in FY2008 due to a write-back of R&D income resulting from the cancellation of existing contracts.

Contribution by Geographical Regions Building on the success of its international expansion strategy which began in FY2005, the Group has established a significant market presence in the growing markets of Vietnam, Pakistan and Korea. In FY2008, the Group further extended the success of the above strategy through entry into Singapore and

Malaysia with maiden contribution from its recently acquired Xuezhikang product – marketed in South East Asia under the brand names HypoCol® and Lipascor® For FY2008, HypoCol® contributed RMB 13.2 million to the Group’s total revenue. Moving forward, the Group will seek to further extend its international market presence and has identified various potential markets in South East Asia for its proprietary pharmaceutical products.

Significant Developments Subsequent to FY2008, the Group received a mandate from shareholders through a Special General Meeting convened on March 6 2009 for 1) the proposed name change of the Group to Luye Pharma Group Ltd and 2) the acquisition and relocation of the Group’s facilities. On 17th March 2009, the Company’s name was changed from Asiapharm Group Ltd. to Luye Pharma Group Ltd. to better align various segments of the Group’s

operation review and development

business under the Luye brand name and complement the Group’s effort to build a stronger and more recognisable brand name for its products. The change will also serve to streamline the Group’s dealings with external business partners. In FY2008, the Group received notification from the PRC government about the rezoning of land usage and the concessionary offer for a larger plot of land within Yantai, Shandong, PRC to relocate Luye’s existing production facilities. This offer came at an opportune time as the Group’s existing facilities – which were constructed in 1999 – had reached their maximum growth potential due to space constraints and could not handle the projected increase in capacity that was necessary to meet the Group’s future development plans. With the approval from shareholders for the acquisition, the Group will invest in total approximately RMB 293.5 million, including the purchase of a plot of new land in Yantai, Shandong for the construction its new production facilities

at a concessionary price. This land parcel – which has an approximate gross area of 216.6mu – is bigger than the existing premises and will house a new facility that caters to the Group’s future growth requirements. Based on preliminary estimates, the new facility will boost the Group’s annual production capacity for Lyophilised powder for injection from 2 billion vials to 4 billion vials. Following the relocation of production facilities to the new site in 2014, the existing premises will be converted into commercial use land and the Group may choose to either lease out or sell the premises.

Forging Ahead In view of the global financial crisis and its effect on the PRC economy, the central government has promulgated a broad array of initiatives including a RMB 4.0 trillion economic stimulus package to spur domestic consumption. Acknowledging the growing importance of a comprehensive healthcare system,

the PRC central government has also committed to increase healthcare expenditure by RMB 850 billion over three years to deliver universal healthcare to all its citizens and to expand the participation rate of both urban and rural populace in the basic national medical insurance system to beyond 90 per cent. We believe these measures will benefit the PRC healthcare sector and reflects the central government’s commitment to the sustained development of the healthcare sector. Leveraging on our experience in drug development and strong financial position, Luye Pharma stands poised to capitalise on opportunities for selective and synergistic mergers and acquisitions. Going forward, the Group will continue to review and evaluate prospective targets that meet Luye Pharma’s set criteria and seek to deliver long-term value to our valued shareholders.

20 March 2009

ANNUAL REPORT 2008

23

corporate information

Board of Directors

Manufacturing Facilities

Liu Dian Bo Executive Chairman

Shandong Luye Pharmaceutical Co., Ltd No. 9 Baoyuan Road Laishan District Yantai 264003, Shandong PRC

Yuan Hui Xian Executive Director Yang Rong Bing Executive Director Tan Soo Kiat Independent Non-Executive Director Tan Chong Huat Independent Non-Executive Director Hong Hai Independent Non-Executive Director Kung Kuo Chuan Non-Executive Director (Appointed on 11 August 2008) Wang Xin Yu Non-Executive Director (Appointed on 11 August 2008)

Audit Committee Tan Soo Kiat Chairman Tan Chong Huat Hong Hai

Nominating Committee Hong Hai Chairman Tan Soo Kiat Tan Chong Huat

Remuneration Committee Tan Chong Huat Chairman Tan Soo Kiat Hong Hai

Company Secretaries Yeo Poh Noi, Caroline Loh Li Ping, Angelin Assistant Company Secretary (Appointed on 1 December 2008) Richard J Evans Assistant Company Secretary, Bermuda (Appointed on 1 December 2008)

Registered Office Clarendon House 2 Church Street Hamilton HM 11 Bermuda

24

Luye Pharma Group Ltd.

Nanjing Kanghai Pharmaceutical Co., Ltd Nanjing Sike Pharmaceutical Co., Ltd Nanjing New High Technology Industry Developing Zone Nanjing 210061 PRC

Singapore Correspondence Office 133 Cecil Street #12-02 Keck Seng Tower Singapore 069535 Tel : (65) 6220 0119 Fax : (65) 6220 0282 www.asiapharm.biz

Share Transfer Agent Boardroom Corporate & Advisory Service Pte. Ltd. 3 Church Street, #08-01 Samsung Hub Singapore 049483

Auditors Ernst & Young Hong Kong Certified Public Accountants 18th floor, Two International Finance Centre 8 Finance Street Central Hong Kong Partner-In-Charge: Hoffman Cheong Appointment since FY 2008

Solicitors Khattar Wong 80 Raffles Place, #25-01, UOB Plaza 1, Singapore 048624 Shook Lin & Bok 1 Robinson Road #18-00 AIA Tower Singapore 048542

Principal Bankers Bank of China (PRC) Citibank, N.A. Singapore

corporate governance Luye Pharma Group Ltd. (formerly known as Asiapharm Group Ltd.) or (the “Company”) is committed to maintaining a high standard of corporate governance. Good corporate governance establishes and maintains an ethical environment and enhances the interests of all shareholders. This report describes the Company’s corporate governance processes and activities with specific reference to the Code of Corporate Governance 2005 (the “Code”).

BOARD OF DIRECTORS (Principles 1, 2, 3 and 6) The primary role of the Board of Directors (the “Board”) is to lead and control the Company’s operations and affairs and to protect and enhance long-term shareholder value. The Board sets the overall strategy for the Group and supervises executive management. To fulfill this role, the Board is responsible for the overall corporate governance of the Group including setting its strategic direction, establishing goals for management and monitoring the achievement of these goals. The Board consists of eight directors and the Board is of the view that the current board size is appropriate, taking into account the nature and scope of the Company’s operations. The Company’s board composition and balance comprise three independent directors making up more than one - third of the Board. The objective judgement of the independent and non-executive directors on corporate affairs and their collective experience and contributions are valuable to the Company. The Board members comprise businessmen and professionals with accounting and financial background and business/ management experience, all of whom as a group, provides the Board with the necessary experience and expertise to direct and lead the Group: Directors

Designation

Date First Appointed

Date Last Re-elected

Liu Dian Bo

Group Executive Chairman

9 July 2003

28 April 2006

Yuan Hui Xian

Executive Director

9 July 2003

28 April 2006

Yang Rong Bing

Executive Director

9 July 2003

28 April 2006

Tan Soo Kiat

Independent Non-Executive Director

31 March 2004

27 April 2007

Tan Chong Huat

Independent Non-Executive Director

31 March 2004

27 April 2007

Hong Hai

Independent Non-Executive Director

1 August 2007

28 April 2008

Kung Kuo Chuan

Non-Executive Director

11 August 2008

N.A. (*)

Wang Xin Yu

Non-Executive Director

11 August 2008

N.A. (*)

(*)

Under the Company’s bye-laws, both Directors are due for retirement and re-election at the next Annual General Meeting (“AGM”) of the Company scheduled for 24 April 2009.

The Board meets at least four times a year, to review and approve the announcements of the quarterly, half-year and full-year results for release to the Singapore Exchange Securities Trading Limited (“SGX-ST”). Ad-hoc meetings are convened as and when necessary to address any specific significant matters that may arise. Frequency of Board meetings and Committee meetings held during the financial year are set out in Table “A”. The Board considers the present size and composition appropriate for the current nature and scope of the Group’s operations. The Board meets to consider the following corporate events and actions: • • • • • • •

To review with the management the business and affairs of the Group; To review the financial performance of the Group; To review and approve the broad policies, strategies and financial objectives of the Company; To review the processes for evaluation of the adequacy of internal controls, risk management, financial reporting and compliance; To review and approve the nominations of board directors and appointment of key personnel; To approve annual budgets, major funding proposals, investment and divestment proposals, including material capital investment; and To monitor and review the performance of Management. ANNUAL REPORT 2008

25

corporate governance (cont’d) The Board has adopted a set of guidelines on matters that require its approval. Matters which are specifically reserved to the Board for decision include those involving business plans and budgets, material acquisitions and disposal of assets, corporate or financial restructuring, corporate strategy, share issuances, dividends, and other returns to shareholders. Specific board approval is required for any investments or expenditures involving merger and acquisition. The Board is supported in its tasks by Board committees, namely the Audit Committee, Nominating Committee and Remuneration Committee, which had been established to assist in the execution of its responsibilities. The Board is furnished with detailed information concerning the Group from time to time, to enable the Board to fulfill its responsibilities and to be fully cognizant of the decisions and actions of the Group’s executive management. All the directors have unrestricted access to the Company’s records and information. Detailed Board papers are prepared for each meeting of the Board and include sufficient information from Management on financial, business and corporate issues to enable the directors to be properly briefed on issues to be considered at Board meetings. All the independent directors have access to all levels of senior executives in the Group, and are encouraged to speak to other employees to seek additional information if they so require. Should the directors, whether as a group or individually, need independent professional advice, the Company will, upon direction by the Board, appoint a professional advisor selected by the group or the individual to render the advice, at the expense of the Company. Newly appointed directors are given briefings by the Management on the business activities of the Group and its strategic directions and will also be updated on major events of the Company. Although the roles of the Executive Chairman and the Executive Directors are separate, with a clear division of responsibilities between the Executive Chairman and the two Executive Directors, both Executive Chairman and the Executive Directors oversee the overall management of the Group. The Executive Chairman, who is a substantial shareholder of the Company, also plays a pivotal role in steering the strategic direction and growth of the business, since he has considerable industry experience, and ensures information flow between Management and the Board. The Board believes that there are sufficient safeguards and measures in place to ensure decision-making are based on collective information and no concentration of power and authority in a single person. The Executive Chairman also monitors communications and relations between the Company and its shareholders and between the Board and Management with a view of encouraging construction relations and dialogue amongst them. The Board has independent access to the Company Secretary and the Assistant Company Secretary (appointed on 1 December 2008), who provide the Board with regular updates on the rules and regulations of the Singapore Exchange Securities Trading Limited (“SGX-ST”) and other relevant regulations applicable to the Company. Either the Company Secretary or the Assistant Company Secretary attend all Board meetings and assist the Chairman in ensuring that Board procedures are followed and reviewed such that the Board functions effectively.

26

Luye Pharma Group Ltd.

corporate governance (cont’d) TABLE “A” DIRECTORS’ ATTENDANCE AT BOARD AND COMMITTEE MEETINGS Meeting of

Board

Audit Committee

Nominating Committee

Remuneration Committee

Total held in FY2008

4

4

1

2

Liu Dian Bo

4

-

-

-

Yuan Hui Xian

1

-

-

-

Yang Rong Bing

2

-

-

-

Tan Soo Kiat

4

4

1

2

Tan Chong Huat

3

3

0

1

Hong Hai

4

4

1

2

Kung Kuo Chuan (Appointed w.e.f. 11.08.2008)

1

-

-

-

Wang Xin Yu (Appointed w.e.f. 11.08.2008)

1

-

-

-



NOMINATING COMMITTEE (Principles 4 and 5) The Nominating Committee (“NC”) comprises all independent directors. Dr Hong Hai was appointed as Chairman of the NC with effect from 14 August 2007. The other members of the NC are Messrs Tan Soo Kiat and Tan Chong Huat. The NC is regulated by a set of written Terms of Reference and its key functions include: (a) (b) (c) (d)

To make recommendations to the Board on all Board appointments and re-appointments; To determine the criteria for identifying candidates and to review nominations for new appointments; To review and to determine on an annual basis the independence of each director; To determine/propose the objective performance criteria for the Board’s approval and to review the Board’s performance in terms of the performance criteria; (e) To conduct a formal assessment of the effectiveness of the Board as a whole and the contribution by each director to the effectiveness of the Board, particularly when a director serves on multiple Boards. The NC has formulated evaluation procedures and the performance criteria for the assessment of the Board’s performance as a whole. In evaluating a director’s contribution and performance for purposes of re-nomination, the NC takes into consideration a variety of factors such as attendance, preparedness, participation and candour. It had conducted a board performance evaluation for the financial year ended 31 December 2008. The Directors submit themselves for re-nomination and re-election at regular intervals of at least once every three years. The Company’s bye-laws also provides for newly appointed directors to submit themselves for re-nomination and reelection at the next AGM of the Company.

REMUNERATION COMMITTEE (Principles 7 and 8) The Remuneration Committee (“RC”) comprises all independent directors. The RC is chaired by Mr Tan Chong Huat and the other members are Mr Tan Soo Kiat and Dr. Hong Hai.

ANNUAL REPORT 2008

27

corporate governance (cont’d) The RC is regulated by a set of written Terms of Reference. Its key functions include: • To recommend to the Board a framework of remuneration for directors’ fees of the Board, as well as remuneration of executive directors and key executives. For executive directors and key executives, the framework covers all aspect of executive remuneration and is competitive and sufficient to attract, retain and motivate the key executives of the required quality to run the company successfully. • To review and determine the specific remuneration packages and terms of employment for each director and senior executives. The Company adopts a remuneration policy for employees comprising a fixed component and a variable component. The fixed component is in the form of a base salary. The variable component is in the form of a variable bonus that is linked to the Company’s and the individual’s performance. For the year under review, the RC had met to review and determine the remuneration packages of the executive directors and key executives and had ensured that the directors are adequately but not excessively remunerated. The RC had also considered, in consultation with the Executive Chairman, amongst other things, the responsibilities, skills, expertise and contribution to the Company’s performance and whether the remuneration packages are competitive and sufficient to ensure that the Company is able to attract and retain the best available executive talent. No individual director is involved in fixing his own remuneration. Non-executive directors are paid directors’ fees annually subject to approval of shareholders at general meeting. The RC will also review the service agreements of Mr Liu Dian Bo (Executive Chairman), Mr Yuan Hui Xian and Mr Yang Rong Bing (both of whom are Executive Directors), upon the expiry of their agreements. The Company does not have any other service agreement with its staff. In addition the RC has been designated as the Scheme Committee responsible for the administration of the Asiapharm Share Award Scheme (the “Scheme”) approved and adopted by the shareholders at the Special General Meeting of the Company held on 27 April 2007.

DISCLOSURE ON REMUNERATION (Principles 8 and 9) Remuneration of Directors A breakdown showing the level and mix of each individual director’s remuneration payable for FY2008 is as per the table below.

28

Salary Including CPF

Bonuses/Profit Sharing

Fees

S$500,000 and above

NIL

S$250,000 to below S$500,000

Liu Dian Bo

71%

16%

13%

Below S$250,000

Yuan Hui Xian

59%

25%

16%

Yang Rong Bing

55%

23%

22%

Luye Pharma Group Ltd.

Tan Soo Kiat

0%

14%

86%

Tan Chong Huat

0%

17%

83%

Hong Hai

0%

17%

83%

Kung Kuo Chuan

0%

0%

100%

Wang Xin Yu

0%

0%

100%

corporate governance (cont’d) Remuneration of Top 5 Key Executives who are not Directors S$500,000 and above

Nil

S$250,000 to below S$500,000

Nil

Below S$250,000

Chong Chin Fan Diao Hai Peng Fan Zhi Cheng Li You Xin Xue Yun Li

None of the employees whose remuneration exceeds S$150,000 during the year are immediate family members of the directors or substantial shareholders.

AUDIT COMMITTEE (Principle 11) The Audit Committee (“AC”) comprises three members, all of whom are independent directors. The Chairman of the AC is Mr Tan Soo Kiat, who is a Chartered Accountant by profession. The other members are Mr Tan Chong Huat and Dr Hong Hai. The members of the Audit Committee have relevant accounting and financial management experience. The key responsibilities of the AC include the following: • To review with the external auditors the audit plans, including the nature, scope and effectiveness of the audit before the commencements of each audit, the evaluation of the Company’s system of internal accounting controls, the audit reports and management letters issued by the external auditors and Management’s response to the letters; • To review with the internal auditors the internal audit plan and effectiveness of the internal audit functions • To evaluate the adequacy of the Group’s system of internal controls with the internal auditor; • To review significant financial reporting issues including the quarterly, half-year and annual financial statements, focusing in particular on the changes in accounting policies and practices, major risk areas, significant adjustments resulting from the audit and compliance with accounting standards so as to ensure the integrity of the financial statements and to review announcements of the results and any formal announcements relating to the Company’s or Group’s financial performance, before submission to the Board for approval for release to the SGX-ST; • To review interested person transactions in accordance with the requirements of the Listing Rules of the SGX-ST; • To review all non-audit services provided by the external auditors to determine if the provision of such services would affect the independence of the external auditors; • To review and recommend the re-appointment of the external auditors; and • To undertake such other functions, duties, reviews and projects as may be requested by the Board or as may be required by statute or the Listing Manual. The AC may also examine any other aspects of the Company’s affairs, as it deems necessary where such matters relate to exposures or risks of regulatory or legal nature, and monitor the Company’s compliance with its legal, regulatory and contractual obligations. The AC meets at least four times a year. For the year under review, the AC has also met with the external auditors without the presence of the Company’s Management.

ANNUAL REPORT 2008

29

corporate governance (cont’d) The Company has in place a whistle-blowing framework, which provides an avenue for the staff of the Company to access the AC Chairman to raise concerns about improprieties and the independent investigation of such matters by the AC. Contact details of the AC have been made available to all staff. The AC has not received any complaints up to the date of this report. The AC has reviewed the non-audit services provided by the external auditors, Messrs Ernst & Young, Hong Kong, and is of the opinion that the provision of such services does not affect their independence. The AC has recommended the reappointment of Messrs Ernst & Young, Hong Kong as external auditors at the forthcoming Annual General Meeting.

INTERNAL CONTROLS AND INTERNAL AUDIT (Principles 12 and 13) The Board believes in the importance of maintaining a sound system of internal controls to safeguard the interests of the shareholders and the Company’s assets. To achieve this, the Company has outsourced the internal audit function to a professional firm and has implemented internal reviews, to ensure that the system of internal controls maintained by the Company is sufficient to provide reasonable assurance that the Company’s assets are safeguarded against loss from unauthorised use or disposal; transactions are properly authorised and proper financial records are being maintained. The AC is satisfied that the outsourced internal audit function is adequately resourced and has appropriate standing within the Company. The AC and the Board have reviewed the Company’s risk assessment based on the reports of the internal auditors and external auditors and are assured that adequate internal controls, including financial, operational and compliance control and risk management, are in place.

COMMUNICATION WITH SHAREHOLDERS (Principles 10, 14 and 15) The Board does not practice selective disclosure, as it is mindful of its obligation to provide timely and fair disclosure of material information. The Board is accountable to the shareholders while Management is accountable to the Board. Results and other material price-sensitive information are released through the SGXNet system on a timely basis for the dissemination to shareholders and the public in accordance with the requirements of the SGX-ST. In addition, all shareholders of the Company receive a copy of the Annual Report and Notice of the AGM. The Notice is also advertised in the newspapers and made available on the SGXNet. At AGMs, shareholders are given opportunities to air their views and to ask questions or seek clarifications from the directors or Management concerning the Company. The Chairmen of the various Board committees and the external auditors are or would be present at every AGM to address any relevant questions that may be raised by the shareholders. The website (www.asiapharm.biz) has information on the Group’s financial and operational performance, portfolio and products. Visitors can visit the website and may download announcements, press releases, annual reports and presentations.

DEALINGS IN THE COMPANY’S SECURITIES The Company has adopted its own Internal Code of Conduct to provide guidance to all directors and officers of the Company and its subsidiaries with regard to dealings in the Company’s securities. Directors of the Company and executives of the Group should not deal in the Company’s shares on short-term considerations and they are prohibited from dealing in the Company’s shares during the periods commencing two weeks prior to the announcement of the Group’s quarterly results and one month prior to the announcement of the Group’s full year results; and ending on the date of the announcement of the relevant results. Directors and all officers are also expected to observe insider-trading laws at all times even when dealing with securities within the permitted trading period.

30

Luye Pharma Group Ltd.

financial contents directors’ report

32

statement by directors

37

independent auditors’ report

38

consolidated income statement

39

balance sheets

40

consolidated cash flow statement

42

statements of changes in equity

44

notes to financial statements

47

statistics of shareholdings

98

notice of annual general meeting

100

directors’ report year ended 31 december 2008

The directors present their report and the audited financial statements of the Company and of the Group for the year ended 31 December 2008.

Directors The directors of the Company in office during the year and up to the date of this report are: Liu Dian Bo - Executive Chairman Yuan Hui Xian - Executive Director Yang Rong Bing - Executive Director Tan Soo Kiat - Independent Non-Executive Director Tan Chong Huat - Independent Non-Executive Director Hong Hai - Independent Non-Executive Director Kung Kuo Chuan - Non-Executive Director (Appointed 11 August 2008) Wang Xin Yu - Non-Executive Director (Appointed 11 August 2008)

Principal Activities The principal activity of the Company is investment holding. Details of the principal activities of the subsidiaries are set out in note 1 to the financial statements. There were no significant changes in the nature of the subsidiaries’ principal activities during the year.

Results for the Year Details of results of the Company and of the Group for the year ended 31 December 2008 and the state of affairs of the Company and of the Group at that date are set out in the financial statements on pages 39 to 97. No final dividend has been recommended by the Directors for the year ended 31 December 2008.

Material Movements in Reserves and Provisions Material transfers to and from reserves are set out in the statements of changes in equity. There were no other material transfers to or from provisions during the year except for normal amounts recognised as an expense for such items as depreciation of fixed assets and amortisation of intangible assets as disclosed in the financial statements.

Acquisition and Disposal of Subsidiaries Disposal of Guangzhou Lifetech Jiuzhoutong New/Special Drug Company On 10 October 2008, the Group has entered into a sale and purchase agreement to divest its 100% equity interest in Guangzhou Lifetech Jiuzhoutong New/Special Drug Company (“Jiuzhoutong”) to an independent party for an aggregate cash consideration of Rmb3,312,882.32. Following the divestment, Jiuzhoutong has ceased to be a subsidiary company of the Group. There is no acquisition during the year.

Issue of Shares and Debentures No shares or debentures were issued during the year.

Arrangements to Enable Directors to Acquire Shares and Debentures Currently, there is no arrangement to enable the directors to acquire shares and debentures.

32

Luye Pharma Group Ltd.

directors’ report (cont’d)

year ended 31 december 2008

Directors’ Interests in Shares and Debentures The directors of the Company holding office at the end of the financial year had no interests in shares and debentures of the Company and related corporations, as recorded in the register of directors’ shareholdings kept by the Company, except as follows: Name of director and Company in which interests is held

Direct Interest

Deemed Interest

1.1.2008 or date of 31.12.2008 appointment, if later

1.1.2008 or date of 31.12.2008 appointment, if later

Liu Dian Bo

11,019,950

-

193,380,900

381,439,877 (1)

Yuan Hui Xian

6,588,900

34,000

-

-

The Company Ordinary shares of US$0.02 each

Yang Rong Bing

-

-

6,588,900

-

Tan Soo Kiat

-

17,000

-

-

Tan Chong Huat

-

17,000

-

-

Hong Hai

-

17,000

-

-

Kung Kuo Chuan

-

-

-

-

Wang Xin Yu

-

-

-

-

Note: 1. Mr Liu Dian Bo’s deemed interest arises from his controlling interest in Asiapharm Holdings Ltd. which is deemed to be interested in the shares held by LuYe Pharmaceutical International Co., Ltd. (“LuYe International”). LuYe International is the holding company of LuYe Pharmaceutical Investment Co., Ltd.. There were no movements in the interest of directors in shares from the end of the financial year to 21 January 2009.

Bad and Doubtful Debts Before the financial statements of the Company and of the Group were made out, the directors took reasonable steps to ascertain that proper action had been taken in relation to the writing off of bad debts and the making of provision for doubtful debts, and have satisfied themselves that all known bad debts, if any, have been written off and that, where necessary, adequate provision has been made for doubtful debts in these financial statements. At the date of this report, the directors are not aware of any circumstances which would render any amount written off or provided for bad and doubtful debts in the Group inadequate to any substantial extent.

Property, plant and equipment Details of movements in the property, plant and equipment of the Group are set out in note 14 to the financial statements.

ANNUAL REPORT 2008

33

directors’ report (cont’d)

year ended 31 december 2008

Current Assets Before the financial statements of the Company and of the Group were made out, the directors took reasonable steps to ascertain that any current assets which were unlikely to realise their book values in the ordinary course of business have been written down to their estimated realisable values or adequate provision has been made for the impairment in the value of such current assets in these financial statements. At the date of this report, the directors are not aware of any circumstances which would render the values attributed to current assets in the consolidated financial statements of the Group misleading.

Charges on Assets and Contingent Liabilities Since the end of the year, and up to the date of this report, no charge on the assets of the Company or any companies in the Group has arisen which secures the liabilities of any other person and no contingent liability has arisen.

Ability to Meet Obligations No contingent or other liability has become enforceable or is likely to become enforceable within the period of twelve months after the end of the year which, in the opinion of the directors, will or may substantially affect the ability of the Company and of the Group to meet their obligations as and when they fall due.

Other Circumstances Affecting the Financial Statements At the date of this report, the directors are not aware of any circumstances not otherwise dealt with in this report or in the financial statements which would render any amount stated in the financial statements of the Company and of the Group misleading.

Unusual Items In the opinion of the directors, the results of the operations of the Company and of the Group during the year have not been substantially affected by any item, transaction or event of a material and unusual nature.

Post balance sheet events Subsequent to the balance sheet date, the Company would be convening a Special General Meeting on 6 March 2009 to seek shareholders’ approval to the following: i) ii) iii) iv)

The proposed change of the Company’s name to “Luye Pharma Group Ltd.” with a secondary name in Chinese as ; The proposed amendments to Memorandum of Association and Bye-Laws of the Company; The proposed Share Purchase Mandate of the Company; and The proposed acquisition of land, construction of new production plant and purchase of new equipment.

Directors’ Service Contracts The Company did not enter into any new service contracts with the directors during the year.

Options At the moment, the Company does not have any share option scheme.

34

Luye Pharma Group Ltd.

directors’ report (cont’d)

year ended 31 december 2008

AsiaPharm Share Award Scheme At a Special General Meeting held on 27 April 2007, the shareholders of the Company had approved the AsiaPharm Share Award Scheme (“ASAS” or “the Scheme”). The committee administering the ASAS is the Remuneration Committee, which comprise three independent non-executive directors, Tan Chong Huat, Tan Soo Kiat and Hong Hai. Details of shares awarded to directors of the company under the Scheme are as follows:

Name of participant

Aggregate number of shares awarded during the financial year ended 31.12.2008

Aggregate number of shares awarded since commencement of scheme to 31.12.2008

Yuan Hui Xian

34,000

34,000

Yang Rong Bing

34,000

34,000

Tan Soo Kiat

17,000

17,000

Tan Chong Huat

17,000

17,000

Hong Hai

17,000

17,000

There are no shares awarded to the controlling shareholders and their associates under the Scheme. No participant has received 5% or more of the total number of shares available under the Scheme. In aggregate, 685,000 treasury shares purchased in FY2007 were awarded to the scheme participants during the financial year. Aggregate Number of Shares Vested Under the ASAS Since the commencement of the Scheme, 685,000 treasury shares purchased under the Share Buyback Mandate in FY2007 were vested in FY2008. Issue of New Shares Under the ASAS During the financial year, no new shares were issued under the ASAS. Unreleased Shares Under the ASAS At the end of the financial year, there were no unreleased shares under the ASAS.

ANNUAL REPORT 2008

35

directors’ report (cont’d)

year ended 31 december 2008

Audit Committee The Audit Committee performed the functions as set out in the Singapore Companies Act. The functions performed are detailed in the Report of Corporate Governance.

Directors’ Interests in Contracts Except for the service contracts signed in 2007 and the transactions disclosed in note 37 to the financial statements, no director received or became entitled to receive a benefit by reason of a contract made by the Company or a related corporation with the director, or with a firm of which the director is a member or with a company in which the director has a substantial financial interest.

Auditors Ernst & Young, Certified Public Accountants, Hong Kong were appointed as the auditors of the Company during the year. The auditors, Ernst & Young, Certified Public Accountants, Hong Kong, have expressed their willingness to accept reappointment as auditors.

ON BEHALF OF THE BOARD

Liu Dian Bo Yuan Hui Xian Executive Chairman Executive Director 5 March 2009

36

Luye Pharma Group Ltd.

statement by directors year ended 31 december 2008

In the opinion of the directors, the financial statements set out on pages 39 to 97 are drawn up so as to give a true and fair view of the state of affairs of the Company and of the Group and the cash flows of the Group for the financial year then ended, and at the date of this statement there are reasonable grounds to believe that the Company will be able to pay its debts as and when they fall due.

ON BEHALF OF THE BOARD

Liu Dian Bo Yuan Hui Xian Executive Chairman Executive Director 5 March 2009

ANNUAL REPORT 2008

37

independent auditors’ report To the shareholders of AsiaPharm Group Ltd. (Incorporated in Bermuda with limited liability) We have audited the financial statements of AsiaPharm Group Ltd. (the “Company”) and its subsidiaries (collectively referred to as the “Group”) set out on pages 39 to 97, which comprise the consolidated and company balance sheets as at 31 December 2008, and the consolidated income statement, the consolidated and company statements of changes in equity and the consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Directors’ responsibility for the financial statements The directors of the Company are responsible for the preparation and the true and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ responsibility Our responsibility is to express an opinion on these financial statements based on our audit. Our report is made solely to you, as a body, in accordance with Section 90 of the Bermuda Companies Act 1981, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and true and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2008 and of the Group’s profit and cash flows for the year then ended in accordance with International Financial Reporting Standards.

Ernst & Young Certified Public Accountants Hong Kong 5 March 2009

38

Luye Pharma Group Ltd.

consolidated income statement year ended 31 december 2008

Group 2008 2007 (Restated)* Notes Rmb’000 Rmb’000 Revenue 7 Cost of sales

650,976 (85,887)

508,980 (80,169)

Gross profit Other income 7 Selling and distribution costs Administrative expenses Other expenses 8

565,089 10,680 (364,291) (85,059) (45,572)

428,811 1,185 (246,827) (76,796) (29,405)

8 9 10 17

80,847 3,168 (14,208) 12,978

76,968 6,634 (17,666) (377)

Profit before income tax

82,785

65,559

Income tax

11

(20,704)

(7,985)

Profit for the year

62,081

57,574

Attributable to: Equity holders of the parent Minority interests

62,089 (8)

58,132 (558)



62,081

57,574

-

14,398

12.60

11.81

Profit from operating activities Finance revenue Finance costs Share of profit/(loss) of associates

Dividend Proposed final

12

Earnings per share (Rmb cents)

13

Basic - For profit for the year attributable to ordinary equity holders of the parent

* Certain numbers shown here do not correspond to the 2007 financial statements and reflect adjustments made as detailed in note 4.

The accounting policies and explanatory notes on pages 47 to 97 form an integral part of the financial statements.

ANNUAL REPORT 2008

39

balance sheets

year ended 31 december 2008

Group Company 2008 2007 2008 2007 (Restated)* (Restated)* Notes Rmb’000 Rmb’000 Rmb’000 Rmb’000 ASSETS Non-current assets Property, plant and equipment 14 Construction in progress 15 Investments in subsidiaries 16 Investments in associates 17 Intangible assets 18 Land use rights 19 Available-for-sale investments 20 Long term deferred expenditure 21 Goodwill 22 Deferred tax assets 11 Current assets Inventories 23 Contracts for services 24 Trade and notes receivables 25 Prepayments, deposits and other receivables 26 Cash and cash equivalents 27 Pledged short-term deposits 27 Due from the holding company 28 Due from related parties 29 Due from subsidiaries 30

150,311 2,123 - 89,776 187,423 12,973 2,184 2,792 165,936 6,936 620,454

147,127 2,179 - 98,002 212,126 13,345 7,176 3,292 165,936 5,052 654,235

- - 10,537 88,166 - - - - - - 98,703

11,262 96,891 108,153

56,028 2,225 221,285 38,597 118,469 - - 9,662 - 446,266

42,250 9,491 231,185 15,313 142,886 20,480 917 2,754 - 465,276

- - - 36,887 9,976 - - - 451,207 498,070

69,404 13,315 1 472,624 555,344

TOTAL ASSETS

1,066,720

1,119,511

596,773

663,497

The accounting policies and explanatory notes on pages 47 to 97 form an integral part of the financial statements.

40

Luye Pharma Group Ltd.

balance sheets (cont’d) year ended 31 december 2008

Group Company 2008 2007 2008 2007 (Restated)* (Restated)* Notes Rmb’000 Rmb’000 Rmb’000 Rmb’000 EQUITY AND LIABILITIES Capital and reserves Issued capital 31 Share premium Treasury shares Reserves/(loss) 32 Proposed final dividend 12 Minority interests Total equity

81,180 428,005 - 312,101 - 821,286 578 821,864

81,180 428,005 (2,011) 249,948 14,398 771,520 622 772,142

81,180 427,980 - (27,419) - 481,741 - 481,741

81,180 427,980 (2,011) (6,988) 14,398 514,559 514,559

Non-current liabilities Interest-bearing loans and borrowings 34 Government grants 33 Deferred tax liabilities 11 Current liabilities Interest-bearing loans and borrowings 34 Trade payables Accrued liabilities and other payables 35 Income tax payable Due to the holding company 28 Due to related parties 29 Due to subsidiaries 30 Total liabilities

74,925 - 31,175 106,100

115,781 1,027 26,406 143,214

74,925 - - 74,925

115,781 115,781

65,849 11,735 54,961 3,596 1,096 1,519 - 138,756 244,856

137,278 8,253 53,134 1,038 2,839 1,613 - 204,155 347,369

33,406 - 3,391 10 105 - 3,195 40,107 115,032

24,747 3,161 6 1,174 709 3,360 33,157 148,938

TOTAL EQUITY AND LIABILITIES

1,066,720

1,119,511

596,773

663,497

* Certain numbers shown here do not correspond to the 2007 financial statements and reflect adjustments made as detailed in note 4.

The accounting policies and explanatory notes on pages 47 to 97 form an integral part of the financial statements.

ANNUAL REPORT 2008

41

consolidated cash flow statement year ended 31 december 2008

2008 Notes Rmb’000 Cash flows from operating activities Profit before income tax Adjustments for: Depreciation of items of property, plant and equipment 8 Amortisation of intangible assets 8 Amortisation of land use rights 8 Amortisation of long term deferred expenditure 8 Loss on disposal of items of property, plant and equipment 8 Gain on disposal of intangible assets 7 Impairment of available-for-sale investments 8 Share compensation expense Gain on disposal of a subsidiary 7 Construction in progress transferred to others 15 Interest income 9 Interest expense 10 Share of net (profit)/loss of associates 17 Write-back of liabilities no longer payable 7

2007 (Restated)* Rmb’000

82,785

65,559

17,371 23,553 372 500

16,109 24,830 277 500

194 (2,320) 4,339 2,011 (400) 730 (3,168) 12,787 (12,978) (2,939)

188 717 (6,634) 16,375 377 (230)

Working capital adjustments: Decrease/(increase) in trade and notes receivables (Increase)/decrease in prepayments, deposits and other receivables Decrease/(increase) in an amount due from the holding company (Increase)/decrease in amounts due from related parties (Increase)/decrease in inventories Decrease in contracts for services Decrease in government grants Increase/(decrease) in trade payables Increase in accrued liabilities and other payables Decrease in an amount due to the holding company (Decrease)/increase in amounts due to related parties Exchange difference on consolidation

122,837 9,900

118,068 (6,758)

(2,556)

40,173

917 (6,908) (13,778) 7,266 (1,027) 6,472 3,568 (1,743) (94) 9,097

(1) 3,631 3,540 1,546 (790) (1,126) 9,599 (1,627) 1,516 (4,837)

Cash generated from operations Interest paid 10 Income tax paid

133,951 (12,787) (15,261)

162,934 (16,375) (10,336)

Net cash inflow from operating activities

105,903

136,223

* Certain numbers shown here do not correspond to the 2007 financial statements and reflect adjustments made as detailed in note 4.

The accounting policies and explanatory notes on pages 47 to 97 form an integral part of the financial statements.

42

Luye Pharma Group Ltd.

consolidated cash flow statement (cont’d)

year ended 31 december 2008

2008 Notes Rmb’000 Net cash inflow from operating activities

105,903

Cash flows from investing activities Purchases of items of property, plant and equipment, construction in progress (39,665) Purchases of land use rights (4,600) Proceeds from disposal of items of property, plant and equipment 209 Proceeds on disposal of a subsidiary 5 401 Proceeds on disposal of intangible assets 3,470 Dividend from an associate 17 12,900 Acquisitions of CMNa business, net of cash acquired - Acquisition of subsidiaries - Acquisition of associates 17 - Decrease/(increase) in pledged short-term deposits 27 20,480 Interest received 9 3,168

2007 (Restated)* Rmb’000 136,223

(14,673) 454 (38,000) (26,656) (99,400) (4,419) 6,634

Net cash outflow from investing activities

(3,637)

(176,060)

Cash flows from financing activities Repurchase of shares Repayment of loans Proceeds from loans Equity dividends paid

- (203,003) 90,718 (14,398)

(2,011) (161,799) 270,059 (19,103)

Net cash (outflow)/inflow from financing activities

(126,683)

87,146

Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at 1 January 27

(24,417) 142,886

47,309 95,577

Cash and cash equivalents at 31 December

118,469

142,886

27

* Certain numbers shown here do not correspond to the 2007 financial statements and reflect adjustments made as detailed in note 4.

The accounting policies and explanatory notes on pages 47 to 97 form an integral part of the financial statements.

ANNUAL REPORT 2008

43

statements of changes in equity year ended 31 december 2008

Attributable to equity holders of the parent Share Statutory Statutory Issued premium Treasury surplus public Reserve capital account shares reserves welfare fund fund Group Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 (note 32) (note 32) (note 32) At 1 January 2007 Fair value change on available-for-sale investments Currency realignment Total income and expense for the year recognised directly in equity Profit for the year (as restated) Total income and expense for the year Final 2006 dividend declared Issue of shares Share repurchase Transfer to statutory reserves Minority interest arising on business combination Proposed final 2007 dividend

80,408

410,158

-

24,707

-

17,196

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- - 772 - -

- - 17,847 - -

- - - (2,011) -

- - - - -

- - - - -

- - - - 11,064

- -

- -

- -

- -

- -

- -

At 31 December 2007 (restated)*

81,180

428,005

(2,011)

24,707

-

28,260

At 1 January 2008 (restated)* Write-back of liabilities no longer payable Currency realignment Total income and expense for the year recognised directly in equity Impairment of available-for-sale investments Profit for the year Total income and expense for the year Final 2007 dividend declared Share compensation expense Transfer to statutory reserves

81,180

428,005

(2,011)

24,707

-

28,260

- -

- -

- -

- -

- -

- -

-

-

-

-

-

-

- -

- -

- -

- -

- -

- -

- - - -

- - - -

- - 2,011 -

- - - 13,998

- - - -

- - - -

At 31 December 2008

81,180

428,005

-

38,705

-

28,260

* Certain numbers shown here do not correspond to the 2007 financial statements and reflect adjustments made as detailed in note 4.

The accounting policies and explanatory notes on pages 47 to 97 form an integral part of the financial statements.

44

Luye Pharma Group Ltd.

statements of changes in equity (cont’d)

year ended 31 december 2008

Foreign Enterprise Unrealised currency Proposed expansion Retained gains translation final fund earnings reserves reserves dividend Total Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 (note 32) (note 12)

Minority interests

Total equity

Rmb’000

Rmb’000

4,730

179,700

4,559

(13,004)

19,103

727,557

558

728,115

- -

- -

(4,188) -

- (7,486)

- -

(4,188) (7,486)

- (7)

(4,188) (7,493)

- -

- 58,132

(4,188) -

(7,486) -

- -

(11,674) 58,132

(7) (558)

(11,681) 57,574

- - - - -

58,132 - - - (11,064)

(4,188) - - - -

(7,486) - - - -

- (19,103) - - -

46,458 (19,103) 18,619 (2,011) -

(565) - - - -

45,893 (19,103) 18,619 (2,011) -

- -

- (14,398)

- -

- -

- 14,398

- -

629 -

629 -

4,730

212,370

371

(20,490)

14,398

771,520

622

772,142

4,730

212,370

371

(20,490)

14,398

771,520

622

772,142

- -

51 -

- -

- 384

- -

51 384

- (36)

51 348

-

51

-

384

-

435

(36)

399

- -

- 62,089

(371) -

- -

- -

(371) 62,089

- (8)

(371) 62,081

- - - -

62,140 - - (13,998)

(371) - - -

384 - - -

- (14,398) - -

62,153 (14,398) 2,011 -

(44) - - -

62,109 (14,398) 2,011 -

4,730

260,512

-

(20,106)

-

821,286

578

821,864

ANNUAL REPORT 2008

45

statements of changes in equity (cont’d)

year ended 31 december 2008

Foreign Share currency Proposed Issued premium Treasury Retained translation final capital account shares earnings reserves dividend Total Company Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 (note 12) At 1 January 2007 Currency realignment Total income and expense for the year recognised directly in equity Profit for the year (as restated) Total income and expense for the year Final 2006 dividend declared Issue of shares Share repurchase Proposed final 2007 dividend At 31 December 2007 and 1 January 2008 (restated)* Currency realignment Total income and expense for the year recognised directly in equity Profit for the year Total income and expense for the year Final 2007 dividend declared Share compensation expense At 31 December 2008

80,408 -

410,133 -

- -

18,659 -

(17,563) (36,374)

19,103 -

510,740 (36,374)

-

-

-

-

(36,374)

-

(36,374)

-

-

-

42,688

-

-

42,688

-

-

-

42,688

(36,374)

-

6,314

- 772 - -

- 17,847 - -

- - (2,011) -

- - - (14,398)

- - - -

(19,103) - - 14,398

(19,103) 18,619 (2,011) -

81,180 -

427,980 -

(2,011) -

46,949 -

(53,937) (33,082)

14,398 -

514,559 (33,082)

- -

- -

- -

- 12,651

(33,082) -

- -

(33,082) 12,651

- - -

- - -

- - 2,011

12,651 - -

(33,082) - -

- (14,398) -

(20,431) (14,398) 2,011

81,180

427,980

-

59,600

(87,019)

-

481,741

* Certain numbers shown here do not correspond to the 2007 financial statements and reflect adjustments made as detailed in note 4.

The accounting policies and explanatory notes on pages 47 to 97 form an integral part of the financial statements.

46

Luye Pharma Group Ltd.

notes to financial statements year ended 31 december 2008

1. Corporate information AsiaPharm Group Ltd. (the “Company”) was incorporated in Bermuda as an exempted company with limited liability under the Bermuda Companies Act on 9 July 2003. Its shares have been listed on the Singapore Exchange Securities Trading Limited (the “SGX-ST”) since 5 May 2004. The Company is an investment holding company. The Company’s subsidiaries are principally engaged in the development, manufacture and distribution of pharmaceutical products. The registered office of the Company is located at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda. The correspondence office of the Company is located at 133 Cecil Street, #12-02 Keck Seng Tower, Singapore 069535.

2.1 Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board (“IASB”). They have been prepared under the historical cost convention, except for available-for-sale investments that have been measured at fair value. These financial statements are presented in Renminbi (“Rmb”) and all values are rounded to the nearest thousand (Rmb’000) except when otherwise indicated. Basis of consolidation The consolidated financial statements comprise the financial statements of the Company and its subsidiaries (collectively referred to as the “Group”) as at 31 December each year. The financial statements of the subsidiaries are prepared for the same reporting year as the parent company, using consistent accounting policies. All intragroup balances, transactions, income and expenses, and profits and losses resulting from intragroup transactions that are recognised in assets, are eliminated in full. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. Minority interests represent the portion of profit or loss and net assets not held by the Group and are presented separately in the income statement and within equity in the consolidated balance sheet, separately from parent shareholders’ equity. Acquisitions of minority interests are accounted for using the parent entity extension method, whereby, the difference between the consideration and the book value of the share of the net assets acquired is recognised as goodwill.

2.2 Impact of new and revised IFRSs The accounting policies adopted are consistent with those of the previous financial year except as follows: The Group has adopted the following new and amended IFRS and IFRIC interpretations as of 1 January 2008. • IAS 39 and IFRS 7 Amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosure – Reclassification of Financial Assets • IFRIC 11 IFRS 2 – Group and Treasury Share Transactions • IFRIC 12 Service Concession Arrangements • IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction

ANNUAL REPORT 2008

47

notes to financial statements (cont’d) year ended 31 december 2008

2.2 Impact of new and revised IFRSs (Cont’d) The Group has also early adopted the following IFRIC interpretation as of 1 Janaury 2008. •

IFRIC 13

Customer Loyalty Programmes

Adoption of these standards and interpretations did not have any effect on the financial performance or position of the Group. They did however give rise to additional disclosures on these financial statements. The principal effects of adopting these changes are as follows: (a) IAS 39 and IFRS 7 Amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosure – Reclassification of Financial Assets

The amendments to IAS 39 permit an entity to reclassify a non-derivative financial asset classified as held for trading, other than a financial asset designated by an entity as at fair value through profit or loss upon initial recognition, out of the fair value through profit or loss category if the financial asset is no longer held for the purpose of selling or repurchasing in the near term, if specified criteria are met.



A debt instrument that would have met the definition of loans and receivables (if it had not been required to be classified as held for trading at initial recognition) may be classified out of the fair value through profit or loss category or (if it had not been designated as available for sale) may be classified out of the available-forsale category to the loans and receivables category if the entity has the intention and ability to hold it for the foreseeable future or until maturity.



In rare circumstances, financial assets that are not eligible for classification as loans and receivables may be transferred from the held-for-trading category to the available-for-sale category or to the held to maturity category (in the case of a debt instrument), if the financial asset is no longer held for the purpose of selling or repurchasing in the near term.



The financial asset shall be reclassified at its fair value on the date of reclassification and the fair value of the financial asset on the date of reclassification becomes its new cost or amortised cost, as applicable. The amendments to IFRS 7 require extensive disclosures of any financial asset reclassified in the situations described above. The amendments are effective from 1 July 2008.



As the Group has not reclassified any of its financial instruments, the amendments have had no impact on the financial position or results of operations of the Group.

(b) IFRIC 11 IFRS 2 – Group and Treasury Share Transactions

48

As at 1 January 2008, the Group adopted IFRIC Interpretation 11. This interpretation requires arrangements whereby an employee is granted rights to an entity’s equity instruments to be accounted for as an equity-settled scheme, even if the entity buys the instruments from another party, or the shareholders provide the equity instruments needed. As the Group has not entered into any of such arrangements, the interpretation had no impact on the financial position or performance of the Group.

Luye Pharma Group Ltd.

notes to financial statements (cont’d) year ended 31 december 2008

2.2 Impact of new and revised IFRSs (Cont’d) The principal effects of adopting these changes are as follows: (c) IFRIC 12 Service Concession Arrangements



As at 1 January 2008, the Group adopted IFRIC Interpretation 12. This interpretation applies to service concession operators and explains how to account for the obligations undertaken and rights received in service concession arrangements. No member of the Group is an operator and, therefore, this interpretation has no impact on the Group.

(d) IFRIC 13 Customer Loyalty Programmes

As at 1 January 2008, the Group early adopted IFRIC Interpretation 13. This interpretation requires customer loyalty credits to be accounted for as a separate component of the sales transaction in which they are granted. A portion of the fair value of the consideration received is allocated to the award credits and deferred. This is then recognised as revenue over the period that the award credits are redeemed. As the Group does not maintain any such programmes, the interpretation had no impact on the financial position or performance of the Group.

(e) IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction

As at 1 January 2008, the Group adopted IFRIC Interpretation 14. This interpretation provides guidance on how to assess the limit on the amount of surplus in a defined benefit scheme that can be recognised as an asset under IAS 1 Employee Benefits. The Group does not have any defined benefit scheme, therefore the adoption of this interpretation had no impact on the financial position or performance of the Group.

2.3 Future changes in accounting policies The Group has not applied the following new and revised IFRSs and IFRIC interpretations, that have been issued but are not yet effective, to these financial statements. • IFRS 1 and IAS 27 Amendments – IFRS 1 First-time Adoption of International Financial Reporting Standards and IAS 27 Consolidated and Separate Financial Statements – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate • IFRS 2 Amendments – Share-based Payment – Vest Conditions and Cancellation • IFRS 3 (Revised) Business Combinations • IFRS 8 Operating Segments • IAS 1 (Revised) Presentation of Financial Statements • IAS 23 (Revised) Borrowing Costs • IAS 27 (Revised) Consolidated and Separate Financial Statements • IAS 32 and IAS 1 Amendments – IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements – Puttable Financial Instruments and Obligations Arising on Liquidation • IAS 39 Amendment – Financial Instruments: Recognition and Measurement – Eligible Hedged Items • IFRIC 15 Agreement for the Construction of Real Estate • IFRIC 16 Hedges of a Net investment in a Foreign Operation • IFRIC 17 Distributions of Non-Cash Assets to Owners • IFRIC 18 Transfers of Assets from Customers

ANNUAL REPORT 2008

49

notes to financial statements (cont’d) year ended 31 december 2008

2.3 Future changes in accounting policies (Cont’d) Apart from the above, the IASB has issued Improvements to IFRSs on May 2008, a collection of 35 amendments to 20 IFRSs (including the related bases for conclusions and guidance). These amendments are the result of conclusions reached by the IASB made in its annual improvements projects, which provides a vehicle for making non-urgent but necessary amendments to IFRSs. Unless otherwise specified, the amendments are generally effective for financial years beginning on or after 1 January 2009, although these amendments are permitted for early adoption. The amendments to IFRS 1 allows an entity to determine the ‘cost’ of investments in subsidiaries, jointly controlled entities or associates in its opening IFRS financial statements in accordance with IAS 27 or using a deemed cost. The amendment to IAS 27 requires all dividends from a subsidiary, jointly controlled entity or associate to be recognised in the income statement in the separate financial statement. Both revisions will be effective for financial years beginning on or after 1 January 2009. The revision to IAS 27 will have to be applied prospectively. The new requirements affect only the parent’s separate financial statement and do not have an impact on the consolidated financial statements. The IFRS 2 Amendments was issued in January 2008 and becomes effective for financial years beginning on or after 1 January 2009. This amendment clarifies the definition of a vesting condition and prescribes the treatment for an award that is effectively cancelled. IFRS 3 (Revised) was issued in January 2008 and becomes effective for financial years beginning on or after 1 July 2009. The revised standard introduces a number of changes in the accounting for business combinations occurring after this date that will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs, and future reported results. IFRS 8 was issued in November 2006 and becomes effective for financial years beginning on or after 1 January 2009. IFRS 8, which will replace IAS 14 Segment Reporting, specifies how an entity should report information about its operating segments, based on information about the components of the entity that is available to the chief operating decision maker for the purposes of allocating resources to the segments and assessing their performance. The standard also requires the disclosure of information about the products and services provided by the segments, the geographical areas in which the Group operates, and revenue from the Group’s major customers. IAS 1 (Revised) was issued in September 2007 and becomes effective for financial years beginning on or after 1 January 2009. The standard separates owner and non-owner changes in equity. The statement of changes in equity will include only details of transactions with owners, with non-owner changes in equity presented as a single line. In addition, the standard introduces the statement of comprehensive income: it presents all items of recognised income and expense, either in one single statement, or in two linked statements. IAS 23 (Revised) was issued in March 2007 and becomes effective for financial years beginning on or after 1 January 2009. The standard has been revised to require capitalisation of borrowing costs related to a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. In accordance with the transitional requirements in the standard, the Group will adopt this as a prospective change. Accordingly, borrowing costs will be capitalised on qualifying assets with a commencement date after 1 January 2009. No changes will be made for borrowing costs incurred to this date that have been expensed. IAS 27 (Revised) requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as an equity transaction. Therefore, such transactions will no longer give rise to goodwill, nor will it give rise to a gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. Other consequential amendments were made to IAS 7 Statement of Cash Flows, IAS 12 Income Taxes, IAS 21 The Effects of Changes in Foreign Exchange Rates, IAS 28 Investments in Associates and IAS 31 Interests in Joint Ventures. The changes by IFRS 3 (Revised) and IAS 27 (Revised) will affect future acquisitions or loss of control and transactions with minority interests.

50

Luye Pharma Group Ltd.

notes to financial statements (cont’d) year ended 31 december 2008

2.3 Future changes in accounting policies (Cont’d) The amendments to IAS 32 and IAS 1 were issued in February 2008 and become effective for financial years beginning on or after 1 January 2009. The revisions provide a limited scope exception for puttable instruments to be classified as equity if they fulfil a number of specified features. The amendments to IAS 39 were issued in August 2008 and become effective for financial years beginning on or after 1 July 2009. The amendment addresses the designation of a one-sided risk in a hedged item, and the designation of inflation as a hedged risk or portion in particular situations. It clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as hedged item. IFRIC Interpretation 15 clarifies when and how revenue and related expenses from the sale of a real estate unit should be recognised if an agreement between a developer and a buyer is reached before the construction of the real estate is completed. Furthermore, the interpretation provides guidance on how to determine whether an agreement is within the scope of IAS 11 or IAS 18. IFRIC Interpretation 16 provides guidance on the accounting for a hedge of a net investment. As such it provides guidance on identifying the foreign currency risks that qualify for hedge accounting in the hedge of a net investment, where within the group the hedging instruments can be held in the hedge of a net investment and how an entity should determine the amount of foreign currency gain or loss, relating to both the net investment and the hedging instrument, to be recycled on disposal of the net investment. IFRIC Interpretation 17 standardises practice in the accounting for non-reciprocal distributions of non-cash assets to owners. The Group expects to apply the interpretation from 1 January 2010 prospectively. The interpretation clarifies that (i) a dividend payable should be recognised when the dividend is appropriately authorised and is no longer at the discretion of the entity; (ii) an entity should measure the dividend payable at the fair value of the net assets to be distributed; and (iii) an entity should recognise the difference between the dividend paid and the carrying amount of the net assets distributed in profit or loss. Other consequential amendments were made to IAS 10 Events after the Balance Sheet Date and IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. IFRIC Interpretation 18 provides additional guidance on the accounting for transfers of assets from customers and clarifies the requirements of IFRSs for agreements in which an entity receives from a customer an item of property, plant and equipment that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services (such as a supply of electricity, gas or water). The Group is in the process of making an assessment of the impact of these new and revised IFRSs and IFRIC interpretations upon initial application. So far, it has concluded that while the adoption of the IFRS 1, IFRS 3, IFRS 8, IAS 1 and IAS 27 may result in new or amended disclosures, these new and revised IFRSs and IFRIC interpretations are unlikely to have a significant impact on the Group’s results of operations and financial position.

2.4 Significant accounting judgements, estimates and assumptions The preparation of the Group’s financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amounts of the assets or liabilities affected in the future. Judgements There is no significant effect on the amounts recognised in the financial statements arising from the judgements, apart from those involving estimations, made by management in the process of applying the Group’s accounting policies.

ANNUAL REPORT 2008

51

notes to financial statements (cont’d) year ended 31 december 2008

2.4 Significant accounting judgements, estimates and assumptions (Cont’d) Estimation and assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Impairment of non-financial assets The Group assesses whether there are any indicators of impairment for all non-financial assets at each reporting date. Goodwill and other indefinite life intangibles are tested for impairment annually and at other times when such indicators exist. Other non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable. When value in use calculations are undertaken, management must estimate the expected future cash flows from the asset or cash-generating unit and choose a suitable discount rate in order to calculate the present value of those cash flows. Further details are given in note 22.

3. Summary of significant accounting policies Subsidiaries A subsidiary is an entity in which the Company, directly or indirectly, controls more than half of its voting power or issued share capital or controls the composition of its board of directors; or over which the Company has a contractual right to exercise a dominant influence with respect to that entity’s financial and operating policies. The results of subsidiaries are included in the Company’s income statement to the extent of dividends received and receivable. The Company’s investments in subsidiaries that are not classified as held for sale in accordance with IFRS 5 are stated at cost less any impairment losses. Foreign currencies translation The consolidated financial statements are presented in Rmb. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the dates of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rates of exchange ruling at the balance sheet date. All differences are taken to the income statement. Nonmonetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Prior to 1 January 2005, the Group treated goodwill and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the parent. Therefore, those assets and liabilities are already expressed in the reporting currency or are non-monetary items and hence no further translation differences occur. Any goodwill arising on the acquisition of a foreign operation subsequent to 1 January 2005 and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the closing rate. The functional currency of the Company, AsiaPharm Investments Ltd. (“AsiaPharm Investments”) and Solid Success Holdings Limited (“Solid Success”), is the United States dollar (“US$”). The functional currency of AsiaPharm Biotech Pte. Ltd. (“ABPL”) (formerly known as Wearnes Biotech & Medicals (1998) Co., Ltd. (“WBM”)) and SmartMedicine Pte. Ltd. (“SmartMedicine”) is the Singapore dollar (“S$”). The functional currency of Kanghai Pharmaceutical Technology Development Limited (“Kanghai”) and Apex Group Holdings Limited (“Apex”) is the Hong Kong dollar (“HK$”). As at the reporting date, the assets and liabilities of the Company, AsiaPharm Investments, Solid Success, ABPL, SmartMedicine, Kang Hai and Apex are translated into the presentation currency of the Group at the rate of exchange ruling at the balance sheet date and their income statements are translated at the weighted average exchange rates for the year. The exchange differences arising on the translation are taken directly to a separate component of equity.

52

Luye Pharma Group Ltd.

notes to financial statements (cont’d) year ended 31 december 2008

3. Summary of significant accounting policies (Cont’d) Property, plant and equipment and depreciation Property, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation and any impairment losses. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable cost of bringing the asset to its working condition and location for its intended use. Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to the income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment and the cost of the item can be measured reliably, the expenditure is capitalised as an additional cost of that asset or as a replacement. Depreciation is calculated on the straight-line basis to write off the cost of each item of property, plant and equipment to its residual value over its estimated useful life. The estimated useful lives of property, plant and equipment are as follows: Buildings 10 - 40 years Machinery and equipment 5 - 10 years Motor vehicles 10 years Computer and office equipment 5 - 10 years The residual values, useful lives and the depreciation method of property, plant and equipment are reviewed, and adjusted if appropriate, at least at each balance sheet date. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognised in the income statement in the year the asset is derecognised is the difference between the net disposal proceeds and the carrying amount of the relevant asset. Construction in progress Construction in progress represents property, plant and equipment under construction, which is stated at cost less any impairment losses, and is not depreciated. Cost comprises the direct costs of construction during the period of construction. Construction in progress is transferred to the appropriate category of property, plant and equipment when completed and ready for use. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, i.e., assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalised as part of the cost of those assets. The capitalisation of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. Borrowing costs are recognised as expenses in the income statement in the period in which they are incurred. Goodwill Business combinations are accounted for using the acquisition accounting method. This involves recognising identifiable assets (including previously unrecognised intangible assets) and liabilities (including contingent liabilities and excluding future restructuring) of the acquired business at fair value. Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. ANNUAL REPORT 2008

53

notes to financial statements (cont’d) year ended 31 december 2008

3. Summary of significant accounting policies (Cont’d) Goodwill (Cont’d) For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the combination’s synergies, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cashgenerating units) is less than the carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash-generating unit (group of cash-generating units) and part of the operation within that unit are disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained. An impairment loss recognised for goodwill is not reversed in a subsequent period. Land use rights Land use rights represent prepaid land lease payments under operating leases, which are initially stated at cost and subsequently measured at cost less accumulated amortisation and accumulated impairment losses. The land use rights are amortised over the lease term of 50 years. Intangible assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value as at the date of acquisition. Following the initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is reflected in the income statement in the year in which the expenditure is incurred. The useful lives of intangible assets of the Group are assessed to be finite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and amortisation method for an intangible asset with a finite useful life is reviewed at least at each financial year-end. Changes in the expected useful life or expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the income statement in the expense category consistent with the function of the intangible asset. Intangible assets are amortised on the straight-line basis over the following useful economic lives: Trademarks Patents and technology know-how

10 years 5 - 20 years

Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the income statement when the asset is derecognised.

54

Luye Pharma Group Ltd.

notes to financial statements (cont’d) year ended 31 december 2008

3. Summary of significant accounting policies (Cont’d) Intangible assets (Cont’d) Research and development (“R&D”) costs All research costs are charged to the income statement as incurred. Expenditure incurred on projects to develop new products is capitalised and deferred only when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the project and the ability to measure reliably the expenditure during the development. Product development expenditure which does not meet these criteria is expensed when incurred. Deferred development costs are stated at cost less any impairment losses and amortised using the straight-line basis over the commercial lives of the underlying products not exceeding ten years commencing from the date when the products are put into commercial production. Investments in associates The Group’s investment in its associates is accounted for using the equity method of accounting. An associate is an entity in which the Group has significant influence and which is neither a subsidiary nor a joint venture. Under the equity method, the investments in the associates are carried in the balance sheet at cost plus post acquisition changes in the Group’s share of net assets of the associate. Goodwill relating to the associates is included in the carrying amount of the investment and is not amortised. The income statement reflects the share of the results of operations of the associate. Where there has been a change recognised directly in the equity of the associates, the Group recognises its share of any changes and discloses this, when applicable, in the statement of changes in equity. Profits and losses resulting from transactions between the Group and the associates are eliminated to the extent of the interest in the associates. The financial statements of the associates are prepared for the same reporting period as the parent company. Where necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognise an additional impairment loss on the Group’s investment in its associates. The Group determines at each balance sheet date whether there is any objective evidence that the investment in the associate is impaired. If this is the case the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount in the income statement. Impairment of non-financial assets other than goodwill The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses of continuing operations are recognised in the income statement in those expense categories consistent with the function of the impaired asset.

ANNUAL REPORT 2008

55

notes to financial statements (cont’d) year ended 31 december 2008

3. Summary of significant accounting policies (Cont’d) Impairment of non-financial assets other than goodwill (Cont’d) An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such an indication exists, the recoverable amount is estimated. A previously recognised impairment loss other than goodwill is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such a reversal is recognised in profit or loss. After such a reversal the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. Investments and other financial assets Financial assets in the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments or available-for-sale financial assets, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Group considers whether a contract contains an embedded derivative when the Group first becomes a party to it. The Group determines the classification of its financial assets after initial recognition and, where allowed and appropriate, reevaluates this designation at each financial year-end. All regular way purchases and sales of financial assets are recognised on the trade date, that is, the date that the Group commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of sale in the near term. Gains or losses on investments held for trading are recognised in the income statement. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are subsequently carried at amortised cost using the effective interest method. Amortised cost is calculated taking into account any discount or premium on acquisition and includes fees that are an integral part of the effective interest rate and transaction costs. Gains and losses are recognised in the income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process. Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-tomaturity when the Group has the positive intention and ability to hold to maturity. Held-to-maturity investments are subsequently measured at amortised cost less any allowance for impairment. This cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount. This calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. Gains and losses are recognised in income when the investments are derecognised or impaired, as well as through the amortisation process.

56

Luye Pharma Group Ltd.

notes to financial statements (cont’d) year ended 31 december 2008

3. Summary of significant accounting policies (Cont’d) Investments and other financial assets (Cont’d) Available-for-sale investments Available-for-sale investments are those non-derivative financial assets that are designated as available for sale or are not classified in any of the three preceding categories. After initial recognition, available-for-sale investments are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investments is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the income statement. Interest and dividends earned are reported as interest income and dividend income, respectively and are recognised in the income statement as “Other income” in accordance with the policies set out for “Revenue recognition” below. Losses arising from the impairment of such investments are recognised in the income statement as “Impairment losses on available-for-sale financial assets” and are transferred from the available-for-sale investment revaluation reserve. When the fair value of unlisted equity securities cannot be reliably measured because (a) the variability in the range of reasonable fair value estimates is significant for the investment, or (b) the probabilities of the various estimates within the range cannot be reasonably assessed and used in estimating fair value, such securities are stated at cost less any impairment losses. Fair value The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business at the balance sheet date. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions; reference to the current market value of another instrument which is substantially the same; a discounted cash flow analysis; and option pricing models. Inventories Inventories are valued at the lower of cost and net realisable value. Costs incurred in bringing each product to its present location and conditions are accounted for as follows: Raw materials

purchase cost on a weighted average basis

Finished goods and work in progress

cost of direct materials and labour and a proportion of manufacturing overheads based on normal operating capacity but excluding borrowing costs

Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Contracts for services Contracts for services revenue comprise the agreed contract amount and appropriate amounts from variation requests. Contract costs incurred comprise the costs of personnel engaged in providing the services, direct materials and attributable overheads. Revenue from fixed price contracts for services is recognised on the percentage of completion method, measured with reference to the surveys of work performed. Where the outcome of a contract cannot be measured reliably, revenue is recognised only to the extent that the expenses incurred are eligible to be recovered. Provision is made for foreseeable losses as soon as they are anticipated by management.

ANNUAL REPORT 2008

57

notes to financial statements (cont’d) year ended 31 december 2008

3. Summary of significant accounting policies (Cont’d) Contracts for services (Cont’d) Where contract costs incurred to date plus recognised profits less recognised losses exceed progress billings, the surplus is treated as an amount due from contract customers. Where progress billings exceed contract costs incurred to date plus recognised profits less recognised losses, the surplus is treated as an amount due to contract customers. Trade and other receivables Trade receivables, which generally have terms of 90 to 180 days, are recognised and carried at original invoice amount less an allowance for any uncollectible amounts, which is considered as the fair value of the consideration to be received. Provision is made when there is objective evidence that the Group will not be able to collect the debts. Bad debts are written off when identified. Treasury shares Own equity instruments which are reacquired (treasury shares) are deducted from equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Group’s own equity instruments. Cash and cash equivalents For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash on hand and demand deposits, and short term highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management. For the purpose of the balance sheets, cash and cash equivalents comprise cash on hand and at banks, including term deposits, which are not restricted as to use. Derecognition of financial assets A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where: • • •

the rights to receive cash flows from the asset have expired; the Group retains the rights to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Group’s continuing involvement is the amount of the transferred asset that the Group may repurchase, except in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, where the extent of the Group’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.

58

Luye Pharma Group Ltd.

notes to financial statements (cont’d) year ended 31 december 2008

3. Summary of significant accounting policies (Cont’d) Financial liabilities at amortised cost (including interest-bearing loans and borrowings) Financial liabilities including trade and other payables, amounts due to the ultimate holding company and related parties and interest-bearing loans and borrowings are initially stated at fair value less directly attributable transaction costs and are subsequently measured at amortised cost, using the effective interest method unless the effect of discounting would be immaterial, in which case they are stated at cost. The related interest expense is recognised within “Financial cost” in the income statement. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the amortisation process. Derecognition of financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognised in the income statement. Impairment of financial assets The Group assesses at each balance sheet date whether a financial asset or a group of financial assets is impaired. Assets carried at amortised cost If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset shall be reduced either directly or through use of an allowance account. The amount of the loss shall be recognised in the income statement. Loans and receivables together with any associated allowance are written off when there is no realistic prospect of future recovery. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the allowance account. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date. In relation to trade receivables, a provision for impairment is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that the Group will not be able to collect all of the amounts due under the original terms of an invoice. The carrying amount of the receivables is reduced through the use of an allowance account. Impaired debts are derecognised when they are assessed as uncollectible. Assets carried at cost If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Impairment losses on these assets are not reversed.

ANNUAL REPORT 2008

59

notes to financial statements (cont’d) year ended 31 december 2008

3. Summary of significant accounting policies (Cont’d) Impairment of financial assets (Cont’d) Available-for-sale investments If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in the income statement, is transferred from equity to the income statement. A provision for impairment is made for availablefor-sale equity investments when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires judgement. In addition, the Group evaluates other factors, such as the share price volatility. Impairment losses on equity instruments classified as available for sale are not reversed through the income statement; increases in their fair value after impairment are recognised directly in equity. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in provision due to the passage of time is recognised as a finance cost. Retirement benefits Contributions made to the government retirement benefit fund under defined contribution retirement plans are charged to the income statement as incurred. The Group participates in the national pension schemes as defined by the laws of the countries in which it has operations. The Company makes contributions to the Central Provident Fund (“CPF”) Scheme in Singapore, a defined contribution pension scheme, for its employees in Singapore. The subsidiaries incorporated and operating in Mainland China are required to provide certain staff pension benefits to their employees under existing regulations of the People’s Republic of China (“PRC”). Pension scheme contributions are provided at rates stipulated by PRC regulations and are made to a pension fund managed by government agencies, which are responsible for administering the contributions for the subsidiaries’ employees. Government grants Government grants are recognised where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to the income statement over the expected useful life of the relevant asset by equal annual instalments. Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

60

Luye Pharma Group Ltd.

notes to financial statements (cont’d) year ended 31 december 2008

3. Summary of significant accounting policies (Cont’d) Leases (Cont’d) Group as a lessee Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Operating lease payments are recognised as an expense in the income statement on the straight-line basis over the lease term. Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: (a) from the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold; (b) from contract for services, on the percentage of completion basis, as further explained in the accounting policy for “Contract for services” above; (c) interest income, on an accrual basis using the effective interest method by applying the rate that discounts the estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset; and (d) dividend income, when the shareholders’ right to receive payment has been established. Income taxes Income tax comprises current and deferred tax. Income tax is recognised in the income statement, or in equity if it relates to items recognised directly in equity. Current tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. Deferred tax Deferred tax is provided using the liability method on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary difference, except: •

where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

•

in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

ANNUAL REPORT 2008

61

notes to financial statements (cont’d) year ended 31 december 2008

3. Summary of significant accounting policies (Cont’d) Income taxes (Cont’d)

Deferred tax (Cont’d) Deferred tax assets are recognised for all deductible temporary differences, carry-forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax credits and unused tax losses can be utilised except: •

where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

•

in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to offset current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Dividends Final dividends proposed by the directors are classified as a separate allocation of retained profits within the equity section of the balance sheet, until they have been approved by the shareholders in a general meeting. When these dividends have been approved by the shareholders and declared, they are recognised as a liability. Related parties A party is considered to be related to the Group if: (a) directly, or indirectly through one or more intermediaries, the party (i) controls, is controlled by, or is under common control with, the Group; (ii) has an interest in the Group that gives it significant influence over the Group; or (iii) has joint control over the Group; (b) the party is an associate; (c) the party is a jointly-controlled entity; (d) the party is a member of the key management personnel of the Company or its parent; (e) the party is a close member of the family of any individual referred to in (a) or (d); or (f ) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e).

62

Luye Pharma Group Ltd.

notes to financial statements (cont’d) year ended 31 december 2008

4. Business combinations and acquisition of minority interests Acquisitions in 2007 Acquisitions of ABPL and its subsidiary (collectively, the “ABPL Group”) On 23 November 2007, the Group acquired 100% of the ordinary shares of ABPL and its 65% owned subsidiary, SmartMedicine, both of which are incorporated in Singapore, for an aggregate consideration of S$2,060,000 (equivalent to approximately Rmb10,520,000). The fair value of the identifiable assets and liabilities of the ABPL Group as at the date of acquisition and the corresponding carrying amounts immediately before the acquisition were: Fair value recognised on acquisitions (Restated) Rmb’000

Previous carrying value Rmb’000

Property, plant and equipment Intangible assets Inventories Investment in associates (note 17) Due from related parties Available-for-sale investments Cash and cash equivalents Interest-bearing loans and borrowings Trade payables Income tax payable Accrued liabilities and other payables Deferred tax liability Minority interest Net assets

52 3,403 407 1,224 1,585 2,682 2,269 (5,866) (376) (15) (956) (613) (629)

52 407 1,224 1,585 2,682 2,269 (5,866) (376) (15) (956) (629)

3,167

377

Goodwill arising on acquisitions (note 22)

7,353

10,143

Total consideration, satisfied by cash Cash outflow on acquisitions:

10,520

10,520

Net cash acquired with the subsidiaries Cash paid on acquisitions of ABPL Group in 2007

2,269 (10,520)

2,269 (10,520)

Net cash outflow on acquisitions of ABPL Group in 2007

(8,251)

(8,251)

The ABPL Group business combination has been accounted for only provisionally in the 31 December 2007 financial statements as the Group had sought an independent valuation for the assets and liabilities of ABPL Group. The results of this valuation had not been received at the date the 2007 accounts were approved for issue by management. The valuation of the assets and liabilities was completed in February 2009 and showed that the fair value of the identifiable assets and liabilities of ABPL Group at the date of acquisition was Rmb3,403,000 higher than the provisional value.

ANNUAL REPORT 2008

63

notes to financial statements (cont’d) year ended 31 december 2008

4. Business combinations and acquisition of minority interests (Cont’d) Acquisitions in 2007 (Cont’d) Acquisitions of ABPL and its subsidiary (collectively, the “ABPL Group”) (Cont’d) The 2007 comparative information has been restated to reflect this adjustment. The value of the assets increased by Rmb3,403,000 and there was an increases in the deferred tax liability of Rmb613,000. There was also a corresponding reduction in goodwill of Rmb2,790,000, to give total goodwill arising on the acquisition of Rmb7,353,000. The increased amortisation charge on the intangible assets from the acquisition date to 31 December 2007 was Rmb30,000. ABPL Group contributed Rmb204,776 from the date of acquisition (23 November 2007) to 31 December 2007 to the profit of the Group. If the combination had taken place at the beginning of the year, the profit and revenue of the Group for 2007 would have been Rmb57,180,000 and Rmb514,402,000, respectively. The goodwill of Rmb7,353,000 comprises the fair value of expected synergies arising from acquisition.

5

Disposal of a subsidiary On 10 October 2008, the Group disposed 100% of the ordinary shares of Guangzhou LifeTech Jiuzhoutong New/ Special Drug Co., Ltd. (“Jiuzhoutong”), which was incorporated in Mainland China, to Guangzhou Shixin Decoration Co., Ltd. for a total consideration of Rmb3,311,000. 2008 Rmb’000

Net assets disposed of: Property, plant and equipment (note 14) Prepayments, deposits and other receivables Cash and bank balances Net assets Gain on disposal of a subsidiary Satisfied by: Cash Exemption of prepayments, deposits and other receivables

1 2,871 39 2,911 400 3,311

440 2,871

3,311 An analysis of the net inflow of cash and cash equivalents in respect of the disposal of a subsidiary is as follows: Cash consideration Cash and bank balances disposed of Net inflow of cash and cash equivalents in respect of the disposal of a subsidiary

64

Luye Pharma Group Ltd.

2008 Rmb’000 440 (39)

401

notes to financial statements (cont’d) year ended 31 december 2008

6. Segment information Segment information is presented by way of two segment formats: (i)

on a primary segment reporting basis, by business segment; and

(ii) on a secondary segment reporting basis, by geographical segment. The Group’s operating business is structured and managed separately according to the nature of their operations and the products and services they provide. Each of the Group’s business segments represents a strategic business unit that offers products and services which are subject to risks and returns that are different from those of the other business segments. Summary details of the business segments are as follows: (i)

research, development, production and sale of drugs comprising mainly medicines manufactured from natural active ingredients extracted from plants, and newly formulated drugs for the fields of orthopaedics, neurology, gastroenterology, hepatology and oncology;

(ii) sale of research and development results and/or patents for new drugs and provision of research services on a contract basis; and (iii) sale of active ingredients for the manufacture of drugs. In determining the Group’s geographical segments, revenues are attributed to the segments based on the location of the customers. As the Group’s assets and liabilities are mainly based in and arise out of Mainland China, there is no geographical segmentation for assets and liabilities. Business segments Intersegment sales and transfers are transacted with reference to the selling prices used for sales made to third parties at the then prevailing market prices. Year ended 31 December 2008 Sale of drugs Rmb’000

Sale of R&D results Rmb’000

Sale of active ingredients Rmb’000

Total Rmb’000

Segment revenue

649,683

(269)

1,562

650,976

Segment results

137,933

(4,396)

153

133,690

Unallocated corporate expenses Other income Finance revenue Finance costs Share of profit of associates Profit before income tax Income tax Minority interests Profit attributable to equity holders of the parent

(63,523) 10,680 3,168 (14,208) 12,978 82,785 (20,704) 8 62,089

ANNUAL REPORT 2008

65

notes to financial statements (cont’d) year ended 31 december 2008

6. Segment information (Cont’d) Business segments (Cont’d) Sale of Sale of Sale of R&D active drugs results ingredients Total Rmb’000 Rmb’000 Rmb’000 Rmb’000 Assets and liabilities Segment assets 509,699 12,009 303 Unallocated corporate assets

522,011 544,709

Total assets

1,066,720

Segment liabilities 201,930 3,353 - Unallocated corporate liabilities

205,283 39,573

Total liabilities

244,856

Other segment information Depreciation of items of property, plant and equipment 16,561 807 3 Amortisation of intangible assets 23,553 - - Amortisation of land use rights 372 - - Capital expenditure 39,169 496 - Impairment losses recognised in the income statement 1,517 3,575 - Unallocated corporate expenses include: Amortisation of long term deferred expenditure

17,371 23,553 372 39,665 5,092 500

Year ended 31 December 2007 Segment revenue

504,801

2,116

2,063

508,980

Segment results

119,740

(20,581)

437

99,596

Unallocated corporate expenses Other income Finance revenue Finance costs Share of loss of associates Profit before income tax Income tax Minority interests Profit attributable to equity holders of the parent

(23,813) 1,185 6,634 (17,666) (377) 65,559 (7,985) 558 58,132

66

Luye Pharma Group Ltd.

notes to financial statements (cont’d) year ended 31 december 2008

6. Segment information (Cont’d) Business segments (Cont’d) Sale of drugs Rmb’000

Sale of R&D results Rmb’000

Sale of active ingredients Rmb’000

Total Rmb’000

Assets and liabilities Segment assets 875,897 21,656 380 Unallocated corporate assets

897,933 221,578

Total assets

1,119,511

Segment liabilities 230,273 1,486 40 Unallocated corporate liabilities

231,799 115,570

Total liabilities

347,369

Other segment information Depreciation of items of property, plant and equipment 15,233 871 5 Amortisation of intangible assets (2007 restated see note 4) 24,830 - - Amortisation of land use rights 277 - - Capital expenditure 256,808 288 - Impairment losses recognised in the income statement 3,352 4,740 - Unallocated corporate expenses include: Amortisation of long term deferred expenditure

16,109 24,830 277 257,096 8,092 500

Geographical segments The following table presents revenue for the Group by geographical segments:

PRC Rmb’000

Non-PRC Rmb’000

Total Rmb’000

633,075

17,901

650,976

506,506

2,474

508,980

Year ended 31 December 2008 Revenue Year ended 31 December 2007 Revenue

ANNUAL REPORT 2008

67

notes to financial statements (cont’d) year ended 31 december 2008

7. Revenue and other income Revenue Sale of drugs Sale of R&D results Sale of active ingredients Less: business tax and government surcharges Other income Government grants Write-back of liabilities no longer payable Gain on disposal of intangible assets Gain on disposal of a subsidiary Royalty income Others

Group 2008 Rmb’000

2007 Rmb’000

649,734 (263) 1,562

504,931 2,122 2,063

651,033 (57)

509,116 (136)

650,976

508,980

3,748 2,939 2,320 400 346 927

642 230 313

10,680

1,185

661,656

510,165

8. Profit from operating activities Profit from operating activities is arrived at after charging/(crediting): Group 2008 2007 Notes Rmb’000 Rmb’000 Depreciation of items of property, plant and equipment 14 Amortisation of intangible assets (2007 restated see note 4) * 18 Amortisation of land use rights * 19 Amortisation of long term deferred expenditure * 21 Write-down of inventories to net realisable value 23 Impairment of amount due from contract customers 24 Impairment of trade receivables 25 Impairment of other receivables 26 Operating lease expenses

68

Luye Pharma Group Ltd.

Company 2008 2007 Rmb’000 Rmb’000

17,371

16,109

-

-

23,553 372

24,830 277

- -

-

500

500

-

-

1,158

600

-

-

3,575 597 3 1,961

1,000 6,321 771 1,430

- - - -

-

notes to financial statements (cont’d) year ended 31 december 2008

8. Profit from operating activities (Cont’d) Profit from operating activities is arrived at after charging/(crediting): Group 2008 2007 Notes Rmb’000 Rmb’000 Directors’ remuneration: Fees 1,068 1,058 Pension 26 66 CPF 65 63 Other emoluments 5,857 4,676 7,016 5,863 Employee benefit expense (excluding directors’ remuneration): Wages and salaries 64,615 57,671 Pension 4,728 3,977 CPF 219 228 Staff welfare expenses 2,342 2,376 71,904 64,252 Other expenses: Research and development costs 36,782 25,261 Impairment of available-for-sale investments 4,339 - Net foreign exchange loss 2,652 3,339 Donation 763 524 Loss on disposal of items of property, plant and equipment 194 188 Others 842 93 45,572 29,405

Company 2008 2007 Rmb’000 Rmb’000 1,068 - 65 3,422 4,555

1,058 63 1,540 2,661

7,369 44 219 271

2,320 228 333

7,903

2,881

-

-

- 2,141 -

1,619 -

- 104

-

2,245

1,619

Research and development costs: Amounts incurred Government grants released 33

44,395 (6,907)

28,667 (3,090)

- -

-

37,488

25,577

-

-

Cost of inventories sold

51,312

53,047

-

-

12,396 15,084

12,245 13,835

- -

-

The “cost of sales” amount includes the following expenses which are also included in the respective total amounts separately disclosed above for each of these expenses:

Depreciation Staff costs

*

The amortisation of intangible assets, land use rights and long term deferred expenditure for the year is included in “Administrative expenses”



on the face of the consolidated income statement.

ANNUAL REPORT 2008

69

notes to financial statements (cont’d) year ended 31 december 2008

8. Profit from operating activities (Cont’d) Remuneration of directors Group 2008 2007 Rmb’000 Rmb’000 Directors’ remuneration: Directors of the Company Directors of the subsidiaries

4,093 2,923

3,691 2,172



7,016

5,863

9. Finance revenue Group 2008 2007 Notes Rmb’000 Rmb’000 Bank interest income Interest income on loan to an associate 37

3,118 50

6,634 -

3,168

6,634

10. Finance costs Group 2008 2007 Rmb’000 Rmb’000 Interest on bank loans Bank charges and others

12,787 1,421

16,375 1,291



14,208

17,666

11. Income tax The major components of income tax expense for the years ended 31 December 2008 and 2007 are: Group 2008 2007 (Restated) Rmb’000 Rmb’000 Current income tax charge Deferred tax, net

70

Luye Pharma Group Ltd.

17,819 2,885

10,802 (2,817)

20,704

7,985

notes to financial statements (cont’d) year ended 31 december 2008

11. Income tax (Cont’d) A reconciliation of the tax expense applicable to profit before income tax using the statutory rate in Mainland China to the tax expense to the applicable tax rate is as follows: Group 2008 2007 Rmb’000 Rmb’000 Profit before income tax 82,785 65,559 At the PRC’s statutory income tax rate of 25% (2007: 33%) 20,696 21,634 Effect of tax rate difference in other countries 4,412 7,997 Lower tax rate for specific province or local authority (11,989) (23,144) Effect of tax concessions and allowances (1,360) (1,543) Effect of tax levied on a deemed income basis 3,235 1,938 Effect of non-deductible expenses 148 1,053 Utilisation of tax loss previously not recognised 6 (134) Deferred tax benefit previously not recognised (1,853) (9) Effect of withholding tax at 5% and 10% on the distributable profit of the Group’s PRC subsidiaries 8,366 Effect on deferred tax balances due to change in income tax rate (957) 193 Tax charge at the Group’s effective rate

20,704

7,985

Under the laws of Bermuda, no withholding tax on dividends or other distributions, nor any tax computed on profits or income or on any capital asset, gain or appreciation will be payable by an exempted company or its operations. Accordingly, the Company and its subsidiary, AsiaPharm Investments, are not subject to tax. Pursuant to the International Business Companies Act, 1984, (“IBC Act”) of the BVI, international business companies incorporated pursuant to the IBC Act enjoy a complete exemption from income tax. This includes an exemption from capital gains tax and all forms of withholding tax. Accordingly, Solid Success is not subject to tax. Pursuant to the relevant tax law of the Hong Kong Special Administrative Region, Kanghai and Apex are subject to profit tax on 16.5% (2007: 17.5%) of their taxable income. Pursuant to the relevant tax law of Singapore, ABPL and SmartMedicine are subject to income tax on 18% (2007: 20%) of their taxable income.

ANNUAL REPORT 2008

71

notes to financial statements (cont’d) year ended 31 december 2008

11. Income tax (Cont’d) In accordance with the Income Tax Law of the PRC, the profits of the following subsidiaries in Mainland China are taxed at the following tax rates: Notes Shandong Luye Pharmaceutical Co., Ltd. (“Shandong Luye”) (a)

2008 Rmb’000

2007 Rmb’000

15%

7.5%

Yantai Luye Drugs Trading Co., Ltd. (“Luye Trading”)

(b)

25%

33%

Shandong Luye Natural Drug Research and Development Co., Ltd. (“Luye R&D”)

(c)

20%

27%

Nanjing Kanghai Pharmaceutical Co., Ltd. (“Nanjing Kanghai”)

(d)

15%

13.78%

Nanjing Sike Pharmaceutical Co., Ltd. (“Nanjing Sike”)

(e)

12.5%

7.5%



(a) Shandong Luye obtained approval from the relevant tax authorities as an advanced technology enterprise. Pursuant thereto, Shandong Luye is subject to a corporate income tax rate of 15% with effect during 2008.





In accordance with the relevant tax laws in the PRC, Shandong Luye is exempted from corporate income tax for its first two profit-making years (after deducting losses incurred in previous years) and is entitled to a 50% tax reduction for the succeeding three years. Shandong Luye was eligible to pay a reduced tax rate of 7.5% until 31 December 2007. As the current year is the sixth profit-making year after deducting the prior years’ carryforward losses, the applicable corporate income tax rate of Shandong Luye for 2008 is 15% (2007: 7.5%). In addition, according to the PRC tax regulation, Shandong Luye is entitled to enjoy the above tax holiday in respect of profit generated from the additional capital injection of 50% or more over the existing paid up capital. On 23 August 2007, Shandong Luye had obtained tax approval from the relevant tax authorities via its additional capital injection of Rmb91,230,162 at the end of 2007, to enjoy another “exemption for first two years and 50% tax exemption for the succeeding three years” started from 2007. Current year is the second profit-making year for the additional capital injection and the relevant profit is exempted from corporate income tax.

(b) Luye Trading is subject to a corporate income tax rate of 25% (2007: 33%) this year. (c) Luye R&D is subject to a corporate income tax rate of 20% (2007: 27%). With effect from 1 July 2006, Luye R&D is taxed on a deemed income basis determined at 10% of its total revenue. The determination of the deemed revenue and the income computation will be assessed annually by the relevant tax authorities. (d) Nanjing Kanghai, being an advanced technology enterprise located in the Nanjing Hi-Technology Development Zone, obtained the approvals from the relevant tax authorities to enjoy a preferential corporate income tax rate of 15% (2007: 13.78%).

72

Luye Pharma Group Ltd.

notes to financial statements (cont’d) year ended 31 december 2008

11. Income tax (Cont’d) (e) Nanjing Sike, being an advanced technology enterprise located in the Nanjing Hi-Technology Development Zone, is subject to the corporate income tax rate of 25%. In accordance with the relevant tax laws in the PRC, Nanjing Sike is exempted from corporate income tax for its first two profit-making years (after deducting losses incurred in previous years) and is entitled to a 50% tax reduction for the succeeding three years. In 2008, Nanjing Sike is in the second year of the 50% tax reduction period and thus is eligible to pay a reduced tax rate of 12.5% (2007: 7.5%). During the Fifth Session of the Tenth National People’s Congress, which was conducted on 16 March 2007, the PRC Corporate Income Tax Law (the “New Corporate Income Tax Law”) was approved. The New Corporate Income Tax Law becomes effective from 1 January 2008. It introduces a wide range of changes which include, but are not limited to, the unification of the income tax rate for domestic-invested and foreign-invested enterprises at 25% and withholding tax on dividend distributions up to a rate of 10%. A lower withholding tax maybe applied if there is a tax treaty between China and jurisdiction of the foreign investors. The Group is subject to withholding corporate income tax at rate of 5% and 10% on the distribution of dividends. The Group recognised deferred tax liabilities in respect of accumulated distributable earnings from its subsidiaries established in Mainland China since 1 January 2008, no matter whether such earnings have been declared or not by the subsidiaries at the balance sheet date. Deferred tax Deferred tax at 31 December relates to the following:

Consolidated balance sheet 2008 2007 Rmb’000 Rmb’000

Consolidated income statement 2008 2007 Rmb’000 Rmb’000

Deferred tax liabilities: Effect of withholding tax at 5% and 10% on the distributable profit of the Group’s PRC subsidiaries Fair value adjustment on acquisitions (2007 restated see note 4)

(8,366)

-

(8,366)

-

(22,809)

(26,406)

3,597

1,623

Deferred tax liabilities

(31,175)

(26,406)

1,726 3 138 501

123 325 59 687

2,357

-

(2,841)

-

(2,885)

2,817

Deferred tax assets: Accrued expenses 1,849 123 Decelerated depreciation for tax purposes 584 581 Provision for obsolete inventories 261 123 Impairment of trade and other receivables 1,885 1,384 Unrealised profit from inter-company transaction 2,357 - Fair value adjustment on acquisitions - 2,841 Deferred tax income Deferred tax assets 6,936 5,052

There are no income tax consequences attaching to the payment of dividends by the Company to its shareholders. ANNUAL REPORT 2008

73

notes to financial statements (cont’d) year ended 31 december 2008

12. Dividend Group 2008 2007 Rmb’000 Rmb’000 Proposed final - nil (FY2007: US$0.004) per ordinary share

-

14,398

13. Earnings per share attributable to ordinary equity holders of the parent Basic earnings per share amounts are calculated by dividing profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing profit attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares assumed to have been issued at no consideration on the conversion of all potential dilutive ordinary shares into ordinary shares. There were no potential dilutive ordinary shares in existence for the years ended 31 December 2008 and 2007. The following reflects the income and share data used in the basic earnings per share computation: Earnings Profit attributable to ordinary equity holders of the parent, used in the basic earnings per share calculation (2007 restated see note 4) Shares Weighted average number of ordinary shares in issue during the year, used in the basic earnings per share calculation

74

Luye Pharma Group Ltd.

2008 Rmb’000

2007 Rmb’000

62,089

58,132

Number of shares 2008 2007

492,764,900

492,350,955

notes to financial statements (cont’d) year ended 31 december 2008

14. Property, plant and equipment Group Buildings Rmb’000 Cost: At 1 January 2007 Acquisitions of subsidiaries Transferred from construction in progress (note 15) Additions Disposals At 31 December 2007 and 1 January 2008 Transferred from construction in progress (note 15) Additions Disposal of a subsidiary (note 5) Disposals At 31 December 2008

Machinery and Motor equipment vehicles Rmb’000 Rmb’000

Computer and office equipment Rmb’000

Total Rmb’000

53,797 33,042

109,715 18,426

2,156 1,860

5,712 2,214

171,380 55,542

2,073 880 (298)

4,145 7,826 (839)

- 1,747 (310)

429 571 (501)

6,647 11,024 (1,948)

89,494

139,273

5,453

8,425

242,645

79 8,460 - (181)

1,701 8,050 - (910)

- 1,194 - (247)

36 1,439 (6) (728)

1,816 19,143 (6) (2,066)

97,852

148,114

6,400

9,166

261,532

Accumulated depreciation: At 1 January 2007 Acquisitions of subsidiaries Provided for the year Disposals At 31 December 2007 and 1 January 2008 Provided for the year Disposal of a subsidiary (note 5) Disposals

10,726 5,568 2,432 (254)

49,360 7,774 12,259 (454)

964 960 477 (215)

3,648 1,715 941 (383)

64,698 16,017 16,109 (1,306)

18,472 2,681 - -

68,939 13,096 - (836)

2,186 485 - (154)

5,921 1,109 (5) (673)

95,518 17,371 (5) (1,663)

At 31 December 2008

21,153

81,199

2,517

6,352

111,221

Net book value: At 31 December 2008

76,699

66,915

3,883

2,814

150,311

At 31 December 2007

71,022

70,334

3,267

2,504

147,127

ANNUAL REPORT 2008

75

notes to financial statements (cont’d) year ended 31 december 2008

14. Property, plant and equipment (Cont’d) The Group has not obtained building ownership certificates for buildings with net book values of Rmb1,871,000 as at 31 December 2008 (2007: Rmb4,153,000). The Group has not obtained the building ownership certificate for one piece of land with a total gross area of approximately 4040 m2 and a net book value of Rmb6,700,000 together with the building on the land as at 31 December 2008 (2007: nil). In the absence of these certificates, the Group is not able to assign, transfer or mortgage these assets. As at 31 December 2007, the Group’s buildings and land use rights with net book value of Rmb10,925,000 and Rmb1,272,000, respectively, were mortgaged to secure bank loans of Rmb14,000,000 (note 34). There was no such arrangement as at 31 December 2008.

15. Construction in progress Group 2008 2007 Rmb’000 Rmb’000 At 1 January 2,179 2,216 Additions 2,490 7,327 Transferred to property, plant and equipment (note 14) (1,816) (6,647) Transferred to others (730) (717) At 31 December 2,123 2,179

16. Investments in subsidiaries Unlisted investments, at cost

76

Luye Pharma Group Ltd.

Company 2008 2007 Rmb’000 Rmb’000 10,537

11,262

notes to financial statements (cont’d) year ended 31 december 2008

16. Investments in subsidiaries (Cont’d) Details of the subsidiaries are as follows: Place and date of incorporation/ Nominal value Effective equity establishment of issued shares/ interest held by Principal Company and operations paid-up capital the Company activities 2008 2007 % % Directly held: AsiaPharm Bermuda US$ 100 100 Investment Investments (a) 2 July 2003 0.12 million holding ABPL (formerly known as WBM) (b) Singapore S$ 100 100 Distribution 23 April 1991 1.70 million and sale of pharmaceutical drugs Indirectly held: Shandong Luye (c) # PRC/ Rmb 100 100 Mainland China 263.7 million 8 June 1994 Luye Trading (d) # PRC/ Rmb 100 100 Mainland China 1 million 27 March 1997 Luye R&D (e) # PRC/ Rmb 69 69 Mainland China 5 million 31 December 2002 Jiuzhoutong (f ) PRC/ Rmb - 100 Mainland China 3 million 28 October 2003 Onsuccess Limited (g) BVI US$1 - 100 18 October 2006 Solid Success (h) BVI US$1 100 100 22 August 2002 100

Manufacture and sale of pharmaceutical drugs and active ingredients Distribution and sale of pharmaceutical drugs Research and development of Chinese and Western medicine and provision of related activities Distribution and sale of pharmaceutical drugs Investment holding Investment holding

ANNUAL REPORT 2008

77

notes to financial statements (cont’d) year ended 31 december 2008

16. Investments in subsidiaries (Cont’d) Place and date of incorporation/ Nominal value Effective equity establishment of issued shares/ interest held by Principal Company and operations paid-up capital the Company activities 2008 2007 % % Kanghai (b) Hong Kong HK$ 100 100 Investment 22 June 2002 100 holding Apex (b) Hong Kong HK$ 100 100 Investment 10 June 1993 10,000 holding SmartMedicine (b) Singapore S$ 65 65 Distribution 19 July 1990 0.25 million and sale of pharmaceutical drugs Nanjing Kanghai (i) PRC/ Rmb 100 100 Manufacture Mainland China 60 million and 17 July 2000 sale of pharmaceutical drugs Nanjing Sike (j) # PRC/ Rmb 100 100 Manufacture Mainland China 10 million and sale of 22 February 2004 pharmaceutical drugs (a) AsiaPharm Investments is not required to be audited in accordance with the laws of the country of establishment, however it is audited by Ernst & Young Singapore, Certified Public Accountants, for consolidation purposes. (b) ABPL, SmartMedicine, Kanghai and Apex are audited by Ernst & Young Singapore, Certified Public Accountants, for consolidation purposes. (c) Shandong Luye was previously a foreign-invested joint stock limited liability company incorporated on 12 November 1999 with an infinite tenure. On 1 January 2006, the Group acquired the remaining 4.07% equity interest from a minority equity holder in Shandong Luye. On 18 February 2006, Shandong Luye was approved as a wholly foreign-owned enterprise, following the acquisition of equity interest from a minority shareholder. (d) Luye Trading is a limited liability company with a tenure of 20 years commencing from 27 March 1997. (e) Luye R&D is a limited liability company with a tenure of 20 years commencing from 31 December 2002. (f ) Jiuzhoutong is a limited liability company with an infinite tenure from 28 October 2003. On 10 October 2008, the Group disposed its entire equity interest to Guangzhou Shixin Decoration Company, an independent third party, for an aggregate consideration of Rmb3,311,000 (note 5).

78

Luye Pharma Group Ltd.

notes to financial statements (cont’d) year ended 31 december 2008

16. Investments in subsidiaries (Cont’d) (g) Onsuccess Limited is not required to be audited in accordance with the laws of the country of establishment. Onsuccess Limited has been deregistered with effect from 1 May 2008. (h) Solid Success is not required to be audited in accordance with the laws of the country of establishment, however it is audited by Ernst & Young Singapore, Certified Public Accountants, for consolidation purposes. (i)

Nanjing Kanghai is a limited liability company with an infinite tenure of 20 years commencing from 17 July 2000. It is audited by a firm other than Ernst & Young. However, it is audited by Ernst & Young Hua Ming, Certified Public Accountants, for consolidation purposes.

(j)

Nanjing Sike is a limited liability company with an infinite tenure of 20 years commencing from 22 February 2004.

#

The statutory consolidated financial statements of Shandong Luye and its subsidiaries, Luye Trading, Luye R&D and Nanjing Sike have been audited by Ernst & Young Hua Ming, Certified Public Accountants.

17. Investments in associates

Group Rmb’000

Company Rmb’000



At 1 January 2007 Additions from business combination (note 4) Acquisition Share of loss (restated) Foreign currency translation difference

- 1,224 99,400 (377) (2,245)

99,400 (289) (2,220)



At 31 December 2007 and 1 January 2008 Share of profit Dividend received Foreign currency translation difference

98,002 12,978 (12,900) (8,304)

96,891 12,359 (12,900) (8,184)

At 31 December 2008

89,776

88,166

The following table illustrates summarised financial information of the Group’s aggregate investment in associates as at 31 December 2008: Group 2008 2007 (Restated) Rmb’000 Rmb’000 Share of the associates’ balance sheet: Current assets Non-current assets Current liabilities Non-current liabilities

Net assets

161,002 128,263 (55,718) (7,997)

143,548 145,555 (49,255) (14,645)

225,550

225,203

ANNUAL REPORT 2008

79

notes to financial statements (cont’d) year ended 31 december 2008

17. Investments in associates (Cont’d)

2008 Rmb’000 Share of net assets Goodwill on acquisition Foreign currency translation difference Carrying amount of the investment Share of associates’ revenue and profit/(loss): Revenue Profit/(loss)

2007 (Restated) Rmb’000

94,326 3,754 (8,304)

96,493 3,754 (2,245)

89,776

98,002

108,686 12,978

16,078 (377)

Particulars of the principal associates as at 31 December 2008 are as follows: Place and Nominal value Percentage of incorporation/ of issued shares interests attributable Company registration paid-up capital to the group Beijing WBL Peking PRC/ Rmb 43 University Biotech Mainland 80 million Co., Ltd. (“WPU”) China Steward Cross Pte. Ltd. Singapore S$ 36 (“Steward Cross”) 185,185

Principal activities Manufacture and sale of pharmaceutical drugs Distribution and sale of pharmaceutical drugs

The accounting for WPU in the 31 December 2007 financial statements was based on a provisional assessment of fair value as the Group had sought an independent valuation for the land use rights, buildings, intangible assets and inventories owned by WPU. The results of this valuation had not been received at the date the 2007 accounts were approved for issue by management. The valuation of land use rights, buildings, intangible assets and inventories was completed in February 2009 and showed that the fair value at the date of acquisition was Rmb118,280,000, an increase of Rmb62,867,000 compared to the provisional value. The 2007 comparative information has been restated to reflect this adjustment. The value of the land use rights, buildings, intangible assets and inventories were increased by Rmb62,867,000 and there was an increases in the deferred tax liability of Rmb14,645,000. There was also a corresponding reduction in goodwill of Rmb33,275,000, to give total goodwill arising on the acquisition of Rmb3,754,000. The increased amortisation and depreciation charge on the land use rights, buildings and intangible assets from the acquisition date to 31 December 2007 was Rmb4,287,000 and the Group’s share of amortisation and depreciation charge was Rmb1,843,000.

80

Luye Pharma Group Ltd.

notes to financial statements (cont’d) year ended 31 december 2008

18. Intangible assets Group Patents and technology Trademarks know-how Rmb’000 Rmb’000

Total Rmb’000

At 1 January 2007

10,048

31,332

41,380

Acquisitions of subsidiaries (restated see note 4) Amortisation (restated)

- (1,038)

195,576 (23,792)

195,576 (24,830)

At 31 December 2007 and 1 January 2008

9,010

203,116

212,126

Disposal Amortisation

- (1,476)

(1,150) (22,077)

(1,150) (23,553)

At 31 December 2008

7,534

179,889

187,423

19. Land use rights The Group’s land use rights represent prepaid land lease payments under operating leases and their carrying amounts are analysed as follows: Group 2008 2007 Rmb’000 Rmb’000 At 1 January Acquisitions of subsidiaries Amortisation

13,345 - (372)

6,575 7,047 (277)

At 31 December 12,973 13,345 As at 31 December 2007, the Group’s land use rights and buildings with net book value of Rmb1,272,000 and Rmb10,925,000 (note 14), respectively, were mortgaged to secure bank loans of Rmb14,000,000 (note 34). There was no such arrangement as at 31 December 2008.

20. Available-for-sale investments

Group 2008 2007 Rmb’000 Rmb’000

Listed equity investment, at fair value Unlisted equity investment, at fair value Unlisted investments, at cost

- 1,684 500

4,023 2,653 500



2,184

7,176

ANNUAL REPORT 2008

81

notes to financial statements (cont’d) year ended 31 december 2008

20. Available-for-sale investments (Cont’d) Available-for-sale financial assets consist of investments in ordinary shares, and therefore have no fixed maturity date or coupon date. The fair value of the listed equity investment is determined by reference to published price quotations in an active market. The fair value of the unlisted equity investment is derived from the latest arm’s length transactions between private investors. The fair value of unlisted investments cannot be reliably measured because (a) the variability in the range of reasonable fair value estimates is significant for the investment, and (b) the probabilities of the various estimates within the range cannot be reasonably assessed and used in estimating fair value. These investments were stated at cost less any impairment losses. There has been a significant decline in the market value of the listed equity investment during the year. The directors consider that such a decline indicates that the listed equity investment has been impaired and an impairment loss was amounted to Rmb3,466,000 (2007: nil), which was included a transfer from the unrealised gains reserves of Rmb371,000 (2007: nil), has been recognised in the income statement for the year. During the year, the Group recognised an impairment loss of Rmb873,000 (2007: nil) pertaining to unlisted equity investment carried at fair value, reflecting the write-down in the carrying value of this private equity investment.

21. Long term deferred expenditure

Group 2008 2007 Rmb’000 Rmb’000

At 1 January Amortisation

3,292 (500)

3,792 (500)

At 31 December

2,792

3,292

Long term deferred expenditure represents the prepayment in Yantai University Pharmaceutical College (the “College”), set up by Shandong Luye and Yantai University, primarily for the procurement of research and development equipment and facilities for use in the laboratories of the College. It is amortised using the straight-line basis over 10 years, effective from the date of investment in July 2004.

22. Goodwill At 1 January Acquisition of subsidiaries (2007 restated see note 4) Carrying amount at 31 December

82

Luye Pharma Group Ltd.

Group 2008 2007 Rmb’000 Rmb’000 165,936

44,398

-

121,538

165,936

165,936

notes to financial statements (cont’d) year ended 31 december 2008

22. Goodwill (Cont’d) The goodwill which arose in 2007 relates to the acquisitions of Solid Success Group and ABPL Group. There was no impairment charge made against goodwill for the year ended 31 December 2008 (2007: nil). Impairment testing of goodwill Goodwill has been allocated to four individual cash-generating units for impairment testing as follows: (a) (b) (c) (d)

CMNa cash-generating unit (“CMNa unit”); Pharmaceutical products other than the CMNa cash-generating unit (“Other products unit”); Solid Success Group cash-generating unit (“SSL unit”); and ABPL cash-generating unit (“ABPL unit”).

Carrying amount of goodwill 2008 2007 Rmb’000 Rmb’000 CMNa unit Other products unit SSL unit ABPL unit (2007 restated see note 4)

38,444 5,954 114,185 7,353

38,444 5,954 114,185 7,353

Total

165,936

165,936

The recoverable amounts of the cash generating units have been determined based on a value in use calculation using cash flow projections based on financial budgets approved by senior management covering a three-year period for the CMNa unit and a five-year period for the other units. The pre-tax discount rate applied to cash flow projections is 14% and no growth has been projected beyond the three-year and five-year period, respectively. Key assumptions used in value in use calculations The calculation of value in use is based on the following assumptions: • Gross margins and operating expenses • Discount rates • Growth rates Gross margins and operating expenses - Gross margins are based on average values achieved in the three years preceding the start of the budget period and are increased over the budget period for anticipated efficiency improvements. Estimates on operating expenses reflect past experience and management commitment to maintain them at an acceptable level. Discount rates - Discount rates reflect management’s estimate of the risks specific to each unit. This is the benchmark used by management to assess operating performance and to evaluate future investment proposals. In determining an appropriate discount rate for each unit, regard has been given to the yield on a ten-year government bond at the beginning of the budgeted year. Growth rates - Rates are based on published industry research.

ANNUAL REPORT 2008

83

notes to financial statements (cont’d) year ended 31 december 2008

23. Inventories Raw materials - at cost - provision Work in progress - at cost - provision Finished goods - at cost - provision

Total lower of cost or net realisable value



Group 2008 2007 Rmb’000 Rmb’000

32,439 (138)

25,775 (115)

4,265 (1,117)

5,823 -

21,177 (598)

11,506 (739)

56,028

42,250

Analysis of provision for obsolete inventories:

Group 2008 2007 Rmb’000 Rmb’000

At 1 January Acquisitions of subsidiaries Additions Written off

854 - 1,158 (159)

527 223 600 (496)

At 31 December

1,853

854

24. Contracts for services

Group 2008 2007 Rmb’000 Rmb’000

Gross amount due from contract customers

6,475

10,491

Contract costs incurred plus recognised profits to date Less: progress billings

57,563 (51,088)

46,120 (35,629)

Less: impairment of amount due from contract customers

6,475

10,491

(4,250)

(1,000)



2,225

9,491

84

Luye Pharma Group Ltd.

notes to financial statements (cont’d) year ended 31 december 2008

24. Contracts for services (Cont’d) Analysis of impairment for contracts for services:

Group 2008 2007 Rmb’000 Rmb’000

At 1 January Additions Written off

1,000 3,575 (325)

1,000 -

At 31 December

4,250

1,000

25. Trade and notes receivables

Group 2008 2007 Rmb’000 Rmb’000

Trade receivables Notes receivable

175,256 52,852

189,250 48,881

At 31 December Less: impairment of trade receivables

228,108 (6,823)

238,131 (6,946)



221,285

231,185

Movements in the provision for impairment of trade receivables were as follows: Individually impaired Rmb’000

Group Collectively impaired Total Rmb’000 Rmb’000

At 1 January 2007 Acquisitions of subsidiaries Charge for the year Utilised

6,475 499 5,136 (8,453)

2,104 - 1,185 -

8,579 499 6,321 (8,453)

At 31 December 2007 Charge for the year Utilised

3,657 597 (487)

3,289 - (233)

6,946 597 (720)

At 31 December 2008

3,767

3,056

6,823

As at 31 December 2008, the Group had discounted bank notes of Rmb2,443,000 (2007: nil) and the proceeds received have been accounted for as short-term loans (note 34).

ANNUAL REPORT 2008

85

notes to financial statements (cont’d) year ended 31 december 2008

25. Trade and notes receivables (Cont’d) An aged analysis of trade receivables as at the balance sheet date, based on invoice date, is as follows:

Group 2008 2007 Rmb’000 Rmb’000

Within 6 months Between 6 and 12 months Between 1 and 2 years Over 2 years

157,632 4,887 8,842 3,895

158,935 20,313 6,362 3,640

At 31 December

175,256

189,250

The aged analysis of the trade receivables that are not considered to be impaired is as follows:

Group 2008 2007 Rmb’000 Rmb’000

Neither past due nor impaired Less than 3 months past due Over 3 months past due

157,632 4,887 5,914

158,935 20,313 3,056



168,433

182,304

Trade receivables that were neither past due nor impaired relate to a large number of diversified customers for whom there was no recent history of default. Trade receivables that were past due but not impaired relate to a number of independent customers that have a good track record with the Group. Based on past experience, the directors of the Group are of the opinion that no provision for impairment is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The Group does not hold any collateral or other credit enhancements over these balances.

26. Prepayments, deposits and other receivables Group 2008 2007 Rmb’000 Rmb’000

Company 2008 2007 Rmb’000 Rmb’000

Prepayments for construction of buildings Other receivables Prepaid income tax Prepayments for land use rights Cash advances Prepayments Prepaid other taxes Subsidy receivable Dividend receivable

19,000 6,493 6,443 4,600 1,565 1,420 136 - -

- 1,111 1,674 - 1,963 11,420 43 423 -

- - - - 58 195 - - 36,634

62 972 68,370

At 31 December Less: impairment of other receivables

39,657 (1,060)

16,634 (1,321)

36,887 -

69,404 -



38,597

15,313

36,887

69,404

86

Luye Pharma Group Ltd.

notes to financial statements (cont’d) year ended 31 december 2008

26. Prepayments, deposits and other receivables (Cont’d) Movements in the provision for impairment of other receivables were as follows: Group Individually impaired Rmb’000 At 1 January 2007 Acquisitions of subsidiaries Charge for the year Utilised

618 315 771 (383)

At 31 December 2007 Charge for the year Utilised

1,321 3 (264)

At 31 December 2008

1,060

The aged analysis of the prepayments, deposits and other receivables that are not considered to be impaired is as follows:

Group 2008 2007 Rmb’000 Rmb’000

Neither past due nor impaired 38,597 15,313 Receivables that were neither past due nor impaired relate to a large number of diversified customers for whom there was no recent history of default.

27. Cash and cash equivalents and pledged short-term deposits

Group 2008 2007 Rmb’000 Rmb’000

Company 2008 2007 Rmb’000 Rmb’000

Cash and bank balances Short-term deposits

117,166 1,303

95,383 67,983

9,976 -

13,315 -

Less: pledged short-term deposits for bank loans

118,469

163,366

9,976

13,315

-

(20,480)

-

-

Cash and cash equivalents

118,469

142,886

9,976

13,315

Cash at banks earns interest at floating rates based on daily bank deposits rates. Short- term time deposits are made for varying periods within three months depending on the immediate cash requirements of the Group, and earn interest at the respective short-term time deposits rates. The banks balance and pledged deposits are deposited with creditworthy banks with no recent history of default. The carrying amounts of the cash and cash equivalents approximate to their fair values as at the balance sheet date. As at 31 December 2008, none of short-term deposits have been pledged to secure bank loans (2007: Rmb17,531,000, earn interest at 3.06% per annum) (note 34).

ANNUAL REPORT 2008

87

notes to financial statements (cont’d) year ended 31 december 2008

28. Due from/to the holding company The amounts due from/to the holding company are unsecured, interest-free and are repayable on demand.

29. Due from/to related parties The amounts due from/to related parties are unsecured, interest-free and are repayable on demand.

30. Due from/to subsidiaries The amounts due from/to subsidiaries are unsecured, interest-free and are repayable on demand.

31. Share capital 2008 US’000

Company 2007 2008 Rmb’000 US’000

2007 Rmb’000

Authorised: 5,000,000,000 (2007: 5,000,000,000) ordinary shares of US$0.02 (2007: US$0.02) each

100,000

828,650

100,000

828,650

Issued and fully paid: 492,764,900 (2007: 492,764,900) ordinary shares of US$0.02 (2007: US$0.02) each

9,855

81,180

9,855

81,180

32. Reserves/(loss) Luye R&D and Luye Trading In accordance with the Company Law of the PRC, Luye R&D and Luye Trading are required to allocate 10% of their profit after tax, as determined in accordance with the relevant PRC accounting standards, to the statutory surplus reserve (“SSR”) until the reserve reaches 50% of the registered capital of the PRC subsidiaries. Subject to certain restrictions set out in the Company Law of the PRC, part of the SSR may be converted to increase share capital, provided that the remaining balance after the capitalisation is not less than 25% of the registered capital. Prior to 1 January 2007, in accordance with the Company Law of the PRC, Luye R&D and Luye Trading were required to transfer 5% to 10% of their profit after tax, as determined in accordance with the relevant PRC accounting standards, to a statutory public welfare fund (“PWF”) which is a non-distributable reserve other than in the event of liquidation of the PRC subsidiaries. The PWF must be used for capital expenditure on staff welfare facilities and these facilities remain as the property of the PRC subsidiaries. According to the revised Company Law of the PRC, effective 1 January 2007, Luye R&D and Luye Trading are no longer required to appropriate their profit after tax to the PWF. The outstanding balance of the PWF as at 31 December 2006 was transferred to the SSR. Shandong Luye Prior to 1 January 2006, Shandong Luye appropriated its profit after tax to the SSR and PWF according to the Company Law of the PRC. Shandong Luye was converted into a wholly foreign-owned enterprise (note 16) in 2006, and, in accordance with the relevant rules applicable to a foreign investment enterprise and its articles of association, Shandong Luye is required to appropriate 10% and 5% of its profit after tax to the statutory reserve fund and enterprise expansion fund, respectively. In 2007, Shandong Luye amended its articles of association to discontinue the appropriation of the enterprise expansion fund.

88

Luye Pharma Group Ltd.

notes to financial statements (cont’d) year ended 31 december 2008

32. Reserves/(loss) (Cont’d) The statutory reserve fund can be used to offset losses and increase capital as approved. The enterprise expansion fund must be used to expand production or operations and to increase capital as approved. Nanjing Kanghai and Nanjing Sike In accordance with the relevant rules applicable to foreign investment enterprises and their articles of association, Nanjing Kanghai and Nanjing Sike are required to appropriate 10% of their profit after tax to the statutory reserve fund. The statutory reserve fund can be used to offset losses and increase capital as approved.

33. Government grants

Group 2008 2007 Rmb’000 Rmb’000

At 1 January Grants received during the year Amount released

1,027 5,880 (6,907)

1,817 2,300 (3,090)

At 31 December

-

1,027

The grants relate to the reimbursement of qualifying research and development expenditures incurred for approved projects and their utilisation are subject to the final assessment of the relevant government authorities.

34. Interest-bearing loans and borrowings Effective interest 2008 rate (%) Maturity Current Bank loans - unsecured Rmb20,000,000 bank loan 7.84 28 August 2009 Rmb10,000,000 bank loan 5.58 27 November 2009 Current portion of long term bank loan - unsecured US$4,888,000 bank loan SIBOR+1.25% 2 February 2009 to 2 November 2009 Discounted bank acceptances * 20 April 2009 to 3 June 2009

Group Rmb’000

Company Rmb’000

20,000 10,000 30,000

-

33,406

33,406

2,443

-

Non-current Bank loans - unsecured US$10,962,000 bank loan SIBOR+1.25% 2010

65,849

33,406

74,925

74,925



140,774

108,331

ANNUAL REPORT 2008

89

notes to financial statements (cont’d) year ended 31 december 2008

34. Interest-bearing loans and borrowings (Cont’d) 2007 Current Bank loans - secured ** US$2,400,000 bank loan (i) Rmb14,000,000 bank loan (ii)

Effective interest rate (%) Maturity

7.64 7.29

24 May 2008 30 October 2008

Group Rmb’000

Company Rmb’000

17,531 14,000

-

Bank loans - unsecured Rmb15,000,000 bank loan 6.43 28 February 2008 15,000 Rmb20,000,000 bank loan 6.84 31 July 2008 20,000 Rmb20,000,000 bank loan 6.39 25 March 2008 20,000 Rmb6,000,000 bank loan 7.29 24 November 2008 6,000 Rmb10,000,000 bank loan 6.90 17 July 2008 10,000 Rmb10,000,000 bank loan 6.84 31 July 2008 10,000 112,531 Current portion of long term bank loan - unsecured US$3,387,000 bank loan SIBOR+1.25% 2 February 2008 24,747 24,747 to 2 November 2008 137,278 24,747 Non-current Bank loans - unsecured US$15,850,000 bank loan SIBOR+1.25% 2009 to 2010 115,781 115,781

253,059

140,528

* Bank notes that have been discounted bear interest rates ranging from 2.1% to 6% (2007: nil) per annum (note 25).

** Certain of the Group’s bank loans are secured by: (i) the pledge of certain of the Group’s time deposits amounting to Rmb20,480,000 (note 27); and (ii) the pledge of certain of the Group’s land use rights and mortgages over certain of the Group’s buildings, which had an aggregate carrying value at the balance sheet date of approximately Rmb12,197,000 (note 14 and note 19).

90

Luye Pharma Group Ltd.

notes to financial statements (cont’d) year ended 31 december 2008

35. Accrued liabilities and other payables 2008 Rmb’000

Group 2007 Rmb’000

Company 2008 Rmb’000

2007 Rmb’000

Other payables Accrued liabilities Accrued payroll Advances from customers Taxes other than corporate income tax Payables for purchases of machinery and construction of buildings Acquisition of the CMNa business

18,571 13,047 8,446 6,333 6,260

17,319 9,700 8,246 1,989 9,608

1,297 914 1,160 - 20

53 2,194 891 23

2,304

3,272

-

-

-

3,000

-

-



54,961

53,134

3,391

3,161

36. Commitments The Group leases certain of its office properties under operating lease arrangements. Leases for properties are negotiated for terms from one to ten years. At 31 December 2008 and 2007, the Group had total future minimum lease payments under non-cancellable operating leases falling due as follows:

Group 2008 2007 Rmb’000 Rmb’000

Operating lease commitments: Within one year In the second to fifth years, inclusive After five years

1,277 1,538 169

802 1,251 169



2,984

2,222

In addition to the operating lease commitments detailed above, the Group and the Company had the following capital commitments at the balance sheet date: Contracted, but not provided for: Plant and machinery New medicine certificate

Group 2008 2007 Rmb’000 Rmb’000

1,340 -

2,636 50,000

Authorised, but not contracted for: Plant and machinery

1,340

52,636

293,586

1,620



294,926

54,256

ANNUAL REPORT 2008

91

notes to financial statements (cont’d) year ended 31 december 2008

37. Related party transactions The Group had the following material related party transactions: Sale Purchase of drugs of drugs 2008 Rmb’000 Rmb’000 AsiaPharm Holdings Ltd. (“AsiaPharm Holdings”) Steward Cross SmartMedicine WPU ABPL Wuhu Luye Pharmaceutical Co., Ltd. (“Wuhu Luye”)

- 9,532 5,050 - - -

Amount due from/ (to) related parties Rmb’000

- - - 4,189 - -

(105) 6,658 1,495 (474) (741) 254

Interest received Rmb’000

Amount due from/ (to) related parties Rmb’000

Loans from/to related party

AsiaPharm Holdings Steward Cross

- 50

(991) 951

Sale Purchase of drugs of drugs 2007 Rmb’000 Rmb’000

Amount due from/ (to) related parties Rmb’000

AsiaPharm Holdings Steward Cross SmartMedicine WPU AsiaPharm Singapore Pte. Ltd. (“AsiaPharm Singapore”) Wuhu Luye

- 49 - -

- 4 - 472

(264) 44 1,655 (556)

- -

- -

(709) (307)

AsiaPharm Holdings is a company wholly owned by certain directors of the Company. SmartMedicine is a wholly-owned subsidiary of Steward Cross. Asiapharm Singapore is a company wholly owned by AsiaPharm Holdings. Wuhu Luye is significantly influenced by certain directors of the Company.

92

Luye Pharma Group Ltd.

notes to financial statements (cont’d) year ended 31 december 2008

37. Related party transactions (Cont’d) Compensation of key management personnel

Group 2008 2007 Rmb’000 Rmb’000

Short-term employee benefits Share Award Scheme Pension CPF Directors’ fees

5,531 667 17 65 1,068

4,259 42 98 325



7,348

4,724

Directors of the Company Other key management personnel

4,093 3,255

2,446 2,278



7,348

4,724

Comprise amounts paid to:

Remuneration of directors The remuneration of the directors of the Company analysed into the following bands is disclosed in compliance with Rule 1207(11) of Chapter 12 of the SGX-ST Listing Manual:

Number of directors Executive Non-executive

Total

2008 Below S$250,000 (Rmb1,227,600) S$250,000 to below S$500,000 (Rmb1,227,600 to below Rmb2,455,200)

2

5

7

1

-

1



3

5

8

2007 Below S$250,000 (Rmb1,267,500) S$250,000 to below S$500,000 (Rmb1,267,500 to below Rmb2,535,000)

1

4

5

1

-

1



2

4

6

Other than the foregoing, there were no other principal related party relationships where control over financial and operating policies existed as at the balance sheet date. In the opinion of the directors, the above related party transactions were entered into in the ordinary course of the Group’s business and were in accordance with the terms of arrangements governing the transactions.

ANNUAL REPORT 2008

93

notes to financial statements (cont’d) year ended 31 december 2008

38. Financial risk management objectives and policies The Group’s principal financial instruments comprise interest-bearing loans and borrowings and cash and short-term deposits. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. The main risks arising from the Group’s financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk. The board of directors reviews and agrees policies for managing each of these risks and they are summarised below. Interest rate risk The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group’s profit before tax (through the impact on floating rate borrowings). There is no impact on the Group’s equity. Increase/ (decrease) in basis point

Increase/ (decrease) in profit before tax Rmb’000

2008 US$ US$

20 (20)

(97) 97

2007 US$ US$

20 (20)

(117) 117

Foreign currency risk Foreign currency risk is the risk of loss resulting from changes in foreign currency exchange rates. Fluctuations in exchange rates between the Renminbi and other currencies in which the Group conducts business may affect its financial condition and results of operations. The Group seeks to limit its exposure to foreign currency risk by minimising its net foreign currency position. The following table demonstrates the sensitivity at the balance sheet date to a reasonably possible change in the US$/S$/HK$ exchange rate, with all other variables held constant, of the Group’s profit before tax (due to changes in the fair value of monetary assets and liabilities) and the Group’s equity (due to changes in fair value of forward currency contracts).

94

Luye Pharma Group Ltd.

notes to financial statements (cont’d) year ended 31 december 2008

38. Financial risk management objectives and policies (Cont’d) Foreign currency risk (cont’d) Increase/ (decrease) in US$/S$/HK$ rate %

Increase/ (decrease) in profit before tax Rmb’000

Increase/ (decrease) in equity Rmb’000

2008 If Renminbi weakens against US$ If Renminbi strengthens against US$

5 (5)

(5,723) 5,723

-

If Renminbi weakens against S$ If Renminbi strengthens against S$

5 (5)

(213) 213

(84) 84

If Renminbi weakens against HK$ If Renminbi strengthens against HK$

5 (5)

(534) 534

-

2007 If Renminbi weakens against US$ If Renminbi strengthens against US$

5 (5)

(3,736) 3,736

(201) 201

If Renminbi weakens against S$ If Renminbi strengthens against S$

5 (5)

(68) 68

(133) 133

If Renminbi weakens against HK$ If Renminbi strengthens against HK$

5 (5)

(871) 871

-

Credit risk The Group trades mainly with recognised and creditworthy third parties. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis. For transactions that are not denominated in the functional currency of the relevant operating unit, the Group does not offer credit terms without the specific approval of senior management. The credit risk of the Group’s other financial assets, which comprise cash and cash equivalents, available-for-sale financial assets and other receivables, arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. Since the Group trades only with recognised and creditworthy third parties, there is no requirement for collateral. Concentrations of credit risk are managed by customer/counterparty, by geographical region and by industry sector. There are no significant concentrations of credit risk within the Group as the customer bases of the Group’s trade receivables are widely dispersed in different sectors and industries. Further quantitative data in respect of the Group’s exposure to credit risk arising from trade and other receivables are disclosed in notes 25 and 26 to the financial statements.

ANNUAL REPORT 2008

95

notes to financial statements (cont’d) year ended 31 december 2008

38. Financial risk management objectives and policies (Cont’d) Liquidity risk The Group monitors its risk to a shortage of funds using a recurring liquidity planning tool. This tool considers the maturity of both its financial investments and financial assets (e.g. accounts receivable, other financial assets) and projected cash flows from operations. The Group maintains a balance between continuity of funding and flexibility through the use of interest-bearing loans and borrowings. The table below summarises the maturity profile of the Group’s financial liabilities at 31 December based on contractual undiscounted payments. Year ended 31 December 2008

On demand Rmb’000

Less than 3 months Rmb’000

3 to 12 months Rmb’000

1 to 5 years Total Rmb’000 Rmb’000

Interest-bearing loans and borrowings Trade payables Accrued liabilities and other payables Due to the holding company Due to related parties

- - 6,260 1,096 1,519

- 11,735 48,701 - -

65,849 - - - -

74,925 - - - -

140,774 11,735 54,961 1,096 1,519



8,875

60,436

65,849

74,925

210,085

Interest-bearing loans and borrowings Trade payables Accrued liabilities and other payables (restated) Due to the holding company Due to related parties

- 800

35,000 7,453

102,278 -

115,781 -

253,059 8,253

4,369 2,839 1,613

48,765 - -

- - -

- - -

53,134 2,839 1,613



9,621

91,218

102,278

115,781

318,898

Capital Management The primary objective of the Group’s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximise shareholder value. The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders less the fixed deposit in banks. No changes were made in the objectives, policies or processes for managing capital during the years ended 31 December 2008 and 2007. The Group monitors capital using a gearing ratio, which is net debt divided by total capital plus net debt. The Group’s policy is to keep the gearing ratio below 40%. Net debt includes interest-bearing loans and borrowings, trade payables, accrued liabilities and other payables, amounts due to the holding company and related parties, less

96

Luye Pharma Group Ltd.

notes to financial statements (cont’d) year ended 31 december 2008

38. Financial risk management objectives and policies (Cont’d) cash and cash equivalents and pledged short-term deposits. Capital includes equity attributable to the equity holders of the parent less the net unrealised gains reserves. The gearing ratios as at the balance sheet dates were as follows:

Group 2008 2007 Rmb’000 Rmb’000

Interest-bearing loans and borrowings Trade payables Accrued liabilities and other payables Due to the holding company Due to related parties Less: cash and cash equivalents

140,774 11,735 54,961 1,096 1,519 (118,469)

253,059 8,253 53,134 2,839 1,613 (142,886)

Net debt

91,616

176,012

Equity Net unrealised gains reserves

821,286 -

771,520 (371)

Total capital

821,286

771,149

Capital and net debt

912,902

947,161

Gearing ratio

10%

19%

39. Financial instruments Fair values The fair value of a financial instrument is the amount at which the instrument could be exchanged or settled between knowledgeable and willing parties in an arm’s length transaction, other than in a forced or liquidation sale. Financial instruments carried at fair value The Group and the Company have carried all investment securities that are classified as available-for-sale investments at their fair values as required by IAS 39, except for unlisted investments which were stated at cost (note 20). Financial instruments whose carrying amounts approximate fair values Management has determined that the carrying amounts of cash and short-term deposits, trade and notes receivables, deposits and other receivables, amounts due from the holding company and related parties, trade payables, accrued liabilities and other payables, amounts due to the holding company and related parties and interest-bearing loans and borrowings, based on their notional amounts, reasonably approximate to their fair values because these financial instruments are mostly short term in nature or are repriced frequently.

40. Events after the balance sheet date There have been no material post balance sheet events which would require disclosure or adjustment to the 31 December 2008 financial statements.

41. Comparative amounts Certain comparative amounts have been reclassified to conform to the current year’s presentation.

42. Approval of the financial statements The financial statements were approved and authorised for issue by the board of directors on 5 March 2009.

ANNUAL REPORT 2008

97

statistics of shareholdings as at 24 march 2009

Authorised share capital Number of Issued Shares Class of Shares Voting Rights Number of Treasury Shares % of Treasury Shares

: : : : : :

US$100,000,000.00 492,764,900 Ordinary shares of US$0.02 each One vote per share Nil Nil

STATISTICS OF SHAREHOLDINGS Size of Shareholding 1 - 999 1,000 - 10,000 10,001 - 1,000,000 1,000,001 and above

Number of Shareholders %

Number of Shareholders

%

0.75 69.88 28.72 0.65 100.00

1,501 4,584,538 12,508,674 475,670,187 492,764,900

0.00 0.93 2.54 96.53 100.00

Direct Interest %

Deemed Interest

%

- 381,439,877 381,439,877 381,439,877 381,439,877 381,439,877 - 35,000,000

77.41 77.41 77.41 77.41 77.41 7.10

8 747 307 7 1,069

SUBSTANTIAL SHAREHOLDERS AS AT 24 MARCH 2009 (As recorded in the Register of Substantial Shareholders) LuYe Pharmaceutical Investment Co., Ltd LuYe Pharmaceutical International Co., Ltd (1) Hygeia Holdings Ltd (2) MBK Partners, L.P. (3) Asiapharm Holdings Ltd (4) Liu Dian Bo (5) See Hoy Chan Investment Limited See Hoy Chan Equities Pte Ltd (6)

381,439,877 - - - - - 35,000,000 -

77.41 - - - - - 7.10 -

NOTES: (1) LuYe Pharmaceutical International Co., Ltd (“LuYe International”) is the holding company of LuYe Pharmaceutical Investment Co., Ltd (“LuYe Investment”) and deemed interested in the shares held by LuYe Investment. (2) Hygeia Holdings Ltd (“Hygeia”) is the holding company of LuYe International and deemed interested in the shares held by LuYe Investment. (3) MBK Partners, L.P. is the holding company of Hygeia and deemed interested in the shares held by LuYe Investment. (4) Asiapharm Holdings Ltd. (“Asiapharm Holdings”) has a controlling interest in LuYe International and is deemed interested in the shares held by LuYe Investment. (5) Liu Dian Bo has a controlling interest in Asiapharm Holdings and is deemed interested in the shares held by LuYe Investment. (6) See Hoy Chan Equities Pte Ltd is the holding company of See Hoy Chan Investment Limited (“See Hoy Chan Investment”) and deemed interested in the shares held by See Hoy Chan Investment.

98

Luye Pharma Group Ltd.

statistics of shareholdings (cont’d) as at 24 march 2009

TWENTY LARGEST SHAREHOLDERS No.

Name

No. of Shares

%

1 LUYE PHARMACEUTICAL INVESTMENT CO., LTD 381,439,877 77.41 2

SEE HOY CHAN INVESTMENT LIMITED

3

DBSN SERVICES PTE LTD

4 5 6



35,000,000

7.10

20,000,000

4.06

DBS VICKERS SECURITIES (SINGAPORE) PTE LTD

18,144,000

3.68

CITIBANK NOMINEES SINGAPORE PTE LTD

14,963,000

3.04

OVERSEA CHINESE BANK NOMINEES PTE LTD

5,000,000

1.01

7

DBS NOMINEES PTE LTD

1,123,310

0.23

8

BRIMA BTE OTHMAN NAYAH

350,000

0.07

9

MORGAN STANLEY ASIA (SINGAPORE) SECURITIES PTE LTD

314,000

0.06

10

KIM ENG SECURITIES PTE. LTD.

241,014

0.05

11

LOH LEE AIK

233,000

0.05

12

CHAN FOOK KHEONG

220,000

0.04

13

HENG NGEE KOON

215,000

0.04

14

PHO KELVIN ROBERT TZEE MING OR PHO WAN HENG ROBERT

212,000

0.04

15

HSBC (SINGAPORE) NOMINEES PTE LTD

203,368

0.04

16

RAINBOW HEALTH LIMITED

200,292

0.04

17

DAIWA SECURITIES SMBC SINGAPORE LIMITED

200,000

0.04

18

RIVA RICO PTE LTD

200,000

0.04

19

UOB KAY HIAN PTE LTD



200,000

0.04

20

WANG CHWOE WAH



200,000

0.04











TOTAL 478,658,861 97.12

PERCENTAGE OF SHAREHOLDING IN PUBLIC’S HANDS Approximately 15.47 % of the Company’s shares are held in the hands of public. Accordingly, the Company has complied to comply with Rule 723 of the Listing Manual of the SGX-ST.

ANNUAL REPORT 2008

99

notice of annual general meeting NOTICE IS HEREBY GIVEN that the Annual General Meeting of Luye Pharma Group Ltd. (“the Company”) will be held at Connection 1, Level 3, Amara Singapore, 165 Tanjong Pagar Road, Singapore 088539 on Friday, 24 April 2009, at 2.00 p.m. for the following purposes:

AS ORDINARY BUSINESS 1.

To receive and adopt the Directors’ Report and the Audited Accounts of the Company for the year ended 31 December 2008 together with the Auditors’ Report thereon. (Resolution 1)

2.

To re-elect the following Directors of the Company retiring pursuant to Bye-laws 85(6) and 86(1) of the Company’s Bye-laws:



Mr Wang Xin Yu (Retiring under Bye-Law 85(6)) Mr Kung Kuo Chuan (Retiring under Bye-Law 85(6)) Mr Liu Dian Bo (Retiring under Bye-Law 86(1)) Mr Yuan Hui Xian (Retiring under Bye-Law 86(1)) Mr Yang Rong Bing (Retiring under Bye-Law 86(1))

3. 4.

To approve the payment of additional Director’s fees of S$23,315 for the year ended 31 December 2008. [See Explanatory Note (i)] (Resolution 7)

5.

To re-appoint Messrs Ernst & Young, Hong Kong as the Company’s Auditors and to authorise the Directors to fix their remuneration. (Resolution 9)

6.

To transact any other ordinary business which may properly be transacted at an Annual General Meeting.



(Resolution 2) (Resolution 3) (Resolution 4) (Resolution 5) (Resolution 6)

To approve the payment of Directors’ fees of S$325,000 for the year ending 31 December 2009 to be paid quarterly in arrears. (2008: S$265,000) (Resolution 8)

AS SPECIAL BUSINESS To consider and if thought fit, to pass the following resolutions as Ordinary Resolutions, with or without any modifications: 7. Authority to issue shares That pursuant to the provisions of the Companies Act 1981 of Bermuda and Rule 806 of the Listing Manual of the Singapore Exchange Securities Trading Limited, the Directors of the Company be authorised and empowered to: (a) (i)

issue shares in the Company (“shares”) whether by way of rights, bonus or otherwise; and/or



(ii) make or grant offers, agreements or options (collectively, “Instruments”) that might or would require shares to be issued, including but not limited to the creation and issue of (as well as adjustments to) options, warrants, d ebentures or other instruments convertible into shares,



at any time and upon such terms and conditions and for such purposes and to such persons as the Directors of the Company may in their absolute discretion deem fit; and

(b) (notwithstanding the authority conferred by this Resolution may have ceased to be in force) issue shares in pursuance of any Instruments made or granted by the Directors of the Company while this Resolution was in force,

100 Luye Pharma Group Ltd.

notice of annual general meeting (cont’d) provided that: (1) the aggregate number of shares (including shares to be issued in pursuance of the Instruments, made or granted pursuant to this Resolution) to be issued pursuant to this Resolution shall not exceed fifty per centum (50%) of the total number of issued shares (excluding treasury shares) in the capital of the Company (as calculated in accordance with sub-paragraph (2) below), of which the aggregate number of shares and Instruments to be issued other than on a pro-rata basis to existing shareholders of the Company shall not exceed twenty per centum (20%) of the total number of issued shares (excluding treasury shares) in the capital of the Company (as calculated in accordance with sub-paragraph (2) below); (2) (subject to such calculation as may be prescribed by the Singapore Exchange Securities Trading Limited) for the purpose of determining the aggregate number of shares that may be issued under sub-paragraph (1) above, the total number of issued shares (excluding treasury shares) shall be based on the total number of issued shares (excluding treasury shares) in the capital of the Company at the time of the passing of this Resolution, after adjusting for:

(a) new shares arising from the conversion or exercise of any convertible securities; (b) new shares arising from exercising share options or vesting of share awards which are outstanding or subsisting at the time of the passing of this Resolution; and (c) any subsequent bonus issue, consolidation or subdivision of shares;

(3) the 50% limit in sub-paragraph (1) above may be increased to 100% for the Company to undertake pro-rata renounceable rights issues; (4) in exercising the authority conferred by this Resolution, the Company shall comply with the provisions of the Listing Manual of the Singapore Exchange Securities Trading Limited for the time being in force (unless such compliance has been waived by the Singapore Exchange Securities Trading Limited) and the Bye-Laws of the Company; and (5) unless revoked or varied by the Company in a general meeting, such authority shall continue in force until the conclusion of the next Annual General Meeting of the Company or the date by which the next Annual General Meeting of the Company is required by law to be held, whichever is earlier. [See Explanatory Note (ii)] (Resolution 10) 8. Authority to issue shares other than on a pro-rata basis pursuant to the aforesaid share issue mandate at discounts not exceeding twenty per centum (20%) of the weighted average price for trades done on the SGX-ST. That subject to and pursuant to the aforesaid share issue mandate being obtained, the Directors of the Company be hereby authorised and empowered to issue shares other than on a pro-rata basis at a discount not exceeding twenty per centum (20%) to the weighted average price for trades done on the SGX-ST for the full market day on which the placement or subscription agreement in relation to such shares is executed (or if not available for a full market day, the weighted average price must be based on the trades done on the preceding market day up to the time the placement or subscription agreement is executed), provided that : (a) in exercising the authority conferred by this Resolution, the Company complies with the provisions of the Listing Manual of the SGX-ST for the time being in force (unless such compliance has been waived by the SGXST); and (b) unless revoked or varied by the Company in general meeting, such authority shall continue in force until the conclusion of the next Annual General Meeting of the Company or the date by which the next Annual General Meeting of the Company is required by law to be held, whichever is earlier. [See Explanatory Note (iii)] (Resolution 11)

ANNUAL REPORT 2008 101

notice of annual general meeting (cont’d) 9. Authority to issue shares under the AsiaPharm Share Award Scheme That the Directors of the Company be authorised and empowered to offer and grant awards in accordance with the provisions of the AsiaPharm Share Award Scheme (the “Share Award Scheme”) and to issue from time to time such number of fully-paid shares in the Company as may be required to be issued pursuant to the vesting of the awards under the Share Award Scheme provided always that the aggregate number of shares to be issued pursuant to the Share Award Scheme shall not exceed fifteen percent (15%) of the total number of issued shares (excluding treasury shares) in the capital of the Company from time to time. [See Explanatory Note (iv)] (Resolution 12) 10. Renewal of Share Purchase Mandate That the Directors of the Company be and are hereby authorised to make purchases or otherwise acquire issued shares in the capital of the Company from time to time (whether by way of market purchases or off-market purchases on an equal access scheme) of up to ten per centum (10%) of the total number of issued shares (excluding treasury shares) in the capital of the Company (as ascertained as at the date of Annual General Meeting of the Company) at the price of up to but not exceeding the Maximum Price as defined in the Letter to Shareholders dated 8 April 2009 as attached, and this mandate shall, unless revoked or varied by the Company in general meeting, continue in force until the earliest of (i) the date on which the next Annual General Meeting of the Meeting is held or required by law to be held; or (ii) the date on which the share purchases are carried out to the full extent mandated. [See Explanatory Note (v)] (Resolution 13)

By Order of the Board

Yeo Poh Noi, Caroline Company Secretary Singapore, 8 April 2009 Explanatory Notes: (i) Messrs Wang Xin Yu and Kung Kuo Chuan were appointed as Non-Executive Directors of the Company on 11 August 2008. Subject to approval at the Annual General Meeting, the additional Director’s fees of S$23,315 for the year ended 31 December 2008 are payable to Messrs Wang Xin Yu and Kung Kuo Chuan. (ii) The Ordinary Resolution 10 in item 7 above, if passed, will empower the Directors of the Company, effective until the conclusion of the next Annual General Meeting of the Company, or the date by which the next Annual General Meeting of the Company is required by law to be held or such authority is varied or revoked by the Company in a general meeting, whichever is the earlier, to issue shares, make or grant instruments convertible into shares and to issue shares pursuant to such instruments, up to a number not exceeding, in total, 50% of the total number of issued shares (excluding treasury shares) in the capital of the Company, of which up to 20% may be issued other than on a pro-rata basis to shareholders. The 50% limit referred to in the preceding sentence may be increased to 100% for the Company to undertake pro-rata renounceable rights issues.

102 Luye Pharma Group Ltd.

notice of annual general meeting (cont’d) For determining the aggregate number of shares that may be issued, the total number of issued shares (excluding treasury shares) will be calculated based on the total number of issued shares (excluding treasury shares) in the capital of the Company at the time this Ordinary Resolution is passed after adjusting for new shares arising from the conversion or exercise of any convertible securities or share options or vesting of share awards which are outstanding or subsisting at the time when this Ordinary Resolution is passed and any subsequent bonus issue, consolidation or subdivision of shares. The 100% renounceable pro-rata rights issue limit is one of the new measures implemented by the SGX-ST as stated in a press release entitled “SGX introduces further measures to facilitate fund raising” dated 19 February 2009 and which became effective on 20 February 2009. It will provide the Directors with an opportunity to raise funds and avoid prolonged market exposure by reducing the time taken for shareholders’ approval, in the event the need arises. Minority shareholders’ interests are mitigated as all shareholders have equal opportunities to participate and can dispose their entitlements through trading of nil-paid rights if they do not wish to subscribe for their rights shares. It is subject to the condition that the Company makes periodic announcements on the use of the proceeds as and when the funds are materially disbursed and provides a status report on the use of proceeds in the annual report. (iii) The Ordinary Resolution 11 in item 8 above is pursuant to measures implemented by the SGX-ST as stated in a press release entitled “SGX introduces further measures to facilitate fund raising” dated 19 February 2009 and which became effective on 20 February 2009. Under the measures implemented by the SGX-ST, issuers will be allowed to undertake non pro-rata placements of new shares priced at discounts of up to 20% to the weighted average price for trades done on the SGX-ST for a full market day on which the placement or subscription agreement in relation to such shares is executed, subject to the conditions that (a) shareholders’ approval be obtained in a separate resolution (the “Resolution”) at a general meeting to issue new shares on a non pro-rata basis at discount exceeding 10% but not more than 20%; and (b) that the resolution seeking a general mandate from shareholders for issuance of new shares on a non pro-rata basis is not conditional upon the Resolution. It should be noted that under the Listing Manual of the SGX-ST, shareholders’ approval is not required for placements of new shares, on a non pro-rata basis pursuant to a general mandate, at a discount of up to 10% to the weighted average price for trades done on the SGX-ST for a full market day on which the placement or subscription agreement in relation to such shares is executed. (iv) The Ordinary Resolution 12 proposed in item 9 above, if passed, will empower the Directors of the Company from the date of this Meeting until the next Annual General Meeting, to offer and grant awards under the AsiaPharm Share Award Scheme (the “Share Award Scheme”) in accordance with the provisions of the Share Award Scheme and to issue from time to time such number of fully-paid shares as may be required to be issued pursuant to the vesting of the awards granted under the Share Award Scheme provided always that the aggregate number of shares to be issued pursuant to the Share Award Scheme shall not exceed 15% of the total number of issued shares (excluding treasury shares) in the capital of the Company from time to time. The Share Award Scheme was adopted at the Special General Meeting held on 25 April 2007. (v) The Ordinary Resolution 13 proposed in item 10 above, if passed, will empower the Directors from the date of the above Meeting until the earliest of (i) the date on which the next Annual General Meeting of the Meeting is held or required by law to be held; (ii) the date on which the share purchases are carried out to the full extent mandated; or (iii) the time when the authority conferred by this mandate is revoked or varied by Shareholders in general meeting to repurchase ordinary shares of the Company by way of market purchases or off-market purchases of up to 10% of the total number of issued shares (excluding treasury shares) in the capital of the Company at the Maximum Price (as defined in the Letter to Shareholders as attached). The rationale for, the authority and limitation on, the sources of funds to be used for the purchase or acquisition including the amount of financing and the financial effects of the purchase or acquisition of ordinary shares by the Company pursuant to the Share Purchase Mandate on the audited consolidated financial accounts of the Group for the financial year ended 31 December 2008 are set out in greater detail in the Letter to Shareholders dated 8 April 2009 attached to this Annual Report.

ANNUAL REPORT 2008 103

notice of annual general meeting (cont’d) Notes 1. A Member (other than a Member which is The Central Depository (Pte) Limited (the “Depository”)) entitled to attend and vote at the Annual General Meeting (the “Meeting”) is entitled to appoint not more than two proxies to attend and vote in his/her stead. A proxy need not be a Member of the Company. 2 A Depositor who is a natural person need not submit the Depositor Proxy Form if he is attending the Meeting in person. 3. Where a Depositor(s) is a corporation and wishes to be represented at the Meeting, it must nominate an Appointee/ Appointees to attend and vote as a proxy of the Depository at the Meeting in respect of the number of the Depositor(s) Shares. 4. A Depositor(s) may nominate not more than two Appointees, who shall be natural persons, to attend and vote in his/her/its place as proxy of the Depository in respect of the number of the Depositor(s) Shares by completing the Depositor Proxy Form and deposit the duly completed Depositor Proxy Form at the office of the Singapore Share Transfer Agent, Boardroom Corporate & Advisory Services Pte. Ltd. at 3 Church Street #08-01, Samsung Hub, Singapore 049483, at least forty-eight (48) hours before the time of the Meeting.

104 Luye Pharma Group Ltd.

Luye Pharma Group Ltd. 133 Cecil Street, #12-02, Keck Seng Tower, Singapore 069535 Tel: (65) 6220 0119 Fax: (65) 6220 0282 Website: www.asiapharm.biz

ANNUAL REPORT 2008

1