Neo-Green Pharmaceutical Technology Development (Cayman) Limited

Transcription

1 The Stock Exchange of Hong Kong Limited and the Securities and Futures Commission take no responsibility for the contents of this Application Proof, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this Application Proof. Application Proof of Neo-Green Pharmaceutical Technology Development (Cayman) Limited (the Company ) (incorporated in the Cayman Islands with limited liability) WARNING The publication of this Application Proof is required by The Stock Exchange of Hong Kong Limited (the Exchange )/the Securities and Futures Commission (the Commission ) solely for the purpose of providing information to the public in Hong Kong. This Application Proof is in draft form. The information contained in it is incomplete and is subject to change which can be material. By viewing this document, you acknowledge, accept and agree with the Company, its sponsors, advisers or member of the underwriting syndicate that: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) this document is only for the purpose of providing information about the Company to the public in Hong Kong and not for any other purposes. No investment decision should be based on the information contained in this document; the publication of this document or supplemental, revised or replacement pages on the Exchange s website does not give rise to any obligation of the Company, its sponsors, advisers or members of the underwriting syndicate to proceed with an offering in Hong Kong or any other jurisdiction. There is no assurance that the Company will proceed with the offering; the contents of this document or supplemental, revised or replacement pages may or may not be replicated in full or in part in the actual final listing document; the Application Proof is not the final listing document and may be updated or revised by the Company from time to time in accordance with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited; this document does not constitute a prospectus, offering circular, notice, circular, brochure or advertisement offering to sell any securities to the public in any jurisdiction, nor is it an invitation to the public to make offers to subscribe for or purchase any securities, nor is it calculated to invite offers by the public to subscribe for or purchase any securities; this document must not be regarded as an inducement to subscribe for or purchase any securities, and no such inducement is intended; neither the Company nor any of its affiliates, advisers or underwriters is offering, or is soliciting offers to buy, any securities in any jurisdiction through the publication of this document; no application for the securities mentioned in this document should be made by any person nor would such application be accepted; the Company has not and will not register the securities referred to in this document under the United States Securities Act of 1933, as amended, or any state securities laws of the United States; as there may be legal restrictions on the distribution of this document or dissemination of any information contained in this document, you agree to inform yourself about and observe any such restrictions applicable to you; and the application to which this document relates has not been approved for listing and the Exchange and the Commission may accept, return or reject the application for the subject public offering and/or listing. If an offer or an invitation is made to the public in Hong Kong in due course, prospective investors are reminded to make their investment decisions solely based on the Company s prospectus registered with the Registrar of Companies in Hong Kong, copies of which will be distributed to the public during the offer period.

2 IMPORTANT IMPORTANT: If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. Neo-Green Pharmaceutical Technology Development (Cayman) Limited (Incorporated in the Cayman Islands with limited liability) [REDACTED] Number of [REDACTED] under the [REDACTED] : [REDACTED] Shares (subject to adjustment and the [REDACTED]) Number of [REDACTED] : [REDACTED] Shares (subject to adjustment) Number of [REDACTED] : [REDACTED] Shares (subject to adjustment and the [REDACTED]) Maximum [REDACTED] : HK$[REDACTED] per Share, plus brokerage of 1%, SFC transaction levy of %, and Stock Exchange trading fee of 0.005% (payable in full on application in Hong Kong dollars and subject to refund on final pricing) Nominal Value : [HK$0.01] per Share [REDACTED] : [REDACTED] Sole Sponsor [REDACTED] Hong Kong Exchanges and Clearing Limited, The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this document, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this document. A copy of this document, having attached thereto the documents specified in the section headed Appendix VI Documents Delivered to the Registrar of Companies in Hong Kong and Available for Inspection, has been registered by the Registrar of Companies in Hong Kong as required by [REDACTED]. The Securities and Futures Commission of Hong Kong and the Registrar of Companies in Hong Kong take no responsibility for the contents of this document or any other document referred to above. The [REDACTED] is expected to be determined by agreement between the [REDACTED] (for itself and on behalf of the [REDACTED]) and us on the [REDACTED], which is expected to be on or around [REDACTED] and, in any event, not later than [REDACTED]. The [REDACTED] will be not more than HK$[REDACTED] per [REDACTED] and is currently expected to be not less than HK$[REDACTED] per [REDACTED], unless otherwise announced. If, for any reason, the [REDACTED] is not agreed by [REDACTED] between the [REDACTED] (for itself and on behalf of the [REDACTED]) and us, the [REDACTED] will not proceed and will lapse. Applicants for the [REDACTED] are required to pay, upon application, the maximum [REDACTED] of HK$[REDACTED] per [REDACTED] for each [REDACTED] together with brokerage of 1%, SFC transaction levy of %, and Stock Exchange trading fee of 0.005%, subject to refund if the [REDACTED] as finally determined is less than HK$[REDACTED] per [REDACTED]. The [REDACTED] (for itself and on behalf of the [REDACTED]) may, with our consent, reduce the number of [REDACTED] being offered under the [REDACTED] and/or the indicative [REDACTED] below that stated in this document at any time on or prior to the morning of the last day for lodging applications under the [REDACTED]. In such a case, a notice of reduction in the number of [REDACTED] being Offered in the [REDACTED] will be published in the South China Morning Post (in English) and the Hong Kong Economic Times (in Chinese) not later than the morning of the day which is the last day for lodging applications under the [REDACTED]. Such notice will also be available at the website of the Stock Exchange at and our website at For further information, see the sections headed Structure of the [REDACTED] and How to Apply for [REDACTED]. The obligations of the [REDACTED] under the [REDACTED] are subject to termination by the [REDACTED] (for itself and on behalf of the [REDACTED]) if certain grounds arise prior to 8:00 a.m. on the day that trading in the [REDACTED] commences on the Stock Exchange. Such grounds are set out in the section headed [REDACTED] in this document. The [REDACTED] have not been and will not be registered under the Securities Act, as amended or any state securities laws in the United States and may not be offered, sold, pledged or transferred within the United States, except that the [REDACTED] may be offered, sold or delivered to [REDACTED] in reliance on Rule 144A or any other available exemption from registration under the U.S. Securities Act of 1933, as amended, or outside the United States in offshore transactions in reliance on Regulation S. * For identification purposes only [REDACTED]

3 EXPECTED TIMETABLE (1) [REDACTED] i

4 EXPECTED TIMETABLE (1) [REDACTED] ii

5 EXPECTED TIMETABLE (1) [REDACTED] iii

6 CONTENTS IMPORTANT NOTE TO INVESTORS This document is issued by us solely in connection with the [REDACTED] and the [REDACTED], and it does not constitute an offer to sell or a solicitation of an offer to buy any security other than the [REDACTED] offered by this document pursuant to the [REDACTED]. This document may not be used for the purpose of, and does not constitute, an offer or invitation in any other jurisdiction or in any other circumstances. We have taken no action to permit a [REDACTED] of the [REDACTED] in any jurisdiction other than Hong Kong, and we have taken no action to permit the distribution of this document in any jurisdiction other than Hong Kong. The distribution of this document and the offering and sale of the [REDACTED] in other jurisdictions are subject to restrictions and may not be made except as permitted under the applicable securities laws of such jurisdictions pursuant to registration with or authorization by the relevant securities regulatory authorities or an exemption therefrom. You should rely only on the information contained in this document and the [REDACTED] to make your investment decision. We have not authorized anyone to provide you with information that is different from what is contained in this document. Any information or representation not made in this document must not be relied on by you as having been authorized by us, the [REDACTED], the Sole Sponsor, the [REDACTED], the [REDACTED], any of the [REDACTED], any of their respective directors, agents, employees or advisers, or any other person or party involved in the [REDACTED]. Information contained on the website at does not form part of this document. Page Expected Timetable... Contents.... i iv Summary... 1 Definitions Glossary of Technical Terms Forward-looking Statements Risk Factors Waivers from Strict Compliance with the Listing Rules Information about this document and the [REDACTED] Directors and Parties Involved in the [REDACTED] Corporate Information iv

7 CONTENTS Page Industry Overview Regulations Our History, Reorganization and Corporate Structure Business Relationship with Our Controlling Shareholders Connected Transactions Directors and Senior Management Substantial Shareholders Share Capital Financial Information Future Plans and [REDACTED] [REDACTED] Structure of the [REDACTED] How to Apply for [REDACTED] Appendix I Accountants Report... I-1 Appendix II Unaudited Pro Forma Financial Information... II-1 Appendix III Property Valuation Report... III-1 Appendix IV Statutory and General Information.... IV-1 Appendix V Summary of the Constitution of the Company and Cayman Companies Law... V-1 Appendix VI Documents Delivered to the Registrar of Companies in Hong Kong and Available for Inspection... VI-1 v

8 SUMMARY This summary aims to give you an overview of the information contained in this document. As this is a summary, it does not contain all the information that may be important to you. You should read the whole document before you decide to invest in the [REDACTED]. There are risks associated with any investment. Some of the particular risks in investing in the [REDACTED] are set out in the section headed Risk Factors in this document. You should read that section carefully before you decide to invest in the [REDACTED]. OVERVIEW We focus on the manufacture, sale and research and development of TCM Granules. We are one of the only five group companies in the PRC authorized by the CFDA to manufacture and sell TCM Granules and the only such company headquartered in Western China, according to the PICO Report. We were the third largest TCM Granules manufacturer in the PRC in terms of revenue in 2016 and ranked first in terms of CAGR of revenue for the period from 2014 to 2016, according to the PICO Report. With our comprehensive portfolio of approximately 670 types of TCM Granules and our ability to manufacture over 750 types of TCM Granules, as well as our proprietary Smart Pharmacy Systems, hospitals and medical institutions can efficiently fulfill their TCM Granule prescription needs. In addition, we have self-operated plantation bases, which we primarily use for research and development and quality control of certain key raw materials we use for the production of TCM Granules. According to the PICO Report, we are one of the only two TCM Granules manufacturers in the PRC that have both self-operated plantation bases and Smart Pharmacy Systems (or other similar systems), allowing us to gain valuable insight into all key components of the entire value chain for TCM Granules. According to the PICO Report, TCM Granules are increasingly being recognized for their convenience, consistency, efficacy and reliability. As a result, according to the PICO Report, the TCM Granules market in the PRC grew at a CAGR of 26.6% from 2012 to 2016, significantly outpacing the overall pharmaceutical industry and the overall TCM industry in the PRC, and is expected to continue to grow at a CAGR of 26.6% from 2017 to For the years ended December 31, 2014, 2015 and 2016, our revenue was RMB711.0 million, RMB1,055.6 million and RMB1,403.3 million, respectively, representing a CAGR of 40.5% over the period, and our profit for the year was RMB208.8 million, RMB367.8 million and RMB594.0 million, respectively, representing a CAGR of 68.7% over the period. For the years ended December 31, 2014, 2015 and 2016, our gross margin was 60.7%, 66.6% and 74.1%, respectively. We generated substantially all of our revenue during the Track Record Period from the sales of TCM Granules. In addition to TCM Granules, during the Track Record Period, we also manufactured and sold to hospitals and medical institutions a small amount of TCM decoction pieces and Chinese patent medicines, such as Danshu Pills ( ), Our sales of TCM Granules accounted for 95.8%, 94.5%, and 99.8% of our total revenue for the years ended December 31, 2014, 2015 and 2016, respectively. We primarily utilize a direct sales model, pursuant to which we market, sell and distribute a substantial majority of our TCM Granules directly to hospitals and medical institutions in the PRC. Distribution of our broad product portfolio using our direct sales model is 1

9 SUMMARY strengthened by our proprietary Smart Pharmacy Systems installed at the premises of many of our customers, which generally comprise one or more dispensing machines and have been designed as a full-service solution to not only prepare and package TCM prescriptions using TCM Granules in a manner that enhances safety, efficiency, accuracy and level of automation, but also help our customers digitize and modernize their TCM prescriptions process. In connection with our direct sales model, we have established an extensive marketing and sales network comprising 463 marketing and sales representatives located in all our major markets as of December 31, 2016, which, according to the PICO Report, was one of the larger teams of in-house marketing and sales representatives among TCM Granules manufacturers in the PRC. We currently manufacture all of our products at our facilities located in Pengzhou City, Chengdu, Sichuan Province. We started to use these facilities in August 2014, which have a designed production capacity of 2,000.0 tons of TCM Granules per year. Our manufacturing facilities are highly automated and controlled by a centralized computer system, requiring minimal manual labor. All of our production lines and our manufacturing facilities are in compliance with GMP standards. Please refer to the section headed Business Manufacturing in this document for further details. We focus our research and development efforts on improving our existing products through developing advanced production and testing techniques, formulating new TCM Granules and other TCM products, such as Chinese patent medicines, and making further improvements to our Smart Pharmacy Systems and medicinal herb farming and cultivation. We are recognized as a leader in the PRC TCM Granules industry for technological advancement and received numerous awards and accolades during the Track Record Period. For details of the awards we received during the Track Record Period, please refer to the section headed Business Awards and Recognitions in this document. OUR COMPETITIVE STRENGTHS We believe the following competitive strengths contribute to our success and position us well for continued growth: (i) we are a leading TCM Granules manufacturer in the PRC and are positioned to capitalize the fast growing and highly attractive TCM Granules market; (ii) we have a proven marketing and sales model with strict control over our sales channels and customer relationships, with our proprietary Smart Pharmacy Systems installed at hundreds of hospitals and medical institutions throughout the PRC, which we believe create significant value for our customers; (iii) we are committed to producing safe, reliable and high quality TCM Granules through our diversified and selective raw materials procurement strategy and strong quality control measures; (iv) we have a comprehensive portfolio of TCM Granules and have created strong brand recognition; (v) our strong research and development capabilities focusing on improving existing products, the development of new products, improvements to our Smart Pharmacy Systems and TCM raw materials quality differentiate us from our competitors; and (vi) we have an experienced, stable and dedicated senior management team with proven track record in delivering business growth. 2

10 SUMMARY OUR STRATEGIES Our objective is to become a forerunner in the modernization of traditional Chinese medicine. In order to achieve this goal, we plan to pursue the following strategies: (i) continue to strengthen our marketing and sales capabilities, expand and deepen our market presence and increase the penetration of our Smart Pharmacy Systems with hospitals and medical institutions; (ii) increase our manufacturing capacity and capability; (iii) continue to implement our diversified and selective raw materials procurement strategy and strengthen our quality control system; (iv) accelerate the growth of our business and our product portfolio through acquisitions and effective integration; and (v) continue to enhance our research and development capabilities, improve the quality of and manufacturing efficiency for our TCM Granules, offer new TCM products and improve the technologies associated with our Smart Pharmacy Systems. OUR PRODUCTS We primarily manufacture, sell, research and develop TCM Granules. We also generated a limited amount of revenue from the sale of other products during the Track Record Period, such as TCM decoction pieces. We currently manufacture and sell approximately 670 different types of single-herb TCM Granules and are capable of manufacturing approximately 750 types of TCM Granules. For the years ended December 31, 2014, 2015 and 2016, our revenue from sales of TCM Granules was RMB680.9 million, RMB997.5 million and RMB1,400.2 million, respectively, accounting for 95.8%, 94.5%, and 99.8% of our total revenue, respectively. In addition, during the Track Record Period, we sold approximately 137 types of TCM decoction pieces. In March 2015, we launched our first Chinese patent medicine product, Danshu Pills ( ). Please refer to the section headed Business Our Products in this document for further details on our TCM Granules, TCM decoction pieces and other products. The following table sets forth a breakdown of our revenue by product type for the periods indicated: For the Years Ended December 31, RMB 000 % RMB 000 % RMB 000 % Sale of TCM Granules 680, , ,400, Sale of other products (1) 30, , , Total 711, ,055, ,403, Note: (1) Mainly consist of TCM decoction pieces. 3

11 SUMMARY MARKETING, SALES AND DISTRIBUTION We market, sell and distribute a substantial majority of our TCM Granules directly to hospitals and medical institutions in the PRC, including primarily Chinese medicine hospitals as well as general hospitals. TCM practitioners practicing at these hospitals and medical institutions, in turn, prescribe them to patients. As of December 31, 2016, our TCM Granules products were sold directly to hospitals and medical institutions in a total of 29 Provinces in the PRC, with the majority of our revenue being derived from Western China and Northern China. For the years ended December 31, 2014, 2015 and 2016, we sold our TCM Granules directly to 550, 658 and 790 hospitals and medical institutions in the PRC, including 475, 573 and 692 hospitals. During the same periods, direct sales to hospitals and medical institutions accounted for 94.6%, 94.9% and 95.6% of our revenue from the sale of TCM Granules. In addition to direct sales to hospitals and medical institutions, we also sell a small portion of our TCM Granules to third-party distributors in the PRC. As of December 31, 2014, 2015 and 2016, we had 73, 77 and 77 distributors, respectively. As of December 31, 2016, our distribution network covered 24 Provinces in the PRC. For the years ended December 31, 2014, 2015 and 2016, sales of our TCM Granules made through third-party distributors constituted 5.4%, 5.1% and 4.4%, respectively, of our revenue from the sale of TCM Granules. In addition, we sell a small portion of our TCM Granules internationally through local third-party distributors. For the years ended December 31, 2014, 2015 and 2016, sales of our TCM Granules overseas accounted for 0.5%, 0.4% and 0.3% of our revenue from the sale of TCM Granules. We have established an extensive marketing and sales network comprising representatives located in all major markets where our products are sold. As of December 31, 2016, we had a team of 463 marketing and sales representatives, which, according to the PICO Report, was one of the larger teams of in-house marketing and sales representatives among TCM Granules manufacturers in the PRC. In addition to marketing and sales representatives, we also employed a team of 822 personnel as of December 31, 2016, who mainly focus on the operation of our Smart Pharmacy Systems that were installed at hospitals and medical institutions. We believe these personnel help us nurture and solidify the relationships we have with our customers. We strategically focus on marketing and distributing our TCM Granules directly to hospitals and medical institutions through our proprietary Smart Pharmacy Systems. We commenced the development of the first generation in 2002 and are currently installing the fifth generation in hospitals and medical institutions across the PRC. Our Smart Pharmacy Systems generally comprise one or more individual dispensing machines and are designed as a full-service solution to not only prepare and package TCM prescriptions using TCM Granules in a manner that improves safety, efficiency, accuracy and level of automation, but also help our customers digitize and modernize their TCM prescriptions process. As of December 31, 2014, 2015 and 2016, our Smart Pharmacy Systems were installed at 182, 239 and 338 hospitals and medical institutions throughout the PRC, respectively. Please refer to the section headed Business Marketing, Sales and Distribution in this document for further details. 4

12 SUMMARY MANUFACTURING We manufacture our TCM Granules using the extraction and concentration technology. The manufacturing process begins with the pre-processing of raw medicinal herbs. Once processed, the TCM decoction pieces undergo the core manufacturing process, which includes extraction, separation and concentration, drying, granulation, mixing and packaging. Each step of our manufacturing process is preceded by a quality control check. It typically takes 10 to 15 days to complete the manufacturing process of a batch of our TCM Granules, depending on the type of product and production amount. We currently manufacture all of our products at our facilities located in Pengzhou City, Chengdu, Sichuan Province, which occupy an aggregate gross site area of approximately 147, sq.m., with an aggregate gross floor area of approximately 65, sq.m. We started to use these facilities in August The designed production capacity of these facilities is 2,000.0 tons of TCM Granules per year. Prior to August 2014, we manufactured our TCM Granules products at our previous facilities, located in Chengdu, Sichuan Province, with a designed production capacity of tons of TCM Granules per year. We ceased to manufacture TCM Granules at our previous manufacturing facilities when our current manufacturing facilities became operational. Our manufacturing facilities are highly automated and controlled by a centralized computer system, requiring minimal manual labor. In addition, all of our production lines and our manufacturing facilities are in compliance with GMP standards. We have implemented quality control procedures in compliance with GMP standards and other CFDA regulations to ensure consistent quality in our products. Please refer to the section headed Business Manufacturing in this document for further details. RAW MATERIALS The primary raw materials used in our production of TCM Granules are raw medicinal herbs. During the Track Record Period, we procured our raw medicinal herbs from (i) third-party suppliers who are either individual farmers or agents; (ii) our plantation partners; and (iii) our self-operated plantation bases. In order to be cost efficient, we source a majority of the raw materials from individual farmers and agents who are Independent Third Parties. These agents also help us coordinate the procurement process and arrange for the delivery logistics. As part of our efforts to ensure the quality of raw materials supplied by such third-party suppliers, we include in the relevant supply agreements specific requirements on the source and quality of raw materials to be provided to us. In 2012, we began establishing cooperation arrangements with our plantation partners, which are individual plantation owners or cooperatives of individual plantation owners. As of December 31, 2016, we had approximately 160 cooperation agreements effective with our plantation partners covering more than 100 types of medicinal herbs. In aggregate, our cooperation arrangements cover approximately 220,000 mu of land across 11 Provinces in the PRC, including in Sichuan Province, Gansu Province, Yunnan Province and Xinjiang Uyghur Autonomous Region. We use approximately 538 types of raw medicinal herbs in the manufacture of our TCM Granules. For the years ended December 31, 2014, 2015 and 2016, the cost of raw materials 5

13 SUMMARY consumed for the manufacture of our TCM Granules were 81.7%, 70.4% and 89.1% of our total cost of production of TCM Granules, respectively. For further details, please refer to the section headed Business Raw Materials in this document. RESEARCH AND DEVELOPMENT We believe that research and development is critical to the sustainable development and future growth of our business. Our research and development efforts focus on improving our existing products through developing advanced manufacturing and testing techniques, formulating new TCM products, such as Chinese patent medicines, and making further improvements to our Smart Pharmacy Systems and medicinal herb farming and cultivation. Our research and development efforts have enabled us to streamline our production process, improve the efficacy, quality and stability of our TCM products, improve our raw material supply and facilitate the distribution of our products. Please refer to the section headed Business Research and Development in this document for further details on various aspects of our efforts on research and development. COMPETITION We operate in the highly restricted TCM Granules market in the PRC. As of the Latest Practicable Date, there were only five group companies licensed to manufacture TCM Granules in the PRC, according to the PICO Report. According to the PICO Report, the top three TCM Granules manufacturers in the PRC in aggregate accounted for 84.3% of the total market share in terms of total revenue for the year ended December 31, We had a market share of 15.4% in terms of total revenue for the year ended December 31, In addition, we are the only licensed pilot enterprise of TCM Granules headquartered in Western China. Our total revenue grew rapidly from RMB711.0 million in 2014 to RMB1,403.3 million in 2016, representing a CAGR of 40.5%. According to the PICO Report, based on revenue and market share in 2016, we were the third largest TCM Granules manufacturer in China. In addition, we currently own two plantation bases in Sichuan Province, which we primarily use for research and development and quality control of certain key raw materials we use for the production of TCM Granules. We are one of the only two TCM Granules manufacturers in China that own self-operated plantation bases and at the same time provide Smart Pharmacy Systems (or other similar systems) to customers, according to the PICO Report. Please refer to the section headed Business Competition in this document for further details. OUR CUSTOMERS AND SUPPLIERS Our customers primarily comprise hospitals and medical institutions as well as third-party distributors in the PRC. For the years ended December 31, 2014, 2015 and 2016, our five largest customers, which are all hospitals and medical institutions in the PRC, accounted for approximately 37.2%, 35.6% and 30.0%, respectively, of our revenue from the sale of TCM Granules for such periods. For the same periods, our largest customer accounted for 14.2%, 13.6% and 12.3% of our revenue from the sale of TCM Granules for such periods, respectively. Our suppliers for raw material used for the manufacture of our TCM Granules primarily consist of third-party individual farmers or agents and our plantation partners. For 6

14 SUMMARY the years ended December 31, 2014, 2015 and 2016, our aggregate purchases from our five largest suppliers represented 28.8%, 28.0% and 23.6% of our total purchase of raw medicinal herbs, respectively. During the same periods, purchases from our largest supplier represented 11.4%, 6.1% and 5.3%, respectively, of our total purchase of raw medicinal herbs. OUR CONTROLLING SHAREHOLDERS Immediately following completion of the [REDACTED] (without taking into account any Shares which may be allotted and issued upon exercise of the [REDACTED] or the options which may be granted under the Share [REDACTED]), Ever Peace and Neo Era will directly hold approximately [REDACTED]% and [REDACTED]% of our equity interest, respectively. Ever Peace is wholly-owned by Mr. Zhou and Neo Era is wholly-owned by Mr. Zhou Xiang, who is the son of Mr. Zhou. On June 18, 2016, Mr. Zhou and Mr. Zhou Xiang entered into the Acting in Concert Agreement, pursuant to which Mr. Zhou and Mr. Zhou Xiang confirmed that they have been acting in concert since January 1, 2014 and they have, during the Track Record Period, jointly controlled and will continue to jointly control our Group by exercising their rights as shareholders in the relevant companies of our Group. Accordingly, Mr. Zhou, Mr. Zhou Xiang, Ever Peace and Neo Era will be interested in more than 30% of our equity interest in aggregate, and hence, for the purpose of the Listing Rules, they will be our Controlling Shareholders. For the background of Mr. Zhou, please refer to the section headed Directors and Senior Management in this document. SUMMARY OF COMBINED FINANCIAL INFORMATION The following is a summary of our combined financial information as at and for the years ended December 31, 2014, 2015 and 2016, extracted from the Accountants Report set out in Appendix I to this document. Please refer to the section headed Financial Information in this document for further details. Summary of Combined Income Statements The following table sets forth selected items of our combined statements of profit or loss and other comprehensive income for the years or periods indicated: For the Years Ended December 31, RMB 000 % RMB 000 % RMB 000 % Revenue 711, ,055, ,403, Cost of sales (279,408) (39.3) (352,884) (33.4) (363,209) (25.9) Gross profit 431, , ,040, Other income 2, , , Selling and distribution expenses (166,798) (23.5) (251,534) (23.8) (350,184) (25.0) Administrative expenses (33,202) (4.7) (46,582) (4.4) (56,140) (4.0) Other expenses (9,406) (1.3) (14,386) (1.4) (20,738) (1.5) Profit from operations 225, , , Finance costs (13,061) (1.8) (25,045) (2.4) (16,477) (1.2) Profit before taxation 212, , , Income tax (3,226) (0.5) (6,229) (0.6) (8,790) (0.6) Profit for the year 208, , ,

15 SUMMARY The following table sets forth a breakdown of the revenue, cost of sales and gross profit by types of products we manufactured for the periods indicated: For the Years Ended December 31, RMB 000 % RMB 000 % RMB 000 % Revenue TCM Granules 680, , ,400, Other products (1) 30, , , Total 711, ,055, ,403, Cost of sales TCM Granules (249,653) 89.4 (298,168) 84.5 (361,341) 99.5 Other products (1) (29,755) 10.6 (54,716) 15.5 (1,868) 4.5 Total (279,408) (352,884) (363,209) Gross profit TCM Granules 431, , ,038, Other products (1) , , Total 431, , ,040, Note: (1) Mainly consist of TCM decoction pieces. Summary of Combined Statements of Financial Position As at December 31, RMB 000 RMB 000 RMB 000 Total non-current assets 551, , ,919 Total current assets 1,002,684 1,341,862 1,777,236 Total current liabilities 414, , ,595 Net current assets 587, , ,641 Total equity 755,039 1,123,284 1,369,797 8

16 SUMMARY Summary of Combined Statements of Cash Flows For the Years Ended December 31, RMB 000 RMB 000 RMB 000 Net cash generated from operating activities 121, , ,581 Net cash (used in)/generated from investing activities (107,966) (142,989) 80,764 Net cash used in financing activities (28,088) (13,708) (350,980) Cash and cash equivalents at January 1 140, ,040 96,659 Cash and cash equivalents at December ,040 96, ,042 Please refer to the section Financial Information Liquidity and Capital Resources Cash Flows Analysis in this document for further details. Key Financial Ratios The following table sets forth some of our key financial ratios as at the dates indicated: As of December 31, Current ratio (1) Gearing ratio (2) 57.0% 36.5% 20.4% Net profit margin (3) 29.4% 34.8% 42.3% Return on total equity (4) 32.1% 39.2% 47.6% Return on total assets (5) 14.1% 21.2% 27.9% Notes: (1) Current ratio was calculated based on our total current assets as of the respective dates divided by our total current liabilities as of the same dates. (2) Gearing ratio was calculated based on our interest-bearing liabilities as of the respective dates divided by our total equity as of the same dates. (3) Net profit margin was calculated based on our profit for the respective years divided by our total revenue for the same years. (4) Return on total equity equals profit for the year divided by average total equity amounts as of the end of the year. (5) Return on total assets equals profit for the year divided by average total assets as of the end of the year. 9

17 SUMMARY NET CURRENT ASSETS AND WORKING CAPITAL SUFFICIENCY As of December 31, 2014, 2015 and 2016, we had net current assets of RMB587.8 million, RMB814.3 million and RMB902.6 million, respectively. Our net current assets increased as of December 31, 2016 as compared to December 31, 2015 primarily due to (i) a RMB243.6 million increase in trade and other receivables due to increased sales of our TCM Granules; (ii) a RMB185.3 million increase in inventories; (iii) an increase of RMB103.4 million in cash and cash equivalents, partially offset by (i) an increase of RMB161.5 million in trade and other payables as a result of increased purchases of raw medicinal herbs; (ii) an increase of RMB138.9 million in amount due to related parties, which primarily consisted of dividends payable to Sichuan Green; (iii) an increase of RMB30.0 million in current bank loans to finance our working capital; and (iv) an increase of RMB16.6 million in provisions for sales return. Our net current assets increased as of December 31, 2015 compared to December 31, 2014 primarily due to (i) an increase of RMB295.7 million in trade and other receivables primarily due to an increase in sale of our TCM Granules resulted from increased number of customers; (ii) an increase of RMB90.0 million in other financial assets, primarily consisting of certain wealth management products issued by licensed commercial banks in the PRC; and (iii) an increase of RMB27.7 million in inventories, partially offset by (i) an increase of RMB100.0 million of current bank loans, primarily due to the change from the designation of non-current portion of the current bank loans on our balance sheet to the designation of current portion; (ii) an increase of RMB14.6 million in provisions for sales return; and (iii) a decrease of RMB29.4 million in cash and cash equivalents due to our investments in other financial assets. Please refer to the section Financial Information Liquidity and Capital Resources Net Current Assets in this document for further details. We finance our working capital needs primarily through cash flow from operating activities and bank borrowings. Taking into account the financial resources available to our Group, including the cash flow from operating activities and the estimated net [REDACTED] from the [REDACTED], our Directors are of the view that, after due and careful inquiry, our Group has sufficient available working capital for our present requirements for at least the next 12 months from the date of this document. [REDACTED]-RELATED EXPENSE INCURRED AND TO BE INCURRED We expect to incur a total of RMB[98.8] million (equivalent to approximately HK$[113.3] million) of [REDACTED] expenses (assuming an [REDACTED] of HK$[REDACTED], being the mid-point of the indicative [REDACTED] range between HK$[REDACTED] and HK$[REDACTED], and assuming that the [REDACTED] is not exercised) until the completion of the [REDACTED], of which RMB[0.6] million is expected to be charged to our consolidated statements of profit or loss and other comprehensive income for the year ended December 31, 2016, RMB[30.7] million is expected to be charged to our consolidated statements of profit or loss and other comprehensive income for the year ending December 31, 2017 and RMB[67.5] million is directly attributable to [REDACTED] and to be capitalized. [REDACTED] expenses represent professional fees and other fees incurred in connection with the [REDACTED], including [REDACTED] commissions. The [REDACTED] expenses above are the best estimate as of the Latest Practicable Date and for reference only and the actual amount may differ from this estimate. 10

18 SUMMARY [REDACTED] STATISTICS [REDACTED] DIVIDEND POLICY AND DISTRIBUTABLE RESERVES On July 6, 2015, we declared dividends in the amount of RMB570.0 million, which was settled in the same month. In August, 2016, we declared cash dividend in the amount of RMB402.5 million, of which RMB260.2 million was paid by December 31, We intend to pay the remainder of the declared dividend before [REDACTED] using our available working capital. Any amount of dividends we pay will be at the discretion of our Directors and will depend on our general business condition and strategies, results of operations, cash flows and financial condition and other factors that our Directors deem relevant. In particular, under applicable PRC laws and our Articles of Association, we can only distribute dividends out of our after-tax profit after the following allocations have been made: (i) recovery of accumulated losses, if any; (ii) mandatory allocations to the statutory common reserve fund equivalent to 10% of our after-tax profit, unless the common reserve fund reaches 50% of our registered capital or above; and (iii) allocations to discretionary common reserve fund, subject to the Shareholders approval at the Shareholders meeting. Please see the section headed Financial Information Dividend Policy and Distributable Reserves in this document for further details. [REDACTED] We estimate that the aggregate net [REDACTED] to our Company from the [REDACTED] will be approximately HK$[REDACTED] million, assuming that the [REDACTED] is not exercised, after deducting the [REDACTED] commissions and other estimated [REDACTED] expenses payable by us and assuming initial [REDACTED] of HK$[REDACTED] per Share, being the 11

19 SUMMARY mid-point of the indicative [REDACTED] range set forth on the stated in this document. We plan to use our net [REDACTED] from the [REDACTED] as follows: [REDACTED] For details of our [REDACTED] from the [REDACTED], please refer to the section headed Future Plans and [REDACTED] in this document. RISK FACTORS We believe that there are certain risks and uncertainties involved in our operations, some of which are beyond our control. Major risks we face include, but not limited to, the following: (i) the TCM industry, including the TCM Granules industry, is heavily regulated, and changes in the regulatory framework, requirements and enforcement trends may have a material adverse effect on our business, financial condition and results of operations; (ii) existing market receptiveness of TCM products generally and TCM Granules in particular may change; (iii) we face heightened competition in the TCM Granules market, and our business, financial condition and results of operations maybe adversely affected if we are not able to compete effectively; (iv) we rely on a stable supply of quality raw materials to manufacture our products, and a decrease in the supply, an increase in the cost or a deterioration in the quality, of these raw materials could materially and adversely affect our business, financial conditions and results of operations; (v) if we or our brand names fail to maintain a positive reputation, our business could be adversely affected; and (vi) we may not be able to maintain and/or obtain approvals from the relevant PRC and local authorities necessary to carry out our business or to cope with future regulatory requirements, maintain the inclusion of our TCM Granules in the Medical Insurance Catalogs of certain regions or obtain new inclusions in other regions. Please refer to the section headed Risk Factors of this document for a detailed discussion of these and other risk we face. 12

20 SUMMARY HISTORICAL NON-COMPLIANCE INCIDENTS During the Track Record Period, we were involved in certain systemic non-compliance incidents in relation to (i) the social insurance and housing provident fund contributions; (ii) the sale of our TCM Granules to certain hospitals and medical institutions in the PRC for clinical use without approval by the relevant Provincial FDAs; and (iii) the manufacture of our TCM Granules at our current manufacturing facilities while we were in the process of preparing for the application to obtain the GMP certification. Please refer to the section headed Business Legal Compliance Systemic Non-compliance Incidents in this document for further details. In view of the nature and extent of these non-compliance incidents and the potential risks we would be exposed to, our Directors believe that these incidents, individually or in the aggregate, do not and will not have any material financial or operational impact on us. RECENT DEVELOPMENT Since December 31, 2016 and up to the date of this document, our business continued to grow which was consistent with our expectation. Particularly, we have expanded our presence in the Southern China market that is comprised of Hainan, Guangxi and Guangdong Provinces. Since December 31, 2016 and up to the Latest Practicable Date, we have entered into new sales agreements with seven hospitals and medical institutions in Southern China. To the best of our knowledge, there is no change to the overall economic and market condition in China and in the PRC TCM Granules industry in which we operate that may have a material adverse effect to our business operations and financial positions. In addition, we entered into a lease agreement with Sichuan Green on June 19, 2017, pursuant to which we will lease the premises involving our previous manufacturing facilities to Sichuan Green for a period of three years from January 1, 2017 to December 31, 2019 and in consideration for the lease, Sichuan Green will pay us an annual rental fee of RMB512,600 during the lease term. The lease will become effective upon [REDACTED]. Please see Connected Transactions in this document for further details. On June 16, 2017, the board of directors of Neo-green Pharmaceutical, our wholly-owned subsidiary, passed a resolution pursuant to which Neo-green Pharmaceutical intends to declare the distribution of certain of its retained earnings within six months after the [REDACTED] to shareholders of Neo-green Pharmaceutical as of December 31,

21 SUMMARY MEASURES ON THE ADMINISTRATION OF CONCENTRATED CHINESE MEDICINE GRANULES (DRAFT VERSION) ( ) On December 24, 2015, the CFDA published a discussion draft of the Measures on the Administration of Concentrated Chinese Medicine Granules (Draft Version) ( ), or the Draft Measures, which formulates the corresponding provisions on the production enterprises, production management, drug standards, filing management, supervision management, use management, name and labels and other aspects of the TCM Granules. Please refer to the section headed Regulations PRC Laws and Regulations Relating to the Manufacturing of Pharmaceutical Products Provisional Regulations on the Administration of Concentrated Chinese Medicine Granules ( ) in this [REDACTED] for details. NO MATERIAL ADVERSE CHANGE After performing sufficient due diligence work which our Directors consider appropriate and after due and careful consideration, our Directors confirm that, up to the date of this document, there has been no material adverse change in our financial or trading position or prospects since December 31, 2016, being the date on which our latest audited combined financial statements were prepared, and there is no event since December 31, 2016 which would materially affect the information as set out in the Accountants Report in Appendix I to this document. 14

22 DEFINITIONS In this document, unless the context otherwise requires, the following terms shall have the meanings set out below. Acting in Concert Agreement affiliate the acting in concert agreement entered into by and between Mr. Zhou and Mr. Zhou Xiang on June 18, 2017 any other person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified person [REDACTED] Articles of Association The articles of association of our Company, conditionally adopted on [ ], 2017, and to be effective on the [REDACTED], as amended, supplemented or otherwise modified from time to time associate(s) Audit Committee has the meaning ascribed thereto under the Listing Rules the audit committee of our Board Beijing Zhongrui Beijing Zhongrui Dehong Investment Development Co., Ltd.* ( ), a company with limited liability established under the laws of the PRC on February 2, 2007, which was a shareholder of Neo-green Pharmaceutical prior to commencement of the Corporate Reorganization Board or our Board Bona Fides business day BVI CAGR the board of Directors Bona Fides Limited, a company with limited liability incorporated under the laws of the BVI on August 22, 2016 which is wholly owned by Zhang Liling ( ), being a Shareholder of our Company a day on which banks in Hong Kong are generally open for normal banking business to the public and which is not a Saturday, Sunday or public holiday in Hong Kong the British Virgin Islands compound annual growth rate 15

23 DEFINITIONS Capitalization Issue Cayman Companies Law or Companies Law CCASS CCASS Clearing Participant the issue of Shares to be made upon capitalization of certain sums standing to the credit of the share premium account of our Company referred to in the paragraph headed Appendix IV Statutory and General Information 1. Further information about our Company C. Written resolutions passed by our Shareholders in this document the Companies Law (2016 Revision) of the Cayman Islands, as amended, supplemented or otherwise modified from time to time the Central Clearing and Settlement System established and operated by HKSCC a person admitted to participate in CCASS as a direct clearing participant or general clearing participant CCASS Custodian Participant a person admitted to participate in CCASS as a custodian participant CCASS Investor Participant a person admitted to participate in CCASS as an investor participant who may be an individual or joint individuals or a corporation CCASS Participant CFDA close associate(s) Companies Ordinance Companies (Winding Up and Miscellaneous Provisions) Ordinance Company, our Company, or the Company a CCASS Clearing Participant, a CCASS Custodian Participant or a CCASS Investor Participant China Food and Drug Administration ( ) has the meaning ascribed thereto under the Listing Rules the Companies Ordinance (Chapter 622 of the Laws of Hong Kong) as amended, supplemented or otherwise modified from time to time the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Chapter 32 of the Laws of Hong Kong) as amended, supplemented or otherwise modified from time to time Neo-Green Pharmaceutical Technology Development (Cayman) Limited ( ), an exempted company with limited liability company incorporated in the Cayman Islands on June 22, 2016 under the Cayman Companies Law 16

24 DEFINITIONS connected person(s) Controlling Shareholder(s) or our Controlling Shareholder(s) Covenantors CSRC Director(s) or our Director(s) Draft Measures Dujiangyan Hengda EIT Law has the meaning ascribed thereto under the Listing Rules has the meaning ascribed thereto under the Listing Rules and in this document, refers to Mr. Zhou, Mr. Zhou Xiang, Ever Peace and Neo Era Mr. Zhou, Mr. Zhou Xiang, Ever Peace and Neo Era China Securities Regulatory Commission ( ) the director(s) of our Company a discussion draft of the Measures on the Administration of Concentrated Chinese Medicine Granules (Draft Version) ( ) published by the CFDA on December 24, 2015 Dujiangyan Hengda Agricultural Development Co., Ltd. ( ), a company with limited liability established under the laws of the PRC on July 28, 2004, a subsidiary of Sichuan Sanmeishui Technology Development Co., Ltd. ( ), which is in turn held as to 50% by Ms. Wang Jie, our executive Director, and a connected person of our Company PRC Enterprise Income Tax Law ( ) adopted by the National People s Congress on March 16, 2007, and became effective on January 1, 2008, as amended, supplemented or otherwise modified from time to time Ever Peace Ever Peace Limited, one of our Controlling Shareholders, a limited liability company incorporated in the BVI on June 15, 2016 which is wholly owned by Mr. Zhou and will directly hold approximately [REDACTED]% of our Company s equity interest immediately following the completion of the [REDACTED] (without taking into account the shares which may be issued upon the exercise of the [REDACTED] and options which may be granted under the Share Option Scheme) Ever Sound (Hong Kong) Ever Sound (Hong Kong) Limited, a limited company incorporated under the laws of Hong Kong on June 29, 2016 and a wholly-owned subsidiary of our Group 17

25 DEFINITIONS First Professional Framework Purchase Agreement GDP GFA First Professional International Limited, a company with limited liability incorporated under the laws of the BVI on June 22, 2011 which is wholly owned by Ms. Carol Lee, being a Shareholder and a Pre-[REDACTED] Investor of our Company the framework purchase agreement entered into between the Company and Lvse Zhongyao Yinpian on [ ], 2017, pursuant to which Lvse Zhongyao Yinpian agrees to provide us with TCM decoction pieces manufactured through broiling process, the details of which are set out in the section headed Connected Transactions Non-exempt Continuing Connected Transactions Framework Purchase Agreement in this document gross domestic product (all references to GDP growth rates are real as opposed to nominal growth rates of GDP) gross floor area [REDACTED] Golden Cache Golden Cache (Hong Kong) Golden Era Golden Cache Limited, a company with limited liability incorporated under the laws of the Cayman Islands on June 15, 2016 which is wholly owned by Ms. Li Yixian ( ) who obtained the permanent residency of the Republic of the Gambia on April 28, 2016 and cancelled her household registration on August 8, 2016, being a Shareholder and a Pre-[REDACTED] Investor of our Company Golden Cache (Hong Kong) Limited, a limited company incorporated under the laws of Hong Kong on June 29, 2016 and a wholly-owned subsidiary of our Group Golden Era Limited, a company with limited liability incorporated under the laws of the BVI on September 13, 2016 which is wholly owned by Huang Xiaoyan ( ), being a Shareholder of our Company Golden Pharma Golden Pharma Limited, a company with limited liability incorporated under the laws of the British Virgin on June 27, 2016 and a wholly-owned subsidiary of our Group Great Expectation The Great Expectation Corporation Ltd, a company with limited liability incorporated under the laws of the BVI on August 4, 2016 which is wholly owned by Zhao Liang ( ), being a Shareholder of our Company 18

26 DEFINITIONS [REDACTED] Group, we, us or our Group our Company and its subsidiaries [REDACTED] HKSCC HKSCC Nominees Hong Kong Hong Kong dollars or HK$ Hong Kong Securities Clearing Company Limited, a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited HKSCC Nominees Limited Hong Kong Special Administrative Region of the PRC Hong Kong dollars, the lawful currency of Hong Kong [REDACTED] IFRS the International Financial Reporting Standards, which include standards and interpretations promulgated by the International Accounting Standards Board (IASB) 19

27 DEFINITIONS Independent Third Party(ies) an individual or a company who is not connected with (within the meaning of the Listing Rules) any Director, chief executive or Substantial Shareholder of our Company, its subsidiaries or any of their respective associates [REDACTED] Lasting Accomplishment Lasting Accomplishment Limited, a company with limited liability incorporated under the laws of the BVI on July 21, 2016 which is wholly owned by Gou Yuquan ( ), being a Shareholder of our Company Latest Practicable Date June 12, 2017, being the latest practicable date for the inclusion of certain information in this document prior to its publication Licorice Thirteen Licorice Thirteen Limited, a company with limited liability incorporated under the laws of the BVI on August 24, 2016 which is owned as to 3.59% by Qiu Kairong ( ), 14.36% by Lai Mei ( ), 3.59% by Wang Ling ( ), 14.36% by Gu Jian ( ), 10.25% by Zhao Jun ( ), 14.36% by Hu Changjiang ( ), 14.36% by Xu Liming ( ), 3.59% by Chen Chunchao ( ), 7.18% by Luo Yurui ( ), 7.18% by Tang Shuqing ( ), 3.59% by Luo Xianzhi ( ) and 3.59% by Chang Zhengsong ( ). Licorice Thirteen is a Shareholder of our Company 20

28 DEFINITIONS [REDACTED] Listing Committee the Listing Committee of the Stock Exchange [REDACTED] Listing Rules Lvse Zhongyao Yinpian the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited Sichuan Lvse Zhongyao Yinpian Co., Ltd.* ( ) established under the laws of the PRC on July 29, 2015, a wholly-owned subsidiary of Sichuan Green and a connected person of our Company Memorandum of Association the memorandum of association of our Company, supplemented or otherwise modified conditionally adopted on [ ], 2017, and to be effective on the [REDACTED] as amended from time to time MOFCOM Mr. Zhou the Ministry of Commerce of the PRC ( ) Mr. Zhou Houcheng ( ), our executive Director, chairman of our Board, one of our Controlling Shareholders, the father of Mr. Zhou Xiang and Ms. Zhou Qiaomin, and the uncle of Ms. Wang Jie, our executive Director Ms. Zhou Qiaomin Ms. Zhou Qiaomin ( ), our substantial shareholder, the daughter of Mr. Zhou, the sister of Mr. Zhou Xiang and the cousin of Ms. Wang Jie, our executive Director Mr. Zhou Xiang Mr. Zhou Xiang ( ), one of our Controlling Shareholders, the son of Mr. Zhou, the brother of Ms. Zhou Qiaomin and the cousin of Ms. Wang Jie, our executive Director NDRC National Development and Reform Commission ( ) 21

29 DEFINITIONS Neo Era Neo-green Modern TCM Neo Era Limited, one of our Controlling Shareholders and a limited liability company incorporated in the BVI on June 15, 2016 which is wholly owned by Mr. Zhou Xiang and will directly hold approximately [REDACTED]% of our Company s equity interest immediately following the completion of the [REDACTED] (without taking into account the shares which may be issued upon the exercise of the [REDACTED] and options which may be granted under the Share Option Scheme) Sichuan Neo-green Modern TCM Development Co., Ltd.* ( ), a company established under the laws of the PRC on March 24, 2009 which is wholly owned by Sichuan Green after the Corporate Reorganization, and a connected person of our Company Neo-green Pharmaceutical Sichuan Neo-green Pharmaceutical Technology Development Co., Ltd. ( ), a limited liability company established under the laws of the PRC on January 16, 2009 and a wholly-owned subsidiary of our Group NGP Holdings NHFPC Nomination Committee NGP Holdings (BVI) Limited, a company with limited liability incorporated under the laws of the BVI on July 5, 2016 and a wholly-owned subsidiary of our Group the National Health and Family Planning Commission of the PRC ( ), which was reorganized from the former Ministry of Health ( ) and National Population and Family Planning Commission ( ) in March 2013 the nomination committee of our Board [REDACTED] 22

30 DEFINITIONS [REDACTED] PBOC the People s Bank of China ( ) PICO Guangzhou PICO Medical Information Company Limited ( ), an affiliate of Southern Medicine and Economy Research Institute ( ), a direct reporting unit of CFDA PICO Report PRC, China or the People s Republic of China the research report dated [ ] compiled by PICO and commissioned by the Company the People s Republic of China, excluding, for purposes of this [REDACTED] only (unless otherwise indicated), Hong Kong, Macau Special Administrative Region of the PRC and Taiwan PRC Government the government of the PRC, including government departments at all levels (including provincial, municipal and other regional or local governmental agencies) Pre-[REDACTED] Investment(s) Pre-[REDACTED] Investor(s) the pre-[redacted] investment(s) made by the Pre-[REDACTED] Investor(s), details of which are set out in the section headed Our History, Reorganization and Corporate Structure Pre-[REDACTED] Investments in this document Golden Cache, First Professional or both of them [REDACTED] 23

31 DEFINITIONS document this document being issued in connection with the [REDACTED] [REDACTED] Regulation S Remuneration Committee RMB or Renminbi Regulation S under the Securities Act, as amended, supplemented or otherwise modified from time to time the remuneration committee of our Board the lawful currency of the PRC Root Limited Root Limited, a company with limited liability incorporated under the laws of the BVI on July 21, 2016 which is wholly owned by Peng Yong ( ), being a Shareholder of our Company [REDACTED] SAFE SAIC or State Administration for Industry and Commerce the State Administration of Foreign Exchange of the PRC ( ), the PRC governmental agency responsible for matters relating to foreign exchange administration, including local branches, when applicable the State Administration for Industry and Commerce of the PRC ( ) SCNPC the Standing Committee of the National People s Congress ( ) [REDACTED] SFC SFO Share(s) or our Share(s) the Securities and Futures Commission of Hong Kong the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), as amended, supplemented or otherwise modified from time to time share(s) in the share capital of our Company with a nominal value of HK$0.01 each 24

32 DEFINITIONS Share Option Scheme Shareholder(s) or our Shareholder(s) the share option scheme conditionally adopted by our Company on [ ], 2017, the principal terms of which are summarized under the paragraph headed 3. Share Option Scheme in Appendix IV to this document holder(s) of our Share(s) Sichuan Green Sichuan Green Pharmaceutical Technology Development Co., Ltd.* ( ), a joint stock company with limited liability established under the laws of the PRC on December 30, 1999 which is owned by Mr. Zhou as to 65.63%, Mr. Zhou Xiang as to 14.83% and Ms. Zhou Qiaomin as to 15.94%, and a connected person of our Company Sichuan Shunli Sincere Nation Sichuan Shunli Technology Development Co., Ltd.* ( ), a limited liability company established under the laws of the PRC on December 3, 2014, which was dissolved on June 6, 2017 for the purpose of the Corporate Reorganization Sincere Nation Limited, a company with limited liability incorporated under the laws of the BVI which is wholly-owned by Ms. Zhou Qiaomin and will directly hold approximately [REDACTED]% of our Company s equity interest immediately following the completion of the [REDACTED] (without taking into account the shares which may be issued upon the exercise of the [REDACTED] and options which may be granted under the Share Option Scheme), being a substantial shareholder of our Company [REDACTED] State Council Stock Exchange State Council of the PRC ( ) The Stock Exchange of Hong Kong Limited 25

33 DEFINITIONS subsidiaries Substantial Shareholder(s) or our Substantial Shareholder(s) has the meaning ascribed thereto in section 15 of the Companies Ordinance has the meaning ascribed thereto under the Listing Rules and in this context, refers to Mr. Zhou, Mr. Zhou Xiang, Ms. Zhou Qiaomin, Ever Peace, Neo Era and Sincere Nation Takeovers Code the Codes on Takeovers and Mergers and Share Buy-backs issued by the SFC, as amended, supplemented or otherwise modified from time to time TCMG Regulations the Provisional Regulations on the Administration of Concentrated Chinese Medicine Granules Track Record Period the three years ended December 31, 2014, 2015 and 2016 [REDACTED] United States or U.S. the United States of America, its territories, its possessions and all areas subject to its jurisdiction UPLI Limited UPLI Limited, a company with limited liability incorporated under the laws of the BVI on August 26, 2016 which is wholly owned by Li Gang ( ), being a Shareholder of our Company US$ United States dollars, the lawful currency of the United States [REDACTED] 26

34 DEFINITIONS Xiaoyudong Lease Agreement Yinpian Factory Lease Agreement the forest land transfer agreement entered into between Neo-green Pharmaceutical and Sichuan Green in April 2017, pursuant to which Sichuan Green agrees to lease the contracted operation right of certain forest land parcels to the Company, the details of which are set out in the section headed Connected Transactions Fully Exempt Continuing Connected Transactions Xiaoyudong Lease Agreement the lease agreement entered into between Neo-green Pharmaceutical and Lvse Zhongyao Yinpian on June 19, 2017, pursuant to which Neo-green Pharmaceutical agrees to lease certain properties to Lvse Zhongyao Yinpian, the details of which are set out in the section headed Connected Transactions Fully Exempt Continuing Connected Transactions Yinpian Factory Lease Agreement in this document In this document, the English names of the PRC nationals, enterprises, entities, departments, facilities, certificates, titles and the like are translation and/or transliteration of their Chinese names and are included for identification purposes only. In the event of inconsistency between the Chinese names and their English translations and/or transliterations, the Chinese names shall prevail. 27

35 GLOSSARY OF TECHNICAL TERMS The glossary contains explanations of certain technical terms used in this document in connection with us and our business. Such terminology and meanings may not correspond to standard industry meanings or usage of those terms. Chinese patent medicine ready-made herbal medicines prepared according to TCM theory and practice that do not require any further preparation by patients before consumption Chinese Pharmacopoeia Class I hospitals Class II hospitals the Pharmacopoeia of the PRC ( ) edited and published by the National Pharmacopoeia Committee of the China Food and Drug Administration and issued with the consent of the State Council of the PRC, which is the statutory standard that forms the basis of monitoring the production, quality control, supply and usage of medicine and includes the name, nature, shape, component, dosage as well as the method of storage and prescription the smaller local hospitals designated as Class I hospitals by the NHFPC hospital classification system, typically having fewer than 100 beds and primarily providing more basic healthcare services limited to the surrounding community the regional hospitals designated as Class II hospitals by the NHFPC hospital classification system, typically having 100 to 500 beds, providing multiple communities with integrated healthcare services and undertaking certain academic and scientific research missions Class III hospitals the largest and best regional hospitals in China designated as Class III hospitals by the NHFPC hospital classification system, typically having more than 500 beds, providing high-quality professional healthcare services covering a wide geographic area and undertaking higher academic and scientific research initiatives EIT GMP or Good Manufacturing Practices the enterprise income tax of the PRC guidelines and regulations issued from time to time pursuant to the Law of the People s Republic of China on the Administration of Pharmaceuticals ( ), which provide quality assurance and ensure that pharmaceutical products subject to the guidelines and regulations are consistently produced and controlled to the quality and standards appropriate for their intended uses 28

36 GLOSSARY OF TECHNICAL TERMS medical institution Medical Insurance Catalog(s) mu plantation partner(s) Province or Provinces Provincial FDA Smart Pharmacy Systems SOP sq.m. strategic reserve raw medicinal herbs institutions other than hospitals, such as medical clinics, established for the practice of medicine the National Basic Medical Insurance Catalog ( ) issued by the PRC Ministry of Labor and Social Security ( ), or the Provincial Medical Insurance Catalogs determined by the provincial governments. Further information is set out in Regulations PRC Laws and Regulations Relating to The National Medical Insurance Program and Price Controls of Pharmaceutical Products a traditional unit of land area in China. One mu equals approximately sq.m. cooperatives of individual plantation owners with whom we enter into cooperation arrangements, pursuant to which we provide technical support and expertise and our plantation partners grant us a right of first refusal to purchase the raw medicinal herbs farmed from their plantations each being a Province or, where the context requires, a provincial level autonomous region or municipality under the direct supervision of the central government of the PRC the provincial food and drug administration authority of a Province, municipality or region of the PRC our proprietary TCM Granules dispensing machines and associated software and hardware, designed by us, that are installed at some of our customers premises standard operating procedures square meter Raw medicinal herbs, including, among other things, bulbus fritillaria ( ) and agilawood ( ), that we strategically purchase and stockpile from time to time when the market prices, in our view, are relatively low and, which we believe can be stored for an extended period of time 29

37 GLOSSARY OF TECHNICAL TERMS TCM or traditional Chinese medicine TCM decoction pieces TCM Granules medicines where the active ingredients come from or are derived from natural plants, animals or minerals according to traditional Chinese medicine theory and practice ready-made products of certain specifications made from Chinese medicinal materials, which are produced using traditional processing technique under the guidance of traditional Chinese medicine theory, and are used as Chinese traditional medicine formula for clinic treatment water-soluble granule made form single TCM herbs, which are produced using modern extraction and concentration technologies 30

38 FORWARD-LOOKING STATEMENTS This document contains certain statements that are, or may be deemed to be, forward-looking statements. These forward-looking statements may be identified by the use of forward-looking terminology, including the terms believe(s), aim(s), estimate(s), plan(s), project(s), anticipate(s), expect(s), intend(s), may, seek(s), can, could, ought to, potential, will or should or similar expressions, or, in each case, their negative or other variations, or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. In particular, references to estimate(s) only refer to the situations whereby best estimation was adopted by the management. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this document and include, but are not limited to, statements regarding our intentions, beliefs or current expectations concerning, among other things, our business, results of operations, financial position, liquidity, prospects, growth, strategies and the industries and markets in which we operate or may operate in the future. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Forward-looking statements are not guarantees of future performance or the actual results of our operations, financial position and liquidity. The development of the markets and the industries in which we operate may differ materially from the description or implication suggested by the forward-looking statements contained in this document. In addition, even if our results of operations, financial position and liquidity as well as the development of the markets and the industries in which we operate are consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods. A number of risks, uncertainties and other factors could cause results and developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation: adverse changes or developments in the industries in which we operate; our operation and business prospect; our ability to maintain and enhance our market position; the effects of domestic and overseas competition in the industries or markets in which we operate and its potential impact on our business; developments in, or changes to, laws, regulations, governmental policies, taxation or accounting standards or practices affecting our operations, especially those related to the PRC; general political and global economic conditions, especially those related to the PRC, and macro-economic measures taken by the PRC Government to manage economic growth; fluctuations in inflation, interest rates and exchange rates; changes in the availability of, or new requirements for financing; 31

39 FORWARD-LOOKING STATEMENTS material changes in the costs of the equipment required for our operations; our ability to successfully implement any of our business strategies, plans, objectives and goals; our ability to expand and manage our business and to introduce new businesses; our ability to obtain or extend the terms of the licenses necessary for the operation of our business; changes in restrictions on foreign currency convertibility and remittance abroad; changes to our expansion plans and estimated capital expenditure; our dividend policy; our success in accurately identifying future risks to our business and managing the risks of the aforementioned factors; and other factors discussed in sections headed Summary, Risk Factors, Future Plans and [REDACTED], Industry Overview, Business and certain statements in the section headed Financial Information with respect to trends in prices, volumes, operations, margins, overall market trends, risk management and exchange rates. Forward-looking statements may and often do differ materially from actual results. Any forward-looking statements in this document reflect our management s current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions. Investors should specifically consider the factors identified in this document, which could cause actual results to differ, before making any investment decision. Except as required by the Listing Rules and applicable laws, we undertake no obligation to revise any forward-looking statements that appear in this document to reflect any change in our expectations, or any events or circumstances, that may occur or arise after the date of this document. All forward-looking statements in this document are qualified by reference to this cautionary statement. 32

40 RISK FACTORS You should carefully read and consider all of the information in this document including the risks and uncertainties described below before deciding to make any investment in our Shares. Our business, financial condition or results of operations could be materially adversely affected by any of these risks and uncertainties. The trading price of our Shares could decline due to any of these risks and uncertainties. As a result, you may lose part or all of your investment. RISKS RELATED TO OUR BUSINESS AND INDUSTRY The TCM industry, including the TCM Granules industry, is heavily regulated, and changes in the regulatory framework, requirements and enforcement trends may have a material adverse effect on our business, financial condition and results of operations. The TCM industry, including the TCM Granules industry, is heavily regulated. We are required to obtain and maintain various licenses and permits for the production, import and export, promotion and sale and distribution of our TCM products in the normal course of business. Please refer to the section headed Business Legal Compliance Licenses and Permits in this document for further details. Loss of or failure to obtain, renew or maintain the relevant licenses and permits and necessary approvals could lead to temporary or permanent suspension of our business operations. Further, if we fail to comply with licensing or other regulatory requirements, we may have to cease our operations. If such events were to occur, our business, financial condition and results of operations would be materially and adversely affected. Moreover, we are governed by various local, regional and national regulatory regimes covering all aspects of our operations, including certification requirements and procedures for the manufacture and sale of TCM Granules products, operating and safety standards, and environmental protection. See the section headed Regulations PRC Regulatory Framework in Relation to the Pharmaceutical Manufacturing Industry in this document for further details. Any changes in relevant government regulations may result in adverse consequences for the industry. For example, currently, there are no industry standards for TCM Granules in the PRC. However, there exist enterprise standards for each qualified enterprise, including our Company. In the event regulatory authorities issue industry standards that are different from the existing enterprise standards, our compliance could be time consuming and costly. Moreover, additional or more stringent regulations or industry standards for the TCM products may be adopted from time to time. Such developments could require the reformulation of certain products to meet new standards, recalls or discontinuance of certain products which we are unable to reformulate, increased documentation of the properties of certain products, additional or different labeling, additional scientific substantiation, adverse event reporting or other new requirements, or result in downward adjustment of our product prices. If we have to comply with such new regulatory requirements, we may experience delays in or disruptions of our production or timely launches of our new products into the market, which could result in additional costs to us, and in turn, have a material and adverse effect on our business, financial condition and results of operations. In addition, although we generally have the flexibility to set prices for our TCM 33

41 RISK FACTORS Granules according to our own pricing policy, we cannot assure you that future regulations or restrictions relating to the pricing of TCM Granules will not come into effect. Any such developments could materially and adversely affect our business, financial condition and results of operations. Existing market receptiveness of TCM products generally and TCM Granules in particular may change. Our continued success depends on the popularity of and the demand for TCM products generally and TCM Granules in particular. However, consumer preferences and demand may shift away from TCM products generally and TCM Granules in particular for various reasons, including, but not limited to: a change in consumers belief that TCM products generally and TCM Granules in particular are effective in achieving their claimed benefits or that the raw materials used for production are consistently authentic; a general change in consumer preferences for TCM products generally and TCM Granules in particular as compared to other types of pharmaceutical products that claim similar benefits, such as western medicines; the cost of TCM Granules being perceived as too high as compared to alternative TCM products, such as TCM decoction pieces or Chinese patent medicines; and the development or increase in the use of other efficient delivery formats, such as capsules. We believe that the TCM products market generally and TCM Granules market in particular are highly dependent upon consumer perception regarding their safety, efficacy, level of side effects and quality. Consumer perception of our products can be significantly influenced by scientific research or findings, national media attention and other publicity regarding TCM products. We cannot assure you that future scientific research, findings or publicity will be favorable to any particular product, or consistent with existing research or findings, which are favorable to that product. Future research reports, findings or publicity that are perceived as less favorable to our products could have a material adverse effect on the demand for our products, and consequently, on our business, financial condition and results of operations. Scientific research reports, findings or publicity, whether accurate or not, may associate illness or other adverse effects with the consumption of TCM products in general or that of our products or any similar products distributed by other companies, question the safety, efficacy or benefits of TCM products or our products in particular, or claim that such products are unsafe or ineffective. Such adverse publicity could arise even if the asserted adverse effects associated with such products resulted from consumers failure to consume such products appropriately or as directed. Any such reports, findings or publicity may have a material adverse effect on the demand for our products, and in turn, on our business, financial condition, results of operation and prospects. 34

42 RISK FACTORS We believe that the TCM industry is characterized by changes in technology, constant enhancement of industrial know-how and the development of new products. Future technological improvements and product developments in the TCM industry may render our existing products obsolete or affect our viability and competitiveness. If we fail to respond to this environment by adjusting our product portfolio in a timely and effective manner, or if future products we manufacture and sell do not achieve adequate market acceptance, our business, financial condition and results of operations may be materially and adversely affected. We face heightened competition in the TCM Granules market, and our business, financial condition and results of operation may be adversely affected if we are not able to compete effectively. We are one of the only five group companies licensed by the CFDA to manufacture and sell TCM Granules in the PRC. While the TCM Granules market has high entry barriers, we face competition from the other licensed TCM Granules producers. Please see Industry Overview TCM Granules Market in China Competitive Landscape Entry Barriers in this document. We cannot assure you that the regulatory entry barriers to the TCM Granules market in the PRC will not be removed in the future. In December 2015, the CFDA published a discussion draft of the Measures on the Administration of Concentrated Chinese Medicine Granules (Draft Version) ( ( ) ), or the Draft Measures, aiming primarily to expand the competitive landscape for TCM Granules manufacturers. The comment solicitation stage has concluded and substantial uncertainties still exist with respect to its enactment timetable, interpretation and implementation. The Draft Measures, if enacted as proposed, may materially impact the competitive landscape of the market in which we operate. For example, new market participants entering the market may have more financial and other resources than we do, and our existing competitors in the industry may seize the opportunity to further expand their existing businesses. In addition, since prices of competing products are one of the factors we consider when setting the prices of our TCM Granules, we may face more intense pricing pressure if new participants entering the TCM Granules market set the prices of their products below the market or lower than the level we expect. See Business Competition. For the years ended December 31, 2014, 2015 and 2016, sales of our TCM Granules accounted for approximately 95.8%, 94.5% and 99.8% of our total revenue for the respective periods. We cannot assure you that we will be able to maintain the competitive advantages of our products, or expand our production capacity, sales team or distribution network, nor can we assure you that we will be able to maintain or increase our existing market share in the TCM Granules market in the PRC. Some of our existing or future competitors in the TCM Granules market in the PRC may have more financial resources, larger manufacturing capacity, greater pricing flexibility, stronger marketing capability and more experience than we do, and may choose to invest more in the product and technology development, service offerings, facilities and equipment, or sales and marketing. As a result, our competitors in the TCM Granules market may succeed in developing products that are more effective, less costly or with a shorter time-to-market than ours. We must continuously keep abreast of the latest developments in the TCM Granules industry in order to remain competitive. We also face competition for marketing and for establishing relationships with academic and research institutions in connection with our product development. In addition, academic institutions, 35

43 RISK FACTORS government agencies and other public and private research organizations may also conduct research, seek patent protection and establish collaborative arrangements for discovery, research and marketing of products similar to ours. If we are unable to successfully compete with these companies and institutions, our business, financial condition and results of operations may be materially and adversely affected. According to the PICO Report, our revenue from the sales of TCM Granules represents 12.0%, 14.2% and 15.4% of the entire TCM Granules market in the PRC for the years ended December 31, 2014, 2015 and 2016, respectively. We may lose our market share in the TCM Granules market in the PRC if more manufacturers are licensed by the CFDA to manufacture and sell TCM Granules. Furthermore, we may face increasing price competition and have to lower the prices of our TCM Granules products if the number of manufacturers licensed by the CFDA for the production of TCM Granules increases. Under any of such circumstances, our business, financial condition and results of operations could be adversely affected. We rely on a stable supply of quality raw materials to manufacture our products, and a decrease in the supply, an increase in the cost or a deterioration in the quality, of these raw materials could materially and adversely affect our business, financial condition and results of operations. Our principal raw materials are raw medicinal herbs. We primarily procure raw medicinal herbs from third-party suppliers, the purchase cost of which accounts for a significant portion of our total costs of sales. For the years ended December 31, 2014, 2015 and 2016, our costs of raw materials for the production and sale of our TCM Granules were RMB200.1 million, RMB304.2 million and RMB353.4 million, respectively, representing approximately 81.7%, 70.4% and 89.1%, respectively, of our total cost of production of TCM Granules during the same periods. As the majority of raw medicinal herbs are agricultural products, their supply and market prices vary from period to period depending on the harvest in the relevant periods. The availability and market prices of raw medicinal herbs may also be adversely affected by factors beyond our control, such as weather conditions, natural disasters or a sudden surge in demand. In order to maintain a stable supply of quality raw medicinal herbs, we have begun implementing a diversified raw materials strategy. During the Track Record Period, we procured our raw medicinal herbs from the following sources: (i) third-party suppliers who are either individual farmers or agents; (ii) our plantation partners; and (iii) our self-operated plantation bases. We purchased a majority of our raw medicinal herbs during the Track Record Period from third-party suppliers who are either individual farmers or agents. In addition, we began establishing cooperation arrangements in 2012 with our plantation partners. Pursuant to the agreements with our plantation partners, we provide technical support and expertise to our plantation partners, including SOPs and other cultivation techniques. Our plantation partners adopt these SOPs and cultivation techniques in their operations and in return, we are typically granted a right of first refusal to purchase raw medicinal herbs farmed from their plantations that meet our quality standards. However, implementation of our SOPs and cultivation techniques necessarily takes time and there may be substantial delay before our plantation partners produce raw materials of sufficient quality for us to purchase, if at all. Moreover, while we are typically granted a right of first refusal for the purchase of our plantation partners raw materials, we cannot assure you that such plantation partners will offer such raw materials at prices that are acceptable to us. As a result, 36

44 RISK FACTORS we are also vulnerable to price fluctuations and supply shortages resulting from any speculation or price manipulation activities engaged by these suppliers. As a result of these factors, we cannot assure you that our raw materials procurement strategy will be successful. Please refer to the section headed Business Raw Materials in this document for more information. The prices and availability of raw medicinal herbs may vary from period to period based on factors such as customer demand, weather changes and harvest volume. We cannot assure you that our plantation partners or other third-party suppliers will continue to supply materials to us on terms and conditions commercially acceptable to us in the future. If we are not able to secure a sufficient amount of raw medicinal herbs, our production efficiency and production volume may decrease and, as a result, our profitability and results of operations may be adversely impacted. In addition, we cannot assure you that we will be able to pass on any increase in raw material costs to our customers. Significant increases in raw material prices would have a direct and negative impact on our gross margin. Ultimately, we may need to raise our product prices to recover the higher raw material costs and maintain our gross margins, which may lead to lower customer demand for our products. If we are unable to pass increases in our raw materials costs to our customers, our gross margins and profitability would be adversely affected. Moreover, if the quality of any raw materials fails to meet our standards or if any raw materials we source contain defects or harmful substances and we fail to detect such issues, the quality of our products may be compromised. Although our quality control department tests raw materials provided by suppliers in accordance with our quality standards, we cannot assure you that we will not experience issues with the quality of our raw materials in the future. If the quality of raw materials suddenly deteriorates and we are not able to timely find suitable replacements from our suppliers, our business, financial condition, results of operations and reputation could be materially and adversely affected. If we or our brand names fail to maintain a positive reputation, our business could be adversely affected. We primarily sell our products under the NGP brand. Our success depends significantly on our well-known corporate and product brands in many aspects of our business, including: to gain access to, and for our products to be perceived favorably by the hospitals, clinics, medical institutions and TCM practitioners which drive demand for TCM Granules in the PRC; to effectively work with the authorities that regulate various aspects of our business; to gain the trust of TCM practitioners and patients in our products; 37

45 RISK FACTORS to attract employees, distributors, logistics service providers and external research partners to work with us; and to increase market share of our TCM Granules through brand recognition. However, we cannot assure you that we will be able to maintain a positive reputation or brand name. Our reputation and brand names may be adversely affected by a number of factors, many of which are beyond our control, including: adverse associations with our products or similar products in the TCM industry, including with respect to their efficacy or side effects; the effects of counterfeit products purporting to be our products; lawsuits and regulatory investigations against us or otherwise relating to our products or the TCM industry; and improper or illegal conduct by our employees, distributors and logistics service providers, whether or not authorized by us. Moreover, negative publicity or disputes regarding our products, regulatory compliance, operations, management or the TCM industry in general, whether founded or unfounded, could materially and adversely affect public perception of our brand. If we or our brands fail to maintain a positive reputation as a result of these or other factors, our products may be perceived unfavorably by hospitals, clinics, medical institutions, TCM practitioners, regulators and patients, as well as existing and potential employees, distributors, logistics service providers and external research partners, and our business, financial condition, results of operations and business prospects could be adversely affected. We may not be able to continue to fully comply with applicable GMP or other regulatory requirements or renew our GMP certifications and other permits and licenses which are material to our business. We are required to obtain certain permits and licenses from PRC governmental authorities, including GMP certifications for the manufacture of TCM Granules and other TCM products from the CFDA. See the section headed Regulations PRC Laws and Regulations Relating to the Manufacturing of Pharmaceutical Products in this document for details regarding certain key permits and licenses relating to our business operations in general. Our GMP certification and other required permits and licenses are subject to periodic renewal and/or reassessment by the relevant government authorities which may result in us bearing substantial compliance burdens and additional costs. The relevant government authorities may also conduct regular on-site inspections and examinations as part of the process of maintaining or renewing such permits, licenses and certifications. For instance, we did not timely obtain the relevant GMP certification for our current manufacturing facilities in Pengzhou City, Chengdu, Sichuan Province, prior to July 10, 2015, which was rectified by us. We obtained the relevant GMP certification on July 10, For details of such non-compliance incident, please refer to the section headed Business Legal Compliance Systemic Non-compliance Incidents in this document. 38

46 RISK FACTORS While we have successfully passed the relevant inspections and renewed our GMP certifications and other required licenses and permits as of the Latest Practicable Date, the standards of such renewal or reassessment may change from time to time. We cannot assure you that we will be able to continue to successfully pass all required inspections and renew all of these permits, licenses and certifications. Any inability to renew any permits, licenses or certifications that are material to our operations could severely disrupt, as well as prevent us from conducting, our business. Furthermore, if any interpretation or implementation of the relevant regulations or new regulation requires us to obtain additional permits, licenses or certifications, we cannot assure you that we will be able to successfully obtain them. Even if we obtain such permits, licenses or certifications, there may be significant additional costs and expenses involved, which may adversely affect our results of operations. Our past performance is not necessarily indicative of future results. During the Track Record Period, although our revenue and gross profit margin have increased from RMB711.0 million and 60.7%, respectively, for the year ended December 31, 2014 to RMB1,403.3 million and 74.1%, respectively, for the year ended December 31, 2016, and our net profit margin has increased from 29.4% for the year ended December 31, 2014 to 42.3% for the year ended December 31, 2016, such financial data only reflects our past performance, which is not necessarily indicative of future results. The effects of the changing regulatory, economic and other unpredictable factors may have a material effect on our business and hence affect our future financial performance. Moreover, our financial and operating results may not meet the expectations of public market analysts or investors, which could cause the future price of the Shares to decline. Our revenue, cost of sales and operating results may vary from period to period in response to a variety of factors beyond our control. Our financial performance may also be affected by any changes in the cost of sales involving our operations, the success of our expansion plan, any adjustments to our sales and marketing strategies and our product mix, among other factors. You should not rely on our historical results to predict the future performance of our Shares. In addition, during the Track Record Period, our revenue grew at a CAGR of 40.5% from 2014 to 2016 while our gross profit and net profit grew at a CAGR of 55.2% and 68.7%, respectively, during the same period. We cannot assure you that this or similar levels of growth will continue in the future. Moreover, our growth has placed, and continues to place, demands on our management personnel, financial and other resources. There can be no assurance that we will be able to manage any future growth effectively, and failure to do so may have a material adverse effect on our business, financial condition and results of operations. We derived a substantial portion of our revenue from Sichuan Province and Beijing in the PRC. Any adverse change in the economic, political or social conditions in these regions may materially and adversely affect our business, financial condition and results of operations. During the Track Record Period, we derived a substantial portion of our revenue from Sichuan Province and Beijing. For each of the three years ended December 31, 2014, 2015 and 2016, revenue derived from Sichuan Province and Beijing in aggregate amounted to approximately RMB478.3 million, RMB602.1 million and RMB753.6 million, representing approximately 66.2%, 56.1% and 52.9% of our total revenue (not taking into account of the provision for sales return), respectively. Our sales in Sichuan Province and Beijing may be 39

47 RISK FACTORS affected by a number of factors, many of which are beyond our control. Examples of such factors include, among others, changes in the laws, regulations and policies governing the pharmaceutical industry or the TCM Granules industry in particular as promulgated by the national, provincial or local government, changes in local customer preferences and spending patterns, natural disasters or any other adverse change in the economic, political or social conditions. If any of these factors occur, our business, financial condition and results of operations could be materially and adversely affected. Our manufacturing facilities are currently located at one single location, and any operational breakdowns, natural disaster or other event affecting these facilities may disrupt our business. We manufacture all of our products in our current manufacturing facilities at a single location in Pengzhou City, Chengdu, Sichuan Province. Our production processes use high pressure and temperature. Our current manufacturing facilities face the risk of operational breakdowns and accidents during the operating process, including, but not limited to, faulty construction and operational error. In the event of an earthquake, fire, drought, flood and/or any other natural disaster, political instability, extended outages of critical utilities or transportation systems, terrorist attack, or other event beyond our control that limits our ability to operate these facilities, we may need to incur substantial additional expenses to repair or replace the damaged production equipment or facilities, or even evacuate the current premises and relocate our current manufacturing facilities to an alternative location. We may also have to outsource part or all of our production operations. Any interruption in, or prolonged suspension of any part of production at, or any damage to or destruction of, any of our current manufacturing facilities arising from operational breakdowns, unexpected or catastrophic events or otherwise may prevent us from supplying products to our customers, which in turn may adversely affect our business and operations. Further, our production is subject to risks such as theft, machinery breakdown, defective manufacturing equipment and shortage of water and fuel, any of which could severely disrupt our operations. We cannot assure you that our insurance will adequately compensate us for any loss arising from damage to our facilities or disruptions to our operations. Any such losses could materially and adversely affect our business, financial condition and results of operations. If we fail to maintain or increase our marketing activities and capabilities, our market share and our business, financial condition and results of operation may be materially and adversely affected. The success of our business depends on our marketing efforts. However, we cannot assure you that our current and planned spending on marketing activities will be adequate to support our future growth. For the years ended December 31, 2014, 2015 and 2016, our selling and distribution expenses were RMB166.8 million, RMB251.5 million and RMB350.2 million, respectively, representing approximately 23.5%, 23.8% and 25.0%, respectively, of our total revenue for the same periods. Any factors adversely affecting our ability to maintain or increase our marketing activities and capabilities may have an adverse effect on the market share of our products and the brand name and reputation of our products, which may result in decreased demand for our products and may materially and adversely affect our business, financial condition and results of operation. 40

48 RISK FACTORS For instance, our marketing activities are conducted by our marketing and sales team, which comprised 1,285 members as of December 31, For the years ended December 31, 2014, 2015 and 2016, direct sales to hospitals and medical institutions accounted for 94.6%, 94.9% and 95.6%, respectively, of our revenue from the sale of TCM Granules, respectively. In addition, during the same periods, we also sold a small portion of our TCM Granules through third-party distributors, which constituted 5.4%, 5.1% and 4.4%, respectively, of our revenue from the sale of TCM Granules, respectively. Our marketing and sales team directly markets and promotes our TCM Granules and other products to hospitals and medical institutions by sharing specialist knowledge and information with medical practitioners, while our third-party distributors who purchase our products from us are responsible for reselling and distributing these products to hospitals and medical institutions. See Business Marketing, Sales and Distribution for information about the functions of our marketing team. We must hire and retain employees with relevant and sufficient marketing expertise and industry knowledge to maintain and continue to develop our marketing plans. There is no assurance that we will continue to be able to recruit and/or retain suitable marketing employees in the future. Furthermore, our marketing activities are also subject to advertising laws, rules and regulations in the PRC, which require advertising content to be fair and accurate, not misleading, and in full compliance with applicable laws, rules and regulations. Violation of these laws or regulations may result in penalties, including fines, orders to cease dissemination of the advertisements, orders to publish an advertisement correcting the misleading information, and even criminal liabilities. In addition, we cannot assure you that regulators will not interpret such laws and regulations differently than we do, or that regulators will deem our advertising content to be fair and accurate. If we are found to have committed any violations, regulators may, among other things, discontinue certain of our advertising activities, or restrict us from broadcasting and/or publishing new advertisements of our products in a timely manner, and our business, financial condition and results of operations will be materially and adversely affected. Our efforts to increase our market share in our target markets may not be successful. We intend to increase the penetration of our products and introduce new TCM products in our target markets in the PRC in order to increase our product sales and expand our market share. We may not have sufficient experience to operate in new regions where we had not sold our products historically and could face considerable challenges in realizing our expansion plans, including, among others, lack of practical experience in dealing with local regulatory authorities and practical understanding of local regulatory requirements, shortage of personnel with necessary technical capabilities, changes in political, regulatory or economic conditions in the PRC or our targeted regions of the PRC, economic slowdown in the PRC or our targeted regions of the PRC, decrease in actual market demand for our TCM Granules, and greater difficulty in collecting accounts receivables. In addition, during the Track Record Period, we sold a small portion of our TCM Granules products internationally through overseas third-party distributors,. For the years ended December 31, 2014, 2015 and 2016, sales of our TCM Granules products overseas accounted for 0.5%, 0.4% and 0.3% of our revenue from the sale of TCM Granules products. As part of our overall strategy, we intend to maintain our sales in the international markets, 41

49 RISK FACTORS which may expose us to additional risks, including, among others, (i) volatility in currency exchange rates; (ii) greater difficulty in collecting accounts receivables; and (iii) changes in political, regulatory or economic conditions. Any of the foregoing risks could have a negative impact on our efforts to expand our markets in the PRC and maintain our sales overseas, which in turn may materially and adversely affect our business, financial condition and results of operations. We may not be able to maintain appropriate inventory levels for our operations. We consider a number of factors when we manage the inventory levels of our raw materials and finished products, including the costs of holding inventory the purchase cost of raw medicinal herbs in a particular year and our expectations of future price trends, our product portfolio, the preferences of our customers and patients, and our goal of prompt delivery of products in sufficient quantities in response to our customers requests. For the years ended December 31, 2014, 2015 and 2016, our average inventory turnover days for the sale of TCM Granules were 484 days, 374 days and 470 days, respectively. See Financial Information Liquidity and Capital Resources Net Current Assets Inventories for more details. While we maintain communication with our customers regarding their expected procurement amount, we may nevertheless face difficulty in accurately projecting optimal inventory levels. Inventory levels in excess of customer demand may result in inventory obsolescence, inventory write-downs or expiration of products. High inventory levels may also require us to commit substantial capital resources, preventing us from deploying our resources for other important business purposes. Conversely, if we underestimate customer demand for our products or if our suppliers fail to provide raw materials to us in a timely manner, we may experience inventory shortages. Such inventory shortages might result in unfilled customer orders and have a negative impact on customer relationships. We cannot assure you that we will be able to maintain appropriate inventory levels for our operations and such failure may have an adverse effect on our business, financial condition and results of operations. We may also seek to take advantage of perceived lower market prices to acquire additional raw materials for future periods. In addition, our ability to accurately track the inventory levels of our customers is limited, which may make it difficult for us to accurately predict our sales trends. Our ability to track such sales and inventory levels mainly relies on our regional marketing and sales personnel and on-site employees and regular communication with our customers. For hospitals and medical institutions which sell our TCM Granules using our Smart Pharmacy Systems, our employees who operate our Smart Pharmacy Systems are generally able to notify the hospital or medical institution when the inventory level of particular TCM Granules is running low. However, we cannot assure you that information on our customers inventory levels can be reported to us in a timely manner. We have limited contact with patients and our sales to hospitals and medical institutions may not be reflective of actual sales trends to patients. Because of our limited ability to regularly track the inventory levels of our customers, we may be unable to gather sufficient information and data regarding the market acceptance of our products as well as the preferences of TCM practitioners and patients in relation to our products. Any failure to accurately track the sales and inventory levels of our customers may make it difficult for us to accurately predict sales trends, and we may not be able to implement effective marketing or product strategies. 42

50 RISK FACTORS Furthermore, each of our products has an associated expiration date after which the product cannot be prescribed or sold. When sales trends change too rapidly or when we do not estimate future demand accurately in our production plans, we may over-produce certain products or have excess raw materials that we cannot use before their expiration dates, and we may be required to write off or write down the value of our inventory, which could adversely affect our results of operations. Delays in collecting receivables from our customers could have a material adverse effect on our business, financial condition and results of operations. A substantial majority of our sales are made on credit directly to hospitals and medical institutions. Our sales agreements typically grant four months credit term to our direct sales customers. We generally grant longer credit periods to state-owned hospitals and medical institutions, which usually have longer payment periods due to more time-consuming internal approval processes. As of December 31, 2014, 2015 and 2016, our trade debtors and bills receivables were RMB366.4 million, RMB668.8 million and RMB910.0 million, respectively, of which RMB44.7 million, RMB139.1 million and RMB192.4 million, respectively, had been past due over three months. For the same periods, our average trade and bills receivable turnover days were 165, 186 and 213 days, respectively. Our liquidity and cash flows from operations may be materially and adversely affected if our receivable cycles or collection periods lengthen further or if we encounter a material increase in defaults of payment of our receivables from customers. Should any these events occur, we may be required to obtain working capital from other sources, such as from third party financing, in order to maintain our daily operations, and such financing from outside sources may not be available at commercially acceptable terms or at all. As of December 31, 2014, 2015 and 2016, we recognized impairment losses in trade receivables of RMB1.5 million, RMB9.1 million and RMB11.3 million, respectively. If our products cause, or are perceived to cause, severe side effects, our reputation, revenue and profitability could be adversely affected. Our products may cause severe side effects as a result of a number of factors, many of which are outside of our control. These factors include potential side effects not revealed in clinical testing, unusual but severe side effects in isolated cases, defective products not detected by our quality management system or misuse of our products by patients. Our products may also be perceived to cause severe side effects when a conclusive determination as to the cause of the severe side effects is not obtained or is unobtainable. In addition, our products may be perceived to cause severe side effects if other companies products containing the same or similar ingredients or raw materials as our products cause or are perceived to have caused severe side effects, or if one or more regulators, such as the CFDA determines that products containing the same or similar ingredients as our products could cause or lead to severe side effects. 43

51 RISK FACTORS If our products cause, or are perceived to cause, severe side effects, we may face a number of consequences, including: injury or death of patients; a severe decrease in the demand for, and sales of, the relevant products; the recall or withdrawal of the relevant products; removal of regulatory approvals for the relevant products or the relevant production facilities; damage to the brand name of our products and our reputation; removal of relevant products from the National or Provincial Medical Insurance Catalogs; exposure to lawsuits and regulatory investigation relating to the relevant products that result in liabilities, fines or penalties; and indemnity to customers and/or patients. As a result of these consequences, our business, financial condition and results of operations, reputation, sales and profitability could be adversely affected. If our products are not manufactured in accordance with our quality standards, our business and reputation could be adversely affected. Our products and manufacturing process are designed to meet certain quality control and production standards. We have established a quality control system and implemented standard operating procedures to prevent quality issues in respect of our products. See Business Quality Control for further details. Despite our existing quality control system and procedures, we cannot eliminate all risks of errors, defects or failure in our manufacturing process. Quality defects may not to be detected or rectified as a result of a number of factors, many of which are outside our control, including: production errors; technical or mechanical malfunctions in our manufacturing process; human error or malfeasance by our quality control personnel; tampering by third parties; and quality issues with the raw materials we procure. 44

52 RISK FACTORS Failure to detect quality defects in our products or to prevent such defective products from being delivered to patients could result in product recalls or withdrawals, regulatory fines, or other problems which could seriously harm our reputation and business, expose us to liability, and adversely affect our revenue and profitability. Our research and development activities may not result in the successful development of new products, applications of existing products, product formulation, or production methods or techniques. Our future growth and prospects depend in part on our ability to successfully develop new products, new applications of existing products, new product formulations, or new production methods or techniques, each of which can be affected by many factors beyond our control. These include failure to meet the clinical safety, efficacy or other standards and requirements during testing and clinical trials, or failure to obtain regulatory approvals, including the approvals from the CFDA and Provincial FDAs, on time or at all. We commit substantial efforts, funds and other resources to our research and development, through both our strong in-house research and development team and collaborations with external research partners. See Business Research and Development for further details. The new product development process is complex, uncertain, time-consuming and costly. If our research and development activities do not result in the successful development of any new products, improvements on existing products, product formulation, or production methods or techniques, we will not be able to recover the related costs of such research and development activities and will need to write-off the relevant capitalized development costs, which could materially and adversely affect our financial condition and results of operations. A new product that appears promising in the early phases of development may nevertheless fail to reach the market for a number of reasons, such as the failure to demonstrate safety and efficacy in preclinical and clinical trials, and the failure to obtain approvals for the intended use from relevant regulatory bodies. Even if we successfully develop and launch a new product, we cannot assure you that it will be commercially accepted in the market. The primary factors which may affect the commercial viability of our products include, among others, the product s advantages and disadvantages as compared to competitors products, the product s cost-effectiveness and the effectiveness of our marketing efforts. Delays in any part of the research, inability to obtain regulatory approval or failure to achieve our projected sales level of the new product, may adversely affect our business, financial condition and results of operations. Termination of our collaboration with external research partners or any failure of our research partners to meet our timing and quality standards or any failure to identify and agree commercially acceptable terms with new research and development partners could increase our research and development costs, delay the research and development process and reduce our efficiency in new product development. We collaborate with scientists and professors at various research institutions, universities and hospitals in the research and development of TCM products. We have benefited and expect to continue to benefit from the resources, technologies and experience of our research partners through such collaboration. See Business Research and Development for further details. These scientists and professors are not, however, our employees and may have other 45

53 RISK FACTORS commitments that limit their availability to us. If a conflict of interest arises between their work for us and their other obligations, including any work for another entity, we may lose their services. A termination of our collaboration with any of our research partners or failure of our research partners to meet the required quality standards and timetables set forth in their research agreements with us or to identify suitable research and development partners for our future research and development partners and agree appropriate commercial terms with them could increase our research and development costs, delay the research and development process and reduce our efficiency in new product development. In addition, we cannot assure you that we will be able to maintain such relationships or enter into new relationships with suitable research partners. Any deterioration in our existing relationships, misappropriation of research results or failure to enter into other new relationships with suitable research partners on acceptable terms for future research and development projects may have an adverse impact on our ability to successfully develop new TCM products, which in turn may materially and adversely affect our growth prospects. We may incur losses resulting from product liability claims or product recalls. We may be subject to product liability claims with respect to our TCM Granules and other TCM products. Such claims may arise if any of our products are deemed or proven to be unsafe, ineffective, defective or contaminated or when we are alleged to have engaged in such practices as insufficient or improper labeling of products, provision of inadequate warnings or insufficient or misleading disclosures of side effects, or unintentional distribution of counterfeit medicines. In the event that the use or misuse of any product manufactured and/or distributed by us results in personal injury or death, product liability and/or indemnity claims may be brought against us, in addition to our product recalls, and the relevant regulatory authorities in the PRC may close down some of our related operations and take administrative actions against us. During the Track Record Period and up to the Latest Practicable Date, we did not receive any material product liability claims from third parties in relation to the use of our products nor did we experience any product recall. We cannot guarantee that such claims will not be filed against us in the future. A substantial claim or a substantial number of claims against us, if successful, would have a material adverse effect on our reputation, business, financial condition and results of operations. If any of our products are alleged to be harmful, we may experience reduced sales of our products and may have to recall these products from the market. In addition, we do not maintain any product liability insurance. Any claims against us or any product recalls, regardless of merit, can strain our financial resources and consume the time and attention of our management. If any claims against us are successful, we may incur monetary liabilities, and our reputation may be severely damaged. Moreover, in the event that any product liability claim resulting from sub-standard, contaminated or otherwise faulty raw materials is successful, we may be unable to recover damages resulting from such claim from our raw materials suppliers or plantation partners, which may have a material and adverse impact on our business, financial condition and results of operations. 46

54 RISK FACTORS Our sales of TCM Granules are subject to seasonality and our results of operations are subject to fluctuations. Our business is subject to risks associated with seasonality. In the PRC, the peak season of the sales of our TCM Granules is generally in the fourth quarter of each year and the low season is in the first quarter of each year. There is generally higher demand for our TCM Granules in the fourth quarter of each year because many customers tend to build up their stock of TCM Granules in advance before the Chinese New Year when most businesses in the PRC are closed. Sales of our TCM Granules may also fluctuate during the course of a financial year for a number of other reasons. For example, the demand for TCM products is typically higher in the second half of the year as many ailments that are commonly treated with TCM, such as respiratory infections, are more common in the autumn and winter months. Due to these seasonal factors, our TCM Granules sales may fluctuate from period to period, and comparison of sales and operating results between different periods within a single financial year may not be meaningful and should not be relied upon as indicators of our performance. In addition, these seasonal consumption patterns may cause our operating results and financial condition relating to our TCM Granules sales to fluctuate from period to period. If we are unable to protect our intellectual property, our business, financial condition and results of operations could be materially and adversely affected. Our success depends, to a large extent, on our ability to protect our intellectual property rights and technology know-how. We rely on a combination of patents, trademark registrations, trade secret laws, as well as non-competition agreements and confidentiality agreements with our employees to protect our intellectual property rights. See Business Intellectual Property Rights for further details on our patent, trademark registration and applications. The process of seeking patent protection can be lengthy and expensive, and we cannot assure you that our pending patent applications or any patent applications in the future in respect of other products will result in issued patents or that any patents issued in the future will be able to provide us with meaningful protection or commercial benefits. Our competitors may independently develop proprietary technology similar to ours and other third parties, introduce products that mimic ours, misappropriate our proprietary information or processes, infringe on our patents, brand name and trademarks, or produce similar technology and products that do not infringe on our patents or successfully challenge our patents. Our efforts to defend our patents, trademarks and other intellectual property rights may be unsuccessful against competitors or other violating entities. In addition, out of the five TCM Granules manufacturing group companies in the PRC, four have proprietary TCM Granules dispensary systems that have similar functions compared to our proprietary Smart Pharmacy Systems and have installed their version of Granules dispensary systems in various hospitals and medical institutions, who may also be our customers. As technologies become more sophisticated and more widespread, we cannot assure you that our proprietary Smart Pharmacy Systems will be able to compete with our competitors, nor can we assure you that our competitors will not expand their business by installing additional Granules dispensary systems in more hospitals and medical institutions. If this occurs, our business, financial condition and results of operations may be adversely affected. Similarly, we may be unable to identify any unauthorized use of our patents, trademarks and other intellectual property rights and may not be afforded adequate remedies for any breach. In particular, in the event 47

55 RISK FACTORS that our registered patents and our applications do not adequately describe, enable or otherwise provide coverage of our technology and products, we would not be able to prohibit others from developing or commercializing these technologies and products. If any of the above occurs, our business, financial condition and results of operations could be materially and adversely affected. In addition, we rely on trade secrets to protect our intellectual properties and proprietary know-how. We have generally entered into confidentiality agreements with our key research and development personnel and other employees, consultants, external research collaborators and other advisers. These agreements provide that all confidential information developed or made known to the individual during the course of the individual s relationship with us is to be kept confidential and not disclosed to third parties except in circumstances specified in the agreements. In the case of employees, the agreements provide that all of the technology which is conceived by the individual during the course of employment is our exclusive property. However, these agreements may not provide meaningful protection or adequate remedies in the event of unauthorized use or disclosure of our proprietary information. In addition, it is possible that third parties could independently develop information and techniques substantially similar to ours or otherwise gain access to our trade secrets. Litigation to protect our intellectual property rights or defend against third-party allegations of infringement may be costly. We may encounter future litigation with third parties in order to protect our intellectual properties. Similarly, we may also encounter future litigation by third parties based on claims that our products or activities infringe the intellectual property rights of others or that we, our employees or consultants have misappropriated the trade secrets of others. It is difficult to predict how such disputes would be resolved. The prosecution and defense of intellectual property rights are costly and will divert technical and management personnel from their normal responsibilities. We may not prevail in any such litigation or proceedings. An adverse decision with respect to any litigation or proceedings against us, resulting in a finding of non-infringement by others or invalidity of our trademarks, patents or other intellectual properties, may result in the use by third-party companies of brand names, technology or products substantially similar to ours. In addition, a determination that we have infringed on the intellectual property rights of another may require us to do one or more of the following: pay monetary damages to settle the results of such adverse determination, which could adversely affect our business, financial condition and results of operations; cease selling, incorporating or using any of our products or technologies that incorporate the challenged intellectual property, which would adversely affect our turnover or costs, or both; obtain a license from the holder of the infringed intellectual property right, which might be costly or might not be available on reasonable terms, or at all; or 48

56 RISK FACTORS redesign our products to make them non-infringing, which would be costly and time-consuming, or may not be possible at all. As of the Latest Practicable Date, we were not aware of any material actual or threatened claim of infringement by us of the intellectual properties of third parties or by any third party of any of our intellectual property. If such a claim is alleged, we cannot assure you that the resolution of the claim would permit us to continue manufacturing the product in question on commercially reasonable terms. In addition, there is a risk that some of our confidential information could be compromised by disclosure during intellectual property litigation. Furthermore, there could be public announcements throughout the course of intellectual property litigation or proceedings as to the results of hearings, motions or other interim proceedings or developments in the litigation. Such public announcements could substantially negatively impact our brand image or corporate reputation, thereby affecting the trading price of our Shares. The existence of counterfeit products in the TCM markets may damage our brand and reputation and have a material adverse effect on our business, financial condition and results of operations. Certain TCM products distributed or sold in the TCM market, particularly in the PRC, may be counterfeit as these products were manufactured without proper licenses or approvals and fraudulently mislabeled with respect to their content and/or manufacturer. Such counterfeit TCM products are generally sold at lower prices than authentic products due to their lower production costs, and in some cases are very similar in appearance to the authentic products. Counterfeit TCM products may or may not have the same chemical content as their authentic counterparts. The regulatory control and enforcement systems with respect to counterfeit TCM products in the PRC are not able to completely eliminate the manufacture and sale of counterfeit products. Any illegal sale of counterfeit products by others under our brand names may subject us to negative publicity, reputational damage, fines and other administrative penalties or even result in litigation against us. Moreover, from time to time, the appearance of counterfeit TCM products, products of inferior quality and other unqualified products in the healthcare markets in the PRC may reflect negatively on all TCM products, TCM products manufacturers and distributors among TCM practitioners, patients and consumers, and may severely harm the reputation and brand names of companies like us. Furthermore, consumers may buy counterfeit products that are in direct competition with our products. As a result of these factors, the proliferation of counterfeit TCM products could have a material adverse effect on our business, financial condition and results of operations. We may not be able to successfully increase our market share or implement our acquisition strategies. We plan to increase our market penetration and sales network coverage in the PRC. The successful increase of our market share depends on a number of factors including, among others, continued growth of the TCM market in general and the TCM Granules market in particular, the availability of funds, market competition and relevant government policies. We cannot assure you that we will be able to successfully expand our business, or at all. Any delays or failure could result in the loss or delayed receipt of revenue, an increase in financing 49

57 RISK FACTORS costs or the failure to grow our business. We cannot assure you that we will be able to implement such business strategies successfully since it involves significant expenses, including sales and marketing costs and the cost of acquiring additional property, plant and equipment. In addition, we also intend to accelerate our business growth through selective acquisitions of suitable pharmaceutical companies, with a focus on TCM products. However, our ability to consummate acquisitions is subject to a number of risks and uncertainties, including that: we may not be able to identify suitable acquisition targets and reach agreement on acceptable terms; we may not have access to financing for acquisitions on acceptable terms; we may fail to obtain the governmental approvals and third party consents necessary to consummate any proposed acquisition; and increasingly intense competition for attractive acquisition targets may make the consummation of acquisitions on commercially acceptable terms increasingly difficult. Even if we are able to consummate acquisitions, our ability to successfully grow our business through such acquisitions remains subject to further risks and uncertainties. Unexpected expenses could prevent us from implementing our business plans and acquisition strategies within our budget or at all, which may materially and adversely affect our business, financial condition and results of operations. See Business Our Strategies for details relating to our business plans. We may be affected by the changes in or cessation of income tax incentives and government grants. We enjoy a preferential enterprise income tax rate of 15% pursuant to the Taxation Policies on In-depth Implementation of Western Region Development Strategy. In addition, we are recognized as a National Key and Leading Enterprise for Agriculture Industrialization ( ) after being assessed by the competent regulatory authorities including the Ministry of Agriculture, the NDRC, the State Administration of Taxation, the CSRC, the Ministry of Finance and the Ministry of Commerce of the PRC. Pursuant to Article 27 of the EIT Law, revenue from operations in agriculture, forestry, animal husbandry and fishery industries are entitled to tax deduction or exemption. Pursuant to the relevant implementation rules, revenue from certain agriculture related operations are exempt from EIT. In addition, during the Track Record Period, we enjoyed the EIT exemption applicable to revenue from certain agriculture related operations for the sales of substantially all of our TCM Granules products. For the years ended December 31, 2014, 2015 and 2016, our effective tax rate was 1.5%, 1.7% and 1.5%, respectively. See Financial Information Description of Major Components of our Combined Statement of Profit or Loss Income Tax and Regulations Regulations on Tax in the PRC. These tax incentives are given at the discretion of the applicable governmental authorities and there is no assurance that we or any of our PRC subsidiaries will continue to enjoy such tax incentives. 50

58 RISK FACTORS In addition, during the three years ended December 31, 2014, 2015 and 2016, we recognized government grants of RMB1.7 million, RMB2.8 million and RMB3.7 million, respectively, primarily for setting up our production facilities and completion of research and development projects in Chengdu, Sichuan Province. Any removal, loss, suspension or reduction of such tax incentives, other tax benefit or relief or government grants may have an adverse effect on our business, financial condition and results of operation. Furthermore, any future increase in the enterprise income tax rate applicable to us or other adverse tax treatments, such as the discontinuation of preferential tax treatments, may have a material adverse effect on our financial condition and results of operation. Failure to comply with applicable anti-corruption laws could subject us to penalties and other adverse consequences. We operate in the TCM industry and sell a substantial majority our TCM Granules directly to hospitals and medical institutions in the PRC. We are subject to anti-corruption laws of the PRC which generally prohibit companies and intermediaries from making improper payments to public officials and industry players for the purpose of obtaining or retaining business and/or other benefits, along with various other anti-corruption laws. While we believe our business activities have been conducted in compliance with the applicable anti-corruption laws and we maintain policies and procedures designed to ensure such compliance, there can be no assurance that we will not be subject to permit and other advise consequences in the future. In addition to our direct sales to hospitals and medical institutions, we make a small portion of sales to distributors. Such distributors are Independent Third Parties and we have limited ability to manage their activities. We also may not be able to effectively manage our employees, as the compensation of our sales and marketing personnel is partially linked to their sales performance. As a result, we cannot assure you that our employees will not violate the anti-corruption laws of the PRC. If our employees and affiliates violate anti-corruption laws, we could be required to pay damages or fines, which could materially and adversely affect our business, financial condition and results of operations. Failure to adequately manage our employees or their non-compliance with employment, distribution or marketing agreements could harm our corporate image among TCM practitioners and patients and disrupt our sales, resulting in a failure to meet our sales goals. Furthermore, we could be held liable for actions taken by our employees, including any violations of applicable law in connection with the marketing and sale of our products. In addition, our brand and reputation, our sales activities and the price of our Shares could be adversely affected if we become the target of any negative publicity or governmental investigations or claims as a result of actions taken by our employees and affiliates. Our results may fluctuate due to revaluation gains or losses on our biological assets. Revaluation gains or losses on our biological assets can impact our profits as part of our profits consists of changes in the fair value of such assets. We are required to assess the fair value of our biological assets less estimated point-of-sale costs at each balance sheet date and 51

59 RISK FACTORS the gain or loss on change in fair value of biological assets has to be recognized in the Group s income statement as profit or loss. Biological assets are measured at fair value less estimated costs to sell at initial recognition and at each reporting date. The gain or loss arising on initial recognition of biological assets at fair value less estimated costs to sell and from a change in fair value less estimated costs to sell of biological assets is recognized in profit or loss for the period in which it arises. We recognized net gains on change in fair value of biological assets of approximately RMB327,000, RMB64,000 and RMB378,000 for the years ended December 31, 2014, 2015 and 2016, respectively. See Financial Information Critical Accounting Policies and Estimates Biological Assets in this document for details. Investors should be aware that our profits are subject to changes in fair value arising from any changes in the discount rates applied in assessing the fair value of our biological assets and such changes in fair value could be dramatic and there is no assurance that such revision in discount rates will not have any adverse impact on our profits. In addition, the aggregate gain or loss arising from the initial recognition of the biological assets is recognized in our income statement as profit or loss. Investors should be aware that the net gain on change in fair value of biological assets shown on our financial statements reflects only unrealized revaluation gain on our biological assets during the respective financial year and does not generate any actual cash flow unless such biological assets are disposed of at such revalued amounts. Furthermore, the fair value of our biological assets are determined pursuant to various assumptions that may vary from time to time. Market prices for hogs and feed grains are highly volatile and susceptible to significant fluctuation from period to period. Our success and business operations are dependent on our senior management team and key research and development personnel, and our business and prospects may be severally disrupted if we lose their services. Our success depends on the continued services of our senior management and key research and development personnel. In particular, we rely on the TCM industry-related experience as well as accumulated knowledge and operational expertise of our senior management team led by Mr. Zhou, the chairman of our Board. Our research and development team is critical to the development and commercialization of our TCM products as well our Smart Pharmacy Systems and technology infrastructure. Our ability to attract and retain key personnel, in particular, senior management, as well as our key research and development personnel, is a critical aspect of our competitiveness. Competition for these individuals could require us to offer higher compensation and other benefits in order to attract and retain them, which would increase our operating expenses and, in turn, could materially and adversely affect our financial conditions and results of operations. We may be unable to attract or retain the specialized personnel required to achieve our business objectives, and failure to do so could adversely affect our business. The loss of any of our key employees, including senior executives or key research and development personnel, could severely harm our business. If we lose the services of any senior management, we may not be able to identify suitable or qualified replacements, and may incur additional expenses to recruit and train new personnel, which could disrupt our operations. Furthermore, if any of our executive officers joins a competitor or forms a competing company, we may lose a significant number of our existing customers, which could have a material adverse effect on our business, financial condition and results of operations. 52

60 RISK FACTORS We may not be able to maintain and/or obtain approvals from the relevant PRC and local authorities necessary to carry out our business or to cope with future regulatory requirements, maintain the inclusion of our TCM Granules in the Medical Insurance Catalogs of certain regions or obtain new inclusions in other regions. During the Track Record Period, we were approved as a qualified pilot manufacturer of TCM Granules. During the Track Record Period and as of the Latest Practicable Date, we have made filings for selling our TCM Granules with the relevant Provincial FDAs in each of the Provinces in which our TCM Granules were sold, except that the approval to sell our TCM Granules in Chongqing has expired on June 14, We are in the process of arranging for the requisite filling with the Chongqing FDA. In addition, we may need to obtain further approvals from these Provincial FDAs for the clinical trial of our TCM Granules in their respective Provinces, and some approvals are subject to periodic renewal by these authorities. There still exists some uncertainties in respect of the PRC laws and regulations relating to the relevant Provincial FDAs oversight and administration of the clinical trial of TCM Granules. Based on the results from clinical trials of TCM Granules, the CFDA and the Provincial FDAs may impose higher standards on our products, or, revoke or refuse to grant and/or renew approvals which are required for us to conduct our business. Future changes in the applicable laws and regulations in the PRC may result in more stringent requirements, stricter enforcement, increased fines and penalties for non-compliance, increased compliance costs, more stringent government assessments, and heightened responsibilities for the CFDA-licensed TCM Granules manufacturers as well as their directors and employees. If any of the activities carried out by us fails to meet the requirements of current or future rules, regulations and standards, or if we fail to obtain or renew the required approvals, such failure could have material adverse effects on our business, financial condition and results of operations. In addition, certain of our TCM Granules have been included in the Medical Insurance Catalogs of various regions in the PRC, such as Beijing, Tianjin, Sichuan Province, Zhejiang Province, Guangdong Province, Hainan Province, Shandong Province, Qinghai Province, Ningxia Hui Autonomous Region, Xinjiang Autonomous Region, Guizhou Province and Yunnan Province. We cannot assure you that our TCM Granules will not be removed from such catalogs as a result of changes in local regulatory compliance, adverse findings by local regulatory authorities or other reasons. If we are unable to maintain inclusion of our TCM Granules in such catalogs, sales of our TCM Granules in the relevant regions may be affected, which may have an adverse impact on our business, financial condition and results of operations. We may be prohibited from selling our TCM Granules to customers that are not approved by relevant Provincial FDAs to clinically use such TCM Granules. According to the relevant PRC regulations, TCM Granules manufacturers are required to file a list of clinical hospitals and medical institutions using their TCM Granule with the relevant Provincial FDAs. However, based on different interpretation and implementation by different Provincial FDAs, certain filings do not necessarily contain such list of hospitals and medical institutions. The relvant Provincial FDAs nevertheless issue corresponding acknowledgments to the filings, which generally contain certain hospitals and medical institutions specifically approved by them. Therefore, clinical hospitals and medical 53

61 RISK FACTORS institutions that are not subsequently approved by the relevant Provincial FDAs in connection with the filings made by TCM Granules manufacturers for the sale of TCM Granules are prohibited from buying, selling and using the TCM Granules products. According to the Reply to the Questions of Administrative Penalty on the Use of the TCM Granules in the Operation of the Units without Approval ( ), the clinical hospitals and medical institutions that are not filed with the relevant Provincial FDAs are not permitted to use TCM Granules and the pharmaceutical trading enterprises are not permitted to sell TCM Granules. The clinical hospitals, medical institutions and pharmaceutical trading enterprises that violate such regulations shall be ordered to cease the clinical use within a prescribed time limit. If they fail to cease the clinical use, the relevant Provincial FDAs can investigate and impose administrative penalties on such clinical hospitals, medical institutions and pharmaceutical trading enterprises. For further details of this regulation, please refer to the section headed Regulations PRC Laws and Regulations Relating to the Manufacturing of Pharmaceutical Products in this document. In addition, during the Track Record Period, while we predominantly sell and distribute our TCM Granules directly to hospitals and medical institutions, we also sell a small portion of our TCM Granules to third-party distributors in the PRC. Some of these distributors may have sold some of our TCM Granules to hospitals and medical institutions during the Track Record Period not approved by relevant Provincial FDAs, for reasons which were beyond our control. For the years ended December 31, 2014, 2015 and 2016, the sales of our TCM Granules we made directly to hospitals and medical institutions that were not approved by the relevant Provincial FDAs ( Non-approved Customers ), together with the sales to hospitals and medical institutions by the third-party distributors, were estimated to be RMB46.1 million, RMB67.7 million and RMB86.4 million, respectively, accounting for approximately 6.7%, 6.7% and 6.1%, respectively, of our total revenue for the same periods. Please refer the section Business Legal Compliance Systemic Non-compliance Incidents in this document for more details In the event the clinical hospitals and medical institutions that purchased our TCM Granules but are not filed with or approved by relevant Provincial FDAs are ordered to cease the clinical use, our business, financial condition and results of operations could be materially and adversely affected. We may be unable to effectively manage the activities of our distributors, and our business, prospects and product brands may be adversely affected by actions taken by our distributors. Besides selling our TCM Granules directly to hospitals and medical institutions, we also sell a small proportion of our TCM Granules to distributors in the PRC during the Track Record Period. For the years ended December 31, 2014, 2015 and 2016, sales of our TCM Granules made to third-party distributors constituted 5.4%, 5.1% and 4.4% of our revenue from the sale of TCM Granules. See Business Marketing, Sales and Distribution in this document for further details regarding the distribution of our products. While we have established long-term relationships and entered into distribution agreements with our distributors, we cannot assure you that we will be able to renew our contracts with them on terms and conditions commercially acceptable to us or that we will receive sufficient compensation as a result of any breach of contract by our distribution to cover our losses. 54

62 RISK FACTORS In addition, it is difficult for us to closely monitor all aspects of the conduct and practices of our distributors. We have no ownership or managerial control over any of our third party distributors. We cannot assure you that our distributors will at all times strictly adhere to the terms and conditions of our distribution agreements. Our distributors may take actions that could have an adverse effect on our business, prospects and brands. For example, our distributors may fail to maintain the requisite licenses or otherwise fail to comply with applicable regulatory requirements when they sell our products, or they may violate anti-corruption and other laws of the PRC and relevant foreign jurisdictions. Further, according to the contracts we entered into with our distributors, if our distributors sell our TCM Granules to hospitals and medical institutions that are not approved to use TCM Granules by the relevant Provincial FDAs as required by the applicable PRC rules and regulations, we will be forced to terminate the relevant distribution agreements prior to the end of their respective contractual terms, which could materially and adversely affect our business, financial condition and results of operations. While we sell a substantial majority of our TCM Granules to customers in the PRC, we sell a very small portion of our TCM Granules to customers internationally, including those in Hong Kong, Australia and Canada. For the years ended December 31, 2014, 2015 and 2016, sales of our TCM Granules overseas accounted for 0.5%, 0.4% and 0.3%, respectively, of our revenue from the sale of TCM Granules. We target these countries and regions primarily due to the existence of large concentrations of ethnic Chinese population who are more receptive to the applicability and effectiveness of traditional Chinese medicine, and we mainly rely on third-party distributors to sell our TCM Granules in these regions. Accordingly, the standards with respect to pharmaceutical products, including TCM Granules, may be different in these countries and regions, and we rely on these distributors to adhere and comply with the applicable local rules and regulations and are generally not in a position to monitor and oversee their operations. In the event any overseas distributor ceases to sell our TCM Granules due to factors beyond our control, such as the fluctuations in exchange rates and changes in the local market conditions, and we are not able to promptly identify and engage suitable replacement distributors, our sales of TCM Granules overseas may be adversely impacted. We may be required to make full payment of social insurance and housing provident fund contributions for our PRC employees. We are required to make social insurance and housing provident fund contributions for our PRC employees under the relevant laws and regulations. During the Track Record Period, we did not make full contributions to the social insurance schemes and the housing provident funds for these employees. As of December 31, 2016, the underpaid amounts of social insurance contribution and housing provident fund contribution was approximately RMB23.6 million and RMB6.3 million, respectively. We cannot assure you that we will not be subject to any order to pay the underpaid amounts of social insurance and housing provident fund contribution within a stipulated period in the future. Nor can we assure you that there is no, or will not be, any claim or employee complaint in relation to our contributions to the social insurance schemes or housing provident funds against us. In addition, we may incur additional expenses to comply with the relevant laws and regulations. In the event that any of the above occurs, our business and financial position may be adversely affected. 55

63 RISK FACTORS We may not be able to secure additional funding in the future for our operations or expansion plans. Our expansion plans may change in light of changing circumstances, the development of our business, unforeseen contingencies or new opportunities. If there is a change of our expansion plans, we may need to obtain additional debt or equity financing. If we are unable to obtain such additional financing on acceptable terms, or at all, we may not be able to expand our business and our operations may be adversely affected. The availability of funding is subject to various factors, some of which are beyond our control, including governmental approvals, prevailing market conditions, credit availability, interest rates and the performance of our business. Our inability to procure additional financing in a timely manner on terms that are satisfactory to us could materially and adversely affect our expansion plans and in turn our business, financial condition and results of operations. We may from time to time become a party to litigation, legal disputes, claims or administrative proceedings that may materially and adversely affect us. We may from time to time become a party to various litigation, legal disputes, claims or administrative proceedings arising in the ordinary course of our business. Negative publicity arising from such proceedings may damage our reputation and adversely affect the image of our brand and products. In addition, ongoing litigation, legal disputes, claims or administrative proceedings may distract our management s attention and consume our time and other resources. Furthermore, any litigation, legal disputes, claims or administrative proceedings which are not of material importance may escalate due to various factors, such as the facts and circumstances of the cases, the likelihood of winning or losing and the monetary amount at stake. Finally, if any verdict or award is rendered against us, we could be required to pay significant monetary damages, assume liabilities, and suspend or terminate any related business operations. Consequently, our business, financial condition and results of operations may be materially and adversely affected. Our Chinese patent medicine products typically must undergo expensive and lengthy clinical trial processes before they can be introduced into the market for commercial sale. Generally, we have to provide regulatory authorities with clinical data that demonstrates the safety and efficacy of our Chinese patent medicine products in order to obtain approval for commercial sale. The clinical trial process, which involves preclinical testing and clinical development, can take several years to complete and the outcome of such process is uncertain. Product testing can fail at any stage of the clinical trial. Success in preclinical testing and early clinical trials does not guarantee that later clinical trials will be successful, and interim results of trials do not necessarily predict final results. Further, the duration of a clinical trial generally varies substantially with the type, complexity, novelty and intended use of the product candidate. Clinical trials may be delayed or need to be repeated for many reasons, such as negative or inconclusive results, adverse medical events, ineffectiveness of the study compound, inability to manufacture sufficient quantities of the compound for use in clinical trials and failure of the regulatory authority to approve our clinical trial protocols. Our clinical trials may be suspended at any time if we or the regulatory authorities believe the patients participating in our studies are exposed to unacceptable health risks. 56

64 RISK FACTORS We do not know whether planned clinical trials will begin on time or whether any of our clinical trials will be completed on schedule, or at all. Our product development costs would likely increase if we encounter delays in testing or obtaining approvals or if we need to perform more or larger clinical trials than planned. If the delays are significant, the commercial prospects for some of our products will be harmed, which will adversely affect our results of operations. Our business may also be adversely affected if after we devote significant time and expense to the clinical trial process, we are unable to obtain the approval for commercial sale of our product under development. Our insurance coverage may not cover all risks related to our business and operations. We maintain certain insurance coverage in line with industry practices in the PRC. See Business Insurance for further details. However, there may be circumstances under which certain types of losses, damages and liabilities are not covered by our insurance policies. There are also certain types of losses, such as those resulting from wars, acts of terrorism, or natural disasters, for which we cannot obtain insurance at a reasonable cost, or at all. Should an accident, natural disaster or terrorist act occur, or should an uninsured loss or a loss in excess of insured limits occur, we may suffer from financial losses, as well as damage to our reputation. Any material loss not covered by our insurance could materially and adversely affect our business, financial condition and results of operations. Our business operations may be materially and adversely affected by present or future environmental regulations or enforcement. We are subject to the laws, rules and regulations of the PRC concerning the discharge of waste water, production emissions and solid wastes during our manufacturing process. In addition, we are required to obtain approvals and authorizations from the relevant authorities in the PRC for the treatment and disposal of these wastes. We were not subject to any material claims or penalties in relation to environmental protection or involved in any environmental accidents or fatalities during the Track Record Period. However, we cannot assure you that we will be able to comply fully at all times with applicable environmental regulations in the PRC. Any violation of these regulations may result in substantial fines, criminal sanctions, revocations of operating permits, shutdown of our facilities and obligations to take corrective measures. Furthermore, the cost of complying with current and future environmental protection laws, rules and regulations and the liabilities which may potentially arise from the discharge of our production wastes may materially increase our costs and decrease our profit. Moreover, an amended Environmental Protection Law was passed by the Standing Committee of the PRC National People s Congress on April 24, 2014 and became effective on January 1, The newly promulgated Environmental Protection Law imposes more stringent punishment on any violation of environmental protection law, thus the amount and timing of future environmental expenditures may vary substantially from those incurred in the past. If the PRC government tightens its supervision and administration on environmental protection, we may need to incur substantial capital expenditures to comply with environmental laws and regulations, including the costs of installing, replacing or upgrading our equipment related to pollution control, the use, storage, handling and disposal of hazardous materials and chemicals and the costs of operational changes to limit any adverse impact of our operations on the environment. In addition, environmental liability insurance is 57

65 RISK FACTORS not commonly available in the PRC. Consequently, any significant environmental liability claims, if successfully brought against us, could have a material adverse effect on our business, financial condition and results of operations. We rely on information systems in managing our operations and any system failures or deficiencies of our information systems may have an adverse effect on our business, financial condition and results of operations. We make use of information systems to record, process, analyze and manage our operational and financial data. We use these systems to, among other things, monitor the daily operations of our business (such as the receipt and processing of orders), and maintain operating and financial data for the compilation of our management and financial reports. We cannot assure you that our information systems will always operate without interruption or malfunction. Any damage by unforeseen events or system failure that causes interruptions to the input, retrieval and transmission of data or increase in service times could disrupt our normal operations. We cannot assure you that we can effectively carry out our disaster recovery plan to handle the failure of our information systems, or that we will be able to restore our operational capacity in a timely manner to avoid disrupting our business. Our failure to address these problems could result in our inability to perform, or prolonged delays in performing, critical business operational functions, the loss of key business data, or our failure to comply with regulatory requirements, which could materially and adversely affect our business, financial condition and results of operations. We may not be able to continue to be in compliance with potential new regulations on TCM Granules industry. If we incur significant additional unexpected compliance cost, our business, financial condition and results of operations may be materially and adversely affected. In December 2015, the CFDA published the Draft Measures, which stipulates the regulatory requirements on various aspects of TCM Granules enterprises, including, among others, production management, drug standards, filing management, supervision management, use management and name and labels. Additional regulatory requirements include, among others, that (i) TCM Granules manufacturers shall meet certain requirements, including having comprehensive procurement capabilities of TCM decoction pieces and comply with GMP standards; and (ii) the manufacturer of the TCM Granules shall file an application for alteration of pharmaceutical manufacturing permit with relevant the Provincial FDA to add TCM Granules to the scope of production. Please see Regulations PRC Laws and Regulations Relating to the Manufacturing of Pharmaceutral Products Measures on the Administration of Concentrated Chinese Medicine Granules (Draft Version) ( ( ) ) in this propectus for more details. The Draft Measures have not yet been formally adopted and implemented. The time of adoption and implementation and whether the existing content of the Draft Measures will be adopted and implemented remain uncertain. Therefore, we cannot assure you that we will be able to remain in compliance with the formal Measures on the Administration of Concentrated Chinese Medicine Granules or any other stringent new regulatory requirements on TCM Granules industry in the future. If significant cost is incurred due to our failure to 58

66 RISK FACTORS comply with such regulatory requirements, our business, financial condition and results of operations may be materially and adversely affected. RISKS RELATED TO CONDUCTING BUSINESS IN THE PRC Changes in the economic, political and social conditions in the PRC could adversely affect our business, financial condition and results of operations. All of our assets are located, and substantially all of our revenue is derived from our operations, in the PRC. Accordingly, our business, financial condition and results of operations are, to a large extent, subject to the economic, political and social conditions in the PRC. The economy of the PRC differs from the economies of most developed countries in many aspects, including but not limited to the amount and degree of the PRC government s involvement, the growth rate and level of development, the uniformity in implementation and enforcement of laws, the control of foreign exchange and the allocation of resources. The PRC economy has been transitioning from a centrally planned economy to a more market-oriented economy. For approximately three decades, the PRC government has implemented economic reform measures to utilize market forces in the development of the PRC economy. The PRC economy has grown significantly in recent decades, though we cannot assure you that this growth will continue at the same pace, or at all. In addition, the PRC government continues to play a significant role in regulating industries and the economy through policy measures. We cannot predict whether changes in the PRC economic, political or social conditions and the PRC laws, regulations and policies will have any adverse effect on our current or future business, financial condition or results of operations. In addition, many of the economic reforms carried out by the PRC government are unprecedented or experimental and we expect them to be changed over time. Other political, economic and social factors may also lead to further adjustments of the PRC government s reform measures. Our business, prospects and results of operations may be materially and adversely affected by policies of the PRC government, such as measures to control inflation and to tighten its monetary policies, and changes in the rates or methods of taxation. These actions, as well as future actions and policies of the PRC government, could cause a decrease in the overall level of economic activity, and in turn have a material and adverse effect on our business, financial condition and results of operations. Our operations are subject to the uncertainties of the PRC legal system and its laws and regulations, which could have a negative effect on our business. Substantially all of our business and operations are conducted in the PRC and governed by PRC laws, rules and regulations. The PRC legal system is a civil law system based on written statutes. Unlike in the common law system, prior cases have limited precedential value in deciding subsequent cases in the civil law system. Additionally, PRC written statutes are often principle oriented and require detailed interpretations by the enforcement bodies for their application and enforcement. When the PRC government started its economic reforms in 1978, it began to build a comprehensive system of laws and regulations to regulate the overall economic order and business practices of the country. The PRC has made significant progress 59

67 RISK FACTORS in the promulgation of laws and regulations dealing with business and commercial affairs of various participants of the economy, involving foreign investment, corporate organization and governance, commercial transactions, taxation and trade. However, the promulgation of new laws, changes in existing laws and abrogation of local regulations by national laws may have a negative effect on our business and prospects. Additionally, given the involvement of different enforcement bodies of the relevant rules and regulations and the non-binding nature of prior court decisions and administrative rulings, the interpretation and enforcement of PRC laws and regulations involve significant uncertainties under the current legal environment. As a result, there are substantial uncertainties in the legal protection available to us. In addition, such uncertainties, including the inability to enforce the contracts we have entered into with our business partners, customers and suppliers, together with any development or interpretation of laws that are adverse to us, could materially and adversely affect our business and operations. We cannot predict the effect of future developments in the legal system of the PRC, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the pre-emption of local regulations by national laws. It may be difficult to effect service of process upon, or to enforce and judgments obtained outside the PRC against us, our Directors, or our senior management members who reside in the PRC. All of our existing executive officers and senior management members reside within the PRC and all of our assets are located within the PRC. It may not be possible for investors to effect service of process upon us or those persons inside the PRC. In addition, the enforcement of foreign judgments in the PRC involves uncertainty. If there exists a treaty between an overseas jurisdiction and the PRC, or a similar judgment made by a foreign court has been recognized in the PRC before, the judgment made in the foreign jurisdiction might be recognized and enforced in the PRC. However, recognition and enforcement in the PRC of judgments of certain overseas courts in relation to any matter not subject to a binding jurisdiction provision may be difficult or impossible. For instance, the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts in the United States, Canada, the United Kingdom, Japan or most other western countries. Fluctuations in the value of the Renminbi, the PRC government s control over foreign currency conversion and more stringent restrictions on the remittance of Renminbi into or out of China may adversely affect our business and results of operations and our ability to remit dividends. Substantially all of our revenue and expenditures are denominated in Renminbi, while the net [REDACTED] from the [REDACTED] and any dividends we pay on our Shares will be in Hong Kong dollars. Fluctuations in the exchange rates between the Renminbi and the Hong Kong dollars will affect the relative purchasing power in Renminbi terms. Fluctuations in the exchange rates may also cause us to incur foreign exchange losses and affect the relative value of any dividend distributed by us. Currently, we have not entered into any hedging transactions to mitigate our exposure to foreign exchange risk. Movements in Renminbi exchange rates are affected by, among other things, changes in political and economic conditions and the PRC s foreign exchange regime and policy. The PBOC regularly intervenes in the foreign exchange market to limit fluctuations in Renminbi exchange rates and achieve certain exchange rate targets and policy goals. From mid-2008 to 60

68 RISK FACTORS mid-2010, the Renminbi traded within a narrow range against the U.S. dollar. In June 2010, the PBOC announced the removal of the de facto peg. Since June 2010, the Renminbi has appreciated against the U.S. dollar, from approximately RMB6.83 per U.S. dollar to RMB per U.S. dollar on January 14, 2014, and subsequently depreciated against the U.S. dollar to RMB on December 30, In August 2015, the PBOC changed the calculation of central parity quotations of Renminbi against the U.S. dollar and cut the daily reference rate for the Renminbi by 1.9%, the largest single-day drop in more than 20 years. We cannot assure you that Renminbi will not appreciate or depreciate significantly in value against Hong Kong dollars in the future. We will need to convert part of the proceeds denominated in foreign currencies from the [REDACTED] into Renminbi. The appreciation of the Renminbi against the U.S. dollar or the Hong Kong dollar could reduce the amount of Renminbi that would be available for our use upon conversion of such proceeds to Renminbi. We cannot predict how Renminbi will fluctuate in the future. As a result, the fluctuation in the exchange rate between Renminbi and other currencies could have a material and adverse effect on our business, financial condition and results of operations, as well as our ability to remit dividends. In addition, since 2015, in response to China s declining foreign currency reserves, the PRC government has placed increasingly stringent restrictions on the convertibility of Renminbi into foreign currencies. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our Shareholders. There is no assurance that new regulations will not be promulgated in the future that would have the effect of further restricting the remittance of Renminbi into or out of China, which may adversely affect our overseas business. PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using proceeds we receive from the [REDACTED] to make loans or additional capital contributions to our PRC subsidiaries. As an offshore holding company of our PRC subsidiaries, our Company may make loans to our PRC subsidiaries, or our Company may make additional capital contributions to our PRC subsidiaries. Any loans to our PRC subsidiaries are subject to the PRC regulations and foreign exchange loan registrations. For example, loans by our Company to our PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the SAFE or its local counterpart. We may also decide to finance our PRC subsidiaries by means of capital contributions. These capital contributions must be filed with the Ministry of Commerce of the PRC or its local counterpart. There is no assurance that we can obtain these government registrations or filings on a timely basis, if at all, with respect to future loans or capital contributions by our Company to finance our PRC subsidiaries. If we fail to receive relevant registrations or filings, our ability to use the proceeds of the [REDACTED] and to capitalize our PRC operations may be negatively affected. This may materially and adversely affect our liquidity and our ability to expand our business. 61

69 RISK FACTORS The PRC government s control of foreign currency conversion may limit our foreign exchange transactions, including dividend payments on our Shares. Currently, Renminbi still cannot be freely converted into any foreign currency, and conversion and remittance of foreign currencies are subject to PRC foreign exchange laws and regulations which would affect exchange rates and our foreign exchange transactions. We cannot guarantee that under a certain exchange rate, we will have sufficient foreign exchange to meet our foreign exchange requirements. Under the current PRC foreign exchange control system, foreign exchange transactions under the current account conducted by us, including the payment of dividends, do not require prior approval from the SAFE, but we are required to present documentary evidence of such transactions and conduct such transactions at designated foreign exchange onshore banks that have the licenses to carry out foreign exchange business. As a result, following the completion of the [REDACTED], we will be able to pay dividends in foreign currencies without prior approval from the SAFE by complying with certain procedural requirements. Our foreign exchange transactions under the capital account, however, must be approved and/or registered in advance by the SAFE or other government authorities. We cannot assure you that the policies regarding foreign exchange transactions under the current account and the capital account will continue in the future. In addition, these foreign exchange policies may restrict our ability to obtain sufficient foreign exchange, which could have an effect on our foreign exchange transactions and the fulfillment of our other foreign exchange requirements. If there are changes in the policies regarding the payment of dividends in foreign currencies to shareholders or other changes in foreign exchange policies resulting in insufficient foreign exchange, our payment of dividends in foreign currencies may be affected. If we fail to obtain approval from the SAFE to convert Renminbi into any foreign exchange for foreign exchange transactions, our capital expenditure plans, and even our business, financial condition and results of operations, may be adversely affected. Payment of dividends is subject to restrictions under PRC laws. Under PRC laws, dividends may be paid only out of distributable profits. Distributable profits are our net profit as determined under PRC GAAP or IFRS, whichever is lower, less any recovery of accumulated losses and appropriations to statutory and other reserves that we are required to make. As a result, we may not have sufficient or any distributable profits to enable us to make dividend distributions to our shareholders in the future, including periods for which our financial statements indicate that our operations have been unprofitable. Any distributable profits that are not distributed in a given year may be used in other operational purposes or retained and available for distribution in subsequent years. Under the current PRC tax laws, regulations and applicable tax treaties, the payment of dividends to a non-prc resident shareholder is subject to withholding tax. See Financial Information Dividend Policy and Distributable Reserves in this document for more details of our dividend policy. 62

70 RISK FACTORS The outbreak of any severe communicable disease in the PRC, if uncontrolled, may materially and adversely affect our business, financial condition, results of operations and future growth. The outbreak of any severe communicable disease in the PRC, if uncontrolled, could have an adverse effect on its overall business sentiment and environment, which in turn may have an adverse impact on domestic consumption and, possibly, on its GDP growth. As substantially all of our revenue is derived from our operations in the PRC, any contraction or slowdown in the growth of domestic consumption or slowdown in the growth of GDP of the PRC may materially and adversely affect our business, financial condition and results of operations. In addition, if our employees are affected by a severe communicable disease, we may be required to take measures to prevent the spread of the disease, which may materially and adversely affect or disrupt our operations, resulting in an adverse effect on our results of operations. The spread of any severe communicable disease in the PRC may also affect the operations of our customers and suppliers, which again, may have a potentially adverse effect on our financial condition and results of operations. RISKS RELATING TO THE [REDACTED] There has been no prior public market for our Shares. The trading volume and market price of our Shares following the [REDACTED] may be volatile. Prior to the [REDACTED], there was no public market for our Shares. The initial [REDACTED] range to the public for our Shares was the result of negotiations between us and [REDACTED] on behalf of the [REDACTED], and the market price for our Shares following the [REDACTED] may differ significantly from the [REDACTED]. We have applied to list and deal in our Shares on the Stock Exchange. However, the [REDACTED] does not guarantee that an active liquid public trading market for our Shares will develop. In addition, the price and trading volumes of our Shares may be volatile. Factors such as variations in our revenue, earnings and cash flows or any other developments of our Company may affect the volume and price at which our Shares will be traded. Future sales or perceived sales of substantial amounts of our securities in the public market could have a material adverse effect on the prevailing market price of our Shares and our ability to raise capital in the future, and may result in dilution of your shareholdings. The market price of our Shares could decline as a result of future sales of substantial amounts of our Shares or other securities relating to our Shares in the public market or the issuance of new Shares or other securities, or the perception that such sales or issuances may occur. Future sales, or perceived sales, of substantial amounts of our securities, including any future offerings, could also materially and adversely affect our ability to raise capital in the future at a time and at a price which we deem appropriate. In addition, our shareholders may experience dilution in their holdings to the extent we issue additional securities in future offerings. 63

71 RISK FACTORS We cannot guarantee you when, if and in what form dividends will be paid in the future; dividends declared in the past may not be indicative of our dividend policy in the future. Our ability to pay dividends will depend on whether we are able to generate sufficient earnings. Distribution of dividends will be formulated by our Board of Directors at their discretion and will be subject to our Shareholders approval. The actual amount of any dividends to be declared or distributed will depend on various factors, including but not limited to our results of operations, cash flows and financial condition, operating and capital expenditure requirements, distributable profits, our Articles of Association, any applicable laws and regulations, market conditions, our strategic plans and prospects for business development, contractual limits and obligations, payment of dividends to us by our operating subsidiaries, taxation, regulatory restrictions and any other factors determined by our Board of Directors from time to time to be relevant. As a result, we cannot guarantee you when, if and in what form dividends will be paid in the future. Subject to any of the above constraints, we may not be able to pay dividends in accordance with our dividend policy. Please refer to the section headed Financial Information Dividend Policy and Distributable Reserves in this document for more details of our dividend policy. Because the [REDACTED] per Share is higher than the net tangible assets per Share, purchasers of our Shares in the [REDACTED] will experience immediate dilution. The [REDACTED] of our Shares is higher than the net tangible book value per Share of our Shares immediately prior to the [REDACTED]. Therefore, purchasers of our Shares in the [REDACTED] will experience an immediate dilution in pro forma net tangible assets of HK$[REDACTED] per Share (assuming an [REDACTED] of HK$[REDACTED] per Share, being the mid-point of our [REDACTED] range of HK$[REDACTED] to HK$[REDACTED] per Share, and no exercise of the [REDACTED]) and existing Shareholders will receive an increase in the net tangible book value per share of their Shares. If we issue additional Shares in the future, purchasers of our Shares may experience further dilution. You may experience difficulties in enforcing your Shareholder rights because we are incorporated in the Cayman Islands; the law of the Cayman Islands is different from the law of Hong Kong and other jurisdictions and may not provide the same protections to minority shareholders. We are an exempted company incorporated in the Cayman Islands with limited liability, and the law of the Cayman Islands differs in some respects from that of Hong Kong or other jurisdictions where investors may be located. Our corporate affairs are governed by our memorandum and articles of association, the Cayman Islands Companies Law and the common law of the Cayman Islands. The rights of shareholders to take legal action against us and our Directors, actions by minority shareholders and the fiduciary responsibilities of our Directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive but not binding authority in a court in the Cayman Islands. The rights of our Shareholders and the fiduciary responsibilities of our Directors under Cayman Islands law may not be as clearly established as they would be under statutes or judicial precedents in Hong Kong, the United 64

72 RISK FACTORS States or other jurisdictions where investors may be located. In particular, the Cayman Islands has a less developed body of securities law. As a result, our Shareholders may have more difficulty in protecting their interests in the face of actions taken by our management, Directors or major Shareholders than they would as shareholders of a Hong Kong company, a United States company or companies incorporated in other jurisdictions. For example, the Cayman Islands does not have a statutory equivalent of section 724 of the Hong Kong Companies Ordinance, which provides a remedy for shareholders who have been unfairly prejudiced by the conduct of the company s affairs. [REDACTED] Investors should not rely on any information contained in press articles or other media regarding us and the [REDACTED]. Prior to the publication of this document, there may be press and media coverage regarding our Company and the [REDACTED]. Such press and media coverage may include references to certain events or information that do not appear in this document, including certain operating and financial information and projections, valuations and other information. We will not authorize the disclosure of any such information in the press or media nor will we accept responsibility for any such press or media coverage or the accuracy or completeness of any such information. We will make no representation as to the appropriateness, accuracy, completeness or reliability of any such information or publication. To the extent such statements are inconsistent with, or conflict with, the information contained in this document, we will disclaim responsibility for them. Accordingly, prospective investors should not rely on any such information and should only rely on information included in this document in making any decision as to whether to purchase our Shares. The industry statistics contained in this document may not be accurate, reliable or fair. Statistical and other information relating to the PRC and our industry contained in the section headed Industry Overview in this document have been derived partly from various publicly available PRC official government publications as well as industry report we commissioned from independent industry advisers. We believe that the sources of such information are appropriate sources for such information and have taken reasonable care in extracting and reproducing such information. We have no reason to believe that such information is false or misleading or that any fact has been omitted that would render such information false or misleading. However, we cannot guarantee the quality of such source 65

73 RISK FACTORS materials. Moreover, statistics derived from multiple sources may not be prepared on a comparable basis. Neither the document nor any of their affiliates or advisers, nor we or any of our affiliates or advisers have verified the accuracy of the information contained in such sources. We make no representation as to the accuracy of the information contained in such sources, which may not be consistent with other information compiled within or outside the PRC. Accordingly, the industry information and statistics contained herein may not be accurate and should not be unduly relied upon for your investment in our Company or otherwise. 66

74 WAIVERS FROM STRICT COMPLIANCE WITH THE LISTING RULES MANAGEMENT PRESENCE According to Rule 8.12 of the Listing Rules, our Company must have sufficient management presence in Hong Kong. This normally means that at least two of the executive directors must be ordinarily residents in Hong Kong. Since our core business and operations, principal clients and assets are primarily located in the PRC, we do not, and for the foreseeable future, will not, have executive Directors who are ordinarily resident in Hong Kong, for the purposes of satisfying the requirements under Rules 8.12 of the Listing Rules. Currently, all of our executive Directors and senior management members reside in the PRC. Accordingly, we have applied to the Stock Exchange for[, and the Stock Exchange has granted,] a waiver from strict compliance with Rules 8.12 of the Listing Rules. We have made arrangements to maintain effective communication between the Stock Exchange and us as follows: (i) (ii) our Company has appointed two authorized representatives pursuant to Rule 3.05 of the Listing Rules who will act as our Company s principal channel of communication with the Stock Exchange. The two authorized representatives are Mr. Xu Liming, an executive Director of our Company, and Mr. Kwok Siu Man, the company secretary of our Company. Each of the authorized representatives will be available to meet with the Stock Exchange in Hong Kong within a reasonable period of time upon request and will be readily contactable by the Stock Exchange from time to time. Each of the authorized representatives has been duly authorized to communicate on our Company s behalf with the Stock Exchange. Both of them have confirmed that they possess valid travel documents to Hong Kong and will be able to meet with the Stock Exchange within a reasonable period of time, when required; our Company s authorized representatives have means of contacting all Directors promptly at all times as and when the Stock Exchange wishes to contact our Directors on any matters. In this regard, our Company has implemented a policy whereby each Director will provide his/her office phone number, mobile phone number, residential phone number, office facsimile number and address, as well as any alternative means of communication when he/she travels as necessary, to the authorized representatives; (iii) each Director who is not ordinarily resident in Hong Kong has confirmed that he/she either possesses or can apply for valid travel documents to visit Hong Kong and will be able to meet with the Stock Exchange in Hong Kong within a reasonable period upon request; (iv) our Company has, in accordance with Rule 3A.19 of the Listing Rules, also appointed TC Capital International Limited as our compliance adviser, who will act as an additional channel of communication with the Stock Exchange. Our compliance adviser will advise on on-going compliance requirements and other issues arising under the Listing Rules and other applicable laws and regulations in Hong Kong for a period commencing on the [REDACTED] at least until the date on 67

75 WAIVERS FROM STRICT COMPLIANCE WITH THE LISTING RULES which our Company complies with Rule of the Listing Rules in respect of our Company s financial results for the first full financial year after the [REDACTED]; and (v) each of the Directors will provide their mobile phone numbers, office phone numbers, addresses and fax numbers to the Stock Exchange. WAIVER IN RELATION TO PUBLIC FLOAT Rules 8.08 of the Listing Rules requires that there must be an open market in the securities for which listing is sought. Under Rule 8.08(1)(a) of the Listing Rules, this normally means that at least 25% of the issuer s total issued share capital must at all times be held by the public. Under Rule 8.08(1)(d) of the Listing Rules, subject to certain criteria, the Stock Exchange may, at its discretion, accept a lower percentage of between 15% and 25% in cases where: (i) (ii) the issuer will have an expected market capitalization at the time of listing of over HK$10 billion; the number of securities concerned and the extent of their distribution would enable the market to operate properly with a lower percentage; (iii) the issuer will make appropriate disclosure of the lower prescribed percentage of public float in the initial listing document; (iv) the issuer will confirm the sufficiency of the public float in successive annual reports after listing; and (v) a sufficient portion (to be agreed in advance with the Stock Exchange) of any securities intended to be marketed contemporaneously within and outside Hong Kong must normally be offered in Hong Kong. We expect to achieve a minimum market capitalization of at least HK$10 billion upon [REDACTED] and we have applied to the Stock Exchange to request the Stock Exchange to exercise, and the Stock Exchange [has confirmed] that it will exercise, its discretion under Rule 8.08(1)(d) of the Listing Rules to allow our Company to comply with a lower minimum public float percentage subject to: (i) the minimum public float should be higher of [REDACTED]% or such percentage after the exercise of the [REDACTED]; and (ii) appropriate disclosure of the lower prescribed percentage of public float and confirmation of sufficiency of public float in our successive annual reports after [REDACTED]. 68

76 WAIVERS FROM STRICT COMPLIANCE WITH THE LISTING RULES We expect that we will be able to demonstrate satisfactory compliance with Rules 8.08(2) and 8.08(3) of the Listing Rules at the time of the [REDACTED]. We will implement appropriate measures and mechanisms to ensure continual maintenance of the minimum percentage of public float. NON-EXEMPT CONTINUING CONNECTED TRANSACTIONS We have entered into certain transactions and expect to continue such transactions after the [REDACTED], which would constitute non-exempt continuing connected transactions under the Listing Rules after the [REDACTED]. Pursuant to Chapter 14A of the Listing Rules, we have applied to the Stock Exchange for[, and the Stock Exchange has granted us,] a waiver from strict compliance with the rules regarding the announcement, circular and independent Shareholders approval requirements under Chapter 14A of the Listing Rules for such non-exempt continuing connected transactions. For further details of such non-exempt continuing connected transactions and the waiver, please refer to the section headed Connected Transactions in this document. 69

77 INFORMATION ABOUT THIS DOCUMENT AND THE [REDACTED] [REDACTED] 70

78 INFORMATION ABOUT THIS DOCUMENT AND THE [REDACTED] [REDACTED] 71

79 INFORMATION ABOUT THIS DOCUMENT AND THE [REDACTED] [REDACTED] 72

80 INFORMATION ABOUT THIS DOCUMENT AND THE [REDACTED] [REDACTED] 73

81 DIRECTORS AND PARTIES INVOLVED IN THE [REDACTED] DIRECTORS Name Address Nationality Executive Directors Mr. Zhou ( ) (Chairman) Phase 2 Jade City Chengdu, Sichuan China Chinese Xu Liming ( ) Room 1802, Unit 1, Building 2 50 Wende Road Chenghua District Chengdu, Sichuan China Chinese Chen Chunchao ( ) Wang Jie ( ) Gu Jian ( ) Room 203, 29 Taiping Street, Waibei Street Community Residents Committee Tianpeng Town, Pengzhou Chengdu, Sichuan China 59-1 Binhe Street, Pengzhou Chengdu, Sichuan China 1401, Unit 1, Block 1, Victoria Harbour 538 Lidu Road Wuhou District Chengdu, Sichuan China Chinese Chinese Chinese Independent non-executive Directors Shi Xuemin ( ) Room 304, Gate 2, Building 49 Xinan Village, Nankai University Nankai District, Tianjin China Chinese Ngai Wai Fung ( ) Wang Zishou ( ) 26/F, Block A, Wah Shan Mansion 17 Taikoo Shing Road Quarry Bay Hong Kong , Zhonghua Jiayuan East Chengdu, Sichuan China Chinese (Hong Kong) Chinese See the section headed Directors and Senior Management in this document for further details of our Directors. 74

82 DIRECTORS AND PARTIES INVOLVED IN THE [REDACTED] OTHER PARTIES INVOLVED IN THE [REDACTED] Sole Sponsor Macquarie Capital Limited Level 18, One International Finance Centre 1 Harbour View Street Central Hong Kong [REDACTED] Legal advisers to our Company As to Hong Kong Law Luk & Partners Unit 2001, Level 20 One International Finance Centre 1 Harbour View Street Central Hong Kong As to U.S. Law Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia Pennsylvania United States As to PRC Law Commerce & Finance Law Offices 6th Floor NCI Tower A12 Jianguomenwai Avenue Beijing, China As to Cayman Islands Law Maples and Calder (Hong Kong) LLP 53rd Floor The Center 99 Queen s Road Central Hong Kong 75

83 DIRECTORS AND PARTIES INVOLVED IN THE [REDACTED] Legal advisers to the [REDACTED] As to Hong Kong and U.S. Laws Herbert Smith Freehills 23rd Floor, Gloucester Tower The Landmark 15 Queen s Road Central Central Hong Kong As to PRC Law Zhong Lun Law Firm 36 37/F, SK Tower 6A Jianguomenwai Avenue Chaoyang District Beijing China Reporting accountants Industry consultant Property valuer Compliance adviser KPMG 8th Floor, Prince Building 10 Chater Road Central Hong Kong Guangzhou PICO Medical Information Company Limited Room 1503, Ziyuan Commercial Building 745 East Dongfeng Road Yuexiu District, Guangzhou China Grant Sherman Appraisal Limited Unit 1005, 10/F, AXA Centre 151 Gloucester Road Wan Chai Hong Kong TC Capital International Limited Suite 1903 & 1904, 19/F, Tower 6 The Gateway, Harbour City 9 Canton Road Tsim Sha Tsui, Kowloon Hong Kong [REDACTED] 76

84 CORPORATE INFORMATION Registered Office Head Office in the PRC Principal Place of Business in Hong Kong Company s Website Company Secretary Authorized Representatives Maples Corporate Services Limited P.O. Box 309, Ugland House Grand Cayman, KY Cayman Islands 279 East Donghe Road Zhihe Town Pengzhou, Sichuan China 31/F., 148 Electric Road North Point Hong Kong (information contained on this website does not form part of this document) Kwok Siu Man ( ), FCS 31/F, 148 Electric Road North Point Hong Kong Xu Liming ( ) Room 1802, Unit 1, Building 2 50 Wende Road Chenghua District Chengdu, Sichuan China Kwok Siu Man ( ) 31/F, 148 Electric Road North Point Hong Kong Audit Committee Nomination Committee Remuneration Committee Ngai Wai Fung ( ) (Chairman) Shi Xuemin ( ) Wang Zishou ( ) Zhou Houcheng ( ) (Chairman) Wang Zishou ( ) Shi Xuemin ( ) Wang Zishou ( ) (Chairman) Zhou Houcheng ( ) Shi Xuemin ( ) 77

85 CORPORATE INFORMATION Strategy and Risk Committee Zhou Houcheng ( ) (Chairman) Xu Liming ( ) Chen Chunchao ( ) [REDACTED] Principal Bankers Agricultural Bank of China, Chengdu Shuangqing branch 99 Shuangqing Road Chengdu, Sichuan China Agricultural Development Bank of China, Sichuan branch 63 Junlong Street Jinjiang District Chengdu, Sichuan China 78

86 INDUSTRY OVERVIEW The information that appears in this Industry Overview section has been prepared by PICO to reflect the estimates of market conditions based on publicly available sources and trade surveys, and has been prepared primarily as a market research tool. The presentation of PICO should not be considered as the advisable opinion as to the value of any securities or the advisability of investment in the Company. Our directors believe that the sources of the information contained in this Industry Overview section are appropriate sources for such information and have taken reasonable care in reproducing such information. Our directors have no reason to believe such information is false or misleading or that any material fact has been omitted that would render such information false or misleading. The information prepared by PICO have not been independently verified by the Company, the [Sole Sponsor, [REDACTED]] or any other person or party involved in the [REDACTED]. We will not give any representations as to the accuracy of the information and the information should not be relied upon in making, or refraining from making, any investment decision. TRADITIONAL CHINESE MEDICINE MARKET IN THE PRC Overview Traditional Chinese medicine products mainly consist of Chinese patent medicines and TCM decoction pieces (including TCM Granules and non-granule TCM decoction pieces). The following summary sets forth the descriptions of the different types of traditional Chinese medicine products: Chinese patent medicines are made from raw medicinal herbs or TCM decoction pieces in accordance with the traditional Chinese medicine theories and practices, usually in the form of pills, capsules, pastes and powders; non-granule TCM decoction pieces are manufactured by processing raw medicinal herbs in accordance with the traditional Chinese medicine theories and practices and can be used for clinical treatment directly or for the preparation of other medicines; and TCM Granules are single-herb decoction pieces in water-soluble granule form that are produced using modern extraction and concentration technologies, which can be used for clinical treatment directly. Market Scale and Growth Trends In recent years, revenue of the traditional Chinese medicine market has grown rapidly due to increased demand as a result of economic growth, healthcare reforms and increased support given by the PRC government to the traditional Chinese medicine industry. Revenue of the entire traditional Chinese medicine market in China grew from RMB506.7 billion in 2012 to RMB865.3 billion in 2016, representing a CAGR of 14.3%. According to the PICO Report, revenue of the traditional Chinese medicine market in China is expected to reach RMB1,531.2 billion in 2021, representing an expected CAGR of 12.0% from 2017 to

87 INDUSTRY OVERVIEW According to the PICO Report, revenue of the TCM Granules market grew rapidly from RMB3.6 billion in 2012 to RMB9.1 billion in 2016, representing a CAGR of 26.6%, which was significantly faster than the CAGR of the overall pharmaceutical market, the traditional Chinese medicine market and the non-granule TCM decoction pieces market in China, which was 15.4%, 14.3% and 20.0%, respectively. According to the PICO Report, although the TCM Granules market in China has been growing quickly, it accounted for only approximately 4.7% of the entire TCM decoction pieces market, which had revenue of RMB195.6 billion in 2016, and was only 1.4% of the Chinese patent medicines market, which had revenue of RMB669.7 billion in As traditional Chinese medicines generally have fewer side effects compared to Western medicines, many physicians in China tend to prefer traditional Chinese medicines when treating certain chronic diseases. In addition, some consumers of Chinese patent medicines and non-granule TCM decoction pieces have gradually begun switching to TCM Granules for their convenience, consistency, efficacy and reliability, which demonstrates a strong growth potential of the TCM Granules market. The following chart illustrates the revenue of the traditional Chinese medicine industry from 2011 to 2016 and the estimated revenue from 2017 to Revenues of traditional Chinese medicine industry (in RMB billion) 2,300 1,800 1, CAGR of , , CAGR of Revenue of Chinese patent medicines 12.8% 10.9% Revenue of non-granule TCM decoction pieces 20.0% 14.4% Revenue of TCM Granules 26.6% 26.6% 1, , , , E 2018E 2019E 2020E 2021E Source: PICO Report 80

88 INDUSTRY OVERVIEW The chart below illustrates the increase of the market share of TCM Granules in the TCM decoction pieces market in the PRC from 2010 to 2016: TCM Granules Non-granule TCM decoction pieces 100% 80% 60% 40% 97.61% 96.90% 96.21% 96.23% 96.01% 95.55% 95.33% 20% 0% 2.39% 3.10% 3.79% 3.77% 3.99% 4.45% 4.67% Source: PICO Report The sales of traditional Chinese medicine products in China are subject to seasonality. Common chronic diseases have a higher morbidity rate and usually exacerbate during autumn and winter seasons. As a result, the sales of traditional Chinese medicines in China are usually higher in the second half of the year. In addition, the convention of having traditional Chinese medicines as dietary supplement during autumn and winter seasons also contributes to the seasonality of sales. The Key Growth Drivers for the Traditional Chinese Medicine Market in China Rising Health Consciousness and Spending According to the PICO Report, total healthcare expenditure and per capita healthcare expenditure in China both experienced steady growth of more than 10% each year during the period from 2009 to 2015, with total healthcare expenditures reaching RMB4,097.5 billion in According to the PICO Report, based on estimates from the Economist Intelligence Unit Market Indicators ( EIU ), while total healthcare expenditures in China ranked second in the world in 2016, total healthcare expenditures in China still have significant growth potential compared with many other countries. Total healthcare expenditures in China, which amounted to US$663.1 billion and ranked second in the world in 2016, only accounted for 5.8% of China s GDP, compared to total healthcare expenditures in the U.S. and Japan, which accounted for 17.7% and 10.4% of GDP, respectively. In 2015, healthcare expenditure per capita in China was only US$480, compared with US$10,115 and US$3,759 in the U.S. and Japan, respectively. We believe that total healthcare expenditures in China is expected to keep growing rapidly due to various factors, including rapid economic growth, increased disposable income, rising health consciousness, longer life expectancy and continued support from the PRC government. 81

89 INDUSTRY OVERVIEW Increasing Prevalence of Chronic Diseases According to the Office of China National Working Committee for the Elderly ( ), the population of Chinese citizens aged 60 years or more was more than million by 2016, accounting for 16.1% of the total population of China. It is expected that this segment of the population will further increase to million, million and million by 2020, 2030 and 2040, respectively, accounting for 18.0%, 23.7% and 27.6% of the total population, respectively. This segment of the population is more susceptible to age-related and chronic diseases. The table below sets forth the morbidity rate of chronic diseases in China by age groups in Age or above Morbidity rate of chronic diseases*(%) * The morbidity rate of chronic diseases is defined as the number of people diagnosed with chronic diseases within the six months prior to the survey divided by the total number of participants in the survey times 1,000. Source: 2014 China Statistical Yearbook of Health and Family Planning; PICO Report An aging population typically results in the rapid growth of the morbidity rates of age-related diseases, including cancer, nutritional and metabolic diseases (such as diabetes) and circulatory system diseases. The rapid growth in the demand for pharmaceuticals treating age-related diseases is expected to substantially increase the market, size of the pharmaceutical industry, as well as the traditional Chinese medicine market, considering traditional Chinese medicine is more widely used for the treatment of chronic diseases. Favorable Government Policies According to the Opinions of the State Council on Deepening the Reform of the Medical and Healthcare System ( ) released in 2009, China is planning to establish a basic healthcare system to cover both urban and rural residents by The basic healthcare system comprises four main systems, namely, the public healthcare system, medical service system, medical insurance system and pharmaceutical supply system. The State Administration of Traditional Chinese Medicine of the PRC formulated and issued its 13th Five-Year plan for the development of the traditional Chinese medicine industry in August 2016 (herein after referred to as the 13th Five-Year Plan ). The 13th Five-Year Plan sets forth specific primary development targets for the traditional Chinese medicine industry in China, including to significantly develop traditional Chinese medical services, accelerate the development of traditional Chinese medicine health care services, promote innovation of traditional Chinese medicine, strengthen the construction of qualified personnel, promote traditional Chinese medicine culture, promote the protection and development of traditional Chinese medicine, explore new forms of Chinese medicine service and promote the overseas development of traditional Chinese medicine. To better implement the 13th Five-Year Plan, the State Administration of Traditional Chinese Medicine of China has formulated various measures to carry out the reform and development of traditional 82

90 INDUSTRY OVERVIEW Chinese medicine industry, including establishing and improving the national, provincial, municipal and county level traditional Chinese medicine management systems, improving the national traditional Chinese medicine inter-ministerial joint meeting system, increase governmental investments and focusing on the development of the traditional Chinese medicine special services and the infrastructure construction of public traditional Chinese medicine hospitals. The 13th Five-Year Development Plan of Pharmaceutical Industry ( ) released in November 2016 also sets forth specific development targets for the traditional Chinese medicine industry as part of the 13th Five-Year Plan, including enhancing the industrial innovation, improving the quality and safety levels, promoting the application of Chinese herbal medicine ecological production technology, improving internationalization of the industry and focusing on the development of endangered rare medicinal materials breeding technology. The number of traditional Chinese medicine hospitals increased steadily from 2,688 in 2008 to 3,267 in 2015, reflecting the PRC government s support of the industry. In addition, the number of traditional Chinese and Western medicine hospitals ( ) and general hospitals ( ) have also increased from 236 and 13,119 in 2008, respectively to 446 and 17,430 in 2015, respectively, which has contributed to the development of the traditional Chinese medicine market in China. The table below sets forth the number of traditional Chinese medicine hospitals, traditional Chinese and Western medicine hospitals and general hospitals in China from 2008 to 2015: Year Traditional Chinese medicine hospitals 2,688 2,728 2,778 2,831 2,889 3,015 3,115 3,267 Traditional Chinese and Western medicine hospitals General hospitals 13,119 13,364 13,681 14,328 15,021 15,887 16,524 17,430 Source: 2016 China Statistical Yearbook of Health and Family Planning; PICO Report In May 2015, the State Council of the PRC released the Development Plan for Traditional Chinese Medicine Healthcare Service ( ) ( ( ) ), which sets out the plan to establish a traditional Chinese medicine healthcare service system and to make traditional Chinese medicine healthcare service an important part of the entire healthcare service industry by Increasing Recognition by Physicians and Patients With the increasing number of traditional Chinese medicine hospitals, physicians and healthcare personnel and favorable government policies, traditional Chinese medicine has been increasingly recommended by physicians and recognized by patients. Furthermore, as the philosophy of traditional Chinese medicine is deeply rooted in Chinese culture, traditional Chinese medicine is generally easily accepted and recognized by consumers in China. The increased recognition and acceptance by physicians and consumers are among the major growth drivers of the traditional Chinese medicine industry in China. 83

91 INDUSTRY OVERVIEW TCM GRANULES MARKET IN CHINA Overview The table below sets forth a timeline of the development of the TCM Granules industry in China: Year Events 1980s Traditional Chinese medicine experts in China completed trial experiments for 101 single herbs (101 ) and formulated prescriptions of a combination of herbs or individual herbs The terminology for TCM Granules was officially selected by the CFDA. The Provisional Regulation on the Management of Traditional Chinese Medicine Granules ( ) was issued, pursuant to which TCM Granules were categorized to be regulated as TCM decoction pieces and will be subject to approval requirements by the state authority. Before the official implementation of the approval procedures, TCM Granules were to remain in the research stage, during which only selected pilot enterprises would be allowed to conduct research and manufacturing of TCM Granules and only selected pilot clinical hospitals would be allowed to prescribe TCM Granules In the Forum of Traditional Chinese Medicine Granules in 2010 (2010 ), the CFDA announced that the manufacturing standards for over 600 types of TCM Granules were completed The CFDA suspended the licensing of additional pilot enterprises to manufacture TCM Granules. Currently, there are five group companies in the TCM Granules market after one of the six pilot enterprises that were authorized by the CFDA to manufacture TCM Granules became a wholly-owned subsidiary of another pilot enterprise. As a result of the suspension in granting additional licenses by the CFDA, it has become difficult for other enterprises to enter the market, which provided protection to the existing pilot enterprises. Although the CFDA published the Draft Measures, which may remove the regulatory barriers for entry into the TCM Granules market, the time of implementation is still uncertain, and it is expected that only a few large pharmaceutical companies will be able to enter the market since the draft regulation, if enacted as proposed, will impose stringent requirements on the entire manufacturing process of TCM Granules. 84

92 INDUSTRY OVERVIEW TCM Granules are considered a breakthrough for the traditional Chinese medicine industry and have paved the way for the modernization of the traditional Chinese medicine. In addition, TCM Granules are still relatively new in China with low penetration rate compared to that of TCM decoction pieces. According to the PICO Report, TCM Granules have numerous advantages as compared to TCM decoction pieces. The main differences are as follows: Item TCM Granules TCM decoction pieces Ingredients Production and processing of TCM Granules is GMP monitored in order to ensure the product quality. Products are not standardized and are not controlled. Patients need to handle the pieces themselves and the actual clinical efficiency may be affected. Preparation process Application Efficacy Flexibility TCM Granules dissolve in water and can be directly consumed. TCM Granules are portable and can also be applied for emergency treatment. Convenient and hygienic. The dosage of TCM Granules is easy to measure. TCM Granules can be stored and prescribed easily and do not perish or contaminate easily. Safe and easy to absorb. Prescriptions consist of single-herb TCM Granules packaged separately. Whether the effect is the same as that of TCM decoction pieces remains to be seen. TCM Granules can be prescribed with more flexibility. Physicians can easily add or cut down the amount of prescription of TCM Granules according to patients condition. TCM decoction pieces can only be consumed after boiling. TCM decoction pieces perish easily and are more susceptible to be damaged by insects and contamination. Dosage of TCM decoction pieces may be inaccurate as they are measured by hand or by scale. The boiling of mixed TCM decoction pieces changes the solubility of the active ingredients, improves the taste and reduces the toxicity of certain types of TCM decoction pieces. It is more difficult to make customized modification to TCM decoction pieces. Source: PICO Report 85

93 INDUSTRY OVERVIEW As the sales of TCM Granules to hospitals are not subject to bidding procedures, TCM Granules manufacturers have discretion over the pricing of TCM Granules. In general, the price of TCM Granules is much higher than that of TCM decoction pieces of the same herb. As a result, according to the PICO Report, the gross margin in TCM Granules industry is significantly higher than that of the TCM decoction pieces industry. Market Size and Growth Trend Revenue of the TCM Granules market in China grew a CAGR of 26.6% for the period from 2012 to According to the PICO Report, the TCM Granules market in China is expected to grow at a CAGR of 26.6% from 2017 to 2021, and is expected to reach RMB31.8 billion in The following chart illustrates the revenue of the PRC TCM decoction pieces from 2011 to 2016 and the estimated revenue from 2017 to Revenues of TCM decoction pieces industry (in RMB billion) CAGR of CAGR of Revenue of non-granule TCM decoction pieces 19.9% 14.4% Revenue of TCM Granules 26.6% 26.6% E 2018E 2019E 2020E 2021E Source: PICO Report 86

94 INDUSTRY OVERVIEW Key Growth Drivers for the TCM Granules Market in China According to the PICO Report, the key growth drivers for the TCM Granules market in China include the following: TCM Granules have retained the traditional characteristics of TCM decoction pieces, while making certain improvements in convenience, precision of dosage and portability. As a result, TCM Granules have quickly gained and are expected to continue to gain recognition among medical professionals and consumers; as an increasing number of Provinces have included TCM Granules in their Medical Insurance Catalogs, the consumer base of TCM Granules has further expanded. TCM Granules have been included in the Medical Insurance Catalogs of various regions in China, such as Beijing, Sichuan Province, Anhui, Guangdong Province, Fujian Province, Shandong Province, Hebei Province (part of the region), Qinghai Province, Guizhou Province, Ningxia Hui Autonomous Region and Yunnan Province. With the development of the industry, it is expected that more and more regions will include TCM Granules in their Medical Insurance Catalogs, which will likely result in increased acceptability and consumption of TCM Granules; and the PRC government has been continuously promoting the development of traditional Chinese medicine, especially the modernization of traditional Chinese medicine. This will result in increasingly relaxed policies that will be conducive to the TCM Granules industry, which are expected to lead to an increase in the number of market participants and a more diverse market. Competitive Landscape Overall Market The CFDA has initially licensed six group companies to manufacture TCM Granules and Company A (listed below) acquired another TCM Granules manufacturer in 2008, reducing the market to five group companies. The table below sets forth the competitive landscape of the TCM Granules market in China based on total revenue, market share and CAGR from 2014 to 2016 (ranking based on total revenue and market share in 2016): Ranking Name of Enterprise Revenue in 2016 Market share in 2016 CAGR from 2014 to 2016 (in RMB millions) (%) 1 Company A 4, % 17.2% 2 Company B 1, % 29.6% 3 Our Company 1, % 40.5% 4 Company C 1, % 20.3% 5 Company D % 23.2% 6 Others (1) % Note: (1) Include two pilot enterprises authorized by the Provincial FDA of Zhejiang ( ) to sell TCM Granules.in Class II and Class III medical units in Zhejiang Province (provincial pilot). 87

95 INDUSTRY OVERVIEW Our total revenue increased from 2014 to 2016 at a CAGR of 40.5%. In 2016, our total revenue reached RMB1,403.3 million, representing a market share of approximately 15.4% of the TCM Granules industry, which ranked us third among the five group companies licensed by the CFDA to manufacture TCM Granules in China. Our competitors in the market mainly include the other four group companies licensed by the CFDA to manufacture TCM Granules: Company A: This company was established in 1992 and was one of the first pilot enterprises approved by the CFDA to manufacture TCM Granules. Its marketing activities are carried out through distributors, covering more than 10 Provinces in China. The company acquired another TCM Granules manufacturer in 2008, which became its wholly-owned subsidiary; Company B: This company commenced research and development of full-ingredient TCM Granules in It conducts its marketing mainly through the direct sales model covering 19 Provinces in China; Company C: This company started its TCM Granules business in 2000 and owns nearly 20 plantation bases. Its marketing activities include both direct sales and sales through distributors, covering 27 Provinces in China; and Company D: This company was established in Its marketing activities are mainly carried out through distributors, with a major focus on Hong Kong. Entry Barriers The TCM Granules market has high barriers to entry, which mainly include the following: Government restrictions on entry. Up to the Latest Practicable Date, there were only five licensed TCM Granules manufactures in the PRC. The time to adopt and implement the Measures on the Administration of Concentrated Chinese Medicine Granules remains uncertain and therefore new participants are still restricted to enter the industry; Strict requirements on supply chain managements. Medicinal herbs used for the production of TCM Granules shall meet the requirements of the Chinese Pharmacopoeia. Authorized TCM Granules manufacturers are required to purchase raw medicinal herbs from designated suppliers to better control their quality and safety; Capability to conduct mass production of TCM Granules. The cost of purchasing and processing 300 to 500 types of Chinese medicinal herbs medicines is usually very high due to the wide variety of products. Therefore, TCM Granules manufacturers must have strong production capacities to optimize the use of their production facilities; 88

96 INDUSTRY OVERVIEW Strict requirements on quality control. The manufacturing of TCM Granules requires more strict quality control than other medicine manufacturing due to a wide variety of raw medicinal herbs used and the complexity of their nature, such as size, moisture content and solubility; and Ability to establish an extensive sales network. Each hospital typically sells only two to three different brands of TCM Granules, therefore, it is difficult for new participants to build their own brand recognition and establish an extensive and effective sales network. Principal Raw Materials and Final Products According to the PICO Report, the prices of raw medicinal herbs decreased after hitting a record high in June Although the overall prices of raw medicinal herbs remained relatively stable from 2013 to 2016, some commonly used raw medicinal herbs used in the production of TCM Granules experienced fluctuations during the same period. The charts below set forth the percentages of increase or decrease in the prices for certain commonly used raw medicinal herbs during the periods indicated. Price change in percentage % 40% 30% 20% 10% 0% -10% -20% -30% 36.6% 3.0% 4.8% -21.7% 12.8% -10.5% 41.0% 5.4% -6.0% 24.1% -29.3% -0.7% 2.9% -3.4% -21.0% Pangolin Suanzaoren Pinellia ternata Fritillaria thunbergii Coptis chinensis Ophiopogon japonicas Angelica sinensis Peony skin White peony root Atractylodes macrocephala Coix seed Eucommia ulmoides Liquorice Membrane of chicken gizzard Yam 89

97 INDUSTRY OVERVIEW Price change in percentage % 0% -10% 3.6% 6.7% 1.5% 2.9% -2.0% 3.6% -20% -30% -40% -50% -43.7% -28.5% -43.1% -18.0% -12.5% -14.1% -28.2% -12.5% -31.8% -60% Pangolin Suanzaoren Pinellia ternata Fritillaria thunbergii Coptis chinensis Ophiopogon japonicas Angelica sinensis Peony skin White peony root Atractylodes macrocephala Coix seed Eucommia ulmoides Liquorice Membrane of chicken gizzard Yam Price change in percentage % 40% 30% 30.0% 45.4% 20% 10% 0% -10% -20% -6.5% 7.4% 12.1% 2.9% -5.4% -11.7% -1.0% -2.1% 8.8% 11.5% -30% -25.8% Pangolin Suanzaoren Pinellia ternata Fritillaria thunbergii Coptis chinensis Ophiopogon japonicas Angelica sinensis Peony skin White peony root Atractylodes macrocephala Coix seed Eucommia ulmoides Liquorice Membrane of chicken gizzard Yam According to the PICO Report, the overall prices of raw medicinal herbs currently are at similar levels as those in

98 INDUSTRY OVERVIEW SOURCE OF INFORMATION This Industry Overview contains information extracted from the PICO Report, a research report commissioned by us and prepared by PICO. A total of RMB454,000 has been paid to PICO for compiling the report. The payment is neither subject to the results of the [REDACTED] nor the results of the PICO Report. No influence has been exerted by us over PICO in the preparation the PICO Report. As of the Latest Practicable Date, our Directors consider that after taking reasonable care, there has been no material adverse change in the market information since the date of the PICO Report which may render the information contained herein qualified or contradictory or may have impact on such information. Established by CFDA South Medicine Economic Research Institute ( SMERI ) in 2001, PICO is a market research company positioned in the pharmaceutical industry under market-oriented operation. SMERI has been devoted to economic research of China s pharmaceutical industry and strived to provide pharmaceutical professional media services and information services to various levels of the food and drug administration authorities in China as well as industrial and commercial pharmaceutical enterprises in China and abroad. SMERI is an affiliated institution of China Food and Drug Administration Bureau and was established in Guangzhou in The information and statistics contained in the PICO report are extracted or derived from multiple sources of information, including the National Bureau of Statistics of China, the National Health and Family Planning Commission of China, CFDA South Medicine Economic Research Institute and PICO. When collecting and providing relevant information and data used in the preparation of this section, PICO uses various primary and secondary sources of information to verify all data or information collected so as to remain objective when reflecting relevant historic and estimated data of China s pharmaceutical market. Data from PICO are derived from, including without limitation: (a) the composite database of CFDA South Medicine Economic Research Institute; (b) the statistical yearbook and other documents published by the National Bureau of Statistics of China and the National Health and Family Planning Commission of China; (c) the statistics and data published by the National Bureau of Statistics of China; and (d) public information and data from different organizations and institutions, such as Wind Information, the research department of CICC and annual reports of listed companies. Whenever necessary, PICO will arrange site visits to enterprises and collect relevant market information and other related data by conducting interviews with industry experts. PICO will also ensure the accuracy and completeness of the information with extensive verification using any data available. When preparing, collecting and providing the forecast information and data used in the preparation of this section, PICO adopted the following assumptions and methods: the pharmaceutical industry in China will continue to grow steadily; there are no material adverse circumstances in the pharmaceutical industry in China; there are no material changes to the growth rate of China s nominal GDP, population and disposable income; and 91

99 INDUSTRY OVERVIEW with regard to specific areas of medical care, there are no significant changes in the safety profile of the relevant drugs unless stated otherwise and there are no changes in the innovative concepts regarding the diagnosis and treatment of diseases. The information and data provided by PICO have been obtained from sources as deemed by PICO to be reliable, but there can be no assurance as to the accuracy or completeness of such information. Forecasts and assumptions (and their relevant assumptions and methods) collected and provided by PICO are inherently uncertain because of events or combinations of events that cannot reasonably be foreseen, including without limitation, the actions of government, individuals, third parties and competitors. Specific factors that could cause actual results to differ materially include, among others, risks inherent in the pharmaceutical industry, financing risks, labor risks, supply risks, regulatory risks and environmental issues. 92

100 REGULATIONS PRC REGULATORY FRAMEWORK IN RELATION TO THE PHARMACEUTICAL MANUFACTURING INDUSTRY Our products are subject to regulatory controls governing pharmaceutical products. Thus, we are subject to regulation and oversight by different levels of the food and drug administration in the PRC, in particular, the CFDA. The Pharmaceutical Administration Law of the People s Republic of China ( ), which was promulgated by the SCNPC on September 20, 1984 and latest amended on April 24, 2015, provides the basic legal framework for the administration of the production and sale of pharmaceutical products in China and covers the manufacturing, distributing, packaging, pricing and advertising of pharmaceutical products in China. Its implementation regulations set out detailed implementation rules with respect to the administration of pharmaceutical products in China. We are also subject to other PRC laws and regulations that regulate the manufacturing and distribution of pharmaceutical products. Principal Regulatory Authorities The principal regulatory authorities responsible for regulating pharmaceutical manufacturing industry mainly include the CFDA, NHFPC, the NDRC and MOFCOM. As the competent authority of pharmaceutical and healthcare industries, the CFDA, together with its local authorities, is responsible for administrative supervision and technical supervision over the research, production, circulation and usage of drugs, including Chinese medicine. The local drug administrative authorities at the level of Provinces, directly under the PRC central government are responsible for supervision and administration of drugs within their respective administrative regions. NHFPC is a constituent department of the State Council. NHFPC performs a variety of regulatory roles in relation to drug administration, including, without limitation, carrying out healthcare system reform, formulating and implementing the National Essential Drugs System, formulating the National Drug Code and the National List of Essential Drugs, proposing pricing policies for National Essential Drugs, and supervising healthcare institutions. The NDRC is responsible for the macro-guidance and management of the healthcare industry s development planning, technological upgrading, approval of investment programs and the economic operation status of the medical enterprises, the supervision and management over the price of medicines and formulating the national unified retail price for certain drugs falling under the National Medical Insurance Catalog and for drugs the production and distribution of which are monopolized. 93

101 REGULATIONS MOFCOM is the competent authority of the pharmaceutical wholesale sector in China. It is responsible for formulating plans, policies and standards concerning the development of the pharmaceutical distribution industry; enhancing the structure readjustment of the pharmaceutical distribution industry; guiding the reform of the pharmaceutical distribution industry; and promoting the development of a modern pharmaceutical distribution industry in China. In order to engage in either the manufacture or distribution of pharmaceutical products in the PRC, enterprises must comply with the laws and regulations in association with pharmaceutical products, and obtain permits, licenses, registrations from relevant competent authorities. PRC LAWS AND REGULATIONS RELATING TO THE MANUFACTURING OF PHARMACEUTICAL PRODUCTS Manufacturers of pharmaceutical products in the PRC must obtain a variety of permits, licenses and registrations before commencing operations and production. These include a business license, a pharmaceutical production license, GMP certification, and medicine approval and registration documents. Pharmaceutical Production License and Business License According to the Pharmaceutical Administration Law of the People s Republic of China ( ), which was promulgated by the SCNPC on September 20, 1984 and latest amended on April 24, 2015, no pharmaceuticals shall be produced without a pharmaceutical production license. A manufacturer of pharmaceutical products must obtain a pharmaceutical production license from the provincial level food and drug administration of the PRC government in order to commence pharmaceutical manufacturing. The grant of such license is subject to an inspection of the manufacturing facilities, and a finding that their sanitary condition, quality assurance systems, management structure and equipment meet the required standards. According to the Regulations of Implementation of the Law of the People s Republic of China on the Administration of Pharmaceuticals ( ), which became effective on September 15, 2002 and as amended on February 6, 2016, respectively, this license is valid for five years and application for renewal shall be made at least six months prior to its expiration date. Good Manufacturing Practice, or GMP, for Pharmaceutical Production A manufacturer of pharmaceutical products and pharmaceutical materials must obtain GMP certification to produce pharmaceutical products and pharmaceutical materials in China. The Good Manufacturing Practice for Pharmaceutical Products ( ) (hereinafter referred to as the Good Manufacturing Practice or GMP ) provides detailed guidelines on practices governing the production of pharmaceutical products. A GMP certification certifies that a manufacturer s factory has met certain criteria in the Good Manufacturing Practice, which include quality management, organization and personnel, premises and facilities, equipment, materials and products, qualification and validation, documentation management, production management, quality control and quality assurance, contract manufacture and analysis, product distribution and recalls and self-inspections. 94

102 REGULATIONS According to the GMP Supplementary Provisions on Traditional Chinese Medicine Decoction Pieces ( GMP ), which became effective on January 30, 2003, and the Notice on Strengthening the supervision and management of Chinese Medicine Decoction Pieces ( ), which became effective on January 5, 2011, the TCM decoction pieces should apply GMP management. The Circular on Promoting the Supervision and Implementation of GMP Operation Relating to Chinese Medicine Decoction Pieces and Other Categories ( GMP ), which became effective on October 26, 2004, provided that all the manufacturers of TCM decoction pieces should produce the TCM decoction pieces in compliance with the GMP criteria with effect from January 1, According to the Administrative Measures for Certification of the Good Manufacturing Practices for Pharmaceutical Products ( ), which became effective on August 2, 2011, a manufacturer of pharmaceutical products shall reapply for the GMP certification six months prior to its expiration date. A manufacturer of pharmaceutical products is subject to continuous supervision by the national and local drug supervision and administration department. A manufacturer of pharmaceutical products is subject to periodic inspection and safety monitoring by the drug supervision and administration department to determine its compliance with regulatory requirements. The drug supervision and administration department has a variety of enforcement actions available to enforce its regulations and rules, such as fines and injunctions, recalls or seizure of products, imposition of operating restrictions, partial suspension or complete shutdown of production and transfer to the relevant authority for criminal investigation. Provisional Regulations on the Administration of Concentrated Chinese Medicine Granules ( ) According to Provisional Regulations on the Administration of Concentrated Chinese Medicine Granules, which became effective on July 5, 2001, TCM Granules products shall be brought into the scope of administration of TCM decoction pieces from December 1, 2001, and shall be subject to management by approval document numbers. Before commencing the implementation of management by approval document numbers, TCM Granules production operation was still at the scientific research stage, the research and manufacture of TCM Granules products shall be operated by the selected pilot enterprises and the trial use shall be conducted at pilot clinical hospitals. Pilot manufacturers, varieties of the products and clinical hospitals shall be selected across the nation. A pilot manufacturer of TCM Granules products shall file the list of clinical hospitals using TCM Granules products with the Provincial FDA of the place where these hospitals are located. The pilot manufacturer of TCM Granules products must have obtained the pharmaceutical manufacturing permit; have applied to the authority at the provincial or ministry level for establishment of scientific research project on TCM Granules products and achieved periodical results; and have manufactured over 400 varieties of TCM Granules products. A manufacturer of TCM Granules products that fails to obtain the qualification of pilot manufacturer is prohibited from manufacturing TCM Granules products, and a clinical hospital that fails to file with the relevant provincial FDA is prohibited from selling and using 95

103 REGULATIONS the TCM Granules products. According to the Reply to the Questions of Administrative Penalty on the Use of the TCM Granules in the Operation of the Units without Approval ( ), without filing with the relevant Provincial FDA, the clinical hospitals are not permitted to use TCM Granules and the pharmaceutical trading enterprises are not permitted to sell TCM Granules. The pharmaceutical trading enterprises and medical institutions that violate such regulations shall be ordered to cease clinical use within a prescribed time limit. If they fail to cease clinical use, the relevant FDA can investigate and impose administrative penalties on such pharmaceutical trading enterprises and medical institutions. Measures on the Administration of Concentrated Chinese Medicine Granules (Draft Version) ( ) On December 24, 2015, the CFDA published a discussion draft of the Measures on the Administration of Concentrated Chinese Medicine Granules (Draft Version) ( ), or the Draft Measures, which stipulates the regulatory requirements on various aspects of TCM Granules enterprises, including, among others, production management, drug standards, filing management, supervision management, use management and names and labels. Additional regulatory requirements include, among others, that (i) TCM Granules manufacturers shall meet certain requirements, including having comprehensive procurement capabilities of TCM decoction pieces and comply with GMP standards; (ii) TCM Granules manufacturers shall properly handle the management of production waste residue by destroying it and prevent it from going back into the market; (iii) the use of TCM Granules shall meet the requirements of pharmaceutical electronic supervision requirements; (iv) The National Pharmacopoeia Commission organizes the formulation and revision of unified standards of TCM Granules; and (v) the manufacturer of the TCM Granules shall file an application for alteration of pharmaceutical manufacturing permit with relevant the Provincial FDA to add TCM Granules to the scope of production. PRC LAWS AND REGULATIONS RELATING TO THE REGISTRATION OF PHARMACEUTICAL PRODUCTS Registration of New Drugs In accordance with the Measures for the Administration of Drug Registration ( ) (hereinafter referred to as the Measures for Drug Registration ), which became effective on October 1, 2007, application for new drugs refers to application for registration of drugs that have not been marketed in China. Application for changing dosage form or channel of administration, or claiming a new indication for marketed drugs, shall be submitted as a new drug application. All new drug applications must undergo four phases before launch: pre-clinical research, phase I clinical trial (preliminary pharmacology and human safety evaluation trials), phase II clinical trial (a preliminary exploration on the therapeutic efficacy), and phase III clinical trial (confirmation of the therapeutic efficacy). After the new drug is launched, a phase IV clinical trial is conducted to assess the product s efficacy and adverse reactions when widely used. 96

104 REGULATIONS Upon completion of the pre-clinical research, new drug applicants must obtain approval from the CFDA prior to commencing clinical trials. Application materials must first be submitted to the Provincial FDA. Upon receipt of the application, the Provincial FDA will review the applicant s submission and conduct on-site inspections. The Provincial FDA will then submit its inspection opinion and report, as well as the application materials to the CFDA. If the drug to be registered is a biological product, sample drugs must be examined by the drug inspection bureau, which will provide a verification report to the CFDA. Upon receipt of the above materials, the CFDA will conduct both technical and non-technical reviews of the application to decide whether to grant an approval for drug clinical trials. After completion of the clinical trials, the applicant shall fill in the form of application for drug registration and submit its application materials to the Provincial FDA. At the same time, the applicant shall submit the raw material for the preparation of the standard product and the relevant standard substance to the National Institute for the Control of Pharmaceutical and Biological Products. The provincial food and drug supervision and administration authority will conduct on-site inspections and a preliminary review of the application materials. For drugs other than biological products, sample drugs must be taken for verification by the drug inspection bureau. After their inspections and assessment of the application, the provincial food and drug supervision and administration authority and the drug inspection bureau will report to the CFDA, which will conduct a final assessment to consider whether an approval for registration of the new drug shall be granted. If approved, the applicant will be granted a new drug certificate and a drug approval number and may commence mass production of the new drug. The Measures for the Administration of Drug Registration also provide that the registration of traditional Chinese medicinal materials, traditional Chinese herbal medicines (or called TCM decoction pieces) and approved imported traditional Chinese medicinal materials shall be subject to other regulations promulgated by the CFDA. As TCM Granules products are subject to the similar administrative system as traditional Chinese herbal medicines, TCM Granules products do not need to undergo clinical trials in four phases which are required for new pharmaceutical products before they are launched in the China market. According to the Provisional Regulations on the Administration of Concentrated Chinese Medicine Granules, where TCM Granules production is still at the scientific research stage, research and manufacture of the TCM Granules products shall be conducted by pilot manufacturers and the TCM Granules products shall be used only by pilot clinical hospitals. In this regard, TCM Granules products may be manufactured by the CFDA-licensed pilot manufacturers and sold for clinical use in the hospitals and medical institutions that have been filed with relevant provincial food and drug supervision and administration authority. To protect public health, the CFDA may set an observation period of up to five years in respect of any new drug approved for production. During the observation period, the drug manufacturer shall investigate the manufacturing processes, quality, stability, therapeutic effect and adverse reactions etc. of the new drug and report annually to the provincial food and drug supervision and administration authority. The CFDA shall not approve other manufacturers to produce, change dosage form of or import the drug during the monitoring period. 97

105 REGULATIONS In accordance with Provisions on the Administration of Special Examination and Approval of Registration of New Drugs ( ), which became effective on January 7, 2009, a new drug application that meets certain requirements as specified below will be handled with priority in the review and approval process. In addition, the applicant is entitled to provide additional materials during the review period besides those requested by the CFDA, and will have access to enhanced communication channels with the CFDA. Applicants for the registration of the following new drugs are entitled to request for priority treatment in review and approval: (i) effective components extracted from the plants, animals, minerals and other materials and the preparations thereof that have not been marketed within China, and newly discovered drug materials and the preparations thereof; (ii) chemical drug substances and the preparations thereof that have not been approved for marketing in China or abroad; (iii) new drugs for the treatment of diseases such as AIDS, malignant tumors and rare diseases, etc. with significant clinical advantage; and (iv) new drugs for the treatment of diseases, for which effective therapeutic methods are not available. Some applications for Class I New Chemical Drugs may fall within the above categories and therefore may be eligible for priority treatment by the CFDA in the review and approval process. Registration of Generic Drugs In accordance with the Measures for Drug Registration, application for generic drugs refers to the registration application for producing drugs that have been approved by the CFDA to be marketed in China and have existing national standards for production. Pharmaceutical manufacturers are required to register their generic drugs in the form of an application for recognition of compliance with national standards before commencing the manufacture of such products. To apply for approval to manufacture a drug with existing national standards, the applicant must fill in the form of application for drug registration and submit relevant information to the Provincial FDA, which will then review such information and conduct on-site inspection. Three consecutive production batches of drug samples will be collected from the applicant s production site for examination by the drug inspection bureau appointed by the CFDA. After the preliminary review, the provincial food and drug supervision and administration authority and the drug inspection bureau will then submit the relevant materials and inspection report to the CFDA, which will conduct a final assessment of the application to consider whether an approval should be granted. If approved, the applicant will be granted a drug approval number or an approval for drug clinical trials. After completing drug clinical trials, the applicant shall submit clinical trial data to the CFDA. The CFDA shall issue a drug approval number or a disapproval notice based on the technical review opinions. Supplemental Application Supplemental application refers to application for variation, addition, or cancelation of the items or contents approved in the original application for new pharmaceutical products, or generic drugs. Where changes or modifications are proposed to a registered medicine in respect of, among other things, its drug standard, curative effects or production technology, 98

106 REGULATIONS the pharmaceutical enterprise which is the applicant or holder of relevant registration certificate for such medicine is required to apply to the provincial food and drug supervision and administration authority or the CFDA. Re-registration An approval number for medicine issued by the CFDA is valid for five years and may be re-registered at least six months prior to its expiration date upon a re-examination by the relevant authority. The Administrative Measures on Healthcare Food ( ) effective on June 1, 1996, set out regulations with respect to the approval of healthcare food, the manufacturing of healthcare food, the labeling, direction of usage and advertising promotions of healthcare food, the supervision and management of healthcare food and relevant penalties. The Administrative Measures on the Registration and Filing of Healthcare Food ( ), which came into force on July 1, 2016, set out regulations with respect to application and approval, the application and approval of product registration, alterations of application and approval, application and approval for registration of technologically-transferred products, raw materials and semi-finished products, labeling and direction of usage, product trials and testing, re-registration and reviews as well as legal obligations. PRC LAWS AND REGULATIONS RELATING TO ANTI-CORRUPTION There is no uniform anti-corruption or anti-bribery law in the PRC. The relevant provisions on anti-corruption and anti-bribery are contained in different PRC laws, regulations, judicial interpretations and governmental disciplines. Pursuant to the Anti-Unfair Competition Law of the PRC ( ), which became effective on December 1, 1993, a business operator shall not offer money, property or other means of bribery for the purposes of selling or purchasing goods. On November 15, 1996, the State Administration for Industry and Commerce promulgated the Interim Provisions on the Prohibition of Commercial Bribery ( Interim Provisions ) ( ), which elaborate the meaning of commercial bribery as an act of offering money or property or other means of bribery for the purposes of selling or purchasing goods, among which, the property refers to cash or physical assets paid by a business operator to another entity or individual concealed under promotion, publicity, sponsorship, scientific research, labor, consultancy, or other such expenses, and other means refer to the means used to provide any types of benefits other than property, such as offering domestic or international tours. If a company commits commercial bribery, the competent authority will confiscate any illegal income (if any) and impose a fine of up to RMB200,000. In addition, the PRC Pharmaceutical Administrative Law ( ) stipulates pharmaceutical manufacturing companies that offer in private the rake-offs or other benefits in the course of purchasing and selling drugs shall be imposed a fine of up to RMB200,000 and the illegal gains, if any, shall be confiscated by the administrative department for industry and commerce. Under serious circumstances, the administrative 99

107 REGULATIONS department for industry and commerce shall revoke the business licenses and inform the department of drug supervision and administration to revoke the pharmaceutical production license. According to the PRC Criminal Law ( ), as amended, which became effective on October 1, 1997, the act of offering money or property to the staff of a company, enterprise or other entity in certain large amounts shall constitute an act of bribery to non-governmental officials. The entity that is found guilty of bribery to non-governmental officials will be liable to a penalty/fine, and its direct responsible person may be subject to imprisonment of up to ten years. Pharmaceutical production and operation enterprises found by a competent judiciary having committed an offence of bribery, penalized by an administrative authority or investigated and penalized by a disciplinary inspection commission shall be listed into the adverse records of commercial briberies by provincial health and family planning administrative department. Pursuant to the Provisions on the Establishment of Adverse Records of Commercial Briberies in the Medicine Purchase and Sales Industry ( ) enforced on March 1, 2014 by the NHFPC, if pharmaceutical production and operation enterprises be listed into the adverse records of commercial briberies for the first time, their products shall not be purchased by public medical institutions, and medical and health institutions receiving financial subsidies in local Province in two years from publication of the record, and public medical institution, and medical and health institutions receiving financial subsidies in other Provinces shall lower their rating in bidding or purchasing process. If pharmaceutical production and operation enterprises be listed into the adverse records of commercial briberies twice or more times in five years, their products shall not be purchased by public medical institutions, and medical and health institutions receiving financial subsidies nationwide in two years from publication of the record. PRC LAWS AND REGULATIONS RELATING TO THE PROTECTION OF PHARMACEUTICAL PRODUCTS Protection under Patent Law Patents in the PRC are mainly protected under the Patent Law of the PRC ( ), which was promulgated by the SCNPC on March 12, 1984 and amended on September 4, 1992, August 25, 2000 and December 27, 2008 respectively, and its implementation rules ( ), which was promulgated by the State Council on June 15, 2001 and amended on December 28, 2002 and January 9, 2010 respectively. The Patent Law of the PRC and its implementation rules provide for three types of patents, invention, utility model and design. Invention refers to any new technical solution relating to a product, a process or improvement thereof; utility model refers to any new technical solution relating to the shape, structure, or their combination of a product, which is suitable for practical use; and design refers to any new design of the shape, pattern, color or the combination of any two of them of a product, which creates an aesthetic feeling and is suitable for industrial application. The duration of a patent right for invention is 20 years, and the duration of a patent right for utility model or design is ten years, from the date of application. 100

108 REGULATIONS Any persons and entities using the patent in the absence of authorization from the patent owner or conducting other activities which infringe upon patent rights will be held liable for compensation to the patent owner, subject to fines charged by relevant administrative authorities and may include criminal liabilities. Protection under Trademark Law The PRC Trademark Law ( ) was promulgated in 1982 (later amended on August 30, 2013), and the PRC Trademark Implementing Regulations ( ) were promulgated on August 3, 2002 and amended on April 29, These laws provide the basic legal framework for the regulation of trademarks in the PRC. The trademark office is responsible for the registration and administration of trademarks throughout the country. Like patents, the PRC has adopted a priority principle with respect to trademarks. The period of validity of a registered trademark is ten years from the date of registration; renewal is allowed thereafter and the period of validity of each renewal of registration is ten years. The State Administration for Industry and Commerce has the power to investigate and handle any act of infringement of the exclusive right to use a registered trademark according to law; where the case is so serious as to constitute a crime, it shall be transferred to the judicial authority for handling. PRC LAWS AND REGULATIONS RELATING TO THE NATIONAL MEDICAL INSURANCE PROGRAM AND PRICE CONTROLS OF PHARMACEUTICAL PRODUCTS Reimbursement Under the National Medical Insurance Program The national medical insurance program was adopted pursuant to the Decision of the State Council on the Establishment of the Urban Employee Basic Medical Insurance Program ( ) issued by the State Council on December 14, 1998, under which all employers in urban cities are required to enroll their employees in the basic medical insurance program and the insurance premium is jointly contributed by the employers and employees. The State Council promulgated guiding opinions of the State Council about the Pilot Urban Resident Basic Medical Insurance ( ) on July 10, 2007, under which urban residents of the pilot district, rather than urban employees, may voluntarily join urban resident basic medical insurance. The pilot urban resident basic medical insurance has covered the whole nation since

109 REGULATIONS Participants of the national medical insurance program and their employers, if any, are required to contribute to the payment of insurance premium on a monthly basis. Program participants are eligible for full or partial reimbursement of the cost of medicines included in the Catalog of Drugs for Basic National Medical Insurance. The Interim Measures for the Administration of the Scope of Medical Insurance Coverage for Pharmaceutical Products for Urban Employee ( ), issued by seven departments on May 12, 1999, provides that a pharmaceutical product listed in the Medical Insurance Catalog must be clinically needed, safe, effective, reasonably priced, easy to use, available in sufficient quantity, and must meet one of the following requirements: it is set forth in the Chinese Pharmacopoeia; it meets the standards promulgated by the CFDA; and if imported, it is approved by the CFDA for import. Factors that affect the inclusion of a pharmaceutical product in the Medical Insurance Catalog include whether the product is consumed in large volumes and commonly prescribed for clinical use in the PRC and whether it is considered to be important in meeting the basic healthcare needs of the general public. The PRC Ministry of Human Resources and Social Security, together with other government authorities, has the power to determine the medicines included in the National Medical Insurance Catalog, which is divided into two parts, Part A and Part B. Provincial governments are required to include all Part A medicines listed on the national Medical Insurance Catalogue in their Provincial Medical Insurance Catalog, but have the discretion to adjust upwards or downwards by no more than 15% from the number of Part B medicines listed in the National Medical Insurance Catalog. As a result, the contents of Part B of the Provincial Medical Insurance Catalogs may differ from region to region in the PRC. Patients purchasing medicines included in Part A of the Medical Insurance Catalog are entitled to reimbursement of the entire amount of the purchase price. Patients purchasing medicines included in Part B of the Medical Insurance Catalog are required to pay a certain percentage of the purchase price and obtain reimbursement for the remainder of the purchase price. The percentage of reimbursement for Part B medicines differs from region to region in the PRC. Price Controls According to the Opinions on Management Reform of Drug Prices ( ), which were promulgated by the State Planning Commission (now known as NDRC) on July 20, 2000, pharmaceutical products included in the Medical Insurance Catalogs and those drugs the production or trading of which are deemed to constitute monopolies are subject to price controls by the PRC government in the form of government pricing, other pharmaceutical products implement the market-regulated prices. Manufacturers and distributors cannot set the actual retail price for any given price-controlled product above the price ceiling or deviate from the fixed price set by the 102

110 REGULATIONS government. The retail prices of pharmaceutical products that are subject to price controls are administered by NDRC and provincial and regional price control authorities. From time to time, the NDRC publishes and updates a list of pharmaceutical products that are subject to price controls. Fixed prices ceilings on pharmaceutical products are determined based on various factors, including profit margins that the relevant government authorities deem reasonable, the type and quality of the medicine, its production costs, the prices of substitute pharmaceutical products. The NDRC directly regulates the pricing of Part A prescription medicines on the Medical Insurance Catalogs, and delegates to provincial and regional price control authorities the authority to regulate the pricing of Part B medicines on the Medical Insurance Catalogs. Further, pursuant to the Notice Regarding Further Improvement of the Order of Market Price of Pharmaceutical Products and Medical Services ( ) jointly promulgated by the NDRC, the Legislative Affairs Office of the State Council, State Council Office for Rectifying, the Ministry of Health, the CFDA, the MOFCOM, the MOF and the Ministry of Labor and Social Security on May 19, 2006, the PRC government exercises price control over pharmaceutical products included in the Medical Insurance Catalogs and made an overall adjustment of their prices by reducing the retail price of certain overpriced pharmaceutical products and increased the retail price of certain underpriced pharmaceutical products in demand for clinical use but that have not been produced in large quantities by manufacturers due to their low retail price level. In particular, the retail price charged by hospitals at the county level or above may not exceed 115% of the procurement cost of the relevant pharmaceutical products or 125% for TCM decoction pieces. According to the Notice on Issuing Opinions on Promoting Drug Price Reform ( ), which was implemented on May 4, 2015, a new drug pricing framework will be established. Under the new drug pricing framework, all drug prices, except for narcotic drugs and type I psychotropic drugs prices, previously formulated by the PRC government will be canceled. With respect to medicines that are not subject to price controls, the pharmaceutical manufacturers can freely determine the retail prices. Sales of pharmaceutical products by pharmaceutical manufacturers in China to overseas markets are not subject to price controls. PRC LAWS AND REGULATIONS RELATING TO CENTRALIZED PROCUREMENT AND TENDER PROCESS The Guiding Opinions Concerning the Urban Medical and Health System Reform ( ), which were promulgated on February 16, 2000, requires that drug purchases made by medical institutions shall be standardized. Under the leadership of the Ministry of Health, in cooperation with the State Economic and Trade Commission and State Drug Administration, uniform drug purchasing shall be implemented on a trial basis according to the PRC Law of Bidding, with the issues of invitation, submission, opening, evaluation, selection of bids, and legal responsibilities of parties studied and investigated to determine standardized methods to regulate uniform drug purchasing. Medical institutions shall be the implementers of uniform drug purchasing, and a medical institution may contract with an agent for bidding matters or undertake the bidding itself, if it has the ability to prepare relevant documents and conduct bidding evaluation. 103

111 REGULATIONS According to the Notice on Issuing Certain Regulations on the Trial Implementation of Centralized Tender Procurement of Drugs by Medical Institutions ( ) which were promulgated on July 7, 2000 and the Notice on Further Improvement on the Implementation of Centralized Tender Procurement of Drugs by Medical Institutions ( ) promulgated on August 8, 2001, medical institutions established by county or higher level government are required to implement centralized tender procurement of drugs. The original Ministry of Health promulgated the Working Regulations of Medical Institutions for Procurement of Drugs by Centralized Tender and Price Negotiations (for Trial Implementation) ( ( ) ) (hereinafter referred to as Centralized Procurement Regulations ), and promulgated Sample Document for Medical Institutions for Procurement of Drugs by Centralized Tender and Price Negotiations (for Trial Implementation) (hereinafter referred to as Centralized Tender Sample Document ) ( ( ) ) on March 13, 2002, to implement the tender process requirements and ensure the requirements are followed uniformly throughout the country. The Centralized Procurement Regulations and the Centralized Tender Sample Document provide rules for the tender process and negotiations of the prices of drugs, operational procedures, a code of conduct and standards or measures of evaluating bids and negotiating prices. On January 17, 2009, the Ministry of Health, the CFDA and other four national departments jointly promulgated the Opinions on Further Regulating Centralized Procurement of Drugs by Medical Institutions ( ). According to the notice, non-profit medical institutions owned by the government at the county level or higher or owned by state-owned enterprises (including state-controlled enterprises) shall purchase pharmaceutical products by on-line centralized procurement. Each provincial government shall formulate its catalog of drugs subject to centralized procurement. Except for drugs in the National List of Essential Drugs (the procurement of which shall comply with the relevant rules on National List of Essential Drugs, certain pharmaceutical products which are under the national government s special control and traditional Chinese medicine, in principle, all drugs used by the medical institutions shall be covered by the catalog of drugs subject to centralized procurement. On July 7, 2010, the original Ministry of Health and five other ministries and commissions jointly promulgated the Working Regulations of Medical Institutions for Centralized Procurement of Drugs ( ) to further regulate the centralized procurement of drugs and clarify the code of conduct of the parties in centralized drug procurement. The centralized tender process takes the form of public tender operated and organized by provincial or municipal government agencies. The centralized tender process is in principle conducted once every year in the relevant Province or city in China. Intermediaries may be engaged to act as bidding agencies for the centralized tender process. Such intermediaries are not permitted to engage in the distribution of drugs and must have no conflict of interest with the organizing government agencies. The bids are assessed by a committee composed of pharmaceutical experts who will be randomly selected from a database of experts approved by the relevant government authorities. The committee members assess the bids based on a number of factors, including but not limited to, bid price, product quality, clinical effectiveness, qualifications and reputation of the manufacturer, and after-sale services. Only 104

112 REGULATIONS targeted pharmaceuticals that have won in the centralized tender process may be purchased by non-profitable medical institutions funded by government in the relevant region. The Guiding Opinions of the General Office of the State Council on Improving Centralized Drug Purchasing of Public Hospitals ( ), which were implemented on February 9, 2015, encourages public hospitals to directly settle the drug payments with corresponding drug manufacturing companies and encourages drug manufacturing companies to directly settle the distribution and delivery expenses with the distributors. Drug manufacturing companies are responsible to guarantee the quality and supply of the drugs. All drugs used in the hospital (excluding TCM decoction pieces) should be procured through a tendering process via the provincial-level platform for centralized procurement of drugs. Drug manufacturing companies or competent drug distributors that have successfully tendered will distribute drugs to designated hospitals directly. According to the Provisional Regulations on the Administration of Concentrated Chinese Medicine Granules, TCM Granules production is still at the scientific research stage, and TCM Granules products shall be used only by pilot clinical hospitals. Therefore, the procurement of our TCM Granules products can only be conducted by those pilot clinical hospitals for clinical use, which means our TCM Granules products are not within the scope of the centralized drug purchasing of public hospitals. Accordingly, the Guiding Opinions of the General Office of the State Council on Improving Centralized Drug Purchasing of Public Hospitals does not apply to the sale of our TCM Granules products. PRC LAWS AND REGULATIONS RELATING TO FOREIGN INVESTMENT The establishment procedures, approval procedures, registered capital requirement, foreign exchange restriction, accounting practices, taxation and labor matters with respect to wholly foreign-owned enterprises are governed by the Wholly Foreign-Owned Enterprise Law of the PRC ( ), which was promulgated by the SCNPC on April 12, 1986 amended on October 31, 2000, and September 3, 2016 and the Implementation Rules for the Wholly Foreign-Owned Enterprise Law ( ), which were promulgated by the State Council on April 12, 2001 and amended on February 19, According to the Catalog of Industries for Guiding Foreign Investment (2015 edition) ( 2015 ), which was effective from 10 April 2015, in thepharmaceutical manufacturing industry, the processing of traditional Chinese medicinal materials listed in the Regulations on Protection of Wild Medicinal Resources ( ) and the Catalog of China s Rare, Endangered and Protected Plants ( ); and the application of broiling techniques of TCM decoction pieces (such as steaming, stir-frying, moxibustion, calcination and production of the products) using proprietary TCM secret prescription fall within the prohibited categories for foreign investment. As we are engaged in the manufacture of TCM Granules products, and our business, including the manufacture of TCM Granules products, does not involve the processing of traditional Chinese medicinal materials listed in the Regulations on Protection of Wild 105

113 REGULATIONS Medicinal Resources and the Catalog of China s Rare, Endangered and Protected Plants, or the application of processing techniques of TCM decoction pieces (such as steaming, stir-frying, moxibustion and calcination) and the production of the Chinese patent medicine using the proprietary TCM secret prescription, our business does not fall within the prohibited category for foreign investment. PRC LAWS AND REGULATIONS RELATING TO RESTRICTIONS ON ADVERTISING OF PHARMACEUTICAL PRODUCTS Pursuant to the Provisions for Drug Advertisement Examination ( ), which were promulgated on March 13, 2007 and came into effect on May 1, 2007, an enterprise seeking to advertise its drugs must apply for an advertising approval code. The validity term of an advertisement approval number for pharmaceutical drugs is one year. The content of an approved advertisement may not be altered without prior approval. Where any alteration to the advertisement is needed, a new advertisement approval number shall be obtained. PRC LAWS AND REGULATIONS RELATING TO PACKAGING OF PHARMACEUTICAL PRODUCTS According to Measures for The Administration of Pharmaceutical Packaging ( ), which became effective on September 1, 1988, pharmaceutical packaging must comply with the provisions of the national standard and professional standard. If there are no standards above, the enterprise can formulate its own standard after obtaining the approval of the provincial level food and drug administration or bureau of standards. The enterprise shall reapply for the relevant authorities if it needs to change the packaging standard. Drugs without packing must not be sold in PRC (except for drugs needed by the army). PRC LAWS AND REGULATIONS RELATING TO LABOR PROTECTION Under the Labor Law of the PRC ( ), which was promulgated by the SCNPC on July 5, 1994 and became effective on January 1, 1995 and subsequently amended on August 27, 2009, the PRC Employment Contract Law ( ), which was promulgated by the SCNPC on June 29, 2007 and became effective on January 1, 2008 and subsequently amended on December 28, 2012 and became effective on July 1, 2013 and the Implementing Regulations of the Employment Contract Law ( ), which were promulgated by the State Council and became effective on September 18, 2008, employers must establish a comprehensive management system to protect the rights of their employees, including setting up a system governing occupational health and safety to provide employees with occupational training to prevent occupational injury, and employers are required, when employing labor, to truthfully inform prospective employees of the job description, working conditions, location, occupational hazards and status of safe production as well as remuneration and other conditions as requested by the PRC Employment Contract Law. Pursuant to the Law of Manufacturing Safety of the People s Republic of China ( ), which became effective on November 1, 2002 and was amended on August 31, 2014 (with the amendments becoming effective on December 1, 2014), 106

114 REGULATIONS manufacturers must establish a comprehensive management system to ensure manufacturing safety in accordance with applicable laws and regulations. Manufacturers not meeting relevant legal requirements are not permitted to commence their manufacturing activities. Pursuant to the Administrative Measures Governing the Production Quality of Pharmaceutical Products ( ), which became effective on March 1, 2011, manufacturers of pharmaceutical products are required to establish production safety and labor protection measures in connection with the operation of their manufacturing equipment and manufacturing process. Pursuant to applicable PRC laws, rules and regulations, including the Social Insurance Law of the People s Republic of China ( ), which was promulgated by the SCNPC on October 28, 2010 and became effective on July 1, 2011, the Interim Regulations on the Collection and Payment of Social Security Funds ( ) which was promulgated by the State Council and became effective on January 22, 1999, Interim Measures concerning the Maternity Insurance ( ) which was put into trial use by original Ministry of Labor since January 1, 1995 and the Regulations on Work-related Injury Insurance ( ) which was promulgated by the State Council on April 27, 2003 and became effective on January 1, 2004 and subsequently amended on December 20, 2010, employers are required to contribute, on behalf of their employees, to a number of social security funds, including funds for basic pension insurance, unemployment insurance, basic medical insurance, work-related injury insurance, and maternity insurance. An employer who fails to register with the social insurance administrative authority may be ordered to rectify within a specific time period. If it fails to do so, the social insurance administrative authority shall impose a fine on the employer equivalent to one to three times the amount of the overdue social insurance contributions, and those management personnel and personnel who are directly responsible for shall be imposed with a fine of between RMB500 to RMB3,000. If the employer fails to make social insurance contributions timely and in full amount, the social insurance collecting authority will order the employer to make up outstanding contributions within the prescribed time period and impose a late payment fee at the rate of 0.05% per day from the date on which the contribution becomes due. If such employer fails to make the overdue contributions within such time limit, the relevant administrative department may impose a fine equivalent to one to three times the overdue amount. According to the Regulation on Management of Housing Provident Fund ( ), which was subsequently promulgated by the State Council on April 3, 1999, became effective on the same day and was amended on March 24, 2002, enterprises must register with the competent managing center for housing provident funds and, upon the examination by such managing center of housing provident fund, complete procedures for opening an account at the relevant bank for the deposit of employees housing provident funds. Employers are required to contribute, on behalf of their employees, to housing provident funds. The payment is required to be made to local administrative authorities. Any employer who fails to contribute may be fined and ordered to make good the deficit within a stipulated time limit. 107

115 REGULATIONS PRC LAWS AND REGULATIONS RELATING TO ENVIRONMENTAL PROTECTION Pursuant to the Environmental Protection Law of the People s Republic of China ( ), which was promulgated and became effective on December 26, 1989 and subsequently amended on April 24, 2014, the environmental protection department of the State Council is in charge of promulgating national standards for environmental protection. The provincial governments and the local governments in autonomous regions and municipalities may also promulgate local standards for environmental protection on matters not specified under national standards and the local governments must report such standards to the competent department of environmental protection administration under the State Council for record. Pursuant to the Law on Environmental Impact Studies of the People s Republic of China ( ), which was promulgated on October 28, 2002, amended on July 2, 2016 and became effective on September 1, 2016, manufacturers must prepare environmental impact study report setting forth the impact the proposed construction project may have on the environment and the measures to prevent or mitigate the impact for approval by the government authority prior to commencement of construction of the relevant project. Pursuant to Air Pollution Prevention Law of the People s Republic of China ( ), which was promulgated by the Standing Committee of NPC, on September 5, 1987, amended on August 29, 2015 and became effective on January 1, 2016, the environmental protection authorities above the county level are in charge of implementing the universal supervision and management over preventing and governing air pollution. The environmental protection department under the State Council formulates national standards and the local provincial governments formulate local standards on matters not specified under national standards. Manufacturers discharging polluted air must comply with applicable national and local standards. If a manufacturer emits polluted air exceeding national or local standards, it must correct its action during a certain period of time and the manufacturer may be subject to penalties. Pursuant to Water Pollution Prevention Law of the People s Republic of China ( ), which was promulgated by the Standing Committee of NPC on November 1, 1984 and amended on February 28, 2008, the environment protection department under the State Council is in charge of promulgating laws and regulations governing national standards relating to discharge of waste water. Provincial governments may promulgate local waste discharge standards for matters not specified in national standards. Manufacturers must discharge of waste water in accordance with national and local standards. Manufacturers discharging waste water must pay water treatment fees. If the waste water discharged exceeds national or local standards, the manufacturer is required to pay higher waste water treatment fees. The environmental protection department has the right to order manufacturers which severely polluted water to correct their actions by reducing the amount of discharge during a stipulated period of time, suspend their operation or shutdown. Pursuant to the Laws of Prevention and Control of Environmental Noise Pollution of the People s Republic of China ( ), which were promulgated on October 29, 1996 and became effective on March 1, 1997, the environment protection department under the State Council is in charge of promulgating national 108

116 REGULATIONS standards for noise control. Local governments at the county level or above are in charge of promulgating local standards with respect to noise control. Manufacturers releasing exhaust fume exceeding the national or local standards may be required to correct their actions and be subject to penalties. According to the List of Systematic Management on Construction Projects Impact Assessment (the List ) ( ), which was promulgated by the Ministry of Environmental Protection and became effective on October 1, 2008 and replaced by the List updated in 2015, the State has implemented the classification management system based on the project s impact on the environment. Construction enterprises shall submit the environmental impact assessment report, the environmental impact report form or fill in the environmental impact registration form, in accordance with the classification of the List. PRC LAWS AND REGULATIONS RELATING TO FOREIGN EXCHANGE The principal regulation governing foreign currency exchange in China is the Foreign Exchange Administration Rules of the PRC ( ) (the Foreign Exchange Administration Rules ). Under these rules, which are last amended and promulgated on August 5, 2008 and implemented on the same date, RMB is generally freely convertible for payments of current account items, such as trade and service-related foreign exchange transactions and dividend payments, but not freely convertible for capital account items, such as capital transfer, direct investment, investment in securities, derivative products or loans unless the prior approval by the competent authorities for the administration of foreign exchange is obtained. Under the Foreign Exchange Administration Rules, foreign-invested enterprises in the PRC may purchase foreign exchange without the approval of SAFE for paying dividends by providing certain evidencing documents (board resolutions, tax certificates, etc.), or for trade and services-related foreign exchange transactions by providing commercial documents evidencing such transactions. They are also allowed to retain foreign currency to satisfy foreign exchange liabilities. Pursuant to Notice of SAFE on Relevant Issues Relating to Foreign Exchange Control on Offshore Investment, Financing and Round-trip Investments by Domestic Residents Through Special Purpose Vehicles (the Circular 37 ) ( ), which was promulgated on July 4, 2014 and implemented on the same date, domestic residents establishing or taking control of a special purpose company abroad which makes round-trip investments in the PRC are required to effect foreign exchange registration with the local foreign exchange bureau. Pursuant to Circular of the State Administration of Foreign Exchange on Further Simplifying and Improving the Direct Investment-related Foreign Exchange Administration Policies ( ) (the Circular 13 ), which was promulgated on February 13, 2015 and implemented June 1, 2015, the initial foreign exchange registration for establishing or taking control of a special purpose company by domestic residents can be conducted with a qualified local bank, instead of the local foreign exchange bureau. 109

117 REGULATIONS On 30 March 2015, the SAFE promulgated the Circular on Reforming the Management Approach regarding the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises ( ) (the Circular 19 ), which became effective on June 1, According to Circular 19, the foreign exchange capital of foreign-invested enterprises ( FIE ) shall be subject to the Discretional Foreign Exchange Settlement ( Discretional Foreign Exchange Settlement ). The Discretional Foreign Exchange Settlement refers to the foreign exchange capital in the capital account of an FIE for which the rights and interests of monetary contribution has been confirmed by the local foreign exchange bureau (or the book-entry registration of monetary contribution by the banks) can be settled at the banks based on the actual operational needs of the FIE. Furthermore, Circular 19 stipulates that the use of capital by foreign-invested enterprises shall follow the principles of authenticity and self-use within the business scope of enterprises. REGULATIONS ON TAX IN THE PRC Income Tax According to the Enterprise Income Tax Law of the PRC ( ) (the EIT Law ), which was promulgated on March 16, 2007, amended on February 24, 2017 and became effective on February 24, 2017, and the Implementing Rules to the EIT Law ( ) (the Implementation Rules ), which was promulgated on December 6, 2007 and with effect from January 1, 2008 by the State Council, enterprises are divided into resident enterprises and non-resident enterprises. A resident enterprise shall pay enterprise income tax on its income deriving from both inside and outside China at the rate of enterprise income tax of 25%. A non-resident enterprise that has an establishment or place of business in the PRC shall pay enterprise income tax on its income deriving from inside China and obtained by such establishment or place of business, and on its income which derives from outside China but has actual relationship with such establishment or place of business, at the rate of enterprise income tax of 25%. A non-resident enterprise that does not have an establishment or place of business in China, or has an establishment or place of business in China but the income has no actual relationship with such establishment or place of business, shall pay enterprise income tax on its income deriving from inside China at the reduced rate of enterprise income tax of 10%. According to Article 27 of the EIT Law and Article 86 of the Implementation Rules, the cultivation of Chinese medicinal herbs and the primary process of agricultural product can be exempted from enterprise income tax. Income Tax In Relation To Dividend Distribution Before the promulgation of the EIT Law, the principal regulations governing the distribution of dividends paid by Wholly Foreign-owned Enterprise include the Wholly Foreign-owned Enterprise Law of the PRC ( ), the Income Tax Law of the PRC for Foreign-Invested Enterprises and Foreign Enterprises ( ) and their respective implementation regulations. Under these regulations, wholly foreign-owned enterprises in China may only pay dividends from accumulated after-tax profit, if any, determined in accordance with PRC accounting standards and regulations. Dividends paid to its foreign investors are exempt from withholding tax. 110

118 REGULATIONS However, this exemption provision has been revoked by the EIT Law which prescribes a standard withholding tax rate of 20% on dividends and other China-sourced passive income of non-resident enterprises. The EIT Law and its implementation rules reduced the rate from 20% to 10%, effective from January 1, The PRC and the government of Hong Kong signed the Arrangement between the Mainland of the PRC and Hong Kong for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income ( ) (the Arrangement ) on August 21, 2006 and implemented on January 1, According to the Arrangement, the withholding tax rate of 5% applies to dividends paid by a PRC company to a Hong Kong resident, provided that such Hong Kong resident directly holds at least 25% of the equity interests of the PRC company. Furthermore, pursuant to the Circular of the State Administration of Taxation on Relevant Issues relating to the Implementation of Dividend Clauses in Tax Agreements ( ), which was promulgated and became effective on February 20, 2009, all of the following conditions should be satisfied simultaneously where the tax payer needs to be entitled to such tax agreement treatment as being taxed at a tax rate specified in the tax agreement for the dividends paid to it by a PRC resident enterprise: (i) the tax resident of the other side who obtains dividends shall, in accordance with the provisions of the tax agreement, be limited to company; (ii) the proportions of the total amount of the owner s equities and the voting shares of the PRC resident enterprise directly owned by the tax resident of the other side complies with the prescribed proportions; and (iii) the proportion of equities owned by the tax resident of the other side shall, at any time within the successive 12 months before obtaining dividends, comply with the proportion specified in the tax agreement. In addition, the Announcement of the SAT on Promulgating the Administrative Measures for Tax Convention Treatment for Non-resident Taxpayers ( ) on August 27, 2015, any non-resident taxpayer meeting conditions for enjoying the convention treatment may be entitled to the convention treatment itself/himself when filing a tax return or making a withholding declaration through a withholding agent, subject to the subsequent administration by the tax authorities. Value-added Tax According to the Temporary Regulations on Value-added Tax ( ), which was promulgated by the State Council on December 13,1993, came into effect on January 1, 1994, and was subsequently amended on November 10, 2008 and February 6, 2016, and the Detailed Implementing Rules of the Temporary Regulations on Value-added Tax ( ), which came into effect on December 25, 1993, and was last amended on October 28, 2011, all taxpayers selling goods, providing processing, repairing or replacement services or importing goods within the PRC shall pay value-added tax. The tax rate of 17% shall be levied on general taxpayers selling or importing various goods; the tax rate of 17% shall be levied on the taxpayers providing processing, repairing or replacement service; the applicable rate for the export of goods by taxpayers shall be nil, unless otherwise stipulated. 111

119 REGULATIONS PRC LAWS AND REGULATIONS RELATING TO PRODUCT LIABILITY AND PROTECTION OF CONSUMERS Pursuant to The General Principles of the Civil Law of the PRC ( ), which became effective from January 1, 1987 and was amended on August 27, 2009, manufacturers and sellers of defective products causing property damage or injury shall incur civil liabilities. The Product Quality Law of the PRC ( ) was promulgated on February 22, 1993 and subsequently amended on July 8, 2000 and August 27, 2009 to strengthen quality control of products and protect consumers rights. Under this law, manufacturers and operators who produce and sell defective products may be subject to the confiscation of earnings from such sales, the revocation of business licenses and imposition of fines, and in severe circumstances, may be subject to criminal liability. The Law of the PRC on the Protection of the Rights and Interests of Consumers ( ) was promulgated on October 31, 1993 and amended on October 25, 2013 to protect consumers rights when they purchase or use goods and accept services. All business operators must comply with this law when they manufacture or sell goods and/or provide services to customers. Under the amendment on October 25, 2013, all business operators shall pay high attention to protect the customers privacy which they obtain information during the business operation. In extreme situations, pharmaceutical product manufacturers and operators may be subject to criminal liability if their goods or services lead to the death or injuries of customers or other sufferers. Under the Tort Law of the PRC ( ), which was promulgated by the SCNPC on December 26, 2009 and was implemented from July 1, 2010, if damages to other persons are caused by defective products that are resulted from the fault of a third party such as the parties providing transportation or warehousing, the producers and the sellers of the products have the right to recover their respective losses from such third parties. If defective products are identified after they have been put into circulation, the producers or the sellers shall take remedial measures such as issuance of warning, recall of products, etc. in a timely manner. The producers or the sellers shall be liable under tort if they fail to take remedial measures in a timely manner or have not make efforts to take remedial measures, thus causing damages. If the products are produced and sold with known defects, causing deaths or severe damage to the health of others, the infringed party shall have the right to claim respective punitive damages in addition to compensatory damages. 112

120 OUR HISTORY, REORGANIZATION AND CORPORATE STRUCTURE OVERVIEW Our history can be traced back to December 1999 when Sichuan Green, our predecessor, was established by Mr. Zhou, among others, in the PRC. The then shareholders of Sichuan Green, which included a company holding 75% interest therein (in which Mr. Zhou then held 94.4% interest), made capital contribution by their own financial resources. In 2002, Sichuan Green became one of the then only five group companies authorized by the CFDA to manufacture and sell TCM Granules. From December 1999 to January 2009, Sichuan Green was primarily engaged in manufacturing, sale and research and development of granules (TCM Granules), capsules, dripping pills and Chinese and western patent medicine. With a view to focusing on the research and development, manufacturing and sale of TCM Granules, our main operating subsidiary, Neo-green Pharmaceutical, was established as a joint stock limited liability company in the PRC on January 16, 2009 by Sichuan Green, among others. Our Company was incorporated as a limited liability company in the Cayman Islands on June 22, For the background and relevant industry experience of Mr. Zhou, please refer to the section headed Directors and Senior Management in this document. OUR MILESTONES The followings set forth the key milestones of our development process: Year Milestone 1999 Sichuan Green, our predecessor, was established in Chengdu, Sichuan Province Sichuan Green became one of the then only five group companies authorized by the CFDA to manufacture and sell TCM Granules and the only one pilot company to manufacture TCM Granules headquartered in Western China. Sichuan Green entered into a cooperation agreement with Sichuan University, which laid down the foundation for the development of our first-generation Smart Pharmacy Systems Our Smart Pharmacy Systems passed the technical evaluation jointly held by Science & Technology Department of Sichuan Province ( ), Sichuan Development and Reform Commission ( ), Administration of Traditional Chinese Medicine of Sichuan ( ) and Chengdu Municipal Development and Reform Commission ( ) Neo-green Pharmaceutical was established in Chengdu, Sichuan Province and became, after the approval of the transfer of the qualification from Sichuan Green by the CFDA, one of the only five group companies authorized to manufacture and sell TCM Granules and the only one pilot company to manufacture TCM Granules headquartered in Western China. 113

121 OUR HISTORY, REORGANIZATION AND CORPORATE STRUCTURE Year Milestone 2010 Our third-generation Smart Pharmacy Systems listed as a scientific achievement promotion project by the Traditional Chinese Medicine Science and Technology Development and Exchange Center of China ( ) We were awarded Hi-Tech Enterprise ( ) jointly by Science & Technology Department of Sichuan Province, Sichuan Provincial Finance Bureau ( ), Sichuan Provincial Office of State Administration of Taxation ( ) and Sichuan Local Taxation Bureau ( ) We began the construction of our current manufacturing facilities We launched our fully automated Smart Pharmacy Systems. We were awarded TCM Granules Engineering Technology Research Center of Sichuan Province ( ) by Science & Technology Department of Sichuan Province. We were accredited as Key State Enterprise of Agricultural Industrialization ( ) by the Ministry of Agriculture of the People s Republic of China ( ), National Development and Reform Commission ( ), Ministry of Finance of the People s Republic of China ( ), Ministry of Commerce of the People s Republic of China ( ), the People s Bank of China ( ), State Administration of Taxation of the PRC ( ), CSRC and All China Federation of Supply and Marketing Cooperatives ( ) We were accredited as Sichuan Provincial Enterprise Technology Center ( ) jointly by Sichuan Provincial Economic and Information Commission ( ), Science & Technology Department of Sichuan Province, Sichuan Provincial Finance Bureau, Sichuan Local Taxation Bureau and Chengdu Customs of the People s Republic of China ( ) We obtained the Sichuan Provincial Science and Technology Improvement Award ( ) issued by Sichuan Provincial People s Government ( ) We were approved by Sichuan Provincial Human Resource and Social Insurance Department Office ( ) to establish the postdoctoral innovation practice base ( ). We were approved by the State Administration of Traditional Chinese Medicine ( ) to establish a key research center in relation to TCM. 114

122 OUR HISTORY, REORGANIZATION AND CORPORATE STRUCTURE OUR CORPORATE HISTORY Our Subsidiaries in the PRC Neo-green Pharmaceutical Neo-green Pharmaceutical is the major operating subsidiary of our Group and is principally engaged in the manufacture, sale and research and development of TCM Granules and is one of the only five group companies in the PRC authorized by the CFDA to manufacture and sell TCM Granules and the only such company headquartered in Western China. Our predecessor, Sichuan Green had engaged in a number of businesses, including the businesses of research and development, manufacturing and sale of TCM Granules (the TCM Granule Business ). Prior to the establishment of Neo-green Pharmaceutical, having considered the expected positive prospect of the TCM Granule Business, the shareholders of Sichuan Green determined to segregate the TCM Granule Business from the other businesses of Sichuan Green in order to provide the TCM Granule Business with dedicated resources, including management and financial resources, to realize its full potential. It was against this background that on January 16, 2009, Neo-green Pharmaceutical was established in the PRC with a registered capital of RMB120 million as the company dedicated to the businesses of research and development, manufacturing and sale of TCM Granule. Upon its establishment, Neo-green Pharmaceutical was owned as to % by Sichuan Green, % by Mr. Zhou, 8.333% by Mr. Zhou Xiang, 8.333% by Ms. Zhou Qiaomin, 4.167% by Beijing Zhongrui, an Independent Third Party and 2.042% by certain minority shareholders (1), respectively. At the time of the establishment of Neo-green Pharmaceutical, Sichuan Green contributed an aggregate registered capital of RMB70.00 million to Neo-green Pharmaceutical, among which RMB20.15 million was contributed by assets, RMB4.95 million by land use rights and the remaining RMB44.90 million by cash. Through such capital contribution, Sichuan Green transferred most of its assets at the time of the capital contribution to Neo-green Pharmaceutical. In March 2009, the CFDA approved the transfer of the qualification from Sichuan Green to Neo-green Pharmaceutical, pursuant to which Neo-green Pharmaceutical became one of the only five group companies authorized to manufacture and sell TCM Granules and the only such company headquartered in Western China instead of Sichuan Green. During July 2009 to December 2011, Lu Peikang, Liu Yong, Zhao Jian and Qiu Kairong entered into several equity transfer agreements with Mr. Zhou Xiang and Ms. Zhou Qiaomin, pursuant to which, they agreed to transfer an aggregate of 1.792% equity interest held by them in Neo-green Pharmaceutical to Mr. Zhou Xiang and Ms. Zhou Qiaomin. Upon the completion of such equity transfers on December 11, 2011, Neo-green Pharmaceutical was owned as to % by Sichuan Green, % by Mr. Zhou, 9.125% by Mr. Zhou Xiang, 9.333% by Ms. Zhou Qiaomin, 4.167% by Beijing Zhongrui, and 0.250% by certain minority shareholders (2), respectively. Notes: (1) Including (a) Lai Mei, the vice general manger of our Group and (b) Qiu Kairong, Wang Ling, Liu Yong, Zhao Jian and Lu Peikang, each a former employee of our Group. (2) Including (a) Lai Mei, the vice general manager of our Group and (b) Qiu Kairong and Wang Ling, each a former employee of our Group. 115

123 OUR HISTORY, REORGANIZATION AND CORPORATE STRUCTURE On June 18, 2012, Beijing Zhongrui, Qiu Kairong, Lai Mei and Wang Ling entered into an equity transfer agreement with Sichuan Green, pursuant to which they agreed to transfer an aggregate of 0.508% equity interest held by them in Neo-green Pharmaceutical to Sichuan Green. On June 12, 2012, the registered capital of Neo-green Pharmaceutical was increased from RMB120 million to RMB135.6 million by converting the undeclared profits of RMB15.6 million into registered capital. On November 27, 2012, the registered capital of Neo-green Pharmaceutical was further increased to RMB136,642,900 by certain new minority shareholders (including Li Gang, Zhao Jun, Zhang Liling and Ma Lirong) subscribing for and contributing a total of RMB1,042,900 as registered capital of Neo-green Pharmaceutical. Upon the completion of such equity transfers and registered capital increases, Neo-green Pharmaceutical was owned as to % by Sichuan Green, % by Mr. Zhou, 9.055% by Mr. Zhou Xiang, 9.262% by Ms. Zhou Qiaomin, 3.659% by Beijing Zhongrui, 0.984% by certain minority shareholders (1), respectively. From November 2012 to July 2013, Sichuan Green entered into several equity transfer agreements with some new minority shareholders (including Gou Yuquan, Zhang Zizhao, Peng Yong, Huang Xiaoyan and Zhao Liang), pursuant to which Sichuan Green agreed to transfer a total of 7.464% equity interest held by it in Neo-green Pharmaceutical to such new minority shareholders. Upon the completion of such equity transfers, Neo-green Pharmaceutical was owned as to % by Sichuan Green, % by Mr. Zhou, 9.055% by Mr. Zhou Xiang, 9.262% by Ms. Zhou Qiaomin, 3.659% by Beijing Zhongrui and 8.448% by certain minority shareholders (2), respectively. In July 2015, the registered capital of Neo-green Pharmaceutical was increased from RMB136,642,900 to RMB706,642,900 by converting and issuing the accrued dividends of RMB570 million to Sichuan Green as registered capital. Upon the completion of such registered capital increase, Neo-green Pharmaceutical was owned as to % by Sichuan Green, 3.606% by Mr. Zhou, 1.751% by Mr. Zhou Xiang, 1.791% by Ms. Zhou Qiaomin, 0.708% by Beijing Zhongrui and 1.633% by certain minority shareholders (2), respectively. In August 2016, the registered capital of Neo-green Pharmaceutical was increased from RMB706,642,900 to RMB758,075,200 by certain minority shareholders (including Gou Yuquan, Peng Yong, Zhao Liang, Huang Xiaoyan, Xu Liming, Hu Changjiang, Gu Jian, Luo Yurui, Tang Shuqing, Chen Chunchao, Luo Xianzhi, Chang Zhensong and Li Gang) subscribing for and contributing a total of RMB9,950,000 as registered capital and by converting the capital reserves of RMB41,482,300 into registered capital. At the same time, Ma Lirong transferred all his equity interest in Neo-green Pharmaceutical to Gu Jian. As a result and immediately prior to the Corporate Reorganization, Neo-green Pharmaceutical was owned as to % by Sichuan Green, 3.556% by Mr. Zhou, 1.727% by Mr. Zhou Xiang, 1.766% by Ms. Zhou Qiaomin and 2.273% by other shareholders (including certain Directors, senior management and employees of our Group and some Independent Third Parties). For details, please refer to the paragraph headed Corporate Reorganization in this section. Notes: (1) Including (a) Lai Mei, the vice general manger of our Group, (b) Qiu Kairong, Wang Ling, Liu Yong, and Zhao Jian, each a former employee of our Group, and (c) Ma Lirong, Li Gang, Zhang Liling and Zhaojun, each an Independent Third Party. (2) Including (a) Lai Mei, the vice general manager of our Group and (b) Qiu Kairong and Wang Ling, each a former employee of our Group, and (c) Ma Lirong, Li Gang, Zhang Liling, Zhaojun, Gou Yuquan, Zhang Zizhao, Peng Yong, Huang Xiaoyan and Zhao Liang, each an Independent Third Party. 116

124 OUR HISTORY, REORGANIZATION AND CORPORATE STRUCTURE On July 28, 2016, Neo-green Pharmaceutical was converted from a joint stock limited liability company into a limited liability company to facilitate the Corporate Reorganization. For details, please refer to the paragraph headed Corporate Reorganization in this section. On September 5, 2016, Sichuan Green and Golden Cache (Hong Kong) entered into an equity transfer agreement, pursuant to which Sichuan Green agreed to transfer 1% equity interest in Neo-green Pharmaceutical held by Sichuan Green to Golden Cache (Hong Kong) for a consideration of RMB7.65 million, which was determined by reference to the net asset value of Neo-green Pharmaceutical as of December 31, Such equity interest transfer was completed on December 27, For details, please refer to the paragraph headed Pre-[REDACTED] Investments in this section. As at the completion of the equity interest transfer, Golden Cache (Hong Kong) was ultimately owned by Ms. Li Yixian who obtained the permanent residency of the Republic of the Gambia on April 28, 2016 and cancelled her household registration on August 8, 2016, Neo-green Pharmaceutical became a Sino-foreign equity joint venture. On December 30, 2016, the then shareholders of Neo-green Pharmaceutical and Ever Sound (Hong Kong) entered into an equity transfer agreement, pursuant to which, the then shareholders of Neo-green Pharmaceutical (except for Golden Cache (Hong Kong)) agreed to transfer an aggregate of 99% equity interest in Neo-green Pharmaceutical held by them to Ever Sound (Hong Kong) for a total consideration of RMB million, which was determined by reference to the net asset value of Neo-green Pharmaceutical as of December 31, Such equity interest transfer was completed on February 23, 2017, after which Neo-green Pharmaceutical became owned as to 99% by Ever Sound (Hong Kong) and 1% by Golden Cache (Hong Kong). Neo-green Modern TCM On March 24, 2009, Neo-green Modern TCM was established in the PRC with a registered capital of RMB1.00 million. At the time of its establishment, Neo-green Modern TCM was wholly owned by Neo-green Pharmaceutical. As Neo-green Modern TCM has not commenced its business since its establishment and it is expected that no further business will be carried out by Neo-green Modern TCM in the future, for the purpose of streamlining our Group structure, our Group has disposed of Neo-green Modern TCM as part of the Corporate Reorganization. For details, please refer to the paragraph headed Corporate Reorganization 2. Disposal of Neo-green TCM by Neo-green Pharmaceutical to Sizhuan Green in this section. 117

125 OUR HISTORY, REORGANIZATION AND CORPORATE STRUCTURE Sichuan Shunli On December 3, 2014, Sichuan Shunli was established in the PRC with a registered capital of RMB10.00 million. Upon its establishment, Sichuan Shunli was owned as to 95.2% by Sichuan Green and 4.8% by certain former employees of our Group. On June 3, 2015, Sichuan Green and Neo-green Pharmaceutical entered into an equity interest transfer agreement, pursuant to which Sichuan Green agreed to transfer its 95.2% equity interest in Sichuan Shunli to Neo-green Pharmaceutical with a total consideration of RMB9.52 million with reference to the then registered capital of Sichuan Shunli. Upon completion of such transfer on June 26, 2015, Sichuan Shunli became a non-wholly-owned subsidiary of Neo-green Pharmaceutical. As Sichuan Shunli has not commenced any business since its establishment and it is expected that no further business will be carried out by Sichuan Shunli in the future, our Group has dissolved Sichuan Shunli as part of the Corporate Reorganization. For details, please refer to the paragraph headed " Corporate Reorganization 6. Dissolution of Sichuan Shunli in this section. PRC LEGAL AND COMPLIANCE Our PRC Legal Advisors confirmed that the establishment of Neo-green Pharmaceutical and all subsequent changes have complied with the relevant laws and regulations in all material aspects, and have obtained all required approvals and confirmation from the relevant competent authorities. APPLICATION FOR H-SHARE LISTING In August 2015, Neo-green Pharmaceutical filed with the CSRC an application (the H-share Application ) for the listing of its H shares on the Main Board of the Stock Exchange (the H-share Listing ). The CSRC formally accepted the H-share Application for review on August 21, In September 2015, as our Group observed unfavourable developments in Hong Kong capital market, Neo-green Pharmaceutical made a strategic decision to concentrate on its business development and abort the H-share Application. It subsequently submitted an application to the CSRC to withdraw the H-share Application on October 28, 2015 on the basis that the overall market conditions in both the PRC and Hong Kong capital markets were not favourable to our H-share Listing. Accordingly, the then management of Neo-green Pharmaceutical considered that the pursuit of the H-share Listing was not in the best interest of the shareholders of Neo-green Pharmaceutical. At all material times, the H-share Application was valid and had not been rejected or returned by the CSRC. Since the submission of the H-share Application to the CSRC on August 21, 2015, we had never received any comments from the CSRC in relation to the H-share Application. We had not submitted any application to either the Stock Exchange or the SFC for the H-share Listing. 118

126 OUR HISTORY, REORGANIZATION AND CORPORATE STRUCTURE CORPORATE REORGANIZATION The shareholding and corporate structure of Corporate Reorganization were as follows: our Group immediately prior to the Mr. Zhou Mr. Zhou Xiang Ms. Zhou Qiaomin Other shareholders of Neo-green Pharmaceutical (1) % % % Sichuan Green 3.556% % 1.727% 1.766% 2.273% Neo-green Pharmaceutical Other shareholders of Sichuan Shunli (2) 100% 95.20% 4.8% Neo-green Modern TCM Sichuan Shunli Notes: (1) Other shareholders of Neo-green Pharmaceutical comprised 19 shareholders (the Minority Shareholders of Neo-green Pharmaceutical ) each owning less than 1% in the registered capital of Neo-green Pharmaceutical, including (a) certain Director, senior management and employees of our Group, namely, Xu Liming (0.028%), an executive Director and the general manager of our Group, Chen Chunchao (0.007%), an executive Director and the director of manufacturing facilities of our Group, Gu Jian (0.028%), an executive Director and the vice general manager of our Group, Lai Mei (0.028%), the vice general manager of our Group, Hu Changjiang (0.028%), the director of research and development of our Group and Tang Shuqing (0.014%), the supervisor of the audit department of our Group; (b) certain former employees of our Group, namely, Wang Ling (0.007%) and Qiu Kairong (0.007%); and (c) certain Independent Third Parties, namely, Beijing Zhongrui (0.698%), Gou Yuquan (0.879%), Huang Xiaoyan (0.279%), Li Gang (0.070%), Zhang Liling (0.070%), and Peng Yong (0.056%), Zhao Liang (0.028%), Zhao Jun (0.020%), Luo Yurui (0.014%), Luo Xianzhi (0.007%) and Chang Zhengsong (0.007%). After the Corporate Reorganization, each of the Minority Shareholders of Neo-green Pharmaceutical (except for Beijing Zhongrui, which owned 0.698% equity interest in Neo-green Pharmaceutical and decided not to become a Shareholder of our Company due to its own commercial consideration) indirectly holds the respective Shares of our Company by virtue of the investment holding companies incorporated by them. (2) Other shareholders of Sichuan Shunli comprised six shareholders each owning 1.5% or less of the registered capital of Sichuan Shunli, including Luo Yurui, Zeng Yougang, Tao Xiao, Xie Jia, Jiao Yi and Zhou Fangqiang, each a former employee of our Group. (3) On September 5, 2016, Sichuan Green and Golden Cache (Hong Kong) entered into an equity transfer agreement, pursuant to which Sichuan Green transferred 1% equity interest in Neo-green Pharmaceutical held by Sichuan Green to Golden Cache (Hong Kong) for a consideration of RMB7.65 million, with reference to the net asset value of Neo-green Pharmaceutical as of December 31, Such equity interest transfer was completed on December 27, Golden Cache (Hong Kong) was wholly owned by Golden Pharma; Golden Pharma was wholly owned by Golden Cache; and Golden Cache was wholly owned by Ms. Li Yixian, a friend of Mr. Zhou. Subsequent to the completion of such transfer, Sichuan Green and Golden Cache (Hong Kong) owned % and 1% in the equity interest of Neo-green Pharmaceutical, respectively. Please refer to the paragraph headed Pre-[REDACTED] Investments in this section for details. 119

127 OUR HISTORY, REORGANIZATION AND CORPORATE STRUCTURE In preparation for the [REDACTED], we underwent the following Corporate Reorganization: 1. Conversion of Neo-green Pharmaceutical from a joint stock limited liability company into a limited liability company Effective from July 28, 2016, Neo-green Pharmaceutical was converted from a joint stock limited liability company into a limited liability company. Such conversion was to facilitate the acquisition of Neo-green Pharmaceutical by Golden Cache (Hong Kong) and Ever Sound (Hong Kong). 2. Disposal of Neo-green TCM by Neo-green Pharmaceutical to Sichuan Green As Neo-green Modern TCM has not commenced its business since its establishment and it is expected that no further business will be carried out by Neo-green Modern TCM in the future, for the purpose of streamlining our Group structure, our Group decided to dispose of Neo-green Modern TCM. On August 8, 2016, Neo-green Pharmaceutical and Sichuan Green entered into an equity transfer agreement, pursuant to which Neo-green Pharmaceutical agreed to transfer its 100% equity interest in Neo-green Modern TCM to Sichuan Green. The registration of such equity interest transfer at the relevant administration for industry and commerce was completed on August 16, On November 25, 2016, Neo-green Pharmaceutical and Sichuan Green entered into a supplemental agreement, pursuant to which the parties agreed that the consideration for the said transfer of equity interest in Neo-green Modern TCM shall be RMB51.53, determined by reference to the net asset value of Neo-green Modern TCM as of October 31, 2016, which has been fully settled. There was no material change of the net asset value of Neo-green Modern TCM since August 8, 2016 until October 31, Incorporation of investment holding companies by the then shareholders of Neo-green Pharmaceutical Incorporation of Ever Peace by Mr. Zhou Ever Peace was incorporated as a limited liability company in the BVI on June 15, 2016 and has been wholly owned by Mr. Zhou since its incorporation. Incorporation of Neo Era by Mr. Zhou Xiang Neo Era was incorporated as a limited liability company in the BVI on June 15, 2016 and has been wholly owned by Mr. Zhou Xiang since its incorporation. Incorporation of Sincere Nation by Ms. Zhou Qiaomin Sincere Nation was incorporated as a limited liability company in the BVI on June 15, 2016 and has been wholly owned by Ms. Zhou Qiaomin since its incorporation. 120

128 OUR HISTORY, REORGANIZATION AND CORPORATE STRUCTURE Incorporation of other investment holding companies by other shareholders The Minority Shareholders of Neo-green Pharmaceutical (except for Beijing Zhongrui) also incorporated certain investment holding companies for the purpose of holding Shares of our Company to be allotted and issued to them. The particulars of such companies are set forth as below: Names of investment holding companies Shareholders of the investment holding companies (% of beneficial interest) Lasting Accomplishment Gou Yuquan ( ) (100%) Golden Era Huang Xiaoyan ( ) (100%) Licorice Thirteen Lai Mei ( ) (14.36%), Gu Jian ( ) (14.36%), Hu Changjiang ( ) (14.36%), Xu Liming ( ) (14.36%), Zhao Jun ( ) (10.25%), Luo Yurui ( ) (7.18%), Tang Shuqing ( ) (7.18%), Qiu Kairong( ) (3.59%), Wang Ling ( ) (3.59%), Chen Chunchao ( ) (3.59%), Luo Xianzhi ( ) (3.59%) and Chang Zhengsong ( ) (3.59%) Root Limited Peng Yong ( ) (100%) UPLI Limited Li Gang ( ) (100%) Bona Fides Zhang Liling ( ) (100%) Great Expectation Zhao Liang ( ) (100%) 121

129 OUR HISTORY, REORGANIZATION AND CORPORATE STRUCTURE 4. Incorporation of Group companies Our Company Our Company was incorporated as an exempted company with limited liability in the Cayman Islands on June 22, 2016 with an authorized share capital of HK$380,000 divided into 380,000 shares with par value of HK$1.00 each. At the time of the incorporation, Mapcal Limited subscribed for one Share in the capital of our Company. On the same date, the said issued one Share was transferred to Mr. Zhou at par value. On September 7, 2016, each issued and unissued Share with par value of HK$1.00 in the share capital of our Company was subdivided into 100 Shares with par value of HK$0.01 each, such that the authorized share capital of our Company is changed to HK$380,000 divided into 38,000,000 Shares with par value of HK$0.01 each, after which the then total issued 100 Shares of our Company with par value of HK$0.01 were owned by Mr. Zhou. On the same date, Mr. Zhou transferred all the 100 issued Shares to Ever Peace. On September 18, 2016, our Company issued and alloted a total of 999,900 new nil-paid Shares to the investment holding companies incorporated by the then shareholders of Neo-green Pharmaceutical (except for Beijing Zhongrui), as detailed in the paragraph headed 3. Incorporation of investment holding companies by the then shareholders of Neo-green Pharmaceutical above, and First Professional, a Pre-[REDACTED] Investor. Each Shareholder of the Company as set out above settled the subscription price for their respective allotment by May 8, 2017 except for 10,000 Shares held by Ever Peace and subsequently transferred to Golden Cache which remained nil-paid until June 16, 2017 when such Shares were credited as fully paid. The details of such transactions have been set forth in the paragraph headed 8. Transfer of the entire issued share capital of Golden Pharma by Golden Cache to NGP Holdings below in this section. The subscription price paid by each Shareholder for the 999,900 Shares issued to them was determined by reference to the net asset value of Neo-green Pharmaceutical as of December 31, 2015 and the dividends paid to the then shareholders of Neo-green Pharmaceutical in July

130 OUR HISTORY, REORGANIZATION AND CORPORATE STRUCTURE Details of the shareholding of the Shareholders after completion of the above steps and the subscription price paid by them are set out below: Names of Shareholders New Shares issued Shareholding after the issue Subscription Price Ever Peace 457,163 (1) % RMB342,156,195 (1) Neo Era 280, % RMB214,200,000 Sincere Nation 240, % RMB183,600,000 Lasting Accomplishment 8, % RMB6,725,880 First Professional (2) 6, % RMB5,337,405 Golden Era 2, % RMB2,135,115 Licorice Thirteen 1, % RMB1,487,160 UPLI Limited % RMB533,970 Bona Fides % RMB533,970 Root Limited % RMB426,870 Great Expectation % RMB213,435 Notes: (1) 10,000 Shares held by Ever Peace remained nil-paid, which was subsequently transferred to Golden Cache as set out in the paragraph headed 6. Transfer of 10,000 nil-paid Shares held by Ever Peace to Golden Cache below, and credited as fully paid on June 16, 2017 upon the acquisition of the entire issued share capital of Golden Pharma as set out in the paragraph headed 8. Transfer of the entire issued share capital of Golden Pharma by Golden Cache to NGP Holdings below. (2) First Professional, which is wholly owned by Ms. Carol Lee, is a Pre-[REDACTED] Investor of our Company. Please refer to the paragraph headed Pre-[REDACTED] Investments in this document for details. NGP Holdings NGP Holdings was incorporated as a limited liability company in the BVI on July 5, 2016 with an authorized share capital of US$50,000 divided into 50,000 shares with par value of US$1.00 each. On the same day, one share of NGP Holdings was allotted and issued to our Company as fully paid at par value. On March 30, 2017, 49,999 new shares of NGP Holdings were further allotted and issued to our Company as fully paid at par value. NGP Holdings is an investment holding company and has been wholly-owned by our Company since its incorporation. Ever Sound (Hong Kong) Ever Sound (Hong Kong) was incorporated as a limited company in Hong Kong on June 29, 2016 with a total share capital of HK$1.00. At the time of its incorporation, Mr. Zhou was the sole shareholder of Ever Sound (Hong Kong). On March 29, 2017, the total share capital of Ever Sound (Hong Kong) was transferred to NGP Holdings. Ever Sound (Hong Kong) is an investment holding company. 123

131 OUR HISTORY, REORGANIZATION AND CORPORATE STRUCTURE 5. Acquisition of 99% equity interest in Neo-green Pharmaceutical by Ever Sound (Hong Kong) On December 30, 2016, the then shareholders of Neo-green Pharmaceutical and Ever Sound (Hong Kong) entered into an equity transfer agreement, pursuant to which, the then shareholders of Neo-green Pharmaceutical (except for Golden Cache (Hong Kong)) agreed to transfer an aggregate of 99% equity interest in Neo-green Pharmaceutical held by them to Ever Sound (Hong Kong) for a total cash consideration of RMB million, which was determined by reference to the net asset value of Neo-green Pharmaceutical as of December 31, Such equity interest transfer was completed on February 23, After the above equity interest transfers, Neo-green Pharmaceutical became owned as to 99% by Ever Sound (Hong Kong) and 1% by Golden Cache (Hong Kong). 6. Dissolution of Sichuan Shunli As Sichuan Shunli has not commenced any business since its establishment and it is expected that no further business will be carried out by Sichuan Shunli in the future, for the purpose of streamlining our Group structure, the Group completed the dissolution of Sichuan Shunli on June 6, Transfer of 10,000 nil-paid Shares held by Ever Peace to Golden Cache On June 16, 2017, Ever Peace transferred 10,000 nil-paid Shares held by it to Golden Cache at nil consideration. 8. Transfer of the entire issued share capital of Golden Pharma by Golden Cache to NGP Holdings On June 8, 2017, Golden Cache, NGP Holdings and our Company entered into an equity transfer agreement, pursuant to which Golden Cache agreed to transfer the entire issued share capital of Golden Pharma held by it to NGP Holdings in consideration for our Company crediting the 10,000 nil-paid Shares held by Golden Cache as fully paid. On June 16, 2017, such share transfer was completed. 124

132 OUR HISTORY, REORGANIZATION AND CORPORATE STRUCTURE PRE-[REDACTED] INVESTMENTS Golden Cache On September 5, 2016, Sichuan Green and Golden Cache (Hong Kong) entered into an equity transfer agreement, pursuant to which Sichuan Green agreed to transfer 1% equity interest in Neo-green Pharmaceutical held by Sichuan Green to Golden Cache (Hong Kong) for a consideration of RMB7.65 million, which was determined by reference to the net asset value of Neo-green Pharmaceutical as of December 31, The equity transfer was deemed asapre-[redacted] Investment to our Group. Details of the Pre-[REDACTED] Investment are set forth as follows: The investor Date of the equity transfer agreement Total Consideration Basis of Consideration Number of Shares held by Golden Cache and cost per Share Golden Cache (Hong Kong) was wholly owned by Golden Pharma, which was in turn wholly owned by Golden Cache and subsequently transferred to NGP Holdings. Golden Cache has been wholly owned by Ms. Li Yixian since its incorporation. Ms. Li Yixian is a friend of Mr. Zhou. September 5, 2016 RMB7.65 million The consideration was determined by reference to the net asset value of Neo-green Pharmaceutical as of December 31, Pursuant to an equity transfer agreement entered into by and among Golden Cache, NGP Holdings and our Company, Golden Cache transferred the 100% equity interest in Golden Pharma held by it to NGP Holdings in consideration for our Company crediting the 10,000 nil-paid Shares held by it as fully paid. Upon the [REDACTED], Golden Cache will hold [REDACTED] Shares, representing approximately [REDACTED]% of the then total issued share capital of our Company (without taking into account of the shares which may be issued upon the exercise of the [REDACTED] and any options which may be granted under the Share Option Scheme). On such basis, upon [REDACTED], the effective cost per Share paid by Golden Cache is approximately RMB[REDACTED] (equivalent to approximately HK$[REDACTED]) per Share, which represents a discount of approximately [REDACTED]% to the low end of the stated [REDACTED] range of HK$[REDACTED] per Share, and a discount of approximately [REDACTED]% to the high end of the stated [REDACTED] range of HK$[REDACTED] per Share. 125

133 OUR HISTORY, REORGANIZATION AND CORPORATE STRUCTURE Payment date of the consideration Lock up Public float Special Right January 18, 2017 Golden Cache has not entered into any lock-up arrangement with our Company, the Sole Sponsor or the [REDACTED]. Since Golden Cache will not be a core connected person of our Company upon [REDACTED] and will not take instructions from a core connected person of our Company in relation to the acquisition, disposal, voting or other disposition of the Shares held by Golden Cache, nor has the acquisition of these Shares been financed directly or indirectly by any core connected person of our Company, the Shares held by Golden Cache will be considered as part of the public float. There was no special right granted to Golden Cache in connection with the Pre-[REDACTED] Investment. First Professional On September 18, 2016, our Company issued and alloted 6,977 new Shares to First Professional for a consideration of RMB5,337,405, which was determined by reference to the net asset value of Neo-green Pharmaceutical as of December 31, 2015 and the dividends paid to the then shareholders of Neo-green Pharmaceutical in July The new issue and allotment was deemed as a Pre-[REDACTED] Investment to our Group. Details of the Pre-[REDACTED] Investment are set forth as follows: The investor First Professional is wholly owned by Ms. Carol Lee, a friend of Mr. Zhou. Date of the issue and allotment September 18, 2016 Total Consideration Basis of Consideration RMB5,337,405 The consideration was determined by reference to the net asset value of Neo-green Pharmaceutical as of December 31, 2015 and the dividends paid to the then shareholders of Neo-green Pharmaceutical in July

134 OUR HISTORY, REORGANIZATION AND CORPORATE STRUCTURE Number of Shares held by First Professional and cost per Share As at the Latest Practicable Date, the 6,977 Shares held by First Professional represent 0.698% of the total issued share capital of our Company. Upon [REDACTED], First Professional will hold [REDACTED] Shares, representing approximately [REDACTED]% of the then total issued share capital of our Company (without taking into account of the shares which may be issued upon the exercise of the [REDACTED] and any options which may be granted under the Share Option Scheme). On such basis, upon the [REDACTED], the effective cost per Share paid by First Professional is approximately RMB[REDACTED] (equivalent to approximately HK$[REDACTED]) per Share, which represents a discount of approximately [REDACTED]% to the low end of the stated [REDACTED] range of HK$[REDACTED] per Share, and a discount of approximately [REDACTED]% to the high end of the stated [REDACTED] range of HK$[REDACTED] per Share. Payment date of the consideration April 20, 2017 Lock up Public float Special Right First Professional has not entered into any lock-up arrangement with our Company, the Sole Sponsor or the [REDACTED]. Since First Professional will not be a core connected person of our Company upon [REDACTED] and will not take instructions from a core connected person of our Company in relation to the acquisition, disposal, voting or other disposition of the Shares held by First Professional, nor has the acquisition of these Shares been financed directly or indirectly by any core connected person of our Company, the Shares held by First Professional will be considered as part of the public float. There was no special right granted to First Professional in connection with the Pre-[REDACTED] Investment. Strategic benefits of the Pre-[REDACTED] Investments Our Directors are of the view that our Group can maintain and broaden our Shareholder basis by the introduction of these supportive and trustworthy Pre-[REDACTED] Investors and their investments also demonstrate their confidence in the business and operation of our Group. [REDACTED] from the Pre-[REDACTED] Investments As the Shares owned by the Pre-[REDACTED] Investors were acquired from the original shareholders of Neo-green Pharmaceutical by virtue of the Corporate Reorganization, there are no proceeds to our Group from the Pre-[REDACTED] Investments. 127

135 OUR HISTORY, REORGANIZATION AND CORPORATE STRUCTURE Confirmation from the Sole Sponsor The Sole Sponsor has confirmed that the investments of the Pre-[REDACTED] Investments are in compliance with the Interim Guidance on Pre-[REDACTED] Investments (HKEX-GL29-12), Guidance on Pre-[REDACTED] Investments (HKEX-GL43-12) and Guidance on Pre-[REDACTED] investments in convertible instruments (HKEX-GL44-12) issued by the Stock Exchange. GROUP STRUCTURE UPON THE COMPLETION OF THE CORPORATE REORGANIZATION The shareholding and corporate structure of our Group immediately after the Corporate Reorganization and the Pre-[REDACTED] Investments are as follows: Mr. Zhou Mr. Zhou Xiang Ms. Zhou Qiaomin Ms. Li Yixian Ms. Carol Lee 100% 100% 100% 100% 100% Ever Peace Neo Era Sincere Nation Other Shareholders (1) Golden Cache (2) First Professional (2) % % % 1.576% 1.000% 0.698% The Company (Cayman Islans) 100% NGP Holdings (BVI) 100% Golden Pharma (BVI) 100% Ever Sound (Hong Kong) (Hong Kong) 99% 100% Golden Cache (Hong Kong) (Hong Kong) 1% Offshore Onshore Neo-Green Pharmaceutical (PRC) Notes: (1) Other Shareholders of our Company comprised seven Shareholders each owning less than 1% in the issued share capital of our Company, including Lasting Accomplishment, Golden Era, Licorice Thirteen, UPLI Limited, Bona Fides, Root Limited and Great Expectation, which are owned by the Minority Shareholders of Neo-green Pharmaceutical (except for Beijing Zhongrui) as to their respective shareholding interest in Neo-green Pharmaceutical immediately prior to the Corporate Reorganization. For details, please refer to the paragraph headed Corporate Reorganization 3. Incorporation of investment holding companies by the then shareholders of Neo-green Pharmaceutical in this section. (2) Each of Golden Cache and First Professional is a Pre-[REDACTED] Investor. 128

136 OUR HISTORY, REORGANIZATION AND CORPORATE STRUCTURE GROUP STRUCTURE UPON [REDACTED] The shareholding and corporate structure of our Group immediately after the [REDACTED] (without taking into account any Shares which may be issued upon the exercise of the [REDACTED] or any options that may be granted under the Share Option Scheme) will be as follows: Mr. Zhou Mr. Zhou Xiang Ms. Zhou Qiaomin Ms. Li Yixian Ms. Carol Lee 100% 100% 100% 100% 100% Ever Peace Neo Era Sincere Nation Other Shareholders (1) Golden Cache (2) First Professional (2) Public Shareholders (3) [REDACTED]% [REDACTED]% [REDACTED]% [REDACTED]% [REDACTED] [REDACTED]% [REDACTED]% The Company (Cayman Islands) 100% NGP Holdings (BVI) 100% Golden Pharma (BVI) 100% Ever Sound (Hong Kong) (Hong Kong) 100% Golden Cache (Hong Kong) (Hong Kong) 99% 1% Offshore Onshore Neo-Green Pharmaceutical (PRC) Notes: (1) Other Shareholders of our Company comprised seven Shareholders each owning less than 1% in the issued share capital of our Company, including Lasting Accomplishment, Golden Era, Licorice Thirteen, UPLI Limited, Bona Fides, Root Limited and Great Expectation, which are owned by the Minority Shareholders of Neo-green Pharmaceutical (except for Beijing Zhongrui) as to their respective shareholding interest in Neo-green Pharmaceutical immediately prior to the Corporate Reorganization. For details, please refer to the paragraph headed Corporate Reorganization 3. Incorporation of investment holding companies by the then shareholders of Neo-green Pharmaceutical in this section. (2) Each of Golden Cache and First Professional is a Pre-[REDACTED] Investor. (3) For details, please refer to the section headed Waivers from Strict Compliance with the Listing Rules in this document. 129

137 OUR HISTORY, REORGANIZATION AND CORPORATE STRUCTURE SAFE REGISTRATION Pursuant to the Circular of the SAFE on Foreign Exchange Administration of Overseas Investment, Financing and Round-trip Investments Conducted by Domestic Residents through Special Purpose Vehicles ( ) (the SAFE Circular No. 37 ), promulgated by SAFE and which became effective on July 14, 2014, (a) a PRC resident must register with the local SAFE branch before he or she contributes assets or equity interests in an overseas special purpose vehicle (the Overseas SPV ) that is directly established or indirectly controlled by the PRC resident for the purpose of conducting investment or financing, and (b) following the initial registration, the PRC resident is also required to register with the local SAFE branch for any major change, in respect of the Overseas SPV, including, among other things, a change of Overseas SPV s PRC resident shareholder(s), the name of the Overseas SPV, terms of operation, or any increase or reduction of the Overseas SPV s capital, share transfer or swap, and merger or division. Pursuant to SAFE Circular No. 37, failure to comply with these registration procedures may result in penalties. Pursuant to the Circular of the SAFE on Further Simplification and Improvement in Foreign Exchange Administration on Director Investment ( ) (the SAFE Circular No. 13 ), promulgated by SAFE and which became effective on June 1, 2015, the power to accept SAFE registration was delegated from local SAFE to local banks where the assets or interest in the domestic entity was located. As advised by our PRC legal advisors, Mr. Zhou, Mr. Zhou Xiang and Ms. Zhou Qiaomin and all our PRC beneficial owners who are PRC residents have completed the registration under the SAFE Circular No. 13 and SAFE Circular No. 37 by October 12, M&A RULES On August 8, 2006, six PRC regulatory agencies, including the MOFCOM, the State Assets Supervision and Administration Commission, the State Administration of Taxation, SAIC, CSRC and SAFE, jointly issued the Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors (the M&A Rules ), which became effective on September 8, 2006, and was amended on June 22, Pursuant to the M&A Rules, a foreign investor is required to obtain necessary approvals when (i) a foreign investor acquires equity in a domestic non-foreign invested enterprise thereby converting it into a foreign-invested enterprise, or subscribes for new equity in a domestic enterprise through an increase of registered capital thereby converting it into a foreign-invested enterprise; or (ii) a foreign investor establishes a foreign-invested enterprise which purchases and operates the assets of a domestic enterprise, or which purchases the assets of a domestic enterprise and injects those assets to establish a foreign-invested enterprise (the Regulated Activities ). Given that (i) Neo-green Pharmaceutical has been a Sino-foreign joint venture before the acquisition of 99% equity interest in Neo-green Pharmaceutical by Ever Sound (Hong Kong); and (ii) no Regulated Activities were involved in the Corporate Reorganization under the M&A Rules, as advised by our PRC legal advisors, the acquisition of 99% equity interest in Neo-green Pharmaceutical by Ever Sound (Hong Kong) and the Corporate Reorganization are not subject to the M&A Rules, and the [REDACTED]of our Company does not require approvals from CSRC and MOFCOM under the M&A Rules. 130

138 BUSINESS OVERVIEW We focus on the manufacture, sale and research and development of TCM Granules. We are one of the only five group companies 1 in the PRC authorized by the CFDA to manufacture and sell TCM Granules and the only such company headquartered in Western China, according to the PICO Report. We were the third largest TCM Granules manufacturer in the PRC in terms of revenue in 2016 and ranked first in terms of CAGR of revenue for the period from 2014 to 2016, according to the PICO Report. With our comprehensive portfolio of approximately 670 types of TCM Granules and our ability to manufacture over 750 types of TCM Granules, as well as our proprietary Smart Pharmacy Systems, hospitals and medical institutions can efficiently fulfill their TCM Granule prescription needs. In addition, we have self-operated plantation bases, which we primarily use for research and development and quality control of certain key raw materials we use for the production of TCM Granules. According to the PICO Report, we are one of the only two TCM Granules manufacturers in the PRC that have both self-operated plantation bases and Smart Pharmacy Systems (or other similar systems), allowing us to gain valuable insight into all key components of the entire value chain for TCM Granules. TCM Granules are a form of traditional Chinese medicine created from the extraction and concentration of medicinal herbs. TCM practitioners prescribe a personalized combination of various single-herb TCM Granules to treat a particular patient. The combination of TCM Granules is then dissolved in water and consumed by the patient. According to the PICO Report, TCM Granules are increasingly being recognized for their convenience, consistency, efficacy and reliability. As a result, according to the PICO Report, the TCM Granules market in the PRC grew at a CAGR of 26.6% from 2012 to 2016, significantly outpacing the overall pharmaceutical industry and the overall TCM industry in the PRC, and is expected to continue to grow at a CAGR of 26.6% from 2017 to We generated substantially all of our revenue during the Track Record Period from the sale of TCM Granules, which accounted for 95.8%, 94.5% and 99.8% of our total revenue for the years ended December 31, 2014, 2015 and 2016, respectively. We primarily utilize a direct sales model, pursuant to which we market, sell and distribute a substantial majority of our TCM Granules directly to hospitals and medical institutions in the PRC. TCM practitioners at these hospitals and medical institutions then prescribe them to patients. For the years ended December 31, 2014, 2015 and 2016, we sold our TCM Granules directly to 550, 658 and 790 hospitals and medical institutions in the PRC, including 475, 573 and 692 hospitals. For the years ended December 31, 2014, 2015 and 2016, direct sales to hospitals and medical institutions accounted for 94.6%, 94.9% and 95.6% of our revenue from the sale of TCM Granules. Our direct sales model allows us to maintain effective control over our sales channel and customer relationships. In addition to TCM Granules, during the Track Record Period, we also manufactured and sold to hospitals and medical institutions a small amount of TCM decoction pieces and Chinese patent medicines, such as Danshu Pills ( ), which are made primarily from peppermint oil and are used for the treatment of chronic gall-bladder discomforts or diseases, including gall-stones. 1 One of the six pilot enterprises that were authorized by the CFDA to manufacture TCM Granules has become a wholly-owned subsidiary of another pilot enterprise, resulting in a total of five group companies being authorized to manufacture TCM Granules. 131

139 BUSINESS Distribution of our broad product portfolio using our direct sales model is strengthened by our proprietary Smart Pharmacy Systems installed at the premises of many of our customers. Our Smart Pharmacy Systems generally comprise one or more dispensing machines and have been designed as a full-service solution to not only prepare and package TCM prescriptions using TCM Granules in a manner that enhances safety, efficiency, accuracy and level of automation, but also help our customers digitize and modernize their TCM prescriptions process. Our Smart Pharmacy Systems provide substantial added-value for our customers, as we believe they reduce costs, improve the efficiency of prescription processing and foster patient loyalty. As of December 31, 2014, 2015 and 2016, our Smart Pharmacy Systems were installed at 182, 239 and 338 hospitals and medical institutions throughout the PRC, respectively. We have established an extensive marketing and sales network comprising 463 marketing and sales representatives located in all our major markets as of December 31, 2016, which according to the PICO Report, was one of the larger teams of in-house marketing and sales representatives among TCM Granules manufacturers in the PRC. We also employed a team of 822 personnel as of December 31, 2016 who mainly focus on the operation of our Smart Pharmacy Systems. These personnel mainly work onsite at the hospitals and medical institutions that installed and operated our Smart Pharmacy Systems. We believe these personnel helped us to nurture and solidify the relationships we have with our customers. We currently manufacture all of our products at our facilities located in Pengzhou City, Chengdu, Sichuan Province. We started to use these facilities in August 2014, which have a designed production capacity of 2,000.0 tons of TCM Granules per year. Prior to August 2014, we manufactured our products at our previous facilities, located in Chengdu, Sichuan Province, which had a design production capacity of tons of TCM Granules per year. We ceased to manufacture TCM Granules at our previous manufacturing facilities when our current manufacturing facilities became operational. Our manufacturing facilities are highly automated and controlled by a centralized computer system, requiring minimal manual labor. All of our production lines and our manufacturing facilities are in compliance with GMP standards. Please refer to the section headed Manufacturing in this document for further details. In addition, we have implemented quality control procedures that are in compliance with GMP standards and other CFDA regulations. We strictly apply quality control standards from supplier audit to raw material procurement to manufacturing processes to ensure our products have consistent quality to satisfy our customers and enhance our reputation. Please see the section headed Quality Control in this document. We focus our research and development efforts on improving our existing products through developing advanced production and testing techniques, formulating new TCM Granules and other TCM products, such as Chinese patent medicines, and making further improvements to our Smart Pharmacy Systems and medicinal herb farming and cultivation. We have also developed collaborative research and development relationships with leading research institutions, universities and hospitals. Please refer to the section headed Research and Development in this document for further details. 132

140 BUSINESS For the years ended December 31, 2014, 2015 and 2016, our revenue was RMB711.0 million, RMB1,055.6 million and RMB1,403.3 million, respectively, representing a CAGR of 40.5% over the period, and our profit for the year was RMB208.8 million, RMB367.8 million and RMB594.0 million, respectively, representing a CAGR of 68.7% over the period. For the years ended December 31, 2014, 2015 and 2016, our gross margin was 60.7%, 66.6% and 74.1%, respectively. OUR COMPETITIVE STRENGTHS We believe the following competitive strengths contribute to our success and position us well for continued growth: We are a leading TCM Granules manufacturer in the PRC and are positioned to capitalize the fast growing and highly attractive TCM Granules market. We are one of the leading manufacturers of TCM Granules in the PRC. We were the third largest TCM Granules manufacturer in the PRC in terms of revenue in 2016 and ranked first in terms of CAGR of revenue for the period from 2014 to 2016, according to the PICO Report. In addition, according to the PICO Report, we are one of the only five group companies in the PRC authorized by the CFDA to manufacture and sell TCM Granules and the only such company in Western China. Our market share of the TCM Granules market in the PRC has increased from 12.0% in 2014 to 15.4% in 2016, in terms of revenue according to the PICO Report. According to the PICO Report, the TCM Granules market in the PRC grew from RMB3.6 billion in 2012 to RMB9.1 billion in 2016, representing a CAGR of 26.6%, which significantly outpaced the overall pharmaceutical industry, the overall TCM industry and the non-granule TCM decoction pieces market in China, which grew at CAGRs of 15.4%, 14.3% and 20.0%, respectively, from 2012 to In addition, the TCM Granules market in the PRC as a percentage of the TCM decoction pieces market also increased from 3.9% in 2012 to 4.7% in 2016, according to the PICO Report. According to the PICO Report, TCM Granules have become widely recognized by hospitals and patients as an alternative to TCM decoction pieces. The use of TCM decoction pieces typically involves lengthy and inconvenient process, including the boiling of herbs in decoction form for patients to consume as a liquid. By comparison, TCM Granules are a more convenient product dissolvable in water for instant consumption. In addition, according to the PICO Report, the variety of TCM Granules available enables TCM practitioners to adjust the prescriptions to meet patients needs, which provides more flexibility to TCM practitioners as compared to Chinese patent medicines. Significantly higher growth rates in the market for TCM Granules in recent years as compared to the overall TCM decoction pieces market are a testament to the growing practitioner and patient preference for TCM Granules. According to the PICO Report, the TCM Granules market in the PRC is expected to grow at a CAGR of 26.6% from 2017 to 2021, which is higher than the estimated CAGRs of the overall TCM decoction pieces market and the overall TCM industry, which are expected to be of 15.1% and 12.0% for the same periods, respectively. 133

141 BUSINESS In addition, according to the PICO Report, the TCM Granules market as part of the traditional Chinese medicine industry, will also benefit from various favorable government policies, including the 13th Five-Year Plan, which set forth specific primary development targets for the traditional Chinese medicine industry in China, the 13th Five-Year Development Plan of Pharmaceutical Industry sets forth specific development targets for the traditional Chinese medicine industry as part of the 13th Five-Year Plan and the Development Plan for Traditional Chinese Medicine Healthcare Service ( ), which set out the plan to establish a traditional Chinese medicine healthcare service system and to make traditional Chinese medicine healthcare services an important part of the entire healthcare service industry in the PRC by Furthermore, an increasing number of Provinces have included TCM Granules in their Medical Insurance Catalogs, which has further expanded the consumer base of TCM Granules, according to the PICO Report. With a comprehensive portfolio of approximately 670 types of TCM Granules and the ability to manufacture over 750 types of TCM Granules, as well as our proprietary Smart Pharmacy Systems, hospitals and medical institutions can efficiently fulfill their TCM Granules prescription needs. In addition, we have self-operated plantation bases, which we primarily use for research and development and quality control of certain key raw materials we use in connection with the production of TCM Granules. According to the PICO Report, we are one of the only two TCM Granules manufacturers in the PRC that have both self-operation plantation bases and Smart Pharmacy Systems (or other similar systems), allowing us to gain valuable insight into all key components of the entire value chain for TCM Granules. Leveraging these strengths in the TCM Granules market, we believe that we are well positioned to take advantage of the expected growth in the TCM Granules market in the PRC. We have a proven marketing and sales model with strict control over our sales channels and customer relationships, with our proprietary Smart Pharmacy Systems installed at hundreds of hospitals and medical institutions throughout the PRC, which we believe create significant value for our customers. We primarily utilize a direct sales model, pursuant to which we market, sell and distribute a substantial majority of our TCM Granules directly to hospitals and medical institutions in the PRC. For the years ended December 31, 2014, 2015 and 2016, we directly sold our TCM Granules to 550, 658 and 790 hospitals and medical institutions in the PRC, including 475, 573 and 692 hospitals. For the years ended December 31, 2014, 2015 and 2016, direct sales to hospitals and medical institutions accounted for 94.6%, 94.9% and 95.6% of our revenue from the sale of TCM Granules. During the Track Record Period, our TCM Granules were sold in 29 Provinces throughout the PRC, with the majority of our revenue being derived from Western and Northern China, which in aggregate accounted for 89.7%, 84.4% and 81.7% of our revenue from sale of TCM Granules for the years ended December 31, 2014, 2015 and 2016, respectively. Our direct sales model allows us to maintain effective control over our sales channel and customer relationships. We have established an extensive marketing and sales network with representatives located in all major markets where our products are sold. As of December 31, 2016, we had a team of 463 marketing and sales representatives, which, according to the PICO Report, was one of the larger in-house marketing and sales teams among TCM Granules manufacturers. In addition, we also employed a team of 822 personnel as of December 31, 2016 who mainly focus on the operation of our Smart Pharmacy Systems. We believe these personnel help us nurture and solidify our relationships with our customers. 134

142 BUSINESS Our direct sales model and large marketing and sales team allow us to strengthen the control over our sales channel and customer relationships. In addition, as a substantial majority of our sales are conducted under our direct sales model, which enables us to manage our sales activities more efficiently and save costs, we believe we are able to achieve higher profitability. Furthermore, we also strive to strengthen market awareness and acceptance of TCM Granules and promote our brand through co-hosting the Symposium on Scientific and Technological Achievements in Traditional Chinese Medicine ( ) with the Traditional Chinese Medicine Science and Technology Development and Communication Center ( ). Experts in the TCM Granules industry are invited to conduct panel discussions on TCM Granules and doctors are invited from different hospitals and medical institutions to attend the symposium. We also organize forums with the State Administration of Traditional Chinese Medicine of the PRC in Chengdu and at our production facilities in Pengzhou City, Chengdu, Sichuan Province, to showcase our plantation bases and research and development centers by inviting our existing and potential customers and other experts in the TCM Granules industry. We believe through our organization and participation in the symposiums and forums, we are able to increase awareness and acceptance of TCM Granules among TCM practitioners and effectively promote our brand. We strategically focus on marketing and distributing our TCM Granules directly to hospitals and medical institutions by installing our proprietary Smart Pharmacy Systems at our customers premises. Our Smart Pharmacy Systems are designed as a full-service solution to not only prepare and package TCM prescriptions using TCM Granules in a manner that improves the safety, efficiency, accuracy and level of automation, but also help our customers digitize and modernize their TCM prescriptions process. The first generation of Smart Pharmacy Systems was designed and developed in collaboration with Sichuan University. Since then, we have implemented technological improvements to each subsequent generation and protected our associated intellectual property therein. Furthermore, we provide our customers with customized solution of Smart Pharmacy Systems based on our customers needs, which helps to increase customer satisfaction and loyalty. With our designated personnel overseeing the daily operation and maintenance of our Smart Pharmacy Systems, we provide excellent customer service and are able to resolve technical issues that may arise in a timely manner. Based on customer and user feedback and our internal review, we have continuously fine-tuned and improved the design and functions of our Smart Pharmacy Systems and have developed our fifth generation Smart Pharmacy Systems. As a result, we believe we are able to make our Smart Pharmacy Systems the most technologically advanced on the market, providing more accurate measurements and lower levels of cross-contamination than our competitors machines, according to the PICO Report. We promote our Smart Pharmacy Systems through model hospitals that other potential customers can visit to experience their value first-hand. Such model hospitals have effectively integrated our Smart Pharmacy Systems into their operations and, we believe, serve as strong examples for customers that consider selecting us to efficiently satisfy their TCM Granules prescription needs. We also promote our Smart Pharmacy Systems through regular academic conferences and the provision of our mobile Smart Pharmacy Systems, which we believe is important to our promotional efforts. We have been continuously increasing the number of our Smart Pharmacy Systems installed at hospitals and medical institutions during the Track Record Period. As of December 31, 2014, 2015 and 2016, our Smart Pharmacy 135

143 BUSINESS Systems were installed at 182, 239 and 338 hospitals and medical institutions throughout the PRC, respectively. Our Smart Pharmacy Systems are permanent fixtures in the hospitals that would be difficult to replace. In addition, our advanced Smart Pharmacy Systems technologies are protected by an extensive patent portfolio, which we believe makes them difficult to be replicated or rivaled by our competitors. As a result, we believe that through our Smart Pharmacy Systems, we have been able to create strong brand recognition and loyalty among hospitals and medical institutions, TCM practitioners as well as patients, while simultaneously increasing entry barriers for other industry players. In particular, for hospitals and medical institutions, our Smart Pharmacy Systems provide substantial added-value as we believe they reduce costs, help improve the efficiency of prescription processing and foster patient loyalty. We have also developed a mobile version of our Smart Pharmacy System that allows for the distribution of our TCM Granules to rural regions in cases of emergency, such as natural disasters. We are committed to producing safe, reliable and high quality TCM Granules through our diversified and selective raw materials procurement strategy and strong quality control measures. In order to increase the control over the quality of our raw material supply and produce safe, reliable and high quality TCM Granules, we have established a diversified and selective raw materials procurement strategy. During the Track Record Period, we primarily procured our raw medicinal herbs from the following sources: (i) third-party suppliers who are either individual farmers or agents; (ii) our plantation partners; and (iii) our self-operated plantation bases. The variety of sources enables us to be selective in procuring raw medicinal herbs meeting our quality standards at a relatively lower price. In order to be cost efficient, we mainly source a majority of the raw materials from individual farmers and agents who are Independent Third Parties. As part of our efforts to ensure the quality of raw materials supplied by such third-party suppliers, we include in the relevant supply agreements specific requirements on the quality of raw materials to be provided to us. In addition, we began establishing cooperation arrangements in 2012 with our plantation partners, which are individual plantation owners or cooperatives of individual plantation owners, and as of December 31, 2016, we had approximately 160 cooperation agreements effective with our plantation partners covering more than 100 types of medicinal herbs. Pursuant to the cooperation arrangements, we provide technical support and expertise to our plantation partners, including SOPs and other cultivation techniques. Our plantation partners adopt these SOPs and cultivation techniques in their operations and, after a period of time of implementation and harvest, offer the resulting raw materials to us for purchase. Pursuant to the cooperation agreements, we are typically granted a right of first refusal to purchase the raw medicinal herbs farmed from their plantations that meet the quality standards set out in the Chinese Pharmacopoeia, which increase the stability of our raw material supply. We also own and operate two plantation bases, covering a total of approximately 45.2 mu of land located in Sichuan Province. We use a small portion of the medicinal herbs grown on these plantations in our manufacturing process, such as Ligusticum chuanxiong ( ). 136

144 BUSINESS Through our diversified raw materials procurement strategy, we are able to maintain a stable raw material supply and also improve the overall quality and consistency of our raw material supply by putting our SOPs and other cultivation techniques to use directly in our raw material supply. We are also able to increase our ability to be selective in our raw material procurement to create the optimal balance of quality and cost. In addition, by establishing relationships with our plantation partners, we are well positioned to source our raw materials from locations best suited for growing particular raw materials, which we believe is important to maintaining high quality of our products. The cooperation with our plantation partners also enables us to further develop and accumulate knowledge and techniques for the planting, growing and harvesting of raw medicinal herbs. Moreover, we believe our breeding, cultivating and processing techniques have helped attract new plantation partners to cooperate with us, which broadens our pool of raw medicinal herb types and sources. With our headquarters located in Sichuan, we have more access to various types of raw medicinal herbs which are typically grown in that Province. We also believe Sichuan Province has the optimal factors, including climate, soil and other natural resources, for cultivating high quality raw medicinal herbs, as compared to other Provinces. In addition to our diversified and selective raw materials procurement strategy, we have also implemented strict and comprehensive quality control measures throughout our operating process, which include supplier audit and raw materials quality control covering procurement from both our plantation partners and third-party suppliers, and manufacturing process supervision. We maintain a list of qualified suppliers and perform periodic supplier audit procedures to ensure only suppliers passing our supplier qualification remain on the list. Our quality management team conducts quality examination on raw materials delivered to us and prepares examination reports. Raw materials that do not pass our quality examination are returned. Our manufacturing process is closely supervised and testing procedures are performed at various stages. Quality testing is conducted on intermediate products before they are moved onto the next stage and product testing and final approval procedures are conducted before final products are released. Currently, our plantation bases are used primarily for research and development purposes, including the development of SOPs for herb cultivation and plantation efficiency, which are aimed at providing better guidance to our plantation partners and improving the overall quality and consistency of our raw material supply. We have a comprehensive portfolio of TCM Granules and have created strong brand recognition. We have been providing TCM Granules under the brand name of Xinlvyao ( ) since We currently offer a comprehensive portfolio of TCM Granules, regularly producing and selling approximately 670 types of TCM Granules, providing hospitals and medical institutions a full-service solution for their TCM prescription needs. In addition, we are currently capable of manufacturing over 750 types of TCM Granules, which ranks first among the TCM Granules manufacturers in the PRC, according to the PICO Report. We believe that our broad range of TCM Granules allows us to offer an extensive portfolio of TCM Granules to treat different types of symptoms that occur in different regions across the PRC and reflects our extensive product knowledge and operational expertise in TCM Granules manufacturing. We have been able to continue to increase the number of hospitals and medical institutions to which we sell our TCM Granules. For the years ended December 31, 2014, 2015 and 2016, we directly sold our TCM Granules to 550, 658 and 790 hospitals and medical institutions, 137

145 BUSINESS including 475, 573 and 692 hospitals, respectively. In addition to TCM Granules, during the Track Record Period, we also manufactured and sold to hospitals and medical institutions a small amount of TCM decoction pieces and Chinese patent medicines, such as Danshu Pills ( ). Our products have been widely recognized in the industry as being of high quality, effective and safe. We believe that through our comprehensive portfolio of TCM Granules and other products, direct marketing, sales and distribution model and provision of our Smart Pharmacy Systems, we have created strong brand recognition and acceptance among hospitals and medical institutions, TCM practitioners and patients. We were accredited with the Science and Technology Progress Award Second Place for TCM Granules and Automatic Dispensing System ( ) in April 2016 by the Sichuan Provincial Government and Excellent Patent Award for Ligusticum Chuanxiong Granule and its Preparation Method ( ) in July 2014 by the Chengdu Municipal Government. For details of the awards we received during the Track Record Period, please refer to the section headed Awards and Recognitions in this document. Our strong research and development capabilities focusing on improving existing products, the development of new products, improvements to our Smart Pharmacy Systems and TCM raw materials quality differentiate us from our competitors. We believe that research and development is critical to the future growth of our business. We focus our research and development efforts on improving our existing products through developing advanced manufacturing and testing techniques, formulating new TCM products, such as Chinese patent medicines, and making further improvements on our Smart Pharmacy Systems and medicinal herb farming and cultivation. As of December 31, 2016, we have a dedicated research and development team of 37 personnel, including one Ph.D. degree holder, 10 master s degree holders and 17 bachelor s degree holders. We established our pharmaceutical research and development center in We have successfully developed and commercialized approximately 670 types of TCM Granules and have the capability to produce over 750 types of TCM Granules. We also have a robust product pipeline that includes Chinese patent medicines. Essential to the improvement of the quality of our existing products and the development of our new products is taking into consideration the knowledge from clinical experience that we acquire through our own research and development team and through ongoing interaction with TCM practitioners. In addition, based on our expertise in operating plantation bases and TCM Granules production, we have developed SOPs governing procedures for our plantation partners, TCM Granules manufacturing processes and quality control measures. We believe these protocols enable us to ensure the quality of our raw materials and products. Finally, since the development of the first generation of our Smart Pharmacy Systems in 2002, we have continued to improve them with each generation and protect the associated intellectual property, thereby, creating greater barriers to entry for our competitors. 138

146 BUSINESS We have also developed collaborative research and development relationships with leading research institutions, universities and hospitals including Yunnan University of Traditional Chinese Medicine, Guang anmen Hospital affiliated with China Academy of Chinese Medical Sciences, Tianjin Modern Medicine Development Institute, Dongzhimen Hospital affiliated with Beijing University of Chinese Medicine, Sichuan Academy of Chinese Medicine Sciences and Chengdu University of Traditional Chinese Medicine to conduct research and development activities on various subjects, including new TCM products development, clinical studies and standardization of the quality of TCM productions. In addition, since our inception, we have participated in a number of government research projects, including, among others, Achievement Transformation of the TCM Granules and Automatic Dispensing Machines ( ), Enhancement of Quality Standard and its Comprehensive Utilization Research on Chinese Medicine with Bulk Production in Southwestern District, including Aconite Root and Erigeron Breviscapus ( ), Research on Application of Automatic Dispensing Machines for TCM Granules ( ) and Research and Application on Mobile Emergency Smart Pharmacy System ( ). We believe long-term relationships with our external research partners and participation in government research projects enable us to stay abreast of the latest development and technologies in the TCM industry. As of the Latest Practicable Date, we held 76 patents and had 34 pending patent applications in the PRC and held one patent in Japan, one patent in Korea, one patent in Hong Kong and one patent in Taiwan. In addition, we also actively participate in policy discussions involving TCM Granules. For example, we co-organized the 2016 Chinese Medical Hospital Presidents Forum of the Second Annual Meeting of the Chinese Medical Hospital Branch of the Chinese Hospital Association ( 2016 ) in September 2016 in Shenyang, Liaoning Province, which was participated by the Deputy Director of the National Health and Family Planning Commission of the PRC and the Director and Deputy Director of the State Administration of Traditional Chinese Medicine, to discuss and evaluate, among other things, government policies regulating the PRC TCM industry and its overall competitiveness. We will continue to devote resources to our research and development initiatives. We have an experienced, stable and dedicated senior management team with proven track record in delivering business growth. Our management team possesses in-depth knowledge and extensive experience in the TCM industry, enabling us to understand the needs of our customers and to consistently deliver quality products and services. Members of our senior management team possess deep experience in and knowledge of the TCM industry and professional management. Our chairman and founder, Mr. Zhou, has over 24 years of experience in the TCM industry. Our chief financial officer, Mr. Wong Dang Sing, has over 11 years of experience in finance and accounting. The director of our research and development initiatives, Mr. Hu Changjiang, has 41 years of experience in researching and teaching in the TCM and related fields. Our general manager, Mr. Xu Liming, has over 17 years of experience in marketing and sales. 139

147 BUSINESS Our senior management team has established a proven track record in executing our business strategy, guiding our expansion and increasing our profitability. In addition, we have been able to establish a stable and positive corporate culture dedicated to the promotion of Chinese culture and the modernization of traditional Chinese medicine. We will continue to capitalize on the industry expertise, professional management skills and strong execution capability of our management and to continue to successfully implement our business strategies. OUR STRATEGIES Our primary mission is to continue to be a forerunner in the modernization of traditional Chinese medicine. As part of this mission, we aim to strengthen and extend our leading position in the TCM Granules market. In order to achieve our goals, we plan to pursue the following strategies: Continue to strengthen our marketing and sales capabilities, expand and deepen our market presence and increase the penetration of our Smart Pharmacy Systems with hospitals and medical institutions. We expect our TCM Granules will continue to be the key driver of our future growth and success. As we undertake proactive measures to educate more hospitals and medical institutions, TCM practitioners and patients of the advantages of TCM Granules over TCM decoction pieces prepared traditionally, we expect the market for TCM Granules to gradually expand. To achieve this objective, we plan to (i) promote the adaptability and mechanism of pharmaceutical products by hosting and/or participating in professional and academic forums and seminars; (ii) strengthen brand building, enhance brand awareness and promote the core competitiveness of our brand; and (iii) plan publicity events in advance in certain Provinces where TCM Granules are not included in their respective Medical Insurance Catalogs. In addition, we intend to further strengthen our sales and marketing capabilities to increase market awareness and acceptance of our brand and products. In particular, we will continue to expand our professional marketing and sales team to vigorously promote the benefits of TCM Granules to hospitals and medical institutions, TCM practitioners and patients through academic activities. We intend to deepen our market penetration and take advantage of the growing market demand for TCM Granules through increasing the number of hospitals and medical institutions to which we sell our TCM Granules in both our existing markets and new markets. We plan to increase penetration in markets throughout the PRC, including Eastern China and Southern China. We believe that our Smart Pharmacy Systems are a key part of our marketing and branding strategies and are essential to the success of the sales of our TCM Granules. We intend to actively promote our Smart Pharmacy Systems to increase the number of hospitals and medical institutions that are using them. In addition, we intend to deepen our relationships with customers that have installed our Smart Pharmacy Systems to increase their use of our Smart Pharmacy Systems and promote customer loyalty. 140

148 BUSINESS We also aim to expand our collaboration with research institutions and medical organizations to increase awareness and visibility of TCM Granules and promote our products. In addition, we will continue to promote our products through popular media such as the Internet, newspaper and magazines. Increase our manufacturing capacity and capability. We anticipate that the demand for TCM Granules in the PRC will continue to grow in the coming years. In order to meet the expected demand, we plan to increase our manufacturing capacities and capabilities over the next three years by constructing new production lines and improving existing production lines and/or production facilities. We also intend to increase our profitability through improving manufacturing efficiency. We plan to continue to effectively manage our production costs by enhancing automation, controlling the inflation of manufacturing labor costs and continuously upgrading our existing manufacturing facilities. In particular, we plan to construct new manufacturing facilities in order to increase their output to meet the increasing market demand. As of the date of this document, we were in the process of analyzing the feasibility of such expansion plan and identifying a suitable location for the construction. The factors we consider include, among other, proximity to our current manufacturing facilities in Pengzhou City, reasonable land use costs and favorable local investment environment. In the event we finalize the location for the new manufacturing facilities and enter into definitive agreements for the construction thereof after the [REDACTED], we will promptly disclose such information in a public announcement. We will also continue to develop new or improve existing manufacturing techniques to enhance product quality and manufacturing efficiency. We believe these efforts will increase our returns on the investment in our manufacturing facilities to drive profitability. Continue to implement our diversified and selective raw materials procurement strategy and strengthen our quality control system. We intend to continue to implement our diversified and selective raw materials procurement strategy. We are dedicated to gaining and maintaining control over our raw material supply and manufacturing process in order to continue to improve the quality of our TCM products. In particular, we are in the process of expanding our cooperation with local plantation partners and expect the number of plantation bases under the cooperation model to increase significantly in the coming years to further secure the consistency, stability, quality and price of our raw materials supply. We will also continue to strengthen our quality control system through the development of advanced testing and quality monitoring techniques. For example, we developed a real-time quality monitoring system using mass spectrometry and inductively coupled plasma mass spectrometry for our manufacturing process. Such monitoring system aims at achieving real-time monitoring and testing of the chemical components of the work in progress by setting up testing points throughout the manufacturing process. Data collected will be transmitted instantaneously to a manufacturing quality control system, upon which further actions can be taken. 141

149 BUSINESS Accelerate the growth of our business and our product portfolio through acquisitions and effective integration. We intend to continue to accelerate our business growth through selective acquisitions of suitable pharmaceutical companies. We plan to implement our acquisition strategy by focusing our acquisition efforts on pharmaceutical products, especially TCM products, which we deem to possess high growth potential. We believe this approach will further enhance our profitability by driving additional revenue through our existing sales and marketing infrastructure and production facilities. We will also explore acquisitions that we believe will enable us to achieve rapid and effective market penetration in new areas within the pharmaceutical industry, as well as acquisitions involving complementary technologies that we believe will enhance our ability to implement our research and development strategies. In order to implement our acquisition strategy, we intend to leverage our existing experience, capabilities and resources, including our industry relationships. We intend to share resources, industry and management experiences, as well as expertise with the acquired companies and we believe these procedures will allow us to efficiently integrate the acquired businesses into our existing platforms and business lines. As of the date of this document, we have not identified any specific acquisition target. Continue to enhance our research and development capabilities, improve the quality of and manufacturing efficiency for our TCM Granules, offer new TCM products and improve the technologies associated with our Smart Pharmacy Systems. We intend to continue to invest in our research and development initiatives in order to improve the quality of and manufacturing efficiency for our TCM Granules, offer new TCM products and upgrade our Smart Pharmacy Systems. We aim to improve manufacturing methods and enhance the quality of the intermediate and final products in the TCM Granules manufacturing process, continue to invest in the development of new TCM products, and continue to enhance the technology of our Smart Pharmacy Systems to achieve even higher accuracy of measurements, stability and lower levels of cross-contamination. We will continue to develop and commercialize innovative TCM products through our research and development programs, in particular with a focus on implementing clinical experience and knowledge. 142

150 BUSINESS OUR PRODUCTS We primarily manufacture, sell, research and develop TCM Granules. During the Track Record Period, we also generated a limited amount of revenue from the sale of TCM decoction pieces. In March 2015, we launched our first Chinese patent medicine product, Danshu Pills ( ). The following table sets forth a breakdown of our revenue by product type for the periods indicated: For the Years Ended December 31, RMB 000 % RMB 000 % RMB 000 % Sale of TCM Granules 680, , ,400, Sale of other products (1) 30, , , Total 711, ,055, ,403, Note: (1) Mainly consist of TCM decoction pieces. TCM Granules Our primary line of products is a broad range of TCM Granules. TCM Granules are a concentrated granule form of TCM created from the pre-processing, extraction and concentration of the medicinal herbs. TCM practitioners prescribe an individualized combination of various single-herb concentrated granules to treat a particular patient according to the patient s medical conditions. The prescribed combination of the single-herb concentrated granules is then dissolved in water and consumed by the patients. TCM Granules can serve as a more convenient alternative to the traditional method of boiling a prescribed mixture of TCM decoction pieces and drinking the resulting medicinal soup. We currently manufacture and sell approximately 670 different types of single-herb TCM Granules, consisting of those that are most commonly used by TCM practitioners in hospitals and medical institutions, and are capable of manufacturing over 750 types of TCM Granules, according to the PICO Report, including the following top 20 single-herb TCM Granules by revenue generated during the Track Record Period. Name Poria Granules ( ) Radix Astragali Granules ( ) Radix Angelica Sinensis Granules ( ) Flos Lonicerae Granules ( ) Pinelliae Rhizoma Praeparatum Granules ( ) Intended Treatment Strengthens the spleen and calming Replenishes blood and reduces swelling Replenishes blood and improves blood circulation Detoxifies the body and removes heat and toxic material Dries dampness, reduces phlegm and relieves dry throat 143

151 BUSINESS Name Radix Paeoniae Alba Granules ( ) Fructus Amomi Granules ( ) Semen Zizyphi Spinosae Granules ( ) Radix Codonopsis Granules ( ) Intended Treatment Replenishes blood, regulates menstruation and relieves pain Enhances the digestive system Nourishes the liver and possesses calming effect Replenishes blood and improves blood circulation Radix Pseudostellariae Granules ( ) Nourishes the lungs and enhances the digestive system Squama Manitis Granules ( ) Radix Saposhnikoviae Granules ( ) Radix Glycyrrhizae Granules ( ) Scorpio Buthus Martensii Granules ( ) Relieves swelling, nourishes blood and relieves pain Removes pain and prevents convulsions Detoxifies the body, relieves coughing, tension and pain Relieves convulsion, removes obstruction in collaterals and detoxifies the body Bran-processed Bulbus Fritillariae Thunbergii Granules ( ) Removes heat and phlegm and reduces swelling Rhizoma Atractylodis Macrocephalae Granules ( ) Rhizoma Dioscoreae Granules ( ) Bran-fried Rhizoma Atractylodis Macrocephalae Granules ( ) Cicada Slough ( ) Radix Bupleuri Granules ( ) Strengthens the spleen and dries dampness Nourishes the stomach and the lungs and regenerates body fluid Nourishes the spleen, regenerates body fluid and treatment of tocolysis Removes heat and relieves coughing Reduces fever and nourishes the liver 144

152 BUSINESS For the years ended December 31, 2014, 2015 and 2016, revenue generated from our top 20 single herb TCM Granules amounted to RMB210.9 million, RMB320.3 million and RMB467.3 million, respectively. We manufacture all of our TCM Granules at our current manufacturing facilities located in Pengzhou City, Chengdu, Sichuan Province. Please refer to the section headed Manufacturing in this document for details relating to our manufacturing process and facilities. We market, sell and distribute a substantial majority of our TCM Granules directly to hospitals and medical institutions across the PRC using our proprietary Smart Pharmacy Systems. Our TCM Granules distributed through our Smart Pharmacy Systems are usually contained in a multi-compartment box, with each compartment containing a single dose that consists of one or more single-herb TCM Granules in accordance with the particular prescription. The image below shows an example of a TCM Granules prescription an individual patient would receive at one of the hospitals or medical institutions using our Smart Pharmacy Systems. We also package single-herb TCM Granules individually for sale to hospitals and medical institutions and for sale internationally. In such cases, our TCM Granules are individually packaged in single dosage based on each type of TCM Granules, as shown in the image below. For the years ended December 31, 2014, 2015 and 2016, the sale of TCM Granules constituted 95.8%, 94.5% and 99.8% of our total revenue, respectively. 145

153 BUSINESS TCM Decoction Pieces and Others TCM decoction pieces are single-herb pieces that are prescribed by TCM practitioners when patients use the traditional boiling method to prepare their prescription. Patients typically boil decoction pieces to create a soup which is then consumed. During the Track Record Period, we sold approximately 137 types of decoction pieces, the top five of which by revenue generated during the Track Record Period are set out below. Name Bulbus Fritillariae ( ) Pinellia Ternate ( ) Ligusticum Chuanxiong ( ) Centipede ( ) Intended Treatment Removes heat and phlegm and reduces swelling Dries dampness, reduces phlegm and relieves dry throat Improves blood circulation and relieves pain Dredges the meridian and relieves pain Cortex Dictamni ( ) Dries dampness and helps detoxification We package our single-herb TCM decoction pieces individually for sale to hospitals and medical institutions. For the years ended December 31, 2014, 2015 and 2016, the sale of TCM decoction pieces and others constituted 4.2%, 5.5% and 0.2% of our total revenue, respectively. As we believe TCM Granules generally have better market prospects than TCM decoction pieces, we have gradually decreased the sale of TCM decoction pieces beginning in 2015 and will cease to sell TCM decoction pieces entirely upon [REDACTED]. However, we will continue to manufacture TCM decoction pieces, which will only be used in connection with the internal production of TCM Granules. We also develop Chinese patent medicines, which are ready-made medicines made in accordance with traditional Chinese medicine theory and practice. Chinese patent medicines are typically available in various forms, including pills, capsules, pastes and powders. We launched our first Chinese patent medicine product, Danshu Pills ( ), in March Danshu Pills are made primarily from peppermint oil and are used for the treatment of chronic gall-bladder discomforts or diseases, including gall-stones. We package our Danshu Pills in packages containing 84 or mg pills and distribute them primarily through direct sales to hospitals and medical institutions. The images below show our Danshu Pills. MARKETING, SALES AND DISTRIBUTION Marketing and Sales of Our TCM Granules We market, sell and distribute a substantial majority of our TCM Granules directly to hospitals and medical institutions in the PRC, including primarily Chinese medicine hospitals as well as general hospitals. TCM practitioners practicing at these hospitals and medical 146

154 BUSINESS institutions, in turn, prescribe them to patients. We also market, sell and distribute a small portion of our products through third-party distributors. As a substantial majority of our sales are conducted under our direct sales model, which enables us to maintain effective control over our sales channel and customer relationships, manage our sales activities more efficiently and save costs, our Directors believe we are able to achieve higher profitability. During the Track Record Period, our TCM Granules were sold in 29 Provinces throughout the PRC, with the majority of our revenue being derived from Western China and Northern China. The following table illustrates the contributions to our total revenue from the sale of TCM Granules by region in which our TCM Granules were distributed for the periods indicated. For the Year Ended December 31,* RMB 000 % RMB 000 % RMB 000 % Western China (1) 319, , , Northern China (2) 301, , , Central China (3) 56, , , Eastern China (4) 9, , , Southern China (5) 1, , , Overseas (6) 3, , , Provision for sales return (7) (11,108) (1.6) (16,741) (1.7) (21,152) (1.5) Total 680, , ,400, Notes: * Includes revenue derived from the sale of TCM Granules to distributors. (1) Includes Sichuan Province, Chongqing, Gansu Province, Qinghai Province, Guizhou Province, Yunnan Province and Xinjiang Uyghur Autonomous Region. (2) Includes Beijing, Hebei Province, Heilongjiang Province, Jilin Province, Liaoning Province, Shandong Province, Tianjin, Shanxi Province, Shaanxi Province, Ningxia Hui Autonomous Region and Inner Mongolia Autonomous Region. (3) Includes Hubei Province, Hunan Province, Anhui Province and Henan Province. (4) Includes Fujian Province, Jiangxi Province, Shanghai and Zhejiang Province. (5) Includes Guangdong Province, Guangxi Province and Hainan Province. (6) Includes primarily Hong Kong, Australia and Canada. (7) Under the terms of the sales agreements, product return by our customers is permitted in certain limited circumstances. See Distribution of Our TCM Granules and Our Smart Pharmacy Systems for further details. Provision is therefore made for the best estimate of the expected sales return in respect of the sales of our products during the Track Record Period. The amount of provision was determined based on our historical statistic of sales return as a percentage of our annual revenue. 147

155 BUSINESS Since we are a CFDA-approved manufacturer of TCM Granules, we are only required to file a list of clinical hospitals and medical institutions using our TCM Granules with the relevant Provincial FDAs, according to the TCMG Regulations. Different Provincial FDAs that oversee local hospitals and medical institutions within their jurisdictions may interpret and implement the TCMG Regulations differently and inconsistently. For instance, some of the Provincial FDAs require that the TCM Granules manufacturers should file a list of clinical hospitals and medical institutions using their TCM Granules, while some other Provincial FDAs do not require the TCM Granules manufacturers to file such lists with them. Due to the lack of consistency in the interpretation and the implementation of the applicable regulations, we believe that it is not compulsory for us to file the lists of clinical hospitals and medical institutions using our TCM Granules clinically with all Provincial FDAs of the jurisdictions where such clinical hospitals and medical institutions are located. Therefore, certain filings do not necessarily contain such list of clinical hospitals and medical institutions. During the Track Record Period and as of the Latest Practicable Date, we have made requisite filings with the relevant Provincial FDA in each of the Provinces where our TCM Granules were sold. We generate demand for our products from hospitals and medical institutions through our marketing and sales activities. We have established an extensive marketing and sales network comprising representatives located in all major markets where our products are sold. As of December 31, 2016, we had a team of 463 marketing and sales representatives, which, according to the PICO Report, was one of the larger teams of in-house marketing and sales representatives among TCM Granules manufacturers in the PRC. Most of our marketing and sales representatives are required to have an educational background relating to the medical field, including pharmacology, pharmaceutical management and administration, pharmaceutical preparation, medical sciences or medical technology, relevant professional qualifications or related work experience. After joining us, our marketing and sales representatives receive ongoing professional training relating to various topics, including, among others, the origins and basics of Chinese medicine and knowledge of our TCM products. In addition to marketing and sales representatives, we also employed a team of 822 personnel as of December 31, 2016, who mainly focus on the operation of our Smart Pharmacy Systems that were installed at hospitals and medical institutions. We believe these personnel help us nurture and solidify the relationships we have with our customers. Our marketing and sales representatives are primarily responsible for promoting our products and actively seek to strengthen the market recognition of our products among hospitals and medical institutions, TCM practitioners and patients. Our marketing and sales representatives focus their efforts on academic promotion, such as organizing academic forums and other activities, targeting doctors and other personnel in major hospitals and medical institutions. In addition, our representatives regularly visit our existing customers with updated product information and seek to develop new customers by attending trade shows, organizing academic training and information sessions for medical professionals and distributing promotional materials about our products. We also aim to increase our collaboration with research institutions and medical organizations to broaden the awareness of TCM Granules and promote our products generally. In the near term, we plan to target our efforts on organizations focused on gynecology, respiration, digestion, dermatology and cardiology since chronic diseases are more commonly seen in these areas, which in turn have a higher potential demand for TCM Granules. In addition to the efforts of our marketing and 148

156 BUSINESS sales representatives, we also promote our products to the general public through popular media such as the Internet, newspapers and magazines. Furthermore, we also strive to strengthen market awareness and acceptance of TCM Granules and promote our brand through participating in the Symposium on Scientific and Technological Achievements in Traditional Chinese Medicine hosted by Traditional Chinese Medicine Science and Technology Development and Communication Center. Experts in the TCM Granules industry are invited to conduct panel discussions on TCM Granules and doctors are invited from hospitals and medical institutions to attend the forums. During the forums, we also have the opportunity to communicate face-to-face with TCM practitioners and answer questions that they may have on our products. Together with the State Administration of Traditional Chinese Medicine of the PRC, we organize forums in Chengdu and at our production facilities in Pengzhou City, Chengdu, Sichuan Province, to showcase our comprehensive list of TCM products by inviting our existing and potential customers and other experts in the TCM Granules industry. We believe through our organization and participation in these symposiums and forums, we are able to increase awareness and acceptance of TCM Granules among TCM practitioners and effectively promote our brand. 149

157 BUSINESS Distribution of Our TCM Granules and Our Smart Pharmacy Systems Direct Sales to Hospitals and Medical Institutions We sell and distribute our TCM Granules primarily through our direct relationships with hospitals and medical institutions. For the years ended December 31, 2014, 2015 and 2016, we sold our TCM Granules directly to 550, 658 and 790 hospitals and medical institutions in the PRC, including 475, 573 and 692 hospitals. During the same periods, direct sales to hospitals and medical institutions accounted for 94.6%, 94.9% and 95.6% of our revenue from the sale of TCM Granules. We divide our marketing, sales and distribution efforts into five regions, covering the majority of the geographic areas of the PRC. As of December 31, 2016, our products were sold directly to hospitals and medical institutions in a total of 29 Provinces in the PRC, including Beijing, Sichuan Province, Tianjin, Henan Province, Xinjiang Autonomous Region and Chongqing. The following map illustrates the geographic coverage, based on our marketing and sales regions, of our TCM Granules in terms of numbers of hospitals and medical institutions to which we directly sell and distribute our TCM Granules, as of December 31, Northern China 212 Western China 447 Central China 80 Eastern China 43 Northern China 212 Eastern China 43 Southern China 8 Southern China 8 Central China 80 Western China

158 BUSINESS Sales Agreements with Hospitals and Medical Institutions We generally enter into sales agreements with our direct sales customers for a term of one to five years with automatic renewal provisions. The prices of our TCM Granules are either fixed in the agreements with us having the right to inform our direct sales customers of any price adjustments by providing one month s written notice, or in the invoices issued to such customers. The table below sets forth the standard terms of our sales agreements. Principal terms Term Price Quality standard and return policy Minimum purchase amount Delivery costs Credit period Summary Ranging from one to five years with automatic renewal provisions Either fixed in the agreements with us having the right to inform customers of any price adjustments by providing one month s written notice, or in the invoices issued to our direct sales customers. We generally adjust the prices based on changes to the market prices of raw medicinal herbs. The actual prices of the different batches of TCM Granules to be purchased by our direct sales customers under the sales agreements are usually included in the individual purchase orders subsequently signed by us. We undertake to provide products meeting the quality standards set out in the Chinese Pharmacopoeia or other applicable quality standards. Product return is permitted in limited circumstances, including in situations where (i) our TCM Granules do not meet these applicable standards; and (ii) customers may demand product return not related to quality issues, provided that such customers must provide us a written statement setting forth the reason(s) for requesting return and have subsequently obtained our express consent. We generally do not require a minimum purchase amount. We bear the delivery costs. Ranging from one to five months. 151

159 BUSINESS Our Smart Pharmacy Systems We strategically focus on marketing and distributing our TCM Granules through our proprietary Smart Pharmacy Systems directly to hospitals and medical institutions. Our Smart Pharmacy Systems generally comprise one or more individual dispensing machines and are designed as a full-service solution to not only prepare and package TCM prescriptions using TCM Granules in a manner that improves safety, efficiency, accuracy and level of automation, but also help our customers digitize and modernize their TCM prescriptions process. Typically, at the hospitals and medical institutions that use our Smart Pharmacy Systems, individual patients are prescribed Chinese medicine prescriptions by their TCM practitioners. Patients then take the prescriptions to our dedicated Smart Pharmacy prescription counter at the hospitals and medical institutions where the prescription is prepared and packaged in precise amounts. Patients can then simply add the TCM Granules to water and consume the mixture according to their TCM practitioner s instructions. Certain hospitals and medical institutions that use our Smart Pharmacy Systems also purchase a small amount of our individually packaged single-herb TCM Granules based on specific needs. We strategically select hospitals and medical institutions to install our Smart Pharmacy Systems primarily based on the following criteria: we install our fourth or fifth generation Smart Pharmacy Systems in Class III Chinese medicine hospitals or hospitals and medical institutions having annual sales of TCM decoction pieces of more than RMB15 million; we install our fourth generation Smart Pharmacy Systems in Class II Chinese medicine hospitals or hospitals and medical institutions having annual sales of TCM decoction pieces of more than RMB4 million; and we install our third generation Smart Pharmacy Systems in Class II Chinese medicine hospitals or hospitals and medical institutions having annual sales of TCM decoction pieces of more than RMB2 million. We successfully commenced the development of our first generation of Smart Pharmacy Systems in 2002 and are now installing the fifth generation in hospitals and medical institutions across the PRC. The first generation of our Smart Pharmacy Systems were designed and developed in collaboration with Sichuan University. Since then, we have implemented technological improvements with subsequent generations and protected the associated intellectual property. Based on customer and user feedback and our internal review, we have continuously fine-tuned and improved the design and functions of our Smart Pharmacy Systems with the primary objective to create the safest, most efficient, most accurate and most automated Smart Pharmacy Systems in the market. As a result, according to the PICO Report, our Smart Pharmacy Systems are one of the most technologically advanced in the market, providing highly accurate measurements and effectively avoiding cross-contamination. Essential to the operation of our Smart Pharmacy Systems are the software and network connection that enable the digitization of the prescription process. Our self-developed software is installed as part of our Smart Pharmacy Systems and connects internally to our customers internal network. Once installed, our Smart Pharmacy Systems enable our customers to monitor and maintain records of each prescription accurately and efficiently. 152

160 BUSINESS All of our Smart Pharmacy Systems that are currently in operation are either third, fourth or fifth generation systems. Our third and fourth generation Smart Pharmacy Systems consist of TCM Granules storage shelves and one or more modular semi-automated dispensing machines that measure and package the TCM Granules. Prescriptions are given to hospital employees who enter the prescription into the computer system, which then transmits the information to the semi-automated dispensing machine that is operated by our employees. Our employees select the appropriate types of TCM Granules from the storage shelf, which are stored in individual containers and insert them into the semi-automated dispensing machine. Once the containers are inserted into the semi-automated dispensing machine, the precise amounts of each individual type of TCM Granules are measured and delivered to an individual compartment box, which is then sealed. With respect to our third generation Smart Pharmacy Systems, up to two containers containing appropriate types of TCM Granules can be inserted into the semi-automatic dispensing machines at a time whereas for our fourth-generation Smart Pharmacy Systems, up to six containers can be inserted into the semi-automatic dispensing machines. The image below shows our fourth generation Smart Pharmacy System with a semi-automated dispensing machine. Fourth Generation Smart Pharmacy System Depending on the size and prescription volume of a given customer, our third and fourth generation Smart Pharmacy Systems may contain one or multiple individual semi-automated dispensing machines. Furthermore, depending on the number of individual semi-automated dispensing machines, our third and fourth generation Smart Pharmacy Systems can typically be operated by two to three technicians, with each semi-automated dispensing machine being operated by one to two employees. Our fifth generation Smart Pharmacy Systems require even fewer employees to operate and consist of one modular unit that contains a TCM Granules storage shelf, a delivery system and a fully-automated dispensing machine. Our fully-automated Smart Pharmacy Systems can be operated by as few as one employee who is only required to enter the prescription into the computer system. Once the prescription is entered, the fully-automated unit selects, measures, packages and generates the appropriate TCM Granules in a sealed compartment box. Until our third and fourth generation Smart Pharmacy Systems, manual insertion of the containers with appropriate types of TCM Granules into the dispensing machines is not necessary with respect to our fifth generation Smart Pharmacy Systems. The image below shows our fifth generation Smart Pharmacy Systems. 153

161 BUSINESS Fifth Generation Smart Pharmacy System Our customers also maintain inventory storage near our Smart Pharmacy Systems in order to ensure efficient and convenient replenishing of TCM Granules to the storage shelves. Through our system software, our Smart Pharmacy Systems are able to record the sales and assess inventory levels, so that our employees are able to notify the hospital or medical institution when inventory is running low, which allows them to project their inventory needs more precisely. Our customers typically monitor their inventory levels accordingly and place sales orders with our dedicated sales representatives when their inventory levels have fallen below a specified standard in accordance with their internal inventory policy. Our Smart Pharmacy Systems bring substantial added-value to hospitals, the key advantages of which include the following: Product safety. Our proprietary dispensation technique is designed to avoid any cross-contamination among different prescribed TCM Granules arising from different prescriptions during the dispensing and packaging process. Our Smart Pharmacy Systems provide low levels of cross-contamination, according to the PICO Report, which helps to ensure product safety. Accuracy. Equipped with precise electronic scales and computer system, our Smart Pharmacy Systems measure TCM Granules to a high degree of accuracy, ensuring prescriptions are filled exactly as prescribed by the TCM practitioners. Efficiency. Due to the high degree of automation and modular design of our machines, a single prescription can be filled within minutes, allowing hospitals and medical institutions to improve patient flow and logistics. Minimized human error. Due to the high degree of automation of our machines, especially for the fifth generation of our fully-automated dispensaries, the risks of human error in the dispensing process are minimized. Efficient design and easy access. In discussion with our customer hospitals and medical institutions, we can customize our Smart Pharmacy Systems to fit the space available, projected sales volume and patient traffic, ensuring that they occupy the most efficient use of space with easy access for our employees. 154

162 BUSINESS Inventory management. The software we install in our Smart Pharmacy Systems records the amount of TCM Granules sold and reflects the balance of TCM Granules in the storage shelf instantaneously, which enables hospitals and medical institutions to track their TCM Granules inventory level more efficiently. Our Smart Pharmacy Systems are permanent fixtures in the hospitals, which we believe would be difficult to be replaced or rivaled by our competitors. With our in-house capability to design, develop and assemble our Smart Pharmacy Systems and our ability to customize our Smart Pharmacy Systems to meet the needs of different hospitals and medical institutions, we believe we have been able to create strong brand recognition and enhance customer loyalty among hospitals and medical institutions, TCM practitioners as well as patients. We have also developed a mobile version of our Smart Pharmacy Systems that allows us to distribute our TCM Granules to rural regions in the PRC as well as to hard-to-reach areas following natural disasters and calamities. For hospitals and medical institutions, our Smart Pharmacy Systems create a compelling value proposition as we believe they reduce operating costs, help improve the efficiency of prescription processing, enhance patient satisfaction and foster patient loyalty. As of December 31, 2014, 2015 and 2016, our Smart Pharmacy Systems were installed at 182, 239 and 338 hospitals and medical institutions throughout the PRC, respectively. Provision of Our Smart Pharmacy Systems We enter into separate use and management agreements with the hospitals and medical institutions to which we provide our Smart Pharmacy Systems at no cost to them. Pursuant to these agreements, we are responsible for designing and building the Smart Pharmacy Systems. After we receive a request from the hospital or medical institution, a project analysis will be conducted based on the size, storage capacity, projected sales volume and patient traffic and other specific needs that our customer may have. As part of the installation process, we visit our customers physical premises to ensure that our design will be appropriate for their needs and available space. The use and management agreements generally have a term of five years, subject to earlier termination by the hospitals and medical institutions with six months prior written notice to us. The manufacture of the automated and semi-automated dispensing machines used in our Smart Pharmacy Systems is usually on a demand basis though we also keep a certain number on inventory to ensure timely delivery and installation to our customers. After project analysis, we typically conduct structure design and control design, after which we will start the manufacturing process. We outsource the manufacture of the individual parts of our Smart Pharmacy Systems based on our internally developed designs. We test and install our Smart Pharmacy Systems at our customers premises ourselves. Our selection of third-party suppliers for the individual parts of the Smart Pharmacy Systems is primarily based on product quality, price, industry ranking, reputation and the length of our relationship with such supplier. When the Smart Pharmacy Systems are built, a number of rounds of testing will be performed and relevant improvements will be made. Specialized personnel from the hospitals or medical institutions will be invited to conduct an assessment of the product, after which the machine can be put into operation. 155

163 BUSINESS We have designated personnel to oversee the daily operation and maintenance of our Smart Pharmacy Systems. Only staff trained and certified by us are allowed to operate our Smart Pharmacy Systems. We provide training for potential candidates who are required to pass an examination at the end of the training before they are certified to work as our Smart Pharmacy Systems operators. We also conduct spot checks on our Smart Pharmacy Systems operators after their commencement of work. For any technical issues that may arise, our internal policy is to resolve such issues within 24 hours, and in practice, technical issues usually can be resolved shortly since our on-site monitoring enables us to respond quickly. Upgrades and improvements, including ones requested specifically by a particular customer, are typically taken care of by staff assigned to particular customer locations. Sales to Distributors PRC Sales to Distributors In addition to direct sales to hospitals and medical institutions, we also sell a small portion of our TCM Granules to third-party distributors in the PRC. We began selling to distributors in the PRC mainly due to (i) certain hospitals specifically requesting or the relevant policies requiring that the sales of TCM Granules be initially made through distributors; and (ii) using them to expand the geographic coverage of our sales. However, over the years, such requests and policies have become less common. As of December 31, 2014, 2015 and 2016, we had 73, 77 and 77 distributors, respectively. As of December 31, 2016, our distribution network covered 24 Provinces in the PRC. For the years ended December 31, 2014, 2015 and 2016, sales of our TCM Granules made to third-party distributors constituted 5.4%, 5.1% and 4.4%, respectively, of our revenue from the sale of TCM Granules. All of our distributors are Independent Third Parties and we do not have ownership or management control over any of them. The following table sets for the number of distributors we sold our TCM products to as of the periods indicated. As of December 31, 2014 As of December 31, 2015 As of December 31, 2016 Number of Distributors We consider various factors when selecting distributors to sell our products, including, but not limited to, their relationships with hospitals, geographic coverage and historical performance and qualifications. We generally enter into standard distribution agreements with our distributors with a term ranging from one to six years. All of our distributors purchase our products as principals by placing purchase orders with specifications on the prices, types and quantities of TCM products. We generally sell our TCM products to our distributors at mutually agreed prices. Such price is equal to a certain percentage of the retail price of each TCM product. After we accept the purchase orders, we arrange the delivery of our products to our distributors and bear the delivery costs. The table below sets forth the standard terms of our agreements with our distributors. 156

164 BUSINESS Principal terms Term Price Quality standard and return policy Minimum purchase amount Delivery costs Credit period Summary Ranging from one to six years, with some distributors having the priority to be granted the right to renew the agreements and certain others with automatic renewal upon expiry unless either party terminates the agreement. Either fixed in the distribution agreements with us having the right to inform our distributors of any price adjustments by providing one month s written notice, or in the individual sales orders to be subsequently signed by us. We usually adjust the prices based on changes to the market prices of raw medical herbs. We undertake to provide products meeting the quality standards set out in the Chinese Pharmacopoeia or other applicable quality standards. Product return is permitted in limited circumstances, including in situations where (i) our TCM Granules do not meet the applicable quality standards; and (ii) customers may demand product return not related to quality issues, provided that such customers must provide us a written statement setting forth the reason(s) for requesting return and have subsequently obtained our express consent. We generally do not require a minimum purchase amount. We generally bear the delivery costs. Ranging from one to six months. Overseas Sales to Distributors We also sell a small portion of our TCM Granules internationally. International sales are made through overseas distributors and agents in the regions or countries in which we sell our TCM Granules. Moreover, we are primarily focused on locations with large Chinese communities, including, primarily, Hong Kong, Australia and Canada. For the years ended December 31, 2014, 2015 and 2016, sales of our TCM Granules overseas accounted for 0.5%, 0.4% and 0.3% of our revenue from the sale of TCM Granules. 157

165 BUSINESS Pricing Policy According to Provisional Regulations on the Administration of Concentrated Chinese Medicine Granules, effective on July 5, 2001, TCM Granules are classified and regulated by the CFDA similar to TCM decoction pieces. Most of the Provinces in the PRC have accepted TCM decoction pieces into their respective Provincial Medical Insurance Catalogs. Our TCM Granules have been included in the Medical Insurance Catalogs of various Provinces such as Beijing, Tianjin, Sichuan Province, Zhejiang Province, Guangdong Province, Hainan Province, Shandong Province, Qinghai Province, Ningxia Hui Autonomous Region, Xinjiang Autonomous Region, Guizhou Province and Yunan Province. Traditional medicinal herbal medicines accepted into the Provincial Medical Insurance Catalogs are generally not subject to price restriction, which is different from other pharmaceuticals accepted into the Provincial Medical Insurance Catalogs that are subject to price restriction. As a result, we generally have the flexibility to set prices for our TCM Granules according to our own pricing policy as detailed below. We set the prices of our products with reference to a number of factors, including prices of raw medicinal herbs, levels of market supply and demand for our products and prices of competing products. Our production, marketing and sales and finance departments meet regularly to evaluate the market conditions and discuss the needs of price adjustment where necessary. We generally review and adjust our product prices from time to time according to market trend and discussion with our customers. The prices of our TCM Granules either are fixed in the supply agreements, with each party having the right to seek price adjustment with one month s written notice, or will be included in individual sales orders to be signed by us subsequently. Product Return Policy We generally only accept sales returns for defective or damaged products. However, in addition to defective or damaged products, we also permit product return in certain limited circumstances where (i) our TCM Granules do not meet the quality standards set out in the Chinese Pharmacopoeia or other applicable quality standards; and (ii) customers may demand product return unrelated to quality issues, provided that such customers must provide us a written statement setting forth the reason(s) for requesting product return and have subsequently obtained our express consent. We reimburse our direct sales customers and distributors for any losses or bear directly the cost of replacement. We generally provide warranties that the products transported to our direct sales customers and distributors are of satisfactory quality and are manufactured, packaged and labeled in compliance with the relevant requirements under PRC laws. As at the Latest Practicable Date, we had not had any material sales returns from our distributors or direct sales customers and had not experienced any material customer complaint, product recall and product liability or other legal claims due to problems with the quality of our products. Logistics and Product Delivery We generally use third-party logistics service providers to transport our TCM Granules from our manufacturing facilities to our customers. These service providers have extensive logistics networks covering a large number of Provinces in the PRC. We enter into relevant 158

166 BUSINESS agreements with these providers for a term of one year which is renewable with prior notice. These providers are required to indemnify us for any damages and losses to our TCM Granules during transportation under these agreements. During the Track Record Period, there was no material damage or loss to our TCM Granules during transportation under these agreements. Marketing, Sales and Distribution of Our Other TCM Products Most of our TCM decoction pieces have historically been sold directly to hospitals and medical institutions that are already our existing customers for TCM Granules. Our sales of TCM decoction pieces are offered to such customers when they have a specific need. As we believe TCM Granules have better market prospects than that of TCM decoction pieces, we have gradually decreased the sale of TCM decoction pieces beginning in 2015 and will cease to sell TCM decoction pieces entirely upon [REDACTED]. However, we will continue to manufacture TCM decoction pieces, which will only be used in connection with the internal production of TCM Granules. Our Chinese patent medicine product, Danshu Pills ( ), has been primarily directly sold to hospitals and medical institutions. We expect to use a combination of direct sales and third-party distributors once we commence sale of our other Chinese patent medicines. Relationship with Customers For the years ended December 31, 2014, 2015 and 2016, our five largest customers accounted for approximately 37.2%, 35.6% and 30.0% respectively, of our revenue from the sale of TCM Granules for such periods. For the same periods, our largest customer accounted for 14.2%, 13.6% and 12.3% of our revenue from the sale of TCM Granules for such periods respectively. During the Track Record Period and up to the Latest Practicable Date, we did not have any material dispute with our customers. None of our Directors, their respective associates and any Shareholder who, to the best knowledge of our Directors, own more than 5% of the issued share capital of our Company have any interest in any of our top five customers. 159

167 BUSINESS MANUFACTURING Manufacturing of Our TCM Granules Manufacturing Process We manufacture our TCM Granules using the extraction and concentration technology. The manufacturing process begins with the pre-processing of raw medicinal herbs. Once processed, the TCM decoction pieces undergo the core manufacturing process, which includes extraction, separation and concentration, drying, granulation, mixing and packaging. Each step of our manufacturing process is preceded by a quality control check. It typically takes 10 to 15 days to complete the manufacturing process of a batch of our TCM Granules, depending on the type of product and production amount. The following diagram summarizes the key steps of our core manufacturing process for our TCM Granules: Raw Medicinal Herbs QC Pre-Processing of Raw Medicinal Herbs (1) QC Steaming/Boiling/ Extraction QC Separation & Concentration Drying QC Packaging Granulation QC TCM Granules Notes: (1) Pre-processing includes the selection and washing of raw medicinal herbs and processing them according to the Chinese Pharmacopoeia and traditional processing methods, and does not involve methods prohibited by the Catalog for the Guidance of Foreign Investment Industries (as amended in 2015), including broiling. A small portion of the raw medicinal herbs that we use for the production of our TCM Granules require special processing that is prohibited by the Catalog for the Guidance of Foreign Investment Industries (as amended in 2015), including broiling, which we currently do not perform ourselves. For such TCM Granules, we purchase the intermediate product needed from either third-party suppliers or our Connected Persons. Please refer to Connected Transactions Non-exempt Continuing Connected Transactions in this document for further details. 160

168 BUSINESS Manufacturing of Our TCM Decoction Pieces The manufacturing process for our TCM decoction pieces also begins with raw medicinal herbs. The raw medicinal herbs are first sorted and are then cleaned to remove all sediment and dirt after which they are cut to smaller sizes. Once dry, the pieces are again sorted to select pieces of sufficient quality and packaged. Since we believe TCM Granules generally have better market prospects than TCM decoction pieces, we will cease to sell TCM decoction pieces entirely upon [REDACTED]. However, we will continue to manufacture TCM decoction pieces, which will only be used in connection with the internal production of TCM Granules. Manufacturing of Our Chinese Patent Medicines The manufacturing of our Chinese patent medicine products in the form of pills primarily involves the preparation and mixing of raw medicinal herbs, which are then dripped into liquid and condensed into pills. The pills are then coated and packaged into finished products which are ready to be sold. Manufacturing Facilities Overview We currently manufacture all of our products at our facilities located in Pengzhou City, Chengdu, Sichuan Province, which occupy an aggregate gross site area of approximately 170,000 sq.m., with an aggregate gross floor area of approximately 102,000 sq.m. The facilities include, among others, raw material warehouses, manufacturing plants with nine manufacturing lines, general offices and waste treatment areas. We started to use these facilities in August The designed production capacity of these facilities is 2,000.0 tons of TCM Granules per year. Prior to August 2014, we manufactured our products at our previous facilities located in Chengdu, Sichuan Province, which occupy an aggregate gross site area of approximately 15,341 sq.m., with an aggregate gross floor area of approximately 5,624 sq.m. Our previous manufacturing facilities had designed production capacity of tons of TCM Granules per year. We ceased to manufacture TCM Granules at our previous manufacturing facilities in August 2014 when our current manufacturing facilities became operational. Our manufacturing facilities are highly automated and controlled by a centralized computer system, requiring minimal manual labor. Our manufacturing facilities are equipped with machinery and equipment for the various stages of the production process, including, among others, automatic control system for extraction production lines, dynamic extraction lines, double-effect concentrators, large spray dryers and dry granulators. All of our production lines and our manufacturing facilities are in compliance with GMP standards. We have implemented quality control procedures in compliance with GMP standards and other CFDA regulations to ensure consistent quality in our products. Please refer to Regulations PRC Laws and Regulations Relating to the Manufacturing of Pharmaceutical Products. 161

169 BUSINESS Utilization The following table sets forth the aggregate designed capacity, actual production volume and utilization rate of our current and previous manufacturing facilities for TCM Granules for the periods indicated: Previous Manufacturing Facilities Production Line Units Designed production capacity (1) Years Ended December 31, Actual production volume* Utilization rate (2) Designed production capacity (1) Actual production volume (3) Utilization rate (2) Designed production capacity (1) Actual production volume (3) Utilization rate (2) TCM Granules tons % N/A N/A N/A N/A Current Manufacturing Facilities Production Line Units Designed production capacity (1) Years Ended December 31, Actual production volume* Utilization rate (2) Designed production capacity (1) Actual production volume Utilization rate (2) Designed production capacity (1) Actual production volume Utilization rate (2) TCM Granules tons 2, % 2, % 2, , % Notes: * For previous manufacturing facilities and current manufacturing facilities, production in 2014 was not for the full year, accordingly, capacity and utilization rate were annualized. (1) Annual designed production capacity for the years ended December 31, 2014, 2015 and 2016 was an estimate based on the management s estimate on the amount of TCM Granules that our manufacturing facilities were capable of producing and is calculated for illustration purpose only, based on assumed 16 hours of operation per day for 330 days per year, multiplied by an extraction ratio determined principally by reference to our average extraction rate required to produce TCM Granules from raw medical herbs up to our production standards. (2) Utilization rate is derived from dividing our actual production volume for each period by designed production capacity of the same period. (3) We ceased to use our previous manufacturing facilities to manufacture TCM Granules in August 2014 when our current manufacturing facilities became operational. We entered into a lease agreement with Lvse Zhongyao Yinpian on June 19, 2017 pursuant to which we will lease the premises involving our previous manufacturing facilities to Lvse Zhongyao Yinpian, effective upon [REDACTED]. Please see Connected Transactions for further details. We plan to increase our manufacturing capacities and capabilities over the next three years by constructing new production lines, as well as improving existing production lines and/or production facilities, to meet expected increasing demand and product sales. We also intend to increase our profitability through improving manufacturing efficiency. We plan to continue to effectively manage our production costs by enhancing automation, controlling the inflation of manufacturing labor costs and continuously upgrading our existing manufacturing facilities. We will also continue to develop new, or improve existing, manufacturing techniques to enhance product quality and manufacturing efficiency. We believe these efforts will increase our returns on the investment in our manufacturing facilities to drive profitability. 162

170 BUSINESS We maintain and upgrade our major machineries and equipment on a regular basis. Our production team will conduct daily inspection of our facilities and equipment before the start of production, particularly to ensure that our facilities equipment are clean and in good condition. Safety engineering technicians will conduct regular inspection of our facilities and equipment and maintain a record. Our engineers and technicians possess the required skills and experience to notice or identify any defects during the maintenance of machineries and equipment. During the Track Record Period and up to the Latest Practicable Date, we did not experience any significant production interruption due to equipment failure or breakdown, raw material shortages, power interruptions, fire or labor disputes. The primary resources used in our manufacturing process are water, electricity and steam. Our production plants are based in an industrial park with adequate energy supply facilities. During the Track Record Period, our major energy supply was generally steady and there were no material disruptions of our manufacturing due to energy supply shortages. We also have back-up electricity generators to continue our operations on a temporary basis in the event of electricity disruption due to emergency situations. Production Plans and Inventory Management Our annual production plans are formulated by the end of each year primarily based on forecast of market demand for the next year and our inventory supply. Annual market demand forecasts are provided by our marketing sales department in light of historical sales volumes and analysis of the TCM Granules products market. More detailed quarterly or monthly production plans are made in accordance with the annual production plan. We have established polices for the management of inventory for our raw materials, works-in-progress and finished goods. We actively monitor and review our inventory levels on a regular basis and seek to maintain a reasonable level of inventories throughout our manufacturing process. In order to avoid risk and undue expenses arising from over-stocking, our raw material procurement is primarily determined by our inventory level, business plan and demand. Our production and logistics teams meet regularly to determine the planned manufacturing and sales volume. Based on this information, the procurement team formulates a procurement and inventory plan and places orders with suppliers for those raw materials whose inventory levels are expected to fall below our target levels. We manage the inventory levels of our raw materials by monitoring our manufacturing levels and incoming sales orders. Depending on the market price of a particular type of medicinal herb, we may decide to purchase an additional amount, a lesser amount or not to purchase at all for certain periods. Due to the large number of types of TCM Granules we manufacture, we have to retain a certain number of works-in-progress and finished goods to meet sales demand. TCM Granules works-in-progress and finished goods typically have an expiry term of three years and we usually formulate our raw material procurement plan six months prior to when inventory levels of finished goods will be depleted based on the full year sales forecast. We generally replenish our raw materials to ensure that our raw materials inventory is sufficient for three months, based on the existing sales forecast. 163

171 BUSINESS RAW MATERIALS Our Raw Materials Procurement Strategy Raw materials procurement is the most important part of our procurement effort. The primary raw materials used in our production of TCM Granules are raw medicinal herbs. We believe that quality raw materials are essential to the success of our TCM Granules and other TCM products. As a result, we have begun implementing a diversified raw materials procurement strategy to help ensure the consistency, stability and high quality of our raw material supply. During the Track Record Period, we procured our raw medicinal herbs from (i) third-party suppliers who are either individual farmers or agents; (ii) our plantation partners; and (iii) our self-operated plantation bases. In order to be cost efficient, we source a majority of the raw materials from individual farmers and agents who are Independent Third Parties. These agents also help us coordinate the procurement process and arrange for the delivery logistics. As part of our efforts to ensure the quality of raw materials supplied by such third-party suppliers, we include in the relevant supply agreements specific requirements on the quality of raw materials to be provided to us. In 2012, we began establishing cooperation arrangements with our plantation partners, which are individual plantation owners or cooperatives of individual plantation owners. Pursuant to the cooperation arrangements, we provide technical support and expertise to our plantation partners, including SOPs and other cultivation techniques. Our plantation partners implement these SOPs and cultivation techniques in their operations and, after a period of time of implementation and harvest, offer the resulting raw materials to us for purchase. Throughout the process, including the selection of land, soil and seeds, fertilization, pest control and harvesting techniques, we provide guidance to help standardize their operations with a goal to improve the quality of their end products. In return, we are typically granted a right of first refusal to purchase the raw medicinal herbs farmed from their plantations subject to the quality standards set out in the Chinese Pharmacopoeia. We enter into agreements with our plantation partners, who hire their own plantation workers to conduct the farming operations. The terms of the agreements may range from three to ten years. The agreements do not specify the price of the medicinal herbs to be purchased by us nor are we obligated to purchase any fixed quantity should they fail to meet our quality standards. We first began establishing cooperation arrangements with our plantation partners in 2012 and as of December 31, 2016, we had approximately 160 cooperation agreements effective with our plantation partners covering more than 100 types of medicinal herbs. In aggregate, our cooperation arrangements cover approximately 220,000 mu of land across 11 Provinces in the PRC, including in Sichuan Province, Gansu Province, Yunnan Province and Xinjiang Uyghur Autonomous Region. We carefully select our plantation partners based on many factors, including location, types of herbs and quality of their individual plantation owners products. In particular, we emphasize location in the selection of our plantation partners as we believe that certain regions are naturally optimal for specific types of herbs. A substantial portion of our plantation partners are strategically located in the Sichuan Province, which we believe has the optimal climate, soil conditions and other natural conditions for plant growth. In addition, we typically prefer growing a particular type of herb at plantations within close proximity to other plantations growing the same herb, in order to 164

172 BUSINESS gain from economies of scale. We are in the process of expanding our cooperation with local plantation partners and expect the number of plantation bases under the cooperation model to increase in the coming years. We also own and operate two plantation bases in Sichuan Province, covering a total of approximately 45.2 mu of land. We are one of the only two TCM Granules manufacturers in the PRC with self-operated plantation bases and Smart Pharmacy Systems (or other similar systems), according to the PICO Report. Currently, these plantation bases are used primarily for research and development purposes, including the establishment of SOPs for increasing herb cultivation and plantation efficiency aimed at improving the overall quality and consistency of our raw medicinal herb supply. In addition, we also use a small portion of the medicinal herbs grown on these plantations in our manufacturing process, such as Ligusticum chuanxiong ( ). We have rights to use the land with respect to the cultivation of Ligusticum chuanxiong ( ), Rhizoma Paridis ( ), Cortex Magnoliae Officinalis ( ) and Rhizoma Bletillae ( ) on these plantation bases, as the case may be, through contractual arrangements, and hire local plantation workers to conduct the farming operations and have designated personnel supervising the entire farming process. Through our diversified raw materials procurement strategy, we are able to take an active role in improving the overall quality and consistency of our raw material supply by putting our SOPs and other cultivation techniques to use directly in our raw material supply. We are also able to further develop and accumulate knowledge and techniques for the planting, growing and harvesting of raw medicinal herbs. In addition, we believe our advanced breeding, cultivating and processing techniques have helped attract new plantation partners to cooperate with us. Through our raw materials procurement strategy, we have become one of only a few TCM manufacturers in the PRC capable of covering all key components of the entire value chain for TCM Granules, according to the PICO Report. Procurement and Suppliers We use approximately 538 types of raw medicinal herbs in the manufacture of our TCM Granules. In addition, we also procure strategic reserve raw medicinal herbs from time to time when the market prices, in our view, are relatively low. For the years ended December 31, 2014, 2015 and 2016, the purchase of raw medicinal herbs for the manufacture of our TCM Granules were 81.7%, 70.4% and 89.1% of our total cost of production of TCM Granules, respectively. Beginning in 2017, we have begun to purchase certain amount of TCM decoction pieces made from the broiling process from Lvse Zhongyao Yinpian to manufacture our TCM Granules. We intend to continue to make such purchases upon [REDACTED] and going forward pursuant to the Framework Purchase Agreement. Please see Connected Transactions in this document for further details. We have a dedicated procurement team, which consisted of 30 people as of December 31, The prices and availability of raw medicinal herbs may vary from period to period based on factors such as customer demand, weather changes, seasonality and total harvest. In order to ensure we are able to reach the optimal balance between the quality and price of our raw materials, we compare prices of raw materials available from our plantation partners and also adopt price tendering process with our third-party suppliers. If other medicinal herbs 165

173 BUSINESS suppliers offer more favorable prices and meet our quality standards, we may decide to purchase from them instead of from our plantation partners. Our selection of suppliers is primarily based on product quality, price and the suppliers ability to provide stable supply. We have maintained a list of suppliers for every type of medicinal herb we use and these suppliers are required to submit sample products to us for our testing annually. Before the inclusion of new suppliers to our supplier list, on-site visits will be conducted to make sure they satisfy our basic requirements. The frequency at which we purchase each type of medicinal herb depends on customer demand, our production schedule and production cycle of the medicinal herb. Our production and sales teams meet regularly to determine the planned production and sales volume. Based on this information, the procurement team formulates a procurement and inventory plan and places orders with suppliers for those raw materials whose inventory levels are expected to fall below our target levels. We manage the inventory levels of our raw materials by monitoring our manufacturing levels and incoming sales orders and also taking into consideration of changing customer preferences. Depending on the market price of a particular type of Chinese medicinal herb, we may decide to purchase an additional amount, a lesser amount or not to purchase at all for certain periods. Please refer to the sections headed Manufacturing Manufacturing of Our TCM Granules Production Plans and Inventory Management and Financial Information Liquidity and Capital Resources Net Current Assets Inventories in this document. Relationships with Our Suppliers For the years ended December 31, 2014, 2015 and 2016, our aggregate purchases from our five largest suppliers represented 28.8%, 28.0% and 23.6% of our total purchase of raw medicinal herbs, respectively. During the same periods, purchases from our largest supplier represented 11.4%, 6.1% and 5.3%, respectively, of our total purchase of raw medicinal herbs. As of December 31, 2014, 2015 and 2016, we purchased raw medicinal herbs from a total of 102, 190 and 205 suppliers, including our plantation partners and other third-party suppliers, respectively. During the Track Record Period and up to the Latest Practicable Date, we did not experience any significant delays or constraints in production due to any supply disruption of raw materials, nor did we have any material disputes with our suppliers. We generally pay for our purchases of raw materials through bank transfer. We generally settle our trade payable with our suppliers within one year. To the best knowledge of our Directors, none of our Directors or their associates or any person who owned 5% or more of our issued share capital as of the Latest Practicable Date had any interest in any of our five largest suppliers during the Track Record Period, and all our suppliers during the Track Record Period were Independent Third Parties. 166

174 BUSINESS QUALITY CONTROL We believe an effective quality management system is the key in manufacturing high quality products and maintaining customer confidence, and therefore one of the most important factors contributing to our success. We have established an effective quality control system and standard operating procedure for each stage of our manufacturing process. As of December 31, 2016, our specialized quality management department consisted of 45 members, each with an educational background and/or work experience relating to the supervision of manufacturing processes in the pharmaceutical industry. The quality management team is divided into the quality assurance division and quality control division, and led by a department head, who oversees the work of managers, group leaders and other quality management personnel performing different functions, including on-site supervision, sample testing and record keeping. Relevant equipment, devices and premises for raw material qualification, manufacturing process control and product testing have been put in place. Our quality control procedures are in compliance with the GMP standards and other CFDA regulations. In order to comply with these standards, our quality management department has formulated detailed GMP guidelines, various quality standards, and a series of operating procedures, including supplier audit procedures, raw material checking procedures and manufacturing process supervision. Supplier Audit Our suppliers are divided into key material suppliers and general material suppliers. Suppliers of raw materials are key material suppliers. We have compiled and maintained a list of suppliers that have passed our supplier qualification. Our quality control department and other relevant departments conduct supplier audit procedures in accordance with our supplier audit standard operation procedures and determine whether a particular supplier may be added to our supplier list. For suppliers already on our supplier list, we perform annual audits for key material suppliers and biennial audits for general material suppliers. In addition, any supplier which has delivered products with quality issues or delays in delivering products on three consecutive occasions will require reevaluation and may be removed from our approved supplier list. 167

175 BUSINESS Raw Material Quality Control Specific quality standards have been established for our different types of raw materials. Our quality management department conducts full examinations for each batch of raw materials we receive and prepares reports. Typically, when raw materials are delivered to us, our procurement personnel will assist our production control team to conduct preliminary inspections and maintain records. The quality management team then samples and conducts quality examination on the raw materials and prepares quality examination reports. Only raw materials obtaining release approvals from our quality management department may enter the manufacturing process. Our procurement team returns raw materials that do not pass our quality examination within seven days after receiving the quality examination reports. This examination and approval process prevents any substandard raw materials from entering the manufacturing process. Manufacturing Process Supervision Our manufacturing process is in compliance with GMP standards. Testing procedures are performed at various stages in the manufacturing process. After passing the initial raw materials testing and being released into the manufacturing line, medicinal herbs are first processed into intermediate products, including TCM decoction pieces. Quality testing is conducted on the intermediate products before they are moved onto the next stage of being processed into final products. Final product testing and approval procedures are then conducted. No final products may be released without the approval from our quality management department. We apply advanced testing methods in line with industry standards, including methods based on UV spectrophotometry, thin layer chromatography, high performance liquid chromatography, gas chromatography, and inductively coupled plasma mass spectroscopy. RESEARCH AND DEVELOPMENT Overview We believe that research and development is critical to the sustainable development and future growth of our business. Our research and development efforts are focused on improving our existing products through developing advanced manufacturing and testing techniques, formulating new TCM products, such as Chinese patent medicines, and making further improvements to our Smart Pharmacy Systems and medicinal herb farming and cultivation. For the years ended December 31, 2014, 2015 and 2016, our research and development expenses amounted to RMB6.9 million, RMB5.8 million and RMB7.9 million, respectively, representing 1.0%, 0.5% and 0.6% of our total revenue for the same periods, respectively. Our research and development efforts have enabled us to streamline our production process, improve the efficacy, quality and stability of our TCM products, improve our raw material supply and facilitate the distribution of our products. 168

176 BUSINESS In-house Research and Development As of December 31, 2016, we had a total of 37 research and development personnel, including one Ph.D. degree holder, 10 master s degree holders and 17 bachelor s degree holders each in medical, pharmaceutical and other related disciplines. Our research and development team is led by our research and development director who is responsible for reviewing our TCM products standard, overseeing research and development of our TCM Granules and approving new product development plans. We established our pharmaceutical research and development center in 2003, which focuses on the research of quality standards and production process of TCM Granules and development of new TCM products. Our research and development personnel conduct new product development, production process development, clinical studies, registration and intellectual properties management. Our research and development center is equipped with advanced laboratory facilities, including various production and testing devices for conducting research and development experiments. Improvements in Manufacturing and Quality for Existing Products As TCM Granules will continue to be our primary product offering, we dedicate a significant portion of our research and development efforts to improving the efficiency of our manufacturing processes as well as the overall quality of our products. We focus on developing advanced manufacturing methods and quality standards for our intermediate and final products. Essential to the improvement of the quality of our existing products is taking in to consideration knowledge from clinical experience that we acquire through our own research and development team and through ongoing interaction with TCM practitioners. Through this experience, we have been able to establish and continually improve and standardize our TCM Granules manufacturing processes and quality control measures. We believe these protocols enable us to increase our production efficiency and ensure the quality of our TCM Granules. Development of New TCM Granules and Other TCM Products After we have successfully developed a new TCM Granule, samples will be delivered to the relevant Provincial FDA for examination and registration. The relevant Provincial FDA will examine the feasibility of the production method and the composition of the TCM Granule to determine whether it satisfies basic quality standards. The relevant Provincial FDA will also examine whether the sample corresponds to the normal product quality that will result from such production method. If the production method and sample products pass the examination, the relevant Provincial FDA will register the relevant production methods and product compositions of the TCM Granules, which we must follow in conducting our production. 169

177 BUSINESS We also develop and commercialize innovative TCM products through our research and development programs. We launched our first Chinese patent medicine product, Danshu Pills ( ), in March As with the improvement of our manufacturing efficiency and quality of our TCM Granules, our knowledge gained from clinical experience is essential to the development of our new TCM products. After we developed a new Chinese patent medicine product, it will go through pre-clinical research and clinical trials, upon completion of which an application will be made with the Provincial FDA and CFDA for registration of the new product. Our Smart Pharmacy Systems We have a dedicated team focusing on the design, development and upgrade of our Smart Pharmacy Systems. We successfully commenced the development of our first generation of Smart Pharmacy Systems in We have continuously upgraded our Smart Pharmacy Systems and are now installing the fifth generation in many hospitals and medical institutions across the PRC. The first generation of our Smart Pharmacy Systems were designed and developed in collaboration with Sichuan University. Since then, we have improved their technology with subsequent generations and maintained protection of their associated intellectual property. Our design and development of Smart Pharmacy Systems is driven by demand from our customers and we continually provide hardware and software upgrades to our customers. In order to protect our technology in this area, we have entered into confidentiality and non-compete agreements with our research and development personnel, and implement confidentiality protection measures when sourcing the components for manufacturing our Smart Pharmacy Systems. Our Plantation Bases We have also devoted significant resources to experimenting and developing SOPs for the cultivation of raw medicinal herbs. These SOPs cover various stages of the farming process, including the selection of land, soil and seeds, fertilization, pest control, harvesting techniques, raw materials processing and packaging. We have also successfully implemented these SOPs on plantation partners bases, from whom we are granted priority supply of medicinal herbs. We believe these efforts have significantly improved the quality of raw materials we source for production. Please refer to the section headed Raw Materials Our Raw Materials Procurement Strategy in this document. External Collaboration and Government-Sponsored Projects We have established collaborative research and development relationships with leading research institutions, universities and hospitals to conduct research and development activities on various subjects, including new TCM products, clinical studies, and standardization of the quality of TCM products. For example, we have entered into cooperation agreement with Chengdu University of Traditional Chinese Medicine and Sichuan Integrative Medicine Hospital to conduct a research on the breeding and cultivation techniques of Rhizoma Bletillae ( ) and Ligusticum chuanxiong ( ). We have also entered into an agreement with Tianjin Modern Medicine Development Institute in connection with the formulation of quality standards of TCM Granules products in Tianjin. Our other research partners include Yunnan University of Traditional Chinese Medicine, Guang anmen Hospital affiliated with 170

178 BUSINESS China Academy of Chinese Medical Sciences, Dongzhimen Hospital affiliated with Beijing University of Chinese Medicine and Sichuan Academy of Chinese Medicine Sciences. Since our inception, we have participated in a number of government research projects, including, among others, Achievement Transformation of the TCM Granules and Automatic Dispensing Machines ( ), Enhancement of Quality Standard and Its Comprehensive Utilization Research on Chinese Medicine with Bulk Production in Southwestern District, including Aconite Root and Erigeron Breviscapus ( ), Research on application of Automatic Dispensing Machines for TCM Granules ( ) and Research and Application on Mobile Emergency Smart Pharmacy System ( ) and Research on the Integrated Value Chain Development for Ligusticum chuanxiong ( ). The terms of our collaboration arrangements for research projects vary depending on the subject and nature of the research and our commercial arrangements with our research partners. Our research and development team may take a leading role in the design and execution of the research projects and participate in the research work. In addition to our participation in this research and development work, we generally also provide the funding for these joint research and development projects. We are typically entitled to co-own the research results as well as intellectual property rights. We believe long-term relationships with our external research partners enable us to stay updated on the latest development and technologies in the TCM industry. INTELLECTUAL PROPERTY RIGHTS As of the Latest Practicable Date, we had been granted 76 patents and had 34 pending patent applications in the PRC and held one patent in Japan, one patent in Korea, one patent in Hong Kong and one patent in Taiwan. We have also registered 30 trademarks and four trademark applications pending in the PRC. We rely on intellectual property rights to protect our technologies, inventions and improvements that we believe are important to maintain the market share of our products. A substantial number of our technologies, including our Smart Pharmacy Systems and related technologies, have intellectual property rights. Please refer to Appendix IV to this document for further details of our material intellectual property rights. In order to protect our own intellectual property rights, we enter into confidentiality agreements with our research employees providing that all relevant intellectual properties developed by our research staff during their employment with us become our intellectual properties and are treated as trade secrets. Our employees are required to refrain from disclosing trade secrets to any third party. Additionally, we also follow procedures to ensure that we do not infringe on the intellectual property rights of others and we are not engaged in the sale of counterfeit pharmaceutical products. As of the Latest Practicable Date, we had not been sued on the basis of and had not undergone arbitration in respect of, nor had we received any notification from third parties claiming infringement of any intellectual property or sales of counterfeit pharmaceutical products. Further, as of the Latest Practicable Date, we had not been the subject of any adverse finding in an investigation or audit by any governmental authorities in respect of 171

179 BUSINESS infringement of any intellectual property of third parties or sales of counterfeit pharmaceutical products. However, despite our internal control procedures, we are still subject to risks relating to intellectual property rights. Please refer to Risk Factors Risks Related to Our Business and Industry If we are unable to protect our intellectual property, our business, financial condition and results of operations could be materially and adversely affected and Risk Factors Risks Related to Our Business and Industry Litigation to protect our intellectual property rights or defend against third-party allegations of infringement may be costly for further details of risks relating to intellectual property rights. COMPETITION With the increasing number of hospitals and medical institutions in China, and in particular, the gradual acceptance by practitioners and patients of TCM Granules as an alternative to TCM decoction pieces, the market share of TCM Granules in the TCM market has increased accordingly. As of the Latest Practicable Date, there were only five group companies licensed to manufacture TCM Granules in the PRC. Moreover, the industry has high barriers to entry, including strict supply chain requirements, requirements for manufacturers to produce a minimum of 400 types of TCM Granules and high quality controls, according to Provisional Regulations on the Administration of Concentrated Chinese Medicine Granules. According to the PICO Report, it is difficult for other manufacturers to enter the industry in the short term. However, we cannot assure you that the regulatory entry barrier to the TCM Granules market will not be removed in the future. See Risk Factors We face heightened competition in the TCM Granules market, and our business, financial condition and results of operation may be adversely affected if we are not able to compete effectively. According to the PICO Report, the top three TCM Granules manufacturers in the PRC in aggregate accounted for 83.3% of the total market share in terms of total revenue for the year ended December 31, Despite the competitive landscape, we had a market share of 15.4% in terms of total revenue for the year ended December 31, 2016, which was an increase from 12.0% in 2014, according to the PICO Report. According to the PICO Report, we are the only licensed pilot enterprise of TCM Granules headquartered in Western China. Our total revenue grew rapidly from RMB711.0 million in 2014 to RMB1,403.3 million in 2016, representing a CAGR of 40.5%. According to the PICO Report, based on revenue and market share in 2016, we were the third largest TCM Granules manufacturer in China. We have established a direct marketing and sales model for the sale of substantially all of our TCM Granules. According to the PICO Report, we have one of the larger marketing and sales teams among all TCM Granules manufacturers in China, consisting of approximately 463 marketing and sales representatives as of December 31, Our sales network covers a total of 29 Provinces, including Beijing, Tianjin, Chongqing, Henan Province and Xinjiang Autonomous Region. Our direct sales model allows us to maintain close control over our sales channels and also facilitates our academic promotion activities. We provide our customers with comprehensive solutions of Smart Pharmacy Systems in addition to our TCM Granules products. Our Smart Pharmacy Systems are quick in dispensing the granules, accurate in measurement and are able to effectively prevent cross-contamination. We have launched the fifth generation of our Smart Pharmacy Systems, 172

180 BUSINESS ahead of our peers in the industry. We are able to design, develop and upgrade our Smart Pharmacy Systems ourselves, and have established a portfolio of patents to protect our technologies on our Smart Pharmacy Systems. We believe we have established a high technology barrier, as we possess distinct technology advantages that are hard for our competitors to duplicate. Furthermore, we provide our customers with customized solution of Smart Pharmacy Systems, enabling us to better satisfy our customers needs in providing our services and products, which helps to increase customer satisfaction and loyalty and effectively enhances our market penetration. In addition, we currently own two plantation bases in Sichuan Province, which we primarily use for research and development and quality control of certain of key raw materials we use for the production of TCM Granules. We are one of the only two TCM Granules manufacturers in China that own self-operated plantation bases and at the same time, provide Smart Pharmacy Systems (or other similar systems) to customers, according to the PICO Report. LAND AND PROPERTIES Owned Properties As of the Latest Practicable Date, we held the land use rights for two parcels of land with an aggregate gross site area of 162, sq.m., and the building ownership certificates for 20 properties with an aggregate gross floor area of 70, sq.m. The table below sets forth a summary of the properties owned by us in Pengzhou City, Chengdu, Sichuan Province as of the Latest Practicable Date: Business Purpose Manufacturing plant, office building and warehouses Manufacturing plant, office building and warehouses Brief Description of Properties We have the land use rights of relevant manufacturing plant, and the building ownership certificates of the office buildings and warehouses. We have the land use rights of relevant manufacturing plant, and the building ownership certificates of the office buildings and warehouses. Total Site Area (sq.m.) Gross Floor Area (sq.m.) 15, (1) 5, (1) 147, , Note: (1) On June 19, 2017, we entered into a lease agreement with Lvse Zhongyao Yinpian pursuant to which we will lease the premises involving our previous manufacturing facilities to Lvse Zhongyao Yinpian, effective upon [REDACTED]. Please see Connected Transaction in this document for further details. In addition, as of the Latest Practicable Date, we owned three buildings with an aggregate gross floor area of approximately 20, sq.m.. We have obtained the relevant certificates of completion of construction for these buildings and are in the process of applying for the relevant building ownership certificates. As advised by our PRC legal adviser, there is no material legal impediment to obtain these building ownership certificates. 173

181 BUSINESS Leased Properties The table below sets forth a summary of the buildings leased by us in Chengdu, Sichuan Province as of the Latest Practicable Date: Business Purpose Gross floor area (sq.m.) Expiration dates in lease agreement Corporate offices 1, October 2017 As of the Latest Practicable Date, we had not registered the lease agreement relating to our leased properties listed above. Our PRC legal adviser, Commerce & Finance Law Offices, has advised us that we may be required by the relevant PRC authorities to register the relevant lease agreements within a prescribed time limit. If we fail to do so, we may be subject to fines ranging from RMB1,000 to RMB10,000 for such lease. However, as of the Latest Practicable Date, we had not been fined by the relevant PRC authorities with respect to such lease. Our PRC legal adviser, Commerce & Finance Law Offices, has confirmed that our lease agreement in the PRC was legal, valid and binding on the parties thereto and its effect won t be affected by the failure to complete registration. In addition, as of the Latest Practicable Date, we had leased the land contract management rights with respect to 18 parcels of land with an aggregate site area of mu and entered into land management rights transfer agreements with the individual third-party farmers who owned the land contract management rights with respect to such parcels of land. These land management rights transfer agreements will generally expire in September 2019 or May 2020, as the case may be. We primarily use these properties for cultivating Chinese medicinal herbs. Furthermore, as of the Latest Practicable Date, we had obtained the forest land use rights with respect to two parcels of forest with an aggregate site area of mu. We entered into forest land transfer contracts with a third-party farmer and Sichuan Green, which expire in September 2019 or January 2034, as the case may be. We mainly use these properties for cultivating Chinese medicinal herbs and forestry production. INTERNAL CONTROL AND RISK MANAGEMENT We are exposed to various risks during our operation. Please refer to the section headed Risk Factors for further discussion. We have implemented various policies and procedures to ensure effective risk management in our operations. Our Board of Directors and senior management assume the overall responsibilities for overseeing the implementation of our internal control and risk management procedures and other measures throughout our Company. We will establish an audit committee upon [REDACTED] to review and supervise the financial reporting procedure, as well as the internal control and risk management systems of our Group. Please refer to the section headed Directors and Senior Management Board Committees Audit Committee in this document for further discussion. 174

182 BUSINESS Corporate Governance Measures In order to continuously improve our corporate governance and to prevent the occurrence of the non-compliance incidents, we intend to adopt or have adopted the following measures: prior to the [REDACTED], our Directors and senior management have attended training sessions on applicable laws and regulations, including the Listing Rules, provided by our external legal advisers. We will continue to arrange various trainings to be provided by external legal advisers from time to time and/or any appropriate accredited institution to update our Directors, senior management and relevant employees on the latest laws and regulations of Hong Kong and the PRC; we regularly review compliance matters of our Group, including monitoring and implementation of the internal control policies to prevent any future non-compliance. The internal control committee regularly reports to the Board; we will engage external advisers where necessary and work with our internal audit department and legal and compliance department to conduct regular reviews to ensure that all registrations, licenses, permits, filings and approvals are valid and that the renewals of such documents are made in a timely manner; and pursuant to Rule 3A.19 of the Listing Rules, we have appointed TC Capital International Limited as our compliance adviser with effect from the date of [REDACTED]. Anti-corruption Measures As part of our risk management and internal control system, we have established a set of internal policies in relation to bribery, corruption and fraudulent activities, which strictly prohibit paying or receiving bribes and kickbacks in commercial transactions. A substantial majority of our revenue is derived from direct sales to hospitals and medical institutions throughout the PRC. In addition, a substantial majority of our marketing and sales efforts are conducted by our own marketing and sales employees without the engagement of third-party distributors or consultants. As a result, our anti-corruption measures and policies are directed at ensuring that our employees abide by such policies. In particular, we have taken the following steps to ensure our employees follow our anti-corruption and policies: Internal compliance. Our employee handbook describes in detail our anti-corruption policies. Employees who violate any of our anti-corruption policies are subject to penalties, including termination of employment. We regularly provide updates of our anti-corruption requirements to our senior management, department heads and employees. 175

183 BUSINESS Ongoing training. All of our marketing and sales employees are required to attend ongoing training programs in order to enhance their knowledge and awareness of relevant anti-corruption regulations. Such training occurs at the start of their employment and is conducted annually as well as from time to time as required. Training covers the background of anti-corruption issues, relevant regulations and laws, the negative impacts of corruption and bribery as well as our anti-corruption measures to be followed. Undertakings. All of our marketing and sales personnel are required to sign agreements with us confirming, among others, that: they understand and have complied with the applicable laws and regulations, including, among others, the PRC anti-corruption laws and regulations; they have not made, and will not make, any improper payment to third party customers, government officials, intermediaries or any other parties, for the purpose of obtaining or retaining business; and they have not engaged in, and will not engage in, any illegal practice or misconduct. Our Directors confirm that during the Track Record Period and up to the Latest Practicable Date, they had not engaged in, and had not been aware of, any bribery, corruption or fraudulent practice by our Directors, employees and distributors. Our Directors further confirm that during the Track Record Period and up to the Latest Practicable Date, our Group had not been involved in any monetary and non-monetary bribery activities, and had not been subject to any anti-corruption claims or investigations by the relevant authorities. As such, our Directors consider that our anti-corruption policies and procedures and relevant internal control measures have been sufficient and effective to ensure our compliance with the relevant anti-corruption laws and regulations as well as to prevent the occurrence of bribery, corruption or fraudulent practice by our Directors, employees and distributors. 176

184 BUSINESS EMPLOYEES As of December 31, 2016, we had 1,846 employees located throughout the PRC. The following table sets forth the number of employees categorized by function as of December 31, Function Number of Employees Percentage of Total % General Administration Marketing and Sales Marketing and Sales Representatives Smart Pharmacy System Personnel Sub-total 1, Production and Logistics Research & Development Quality Control Procurement Finance Legal and Compliance Total 1, The remuneration package for our employees generally includes salary and bonuses. We conduct periodic performance reviews for our employees, and their remuneration is performance-based. Employees also receive welfare benefits including medical care, housing subsidies, pension, occupational injury insurance and other miscellaneous benefits. As required by applicable PRC regulations, we participate in various employee benefit plans that are organized by municipal and provincial governments, including housing funds, pension, work-related medical, maternity and unemployment benefit plans. The PRC government also requires us to provide work-related injury insurance for each of our employees who have entered into service contracts with us. We recruit our employees based on a number of factors, including their work experience, educational background and the needs of our vacancies. We provide regular training to employees designed to strengthen staff commitment and improve staff knowledge in a number of important areas of our services, such as knowledge about our Company and our products and sales, laws and regulations applicable to our operation, requirements under GMP certification, quality control, workplace safety and corporate culture. In particular, in December 2014, we established our in-house training program titled the Neo-green Pharmaceutical Elite College ( ) to further implement our overall strategies. With senior management and a professional training team as lecturers, we nurture our corporate talent by providing them with concrete support through practical training, including lectures, case studies and interactive teaching. We believe our Elite College offers employees sustainable, organized and target-oriented quality training, which we believe can enhance the productivity of our employees. Our Directors and PRC legal adviser confirmed that except as disclosed in this document we have complied with applicable employment laws and regulations in all material respects and there have been no outstanding material labor related legal proceedings or disputes against us as of the Latest Practicable Date. 177

185 BUSINESS INSURANCE We maintain mandatory traffic liability insurance, insurance for key employees and social welfare insurance in accordance with the relevant laws and regulations in the PRC. We do not maintain any property insurance covering equipment, product liability insurance or business interruption insurance, which are not mandatory under PRC law. Please refer to Risk Factors Risks Relating to Our Business and Industry Our insurance coverage may not cover all risks related to our business and operations for further details of risks relating to our current insurance coverage. Our Directors are of the view that our current insurance coverage is in line with industry practice and is adequate for our operations. HEALTH AND OCCUPATIONAL SAFETY We are subject to various PRC laws and regulations in respect of health and occupational safety. We are committed to complying with PRC regulatory requirements, preventing and reducing hazards and risks associated with our operation, and ensuring the health and safety of our employees and surrounding communities. We have adopted and maintained a series of rules, standard operating procedures and measures to maintain a healthy and safe environment for our employees, including those required under the GMP certification. For example, we construct and maintain all of our production facilities in accordance with the GMP certification and have implemented safety guidelines at our production facilities and require all employees to strictly comply with such requirements. We also require new employees to participate in safety training to familiarize themselves with the relevant safety rules and procedures. As of the Latest Practicable Date, we had not experienced any material accidents in the course of our operation and our Directors were not aware of any claims for personal or property damages in connection with health and occupational safety. ENVIRONMENTAL MATTERS Our business is subject to national, provincial and local environmental laws and regulations of the PRC. The relevant laws and regulations applicable to pharmaceutical productions in the PRC include provisions governing air emissions, water discharge, prevention and treatment of sewage and exhaust fumes and the management and disposal of hazardous substances and waste. Manufacturers are also required to conduct an environmental impact assessment before engaging in new construction projects to ensure that the production processes meet the required environmental standards to treat wastes before the wastes are discharged. The relevant environmental laws and regulations empower certain governmental authorities to shut down any enterprise that materially violates such laws and regulations through the discharge of pollutants. The main pollutants generated during our production process include waste water and solid waste in the form of medicinal herbal residue. We have established a pollution control system in order to comply with GMP certification requirements as well as other applicable laws and regulations. For solid waste, we generally contract with qualified sanitation companies or recycling companies for special treatment. We seek to reduce, treat and recycle the waste generated in our production process and improve our production technique to reduce the pollutants we discharge to the environment. For the years ended December 31, 2014, 2015 and 2016, our annual cost incurred in relation to environmental protection was 178

186 BUSINESS approximately RMB8,000, nil and RMB20,000, respectively. These costs do not include historical capital expenditure on property, plant and equipment that may be attributable to environmental compliance. We expect that our cost of compliance with applicable environmental rules and regulations will not materially deviate from the levels we recognized for the year ended December 31, We believe we have maintained good relationship with the communities surrounding our production facilities. Our PRC legal adviser confirmed that as of the Latest Practicable Date, we had complied with all applicable laws and regulations relating to production safety and environmental requirements in all material respects. LEGAL COMPLIANCE Licenses and Permits As a PRC-based company that develops, manufactures, markets and sells TCM Granules products, we are subject to laws, regulations and supervision by different levels of regulatory authorities and are required to maintain various licenses, permits and approvals in order to operate our facilities and conduct our business. See Regulations for a detailed description of such licenses, permits and approvals. Except for the approval to sell our TCM Granules in Chongqing, which has expired on June 14, 2017, our PRC legal adviser has advised that we have obtained all material requisite licenses, permits and approvals for our operations and such licenses, permits and approvals were valid and remain in effect as of the Latest Practicable Date. We are in the process of arranging for the requisite filing with the Chongqing FDA. Except as disclosed below, we have complied with all material rules and regulations applicable to our business in all material respects during the Track Record Period and up to the Latest Practicable Date. The following table sets forth key licenses, permits, approvals and certificates relating to our business and operations (apart from those pertaining to general business requirements), their respective purpose, issuing authority and expiry date. Approvals for the Sale of Our Products in the PRC License/Permit/Approval/ Certificate Purpose Issuing Authority Expiry Date Pharmaceutical Sales Certificate ( ) ( ( )) Sales of pharmaceutical products Sichuan Food and Drug Administration March 24, 2018 Production Permits in the PRC License/Permit/Approval/ Certificate Purpose Issuing Authority Expiry Date Pharmaceutical Production Permit Production of pharmaceutical products Sichuan Food and Drug Administration December 31,

187 BUSINESS License/Permit/Approval/ Certificate Purpose Issuing Authority Expiry Date Qualification for TCM Granules Trial Production Trial production of TCM Granules Drug Registration Division under CFDA ( ) N/A GMP certificate (No. 279 Zhihe Zhendonghe Road East, Pengzhou City, Chengdu) Control of production quality of pharmaceutical product CFDA July 9,

188 BUSINESS Systemic Non-compliance Incidents The following table sets forth the details of the systemic non-compliance incidents of our Group during the Track Record Period. Particulars of Non-compliance Legal Consequences Status and Remedial Measures Manufacturing without GMP certification According to our PRC legal adviser, relevant On July 10, 2015, we have obtained the GMP PRC laws and regulations stipulate that drug certification for our current manufacturing From August 2014 and up to July 10, 2015 (the manufacturers must apply for GMP facilities. Applicable Time Period ), our current manufacturing certification when constructing new facilities located in Pengzhou City, Chengdu, Sichuan manufacturing facilities (or production lines) On August 31, 2016, the FDA of Sichuan Province, engaged in the production of TCM Granules or renovating or expanding existing Province issued to us a confirmation letter and TCM decoction pieces without timely obtaining the manufacturing facilities (or production pursuant to which (i) we were recognized as a relevant GMP certification. We obtained the requisite lines). Manufacturers that did not obtain the legal drug manufacturing enterprise; (ii) we GMP certification for such manufacturing facilities on relevant GMP certification may be had not undertaken any activities in July 10, The volume of TCM Granules produced at admonished by the PRC government contravention of GMP since 2009; (iii) the these manufacturing facilities without proper GMP authorities and ordered to rectify within a pharmaceutical products we manufactured certification for the Applicable Time Period was prescribed period of time. Failure to obtain were consistent with the applicable quality approximately tons and tons for the years the requisite GMP certification within such standards; and (iv) after government ended December 31, 2014 and 2015, respectively. prescribed time period may result in inspection and up to the date of the suspension of production and the imposition confirmation letter, we had not been found to Reasons for non-compliance of a fine in the amount above RMB5,000 and have violated the applicable PRC laws and below RMB20,000. Serious offenders are regulations in the course of our subject to the revocation of their manufacturing activities. pharmaceutical production permits. We initiated the application for GMP certification in August 2014, which generally involves a lengthy period of government inspection and authentication. During this time, in order to satisfy customer demand, we continued to produce TCM Granules at our current manufacturing facilities by applying the same GMP certification standards that were applicable to our previous manufacturing facilities, and we ensured each type of TCM Granules we produced was subject to stringent enterprise quality control standards. Based on the foregoing, our PRC legal adviser has advised that the likelihood that the relevant government authorities imposing any fines or administrative penalties on us for failure to timely obtain GMP certification is low. Our PRC legal adviser further advised that the FDA in Sichuan Province is the competent authority to issue such confirmation. Furthermore, we have established formal policy and internal control measures to prevent the recurrence of such non-compliance incident. In particular, these internal control measures include the following: (i) we have established a warning mechanism to monitor the expiration of our licenses; and (ii) within the 60 days of the expiry date of the relevant license, we will notify the relevant departments of our Company in writing to renew such license and monitor the progress on a weekly basis until the renewal is completed. 181

189 BUSINESS Particulars of Non-compliance Legal Consequences Status and Remedial Measures Social insurance and housing provident fund contributions During the Track Record Period, we did not make full contributions to the social insurance schemes and the housing provident funds for our employees as required by the relevant PRC laws. As of December 31, 2016, we underpaid our social insurance contributions and housing provident contributions in the amount of approximately RMB23.6 million and RMB6.3 million, respectively. Reasons for non-compliance Our human resources department in the PRC made contributions for our employees according to its understanding of local general practice where we have operations. Social insurance contribution As advised by our PRC legal adviser, for our outstanding contributions prior to the effectiveness of the Social Insurance Law of the PRC on July 1, 2011, relevant authorities may require us to pay the outstanding amount within a prescribed time limit. If we fail to make the overdue contributions within such time limit, an additional late payment penalty at daily rate of 0.2% of the outstanding amount may be imposed. For our outstanding contribution after July 1, 2011, relevant authorities may require us to pay the outstanding amount with an additional late payment penalty at the daily rate of 0.05% from the due date. If the outstanding contribution is not settled within the stipulated period, the social insurance authority may impose a fine equal to one to three times the outstanding amount. Housing provident fund contribution In respect of our failure to pay adequate amount of housing provident fund for all employees in compliance with law, the relevant housing provident fund authority may require us to settle the outstanding contribution within a stipulated period. If the outstanding contribution is not settled within such period, the authority apply for mandatory enforcement at relevant courts. The relevant social insurance administrative authority has issued us a confirmation that we will not be subject to any administrative penalties for any historical non-compliance, nor will we be required to make payments for any outstanding amount of social insurance contributions. In addition, based on confirmations issued by the relevant housing provident funds administration authority, during the Track Record Period, we did not have any records of administrative penalties due to violation of relevant national or municipal laws and regulations relating to housing provident funds, nor were we involved in any litigation and arbitration arising from disputes or controversies relating to housing provident funds. We did not make any provisions for the outstanding amounts of social insurance contributions based on the confirmation issued by the relevant social insurance administrative authority. In addition, no provision was made for the outstanding amounts of housing provident funds as we are of the view that risk of being required to make up for the potential shortfall by the government authorities is low. Our Directors undertake to use their best endeavors to comply with the applicable laws and regulations by the end of Our Controlling Shareholders have agreed to indemnify us for all claims, costs, expenses and losses incurred by us arising from this non-compliance incident that exceeds our provisions for the under paid amount of serial insurance contribution and housing provident fund contribution. As advised by our PRC legal adviser, the risk that our failure to fully make social insurance contributions and housing provident fund contributions for all employees will be subject to administrative penalty by the relevant government authorities is remote. 182

190 BUSINESS Particulars of Non-compliance Legal Consequences Status and Remedial Measures Provincial approval for the clinical use of our TCM Granules Since we are a CFDA-approved manufacturer of TCM Granules, we are only required to file a list of clinical hospitals and medical institutions using our TCM Granules with the relevant Provincial FDAs, according to the TCMG Regulations. Different Provincial FDAs within their jurisdictions may interpret and implement the TCMG Regulations differently and inconsistently. For instance, some of the Provincial FDAs require that the TCM Granules manufacturers should file a list of clinical hospitals and medical institutions using their TCM Granules, while some other Provincial FDAs do not require the TCM Granules manufacturers to file such lists with them. Due to the lack of consistency in the interpretation and the implementation of the applicable regulations, we believe that it is not compulsory for us to file the lists of clinical hospitals and medical institutions using our TCM Granules clinically with all Provincial FDAs of the jurisdictions where such hospitals and medical institutions are located. During the Track Record Period and as of the Latest Practicable Date, we have made requisite filings with the relevant Provincial FDA in each of the Provinces where our TCM Granules were sold. However, for each filing we made, the relevant Provincial FDA issued a corresponding acknowledgment. These acknowledgments generally instructed us to sell our TCM Granules to a limited number of approved hospitals and medical institutions. During the Track Record Period, we sold our TCM Granules to certain hospitals and medical institutions that were not officially approved by the relevant Provincial FDAs to clinically use our TCM Granules (the Non-approved Customers ). For years ended December 31, 2014, 2015 and 2016, sales of TCM Granules to the Non-approved Customers were estimated to be approximately RMB46.1 million, RMB67.7 million and RMB86.4 million, respectively, accounting for approximately 6.7%, 6.7% and 6.1%, respectively, of our total revenue for the same periods. (1) Reasons for non-compliance We sold out TCM Granules to the Non-approved Customers mainly due to our oversight and inadvertent belief by some of our sales and marketing representatives that they were permitted to sell to Non-approved Customers. As advised by our PRC legal adviser, according to the Reply to the Question of Administrative Penalty of the Use of the Traditional Chinese Medicine Granules in the Operation of the Units Without Approval ( ), the relevant FDAs may order Non-approved Customers to cease the clinical use of the TCM Granules within a prescribed period of time. If any of the Non-approved Customers fails to cease clinical use, the relevant FDAs can investigate and impose administrative penalties on such Non-approved Customer. Our PRC legal adviser has advised us that as of the Latest Practicable Date, there was no explicit PRC law or regulation that imposes fines or administrative penalties against TCM Granules manufacturers for the clinical use of the TCM Granules by Non-approved Customers. Please refer to the section headed Regulations in this document for further details. As advised by our PRC legal adviser, as of the Latest Practicable Date, according to the relevant laws, regulations and rules, there was no legal basis to impose any administrative penalties on us for Non-approved Customers purchasing and using TCM Granules we manufactured, nor was there any legal basis to impose any administrative penalties on us for any pharmaceutical enterprises purchasing and selling TCM Granules we manufactured. We intend to cease to sell to the Nonapproved Customers if they failed to become approved hospitals and medical institutions before the end of During the Track Record Period and up to the Latest Practicable Date, we did not receive any notification from the relevant government authorities alleging that we were in breach of the TCMG Regulations and penalizing us for such non-compliance, nor were we aware that any of our Non-approval Customers had been ordered to cease the clinical use of our TCM Granules. Furthermore, we have established formal policy and internal control measures to oversee the sales of our TCM Granules for the clinical use in the PRC. In particular, these internal control measures include the following: (i) strengthen our supervision of our marketing and sales representatives team; and (ii) provide education to our marketing and sales representatives regarding approved hospitals and medical institutions to which we may sell our TCM Granules. Note: (1) Sales of our TCM Granules to the Non-approved Customers include both direct sales and those made to third-party distributors. In calculating annual revenue contribution from the sales through distributors to the Non-approved Customers, we do not have any reliable means to accurately determine the annual distributor sales to the Non-approved Customers and to the approved customers out of the total annual distributor sales amount for each of our distributors. For prudence and for illustrative purposes, we have included (i) our annual direct sales to the Non-approved Customers; and (ii) all of the sales to distributors (which include distributor sales to approved customers and to Non-approved Customers), to estimate and determine the maximum percentage of the revenue contribution from the sales to the Non-approved Customers during the Track Record Period. 183

191 BUSINESS Our Directors are of the view that the above non-compliance incidents during the Track Record Period, individually or in the aggregate, do not and will not have any material financial or operational impact on us. Legal Proceedings We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business. As of the Latest Practicable Date, no member of our Group was engaged in any litigation, claim or administrative proceedings of material importance and no litigation, claim or administrative proceedings of material importance is known to our Directors to be pending or threatened against any member of the Group. AWARDS AND RECOGNITIONS During the Track Record Period and up to the Latest Practicable Date, we have received various awards and recognitions in the PRC. The table below sets out some of the awards we have received in respect of our group companies: Awarding Body Award Name/Awarded For Year of Award Sichuan Provincial Government Sichuan Provincial Government Chengdu Municipal Government Science and Technology Progress Award Second Place/TCM Granules Preparation and Automatic Dispensing System ( ) Science and Technology Progress Award First Place/Restoration and Reconstruction of Medicinal Resources in Disaster Areas after 5.12 Devastating Earthquake and Comprehensive Utilization and Its Demonstration ( 5.12 ) Excellent Patent Award/Ligusticum Chuanxiong Granule and Its Preparation Method ( ) April 2016 April 2016 July

192 RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS CONTROLLING SHAREHOLDERS Immediately following completion of the [REDACTED] (without taking into account any Shares which may be allotted and issued upon exercise of the [REDACTED] or the options which may be granted under the Share Option Scheme), Ever Peace and Neo Era will directly hold approximately [REDACTED] and [REDACTED] of our equity interest, respectively. Ever Peace is wholly owned by Mr. Zhou and Neo Era is wholly owned by Mr. Zhou Xiang. On June 18, 2017, Mr. Zhou and Mr. Zhou Xiang entered into the Acting in Concert Agreement, pursuant to which Mr. Zhou and Mr. Zhou Xiang confirmed that they have been acting in concert since January 1, 2014 and they have, during the Track Record Period, jointly controlled and will continue to jointly control our Group by exercising their rights as shareholders in the relevant companies in our Group. Accordingly, each of Mr. Zhou, Mr. Zhou Xiang, Ever Peace and Neo Era will be interested in more than 30% of our equity interest, and hence, for the purpose of the Listing Rules, they will be our Controlling Shareholders. For the background of Mr. Zhou, please refer to the section headed Directors and Senior Management in this document. CONTROLLING SHAREHOLDERS INTERESTS IN OTHER COMPANIES Sichuan Green As of the Latest Practicable Date, Mr. Zhou and Mr. Zhou Xiang held 65.63% and 14.83%, respectively, of the equity interest in Sichuan Green. Sichuan Green is our predecessor which transferred its entire TCM Granules business and qualification to Neo-green Pharmaceutical in Currently, Sichuan Green itself is an investment holding company and does not have any business operation. In addition, neither Sichuan Green nor any of its subsidiaries has the required qualification to manufacture TCM Granules, as it is not among the only five group companies in the PRC which are authorized by the CFDA to manufacture and sell TCM Granules. Lvse Zhongyao Yinpian Mr. Zhou, through Sichuan Green, indirectly holds the entire equity interest in Lvse Zhongyao Yinpian, which was established in the PRC in July The principal business of Lvse Zhongyao Yinpian is the manufacturing and sale of TCM decoction pieces, including those produced by using broiling process. As advised by our PRC legal advisers, the manufacturing and sale of TCM decoction pieces through broiling process by companies with foreign investors is currently prohibited pursuant to the 2015 Catalog. For further details, please refer to the section headed Regulations PRC Laws and Regulations Relating to Foreign Investment in this document. Our Company is therefore not permitted to manufacture TCM decoction pieces produced by using broiling process until and unless the above prohibition is lifted. While our Group also manufactures TCM decoction pieces, our Directors consider that the businesses of our Group and that of Lvse Zhongyao Yinpian are clearly delineated and there is no competition between each other for the following reasons: (i) the nature of the TCM decoction pieces produced by our Group and by Lvse Zhongyao Yinpian are different. The TCM decoction pieces produced by our Group are semi-finished goods to be further processed into TCM Granules, whereas those produced by Lvse Zhongyao Yinpian, other than those to be supplied to us, are finished goods to be sold to their customers; 185

193 RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS (ii) Lvse Zhongyao Yinpian is primarily engaged in the sale of TCM decoction pieces as finished goods whereas our Group is primarily engaged in the sale of TCM Granules; (iii) the customers and market of our Group and that of Lvse Zhongyao Yinpian are different. Our major customers are hospitals and medical institutions while Lvse Zhongyao Yinpian primarily plans to sell their products to third party distributors. To avoid any potential competition, Lvse Zhongyao Yinpian has undertaken to the Company not to sell their products to any hospitals or medical institutions, and not to sell their products to any third party distributors who are customers of our Group. In addition, when the prohibition against foreign ownership of companies engaged in production of TCM decoction pieces using broiling process is lifted in the future, we will have the right to acquire Lvse Zhongyao Yinpian pursuant to the relevant terms of the Non-competition Agreement. For details, please refer to the paragraph headed Non-competition Agreement in this section. Xinlvse Yiyao and Hongdu Coal Mr. Zhou Xiang holds 40% of the equity interest in Sichuan Xinlvse Yiyao Group Ltd. (, Xinlvse Yiyao ). The remaining 60% of the equity interest in Xinlvse Yiyao is held as to 30% by Mr. Xu Liming, our executive Director, and 30% by Mr. Zhang Zhuhua, an Independent Third Party, respectively. Xinlvse Yiyao directly holds the entire equity interest in Sichuan Hongdu Coal Co., Ltd. (, Hongdu Coal ). Xinlvse Yiyao is principally engaged in sale of narcotic drugs and psychiatric drugs in the PRC. Hongdu Coal is principally engaged in mining operations in the PRC. Hence, there is no competition or potential competition, direct or indirect, between Xinlvse Yiyao and our Principal Business and that between Hongdu Coal and our Principal Business. NON-COMPETITION AGREEMENT Non-competition Our principal business (the Principal Business ) is the manufacturing and sale of TCM Granules. We entered into the Non-competition Agreement with the Covenantors on [ ], under which the Covenantors and their respective controlled entities agreed not to, and to procure its/his respective associate(s) (as appropriate) (other than our Group) not to, either directly or indirectly, compete with our Principal Business, and granted to our Group the option for new business opportunities, option for acquisitions and pre-emptive rights. The Covenantors have further irrevocably undertaken in the Non-competition Agreement that, during the term of the Non-competition Agreement, it/he and its/his controlled entities (as appropriate) (other than our Group) will not, and will also procure its/his respective associate(s) (as appropriate) (other than our Group) not to, in any form, directly or indirectly, invest in, engage in, participate in, or operate, or support to invest in, engage in, participate in or operate any business that competes, or is likely to compete, directly or indirectly, with our Principal Business. 186

194 RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS Options for New Business Opportunities The Covenantors have undertaken in the Non-competition Agreement that, during the term of the Non-competition Agreement, if the Covenantors, its/his controlled entities and/or its/his associate(s) (as appropriate) (other than our Group) become aware of a business opportunity which competes, or may compete, directly or indirectly, with our Principal Business ( New Business Opportunity ), the Covenantors or its/his controlled entities will, and/or will procure their respective associate(s) (as appropriate) (other than our Group) to, notify us in writing within seven days upon being aware of such business opportunity and provide us with all information which is reasonably necessary for us to consider whether or not to engage in such business opportunity ( Offer Notice ). We are entitled to decide whether or not to take up such business opportunity and notify our decision in writing within 30 days from receiving the Offer Notice. If we decide not to take up the New Business Opportunity for any reason or do not respond within 30 days from receiving the Offer Notice, the Covenantors, its/his controlled entities and/or its/his associate(s) (as appropriate) may invest in, participate in, and/or operate such New Business Opportunity on its/his own on terms no favorable than those provided to our Company and subject to the option for acquisition and pre-emptive right as stated below. Option for Acquisitions In relation to any New Business Opportunity of the Covenantors, its/his controlled entities and/or its/his associate(s) (as appropriate) (other than our Group), which has been offered to, but has not been taken up by, our Company and has been retained by the Covenantors, its/his controlled entities and/or any of its/his associate(s) (as appropriate) (other than our Group), which competes, or may lead to competition, directly or indirectly, with our Principal Business, the Covenantors have undertaken to us that the Covenantors or its/his controlled entities will, and/or will procure their respective associate(s) (as appropriate) (other than our Group), to grant us the option, which is exercisable at any time during the term of the Non-competition Agreement, subject to applicable laws and regulations, to purchase at one or more times any equity interests, assets or other interests of the new business as described above, or to operate the new business as described above by way of, including, without limitation, entrusted operation, lease or contracting operation. However, if a third party has the pre-emptive right, in accordance with applicable laws and regulations and/or a prior legally binding document (including, without limitation, articles of association and a shareholders agreement), our option for acquisitions shall be subject to such third party s pre-emptive right. In this case, the Covenantors will procure such third party to waive such pre-emptive right. 187

195 RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS Pre-emptive Right The Covenantors have undertaken that, during the term of the Non-competition Agreement, if the Covenantors, its/his controlled entities and/or any of its/his associate(s) (as appropriate) (other than our Group) intend to transfer, sell, lease, license to a third party or otherwise permit a third party to operate, any New Business Opportunity, which has been offered to, but has not been taken up by, our Company and has been retained by them, the Covenantors and its/his controlled entities shall, and/or will procure their respective associate(s) (as appropriate) (other than our Group) to, notify us by a written notice ( Selling Notice ) in advance. The Selling Notice shall contain the terms of the transfer, sale, lease or license and any information which may be reasonably necessary for our Company to make an investment decision. We shall reply to the Covenantors within 30 days after receiving the Selling Notice. Each of the Covenantors has undertaken that until it receives the reply from us, it/he and its/his controlled entities shall not, and will procure its/his associate(s) (as appropriate) (other than our Group) not to, notify any third party of the intention to transfer, sell, lease, license or otherwise permit to operate the business. If our Company decides not to exercise its pre-emptive right or if our Company does not reply within the agreed time period, the Covenantors, its/his controlled entities and/or its/his associate(s) (as appropriate) (other than our Group) are entitled to transfer, sell, lease, license to a third party, or otherwise permit a third party to operate, the business pursuant to the terms stipulated in the Selling Notice. If our Company does not accept the terms as set out in the Selling Notice and issues to the Covenantors, or its/his controlled entities and/or its/his associates (as appropriate) (other than our Group) a written notice within the agreed time period stating acceptable conditions which, however, are not acceptable to the Covenantors, its/his controlled entities and/or its/his associates (as appropriate) (other than our Group), the Covenantors, its/his controlled entities and/or its/his associates (as appropriate) (other than our Group) are entitled to transfer, sell, lease, license to a third party, or otherwise permit a third party to operate, the business pursuant to terms not more favorable than those stipulated in the Selling Notice. Decision-making as to Whether to Take Up the Options or Pre-emptive Right Our independent non-executive Directors will be responsible for reviewing, considering and deciding whether or not to exercise the option for New Business Opportunity or the option for acquisitions or our pre-emptive right. In assessing whether or not to exercise such option(s) or pre-emptive right, the independent non-executive Directors will consider a range of factors including business scale, business prospects, estimated profitability, investment value, and license and approval requirements. Cessation of the Manufacturing and Sale of TCM Decoction Pieces through Permitted Techniques The Covenantors, individually and severally, have irrevocably undertaken to our Group that in the event that the manufacturing techniques which are used by Lvse Zhongyao Yinpian and currently prohibited from being applied by companies with foreign investors under the 2015 Catalog are no longer prohibited (the Policy Amendment ), the Company shall have the right (but not the obligation) to require the shareholders of Lvse Zhongyao Yinpian to sell, and the Covenantors shall procure the sale of, Lvse Zhongyao at the fair market value of Lvse Zhongyao Yinpian as determined by an independent qualified valuer at any time after the effective date of the Policy Amendment upon notice by our Company. 188

196 RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS The Covenantors Further Undertakings Each of the Covenantors has further undertaken that: (i) (ii) it/he and its/his controlled entities will, and will procure their respective associate(s) to, provide all information necessary for our independent non-executive Directors or reporting accountants to review the Covenantors, its/his controlled entities and their respective associates compliance with and enforcement of the Non-competition Agreement; it/he and/or its/his controlled entities consent, and will procure their respective associate(s) to consent, to our disclosure of the decision(s) made by our independent non-executive Directors in relation to the compliance with and enforcement of the Non-competition Agreement in our annual report, or by way of announcement; and (iii) it/he and/or its/his controlled entities will, and will procure their respective associate(s) to, make a declaration to our independent non-executive Directors or reporting accountants annually regarding their compliance with the Non-competition Agreement for our disclosure in our annual reports. The Non-competition Agreement will become effective upon [REDACTED] and remain in full force and be terminated upon the earlier of: (i) (ii) our Shares being revoked or no longer being listed on the Stock Exchange (except for being suspended by any reason whatsoever); the Covenantors and its/his associate(s) (as appropriate) (other than our Group) no longer, directly or indirectly, holding any Share; or (iii) the Covenantors and its/his associate(s) (as appropriate) (other than our Group) together, directly or indirectly, being entitled to exercise, or control the exercise of, less than 30% of the voting power at general meetings of our Company and is unable to control the composition of a majority of our Board. Our PRC legal advisers are of the view that the Non-competition Agreement does not violate any applicable PRC laws, and the Covenantors undertakings pursuant to the Non-competition Agreement are valid and binding obligations of the Covenantors under PRC laws after the Non-competition Agreement takes effect, and may be enforced by us in the courts of the PRC thereafter subject to compliance with applicable provisions of th Civil Procedure Law of the PRC. 189

197 RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS DIRECTORS INTERESTS IN OTHER COMPANIES Our executive Director, Ms. Wang Jie, through Sichuan Sanmeishui Technology Development Co., Ltd. (, SanMeiShui ), a company in which Ms. Wang holds 49% interest, indirectly holds 69.70% interest and directly holds 14.85% interest, in Dujiangyan Hengda. SanMeiShui and Dujiangyan Hengda are investment holding companies and have not been engaged in any business since their establishment in January 1999 and July 2004, respectively. CONFIRMATION Save as disclosed above, neither our Controlling Shareholders, nor any of our Directors, was, as of the Latest Practicable Date, interested in any business, other than our Group, which, competes or is likely to compete, either directly or indirectly, with our Principal Business and which requires disclosure pursuant to Rule 8.10 of the Listing Rules. CORPORATE GOVERNANCE MEASURES Our Directors believe that there are adequate corporate governance measures in place to manage the conflicts of interest arising from the potential competing business and to safeguard the interests of our Shareholders, including: (a) (b) (c) (d) the independent non-executive Directors will review, on an annual basis, the compliance with the undertakings by each of the Covenantors, its/his controlled entities and/or its/his associates under the Non-competition Agreement, and the Covenantors undertake to provide all information requested by our Company which is necessary for the annual review by the independent non-executive Directors and the enforcement of the Non-competition Agreement; our Company will disclose decisions, with basis, on matters reviewed by the independent non-executive Directors relating to compliance and enforcement of the undertaking of the Non-competition Agreement, including decisions reached in respect of exercising the options for New Business Opportunities, in our annual reports or by way of announcement to the public in compliance with the relevant requirements of the Listing Rules; we believe that our Board has a balanced composition of executive Directors and independent non-executive Directors that can facilitate the exercise of independent judgment. With the expertise in their respective professional fields, our Directors believe that the independent non-executive Directors have the necessary caliber and expertise to form and exercise independent judgment in the event that conflicts of interest between our Company and the Covenantors arise; in the event that any potential conflict of interest arises, i.e. where a Director has an interest in a company that will enter into an agreement with our Group, the Director(s) with an interest in the relevant transaction(s) shall abstain from attending and voting and shall not be counted towards the quorum in respect of the relevant resolution(s) at such Board meeting; 190

198 RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS (e) (f) (g) (h) (i) in the event any potential conflict of interest arises at the shareholders level, the Covenantors shall abstain from voting at the Shareholders meeting of our Company with respect to the relevant resolution(s); only our independent non-executive Directors will be involved in determining whether our Company should exercise the options for New Business Opportunities; and our Company will make relevant and appropriate disclosures in the annual reports on the decision of our independent non-executive Directors, with basis, in respect of the exercise of such option; pursuant to the Corporate Governance Code and Corporate Governance Report in accordance with Appendix 14 to the Listing Rules, our Directors, including our independent non-executive Directors, will be able to seek independent professional advice from external parties in appropriate circumstances at our Company s cost; any proposed transaction between us and our connected persons will be subject to Chapter 14A of the Listing Rules including, where applicable, the announcement, reporting and independent Shareholders approval requirements of such rules; and we have appointed TC Capital International Limited as our compliance adviser, which is expected to provide advice and guidance to us in respect of compliance with applicable laws and the Listing Rules, including various requirements relating to directors duties and internal controls. INDEPENDENCE FROM OUR CONTROLLING SHAREHOLDERS Our Directors believe that our Group is capable of carrying on our business independent of, and does not place undue reliance on, our Controlling Shareholders or their respective close associates, taking into consideration the following factors: (a) Financial Independence We have established our own finance department with a team of independent financial staff, who are responsible for financial control, accounting, financial reporting and credit functions of our Group independent of our Controlling Shareholders. We can make financial decisions independently and our Controlling Shareholders do not intervene with our use of funds. We have also established independent standardized financial and accounting system and a comprehensive financial management system. In addition, we maintain bank accounts with banks independently and our Controlling Shareholders do not share any bank accounts with us. We are capable of obtaining financing from third parties without relying on any guarantee or security provided by our Controlling Shareholders or other connected persons. Our Directors are of the view that the Company is financially independent of our Controlling Shareholders and the Company will have sufficient capital to operate our business independently from our Controlling Shareholders after the [REDACTED]. 191

199 RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS (b) Operational Independence We possess sufficient capital, property, equipment, technology and human resources to operate our business independently from our Controlling Shareholders, and hold qualifications that are necessary for all our current business operations. In addition, we possess the legal title to all patents which are material to our business as currently conducted. We lease from Sichuan Green the right to operate certain parcels of contracted woodland and purchase from Lvse Zhongyao Yinpian certain TCM decoction pieces manufactured through broiling process. For details, please refer to the section headed Connected Transactions in this document. Notwithstanding the aforementioned continuing connected transactions, our Directors are of the view that we will be able to function and operate independently from our Controlling Shareholders for the following reasons: (1) we have independent access to sources of suppliers for the operation of our business, as well as independent access to our customers. In particular, we are not restricted to procure TCM decoction pieces produced through broiling process exclusively from Lvse Zhongyao Yinpian. Please refer to the section headed Connected Transactions Non-exempt Continuing Connected Transactions Framework Purchase Agreement (c) Reasons for the Transaction for details. Also, the woodland leased by our Group under the Xiaoyudong Lease Agreement is not critical to the manufacturing operation of our Group. We also engage in our business independently, with the independent right to make operational decision and implement such decisions; (2) the value of transactions between our Company and Sichuan Green or between our Company and Lvse Zhongyao Yinpian is not excessive; and (3) our Directors are of the view that the above-mentioned continuing connected transactions have been and will be entered into in the ordinary and usual course of business of our Company, and such transactions have been and will be negotiated on arms length basis, on normal commercial terms (or better for our Group) and are fair and reasonable and in the interests of our Company and our Shareholders as a whole. (c) Management Independence Our Board consists of eight Directors, comprising five executive Directors and three independent non-executive Directors. For details, please refer to the section headed Directors and Senior Management in this document. Mr. Zhou, being the chairman of our Board, is principally responsible for our Group s overall business operation and strategic planning, and together with the Company s senior management, has been actively involved in the daily management of our Group. Mr. Zhou is also the sole director of Ever Peace. Ever Peace is an investment holding company whose principal asset is its shareholding in our Company. 192

200 RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS Our Directors are of the view that our Board and senior management will function independently of our Controlling Shareholders for the following reasons: (i) (ii) each of our Directors is aware of his/her fiduciary duties as a Director which require, among other things, that he/she acts for the benefit and in the best interest of our Company and does not allow any conflict between his/her duties as a Director and his/her personal interests to exist; in the event that there is a potential conflict of interest arising from any transaction to be entered into between our Group and our Directors or their respective associates, the interested Director(s) shall abstain from voting at the relevant board meetings of our Company in respect of such transactions, and shall not be counted in the quorum; (iii) our independent non-executive Directors have extensive experience in different areas and have been appointed in accordance with the requirements under the Listing Rules to ensure that the decision of our Board are made only after due consideration of independent and impartial opinions; and (iv) our Company has also established internal control mechanism to identify related party transactions to ensure that our Shareholders or Directors with conflicting interests in a proposed transaction will abstain from voting on the relevant resolutions. Based on the above, our Directors are of the view that each Director is able to perform his/her roles in our Company independently and our Board is able to operate independently of our Controlling Shareholders after the [REDACTED]. 193

201 CONNECTED TRANSACTIONS CONNECTED PERSONS The table below sets forth the connected persons of our Company which conduct or will continue to conduct connected transactions with our Company upon [REDACTED] and their relationships with our Company: Name Sichuan Green Connected Relationship Sichuan Green is held by Mr. Zhou, one of our Directors and our Controlling Shareholders, as to 65.63%. As such, Sichuan Green is an associate of Mr. Zhou pursuant to Rule 14A.12(1)(c) of the Listing Rules. Therefore, Sichuan Green is our connected person pursuant to Rule 14A.07(4) of the Listing Rules. Lvse Zhongyao Yinpian Lvse Zhongyao Yinpian is wholly owned by Sichuan Green, which is in turn held by Mr. Zhou, one of our Directors and our Controlling Shareholders, as to 65.63%. As such, Lvse Zhongyao Yinpian is an associate of Mr. Zhou pursuant to Rule 14A.12(1)(c) of the Listing Rules. Therefore, Lvse Zhongyao Yinpian is our connected person pursuant to Rule 14A.07(4) of the Listing Rules. FULLY EXEMPT CONTINUING CONNECTED TRANSACTIONS Xiaoyudong Lease Agreement (a) Principal Terms In April 2017, we entered into the Xiaoyudong Lease Agreement with Sichuan Green for a term commencing from August 13, 2014 and ending on January 22, 2064 (1). Under the Xiaoyudong Lease Agreement, Sichuan Green will lease the right to operate ten parcels of contracted woodland with a total area of mu located in Xiaoyudong Town, Sichuan Province (the Xiaoyudong Lands ) to us at nil consideration. (b) Reasons for the Transaction The Xiaoyudong Lands will be primarily used by us for research and development purposes. Sichuan Green has allowed our Group to utilize the Xiaoyudong Lands for nil consideration since our Group started to operate our plantation bases on them. See the section headed Business Raw Materials Our Raw Materials Procurement Strategy for further details. Having considered (i) that the Xiaoyudong Lands had been used for research and development of Chinese medicinal herbs grown on it, including Rhizoma Paridis ( ) Note: (1) As advised by our PRC legal adviser, pursuant to the relevant PRC laws and regulations, the Xiaoyudong Lease Agreement is only valid for 20 years commencing from August 13,

202 CONNECTED TRANSACTIONS and Cortex Magnoliae Officinalis ( ) since August 2014; (ii) the life cycle until harvesting for the bearer plant of Rhizoma Paridis ( ) and Cortex Magnoliae Officinalis ( ) is around 3 to 5 years and over 15 years, respectively; (iii) that a long term lease covering the entire life cycles of the relevant plants is necessary to enable our Group to complete the relevant research projects, which will be severely interrupted should our research and development site is to be relocated; and (iv) that lease agreements of short duration may give rise to uncertainties on the stability of our research and development activities and be disadvantageous to our Group from a commercial perspective, our Directors confirm that the term of the Xiaoyudong Lease Agreement, which is longer than three years, is required and it is normal business practice for the Xiaoyudong Lease Agreement, to be of such duration, as this would minimize the risk of potential disruption to our Group s business operations. Our Directors, including the independent non-executive Directors, are of the view that the Xiaoyudong Lease Agreement was entered into in the ordinary and usual course of our business and is on normal commercial terms or better for our Company. (c) Historical Transaction Amounts There was no historical transaction amounts for this transaction. (d) Annual Caps on Future Transaction Amounts The aggregate annual amount of rent to be paid by us to Sichuan Green during the term of the Xiaoyudong Lease Agreement is nil. Grant Sherman, an independent property valuer and consultant, has confirmed that the terms and conditions of the Xiaoyudong Lease Agreement are normal commercial terms (or better for our Company), fair and reasonable and no less favorable than those offered by an Independent Third Party. (e) Listing Rule Requirements As the highest relevant percentage ratio in respect of the transactions contemplated under the Xiaoyudong Lease Agreement will be, on an annual basis, less than 0.1% and the Xiaoyudong Lease Agreement is on normal commercial terms or better for our Company, it will constitute a de minimis continuing connected transaction which is fully exempt from compliance with Shareholders approval, annual review and all disclosure requirements under the Listing Rules pursuant to Rule 14A.76(1)(a) of the Listing Rules. Yinpian Factory Lease Agreement (a) Principal Terms On June 19, 2017, Neo-green Pharmaceutical entered into the Yinpian Factory Lease Agreement with Lvse Zhongyao Yinpian, pursuant to which we lease a parcel of land and six single to 2-story buildings located at No. 96 Chaoyang Road South, Tianpeng Town, Pengzhou City, Chengdu, Sichuan Province, the PRC, with a total floor area of approximately 20,964 sq. m. (the Yinpian Factory Lease ), to Lvse Zhongyao Yinpian at RMB512,600 per 195

203 CONNECTED TRANSACTIONS annum for a term of three years commencing on January 1, 2017 as its manufacturing facilities for the production of TCM decoction pieces. The Yinpian Factory Lease Agreement will take effect on the [REDACTED]. (b) Reasons for the Transaction The premises under the Yinpian Factory Lease Agreement have been used by Lvse Zhongyao Yinpian for the manufacturing of TCM decoction pieces through broiling process and we currently have no other alternative use for such premises. In addition, pursuant to the Framework Purchase Agreement, Lvse Zhongyao Yinpian will supply TCM decoction pieces produced through broiling process to us. The Yinpian Factory Lease Agreement will enable Lvse Zhongyao Yinpian to conduct its manufacturing operations without interruption or the need to relocate, and accordingly will avoid any disruption in its supply of TCM decoction pieces to us due to relocation. The Yinpian Factory Lease Agreement will also allow us to generate a reasonable amount of return on its properties which would otherwise be unused. Our property valuer, Grant Sherman Appraisal Limited, advises that the rental rate under the Yinpian Factory Lease is fair and reasonable and comparable to the current market rents for similar premises in similar location. As such, the Yinpian Factory Lease Agreement is beneficial to our Group with additional rental and lease income on an arm s length basis upon normal commercial terms with reference to prevailing market rates. (c) Historical transaction amounts As we have allowed Lvse Zhongyao Yinpian to use the relevant premises before the Yinpian Factory Lease Agreement takes effect for nil consideration, there is no historical transaction amount for this transaction. (d) Annual Caps on Future Transaction Amounts Our Directors anticipated that the annual caps for the Yinpian Factory Lease for each of the years ending 31 December 2017, 2018 and 2019 are RMB512,600, RMB512,600 and RMB512,600, respectively. In determining the above annual caps, the Group has considered the following: (i) the current terms and conditions under the Yinpian Factory Lease Agreement; and (ii) the prevailing market rent for similar promises in the area. In light of the above, our Directors (including the independent non-executive Directors) are of the view that (i) the Yinpian Factory Lease has been entered into in the ordinary and usual course of business of our Group, are on normal commercial terms and are fair and reasonable and are in the interests of the Shareholders as a whole; and (ii) the annual caps for the Yinpian Factory Lease are fair and reasonable and in the interest of the Shareholders as a whole. 196

204 CONNECTED TRANSACTIONS (e) Listing Rules Requirements As the highest relevant percentage ratio in respect of the transactions contemplated under the Yinpian Factory Lease Agreement will be, on an annual basis, less than 0.1% and the Yinpian Factory Lease Agreement is on normal commercial terms, it will constitute a de minimis continuing connected transaction which is fully exempt from compliance with Shareholders approval, annual review and all disclosure requirements under the Listing Rules pursuant to Rule 14A.76(1)(a) of the Listing Rules. NON-EXEMPT CONTINUING CONNECTED TRANSACTIONS Framework Purchase Agreement (a) Principal Terms On [ ], 2017, we entered into the Framework Purchase Agreement with Lvse Zhongyao Yinpian for a term commencing from the [REDACTED] until December 31, Under the Framework Purchase Agreement, Lvse Zhongyao Yinpian will provide us with TCM decoction pieces through broiling process, which we would apply for further processing into some of our TCM Granules products. Lvse Zhongyao Yinpian will grant pre-emptive right to us to ensure its supply volume to us. Separate purchase orders will be placed to set out detailed terms and conditions for purchase of specific types of TCM decoction pieces according to the principles as well as pricing policy provided in the Framework Purchase Agreement. The Framework Purchase Agreement was entered into on an arm s length basis and on normal commercial terms. (b) Pricing Policy The unit prices of the purchases of TCM decoction pieces under the Framework Purchase Agreement will be determined based on the production cost of such TCM decoction pieces plus a 5% mark-up. (c) Reasons for the Transaction As decreed in the Catalog for the Guidance of Foreign Investment Industries (Amended in 2015), broiling techniques are prohibited from being applied to manufacture TCM decoction pieces by companies with foreign investors. Therefore, since Neo-green Pharmaceutical became a Sino-foreign joint venture on December 27, 2016, as advised by our PRC legal advisers, we are no longer allowed to manufacture TCM decoction pieces through broiling process. For further details, please refer to the section headed Regulations PRC Laws and Regulations Relating to Foreign Investment in this document. Although we are not restricted to purchase TCM decoction pieces produced using broiling process exclusively from Lvse Zhongyao Yinpian, our Directors consider that it is in the interests of our Group and our Shareholders as a whole to conduct the transactions underlying the Framework Purchase Agreement because given our understanding, we believe Lvse Zhongyao Yinpian is able to supply us with sufficient amount of TCM decoction pieces that could meet our quality standard in a stable manner, without having to incur additional costs associated with engaging and assessing new suppliers which can fulfill our standard and volume requirements. 197

205 CONNECTED TRANSACTIONS (d) Historical Transaction Amounts During the three years ended December 31, 2016, to obtain the TCM decoction pieces produced through broiling process we required for production of our TCM Granule products, we primarily manufactured such TCM decoction pieces ourselves during the times when we were permitted under the relevant laws to conduct broiling process. Accordingly, we had not purchased any TCM decoction pieces from Lvse Zhongyao Yinpian or any other third party suppliers during the three years ended December 31, (e) Annual Caps The maximum aggregate annual amount of purchase by us from Lvse Zhongyao Yinpian for the years ending December 31, 2017, 2018 and 2019 shall not exceed the caps set out below: Proposed annual cap for the year ending December 31, RMB 000 Total purchases 15,000 45,500 61,900 The above annual caps are determined based on (i) the high end of the unit costs of the each type of all TCM decoction pieces produced using broiling process during the three years ended December 31, 2016; (ii) a 5% mark-up (the Mark-up ) on the production cost to Lvse Zhongyao Yinpian for manufacturing the TCM decoction pieces. In determining the Mark-up, we make an equity to Sichuan Medicine Industry Association ( ) (the Industry Association ) in respect of the range (the GFM Range ) of the gross profit margins regarding the sale of the relevant types of the TCM decoction pieces. According to the written response from the Industry Association dated June 20, 2017, the lower end of the GFM Range is approximately 5% by reference to which the Mark-up is determined; (iii) the estimated sales volume of our TCM Granules products which are produced from TCM decoction pieces that are in turn produced by using broiling process for each of the years ending December 31, 2017, 2018 and 2019; (iv) our existing inventory of TCM decoction pieces as our semi-finished goods and our inventory of TCM Granules products as at May 31, 2017; and (v) our expected requirement for various types of raw materials in accordance with our inventory policy. As we had excess inventory of TCM decoction pieces and finished goods as at the Latest Practicable Date, it is expected that we will first utilize such existing inventory for sales and production purposes before procuring the necessary supply from Lvse Zhongyao Yinpian. Accordingly, our purchase of TCM decoction pieces from Lvse Zhongyao Yinpian for the year ending December 31, 2017 is expected to be lower than the amount to be utilized in our production during the year, and therefore is not proportionate to the amount to be purchased in the years ending December 31, 2018 and December 31, 2019, which are expected to be in line with the growth in our sales volume of TCM Granule products produced from TCM decoction pieces which are produced using broiling process. 198

206 CONNECTED TRANSACTIONS (f) Listing Rule Requirements As at least one of the relevant percentage ratios based on the annual caps in respect of the transactions contemplated under the Framework Purchase Agreement is expected to be more than 5%, these connected transactions are subject to the annual reporting, annual review, announcement, circular and independent Shareholders approval requirements under Chapter 14A of the Listing Rules. APPLICATION FOR WAIVER OF NON-EXEMPT CONTINUING CONNECTED TRANSACTIONS In respect of the Framework Purchase Agreement, as at least one of the relevant percentage ratios under the Listing Rules is expected to be more than 5%, these transactions are subject to the annual reporting, annual review, announcement, circular and independent Shareholders approval requirements under Chapter 14A of the Listing Rules. Since the Framework Purchase Agreement is expected to be carried out on a continuing basis and to extend over a considerable period of time, our Directors are of the view that strict compliance with the announcement, circular and independent Shareholders approval requirements under the Listing Rules would be impracticable and unduly burdensome and would impose unnecessary administrative costs upon us. Therefore, we have applied for[, and the Stock Exchange has granted to us,] a waiver from strict compliance with the announcement, circular and independent Shareholders approval requirements under Rules 14A.35, 14A.36, 14A.46 and 14A.53(3) of the Listing Rules with respect to the transactions under the Framework Purchase Agreement. In the event of any future amendment to the Listing Rules imposing more stringent requirements than those as of the Latest Practicable Date on the aforesaid continuing connected transactions, we will take appropriate measures to ensure that relevant new requirements are complied with within a reasonable period of time. CONFIRMATION BY DIRECTORS Our Directors (including independent non-executive Directors) believe that: (i) the aforesaid non-exempt continuing connected transactions underlying the Framework Purchase Agreement will be entered into in the ordinary and usual course of business and are fair and reasonable and in the interests of our Company and our Shareholders as a whole; and (ii) the proposed annual caps of such transactions are also fair and reasonable and in the interests of our Company and our Shareholders as a whole. CONFIRMATION BY SOLE SPONSOR The Sole Sponsor believes that: (i) the aforesaid non-exempt continuing connected transactions underlying the Framework Purchase Agreement will be entered into in the ordinary and usual course of business and are fair and reasonable and in the interests of our Company and our Shareholders as a whole; and (ii) the proposed annual caps of such transactions are also fair and reasonable and in the interests of our Company and our Shareholders as a whole. 199

207 DIRECTORS AND SENIOR MANAGEMENT Our Board consists of eight Directors, including five executive Directors and three independent non-executive Directors. The following table sets forth certain information in respect of our Directors. Name Age Position/Title Date of Joining the Group Date of Appointment for the Current Term Date of First Appointment as a Director Role and Responsibility Relationship with Other Directors and Senior Management Members Executive Directors Mr. Zhou ( ) 56 Executive Director and Chairman of our Board January 16, 2009 June 14, 2017 June 22, 2016 To formulate and decide the significant policies and strategic objectives of our Group Uncle of Ms. Wang Jie Mr. Xu Liming ( ) 38 Executive Director January 16, 2009 June 14, 2017 June 14, 2017 To implement the overall business operation of our Group N/A Mr. Chen Chunchao ( ) 37 Executive Director January 16, 2009 June 14, 2017 June 14, 2017 To manage the production of our Group N/A Ms. Wang Jie ( ) 37 Executive Director January 16, 2009 June 14, 2017 June 14, 2017 To control our procurement cost and manage our suppliers Niece of Mr. Zhou Mr. Gu Jian ( ) 43 Executive Director October 8, 2010 June 14, 2017 June 14, 2017 To manage the marketing and sales of our Group N/A Independent non-executive Directors Mr. Shi Xuemin ( ) Dr. Ngai Wai Fung ( ) Mr. Wang Zishou ( ) 79 Independent non-executive Director 55 Independent non-executive Director 63 Independent non-executive Director July 1, 2015 [ ], 2017 [ ], 2017 To provide strategic advice on the business and operation of our Group July 1, 2015 [ ], 2017 [ ], 2017 To provide strategic advice on the business and operation of our Group [ ] [ ], 2017 [ ], 2017 To provide Strategic advice on the business and operation of our Group N/A N/A N/A 200

208 DIRECTORS AND SENIOR MANAGEMENT DIRECTORS Executive Directors Mr. Zhou ( ), aged 56, is our executive Director and the chairman of our Board. Mr. Zhou has more than 24 years of experience in the healthcare and pharmaceutical industry. He is responsible for formulating and deciding the significant policies and strategic objectives of our Group. He founded Neo-green Pharmaceutical in January He served as general manager of Neo-green Pharmaceutical from June 2012 to July 2015 and has been serving as a director and the chairman of the board of directors of Neo-green Pharmaceutical since January Prior to joining our Group, Mr. Zhou served as the manager of Peng County Dancheng Local Product Trading Station ( ) from January 1992 to December 1998 and served as the chairman and general manager of Pengzhou Tianle Local Product Company ( ), a company engaged in the purchase and sale of agricultural and related products, from December 1998 to December 1999, where he was primarily responsible for its daily operation and development planning. Mr. Zhou has been serving as the chairman of the board of directors and the general manager of Sichuan Green since December 1999, where he has primarily been responsible for its overall business operation and strategic planning. Mr. Zhou took master of business administration courses at and graduated from Sichuan School of Business Administration ( ) in Chengdu, China in July Mr. Zhou was awarded the title of Third Session of Star Startup Entrepreneur of Sichuan Province ( ) by the committee of the third session of Star Startup Entrepreneur of Sichuan Province ( ) and Top Ten Outstanding Startup Entrepreneurs of Sichuan Province ( ) in October 1999 and Role Model of Sichuan Province ( ) by Sichuan Provincial People s Government in Mr. Xu Liming ( ), aged 38, is our executive Director and our general manager. Mr. Xu has more than 17 years of experience in the healthcare and pharmaceutical industry. He joined Neo-green Pharmaceutical in January 2009 and served as the vice general manager of Neo-green Pharmaceutical from January 2009 to July 2015, where he was responsible for implementing the corporate sales and marketing strategies and organizing for the implementation of sales targets. He has been serving as the general manager of, and the director for the Northern China region of, Neo-green Pharmaceutical since July 2015, where he has been responsible for leading, formulating and implementing the overall strategies of our Group and the overall business operation. Prior to joining our Group, from December 1999 to January 2009, he successively served as the head of trading department, the manager of trading department, an assistant to general manager and the deputy general manager of Sichuan Green where he was primarily responsible for domestic and foreign trade relations. 201

209 DIRECTORS AND SENIOR MANAGEMENT Mr. Xu obtained a secondary vocational diploma from Sichuan Pharmaceutical School (, currently known as Sichuan Food and Drug School ( )) in Emeishan, China in June 1999, majoring in pharmaceutical preparation. In May 2016, Mr. Xu was admitted as a candidate for the degree of Master of Business Administration by Southwest University ( ) in Chongqing, China. Mr. Xu was accredited as a pharmacist of traditional Chinese medicine by Anguo Health Elementary Judging Panel ( ) in June Mr. Chen Chunchao ( ), aged 37, is our executive Director and the director of our manufacturing facilities. Mr. Chen has more than 16 years of experience in production management in the healthcare and pharmaceutical industry. He joined our Group in January 2009, served as the deputy director of Neo-green Pharmaceutical s manufacturing facilities from January 2009 to September 2013 and has been serving as the production head of Neo-green Pharmaceutical s manufacturing facilities since September He is responsible for organizing, formulating and implementing strategic production plans of our Group and organizing, managing, controlling and supervising the production system to achieve the production target of our Group. Prior to joining our Group, from January 2001 to October 2003, Mr. Chen served as the head of sub-packaging at the solid preparation workshop of Sichuan Green, where he was primarily responsible for monitoring the sub-packaging procedures and the relevant personnel. From November 2003 to October 2005, he served as the manager of the solid preparation workshop of Sichuan Green, where he was primarily responsible for production arrangement, production materials and personnel arrangement. From November 2005 to January 2009, he served as the manager of the production technology department of Sichuan Green, where he was primarily responsible for production management. Mr. Chen graduated from Sichuan Education College (, currently known as Chengdu Normal University ( )), majoring in pharmaceutical operation and management, in Chengdu, China in June 2000, and obtained an associate degree from Sichuan University ( ), majoring in pharmaceutics, in Chengdu, China in June Mr. Chen obtained a bachelor s degree from Chengdu University of TCM ( ), majoring in traditional Chinese medicine, in Chengdu, China in January Mr. Chen was accredited as a certified pharmacist by the Ministry of Personnel of People s Republic of China and the CFDA in January Ms. Wang Jie ( ), aged 37, is our executive Director and the director of the procurement department. Ms. Wang has 15 years of experience in procurement in the healthcare and pharmaceutical industry. She joined our Group in January 2009 and served as the manager of procurement department of Neo-green Pharmaceutical from January 2009 to December 2011, where she was responsible for co-ordination and strategic planning of procurement work. She worked as the manager of the materials control department of Neo-green Pharmaceutical from December 2011 to July 2014, where she was responsible for establishing and implementing the materials supply management system of our Group. She has been serving as the director of Neo-green Pharmaceutical s procurement department since July 2014, where she was responsible for controlling the procurement costs of our Group and supplier management. Prior to joining our Group, from November 2001 to January 2009, she successively served as the assistant to office administrator of the manufacturing facilities of, the office administrator of the manufacturing facilities of, the manager of the materials 202

210 DIRECTORS AND SENIOR MANAGEMENT control department of, and the deputy manager of the manufacturing facilities of, Sichuan Green, where she was primarily responsible for materials analysis, formulating and executing the strategic plans for materials supply as well as assessment of existing and new suppliers, and coordination of all departments, respectively. Ms. Wang obtained a vocational degree from Chengdu University of TCM ( ), majoring in traditional Chinese medicine, in Chengdu, China in July Mr. Gu Jian ( ), aged 43, is our executive Director and vice general manager. Mr. Gu has 16 years of experience in the healthcare and pharmaceutical industry. Mr. Gu joined our Group in October 2010 and from October 2010 to September 2011, he served as the vice general manager of Neo-green Pharmaceutical, where he was responsible for the management and operation of Chengdu Center, Xi an Center and its commerce department. Since October 2011, he has been serving as Neo-green Pharmaceutical s vice general manager and regional director, and is responsible for the management of prescribed medicine business department s marketing and sales activities in the Central China region. Prior to joining our Group, from December 1999 to June 2004, he served as a sales manager in the sales management department of Sichuan Green, where he was primarily responsible for implementing sales target. He served as a district manager of Sichuan Green from July 2004 to August 2007, and was primarily responsible for management of sales teams and their work in accordance with the sales plan formulated by the sales department. From September 2007 to January 2009, he served as a regional director of Sichuan Green, where he was responsible for formulating and implementing sales and marketing plans, establishing district partnership and the establishment and maintenance of sales network. From February 2009 to October 2010, he served as a vice general manager of Sichuan Green where he was responsible for formulating sales development plans and sales targets. Mr. Gu graduated from Southwest Jiaotong University ( ) in January 2015 after attending online courses, majoring in business administration. Independent non-executive Directors Mr. Shi Xuemin ( ), aged 79, is our independent non-executive Director. Mr. Shi has more than 53 years of experience in traditional Chinese medicine industry. Before he was appointed as our independent non-executive Director on [ ], 2017, Mr. Shi had also been serving as an independent non-executive director of Neo-green Pharmaceutical since July 2015 before he resigned in September Prior to joining our Group, he worked as a doctor at First Teaching Hospital of Tianjin College of TCM (, currently known as First Teaching Hospital of Tianjin University of TCM ( )) from October 1962 to June From September 1968 to April 1971, he served as a doctor-in-charge on the Chinese medical team stationed in Algeria. He has been a professor and chief physician at the aforementioned hospital since April 1971 where he is responsible for medical, teaching, scientific research and management work. The Clinical Research Study of Brain Rejuvenation Stroke Rehabilitation Acupuncture Therapy ( ) which is developed by Mr. Shi was granted the Third Class Award by the State Science and Technology Commission in December 1995 and the Second Class Award by the State Education Commission ( ) in 203

211 DIRECTORS AND SENIOR MANAGEMENT January In September 2002, Study on Acupuncture Therapy for Treatment of Stroke ( ) was granted the Natural Science Award (Second Class) by the People s Government of Tianjin. In January 2010, Study on Acupuncture Therapy for Treatment of Ischemic Cerebrovascular Disease ( ) was granted the Science and Technology Progress Award (First Class). Mr. Shi graduated from Tianjin College of Traditional Chinese Medicine (, currently known as Tianjin University of Traditional Chinese Medicine ( )) in Tianjin, China in October 1962, majoring in traditional Chinese medicine. Mr. Shi was awarded the title of Adolescent and Middle-Aged Experts with Outstanding Contributions ( ) by the Ministry of Personnel of the People s Republic of China ( ) in 1990, awarded as qualified practicing doctor by Tianjin Health Bureau in May 1999, and received certification of registered practicing doctor by Tianjin Health Bureau in December Mr. Shi was elected as a member of the Chinese Academy of Engineering in June 2006 and awarded the honorary title of Master of Traditional Chinese Medicine ( ) by the Ministry of Human Resources and Social Security, National Health and Family Planning Commission and State Administration of Traditional Chinese Medicine in August Dr. Ngai Wai Fung ( ), aged 55, is our independent non-executive Director. Before he was appointed as our independent non-executive Director on [ ], 2017, Dr. Ngai had also been serving as an independent non-executive director of Neo-green Pharmaceutical since July 2015 before he resigned in September Dr. Ngai is the director and chief executive officer of SW Corporate Services Group Limited, a company that specializes in providing secretarial, corporate governance and compliance services to companies in pre-ipo and post-ipo stages. Dr. Ngai has over 20 years of senior management experience including acting as an executive director, chief financial officer or company secretary, most of which are in the areas of finance, accounting, internal control and regulatory compliance, corporate governance and secretarial work for listed issuers. Dr. Ngai currently holds directorships in the following companies listed on the Stock Exchange and other securities markets: Company Name (English) Company Name (Chinese) Securities Market Stock Code Position Held Time of the First appointment Bosideng International Holdings Limited Stock Exchange 3998 Independent non-executive director and the chairman of the audit committee September 2007 Powerlong Real Estate Holdings Limited Stock Exchange 1238 Independent non-executive director and the chairman of the audit committee June

212 DIRECTORS AND SENIOR MANAGEMENT Company Name (English) Company Name (Chinese) Securities Market Stock Code Position Held Time of the First appointment BaWang International (Group) Holding Limited ( ) Stock Exchange 1338 Independent non-executive director, the chairman of the audit and risk management committee and a member of the nomination committee and the remuneration committee December 2008 Biostime International Holdings Limited Stock Exchange 1112 Independent non-executive director, the chairman of the audit committee and a member of the nomination committee and the remuneration committee July 2010 SITC International Holdings Company Limited Stock Exchange 1308 Independent non-executive director, and a member of the audit committee, the nomination committee and the remuneration committee September 2010 China Coal Energy Company Limited Stock Exchange Shanghai Stock Exchange Independent non-executive director, the chairman of the remuneration committee, and a member of the audit and risk management committee and the safety, health and environmental committee December

213 DIRECTORS AND SENIOR MANAGEMENT Company Name (English) Company Name (Chinese) Securities Market Stock Code Position Held Time of the First appointment Beijing Capital Juda Limited (formerly known as Juda International Holdings Limited) ( ) Stock Exchange 1329 Independent non-executive director, the chairman of the audit committee, and a member of the remuneration committee and the nomination committee December 2013 China Railway Group Limited Stock Exchange Shanghai Stock Exchange Independent non-executive director, and a member of the audit and risk management committee and the safety, health and environmental protection committee June 2014 Yangtze Optical Fibre and Cable Joint Stock Limited Company Stock Exchange 6869 Independent non-executive director, the chairman of the audit committee, and a member of the nomination and remuneration committee September 2014 BBMG Corporation Stock Exchange Shanghai Stock Exchange Independent non-executive director, and a member of the remuneration and nomination committee, the strategic committee and the audit committee November

214 DIRECTORS AND SENIOR MANAGEMENT Company Name (English) Company Name (Chinese) Securities Market Stock Code Position Held Time of the First appointment Travelsky Technology Limited Stock Exchange 696 Independent non-executive director, the chairman of the audit and risk management committee, and a member of the remuneration and evaluation committee January 2016 China HKBridge Holdings Limited (formerly known as Topsearch International (Holdings) Limited) ( ( ) ) Stock Exchange 2323 Independent non-executive director, the chairman of the remuneration committee, and a member of the nomination committee and the audit committee March 2016 SPI Energy Company Limited Nasdaq SPI Independent director, the chairman of the audit committee, and a member of the compensation committee May 2016 He was an independent non-executive director of China Railway Construction Corporation Limited (listed on the Stock Exchange (stock code: 01186) and the Shanghai Stock Exchange (stock code: )) from December 2007 to October 2014, and an independent non-executive director of Sany Heavy Equipment International Holdings Company Limited (listed on the Stock Exchange (stock code: 00631)) from November 2009 to December Dr. Ngai has been served, since July 2011, as an independent director of LDK Solar Co., Ltd. (a company incorporated in the Cayman Islands and principally engaged in the manufacturing of photovoltaic (PV) products, whose American depositary shares were previously listed on the New York Stock Exchange, and are now listed on the OTC Pink Limited Information, stock code: LDKYQ) ( LDK ). On April 6, 2016, the Grand Court of the Cayman Islands issued a winding-up order against LDK and appointed joint official liquidators to wind up LDK s affairs for liquidation, pursuant to a winding-up petition filed by certain creditors of LDK. As at the Latest Practicable Date, the proceeding is still in progress. 207

215 DIRECTORS AND SENIOR MANAGEMENT Dr. Ngai graduated from University of Wolverhampton with a bachelor s degree in law in October He received a master s degree in business administration from Andrews University of Michigan in August 1992, a master s degree in corporate finance from Hong Kong Polytechnic University in November 2002, and a doctorate degree in economics (finance) from Shanghai University of Finance and Economics ( ) in June Dr. Ngai has been a fellow of the Institute of Chartered Secretaries and Administrators since 2000, and a fellow of The Hong Kong Institute of Company Secretaries since November Dr. Ngai has been a member of Hong Kong Securities and Investment Institute since July 1999, a member of the Hong Kong Institute of Certified Public Accountants since July 2007, a fellow of Hong Kong Institute of Directors since February 2010, and a fellow of the Association of Chartered Certified Accountants in the United Kingdom since March He has been an Adjunct Professor of Law of Hong Kong Shue Yan University since September He was appointed in 2013 by the Chief Executive of The Hong Kong Special Administrative Region as a member of the Working Group on Professional Services under the Economic Development Commission for two years, and was re-appointed for another two years in He has been a member of the qualification and examinations board of the Hong Kong Institute of Certified Public Accountants since January 2013 and a member of the general committee of The Chamber of Hong Kong Listed Companies since June Mr. Wang Zishou ( ), aged 63, is our independent non-executive Director. Mr. Wang has more than 39 years of experience in traditional Chinese medicine industry. Prior to joining our Group, he worked at Chengdu College of TCM (, currently known as Chengdu University of TCM ( )) from August 1977 to June 2014, where he served as teaching assistant, lecturer, associate professor and professor during his tenure, responsible for teaching, scientific research and management work. From June 2002 to December 2010, he also served as the dean of the faculty of adult education. Mr. Wang was granted the Science and Technology Progressive Award (Third Class) by the Chengdu People s Government for his study of the New Purpose for the Ancient Recipe of Jinlingdan ( ) in He was granted the Teaching Achievement Award (First Class) twice by the Chengdu People s Government in May 2005 and in March 2010 respectively. Mr. Wang graduated from Sichuan School of Chinese Medicine ( ) injuly 1977, majoring in traditional Chinese medicine. He has been a qualified practicing doctor of traditional Chinese medicine in the PRC since April Save as disclosed herein, to the best of the knowledge, information and belief of our Directors, having made all reasonable enquiries, there are no other matters relating to the appointment of Directors that need to be brought to the attention of our Shareholders, nor is there any information relating to our Directors that is required to be disclosed pursuant to paragraphs (h) to (v) of Rule 13.51(2) of the Listing Rules, including matters relating to directorships held by Directors in any public companies the securities of which are listed on any securities market in Hong Kong or overseas in the last three years. As of the Latest Practicable Date, other than Mr. Zhou, none of our Directors had any interest in our Shares within the meaning of Part XV of the SFO. 208

216 DIRECTORS AND SENIOR MANAGEMENT SENIOR MANAGEMENT The following table sets forth certain information in respect of the Company s senior management members: Name Age Position/ Title Mr. Xu Liming ( ) Date of Joining the Group Role and Responsibility 38 General manager January 16, 2009 Operation and implementation of the business of our Group Relationship with Directors and Senior Management Members N/A Mr. Gu Jian ( ) 43 Vice general manager October 8, 2010 Management of prescribed medicine business department s marketing and sales activities in the Central China region N/A Ms. Lai Mei ( ) 41 Vice general manager May 26, 2009 Management of prescribed medicine business department s marketing and sales activities in the Eastern China region N/A Mr. Hu Changjiang ( ) 64 Director of research and development December 16, 2010 Research, development and management of our products N/A Mr. Wong Dang Sing ( ) 41 Chief financial officer March 14, 2016 Financial management of our Group N/A Mr. Chen Chunchao ( ) 37 Director of manufacturing facilities January 16, 2009 Production management of our Group N/A Mr. Li Dongbing ( ) 51 Secretary to the Board of Directors March 31, 2012 Implementation of the resolutions and instructions of our Board N/A Please refer to the section headed Directors Executive Directors for the biographical details of Mr. Xu Liming, Mr. Chen Chunchao and Mr. Gu Jian. Ms. Lai Mei ( ), aged 41, is our vice general manager. Ms. Lai has 22 years of experience in the TCM industry. Ms. Lai joined our Group in May 2009 and from May 2009 to February 2014, she served as the vice general manager of Neo-green Pharmaceutical, where she was responsible for carrying out sales and development work in accordance with the relevant indicators. Since February 2014, Ms. Lai has been serving as a vice general manager and a regional director of Neo-green Pharmaceutical, where she has been responsible for the management of prescribed medicine business department s marketing and sales activities in the Eastern China region. Prior to joining our Group, from August 1994 to May 2002, Ms. Lai served as a TCM pharmacist in the People s Hospital of Pengzhou ( ), where she was primarily responsible for manufacturing as well as recording the manufacturing process, and quality check of, TCM decoction pieces. From May 2002 to July 2003, she served as a quality control specialist in Sichuan Green s quality control department, where she was responsible for the control of manufacturing procedures and quality control of medicine. From July 2003 to September 2004, she served as a manager of Sichuan Green s quality 209

217 DIRECTORS AND SENIOR MANAGEMENT control department, where she was responsible for implementing the quality control system and the day-to-day management of the quality control department. From September 2004 to April 2005, she served as a vice director of Sichuan Green s manufacturing facilities where she was responsible for assisting the director of manufacturing facilities, formulating and implementing strategic production plans and guiding the actual production, and from April 2005 to May 2009, she was promoted as the director of Sichuan Green s manufacturing facilities where she was responsible for the overall management of the overall production and business operation. Ms. Lai graduated from Sichuan Education College (, currently known as Chengdu Normal University ( )) in Chengdu, Sichuan in January 2007, majoring in biological science. Ms. Lai obtained a master s degree of engineering in software engineering from Beijing Institute of Technology ( ) in Beijing, China in June Ms. Lai was accredited as a qualified TCM pharmacist by Pengzhou Reform of Professional Title Leading Group ( ) in February 2001 and was accredited as a licensed pharmacist by Sichuan Provincial Human Resources Department ( ) in April Mr. Hu Changjiang ( ), aged 64, is our director of research and development. Mr. Hu has 41 years of experience in teaching medicine. He joined our Group in December 2010 and has been serving as the director of research and development of Neo-green Pharmaceutical since then. Prior to joining our Group and up to date, Mr. Hu was and has been engaged in teaching and scientific research of TCM manufacturing in Chengdu College of TCM ( ) (now renamed as Chengdu University of TCM). From October 1975 to October 1980, Mr. Hu was a teaching assistant at Chengdu University of TCM. From November 1980 to October 1985, he was a lecturer at Chengdu University of TCM. From November 1985 to September 2003, he was a teaching and research director at Chengdu University of TCM. From October 2003 to October 2008, Mr. Hu served as associate professor at Chengdu University of TCM. Mr. Hu became a professor in December Since November 2009, he has been a professor and doctoral supervisor at Chengdu University of TCM. Mr. Hu graduated from the then Chengdu College of TCM in Chengdu, China in September 1975, majoring in traditional Chinese medicine. Mr. Hu was awarded the Second Prize of Technology Progress Award of Chengdu Province ( ) by Chengdu City People s Government in 2005 in recognition of his significant contribution to the development of science and technology and the Representative Successor of TCM Manufacturing of Chengdu City under the Non-materialistic Heritage of Sichuan Province ( ) by the Culture Department of Sichuan Province ( ) in December Mr. Hu was awarded special government subsidy certificate by the State Council in February 2013 for his outstanding contribution to the natural science education of China. Mr. Hu was approved as one of the tenth batch of academic and technology leaders by the Sichuan Province Committee of the Communist Party of China and Sichuan Province People s Government after the consideration of the second session of professional evaluation committee of Sichuan Province in July

218 DIRECTORS AND SENIOR MANAGEMENT Mr. Hu is devoted to scientific research and education. He has published over 10 books including Manufacturing Traditional Chinese Medicine ( ), a teaching material for advanced TCM schools in China, Encyclopaedia of Traditional Chinese Medicine ( ), and Manufacturing and Clinical Application of Traditional Chinese Medicine ( ). Mr. Wong Dang Sing ( ), aged 41, is our chief financial officer. Mr. Wong has more than 11 years of experience in finance. He joined our Group in March 2016 and has been serving as our chief financial officer since then. He is responsible for Group s financial strategies, financial management, and internal control. Prior to joining our Group, from June 2005 to August 2013, he served as a senior manager of Ernst & Young at its Beijing office. From September 2013 to April 2015, he was the chief financial officer of Oriental University City Holdings (H.K.) Limited ( ( ) ) (listed on the Stock Exchange, stock code: 8067), which is a company engaged in owning and leasing education facilities in the PRC, where he was primarily responsible for leading the finance team and handling matters of the board of directors. Mr. Wong has been a Chartered Accountant of the Malaysia Institute of Accountants since September 2013, a Certified Public Accountant of the Hong Kong Institute of Certified Public Accountants since September 2012, and a member of the Association of Chartered Certified Accountants in the United Kingdom since December Mr. Li Dongbing ( ), aged 51, is the secretary to our Board. Mr. Li has over 12 years of experience of being a board secretary. Mr. Li joined our Group in March 2012 and has since then been serving as the secretary to the board of directors of, and deputy general manager of, Neo-green Pharmaceutical and is responsible for assisting the board of directors of Neo-green Pharmaceutical in determining its development direction and formulating mid-to-long term and annual work plans of Neo-green Pharmaceutical based on its operation and development. He is also responsible for conveying, supervising and implementing the resolutions and instruction of the board of directors of Neo-green Pharmaceutical. Prior to joining our Group, from June 2005 to April 2012, he successively served as head of the board office and securities affairs representative of New Hope Liuhe Co., Ltd. (listed on the Shenzhen Stock Exchange, stock code: ), a company engaged in agricultural and animal husbandry products business, where he was principally responsible for investor relations. Mr. Li graduated from Zhengzhou University of Light Industry ( ) in Zhengzhou, China in July 1988, majoring in industrial automation electrical engineering. He graduated from Beijing Foreign Studies College (, currently known as Beijing Foreign Studies University ( )) through correspondence course in December 1991 and completed the master course of business administration of The School of Agriculture and Rural Development of Renmin University of China ( ) in Beijing, China in July He was awarded the certificate for board secretary by the Shenzhen Stock Exchange in September

219 DIRECTORS AND SENIOR MANAGEMENT Save as disclosed herein, to the best of the knowledge, information and belief of our Directors, having made all reasonable enquiries, there are no other matters relating to the appointment of the Company s senior management members that need to be brought to the attention of our Shareholders, and none of the Company s senior management members held any directorship in any public companies the securities of which are listed on any securities market in Hong Kong or overseas in the last three years. As of the Latest Practicable Date, none of the Company s senior management members had any interest in our Shares within the meaning of Part XV of the SFO. COMPANY SECRETARY Mr. Kwok Siu Man ( ), aged 58, was appointed as our company secretary on June 14, Prior to joining our Group, Mr. Kwok was the Group Company Secretary of a conglomerate comprising 5 companies respectively listed on the Main Board and the Growth Enterprise Market of the Stock Exchange and the Company Secretary of a long-established related group also listed on the Main Board of the Stock Exchange simultaneously. He has over 25 years extensive legal, corporate secretarial and management experience gained at company secretary and other senior positions from other reputable companies overseas and in Hong Kong (including the Hang Seng Index Constituent (the HSIC ) and Hang Seng Mid-Cap 50 stock companies). Moreover, he was the managing director of a top-notch fi nancial printer in Hong Kong with international affiliation, a director of a property management company for luxury residential properties and an independent non-executive director of a company listed on the Main Board of the Stock Exchange. Further, he has been a director of a charity fund in Hong Kong since its incorporation in Mr. Kwok is a fellow member of The Institute of Chartered Secretaries and Administrators and The Institute of Financial Accountants in England, the Institute of Public Accountants in Australia, The Hong Kong Institute of Chartered Secretaries ( HKICS ), The Association of Hong Kong Accountants and The Hong Kong Institute of Directors and a member of the Hong Kong Securities and Investment Institute. He also possesses professional qualifications in arbitration, taxation, financial planning and human resources management. In addition, he matriculated from Queen s College, holds a professional diploma in company secretaryship and administration, a bachelor s degree of arts (with honors) and a post-graduate diploma in laws (with credit) and has passed the Common Professional Examinations in England and Wales. In 1999, he received induction into the International WHO s WHO of Professionals, an international organization which establishes a network of international elite professionals. He was one of the adjudicators for the Best Annual Reports Awards organized by the Hong Kong Management Association in the early 1990 s and the late 2000 s. Having been the reviewer and the chief examiner of the Hong Kong Company Secretarial Practice/Corporate Secretaryship of the international qualifying examinations of the HKICS and participated in the review of the Hong Kong law variant modules thereof for about a decade, Mr. Kwok holds the record of being the HKICS s longest-serving council member and director (i.e. for 18 years). He was also a founding member of the (Listed) Company Secretaries Panel and the vice chairman of the Technical Committee thereof. Further, he was a member of the Board of Review appointed by the Hong Kong government under the Inland Revenue Ordinance and has been acting as an external 212

220 DIRECTORS AND SENIOR MANAGEMENT examiner/adviser/member of the validation panel of corporate management courses organized by recognized academic and vocational institutions in Hong Kong since the mid-1990 s. He has been influential in making the regulators in Hong Kong (including the Stock Exchange) review and amend the Listing Rules in many aspects since the mid-2000 s. BOARD COMMITTEES In accordance with the corporate governance practice under the Listing Rules, we have established the following committees including: the Audit Committee, the Remuneration Committee, the Nomination Committee and the Strategy and Risk Management Committee. These committees operate in accordance with the relevant terms of reference established by our Board. Audit Committee The Audit Committee consists of three Directors: Ngai Wai Fung, Shi Xuemin and Wang Zishou. Ngai Wai Fung currently serves as the chairman of the Audit Committee. The primary responsibilities of the Audit Committee are reviewing and supervising our financial reporting procedures, including proposal of appointing or changing the external auditors, supervision of our internal audit system and its implementation, serving as a communication channel between the internal auditors and external auditors, auditing the financial information and its disclosure, reviewing our internal control system and auditing the significant connected transactions, nominating the heads of the internal audit department and other matters that our Board has authorized it to deal with. Nomination Committee The Nomination Committee consists of three Directors: Mr. Zhou, Wang Zishou and Shi Xuemin. Mr. Zhou currently serves as the chairman of the Nomination Committee. The primary responsibilities of the Nomination Committee are preparing the procedures and criteria for determining the candidates for our Directors and the Company s senior management and conducting preliminary review on their qualifications and credentials, including proposing to our Board on its size and composition in accordance with our operating results, assets and shareholding structure, reviewing the procedures and criteria for determining the candidates for our Directors and our general managers and making proposals to our Board, looking for the qualified candidates for our Directors and general managers, reviewing and making proposals on the candidates for our Directors and general managers, reviewing and making proposals on the candidates for the other senior management members such as the vice general managers, secretary to our Board and chief accountant, on which our Board needs to resolve, and other matters that our Board has authorized it to deal with. 213

221 DIRECTORS AND SENIOR MANAGEMENT Remuneration Committee The Remuneration Committee consists of three Directors: Wang Zishou, Mr. Zhou and Shi Xuemin. Wang Zishou currently serves as the chairman of the Remuneration Committee. The primary responsibilities of the Remuneration Committee are formulating the criteria for and conducting assessment on our Directors and senior management as well as determining and reviewing the remuneration policies and plans for our Directors and senior management, including formulating remuneration plans and proposals in accordance with the terms of reference of our Board and the importance of their positions as well as the remuneration benchmarks for the relevant positions in other comparable companies (the remuneration plans and proposals include, without limitation, criteria, procedures and main assessment system for performance assessment, and main proposals and regulations on award and punishment), reviewing the performance of our Directors and senior management and conducting annual assessment on their performance and results, supervising the implementation of our remuneration policies and other matters that our Board has authorized it to deal with. Strategy and Risk Management Committee The Strategy and Risk Management Committee currently consists of three Directors: Mr. Zhou, Xu Liming and Chen Chunchao. Mr. Zhou currently serves as the chairman of the Risk Management Committee. The primary responsibilities of the Strategy and Risk Management Committee include reviewing and providing suggestions on our Company s long term strategic plan and significant investment decision, reviewing our Company s risk management policies and standards, supervising and monitoring our Company s exposure to legal risks. COMPENSATION OF THE DIRECTORS AND EMPLOYEES For the years ended December 31, 2014, 2015 and 2016, the aggregate amount of fees, salaries, allowances, discretionary bonus, pension-defined contribution plans and other benefits in kind (if applicable) paid by us to our Directors were approximately RMB1,102,000, RMB1,840,000 and RMB4,561,000, respectively. For the years ended December 31, 2014, 2015 and 2016, the remuneration and benefits in kind (if applicable) received by the five highest-paid individuals were RMB1,696,000, RMB2,423,000 and RMB7,168,000, respectively. Our Directors and employees remuneration is determined with reference to salaries paid by comparable companies, their experience, their responsibilities and their performance. During the Track Record Period, no remuneration was paid by us to, or receivable by, our Directors or the five highest-paid individuals as an inducement to join or upon joining our Company. No compensation was paid by us to, or receivable by, our Directors, former Directors or the five highest-paid individuals for each of the Track Record Period for the loss of any office in connection with the management of the affairs of any subsidiary of our Company. 214

222 DIRECTORS AND SENIOR MANAGEMENT None of our Directors waived any remuneration for any of the three years ended December 31, Under our remuneration policy, the Remuneration Committee will consider factors such as salaries paid by comparable companies, tenure, commitment, responsibilities and performance of our Directors and the senior management as the case may be, in assessing the amount of remuneration payable to our Directors and such employees. Under the arrangements currently in force, the aggregate remuneration payable to our Directors for the year ending December 31, 2017 is estimated to be approximately RMB1.92 million. COMPLIANCE ADVISER We have appointed TC Capital International Limited as our Compliance Adviser pursuant to Rule 3A.19 of the Listing Rules. Pursuant to Rule 3A.23 of the Listing Rules, the Compliance Adviser will advise us on the following circumstances: before the publication of any regulatory announcement, circular or financial report; where a transaction, which might be a notifiable or connected transaction, is contemplated, including share issues and share repurchases; where we propose to use the [REDACTED] of the [REDACTED] in a manner different from that detailed in this document or where our business activities, developments or results deviate from any forecast, estimate or other information in this document; and where the Stock Exchange makes an inquiry of us regarding unusual movements in the price or trading volume of our Shares. The terms of the appointment shall commence on the [REDACTED] and end on the date which we distribute our annual report of our financial results for the financial year ending December 31, 2017 and such appointment may be extended by mutual agreement based on our Directors review of the corporate governance status of our Group at that time. 215

223 SUBSTANTIAL SHAREHOLDERS So far as our Directors are aware, immediately following the completion of the [REDACTED] (without taking into account the Shares which may be issued upon the exercise of the [REDACTED] or any options that may be granted under the Share Option Scheme), the following persons will have an interest or short position in Shares or underlying shares of our Company, which would be required to be disclosed to our Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or, directly or indirectly, be interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of our Company: As at the Latest Practicable Date Immediately after the [REDACTED] and the Capitalization Issue Name of Shareholder Nature of Interest Number of Shares Approximate percentage of Shareholding in our Company Number of Shares Approximate percentage of Shareholding in our Company Mr. Zhou (1)(2) Interest in controlled 727, % [REDACTED] (L) [REDACTED]% (L) corporation/person acting in concert Mr. Zhou Xiang (1)(3) Interest in controlled 727, % [REDACTED] (L) [REDACTED]% (L) corporation/person acting in concert Ms. Zhou Qiaomin (4) Interest in controlled 240, % [REDACTED] (L) [REDACTED]% (L) corporation Ever Peace Beneficial owner 447, % [REDACTED] (L) [REDACTED]% (L) Neo Era Beneficial owner 280, % [REDACTED] (L) [REDACTED]% (L) Sincere Nation Beneficial owner 240, % [REDACTED] (L) [REDACTED]% (L) Notes: The letter L denotes long position in our Shares. (1) By virtue of Mr. Zhou and Mr. Zhou Xiang acting in concert with each other, Mr. Zhou is deemed to be interested in Mr. Zhou Xiang s interests in our Company and Mr. Zhou Xiang is deemed to be interested in Mr. Zhou s interests in our Company. (2) Ever Peace is wholly owned by Mr. Zhou and accordingly Mr. Zhou is deemed to be interested in all the Shares held by Ever Peace. (3) Neo Era is wholly owned by Mr. Zhou Xiang and accordingly Mr. Zhou Xiang is deemed to be interested in all the Shares held by Neo Era. (4) Sincere Nation is wholly owned by Ms. Zhou Qiaomin and accordingly Ms. Zhou Qiaomin is deemed to be interested in all the Shares held by Sincere Nation. Except as disclosed above, we are not aware of any person who will, immediately following the [REDACTED] (without taking into account the Shares may be issued upon the exercise of the [REDACTED] or any options that may be granted under the Share Option Scheme), have an interest or short position in Shares or underlying shares which would be required to be disclosed to our Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or, directly or indirectly, be interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of our Group. 216

224 SHARE CAPITAL SHARE CAPITAL The authorized and issued share capital of our Company is as follows: Authorized Share Capital: (HK$) 38,000,000 Shares 380,000 Assuming the [REDACTED] is not exercised at all, the issued share capital of our Company immediately following the completion of the Capitalization Issue and the [REDACTED] will be as follows: Issued Share Capital: HK$ Approximate percentage of issued share capital 1,000,000 Shares in issue as of the date of this document [REDACTED] Shares to be issued under the Capitalization Issue [REDACTED] Shares to be issued under the [REDACTED] (%) 10,000 [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] Shares in total [REDACTED] 100 Assuming the [REDACTED] is exercised in full, the issued share capital of our Company immediately following the completion of the Capitalization Issue and the [REDACTED] will be as follows: Issued Share Capital: HK$ Approximate percentage of issued share capital (%) 1,000,000 Shares in issue as of the date of 10,000 [REDACTED] this document [REDACTED] Shares to be issued under the [REDACTED] [REDACTED] Capitalization Issue [REDACTED] Shares to be issued under the [REDACTED] (2) [REDACTED] [REDACTED] [REDACTED] Shares in total [REDACTED] 100 Notes: (1) The Shares referred to in the above table have been or will be fully paid or credited as fully paid. (2) Assuming a total of [REDACTED] Shares will be issued upon exercise of the [REDACTED] in full. RANKING The [REDACTED] are ordinary Shares in the share capital of our Company and will rank equally in all respects with all Shares in issue or to be issued as set out in the above table, and will qualify and rank equally for all dividends or other distributions declared, made or paid after the date of this document. 217

225 SHARE CAPITAL ALTERATIONS OF SHARE CAPITAL Our Company may from time to time by ordinary resolution or special resolution (as the case may be) of shareholders alter the share capital of our Company. For a summary of the provisions in the Article of Association regarding alterations of share capital, see paragraph Appendix V Summary of the Constitution of the Company and Cayman Islands Companies Law 2. Articles of Association 2.5 Alteration of Capital in this document. THE SHARE OPTION SCHEME We have conditionally adopted the Share Option Scheme on [ ], The principal terms of the Share Option Scheme are summarized in the paragraph headed 3. Share Option Scheme in Appendix IV to this document. GENERAL MANDATE TO ISSUE SHARES Our Directors have been granted a general unconditional mandate to allot, issue and deal with Shares with an aggregate nominal value of not more than the sum of: (i) (ii) 20% of the aggregate nominal value of the share capital of our Company in issue immediately following the completion of the Capitalization Issue and the [REDACTED] (excluding any Shares which may fall to be issued pursuant to the [REDACTED]); and the aggregate nominal value of share capital of our Company repurchased by our Company (if any) under the general mandate to repurchase Shares referred to below. This mandate will expire at the earliest of: (i) (ii) the conclusion of our Company s next annual general meeting unless renewed by an ordinary resolution of our Shareholders in a general meeting, either unconditionally or subject to conditions; or the expiration of the period within which our Company is required by law or the Articles of Association to hold its next annual general meeting; or (iii) the time when such mandate is varied, revoked or renewed by an ordinary resolution of our Company s Shareholders in a general meeting. Further details of this general mandate are set out in the paragraph headed Appendix IV Statutory and General Information 1. Further information about our Company C. Written resolutions passed by our Shareholders in this document. 218

226 SHARE CAPITAL GENERAL MANDATE TO REPURCHASE SHARES Our Directors have been granted a general unconditional mandate to exercise all the powers of our Company to repurchase Shares with a total nominal value of not more than 10% of the aggregate nominal amount of the share capital of our Company in issue or to be issued immediately following the completion of the Capitalization Issue and the [REDACTED] (excluding any Shares which may fall to be issued upon the exercise of the [REDACTED]). This mandate only relates to repurchases made on the Stock Exchange, or any other approved stock exchange(s) on which the Shares are listed (and which is recognized by the SFC and the Stock Exchange for this purpose), and which are made in accordance with all applicable laws and/or requirements of the Listing Rules. This mandate will expire at the earliest of: (i) (ii) the conclusion of our Company s next annual general meeting unless renewed by an ordinary resolution of our Shareholders in a general meeting, either unconditionally or subject to conditions; or the expiration of the period within which our Company is required by law or the Articles of Association to hold its next annual general meeting; or (iii) the time when such mandate is varied, revoked or renewed by an ordinary resolution of our Company s Shareholders in a general meeting. Further details of this share repurchase mandate are set out in the paragraph headed Appendix IV Statutory and General Information 1. Further information about our Company C. Written resolutions passed by our Shareholders in this document. 219

227 FINANCIAL INFORMATION You should read the following discussion in conjunction with the combined financial statements and the notes thereto included in Appendix I Accountants Report and Appendix II Unaudited Pro Forma Financial Information to this document and the selected historical financial information and operating data included elsewhere in this document. Our historical results do not necessarily indicate results expected for any future periods. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ from those anticipated in these forward-looking statements as a result of any number of factors, including those set forth in Forward-Looking Statements and Risk Factors. In evaluating our business, you should carefully consider the information provided in the section headed Risk Factors in this document. OVERVIEW We focus on the manufacture, sale, and research and development of TCM Granules. We are one of the only five group companies 1 in the PRC authorized by the CFDA to manufacture and sell TCM Granules and the only such company headquartered in Western China, according to the PICO Report. We were the third largest TCM Granules manufacturer in the PRC in terms of revenue in 2016 and ranked first in terms of CAGR of revenue for the period from 2014 to 2016, according to the PICO Report. With our comprehensive portfolio of approximately 670 types of TCM Granules and our ability to manufacture over 750 types of TCM Granules, as well as our proprietary Smart Pharmacy Systems, hospitals and medical institutions can efficiently fulfill their TCM Granule prescription needs. In addition, according to the PICO Report, we have self-operated plantation bases, which we primarily use for the research and development and quality control of certain key raw materials we use for the production of TCM Granules. According to the PICO Report, we are one of the only two TCM Granules manufacturers in the PRC that have both self-operated plantation bases and Smart Pharmacy Systems (or other similar systems), allowing us to gain valuable insight into all key components of the entire value chain for TCM Granules. TCM Granules are a form of traditional Chinese medicine created from the extraction and concentration of medicinal herbs. TCM practitioners prescribe a personalized combination of various single-herb TCM Granules to treat a particular patient. The combination of TCM Granules is then dissolved in water and consumed by the patient. According to the PICO Report, TCM Granules are increasingly being recognized for their convenience, consistency, efficacy and reliability. As a result, according to the PICO Report, the TCM Granules market in the PRC grew at a CAGR of 26.6% from 2012 to 2016, significantly outpacing the overall pharmaceutical industry and the overall TCM industry in the PRC, and is expected to continue to grow at a CAGR of 26.6% from 2017 to We generated substantially all of our revenue during the Track Record Period from the sale of TCM Granules, which accounted for 95.8%, 94.5% and 99.8% of our total revenue for the years ended December 31, 2014, 2015 and 2016, respectively. We primarily utilize a direct 1 One of the six pilot enterprises that were authorized by the CFDA to manufacture TCM Granules has become a wholly-owned subsidiary of another pilot enterprise, resulting in a total of five group companies being authorized to manufacture TCM Granules. 220

228 FINANCIAL INFORMATION sales model, pursuant to which we market, sell and distribute a substantial majority of our TCM Granules directly to hospitals and medical institutions in the PRC. TCM practitioners at these hospitals and medical institutions then prescribe them to patients. For the years ended December 31, 2014, 2015 and 2016, we sold our TCM Granules directly to 550, 658 and 790 hospitals and medical institutions including 475, 573 and 692 hospitals. For the years ended December 31, 2014, 2015 and 2016, direct sales to hospitals and medical institutions accounted for 94.6%, 94.9% and 95.6% of our revenue from the sale of TCM Granules. Our direct sales model allows us to maintain effective control over our sales channel and customer relationships. In addition to TCM Granules, we also manufacture and sell to hospitals and medical institutions a small amount of TCM decoction pieces and Chinese patent medicines, such as Danshu Pills ( ). We currently manufacture all of our products at our facilities located in Pengzhou City, Chengdu, Sichuan Province. We started to use these facilities in August 2014, which have a designed production capacity of 2,000.0 tons of TCM Granules per year. Prior to August 2014, we manufactured our products at our previous facilities, located in Chengdu, Sichuan Province, which had a designed production capacity of tons of TCM Granules per year. We ceased to manufacture TCM Granules at our previous facilities in August 2014 when our current manufacturing facilities became operational. Distribution of our broad product portfolio using our direct sales model is strengthened by our proprietary Smart Pharmacy Systems installed at the premises of many of our customers. Our Smart Pharmacy Systems generally comprise one or more dispensing machines and have been designed as a full-service solution to not only prepare and package TCM prescriptions using TCM Granules in a manner that enhances safety, efficiency, accuracy and level of automation, but also help our customers digitize and modernize their TCM prescriptions. We have established an extensive marketing and sales network comprising 463 marketing and sales representatives located in all our major markets as of December 31, 2016, which, according to the PICO Report, was one of the larger teams of in-house marketing and sales representatives among TCM Granules manufacturers in the PRC. We also employed a team of 822 personnel who mainly focus on the operation of our Smart Pharmacy Systems as of December 31, We believe these personnel help us nurture and solidify the relationships we have with our customers. For the years ended December 31, 2014, 2015 and 2016, our revenue was RMB711.0 million, RMB1,055.6 million and RMB1,403.3 million, respectively, representing a CAGR of 40.5% over the period, and our profit for the year was RMB208.8 million, RMB367.8 million and RMB594.0 million, respectively, representing a CAGR of 68.7% over the period. For the years ended December 31, 2014, 2015 and 2016, our gross profit margin was 60.7%, 66.6% and 74.1%, respectively. 221

229 FINANCIAL INFORMATION FACTORS AFFECTING OUR RESULTS OF OPERATIONS Our business, financial condition and results of operations have been, and are expected to continue to be, affected by a number of factors, which primarily include the following: Market Demand for TCM Granules We offer an extensive range of TCM Granules to our customers. Our revenue growth during the Track Record Period was primarily attributable to an increase in sales of our TCM Granules to hospitals and medical institutions, which has been driven primarily by the significant growth of market demand for TCM Granules in the PRC. According to the PICO Report, in terms of total revenue, the TCM Granules market in the PRC grew at a CAGR of 26.6% from 2012 to 2016, significantly outpacing the overall pharmaceutical industry, the overall TCM industry and the TCM decoction pieces market in China, which grew at CAGRs of 15.4%, 14.3% and 20.0%, respectively, from 2012 to According to the PICO Report, TCM Granules have become widely recognized by hospitals and patients as an alternative to TCM decoction pieces. In addition, the use of TCM decoction pieces typically involves lengthy and inconvenient preparation, including the boiling of herbs in decoction form for patients to consume as a liquid. By comparison, TCM Granules are a more convenient product dissolvable in water for instant consumption. As a result, in recent years, there has been a trend in the industry that TCM practitioners prefer to prescribe TCM Granules rather than TCM decoction pieces, according to the PICO Report. We believe significantly higher growth rate in the revenue for TCM Granules in recent years as compared to the revenue for TCM decoction pieces was a testament to the growing practitioner and patient preference for TCM Granules. In addition, according to the PICO Report, the TCM Granules market in the PRC is expected to further grow at a CAGR of 26.6% from 2017 to 2021 in terms of total revenue. With our strong market position, our extensive range of product offerings, and our effective marketing, sales and distribution network across the PRC, we believe we are well-positioned to take advantage of the future growth of these markets. Market demand for our products is and will be subject to a number of factors, including, among other things, increasing health awareness of the general public, the aging population, increasing consumer spending ability and changing consumer perception toward TCM, and growing incidents of chronic diseases due to various reasons, such as deteriorating environment in the PRC. We expect that the market demand for our products will continue to grow in the near future and drive growth in our revenue and profit. Performance and Expansion of Our Marketing, Sales and Distribution Network and Penetration of our Smart Pharmacy Systems The growth of our revenue depends on the performance and expansion of our marketing, sales and distribution network across the PRC, as well as our ability to expand the distribution of our Smart Pharmacy Systems. Our ability to increase revenue is directly affected by the scale of our marketing, sales and distribution network and the effectiveness of our marketing and sales activities in our target markets. We have successfully developed a marketing and sales model primarily based upon direct sales to hospitals and medical institutions throughout the PRC to capitalize on the rising demand for our products. We market, sell and distribute a substantial majority of our TCM Granules directly to hospitals and medical institutions in the 222

230 FINANCIAL INFORMATION PRC, including Chinese medicine hospitals as well as general hospitals. The number of hospitals and medical institutions to which we have sold our TCM Granules has increased during the Track Record Period. For the years ended December 31, 2014, 2015 and 2016, we sold our TCM Granules directly to 550, 658 and 790 hospitals and medical institutions, including 475, 573 and 692 hospitals. During the Track Record Period, we sold our products in 29 Provinces throughout the PRC. We sell a majority of our TCM Granules to hospitals and medical institutions at which we have installed our Smart Pharmacy Systems. As a result, we actively promote our Smart Pharmacy Systems to increase the number of hospitals and medical institutions that are using them. In addition, based on our experience, hospitals and medical institutions that have installed our Smart Pharmacy Systems and for whom we have been successful at developing their use and reliance on them typically make more purchases of our TCM Granules. Accordingly, we proactively work to deepen our relationships with customers that have installed our Smart Pharmacy Systems to increase their use of our Smart Pharmacy Systems and as a result, increase our sales of TCM Granules to them. As of December 31, 2016, we employed a team of 822 personnel who mainly focus on the operation of our Smart Pharmacy Systems. These personnel worked onsite at the hospitals and medical institutions that installed our Smart Pharmacy Systems. The number of hospitals and medical institutions that had our Smart Pharmacy Systems installed has increased steadily. As of December 31, 2014, 2015 and 2016, our Smart Pharmacy Systems were installed at 182, 239 and 338 hospitals and medical institutions in the PRC. We expect that our revenue growth will continue to rely on our ability to further expand our marketing, sales and distribution network and the use of our Smart Pharmacy Systems. Policies and Regulations of the PRC TCM Industry The TCM industry in the PRC, including the TCM Granule industry, is highly regulated. Government policies and regulations and their implementation and enforcement have had, and are expected to continue to have, a material effect on the manufacture, sale and use of TCM products and therefore affect our results of operations. See Regulations. Favorable policies and incentives adopted by the PRC government in recent years to support the TCM industry have contributed to and are expected to continue to contribute to an increase in the market demand for TCM Granules. As of December 31, 2016, the CFDA approved five group companies to manufacture, distribute and sell TCM Granules in the PRC. Moreover, TCM Granules have been included in the coverage of Medical Insurance Catalogs in a number of Provinces in China. Changes in policies and regulations may materially affect our results of operations. In addition, we are required to comply with various quality standards and requirements set forth in the Chinese Pharmacopoeia and other relevant regulations. Changes in such standards and requirements could cause us to incur substantial compliance costs and may affect our ability to supply sufficient products to meet market demand in a timely manner. Please refer to Risk Factors Risks Related to Our Business and Industry The TCM industry, including the TCM Granules industry, is heavily regulated, and changes in the regulatory framework, requirements and enforcement trends may have a material adverse effect on our business, financial condition and results of operations in this document. 223

231 FINANCIAL INFORMATION Cost of Raw Materials Our cost of sales directly affects our profitability. The major components of our cost of sales include cost of raw materials and staff costs in relation to our manufacture of TCM Granules. For the years ended December 31, 2014, 2015 and 2016, the cost of raw materials for the manufacture of our TCM Granules accounted for 81.7%, 70.4% and 89.1%, respectively, of our total cost of production of TCM Granules, for the respective periods. We procure a wide variety of raw medicinal herbs for our production, and each particular type of raw medicinal herb generally accounted for an insignificant portion of our cost of raw materials during the Track Record Period. Based on our historical experience, we do not consider that the price fluctuation of any single type of raw medicinal herbs materially affects our results of operations and financial condition. However, price fluctuations of multiple types of medicinal herbs of which we use large quantities in our manufacturing, or of which the price is particularly high may impact our results of operations and in particular our gross profit and gross profit margin in particular if we are unable to pass on the price increases to our customers. The prices and availability of different types of raw medicinal herbs may vary from period to period, primarily due to factors such as the growth cycles of the relevant medicinal herbs, market conditions and in terms of size of purchases with suppliers. We are exposed to the market risk of price fluctuation of raw medicinal herbs, and the fluctuation in such prices may consequently cause fluctuation in our cost of sales. In order to reduce the impact of increases in raw material prices and control our procurement costs, we have adopted a diversified raw materials procurement strategy. See Business Raw Materials. We may also seek to take advantage of perceived lower market prices to acquire additional raw materials for future periods. In order to ensure we are able to reach the optimal balance between the quality and price of our raw materials, we compare prices of raw materials available and also adopt pricing tendering process with our plantation partners and other third-party suppliers. If other third-party medicinal herbs suppliers offer more favorable prices while meeting our quality standards, we may decide to purchase from them instead of from our plantation partners. Prior to establishing a sufficient number of relationships with plantation partners, we generally conduct our procurement through an open tender process. Based on the extent of fluctuation in raw material costs during the Track Record Period, for illustrative purposes only, the following table shows the sensitivity of our overall gross profit during the Track Record Period with regard to certain possible changes in the cost of raw materials during the same period, assuming all other variables remained constant. To illustrate the potential effect on our financial performance, the sensitivity analysis below shows the potential impact on our gross profit with a 5%, 10% and 15% increase or decrease in our cost of raw materials. For the Years Ended December 31, RMB 000 RMB 000 RMB 000 Changes in cost of raw materials -15% 29,889 45,367 52,734-10% 19,926 30,244 35,156-5% 9,963 15,122 17,578 +5% (9,963) (15,122) (17,578) +10% (19,926) (30,244) (35,156) +15% (29,889) (45,367) (52,734) 224

232 FINANCIAL INFORMATION See Risk Factors Risks Related to Our Business and Industry We rely on a stable supply of quality raw materials to manufacture our products, and a decrease in the supply, an increase in the cost or a deterioration in the quality, of these raw materials could materially and adversely affect our business, financial condition and results of operations in this document for further details. Preferential Tax Treatment Substantially all of our revenue is derived from the sales of our products in the PRC. Preferential tax treatment in the PRC historically has had a material effect on our results of operations. Beginning on January 1, 2008, the PRC s statutory enterprise income tax ( EIT ) rate has been 25%, which is applicable to us. However, we enjoy several preferential tax treatments pursuant to the relevant laws and regulations. First, we enjoy a preferential enterprise rate of 15% pursuant to the Taxation Policies on In-depth Implementation of Western Region Development Strategy. Additionally, we are recognized as a National Key and Leading Enterprise for Agriculture Industrialization ( ) after being assessed by the competent regulatory authorities, including the Ministry of Agriculture, the NDRC, the State Administration of Taxation, the CSRC, the Ministry of Finance and the Ministry of Commerce of the PRC. Pursuant to Article 27 of the EIT Law, profit generated from operations in agriculture, forestry, animal husbandry and fishery industries are entitled to tax deduction or exemption. Pursuant to the relevant implementation rules, revenue from certain agriculture-related operations are exempt from EIT. During the Track Record Period, we enjoyed the EIT exemption applicable to revenue from certain agriculture-related operations for the sales of substantially all of our TCM Granules products. As a result, for the years ended December 31, 2014, 2015 and 2016, our effective tax rate was 1.5%, 1.7% and 1.5%, respectively. See Description of Major Components of Our Combined Statement of Profit or Loss Income Tax and Regulations Regulations on Tax in the PRC. We expect to continue to enjoy preferential tax treatment in the future. The discontinuation of any preferential tax treatment currently available to us will cause our effective tax rate to increase, which could have a material adverse effect on our results of operations. See Risk Factors Risks Related to Our Business and Industry We may be affected by the changes in or cessation of income tax incentives and government grants in this document. Seasonality We have historically experienced higher sales of our TCM Granules in the second half of each year (particularly in the fourth quarter) as compared to those in the first half of the year. This seasonality is the result of a combination of several factors. We typically experience lower sales in the first quarter due to reduced business activity around the Chinese New Year holiday as our direct sales customers place their orders for the first quarter of each year generally in the fourth quarter of the previous year. In addition, the demand for TCM products is typically higher in the second half of the year as many ailments that are commonly treated with TCM, such as respiratory infections, are more common in the autumn and winter months. As a result, the levels of our inventory levels and trade payables are typically at higher levels before our peak season of sales in the fourth quarter of each year, and our revenue is 225

233 FINANCIAL INFORMATION also higher in the fourth quarter. Please see Risk Factors Risks Related to Our Business and Industry Our sales of TCM Granules are subject to seasonality and our results of operations are subject to fluctuations in this document. BASIS OF PRESENTATION The combined statements of profit or loss and other comprehensive income, statements of changes in equity and statements of cash flows of our Group during the Track Record Period include the results and cash flows of all companies now comprising our Group from the earliest date presented or since the respective dates of establishment of the companies, whichever is a shorter period. The combined statements of financial position of our Group as of December 31, 2014, 2015 and 2016 have been prepared to present the assets and liabilities of the subsidiaries at these dates. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We have identified certain accounting policies that we believe are most significant to the preparation of our combined financial statements. Some of our significant accounting policies involve subjective assumptions and estimates, as well as complex judgments by our management relating to accounting items. Our significant accounting policies are set forth in detail the Accountant s Report included in Appendix I to this document. The estimates and associated assumptions are based on our historical experience and various other relevant factors that we believe are reasonable under the circumstances, the results of which form the basis of making judgments about matters that are not readily apparent from other sources. When reviewing our financial results, you should consider: (i) our selection of significant accounting policies, (ii) the judgment and other uncertainties affecting the application of such policies, and (iii) the sensitivity of reported results to changes in conditions and assumptions. The determination of these items requires management judgments based on information and financial data that may change in the future periods, and as a result, actual results could differ from those estimates. Revenue Recognition We recognize revenue on the following bases: from the sale of goods, when goods are delivered at our customers premises and when our customer has accepted the goods and the related risks and rewards of ownership; interest income, as it accrues using the effective interest method; and from government grants, when there is reasonable assurance that they will be received and that our Group will comply with the conditions attaching to them. Inventories Inventories are stated at the lower of cost and net realizable value. Cost is determined by the weighted-average method. Net realizable value is based on estimated selling prices less any estimated costs to be incurred to completion and disposal. Major types of inventories include raw materials, work-in-progress, finished goods and packaging materials. 226

234 FINANCIAL INFORMATION Research and Development Expenditure Research expenditure is recognized as an expense in the period it is incurred while development expenditure is capitalized when the product or process is technically and commercially feasible and we have sufficient resources and intention to complete the development. Capitalized development expenditure includes the costs of materials, direct labor and an appropriate proportion of overheads and borrowing costs, where applicable. Capitalized development expenditure is stated at cost less accumulated amortization and impairment losses. Other development expenditure is recognized as an expense in the period it is incurred. Biological Assets Biological assets are living plants involved in the agricultural activities of the transformation of biological assets for sale into agricultural produce or into additional biological assets. Biological assets are measured at fair value less estimated costs to sell at initial recognition and at each reporting date. The fair value of biological assets is determined based on market approach given their age profiles if there exists an active market with quoted price of comparable assets. If there did not exist an active market for trading these assets in their immature form, the income approach is applied in assessing the future economic benefits derived from these assets then arriving at their fair value less costs to sell. The gain or loss arising on initial recognition of biological assets at fair value less costs to sell and from a change in fair value less costs to sell of biological assets is recognized in profit or loss for the period in which it arises. Income Tax Determining income tax provisions involves judgement on the future tax treatment of certain transactions. Management carefully evaluates tax implications of transactions and tax provisions are set up accordingly. The tax treatment of these transactions is reconsidered periodically by taking into account all changes in tax legislations. Deferred tax assets are recognized for deductible temporary differences. As deferred tax assets can only be recognized to the extent that it is probable that future taxable profit will be available, management s judgement is required to assess the probability of future taxable profits. Management s assessment is constantly reviewed and additional deferred tax assets, if any, are recognized if it becomes probable that future taxable profits will allow the deferred tax asset to be recovered. Provision for Sales Return Our sales agreements generally do not permit product returns without management s consent, except for defective or damaged products, or products not meeting the applicable quality standards. However, in practice, we have historically accepted certain returns by hospitals and medical institutions. Based on our past experience, the percentage of subsequent returns is determined to be approximately 5% of annual sales. Therefore, we have recognized revenue with a corresponding provision against revenue for estimated returns with 5% of annual sales for the Track Record Period. As historical sales return rate is not completely indicative of future returns, any increase or decrease in the provision would affect our profit or loss in future years. 227

235 FINANCIAL INFORMATION RESULTS OF OPERATIONS Combined Statement of Profit or Loss The table below sets forth our combined statement of profit or loss with line items in absolute amounts and as percentages of our total revenue for the periods indicated: For the Years Ended December 31, RMB 000 % RMB 000 % RMB 000 % Revenue 711, ,055, ,403, Cost of sales (279,408) (39.3) (352,884) (33.4) (363,209) (25.9) Gross profit 431, , ,040, Other income 2, , , Selling and distribution expenses (166,798) (23.5) (251,534) (23.8) (350,184) (25.0) Administrative expenses (33,202) (4.7) (46,582) (4.4) (56,140) (4.0) Other expenses (9,406) (1.3) (14,386) (1.4) (20,738) (1.5) Profit from operations 225, , , Finance costs (13,061) (1.8) (25,045) (2.4) (16,477) (1.2) Profit before taxation 212, , , Income tax (3,226) (0.5) (6,229) (0.6) (8,790) (0.6) Profit for the year 208, , , DESCRIPTION OF MAJOR COMPONENTS OF OUR COMBINED STATEMENT OF PROFIT OR LOSS Revenue The following table sets forth a breakdown of our revenue based on product type for the periods indicated. For the Years Ended December 31, RMB 000 % RMB 000 % RMB 000 % Sale of TCM Granules 680, , ,400, Sale of other products (1) 30, , , Total 711, ,055, ,403, Note: (1) Mainly consist of TCM decoction pieces. 228

236 FINANCIAL INFORMATION Sale of TCM Granules We generate substantially all of our revenue from the sale of TCM Granules. For the years ended December 31, 2014, 2015 and 2016, we derived 95.8%, 94.5% and 99.8% of our revenue from the sale of TCM Granules, respectively. We sell and distribute a substantial majority of our TCM Granules directly to hospitals and medical institutions, and the remainder to third-party distributors. For the years ended December 31, 2014, 2015 and 2016, our revenue from direct sales accounted for 94.6%, 94.9% and 95.6% of our revenue from the sale of TCM Granules. In addition, the majority of our TCM Granules are sold directly to hospitals and medical institutions that have installed our Smart Pharmacy Systems. We also package single-herb TCM Granules individually for sale primarily to hospitals and medical institutions that do not use our Smart Pharmacy Systems and for sale overseas. The following table illustrates our revenue from the sale of TCM Granules based on geographic region in absolute amounts, taking into consideration the provision for sales return and as percentages of our total revenue from the sales of TCM Granules for the periods indicated. For the Year Ended December 31,* RMB 000 % RMB 000 % RMB 000 % Western China (1) 319, , , Northern China (2) 301, , , Central China (3) 56, , , Eastern China (4) 9, , , Southern China (5) 1, , , Overseas (6) 3, , , Provision for sales return (7) (11,108) (1.6) (16,741) (1.7) (21,151) (1.5) Total 680, , ,400, Notes: * Includes revenue derived from the sale of TCM Granules to distributors. (1) Includes Sichuan Province, Chongqing, Gansu Province, Qinghai Province, Guizhou Province, Yunnan Province and Xinjiang Uyghur Autonomous Region. (2) Includes Beijing, Hebei Province, Heilongjiang Province, Jilin Province, Liaoning Province, Shandong Province, Tianjin, Shanxi Province, Shaanxi Province, Ningxia Hui Autonomous Region and Inner Mongolia Autonomous Region. (3) Includes Hubei Province, Hunan Province, Anhui Province and Henan Province. (4) Includes Fujian Province, Jiangxi Province, Shanghai and Zhejiang Province. (5) Includes Guangdong Province, Guangxi Province and Hainan Province. (6) Includes primarily Hong Kong, Australia and Canada. (7) Under the terms of the sales agreements, product return by our customers is permitted in certain limited circumstances. See Business Marketing, Sales and Distribution Distribution of Our TCM Granules and Our Smart Pharmacy Systems for further details. Provision is therefore made for the best estimate of the expected return in respect of the sales of our products during the Track Record Period. The amount of provision was determined based on our historical statistic of sales return as a percentage of our annual revenue. 229

237 FINANCIAL INFORMATION Sale of Other Products During the Track Record Period, we also generated a limited amount of revenue from the sale of TCM decoction pieces and Chinese patent medicines, such as Danshu Pills ( ). As we believe TCM Granules have better market prospects that TCM decoction pieces, we have gradually decreased the sale of TCM decoction pieces since 2015 and will cease to sell them upon [REDACTED]. For the years ended December 31, 2014, 2015 and 2016, we derived 4.2%, 5.5% and 0.2% of our revenue from the sale of other products, respectively. Cost of Sales Overview Our cost of sales consists of the cost of sales of TCM Granules and the cost of sales of other products. The following table sets forth a breakdown of the components of our cost of sales for the periods indicated: For the Years Ended December 31, RMB 000 % RMB 000 % RMB 000 % Cost of sales of TCM Granules Cost of raw materials 200, , , Labor costs 15, , , Depreciation and amortization 6, , , Fuel and utilities expenses 7, , , Cost of packaging materials 4, , , Maintenance , , Others 9, , , Changes in work-in-progress , (28,624) (7.9) Total cost of production of TCM Granules 244, , , Changes in finished goods 8, (131,800) (37.3) (30,863) (8.5) Provision for Sales return (3,612) (1.3) (2,182) (0.6) (4,524) (1.2) Total cost of sales of TCM Granules 249, , , Costs of sales of other products 29, , , Total cost of sales 279, , ,

238 FINANCIAL INFORMATION The primary source of our cost of sales is the cost associated with the sales of TCM Granules, which mainly includes the cost of raw materials, direct labor costs, fuel and utilities expenses and manufacturing overhead. For the years ended December 31, 2014, 2015 and 2016, the cost of sales of TCM Granules amounted to RMB249.7 million, RMB298.2 million and RMB361.3 million, respectively, representing 36.7%, 29.9% and 25.8%, respectively, of our total revenue from the sales of TCM Granules for the same years. For the years ended December 31, 2014, 2015 and 2016, the cost of raw materials for the manufacture of our TCM Granules accounted to 81.7%, 70.4% and 89.1% of our cost of production of TCM Granules, respectively. For the years ended December 31, 2014, 2015 and 2016, the cost of sales of other products amounted to RMB29.8 million, RMB54.7 million and RMB1.9 million, respectively. A major component of our cost of sales of other products during the Track Record Period was the cost of raw materials. The cost of sales of other products decreased substantially in 2016 mainly reflecting our strategic business decision to shift our focus to the production and sales of TCM Granules due to their better market prospects. Gross Profit and Gross Profit Margin Overview Gross profit represents our revenue less cost of sales. Our gross profit margin represents our gross profit as a percentage of our revenue. For the years ended December 31, 2014, 2015 and 2016 our gross profit was RMB431.6 million, RMB702.7 million and RMB1,040.1 million, respectively, representing gross profit margins of 60.7%, 66.6% and 74.1%, respectively. Please refer to Risk Factor Risks Relating to Our Business and Industry Our past performance is not necessarily indicative of future performance in this [REDACTED]. Sale of TCM Granules For the years ended December 31, 2014, 2015 and 2016, gross profit for the sale of TCM Granules was RMB431.2 million, RMB699.3 million and RMB1,038.9 million, respectively, representing gross profit margins of 63.3%, 70.1% and 74.2%, respectively. Sale of Other Products For the years ended December 31, 2014, 2015 and 2016, gross profit for the sale of other products was RMB0.4 million, RMB3.4 million and RMB1.2 million, respectively, representing gross profit margins of 1.4%, 5.8% and 39.5%, respectively. 231

239 FINANCIAL INFORMATION The following table sets forth a breakdown of the revenue, cost of sales and gross profit by types of products we manufactured for the periods indicated: For the Years Ended December 31, RMB 000 % RMB 000 % RMB 000 % Revenue TCM Granules 680, , ,400, Other products (1) 30, , , Total 711, ,055, ,403, Cost of sales TCM Granules (249,653) 89.4 (298,168) 84.5 (361,341) 99.5 Other products (1) (29,755) 10.6 (54,716) 15.5 (1,868) 0.5 Total (279,408) (352,884) (363,209) Gross profit TCM Granules 431, , ,038, Other products (1) , , Total 431, , ,040, Note: (1) Mainly consist of TCM decoction pieces. Other Income Other income primarily consists of (i) interest income on financial assets not at fair value through profit or loss; (ii) government grants; (iii) change in fair value of biological assets; and (iv) others. The following table sets forth a breakdown of the components of our other income for the periods indicated: For the Years Ended December 31, RMB 000 RMB 000 RMB 000 Total interest income on financial assets not at fair value through profit or loss 707 2,052 1,928 Government grants (1) 1,669 2,751 3,738 Change in fair value of biological assets Penalty and confiscatory income (2) 5 3, Others Total 2,846 8,865 6,171 Notes: (1) Primarily includes the subsidies we received due to completion of or being qualified as government subsidy projects, including for construction projects and research and development projects. (2) Represents the receipt of monetary damages awarded to us in a lawsuit against a third-party construction contractor in

240 FINANCIAL INFORMATION During the Track Record Period, many of our government grants consisted of one-time awards related to specific projects. As a result, our other income during the Track Record Period has fluctuated from period to period. Selling and Distribution Expenses Selling and distribution expenses primarily consist of (i) marketing and promotion expenses; (ii) staff costs; (iii) business entertainment expenses; and (iv) vehicle costs. The table below sets forth a breakdown of our distribution expenses for the periods indicated. For the Years Ended December 31, RMB 000 % RMB 000 % RMB 000 % Staff costs (1) 35, , , Depreciation and amortization (2) 1, , , Marketing and promotion expenses (3) 88, , , Business entertainment expenses 12, , , Vehicle costs 10, , , Medicine cabinet and consumables 4, , , Travelling expenses (4) 4, , , Transportation costs 2, , , Rental expenses 1, , , Office expenses , , Renovation costs 2, , , Others (5) 1, , , Total 166, , , Notes: (1) Includes primarily salaries and other benefits and expenses for our sales and marketing personnel. (2) Includes primarily depreciation and amortization of our Smart Pharmacy Systems and certain office equipment. (3) Includes primarily fees associated with organizing/participating in advertising and promotion events and conferences. (4) Includes primarily travelling expenses incurred by our marketing and sales representatives. (5) Includes primarily other miscellaneous expenses for the sales and distribution of our products. Our selling and distribution expenses increased in absolute terms during the Track Record Period, primarily due to (i) an increase in marketing and promotion expenses relating to additional marketing efforts to expand the sales of our TCM Granules, as well as our increased efforts to host/participate in conferences and forums to promote our products and educate our potential customers on the advantages of our TCM Granules; and (ii) an increase in staff costs as a result of the hiring of additional marketing and sales personnel, as well as increases in salaries and benefits for our existing marketing and sales personnel. 233

241 FINANCIAL INFORMATION Administrative Expenses Administrative expenses primarily consist of (i) staff costs; (ii) taxes; (iii) research and development expenses; (iv) depreciation and amortization; (v) [REDACTED] expenses; and (vi) loss on disposal of inventories. The following table sets forth a breakdown of the components of our administrative expenses for the periods indicated: For the Years Ended December 31, RMB 000 % RMB 000 % RMB 000 % Staff costs (1) 6, , , Depreciation and amortization (2) 2, , , Research and development expenses (3) 6, , , [REDACTED] expenses Taxes (4) 8, , , Loss on stock-take variance , , Entertainment expenses (5) 1, , , Rental expenses 1, , , Vehicle costs Travelling expenses (6) Others (7) 3, , , Total 33, , , Notes: (1) Includes primarily salaries and benefits for our administrative personnel. (2) Includes primarily depreciation and amortization of office equipment. (3) Includes primarily salaries and traveling expenses relating to our research and development staff. (4) Includes primarily tax expenses related to VAT related surcharges. (5) Includes primarily expenses incurred by our administrative personnel in relation to business development efforts. (6) Includes primarily travelling expenses incurred by our administrative personnel. (7) Includes primarily professional services fees relating to the H-share Application. Our administrative expenses generally increased during the Track Record Period, primarily due to (i) an increase in staff costs as a result of increased salaries and benefits of our administrative personnel; (ii) an increase in the expenses we incurred in connection with the H-share Application, which mainly consisted of professional services fee; and (iii) an increase in miscellaneous taxes due to our increased business activities. 234

242 FINANCIAL INFORMATION Other Expenses Other expenses primarily consist of (i) impairment losses; (ii) net loss on disposal of property, plant and equipment; and (iii) others. The following table sets forth a breakdown of the components of our other expenses for the periods indicated: For the Years Ended December 31, RMB 000 RMB 000 RMB 000 Impairment losses 2,617 11,986 14,527 Net loss on disposal of property, plant and equipment 6,040 1,755 4,633 Others (1) ,578 Total 9,406 14,386 20,738 Note: (1) Primarily includes donations to charitable organizations. Finance Costs Finance costs primarily consist of interest on interest-bearing bank borrowings. The following table sets forth a breakdown of the components of our finance costs for the periods indicated: For the Years Ended December 31, RMB 000 RMB 000 RMB 000 Interest on bank loans 29,362 25,045 16,477 Less: interest expense capitalized into construction in progress (1) (16,301) Total 13,061 25,045 16,477 Note: (1) The borrowing costs have been capitalized at a rate of 6.4% per annum for the year ended December 31,

243 FINANCIAL INFORMATION Income Tax Substantially all of our revenue during the Track Record Period was derived from the sale of our products in the PRC. Beginning on January 1, 2008, the PRC s statutory EIT rate has been 25%. We are subject to income tax rates at 25% on our respective taxable income as calculated in accordance with the EIT Law and its relevant regulations. We enjoy several preferential tax treatments pursuant to relevant laws and regulations. First, we enjoy a preferential enterprise income tax rate of 15% pursuant to the Taxation Policies on In-depth Implementation of Western Region Development Strategy. In addition, we are recognized as a National Key and Leading Enterprise for Agriculture Industrialization ( ) after assessment by the competent regulatory authorities including the Ministry of Agriculture, the NDRC, the State Administration of Taxation, the CSRC, the Ministry of Finance and the Ministry of Commerce of the PRC. Pursuant to Article 27 of the EIT Law, revenue from operations in agriculture, forestry, animal husbandry and fishery industries are entitled to tax deduction or exemption. Pursuant to the relevant implementation rules, profit from certain agriculture related operations are exempt from EIT. During the Track Record Period, we enjoyed the EIT exemption applicable to the profit generated from certain agriculture related operations for the sales of substantially all of our TCM Granules products. For the years ended December 31, 2014, 2015 and 2016, our effective tax rate was 1.5%, 1.7% and 1.5%, respectively. Please refer to Risk Factors Risks Related to Our Business and Industry We may be affected by the changes in or cessation of income tax incentives and government grants in this document for a description of risks relating to our tax incentives. During the Track Record Period, we paid all relevant taxes and there were no disputes or unresolved tax issues with the relevant tax authorities. The following table shows the current and deferred components of the income tax expense in the PRC appearing in our combined statements of profit or loss and other comprehensive income. We did not earn any income that was subject to Hong Kong profits tax during the Track Record Period, which has a tax rate of 16.5%. The following table sets forth the breakdown of our income tax for the periods indicated: For the Years Ended December 31, RMB 000 RMB 000 RMB 000 Current tax 3,987 6,120 8,786 Deferred tax (761) Total 3,226 6,229 8,

244 FINANCIAL INFORMATION PERIOD TO PERIOD COMPARISON OF RESULTS OF OPERATIONS Year ended December 31, 2016 Compared to Year ended December 31, 2015 Revenue Our revenue increased by 32.9% from RMB1,055.6 million for the year ended December 31, 2015 to RMB1,403.3 million for the year ended December 31, This increase was primarily due to an increase in the sales of TCM Granules from RMB997.5 million for the year ended December 31, 2015 to RMB1,400.2 million for the year ended December 31, The increase in the sales of TCM Granules was primarily due to (i) an increase in the number of hospitals and medical institutions to which we directly sold our TCM Granules from 658 in 2015, including 239 hospitals and medical institutions that installed our Smart Pharmacy Systems, to 790 in 2016, including 338 hospitals and medical institutions that installed our Smart Pharmacy Systems; and (ii) an increase in the revenue generated from sales to a substantial majority of our top 20 customers in 2016, partially offset by a decrease in the revenue of other products as we made a strategic business decision to shift our focus to the production and sales of TCM Granules due to their better market prospects. Cost of Sales Our cost of sales increased by 2.9% from RMB352.9 million for the year ended December 31, 2015 to RMB363.2 million for the year ended December 31, This increase was primarily due to an increase in the cost of sales of our TCM Granules by 21.2% from RMB298.2 million for the year ended December 31, 2015 to RMB361.3 million for the year ended December 31, 2016, partially offset by a decrease in the cost of sales of other products from RMB54.7 million for the year ended December 31, 2015 to RMB1.9 million for the year ended December 31, The increase in the cost of sales of our TCM Granules primarily reflected increased sales of TCM Granules in the PRC while the decrease in the cost of sales of other products reflected a substantial decrease in the sales of TCM decoction pieces as a result of our strategic decision to shift our focus to the manufacturing and sales of TCM Granules due to their better market prospects. Gross Profit and Gross Profit Margin As a result of the foregoing, our gross profit increased by 48.0% from RMB702.7 million for the year ended December 31, 2015 to RMB1,040.1 million for the year ended December 31, 2016, primarily as a result of an increase in the gross profit margin for the sale of TCM Granules, our overall gross profit margin increased from 66.6% for the year ended December 31, 2015 to 74.1% for the year ended December 31, Our gross profit for the sale of TCM Granules increased 48.6% from RMB699.3 million for the year ended December 31, 2015 to RMB1,038.9 million in the year ended December 31, 2016, mainly because (i) the average market prices of key raw medicinal herbs that are most commonly used by us in the manufacture of TCM Granules decreased in 2015 compared to 2014 and remained relatively stable in 2016 and we manufactured our TCM Granules using a combination of the raw medicinal herbs we sourced in 2015 and 2016; and (ii) a reduction in the sales of TCM 237

245 FINANCIAL INFORMATION decoction pieces which had a lower gross profit margin compared to that of TCM Granules. The gross profit margin for the sale of our TCM Granules increased from 70.1% for the year ended December 31, 2015 to 74.2% for the year ended December 31, Other Income Our other income decreased by 30.3% from RMB8.9 million for the year ended December 31, 2015 to RMB6.2 million for the year ended December 31, The decrease was primarily due to the receipt of a one-time amount of monetary damages of RMB3.8 million awarded to us in a lawsuit against a third-party construction contractor in Selling and Distribution Expenses Our selling and distribution expenses increased by 39.2% from RMB251.5 million for the year ended December 31, 2015 to RMB350.2 million for the year ended December 31, As a percentage of revenue, our selling and distribution expenses increased from 23.8% for the year ended December 31, 2015 to 25.0% for the year ended December 31, This increase was primarily due to (i) an increase in marketing and promotion expenses from RMB130.9 million for the year ended December 31, 2015 to RMB194.5 million for the year ended December 31, 2016, as a result of our increased efforts to host/participate in conferences and forums to educate our potential customers on the advantages of our TCM Granules and to promote such products, and our increased sales and marketing efforts relating to our TCM Granules; and (ii) an increase in staff costs from RMB66.5 million for the year ended December 31, 2015 to RMB88.4 million for the year ended December 31, 2016, mainly as a result of the hiring of additional marketing and sales personnel as well as increases in salaries and benefits for our existing marketing and sales personnel. Administrative Expenses Our administrative expenses increased by 20.5% from RMB46.6 million for the year ended December 31, 2015 to RMB56.1 million for the year ended December 31, As a percentage of revenue, our administrative expenses decreased from 4.4% for the year ended December 31, 2015 to 4.0% for the year ended December 31, The decrease was primarily due to an decrease in professional services fees associated with the H-share Application from RMB6.7 million for the year ended December 31, 2015 to RMB5.8 million for the year ended December 31, The [REDACTED] expenses incurred for the year ended December 31, 2016 were mainly related to the professional services provided to us in preparation for the [REDACTED]. Other Expenses Our other expenses increased from RMB14.4 million for the year ended December 31, 2015 to RMB20.7 million for the year ended December 31, 2016, primarily due to an increase in impairment losses on trade debtors, bills receivables and other receivables in the year ended December 31, The increase was mainly due to the advances we extended to certain of our employees who subsequently departed from their employment with us and did not fully repay us. 238

246 FINANCIAL INFORMATION Finance Costs Our finance costs decreased from RMB25.0 million for the year ended December 31, 2015 to RMB16.5 million for the year ended December 31, 2016, primarily due to a decrease in interest on bank loans since we repaid part of our borrowings in Income Tax Our income tax increased by 41.9% from RMB6.2 million for the year ended December 31, 2015 to RMB8.8 million for the year ended December 31, This increase was primarily due to an increase in our taxable income for the year ended December 31, Our effective tax rate remained relatively stable at 1.5% for the year ended December 31, 2016 compared to 1.7% for the year ended December 31, Profit for the Year As a result of the foregoing, our profit for the year increased by 61.5% from RMB367.8 million for the year ended December 31, 2015 to RMB594.0 million for the year ended December 31, Year Ended December 31, 2015 Compared to Year Ended December 31, 2014 Revenue Our revenue increased by 48.5% from RMB711.0 million for the year ended December 31, 2014 to RMB1,055.6 million for the year ended December 31, This increase was primarily due to an increase in the sales of TCM Granules from RMB680.9 million in 2014 to RMB997.5 million in The increase in the sale of TCM Granules was primarily due to (i) an increase in the number of hospitals and medical institutions to which we directly sold TCM Granules from 550 in 2014, including 182 hospitals and medical institutions that installed our Smart Pharmacy Systems, to 658 in 2015, including 239 hospitals and medical institutions that installed our Smart Pharmacy Systems; and (ii) an increase in the revenue generated from sales to a substantial majority of our top 20 customers in These increases were primarily the result of our ongoing marketing efforts. Cost of Sales Our cost of sales increased by 26.3% from RMB279.4 million for the year ended December 31, 2014 to RMB352.9 million for the year ended December 31, In particular, the cost of sales of TCM Granules increased 19.4% from RMB249.7 million for the year ended December 31, 2014 to RMB298.2 million for the year ended December 31, The increase was primarily due to increases in the cost of raw material and manufacturing costs as we used an increased quantity of raw medicinal herbs for the production of TCM Granules and additional indirect labor costs associated with the operation of our current manufacturing facilities. Gross Profit and Gross Profit Margin As a result of the foregoing, our gross profit increased by 62.8% from RMB431.6 million for the year ended December 31, 2014 to RMB702.7 million for the year ended December 31, 2015, primarily as a result of an increase in the gross profit margin for the sale of TCM 239

247 FINANCIAL INFORMATION Granules, our overall gross profit margin increased from 60.7% for the year ended December 31, 2014 to 66.6% for the year ended December 31, Our gross profit for the sale of TCM Granules increased by 62.2% from RMB431.2 million for the year ended December 31, 2014 to RMB699.3 million for the year ended December 31, 2015, primarily because (i) the average market price of the key raw medicinal herbs that are most commonly used by us in the manufacture of TCM Granules decreased from 2014 to 2015 and we manufactured our TCM Granules using a combination of the raw medicinal herbs we sourced in 2014 and 2015; and (ii) we experienced the effect of economies of scale in 2015 as we ramped up our production capacity in 2015 as a result of our current manufacturing facilities becoming fully operational since August As a result, the gross profit margin for the sale of TCM Granules increased from 63.3% for the year ended December 31, 2014 to 70.1% for the year ended December 31, Other Income Our other income increased by 217.9% from RMB2.8 million for the year ended December 31, 2014 to RMB8.9 million for the year ended December 31, This increase was primarily due to an increase in interest income on financial assets and an increase in penalty and confiscatory income in The increase in interest income on financial assets was due to an increased amount of financial products we purchased in 2015 and the increase in penalty and confiscatory income was due to receipt of monetary damages of RMB3.9 million awarded to us in a lawsuit against a third-party construction contractor in Selling and Distribution Expenses Our selling and distribution expenses increased by 50.8% from RMB166.8 million for the year ended December 31, 2014 to RMB251.5 million for the year ended December 31, As a percentage of revenue, our selling and distribution expenses increased from 23.5% for the year ended December 31, 2014 to 23.8% for the year ended December 31, This increase in selling and distribution expenses was primarily due to (i) an increase in marketing and promotion expenses as a result of the increased marketing and promotional activities we conducted in 2015; and (ii) an increase in staff costs relating to the hiring of additional marketing and sales personnel as well as increases in salaries and benefits for our existing marketing and sales personnel. Administrative Expenses Our administrative expenses increased by 40.3% from RMB33.2 million for the year ended December 31, 2014 to RMB46.6 million for the year ended December 31, The increase was primarily due to an increase in professional service fees in 2015 relating to the H-share Application. As a percentage of revenue, our administrative expenses remained relatively stable, decreasing slightly from 4.7% for the year ended December 31, 2014 to 4.4% for the year ended December 31, Other Expenses Our other expenses increased by 53.2% from RMB9.4 million for the year ended December 31, 2014 to RMB14.4 million for the year ended December 31, 2015, primarily due to an increase in impairment losses on trade debtors, bills receivables and other receivables in the year ended December 31, The increase was mainly a result of the advances we extended to certain of our employees who subsequently departed from their employment with us and did not fully repay us. 240

248 FINANCIAL INFORMATION Finance Costs Our finance costs increased by 90.8% from RMB13.1 million for the year ended December 31, 2014 to RMB25.0 million for the year ended December 31, 2015, primarily as we started expensing interest expenses relating to the borrowings for the construction of our manufacturing facilities after the construction was completed in See Indebtedness for further details. Income Tax Our income tax increased by 93.8% from RMB3.2 million for the year ended December 31, 2014 to RMB6.2 million for the year ended December 31, This increase was primarily due to an increase in our taxable income for the year. Our effective tax rate remained relatively stable and was 1.5% for the year ended December 31, 2014 and 1.7% for the year ended December 31, Profit for the Year As a result of the foregoing, our profit for the year increased by 76.1% from RMB208.8 million for the year ended December 31, 2014 to RMB367.8 million for the year ended December 31, LIQUIDITY AND CAPITAL RESOURCES Cash Flows Analysis We have financed our operations primarily through cash generated from our operating activities and bank borrowings. Our primary uses of cash are to fund working capital and other recurring expenses. Going forward, we believe that our liquidity requirements will be satisfied by a combination of cash generated from our operating activities, bank borrowings, other funds raised from the capital markets from time to time and the proceeds from this [REDACTED]. The following table sets forth our cash flows for the periods indicated: For the Years Ended December 31, RMB 000 RMB 000 RMB 000 Net cash generated from operating activities 121, , ,581 Net cash (used in)/generated from investing activities (107,966) (142,989) 80,764 Net cash used in financing activities (28,088) (13,708) (350,980) Cash and cash equivalents at January 1 140, ,040 96,659 Cash and cash equivalents at December ,040 96, ,

249 FINANCIAL INFORMATION Net Cash Generated from Operating Activities During the Track Record Period, our cash inflows from operating activities were generated primarily by sales of our TCM Granules, TCM decoction pieces and Chinese patent medicines. Our cash outflows from operating activities primarily relate to purchases of raw materials. For the year ended December 31, 2016, our net cash generated from operating activities were RMB373.6 million, consisting of RMB657.4 million of cash generated from operations before working capital adjustments and less negative net working capital adjustments of RMB274.9 million and income tax paid of RMB8.8 million. Our negative working capital adjustments primarily consisted of (i) a RMB185.3 million increase in inventories due to increased production output of our TCM Granules and increased purchases of raw medicinal herbs during the year and expected higher demand for our TCM Granules; and (ii) a RMB273.0 million increase in trade and other receivables due to an increase in direct sales of our TCM Granules during the period. These negative working capital adjustments were partially offset by a RMB166.8 million increase in trade and other payables due to increased purchases of raw medicinal herbs used for the production of TCM Granules. For the year ended December 31, 2015, our net cash generated from operating activities were RMB127.3 million, consisting of RMB429.4 million of cash generated from operations before working capital adjustments and less negative net working capital adjustments of RMB297.7 million and income tax paid of RMB4.4 million. Our negative working capital adjustments primarily consisted of (i) a RMB316.2 million increase in trade and other receivables due to an increase in direct sales of our TCM Granules during the year; (ii) a RMB27.7 million increase in inventories. These negative working capital adjustments were partially offset by a RMB29.9 million increase in trade and other payables due to an increase in unpaid salaries and welfare and payables on new equipment we acquired for our current manufacturing facilities. For the year ended December 31, 2014, our net cash generated from operating activities were RMB121.3 million, consisting of RMB241.9 million of cash generated from operations before working capital adjustments and less negative net working capital adjustments of RMB116.8 million and income tax paid of RMB3.9 million. Our negative working capital adjustments primarily consisted of (i) a RMB117.5 million increase in trade and other receivables due to an increase in direct sales of our TCM Granules; and (ii) a RMB52.3 million decrease in trade and other payables related to increased payments to raw materials suppliers. These negative working capital adjustments were partially offset by a RMB45.4 million decrease in inventories related to increased sales of our TCM Granules in the third and fourth quarters of Net Cash (Used in)/generated from Investing Activities During the Track Record Period, our cash used in investing activities primarily related to purchases of production equipment, payment for acquisition of property and intangible assets related to construction of our current manufacturing facilities located in Pengzhou City and the purchases of other investments. 242

250 FINANCIAL INFORMATION For the year ended December 31, 2016, our net cash generated from investing activities were RMB80.8 million, primarily relating to the sale of other investments in the amount of RMB130.0 million, partially offset by purchase of other investments in the amount of RMB40.0 million, as part of our cash management measures. For the year ended December 31, 2015, our net cash used in investing activities were RMB143.0 million. Our primary uses of cash for investing activities during this period were (i) purchases of other investments in the amount of RMB270.0 million; and (ii) purchases of plant, property and equipment items in the amount of RMB55.1 million, partially offset by the sale of other investments in the amount of RMB180.0 million. For the year ended December 31, 2014, our net cash used in investing activities were RMB108.0 million. Our primary uses of cash for investing activities during this period were (i) the purchases of property, plant and equipment and intangible assets in relation to the construction of our current manufacturing facilities located in Pengzhou City of RMB108.7 million; and (ii) a purchase of other investments in the amount of RMB40.0 million, partially offset by the sale of other investments in the amount of RMB40.0 million. Net Cash Used in Financing Activities During the Track Record Period, our net cash used in financing activities related primarily to obtaining and repaying bank loans and paying dividends. See Indebtedness for further details relating to our borrowings. For the year ended December 31, 2016, our net cash used in financing activities were RMB351.0 million, primarily relating to (i) dividends paid in the amount of RMB260.2 million and (ii) repayments of bank loans in the amount of RMB170.0 million. For the year ended December 31, 2015, our net cash used in financing activities were RMB13.7 million, primarily relating to (i) repayments of bank loans in the amount of RMB70.0 million; and (ii) interest paid on bank loans in the amount of RMB25.0 million, partially offset by (i) proceeds from bank loans in the amount of RMB50.0 million; and (ii) net cash from related parties in the amount of RMB30.9 million. For the year ended December 31, 2014, our net cash used in financing activities were RMB28.1 million, primarily relating to (i) repayments of bank loans in the amount of RMB80.0 million; and (ii) interest paid on bank loans in the amount of RMB29.5 million, partially offset by (i) net cash from related parties in the amount of RMB51.4 million; and (ii) proceeds from bank loans in the amount of RMB30.0 million. 243

251 FINANCIAL INFORMATION Net Current Assets The following table sets forth the breakdown of current assets and current liabilities as of the dates indicated. As of December 31, As of April 30, RMB 000 RMB 000 RMB 000 RMB 000 Current assets Biological assets Inventories 347, , , ,871 Trade and other receivables 401, , , ,575 Amount due from related parties 127,743 82,874 75,895 75,282 Other financial assets 90,000 Cash and cash equivalents 126,040 96, , ,314 Total current assets 1,002,684 1,341,862 1,777,236 1,872,095 Current liabilities Trade and other payables 297, , , ,953 Amount due to related parties 19,647 6, ,946 94,920 Bank loans 70, , , ,000 Deferred income 965 1,024 1,024 1,024 Current taxation 3,791 5,475 5,418 Provisions 22,822 37,381 54,009 4,760 Total current liabilities 414, , , ,687 Net current assets 587, , ,641 1,139,438 As of April 30, 2017, we had net current assets of RMB1,139.4 million, as compared to net current assets of RMB902.6 million as of December 31, The increase in net current assets was primarily due to (i) an increase of RMB84.9 million in current assets, primarily consisting of increases in inventories and cash and cash equivalents; and (ii) a decrease of RMB141.9 million in current liabilities, mainly due to decreases in provisions for sales return and bank loans. As of December 31, 2016, we had net current assets of RMB902.6 million, as compared to net current assets of RMB814.3 million as of December 31, The increase in net current assets was primarily due to (i) a RMB243.6 million increase in trade and other receivables due to increased sales of our TCM Granules in 2016; (ii) a RMB185.3 million increase in inventories; (iii) an increase of RMB103.4 million in cash and cash equivalents, partially offset by (i) an increase of RMB161.5 million in trade and other payables as a result of increased purchases of raw medicinal herbs; (ii) an increase of RMB138.9 million in amount due to related parties, which primarily consisted of dividends payable to Sichuan Green; (iii) an increase of RMB30.0 million in current bank loans to finance our working capital; and (iv) an increase of RMB16.6 million in provisions for sales return. As of December 31, 2015, we had net current assets of RMB814.3 million, as compared to net current assets of RMB587.8 million as of December 31, The increase in net current assets was primarily due to (i) an increase of RMB295.7 million in trade and other 244

252 FINANCIAL INFORMATION receivables primarily due to an increase in sale of our TCM Granules in 2015 resulted from an increased number of customers and an increase in the sales to our top 20 customers; (ii) an increase of RMB90.0 million in other financial assets, primarily consisting of certain wealth management products issued by licensed commercial banks in the PRC; and (iii) an increase of RMB27.7 million in inventories partially offset by (i) an increase of RMB100.0 million of current bank loans, primarily due to the change from the designation of the non-current portion of the bank loans on our balance sheet to the designation of current portion; (ii) an increase of RMB14.6 million in provisions for sales return; and (iii) a decrease of RMB29.4 million in cash and cash equivalents due to our investments in other financial assets. Inventories Overview Our inventories consist of raw materials, work-in-progress, finished goods, packaging materials and goods in transit. The following table sets forth the components of our inventories as of the dates indicated. As of December 31, RMB 000 RMB 000 RMB 000 Raw materials (1) 189, , ,521 Works-in-progress (2) 106,152 46,531 75,155 Finished goods (3) 44, , ,737 Others (4) 6,866 8,268 8,296 Total 347, , ,709 Note: (1) Our inventories of raw materials consist of raw medicinal herbs used for the manufacture of TCM Granules and TCM decoction pieces, including strategic reserve raw medicinal herbs. (2) Our work-in-progress consists primarily of TCM Granules that are stored prior to packaging. (3) Our finished goods consist primarily of packaged TCM Granules. (4) Others primarily include packaging materials and goods in transit. Our inventories, as of December 31, 2014, 2015 and 2016 were RMB347.7 million, RMB375.4 million and RMB560.7 million, respectively. It included strategic reserve raw medicinal herbs, which we stockpiled based on our perception that raw material market conditions were favorable for us to do so when their prices were, in our view, relatively low as a measure to effectively control our cost of raw material procurement. From December 31, 2015 to December 31, 2016, our inventories increased by RMB185.3 million, primarily as a result of an increase in raw materials as we purchased and stockpiled certain additional raw medicinal herbs based on our perception that raw material market conditions were favorable for us to do so when their prices, in our view, were relatively low as a measure to effectively control our cost of raw material procurement. From December 31, 2014 to December 31, 2015, our inventories increased by RMB27.7 million, primarily as a result of increased finished goods, partially offset by a decrease in the inventory level of raw materials as we expanded the production of TCM Granules in 2015 with a full year s operation of our 245

253 FINANCIAL INFORMATION current manufacturing facilities and the usage of a portion of strategic reserve medicinal herbs for the production of TCM decoction pieces. We have established polices for the management of inventory for our raw materials, works-in-progress and finished goods. We proactively monitor and review our inventory levels on a regular basis and seek to maintain a reasonable level of inventories throughout our manufacturing process. Due to the large number of types of TCM Granules we manufacture, we have to retain a certain quantity of work-in-progress and finished goods to meet sales demand. TCM Granule work-in-progress and finished goods typically have an expiry term of three years and we usually formulate our raw material procurement plan six months prior to when inventory levels of finished goods will be depleted based on the full year sales forecast. We generally replenish our raw materials to ensure that our raw materials inventory is sufficient for at least three months, based on the existing sales forecast. The following table sets forth our overall average inventory turnover days for the periods indicated. For the Years Ended December 31, Average inventory turnover days (1) Notes: (1) Calculated using the average of the beginning and ending inventory balances of the period, divided by cost of sales for the period and multiplied by 365 days for a year in respect of the periods indicated. For the years ended December 31, 2014, 2015 and 2016, our inventory turnover days were 484, 374 and 470. Our average inventory turnover days decreased from 484 days in 2014 to 374 days in 2015 mainly because we used certain amount of strategic reserve raw medicinal herbs to produce TCM decoction pieces. Our average inventory turnover days increased to 470 days in 2016, primarily because of (i) an increase in the inventory level of raw materials as we purchased and stockpiled certain additional raw medicinal herbs commonly used in the production of TCM Granules; and (ii) we stockpiled strategic reserve raw medicinal herbs based on our perception that raw material market conditions were favorable for us to do so when their prices were, in our view, relatively low as a measure to effectively control our cost of raw material procurement. Our average inventory turnover days were relatively high during the Track Record Period, primarily attributable to our extensive product portfolio consisting of approximately 670 TCM Granules. During the manufacturing process, certain down time is required for cleaning of manufacturing equipment when we make manufacturing shifts between different products. As a result, we believe that we are able to take advantage of economies of scale in our manufacturing by increasing the production batch size of each product to fulfill expected customer needs, which results in higher inventory levels of works-in-progress and finished goods but minimized the down time for our manufacturing facilities between production of different types of TCM Granules. 246

254 FINANCIAL INFORMATION If we fail to manage our inventories effectively, we may be subject to certain risks. See Risk Factors Risks Relating to our Business and Industry We may not be able to maintain appropriate inventory levels for our operations in this document. As of April 30, 2017, being the latest date for the purpose of the liquidity disclosure in this document, approximately RMB132.4 million, or 62.0%, of our inventories as of December 31, 2016, were subsequently sold. Trade and Other Receivables Our trade and other receivables consist primarily of (i) trade debtors, which include balances due from our customers; (ii) bills receivable, which includes bills of exchange from certain of our customers with maturity dates of less than one year; and (iii) other receivables, which mainly represent interest-free borrowings to third parties. The following table sets forth our trade and other receivables as of the dates shown. As of December 31, RMB 000 RMB 000 RMB 000 Trade debtors 376, , ,273 Less: allowance for doubtful debts (14,486) (23,576) (34,568) 362, , ,705 Bills receivable 4,139 5,987 13,277 Other receivables 27,484 28,279 29,786 Less: allowance for doubtful debts (2,072) (4,968) (8,169) 25,412 23,311 21,617 Deposits and prepayments 9,351 4,793 8,938 Total 401, , ,537 Our trade and other receivables as of December 31, 2014, 2015 and 2016 were RMB401.2 million, RMB696.9 million and RMB940.5 million, respectively. The increase in our trade and other receivables during the Track Record Period was primarily due to the increase of our sales of TCM Granules to customers comprising primarily state-owned hospitals and medical institutions. 247

255 FINANCIAL INFORMATION We estimate the impairment allowances for trade and other receivables by assessing the recoverability based on credit history and prevailing market conditions. This requires the use of estimates and judgments. Allowances are applied to trade and other receivables where events or changes in circumstances indicate that the balances may not be collectible. Where the expectation is different from the original estimate, such difference will affect the carrying amounts of trade and other receivables and thus the impairment loss in the period in which such estimate is changed. We reassess impairment allowances annually. We recognize provision for impairment of trade and other receivables as administrative expenses in the combined statements of profit or loss and other comprehensive income. As of December 31, 2014, 2015 and 2016, we made provision for doubtful debts of RMB16.6 million, RMB28.5 million and RMB42.7 million, respectively. We did not hold any collateral or other security over such impaired amount. We believe that we have made sufficient provision for the unsettled trade and other receivables based on our assessment and impairment provision policy, and no additional provision is necessary for the Track Record Period. The following table sets forth an aging analysis of our trade debtors and bills receivables as of the dates indicated. As of December 31, Within 1 month 92, , ,421 1 to 3 months 130, , ,378 3 to 6 months 95, , ,485 6 to 12 months 29, , ,112 1 to 2 years 16,081 26,394 88,430 2 to 3 years 2,809 5,832 8,156 Total 366, , ,982 Our sales agreements typically grant credit terms of up to four months to our direct sales customers with established trading histories. Other customers without established trading histories are required to make payment on cash terms or payment in advance. Receivables that were neither past due nor impaired relate to a wide range of customers for whom there was no recent history of default. Receivables that were past due but not impaired relate to a number of independent customers that have a good track record with us. The balance of our trade receivables over four months mainly comprise direct sales made to state-owned hospitals and medical institutions, which generally have longer payment periods due to longer internal approval processes. Based on our past experience, we 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. 248

256 FINANCIAL INFORMATION The following table sets forth the average turnover days of receivables for the periods shown. our trade and other For the Years Ended December 31, Average trade and bills receivables turnover days (1) Note: (1) Calculated using the average of the beginning and ending trade and bills receivables balances of the period, divided by revenue for the period and multiplied by 365 days for a year in respect of the periods indicated. Our average trade and bills receivable turnover days for the years ended December 31, 2014, 2015 and 2016 were 165, 186 and 213, respectively. The increase during the Track Record Period was primarily attributable to an increase in our direct sales to customers comprising state-owned hospitals and medical institutions, which generally have longer payment periods due to their longer internal approval processes. As of April 30, 2017, being the latest date for liquidity disclosure, approximately RMB512.5 million, or 56.3%, of our trade and bills receivables as of December 31, 2016 were subsequently settled. Biological Assets We cultivate certain agricultural plants that generate TCM raw materials when harvested. The TCM raw materials we harvest from the plantation bases are used primarily for research and development activities, and for a small portion, for use in the production of TCM Granules. Plants are generally harvested between nine and 180 months after planting and are typically re-planted after harvest. The fair value of the biological assets was independently valued by Grant Sherman Appraisal Limited, a firm of independent valuers. Biological assets as of December 31, 2014, 2015 and 2016 are analyzed in the table below. As of December 31, RMB 000 RMB 000 RMB 000 Non-current portion ,087 Current portion 9 53 Total ,

257 FINANCIAL INFORMATION Other Financial Assets During the Track Record Period, we made investments in other financial assets. These financial assets primarily consisted of short-term wealth management products issued by licensed commercial banks in the PRC. Targeted investments of these financial products we purchased during the Track Record Period mainly consist of (i) highly liquid assets, including, but not limited to, PRC government bonds, investment-grade bonds, financial bonds, bank deposits, inter-bank borrowings, bond repurchases and other debt instruments; and (ii) various types of asset management plans, or a combination of any of the foregoing. We made investments in these wealth management products primarily for the purpose of gaining higher short-term investment returns than the fixed rate returns from cash deposits at commercial banks. The following table sets forth our other financial assets as of the dates indicated: As of December 31, RMB 000 RMB 000 RMB 000 Investment in wealth management products issued by banks, classified as Loans and receivables 50,000 Available-for-sale financial assets 40,000 Total 90,000 Our other financial assets mainly consist of low-risk wealth management products that we purchase as part of our cash management strategy in order to obtain higher yields than we can receive on regular bank deposits. Our other financial assets as of December 31, 2015 consisted of (i) a principal-unprotected floating income wealth management product in the principal investment amount of RMB40.0 million issued by Chengdu Rural Commercial Bank with an expected investment return rate of 4.5% per annum and a maturity of 90 days. It had a relatively low risk profile of PR2 (PR1 being the lowest risk category whereas PR5 being the highest risk category assigned by the issuing bank). Target investments mainly included investment-grade bonds, priority-class asset-backed securities bond market financial instruments and currency market financial instruments, such as bond repurchases and inter-bank borrowings; and (ii) a principal-protected wealth management product in the principal investment amount of RMB50.0 million issued by Bank of Communications with an expected investment return rate of 3.9% per annum and a maturity of 115 days. It had a low risk profile of 1R (1R being the lowest risk category whereas 6R being the highest risk category assigned by the issuing bank). The target investments mainly included currency market instruments and fixed income instruments. The maximum gain of these wealth management products would be the interests received during the period prior to maturity, which are equal to the highest potential interest rate multiplied by the principal investment amount. The maximum loss of the principal-unprotected wealth management product would be the loss of the principal amount of the investment. 250

258 FINANCIAL INFORMATION Our Investment Policies We have in place investment management policies that set forth guidelines for the investment in other financial assets. Such policies specify responsible parties and internal procedures for the review and approval for each investment activity. Our investment management policies, including the review, approval and monitoring of our investment in each investment in other financial assets, are implemented by our finance department. Investment amounts below RMB20,000 require the review of our responsible financial manager while investment amounts above RMB20,000 require review of our Chief Financial Officer. All investments, regardless of amount, require the approval of our chairman of the Board. Risk Management Policies and Internal Control Measures To better detect and manage the risks we are exposed to in connection with our operations, we have implemented a comprehensive set of risk management policies, which are set forth below: we have established a risk management committee under our Board of Directors. The committee has a risk assessment management team, which is primarily comprised of responsible personnel in various key departments of our Company. The risk assessment management team is mainly responsible for tracking the risks assessed by such departments in various stages, monitoring the implementation of risk management measures and providing risk assessment documents to the risk management committee. In order to strictly adhere to our treasury and investment policies, we also established a set of internal control procedures relating to our investments in other financial assets during the Track Record Period. The following sets forth the detailed internal control measures: our finance department analyzes and investigates the investment environment, collects information and prepares investment proposals for Board of Directors to review and approve; we established a Chinese Wall for financial investment management to ensure strict separation of personnel, information, accounts, funds and accounting; we use special account for funds used in connection with our investments in other financial assets; and our finance department designates personnel to track the investment progress and security status of our investment. Cash and Cash Equivalents Our cash and cash equivalents comprised cash on hand and cash at banks. Our cash and cash equivalents as of December 31, 2014, 2015 and 2016 were RMB126.0 million, RMB96.7 million and RMB200.0 million, respectively. For a detailed analysis of the increase or decrease of the balance of our cash and cash equivalents, please refer to the section headed Liquidity and Capital Resources Cash Flows Analysis. 251

259 FINANCIAL INFORMATION Trade and Other Payables Our trade and other payables primarily consist of amounts outstanding for our purchases of raw materials in relation to our manufacturing of products. The following table sets forth our trade and other payables as of the dates indicated: As of December 31, RMB 000 RMB 000 RMB 000 Trade creditors 238, , ,733 Accrued payroll and benefits 4,628 3,662 4,283 Receipts in advance 915 1,291 1,769 Payables and accruals for procurement of property, plant and equipment 38,497 32,590 36,894 VAT and other tax payables 4,297 18,617 30,650 Others 11,317 9,099 19,869 Total 297, , ,198 Our trade and other payables as of December 31, 2014, 2015 and 2016 were RMB297.7 million, RMB307.7 million and RMB469.2 million, respectively. From December 31, 2015 to December 31, 2016, our trade and other payables increased by RMB161.5 million, primarily as a result of an increase of RMB133.3 million in trade payable relating to additional purchases of raw materials, including the strategic reserve raw medicinal herbs. From December 31, 2014 to December 31, 2015, our trade and other payables increased by RMB10.0 million, primarily as a result of an increase in other taxes payables mainly relating to increased property tax as a result of our current manufacturing facilities becoming operational in August The following table sets forth an aging analysis of our trade payables as of the dates indicated. As of December 31, RMB 000 RMB 000 RMB 000 Within 6 months 148, , ,079 6 months to 1 year 43,489 13,712 74,492 1 to 2 years 35,004 1,429 10,048 More than 2 years 10, Total 238, , ,

260 FINANCIAL INFORMATION Our trade payables are non-interest bearing and are normally settled within one year. The following table sets forth our average trade payable turnover days for the periods indicated. For the Years Ended December 31, RMB 000 RMB 000 RMB 000 Average trade payable turnover days (1) Note: (1) Calculated using the average of the beginning and ending trade payables balances of the period, divided by cost of sales for the period and multiplied by 365 days for a year in respect of the periods indicated. Our average trade payable turnover days for the years ended December 31, 2014, 2015 and 2016 were 362, 248, and 311, respectively. Our average trade payable turnover days decreased from 362 day in 2014 to 248 days in 2015 mainly because the average price of raw materials decreased in 2015 compared to 2014 and we became more active in paying our suppliers in cash in order to maintain our competitive edge in raw material procurement. Our average trade payable turnover days increased to 311 days in 2016 primarily due to the purchases of additional strategic reserve raw medicinal herbs we stockpiled when the market prices, in our view, were relatively low. RELATED PARTY TRANSACTIONS During the Track Record Period, we entered into various transactions with related parties. The following table sets forth information relating to our transactions with related parties during the periods indicated. Year ended December 31, RMB 000 RMB 000 RMB 000 Purchases of goods from: Sichuan Green 2,288 2,288 Funding arrangements (1) : Mr. Zhou Houcheng (1,630) Mr. Zhou Xiang (3,007) Dujiangyan Hengda Agricultural Development Co., Ltd. 24,000 39,500 Chengdu Jia Qiang Building Materials Co., Ltd. (7,000) 7,000 Chengdu Shi Wei Mechanical Equipment Co., Ltd. 15,000 (9,000) Sichuan Green 19,418 Sichuan Zhongrui Tianyue Industrial Co., Ltd. 5,000 Note: (1) During the Track Record Period, we had funding arrangements from/(to) the related parties, the net cash inflows/(outflows) of which are as above. 253

261 FINANCIAL INFORMATION The table below sets for outstanding balances with related parties as of the periods indicated. As at December 31, RMB 000 RMB 000 RMB 000 Amounts due from: Non-trade related: Sichuan Green 75,282 75,282 75,282 Dujiangyan Hengda Agricultural Development Co., Ltd. 39,500 Chengdu Jia Qiang Building Materials Co., Ltd. 7,000 7,000 Sichuan Zhongrui Tianyue lndustrial Co., Ltd. 5,000 Xinjiang Rainbow Mining Investment Co., Ltd Others ,743 82,874 75,895 Amounts due to : Non-trade related: Dividend payable due to: Sichuan Green 138,920 Other payables due to: Mr. Zhou Houcheng 1,630 Mr. Zhou Xiang 3,007 Chengdu Shi Wei Mechanical Equipment Co., Ltd. 15,000 6,000 6,000 Others ,647 6, ,946 The balances due to related parties represent advances received from related parties, and the current balances due from related parties represent advances to related parties. The above-mentioned balances due to/from related parties are all non-interest-bearing and due on demand. Such balances will be settled before the [REDACTED]. Please refer to Note 30 or the Accountant s Report included in Appendix I to this document for further information. 254

262 FINANCIAL INFORMATION CAPITAL EXPENDITURE AND COMMITMENTS Capital Expenditure The following table sets forth our capital expenditures for the periods indicated. For the Years Ended December 31, RMB 000 RMB 000 RMB 000 Our current manufacturing facilities (1) 105,153 17,231 5,232 Smart Pharmacy Systems (2) 23,944 16,551 13,149 Others (3) 14,279 9,247 6,491 Total 143,376 43,029 24,872 Notes: (1) Includes the production facilities and offices of our current manufacturing facilities in Pengzhou City and capital expenditure relating to corresponding land use rights. (2) Includes the capital expenditure related to the purchase and construction of Smart Pharmacy Systems. (3) Includes office computers and machinery and equipment purchased for research and development. Our capital expenditures comprised purchase and construction of our current manufacturing facilities and Smart Pharmacy Systems. For the years ended December 31, 2014, 2015 and 2016, our total capital expenditures were RMB143.4 million, RMB43.0 million and RMB24.9 million, respectively. Capital expenditures for our Smart Pharmacy Systems increased from 2014 to 2015, primarily as a result of an increased purchase and construction of our Smart Pharmacy Systems in 2014 in response to the growing demand for the hospitals and medical institutions that installed our Smart Pharmacy Systems in We expect to incur capital expenditures of approximately RMB110.1 million in 2017 and Our expected capital expenditures in 2017 and 2018 are primarily for the expansion of our manufacturing capacity and the development of our Smart Pharmacy Systems. We expect to finance our capital expenditures through a combination of operating cash flows and the net [REDACTED] from the [REDACTED]. We may adjust our capital expenditures for any given period according to our development plans or in light of market conditions and other factors we believe to be appropriate. 255

263 FINANCIAL INFORMATION The table below sets forth a breakdown of our expected capital expenditures for the periods indicated. For the Years Ended December 31, RMB 000 RMB 000 Our current manufacturing facilities (1) 50,000 Smart Pharmacy Systems (2) 12,419 32,654 Others (3) 7,761 7,236 Total 20,180 89,890 Notes: (1) Includes the production facilities and offices at our current manufacturing facilities in Pengzhou City and capital expenditure relating to corresponding land use rights. (2) Includes the capital expenditure related to the purchase and construction of Smart Pharmacy Systems. (3) Includes office computers and machinery and equipment purchased for research and development. Operating Lease Commitments The following table sets forth our total commitments for future minimum lease payments under non-cancellable operating leases for the periods indicated. The operating leases relate to the lease of offices and plantation bases. As of December 31, As of April 30, RMB 000 RMB 000 RMB 000 RMB 000 Within 1 year 1,845 1,310 1, After 1 year but within 5 years 1, After 5 years Total 3,433 1,334 1, Capital Commitments In addition to operating lease commitments, we also have certain capital commitments relating to the construction and purchase of items of property, plant and equipment for our manufacturing. As of December 31, As of April 30, RMB 000 RMB 000 RMB 000 RMB 000 Contracted for 2,759 Authorized, but not contracted for 17,217 Total 17,217 2,

264 FINANCIAL INFORMATION INDEBTEDNESS Interest-bearing Bank Borrowings The table below sets forth the components of our bank loans and other borrowings as of the dates indicated. As of December 31, As of April 30, RMB 000 RMB 000 RMB 000 RMB 000 (Unaudited) Non-current Non-current bank borrowings Secured 400, , , ,000 Less: current portion of non-current borrowings (40,000) (120,000) (160,000) (120,000) Current Current bank borrowings secured 30,000 50,000 unsecured 40,000 40,000 Add: Current portion of non-current bank borrowings 40, , , ,000 Total 430, , , ,000 From December 31, 2015 to December 31, 2016, the total amount outstanding of our bank loans decreased by RMB130.0 million. From December 31, 2014 to December 31, 2015, our bank loans decreased by RMB20.0 million. These decreases were primarily as a result of our repayment of certain bank loans during the Track Record Period. We expect to repay a portion of our borrowings with the net [REDACTED] of the [REDACTED]. Please refer to Future Plans and [REDACTED]. The following table sets forth the ranges of the effective interest rates on our bank borrowings as of the dates indicated: As of December 31, RMB 000 RMB 000 RMB 000 Fixed-rate bank borrowings 30,000 Variable rate borrowings 400, , ,000 Our bank loans carried weighted average interest rates of 6.47%, 5.67% and 4.79% per annum for the years ended December 31, 2014, 2015 and 2016, respectively. 257

265 FINANCIAL INFORMATION As of December 31, 2014, 2015 and 2016, these banking facilities were secured by mortgages over land and buildings with an aggregate carrying amount of RMB36.3 million, RMB39.9 million and RMB38.9 million, respectively. The following table sets forth the maturity profile of our borrowings as of the dates indicated: As of December 31, RMB 000 RMB 000 RMB 000 Bank loans repayable: Within 1 year or on demand 70, , ,000 After 1 year but within 2 years 120, ,000 80,000 After 2 years but within 5 years 240,000 80, , , ,000 Our chairman, our related parties provided guarantees to the bank loans with carrying amount of RMB30.0 million and RMB50.0 million as of December 31, 2014 and 2015, respectively. As of December 31, 2014, 2015 and 2016, the secured loans amounting to RMB400.0 million, RMB360.0 million and RMB240.0 million, respectively, were guaranteed by two third-party companies. All such guarantees will be released upon [REDACTED]. As of April 30, 2017, being the latest practicable date for the purpose of this indebtedness statement, we had total borrowings of RMB240.0 million. Our Directors confirm that there has not been any material change in the indebtedness commitments and contingent liabilities of our Group since April 30, 2017 and up to the Latest Practicable Date. Contingent Liabilities and Guarantees As of April 30, 2017, being the latest date for liquidity disclosure, we did not have any unrecorded significant contingent liabilities, guarantees or any litigation against us. 258

266 FINANCIAL INFORMATION KEY FINANCIAL RATIOS The following table sets forth certain of our key financial ratios as of the dates and for the periods indicated: As of December 31, Current ratio (1) Gearing ratio (2) 57.0% 36.5% 20.4% Net profit margin (3) 29.4% 34.8% 42.3% Return on total equity (4) 32.1% 39.2% 47.6% Return on total assets (5) 14.1% 21.2% 27.9% Notes: (1) Current ratio was calculated based on our total current assets as of the respective dates divided by our total current liabilities as of the same dates. (2) Gearing ratio was calculated based on our interest-bearing liabilities as of the respective dates divided by our total equity as of the same dates. (3) Net profit margin was calculated based on our profit for the respective years divided by our total revenue for the same years. (4) Return on total equity equals profit for the year divided by average total equity amounts as of the end of the year. (5) Return on total assets equals profit for the year divided by average total assets as of the end of the year. Current Ratio Our current ratio increased slightly from 2.4 as of December 31, 2014 to 2.5 as of December 31, 2015, mainly due to increases in (i) trade and other receivables as we increased the direct sales of TCM Granules to hospitals and medical institutions; and (ii) other financial assets as part of our cash management measures, compared to the increase in trade and other payables and bank loans. Our current ratio decreased to 2.0 as of December 31, 2016, mainly due to a large increase in trade and other payables. Gearing Ratio Our gearing ratio decreased from 57.0% as of December 31, 2014 to 36.5% as of December 31, 2015, mainly due to the repayment of certain short-term borrowings in 2014 and an increase in our total equity as a result of our profit growth in Please refer to Indebtedness for further details. Our gearing ratio further decreased to 20.4% as of December 31, 2016, mainly due to the repayment of certain short-term borrowings in 2015 and 2016 and an increase in our total equity as a result of our profit growth in

267 FINANCIAL INFORMATION Net Profit Margin Our net profit margin increased from 29.4% for the year ended December 31, 2014 to 34.8% for the year ended December 31, 2015, and further to 42.3% for the year ended December 31, 2016 mainly due to increases in our gross profit margin in 2015 and Return on Total Equity Our return on total equity increased from 32.1% for the year ended December 31, 2014 to 39.2% for the year ended December 31, 2015, mainly due to our increased profit for the year. Our return on total equity further increased from 39.2% for the year ended December 31, 2015 to 47.6% for the year ended December 31, 2016, mainly due to our increased profit for the year. Return on Total Assets Our return on total assets increased from 14.1% for the year ended December 31, 2014 to 21.2% for the year ended December 31, 2015, mainly due to our increased profit for the year. Our return on total assets further increased to 27.9% for the year ended December 31, 2016, mainly due to our increased profit for the year. Our profits for the year in 2015 and 2016 increased at a faster pace than the increases in our total assets for the respective years. WORKING CAPITAL We finance our working capital needs primarily through cash flow from operating activities and bank borrowings. Taking into account the financial resources available to our Group, including the cash flow from operating activities and the estimated net [REDACTED] from the [REDACTED], our Directors are of the view that, after due and careful inquiry, our Group has sufficient available working capital for our present requirements for at least the next 12 months from the date of this document. 260

268 FINANCIAL INFORMATION QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISKS Credit Risk Our Group s credit risk is primarily attributable to trade and other receivables. Management has a credit policy in place and the exposures to these credit risks are monitored on an ongoing basis. In respect of trade and other receivables, individual credit evaluations are performed on all customers requiring credit. These evaluations focus on the customer s past history of making payments when due and current ability to pay, and take into account information specific to the customer as well as pertaining to the economic environment in which the customer operates. Trade receivables are due within 30 to 270 days from the date of billing. Normally, our Group does not obtain collateral from customers. Our Group s exposure to credit risk is influenced mainly by the individual characteristics of each customer rather than the industry or country in which the customer operates, and therefore significant concentrations of credit risk primarily arise when our Group has significant exposure to individual customers. As of December 31, 2014, 2015 and 2016, 25%, 27% and 21% of trade and other receivables were due from our five largest customers. Our Group does not provide any other guarantees which would expose our Group to the credit risk. Interest Rate Risk Our Group s interest rate risk arises primarily from interest-bearing borrowings. Borrowings issued at variable and fixed rates expose our Group to cash flow interest rate risk and fair value interest rate risk, respectively. Our Group defines net borrowings as being interest-bearing financial liabilities less interest-bearing investments (excluding cash held for short-term working capital purposes). Our Group s interest rate profile as monitored by management is set out in (i) below. Our Group is not exposed to significant interest rate risk for cash and cash equivalent because the interest rates of cash at bank are not expected to change significantly. 261

269 FINANCIAL INFORMATION (i) Interest rate profile The following table details the interest rate profile of our Group s net borrowing (as defined above) at the end of each reporting period, after taking into account the effect of interest rate swaps designated as cash flow hedging instruments. Effective Interest rate As at 31 December Effective Interest rate Effective Interest rate % RMB 000 % RMB 000 % RMB 000 Net fixed rate borrowings: Bank loans 8% 30,000 Other financial assets 3.9% (50,000) (50,000) Variable rate borrowings: Bank loans 6.4% 400, % 6.4% 410, % 5.25% 280,000 Available-for-sale investment 4.5% 4.55% (40,000) 400, , ,000 Total net borrowings 430, , ,000 Net fixed rate borrowings as a percentage of total net borrowings 7.0% 0% 0% (ii) Sensitivity analysis The following table details the effect on our Group s profit after tax for each relevant period during the Track Record Period and retained profits as of the dates indicated that an increase/ decrease of 100 basis points interest rates would have An increase of 100 basis points in interest rates An decrease of 100 basis points in interest rates An increase of 100 basis points in interest rates An decrease of 100 basis points in interest rates An increase of 100 basis points in interest rates An decrease of 100 basis points in interest rates RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 Effect on: Profit after tax (3,400) 3,400 (3,145) 3,145 (2,380) 2,380 Retained profits (3,400) 3,400 (3,145) 3,145 (2,380) 2,380 The sensitivity analysis above indicates the instantaneous change in our Group s profit after tax (and retained profits) and other components of combined equity that would arise assuming that the change in interest rates had occurred at the end of the reporting period and had been applied to re-measure those financial instruments held by our Group which expose our Group to fair value rate risk arising from floating rate non-derivative instruments held by 262

270 FINANCIAL INFORMATION our Group at the end of the reporting period, the impact on our Group s profit after tax (and retained profits) and other components of combined equity is estimated as an annualized impact on interest expense or income of such a change in interest rates. Liquidity Risk Our Group s policy is to regularly monitoring our liquidity, the expected cash inflows and outflows, and maturity of loans and borrowings in order to ensure that we maintain sufficient reserves of cash and adequate committed lines of funding from major financial institutions to meet our liquidity requirements in the short and longer term. The following tables show the remaining contractual maturities at the end of the reporting period of our Group s financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates, or, if floating, based on rates current at the dates indicated) and the earliest dates our Group can be required to pay. Within 1 year or on demand As at 31 December 2014 Contractual undiscounted cash outflow More than 1 year but less than 2 years More than 2 years but less than 5 years More than 5 years Total Carrying amount at 31December RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 Bank loans 133, , , , ,000 Amounts due to related parties 19,647 19,647 19, , , , , ,647 Within 1 year or on demand As at 31 December 2015 Contractual undiscounted cash outflow More than 1 year but less than 2 years More than 2 years but less than 5 years More than 5 years Total Carrying amount at 31December RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 Bank loans 186, ,057 81, , ,000 Amount due to a related party 6,000 6,000 6, , ,057 81, , ,000 Within 1 year or on demand As at 31 December 2016 Contractual undiscounted cash outflow More than 1 year but less than 2 years More than 2 years but less than 5 years More than 5 years Total Carrying amount at 31December RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 Bank loans 210,362 81, , ,000 Amounts due to related parties 6,026 6,026 6, ,388 81, , ,

271 FINANCIAL INFORMATION OFF-BALANCE SHEET COMMITMENTS AND ARRANGEMENTS As of the Latest Practicable Date, we had not entered into any off-balance sheet transactions. PROPERTY VALUATION The particulars of our properties are set out in Business and in Appendix III Property Valuation Report. Grant Sherman Appraisal Limited has valued the properties as of April 30, A full list of properties and a summary of the values issued by Grant Sherman Appraisal Limited is included in Appendix III Property Valuation Report. The full set valuation report issued by Grant Sherman Appraisal Limited will be available for inspection at the offices of Luk & Partners as described in Appendix VI to this document. The table below sets forth the reconciliation of aggregate amounts of our property interests from our combined financial statements as of December 31, 2016 to the unaudited net book value of our property interests as of April 30, 2017: Amount RMB 000 Net book value of our property interests as of December 31, 2016* 366,001 Movements for four months ended April 30, 2017 (3,399) Net book value of our property interests as of April 30, 2017* 362,602 Valuation surplus as of April 30, ,098 Valuation as of April 30, 2017 per Appendix III Property Valuation Report 388,700 Note: * Certain buildings were not included in the net book value due to the absence of the relevant building ownership certificates. Please refer to Business Land and Properties in this [REDACTED]. DIVIDEND POLICY AND DISTRIBUTABLE RESERVES Our Directors, subject to approval by our Shareholders, may declare dividends after taking into account, among other things, our general business condition and strategies, results of operations, cash flows and financial condition, operating and capital requirements, interests of our Shareholders, taxation conditions, the amount of distributable profits, our Articles of Association, the PRC Company Law, applicable laws and regulations and other factors that our Directors deem relevant. In particular, under applicable PRC laws and our Articles of Association, we can only distribute dividends out of our after-tax profit after the following allocations have been made: (i) recovery of accumulated losses, if any; (ii) mandatory allocations to the statutory common reserve fund equivalent to 10% of our after-tax profit, unless the common reserve fund reaches 50% of our registered capital or above; and (iii) allocations to discretionary common reserve fund, subject to the Shareholders approval at the Shareholders meeting. 264

272 FINANCIAL INFORMATION On July 6, 2015, we declared dividends in the amount of RMB570.0 million, which was settled in the same month. In August, 2016, we declared cash dividend in the amount of RMB402.5 million, of which RMB260.2 million was paid by December 31, We intend to pay the remainder of the declared dividend before [REDACTED] using our available working capital. You should note that historical dividend distributions are not indicative of our future dividend distribution policy. We cannot assure you that we will be able to declare dividends of such amount or any amount in any year. In addition, the declaration and/or payment of dividends may be limited by legal restrictions and/or by financing agreements that we may enter into in the future. As of December 31, 2016, our distributable reserves were RMB441.9 million. [REDACTED]-RELATED EXPENSE INCURRED AND TO BE INCURRED We expect to incur a total of RMB[98.8] million (equivalent to approximately HK$[113.3] million) of [REDACTED] expenses (assuming an [REDACTED] of [REDACTED], being the mid-point of the indicative [REDACTED] between [REDACTED] and [REDACTED], and assuming that the [REDACTED] is not exercised) until the completion of the [REDACTED], of which RMB[0.6] million is expected to be charged to our consolidated statements of profit or loss and other comprehensive income for the year ended December 31, 2016, RMB[30.7] million is expected to be charged to our consolidated statements of profit or loss and other comprehensive income for the year ending December 31, 2017 and RMB[67.5] million is directly attributable to the issue of the Shares to the public and to be capitalized. [REDACTED] expenses represent professional fees and other fees incurred in connection with the [REDACTED], including [REDACTED] commissions. The [REDACTED] expenses above are the best estimate as of the Latest Practicable Date and for reference only and the actual amount may differ from this estimate. CHANGE IN REPORTING ACCOUNTANTS We previously engaged Ernst and Young ( EY ) as our reporting accountants for [REDACTED] purposes in February We and EY mutually agreed to the disengagement of EY as our reporting accountants, which was formally documented in the termination letter. We subsequently engaged KPMG as our reporting accountants for [REDACTED] purposes in March 2017, who obtained a clearance letter from EY with reference to Section 440 of the Code of Ethics for Professional Accountants issued by the Hong Kong Institute of Certified Public Accountants. 265

273 FINANCIAL INFORMATION NO MATERIAL ADVERSE CHANGE After performing sufficient due diligence work which our Directors consider appropriate and after due and careful consideration, our Directors confirm that, up to the date of this document, there has been no material adverse change in our financial or trading position or prospects since December 31, 2016, being the date on which our latest audited combined financial statements were prepared, and there is no event since December 31, 2016 which would materially affect the information as set out in the Accountants Report in Appendix I to this document. DISCLOSURE UNDER RULES TO OF THE LISTING RULES Our Directors confirm that, except as otherwise disclosed in this document, as of the Latest Practicable Date, there was no circumstance that would give rise to a disclosure requirement under Rules to of the Listing Rules. UNAUDITED PRO FORMA STATEMENT OF ADJUSTED NET TANGIBLE ASSETS [REDACTED] 266

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275 FUTURE PLANS AND [REDACTED] FUTURE PLANS Please refer to the section headed Business Our Strategies in this document for a detailed discussion of our future plans. [REDACTED] We estimate that we will receive [REDACTED] of approximately [REDACTED] million from the [REDACTED], assuming that the [REDACTED] is not exercised, after deducting the [REDACTED] commissions and other estimated [REDACTED] expenses payable by us and assuming the initial [REDACTED] of [REDACTED] per Share, being the mid-point of the indicative [REDACTED] set forth on the cover page of this document. We intend to use the [REDACTED] from the [REDACTED] for the purposes and in the amounts set out below: [REDACTED] 268

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320 APPENDIX I ACCOUNTANTS REPORT The following is the text of a report set out on pages I-1 to I-48, received from the Company s reporting accountants, KPMG, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this document. ACCOUNTANTS REPORT ON HISTORICAL FINANCIAL INFORMATION TO THE DIRECTORS OF NEO-GREEN PHARMACEUTICAL TECHNOLOGY DEVELOPMENT (CAYMAN) LIMITED AND MACQUARIE CAPITAL LIMITED Introduction We report on the historical financial information of Neo-green Pharmaceutical Technology Development (Cayman) Limited (the Company ) and its subsidiaries (together, the Group ) set out on pages I-4 to I-48, which comprises the combined statements of financial position of the Group as at 31 December 2014, 2015 and 2016 and the statement of financial position of the Company as at 31 December 2016, and the combined statements of profit or loss and other comprehensive income, the combined statements of changes in equity and the combined statements of cash flow, for each of the years ended 31 December 2014, 2015 and 2016 (the Relevant Periods ), and a summary of significant accounting policies and other explanatory information (together, the Historical Financial Information ). The Historical Financial Information set out on pages I-4 to I-48 forms an integral part of this report, which has been prepared for inclusion in the document of the Company dated [ ] (the Document ) in connection with the initial [REDACTED] of shares of the Company on the Main Board of The Stock Exchange of Hong Kong Limited. Directors responsibility for Historical Financial Information The directors of the Company are responsible for the preparation of Historical Financial Information that gives a true and fair view in accordance with the basis of preparation and presentation set out in Note 1 to the Historical Financial Information, and for such internal control as the directors of the Company determine is necessary to enable the preparation of the Historical Financial Information that is free from material misstatement, whether due to fraud or error. Reporting accountants responsibility Our responsibility is to express an opinion on the Historical Financial Information and to report our opinion to you. We conducted our work in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 200 Accountants Reports on Historical Financial Information in Investment Circulars issued by the Hong Kong Institute of Certified Public Accountants ( HKICPA ). This standard requires that we comply with ethical standards and plan and perform our work to obtain reasonable assurance about whether the Historical Financial Information is free from material misstatement. I-1

321 APPENDIX I ACCOUNTANTS REPORT Our work involved performing procedures to obtain evidence about the amounts and disclosures in the Historical Financial Information. The procedures selected depend on the reporting accountants judgement, including the assessment of risks of material misstatement of the Historical Financial Information, whether due to fraud or error. In making those risk assessments, the reporting accountants consider internal control relevant to the entity s preparation of Historical Financial Information that give a true and fair view in accordance with the basis of preparation and presentation set out in Note 1 to the Historical Financial Information in order to design 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. Our work also included 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 Historical Financial Information. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion In our opinion, the Historical Financial Information gives, for the purpose of the accountants report, a true and fair view of the Company s financial position as at 31 December 2016, the Group s financial position as at 31 December 2014, 2015 and 2016 and of the Group s financial performance and cash flows for the Relevant Periods in accordance with the basis of preparation and presentation set out in Note 1 to the Historical Financial Information. REPORT ON MATTERS UNDER THE RULES GOVERNING THE [REDACTED] OF SECURITIES ON THE STOCK EXCHANGE OF HONG KONG LIMITED AND THE COMPANIES (WINDING UP AND MISCELLANEOUS PROVISION) ORDINANCE Adjustments In preparing the Historical Financial Information, no adjustments to the Underlying Financial Statements as defined on page I-4 have been made. Dividends We refer to note 26(b) to the Historical Financial Information which states that no dividends have been paid by the Company in respect of the Relevant Periods. I-2

322 APPENDIX I ACCOUNTANTS REPORT No historical financial statements for the Company No financial statements have been prepared for the Company since its incorporation. KPMG Certified Public Accountants 8th Floor, Prince s Building 10 Chater Road Central, Hong Kong [REDACTED] I-3

323 APPENDIX I ACCOUNTANTS REPORT HISTORICAL FINANCIAL INFORMATION Set out below is the Historical Financial Information which forms an integral part of this accountants report. The combined financial statements of the Group for the Relevant Periods, on which the Historical Financial Information is based, were audited by KPMG Huazhen LLP in accordance with Hong Kong Standards on Auditing issued by the HKICPA ( Underlying Financial Statements ). Combined statements of profit or loss and other comprehensive income Year ended 31 December Note RMB 000 RMB 000 RMB 000 Revenue 4 711,042 1,055,560 1,403,336 Cost of sales 6(c) (279,408) (352,884) (363,209) Gross profit 431, ,676 1,040,127 Other income 5(a) 2,846 8,865 6,171 Selling and distribution expenses (166,798) (251,534) (350,184) Administrative expenses (33,202) (46,582) (56,140) Other expenses 5(b) (9,406) (14,386) (20,738) Profit from operations 225, , ,236 Finance costs 6(a) (13,061) (25,045) (16,477) Profit before taxation 6 212, , ,759 Income tax 7(a) (3,226) (6,229) (8,790) Profit for the year 208, , ,969 Other comprehensive income for the year Total comprehensive income for the year 208, , ,969 Attributable to: Equity shareholders of the Company 208, , ,979 Non-controlling interests (10) Profit and total comprehensive income for the year 208, , ,969 Earnings per share 10 N/A N/A N/A The accompanying notes form part of the Historical Financial Information. I-4

324 APPENDIX I ACCOUNTANTS REPORT Combined statements of financial position As at 31 December Note RMB 000 RMB 000 RMB 000 Non-current assets Property, plant and equipment , , ,874 Interests in leasehold land held for own use under operating leases 12 30,324 29,688 29,052 Intangible assets 13 1,368 1,447 1,342 Biological assets ,087 Deferred tax assets 24(b) 3,677 3,568 3, , , ,919 Current assets Biological assets Inventories , , ,709 Trade and other receivables , , ,537 Amount due from related parties 29(d) 127,743 82,874 75,895 Other financial assets 19 90,000 Cash and cash equivalents ,040 96, ,042 1,002,684 1,341,862 1,777,236 Current liabilities Trade and other payables , , ,198 Amount due to related parties 29(d) 19,647 6, ,946 Bank loans 21 70, , ,000 Deferred income ,024 1,024 Current taxation 24(a) 3,791 5,475 5,418 Provisions 25 22,822 37,381 54, , , ,595 Net current assets 587, , ,641 Total assets less current liabilities 1,139,549 1,387,071 1,473,560 Non-current liabilities Bank loans , ,000 80,000 Deferred income 22 24,510 23,787 23, , , ,763 NET ASSETS 755,039 1,123,284 1,369,797 CAPITAL AND RESERVES Share capital 26(a) 136, , ,075 Reserves 26(c) 618, , ,252 Total equity attributable to equity shareholders of the Company 755,039 1,122,804 1,369,327 Non-controlling interests TOTAL EQUITY 755,039 1,123,284 1,369,797 The accompanying notes form part of the Historical Financial Information. I-5

325 APPENDIX I ACCOUNTANTS REPORT Statement of financial position of the Company Note As at 31 December 2016 RMB 000 Current assets Trade and other receivables 128 Cash and cash equivalents 128 Current liabilities Amount due to related parties 513 Trade and other payables NET LIABILITIES (385) CAPITAL AND RESERVES Share capital 26(a) Reserves (385) TOTAL EQUITY (385) The accompanying notes form part of the Historical Financial Information. I-6

326 APPENDIX I ACCOUNTANTS REPORT Combined statements of changes in equity Note Share capital Attributable to equity shareholders of the Company Capital reserve PRC statutory reserves Retained profits Total Noncontrolling interests Total equity RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 At 1 January ,643 2,607 48, , , ,252 Changes in equity for 2014: Total profit and comprehensive income for the year 208, , ,787 Appropriation to statutory reserve 26(c) 19,631 (19,631) At 31 December 2014 and 1 January ,643 2,607 68, , , ,039 Changes in equity for 2015: Total profit and comprehensive income for the year 367, , ,765 Appropriation to statutory reserve 26(c) 39,142 (39,142) Dividend declared and transferred to share capital 26(b) 570,000 (570,000) Non-controlling shareholders capital contribution At 31 December 2015 and 1 January ,643 2, , ,090 1,122, ,123,284 Changes in equity for 2016: Total profit and comprehensive income for the year 593, ,979 (10) 593,969 Appropriation to statutory reserve 26(c) 55,639 (55,639) Shareholders capital contribution 26(c) 9,950 45,128 55,078 55,078 Dividends declared 26(b) (402,534) (402,534) (402,534) Transfer from capital reserve to share capital 26(c) 41,482 (41,482) At 31 December ,075 6, , ,896 1,369, ,369,797 The accompanying notes form part of the Historical Financial Information. I-7

327 APPENDIX I ACCOUNTANTS REPORT Combined statements of cash flow Year ended 31 December Note RMB 000 RMB 000 RMB 000 Operating activities Cash generated from operations 18(b) 125, , ,424 PRC Corporate Income Tax paid 24(a) (3,868) (4,436) (8,843) Net cash generated from operating activities 121, , ,581 Investing activities Payment for the purchase of property, plant and equipment and intangible assets (108,673) (55,057) (11,400) Proceeds from sale of property, plant and equipment Payment for purchase of other investments (40,000) (270,000) (40,000) Proceeds from sale of other investments 40, , ,000 Interest received 707 2,052 1,928 Net cash (used in)/generated from investing activities (107,966) (142,989) 80,764 Financing activities Proceeds from bank loans 30,000 50,000 40,000 Repayments of bank loans (80,000) (70,000) (170,000) Net cash from related parties 51,407 30,854 7,026 Proceeds from shareholders investment 48,825 Proceeds from non-controlling interests investment 480 Dividends paid (260,153) Interest paid (29,495) (25,042) (16,678) Net cash used in financing activities (28,088) (13,708) (350,980) Net (decrease)/increase in cash and cash equivalents (14,793) (29,427) 103,365 Cash and cash equivalents at 1 January 18(a) 140, ,040 96,659 Effect of foreign exchange rate changes (4) Cash and cash equivalents at 31 December 18(a) 126,040 96, ,042 The accompanying notes form part of the Historical Financial Information. I-8

328 APPENDIX I ACCOUNTANTS REPORT NOTES TO THE HISTORICAL FINANCIAL INFORMATION 1 Basis of preparation and presentation of Historical Financial Information Neo-green Pharmaceutical Technology Development (Cayman) Limited (the Company ) was incorporated in the Cayman Islands on 22 June 2016 as an exempted company with limited liability under the Companies Law (2013 Revision) (as consolidated and revised) of the Cayman Islands. The Company is an investment holding company and has not carried on any business since the date of its incorporation save for the group reorgnization mentioned below. The Company and its subsidiaries (together, the Group ) are principally engaged in manufacturing and sale of traditional Chinese medicine ( TCM ) granules in the People s Republic of China (the PRC ). Prior to the incorporation of the Company, the above mentioned principal activities were carried out by Sichuan Neo-green Pharmaceutical Technology Development Co., Ltd. ( ) ( Neo-green Pharmaceutical ) and its subsidiaries. To rationalize the corporate structure in preparation of the listing of the company s shares on The Stock Exchange of Hong Kong Limited, the Group underwent a reorganization (the Reorganization ), as detailed in the section headed History, Reorganization and Corporate Structure in the document. Upon completion of the Reorganization in June 2017, the Company became the holding company of the Group. As Neo-green Pharmaceutical was ultimately controlled by Mr. Zhou Houcheng ( ) and Mr. Zhou Xiang ( ) (referred as to Controlling Shareholders ) before and after the Reorganization and therefore there were no changes in the economic substance of the ownership and the business of the Group. On 18 June 2017, Mr. Zhou Houcheng and Mr. Zhou Xiang, son of Mr. Zhou Houcheng, entered into the acting in concert agreement, pursuant to which they confirmed that they have been acting in concert since 1 January 2014 and have, during the Relevant Period, controlled the Group as persons acting in concert. The Reorganization only involved inserting newly formed entities with no substantive operations as the new holding companies of Neo-green Pharmaceutical, the former holding company of the Group, during the Relevant Periods. Accordingly, the Reorganization has been accounted for using a principle similar to that for a reverse acquisition, with Neo-green Pharmaceutical treated as the acquirer for accounting purposes. The Historical Financial Information has been prepared and presented as a continuation of the financial statements of Neo-green Pharmaceutical with the assets and liabilities of Neo-green Pharmaceutical recognized and measured at their historical carrying amounts prior to the Reorganization. Intra-group balances, transactions and unrealized gains/losses on intra-group transactions are eliminated in full in preparing the Historical Financial Information. As at the date of this report, no audited financial statements have been prepared for the Company, NGP Holdings (BVI) Limited, and Golden Pharma Limited as they either have not carried on any business since the date of incorporation or are investment holding companies and not subject to statutory audit requirements under the relevant rules and regulations in the jurisdiction of incorporation. No statutory financial statements have been prepared for Sichuan Neo-green Modern TCM Development Co., Ltd ( ) (disposed on 16 August 2016) and Sichuan Shunli Technology Development Co., Ltd. ( ) (dissolved on 6 June 2017) as they have not carried on any business since the date of incorporation. As at the date of this report, statutory audit of Ever Sound (Hong Kong) Limited and Golden Cache (Hong Kong) Limited, both incorporated on 29 June 2016, for the period ended 31 December 2016 have not been completed. Upon completion of the Reorgnization and as at the date of this report, the Company has direct or indirect interests in the following subsidiaries, all of which are private companies: Company Name Directly hold Date and place of incorporation/ establishment Particulars of issued and paid-up capital Proportion of ownership interests Held by the Company Held by a subsidiary Principal activities Name of statutory auditor NGP Holdings (BVI) Limited ( NGP Holdings ) 05 July 2016 The British Virgin Islands ( BVI ) USD50, % Investment holding N/A I-9

329 APPENDIX I ACCOUNTANTS REPORT Company Name Indirectly hold Date and place of incorporation/ establishment Particulars of issued and paid-up capital Proportion of ownership interests Held by the Company Held by a subsidiary Principal activities Name of statutory auditor Golden Pharma Limited ( Golden Pharma ) 27 June 2016 The BVI USD1 100% Investment holding N/A Ever Sound (Hong Kong) Limited ( Ever Sound (Hong Kong) ) 29 June 2016 Hong Kong HKD1 100% Investment holding N/A Golden Cache (Hong Kong) Limited ( Golden Cache (Hong Kong) ) 29 June 2016 Hong Kong HKD1 100% Investment holding N/A Sichuan 16 Jan 2009 Neo-green The PRC Pharmaceutical Technology Development Co., Ltd. ( Neo-green Pharmaceutical ) ( ) 1 RMB758,075, % Manufacturing and sale of TCM granules Sichuan Huajun CPA Co., Ltd. 2 1 The official name of this entity is in Chinese. The English name is for identification purpose only. This company was registered as a wholly foreign-owned enterprise under the PRC Law. 2 The statutory financial statements of Neo-green Pharmaceutical for the years ended 31 December 2014, 2015 and 2016 were prepared in accordance with the Accounting Standards for Business Enterprises applicable to the enterprises in the PRC. The Historical Financial Information has been prepared in accordance with all applicable International Financial Reporting Standards ( IFRSs ) which collective term includes all applicable individual International Financial Reporting Standards, International Accounting Standards and Interpretations issued by the International Accounting Standards Board ( IASB ). Further details of the significant accounting policies adopted are set out in Note 2. The IASB has issued a number of new and revised IFRSs. For the purpose of preparing this Historical Financial Information, the Group has adopted all applicable new and revised IFRSs to the Relevant Periods, except for any new standards or interpretations that are not yet effective for the accounting period ended 31 December The revised and new accounting standards and interpretations issued but not yet effective for the accounting year beginning 1 January 2016 are set out in Note 31. The Historical Financial Information also complies with the applicable disclosure provisions of the Rules Governing the [REDACTED] of Securities on The Stock Exchange of Hong Kong Limited. The accounting policies set out below have been applied consistently to all periods presented in the Historical Financial Information. I-10

330 APPENDIX I ACCOUNTANTS REPORT 2 Significant accounting polices (a) Basis of measurement and functional and presentation currency The measurement basis used in the preparation of the Historical Financial Information is the historical cost basis except that the following assets and liabilities are stated at their fair value as explained in the accounting policies set out below: financial instruments classified as available-for-sale or as trading securities (see note 2(d)); and biological assets(see note 2(g)). The Historical Financial Information is presented in Renminbi ( RMB ), rounded to the nearest thousand except when otherwise indicated, which is the functional currency of the Group s subsidiaries established in the mainland China. Almost all the Group s operating activities are carried out in the mainland China with most of the transactions denominated in RMB. The functional currency of the Company and the Company s subsidiaries outside the mainland China are Hong Kong Dollars ( HKD ). The Group translates the financial statements of the Company and the Company s subsidiaries outside the mainland China from HKD into RMB. (b) Use of estimates and judgments The preparation of the Historical Financial Information in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgements made by management in the application of IFRSs that have significant effect on the Historical Financial Information and major sources of estimation uncertainty are discussed in Note 3. (c) Subsidiaries and non-controlling interests Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. When assessing whether the Group has power, only substantive rights (held by the Group and other parties) are considered. The financial statements of subsidiaries are included in the Historical Financial Information from the date that control commences until the date that control ceases. Intra-group balances, transactions and cash flows and any unrealised profits arising from intra-group transactions are eliminated in full in preparing the Historical Financial Information. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment. Non-controlling interests represent the equity in a subsidiary not attributable directly or indirectly to the Company, and in respect of which the Group has not agreed any additional terms with the holders of those interests which would result in the Group as a whole having a contractual obligation in respect of those interests that meets the definition of a financial liability. For each business combination, the Group can elect to measure any non-controlling interests either at fair value or at the non-controlling interests proportionate share of the subsidiary s net identifiable assets. Non-controlling interests are presented in the combined statements of financial position within equity, separately from equity attributable to the equity shareholders of the Company. Non-controlling interests in the results of the Group are presented on the face of the combined statements of profit or loss and other comprehensive income as an allocation of the total profit or loss and total comprehensive income for the year between non-controlling interests and the equity shareholders of the Company. Loans from holders of I-11

331 APPENDIX I ACCOUNTANTS REPORT non-controlling interests and other contractual obligations towards these holders are presented as financial liabilities in the combined statements of financial position in accordance with notes 2(l) or (m) depending on the nature of the liability. Changes in the Group s interests in a subsidiary that do not result in a loss of control are accounted for as equity transactions, whereby adjustments are made to the amounts of controlling and non-controlling interests within combined equity to reflect the change in relative interests, but no adjustments are made to goodwill and no gain or loss is recognized. When the Group loses control of a subsidiary, it is accounted for as a disposal of the entire interest in that subsidiary, with a resulting gain or loss being recognized in profit or loss. Any interest retained in that former subsidiary at the date when control is lost is recognized at fair value and this amount is regarded as the fair value on initial recognition of a financial asset (see note 2(d)) or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture. In the Company s statement of financial position, an investment in a subsidiary is stated at cost less impairment losses (see note 2(i)), unless the investment is classified as held for sale (or included in a disposal group that is classified as held for sale). (d) Other investments in debt and equity securities The Group s and the Company s policies for investments in debt and equity securities, other than investments in subsidiaries, associates and joint ventures, are as follows: Investments in debt and equity securities are initially stated at fair value, which is their transaction price unless it is determined that the fair value at initial recognition differs from the transaction price and that fair value is evidenced by a quoted price in an active market for an identical asset or liability or based on a valuation technique that uses only data from observable markets. Cost includes attributable transaction costs, except where indicated otherwise below. These investments are subsequently accounted for as follows, depending on their classification: Investments in securities held for trading are classified as current assets. Any attributable transaction costs are recognized in profit or loss as incurred. At the end of each reporting period the fair value is remeasured, with any resultant gain or loss being recognized in profit or loss. The net gain or loss recognized in profit or loss does not include any interest earned on these investments as these are recognized in accordance with the policies set out in note 2(r). Dated debt securities that the Group and/or the Company have the positive ability and intention to hold to maturity are classified as held-to-maturity securities. Held-to-maturity securities are stated at amortized cost less impairment losses (see note 2(i)). Investments in securities which do not fall into any of the above categories are classified as available-for-sale securities. At the end of each reporting period the fair value is remeasured, with any resultant gain or loss being recognized in other comprehensive income and accumulated separately in equity in the fair value reserve. As an exception to this, investments in equity securities that do not have a quoted price in an active market for an identical instrument and whose fair value cannot otherwise be reliably measured are recognized in the statements of financial position at cost less impairment losses (see note 2(i)). Dividend income from equity securities and interest income from debt securities calculated using the effective interest method are recognized in profit or loss in accordance with the policies set out in notes 2(r), respectively. Foreign exchange gains and losses resulting from changes in the amortized cost of debt securities are also recognized in profit or loss. When the investments are derecognized or impaired (see note 2(i)), the cumulative gain or loss recognized in equity is reclassified to profit or loss. Investments are recognized/derecognized on the date the Group commits to purchase/sell the investments or they expire. (e) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses (see note 2(i)). I-12

332 APPENDIX I ACCOUNTANTS REPORT The cost of self-constructed items of property, plant and equipment includes the cost of materials, direct labor, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and an appropriate proportion of production overheads and borrowing costs (see note 2(t)). Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognized in profit or loss on the date of retirement or disposal. Depreciation is calculated to write off the cost or valuation of items of property, plant and equipment, less their estimated residual value, if any, using the straight line method over their estimated useful lives as follows: Plants and buildings situated on leasehold land are depreciated over the shorter of the unexpired term of lease and their estimated useful lives, being no more than 40 years after the date of completion Machinery 15 years Motor vehicles 10 years Office equipment and others 5 10 years Where parts of an item of property, plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually. Construction-in-progress is stated at cost less impairment loss. Cost comprises direct costs of construction during the period of construction and installation. Capitalization of these costs ceases and the construction-in-progress is transferred to property, plant and equipment when substantially all of the activities necessary to prepare the assets of their intended use are substantially complete. No depreciation is provided in respect of construction-in-progress until it is substantially complete and ready for its intended use. (f) Intangible assets (other than goodwill) Expenditure on research activities is recognized as an expense in the period in which it is incurred. Expenditure on development activities is capitalised if the product or process is technically and commercially feasible and the Group has sufficient resources and the intention to complete development. The expenditure capitalised includes the costs of materials, direct labour, and an appropriate proportion of overheads and borrowing costs, where applicable (see note 2(t)). Capitalised development costs are stated at cost less accumulated amortisation and impairment losses (see note 2(i)). Other development expenditure is recognized as an expense in the period in which it is incurred. Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation (where the estimated useful life is finite) and impairment losses (see note 2(i)). Amortisation of intangible assets with finite useful lives is charged to profit or loss on a straight-line basis over the assets estimated useful lives. The following intangible assets with finite useful lives are amortized from the date they are available for use and their estimated useful lives are as follows: software 10 years patents and trademarks 5 to 10 years Both the period and method of amortisation are reviewed annually. (g) Biological assets Biological assets are measured at fair value less costs to sell, with any change therein recognized in profit or loss. I-13

333 APPENDIX I ACCOUNTANTS REPORT (h) Leased assets An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the Group determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease. (i) Classification of assets leased to the Group Assets that are held by group under leases which transfer to the Group substantially all the risks and rewards of ownership are classified as being held under finance leases. Leases which do not transfer substantially all the risks and rewards of ownership to the Group are classified as operating leases. (ii) Operating lease charges Where the Group has the use of assets held under operating leases, payments made under the leases are charged to profit or loss in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. (iii) Leasehold land held for own use under operating leases Leasehold land held for own use under operating leases represent cost of land use rights paid to the PRC government authorities. Land use rights are stated as cost less accumulated amortisation and impairment losses. Amortisation is recognized in profit or loss on a straight-line basis over the respective period of the rights. (i) Impairment of assets (i) Impairment of investments in debt and equity securities and other receivables Investments in debt and equity securities and other current and non-current receivables that are stated at cost or amortized cost or are classified as available-for-sale securities are reviewed at the end of each reporting period to determine whether there is objective evidence of impairment. Objective evidence of impairment includes observable data that comes to the attention of the Group about one or more of the following loss events: significant financial difficulty of the debtor; a breach of contract, such as a default or delinquency in interest or principal payments; it becoming probable that the debtor will enter bankruptcy or other financial reorgnization; significant changes in the technological, market, economic or legal environment that have an adverse effect on the debtor; and a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost. If any such evidence exists, any impairment loss is determined and recognized as follows: For trade and other current receivables and other financial assets carried at amortized cost, the impairment loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the financial asset s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets), where the effect of discounting is material. This assessment is made collectively where these financial assets share similar risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with credit risk characteristics similar to the collective group. I-14

334 APPENDIX I ACCOUNTANTS REPORT If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognized, the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset s carrying amount exceeding that which would have been determined had no impairment loss been recognized in prior years. For available-for-sale securities, the cumulative loss that has been recognized in the fair value reserve is reclassified to profit or loss. The amount of the cumulative loss that is recognized in profit or loss is the difference between the acquisition cost (net of any principal repayment and amortisation) and current fair value, less any impairment loss on that asset previously recognized in profit or loss. Impairment losses recognized in profit or loss in respect of available-for-sale equity securities are not reversed through profit or loss. Any subsequent increase in the fair value of such assets is recognized in other comprehensive income. Impairment losses in respect of available-for-sale debt securities are reversed if the subsequent increase in fair value can be objectively related to an event occurring after the impairment loss was recognized. Reversals of impairment losses in such circumstances are recognized in profit or loss. Impairment losses are written off against the corresponding assets directly, except for impairment losses recognized in respect of trade debtors and bills receivable included within trade and other receivables, whose recovery is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded using an allowance account. When the Group is satisfied that recovery is remote, the amount considered irrecoverable is written off against trade debtors and bills receivable directly and any amounts held in the allowance account relating to that debt are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognized in profit or loss. (ii) Impairment of other assets Internal and external sources of information are reviewed at the end of each reporting period to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognized no longer exists or may have decreased: property, plant and equipment; pre-paid interests in leasehold land classified as being held under an operating lease; intangible assets; and investments in subsidiaries in the Company s statement of financial position. If any such indication exists, the asset s recoverable amount is estimated. Calculation of recoverable amount The recoverable amount of an asset is the greater of its fair value less costs of disposal and value in use. 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. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit). I-15

335 APPENDIX I ACCOUNTANTS REPORT Recognition of impairment losses An impairment loss is recognized in profit or loss if the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs of disposal (if measurable) or value in use (if determinable). Recognition of impairment losses In respect of assets other than goodwill, an impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed. A reversal of an impairment loss is limited to the asset s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognized. (j) Inventories Inventories are carried at the lower of cost and net realizable value. Cost is calculated using the weighted average cost formula and comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. When inventories are sold, the carrying amount of those inventories is recognized as an expense in the period in which the related revenue is recognized. The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs. (k) Trade and other receivables Trade and other receivables are initially recognized at fair value and thereafter stated at amortized cost using the effective interest method, less allowance for impairment of doubtful debts (see note 2(i)), except where the receivables are interest-free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less allowance for impairment of doubtful debts. (l) Interest-bearing borrowings Interest-bearing borrowings are recognized initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortized cost with any difference between the amount initially recognized and redemption value being recognized in profit or loss over the period of the borrowings, together with any interest and fees payable, using the effective interest method. (m) Trade and other payables Trade and other payables are initially recognized at fair value. Except for financial guarantee liabilities, trade and other payables are subsequently stated at amortized cost unless the effect of discounting would be immaterial, in which case they are stated at cost. I-16

336 APPENDIX I ACCOUNTANTS REPORT (n) Cash and cash equivalents Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition. Bank overdrafts that are repayable on demand and form an integral part of the Group s cash management are also included as a component of cash and cash equivalents for the purpose of the combined cash flow statements. (o) Employee benefits (i) Short-term employee benefits Employee wages or salaries, bonuses, social security contributions such as medical insurance, work injury insurance, maternity insurance and housing fund, measured at the amount incurred or at the applicable benchmarks and rates, are recognized as a liability as the employee provides services, with a corresponding charge to profit or loss or included in the cost of assets where appropriate. (ii) Share-based payment arrangements The grant-date fair value of equity-settled share-based payment arrangements granted to employees is generally recognized as an expense, with a corresponding increase in equity, over the vesting period of the awards. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognized is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant-date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. (iii) Defined contribution plans Annual contributions to retirement benefit schemes operated by the government in the PRC are recognized in the profit or loss as and when incurred. (p) Income tax Income tax for the year comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognized in profit or loss except to the extent that they relate to items recognized in other comprehensive income or directly in equity, in which case the relevant amounts of tax are recognized in other comprehensive income or directly in equity, respectively. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the reporting period, and any adjustment to tax payable in respect of previous years. Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits. Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilized, are recognized. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilized. I-17

337 APPENDIX I ACCOUNTANTS REPORT The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable differences, the Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future. The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilized. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available. Additional income taxes that arise from the distribution of dividends are recognized when the liability to pay the related dividends is recognized. Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities, if the Company or the Group has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met: in the case of current tax assets and liabilities, the Company or the Group intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously; or in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either: the same taxable entity; or different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously. (q) Provisions and contingent liabilities Provisions are recognized for other liabilities of uncertain timing or amount when the Group or the Company has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation. Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote. (r) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Provided it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognized in profit or loss as follows: (i) Sale of goods Revenue is recognized when goods are delivered at the customers premises which is taken to be the point in time when the customer has accepted the goods and the related risks and rewards of ownership. Revenue excludes value added tax or other sales taxes and is after deduction of any trade discounts. I-18

338 APPENDIX I ACCOUNTANTS REPORT (ii) Interest income Interest income is recognized as it accrues using the effective interest method. (iii) Government grants Government grants are recognized in the statements of financial position initially when there is reasonable assurance that they will be received and that the Group will comply with the conditions attaching to them. Grants that compensate the Group for expenses incurred are recognized as income in profit or loss on a systematic basis in the same periods in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are recognized initially as deferred income and amortized to profit or loss on a straight-line basis over the useful life of the asset by way of recognized in other revenues. (s) Translation of foreign currencies Foreign currency transactions during the year are translated at the foreign exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at the end of the reporting period. Exchange gains and losses are recognized in profit or loss. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the foreign exchange rates ruling at the transaction dates. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated using the foreign exchange rates ruling at the dates the fair value was measured. The results of foreign operations are translated into Renminbi at the exchange rates approximating the foreign exchange rates ruling at the dates of the transactions. Statements of financial position items are translated into Renminbi at the closing foreign exchange rates at the end of the reporting period. The resulting exchange differences are recognized in other comprehensive income and accumulated separately in equity in the exchange reserve. On disposal of a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation is reclassified from equity to profit or loss when the profit or loss on disposal is recognized. (t) Borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of that asset. Other borrowing costs are expensed in the period in which they are incurred. The capitalization of borrowing costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalization of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or complete. (u) Related parties (a) A person, or a close member of that person s family, is related to the Group if that person: (i) (ii) (iii) has control or joint control over the Group; has significant influence over the Group; or is a member of the key management personnel of the Group or the Group s parent. I-19

339 APPENDIX I ACCOUNTANTS REPORT (b) An entity is related to the Group if any of the following conditions applies: (i) (ii) (iii) (iv) (v) (vi) (vii) The entity and the Group are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others). One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member). Both entities are joint ventures of the same third party. One entity is a joint venture of a third entity and the other entity is an associate of the third entity. The entity is a post-employment benefit plan for the benefit of employees of either the Group or an entity related to the Group. The entity is controlled or jointly controlled by a person identified in (a). A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity). (viii) The entity, or any member of a group of which it is a part, provides key management personnel services to the Group or to the Group s parent. Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity. (v) Segment reporting Management has determined operating segments with reference to the reports reviewed by the chief operating decision maker of the Group that are used to assess the performance and allocate resources. The Group is principally engaged in the manufacturing and sale of TCM granules in the PRC. The chief operating decision maker of the Group assesses the performance and allocates the resources of the Group as a whole, as all of the Group s activities are considered to be primarily dependent on the performance on sales of TCM pharmaceutical products. Therefore, management considers there to be only one operating segment under the requirements of IFRS 8, Operating Segments. In this regard, no segment information is presented for the Relevant Periods. No geographic information is shown as the Group s operating profit is entirely derived from activities of manufacturing and sale of TCM pharmaceutical products in the PRC and all of the non-current assets are located in the PRC. 3 Accounting judgements and estimates Judgements and estimations used in preparation of the Historical Financial Information are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Note 27 contain information about the assumption and their risk factors relating to financial instruments. Other key sources of significant estimation uncertainty are as follows: (a) Impairment of trade and other receivables The Group estimates the impairment allowances for trade and other receivables by assessing the recoverability based on credit history and prevailing market conditions. This requires the use of estimates and judgements. Allowances are applied to trade and other receivables where events or changes in circumstances indicate that the balances may not be collectible. Where the expectation is different from the original estimate, such difference will affect the carrying amounts of trade and other receivables and thus the impairment loss in the period in which such estimate is changed. The Group reassesses the impairment allowances at the end of each reporting period. I-20

340 APPENDIX I ACCOUNTANTS REPORT (b) Net realisable value of inventories Net realizable value of inventories is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. These estimates are based on the current market conditions and the historical experience of selling products with similar nature. Any change in the assumptions would increase or decrease the amount of net realisable value of inventories. The Group reassesses these estimates at the end of each reporting period. (c) Useful lives, residual values and depreciation of property, plant and equipment Items of property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual value. Management reviews the estimated useful lives of the assets regularly in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives of the assets are based on the Group s historical experience with similar assets and taking into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates. (d) Income tax Determining income tax provisions involves judgement on the future tax treatment of certain transactions. Management carefully evaluates tax implications of transactions and tax provisions are set up accordingly. The tax treatment of these transactions is reconsidered periodically by taking into account all changes in tax legislations. Deferred tax assets are recognized for deductible temporary differences. As deferred tax assets can only be recognized to the extent that it is probable that future taxable profits will be available, management s judgement is required to assess the probability of future taxable profits. Management s assessment is constantly reviewed and additional deferred tax assets, if any, are recognized if it becomes probable that future taxable profits will allow the deferred tax asset to be recovered. (e) Provision for sales return The Group s sales agreements do not permit product returns without management s consent, except for product defective or damaged, or not meeting the quality standards. However, in practice, the Group has historically accepted certain returns by hospitals and medical institutions. Based on past experience, the percentage of subsequent returns will be approximately 5% of annual sales. Therefore, the Group has recognized revenue with a corresponding provision against revenue for estimated returns with 5% of annual sales for the Relevant Period. As the historical sales return rate is not completely indicative of future returns, any increase or decrease in the provision would affect profit or loss in future years. 4 Revenue The principal activities of the Group are the manufacturing and sale of TCM granules. Revenues represents the sales value of goods supplied to customers less returns and sales rebates and is after deduction of any trade discounts. The amount of each significant category of revenue is as follows: Year ended 31 December RMB 000 RMB 000 RMB 000 Sales of TCM granules 680, ,466 1,400,248 Sales of other products (i) 30,180 58,094 3, ,042 1,055,560 1,403,336 (i) Other products mainly consists of TCM decoction pieces. The Group s customer base is diversified and included only one customer with whom transactions have exceeded 10% of the Group s revenues for the years ended 31 December 2014, 2015 and Revenues from sales of TCM granules to this customer amounted to approximately RMB97,305,000, RMB137,634,000 and RMB174,317,000 for the years ended 31 December 2014, 2015 and 2016 respectively. Details of concentrations of credit risk arising from customers are set out in note 27(a). I-21

341 APPENDIX I ACCOUNTANTS REPORT 5 Other income and other expenses (a) Other income Year ended 31 December RMB 000 RMB 000 RMB 000 Total interest income on financial assets not at fair value through profit or loss 707 2,052 1,928 Government grants 1,669 2,751 3,738 Change in fair value of biological assets (note 14) Penalty and confiscatory income (i) 5 3, Others ,846 8,865 6,171 (i) Penalty and confiscatory income includes receipt of monetary damages as a result of winning a lawsuit against a third-party construction contractor in (b) Other expenses Year ended 31 December RMB 000 RMB 000 RMB 000 Impairment losses (note 6(c)) 2,617 11,986 14,527 Net loss on disposal of property, plant and equipment 6,040 1,755 4,633 Others ,578 9,406 14,386 20,738 6 Profit before taxation Profit before taxation is arrived at after charging/(crediting): (a) Finance costs Year ended 31 December RMB 000 RMB 000 RMB 000 Interest on bank loans 29,362 25,045 16,477 Less: interest expense capitalised into construction in progress (16,301) 13,061 25,045 16,477 The borrowing costs were capitalised at a rate of 6.4% per annum for the year ended 31 December I-22

342 APPENDIX I ACCOUNTANTS REPORT (b) Staff costs Year ended 31 December RMB 000 RMB 000 RMB 000 Salaries, wages, bonuses and other benefits 57,248 95, ,843 Equity-settled share-based payment expenses (note 23) 6,253 Contributions to defined contribution retirement plan 3,259 4,979 7,228 60, , ,324 Staff costs includes remuneration of directors, supervisors and senior management (note 8 and note 9). Pursuant to the relevant labour rules and regulations in the PRC, the Company and its subsidiaries in the PRC participate in defined contribution retirement benefit schemes (the Schemes ) organized by the local government authorities whereby the Company and its subsidiaries in the PRC are required to make contributions to the Schemes based on certain percentages of the eligible employee s salaries. The local government authorities are responsible for the entire pension obligations payable to the retired employees. The Group has no other obligations for payments of retirement and other post-retirement benefits of employees other than the contributions described above. (c) Other items Year ended 31 December RMB 000 RMB 000 RMB 000 Amortisation leasehold land (note 12) intangible assets (note 13) Depreciation (note 11) 9,027 19,717 21,470 Impairment losses on trade and other receivables (note 17(b)) 2,617 11,986 14,527 Operating lease charges: minimum lease payments 3,633 4,346 4,614 Research and development costs* (other than amortisation costs) 6,909 5,759 7,899 Cost of inventories # (note 16(b)) 279, , ,209 * During the years ended 31 December 2014, 2015 and 2016, research and development cost include RMB3,931,000, RMB3,305,000 and RMB3,962,000, relating to staff costs, depreciation and amortisation expenses and operating lease charges, which amount is also included in the respective total amounts disclosed separately above or in the note 6(b) for each of these types of expenses. # During the years ended 31 December 2014, 2015 and 2016, cost of inventories includes RMB21,576,000, RMB37,451,000 and RMB39,989,000 relating to staff costs, depreciation and amortisation expenses, and operating lease charges, which amount is also included in the respective total amounts disclosed separately above or in note 6(b) for each of these types of expenses. I-23

343 APPENDIX I ACCOUNTANTS REPORT 7 Income tax in the combined statements of profit or loss and other comprehensive income (a) Taxation in the combined statements of profit or loss and other comprehensive income represents: Year ended 31 December RMB 000 RMB 000 RMB 000 Current tax Provision for PRC Corporate Income Tax (note 24(a)) 3,987 6,120 8,786 Deferred tax Origination and reversal of temporary differences (note 24(b)) (761) ,226 6,229 8,790 (b) Reconciliation between tax expense and accounting profit at applicable tax rates: Year ended 31 December RMB 000 RMB 000 RMB 000 Profit before taxation 212, , ,759 Notional tax on profit before taxation, calculated at the rates applicable to profits in the tax jurisdictions concerned (note (i)) 53,003 93, ,690 Tax effect of non-taxable profit from tax-exempt operation (note (ii)) (49,188) (84,567) (137,947) Tax effect of non-deductible expenses Effect of preferential tax rate (note (iii)) (1,149) (2,826) (4,229) Others 507 (73) 50 Actual tax expense 3,226 6,229 8,790 (i) Pursuant to the rules and regulations of the Cayman Island and the BVI, the Group is not subject to any income tax in the Cayman Islands and the BVI. The income tax rate applicable to group entities incorporated in Hong Kong for the income subject to Hong Kong Profits Tax during the Relevant Periods is 16.5%. No provision for Hong Kong Profits Tax has been made as the Group did not earn any income subject to Hong Kong Profits Tax during the Relevant Periods. Effective from 1 January 2008, under the PRC Corporate Income Tax Law, the PRC s statutory income tax rate is 25%. The Group s PRC subsidiaries are subject to PRC income tax at 25% unless otherwise specified. (ii) Pursuant to PRC corporate income tax laws and its implementation rules and Announcement of the State Administration of Taxation on tax reduction for preliminarily processed agricultural products (Cai Shui [2008]149), the sales of preliminarily processed agricultural products are exempt from corporate income tax. Operating results from certain TCM granules produced and sold by the Group are eligible to exempt from corporate income tax. I-24

344 APPENDIX I ACCOUNTANTS REPORT (iii) For generated from non-tax exempt business, pursuant to Announcement of the State Administration of Taxation on Issues Relating to Enterprise Income Tax Pertaining to Implementation of the Catalogue of Encouraged Industries in Western Region, Neo-green Pharmaceutical falls within the eligible industry category and is entitled to enjoy the preferential income tax rate of 15% during the Relevant Periods. 8 Directors emoluments Directors emoluments disclosed pursuant to section 383(1) of the Hong Kong Companies Ordinance and part 2 of the Companies (Disclosure of Information about Benefits of Directors) Regulation are as follows: Directors fees Salaries, allowances and benefits in kind Discretionary bonuses Retirement scheme contributions Year ended 31 December 2014 total RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 Executive directors Mr. Zhou Houcheng (Chairman)* Mr. Xu Liming # Mr. Gu Jian # Mr. Chen Chunchao # Ms. Wang Jie # , ,102 Directors fees Salaries, allowances and benefits in kind Discretionary bonuses Retirement scheme contributions Year ended 31 December 2015 total RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 Executive directors Mr. Zhou Houcheng (Chairman) Mr. Xu Liming Mr. Gu Jian Mr. Chen Chunchao Ms. Wang Jie , ,840 Directors fees Salaries, allowances and benefits in kind Discretionary bonuses Retirement scheme contributions Sub-Total Share-based payments (note 23) Year ended 31 December 2016 total RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 Executive directors Mr. Zhou Houcheng (Chairman) Mr. Xu Liming ,700 2,185 Mr. Gu Jian ,283 Mr. Chen Chunchao Ms. Wang Jie , ,708 2,853 4,561 * appointed on 22 June 2016 and for the current term on 14 June # appointed on 14 June I-25

345 APPENDIX I ACCOUNTANTS REPORT 9 Individuals with highest emoluments For the years ended 31 December 2014, 2015 and 2016, of the five individuals with the highest emoluments, 1, 2 and 2 are directors whose emoluments are disclosed in note 8. The aggregate emoluments in respect of the remaining individuals are as follows: Year ended 31 December RMB 000 RMB 000 RMB 000 Salaries and other emoluments Discretionary bonuses Share-based payments 3,400 Retirement scheme contributions ,409 1,263 3,700 The emoluments of the above individuals with the highest emoluments are within the following bands: Year ended 31 December Number of individuals Number of individuals Number of individuals Nil HKD 1,000, HKD1,000,001 2,000, Earnings per share Earnings per share information is not presented as its inclusion, for the purpose of this report, is not considered meaningful due to the Reorganization and the preparation of the results of the Group for the Relevant Period on the basis as disclosed in note 1. I-26

346 APPENDIX I ACCOUNTANTS REPORT 11 Property, plant and equipment Plants and buildings Machinery Motor vehicles Office equipment and others Construction in progress Total RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 Cost: At 1 January ,908 23,904 17,081 6, , ,118 Additions 20,258 1, , ,376 Transfer from construction in progress 325,604 87, ,297 (415,739) Disposals (6,814) (6,814) At 31 December , ,055 18,780 8,966 44, ,680 Additions 17,220 5,396 1,574 18,839 43,029 Disposals (2,343) (26) (2,369) At 31 December , ,932 24,176 10,514 63, ,340 Additions 12,743 3,303 8,826 24,872 Transfer from construction in progress 67,283 1,435 (68,718) Disposals (5,391) (1,866) (24) (7,281) At 31 December , ,719 22,310 13,793 3, ,931 Accumulated depreciation: At 1 January 2014 (1,514) (7,030) (1,864) (2,219) (12,627) Charge for the year (3,257) (3,490) (1,675) (605) (9,027) Disposals At 31 December 2014 (4,771) (9,747) (3,539) (2,824) (20,881) Charge for the year (9,106) (7,765) (2,095) (751) (19,717) Disposals At 31 December 2015 (13,877) (16,935) (5,634) (3,554) (40,000) Charge for the year (9,109) (8,708) (2,478) (1,175) (21,470) Disposals 1,111 1, ,413 At 31 December 2016 (22,986) (24,532) (6,823) (4,716) (59,057) Net book value: At 31 December , ,308 15,241 6,142 44, ,799 At 31 December , ,997 18,542 6,960 63, ,340 At 31 December , ,187 15,487 9,077 3, ,874 (a) (b) All of the property, plant and equipment owned by the Group are located in the PRC. As at 31 December 2014, 2015 and 2016, plants and buildings with carrying amount of RMB10,477,000, RMB10,172,000 and RMB nil, respectively, were pledged against certain bank loans. As at 31 December 2016, plants and buildings with carrying amount of RMB9,868,000 were pledged against certain unutilised banking facilities (note 21). I-27

347 APPENDIX I ACCOUNTANTS REPORT (c) As at 31 December 2014, 2015 and 2016, the Group was applying for certificates of ownership for certain properties, with carrying value of RMB216,572,000, RMB nil and RMB67,283,000, respectively. The directors of the Group are of the opinion that the use of and the conduct of operating activities at the properties referred to above are not affected by the fact that the Group has not yet obtained the relevant property title certificates. 12 Interests in leasehold land held for own use under operating leases As at 31 December RMB 000 RMB 000 RMB 000 Cost: At 1 January 31,808 31,808 31,808 Additions At 31 December 31,808 31,808 31,808 Accumulated amortisation: At 1 January (848) (1,484) (2,120) Charge for the year (636) (636) (636) At 31 December (1,484) (2,120) (2,756) Net book value: At 31 December 30,324 29,688 29,052 The Interests in leasehold land held for own use under operating leases represents use rights in respect of lands located in the PRC with lease term of no more than 50 years, on which the Group built its production premises and buildings. The land use rights will expire in year 2051 and year 2063 respectively. As at 31 December 2014, 2015 and 2016, interests in leasehold land held for own use under operating leases with carrying amount of RMB25,821,000, RMB29,688,000 and RMB24,747,000, respectively, were pledged against certain bank loans. As at 31 December 2016, interests in leasehold land held for own use under operating leases with carrying amount of RMB4,305,000 were pledged against certain unutilised banking facilities (see note 21). I-28

348 APPENDIX I ACCOUNTANTS REPORT 13 Intangible assets Software Patents and trademarks Total RMB 000 RMB 000 RMB 000 Cost: At 1 January ,744 Additions At 31 December , ,928 Additions At 31 December , ,204 Additions At 31 December , ,319 Accumulated Amortization: At 1 January 2014 (239) (126) (365) Charge for the year (96) (99) (195) At 31 December 2014 (335) (225) (560) Charge for the year (117) (80) (197) At 31 December 2015 (452) (305) (757) Charge for the year (135) (85) (220) At 31 December 2016 (587) (390) (977) Net book value: At 31 December ,368 At 31 December ,447 At 31 December , Biological assets (a) Reconciliation of carrying amount The Group cultivates certain agricultural plants that mainly generate raw medicinal herbs when harvested. The raw medicinal herbs the Group harvested from the plantation bases are used primarily for the purpose of research and development activities as well as the production of TCM granules. Plants are generally harvested between 9 and 180 months after planting. The fair value of the biological assets was valued by an independent valuer. As at 31 December RMB 000 RMB 000 RMB 000 At 1 January Addition due to plantation Change in fair value Harvested and transferred to inventories (29) (78) (68) At 31 December ,140 I-29

349 APPENDIX I ACCOUNTANTS REPORT Biological assets as of 31 December 2014, 2015, 2016 are analyzed in the table below. As at 31 December RMB 000 RMB 000 RMB 000 Non-current portion ,087 Current portion ,140 (b) Measurement of fair values (i) Fair value hierarchy The fair value measurements for raw medicinal herbs have been categorized as Level 3 fair values based on the inputs to the valuation techniques used. (ii) Level 3 fair values The following table shows a breakdown of the total gains (losses) recognized in respect of Level 3 fair values (raw medicinal herbs). Year ended 31 December RMB 000 RMB 000 RMB 000 Gain included in other income Change in fair value (realized) Change in fair value (unrealized) (iii) Valuation techniques and significant unobservable inputs The following table shows the valuation techniques used in measuring Level 3 fair values, as well as the significant unobservable inputs used. Type Raw medicinal herbs Valuation technique Discounted cash flows: The valuation model considers the present value of the net cash flows expected to be generated by the plantation. The cash flow projections include specific estimates. The expected net cash flows are discounted using a risk adjusted discount rate. Significant unobservable inputs Inter-relationship between key unobservable inputs and fair value measurement Estimated future raw medicinal herbs market prices per kilogram. Expected raw medicinal herbs to be produced on maturity. Risk-adjusted discount rate. The estimated fair value would increase (decrease) if: Estimated future raw medicinal herbs market prices per kilogram were higher (lower); Expected raw medicinal herbs to be produced on maturity were higher (lower); Risk-adjusted discount rate were lower (higher). I-30

350 APPENDIX I ACCOUNTANTS REPORT 15 Investments in subsidiaries The following list contains the particulars of subsidiaries as at 31 December The class of shares held is ordinary unless otherwise stated. Name of company Place of incorporation and business Particulars of issued and paid-up capital Group s effective interest Proportion of ownership interest Held by the company Held by a subsidiary Principal activity NGP Holdings The BVI USD50, % 100% Investment holding Ever Sound (Hong Kong) Hong Kong HKD1 100% 100% Investment holding Neo-green Pharmaceutical The PRC RMB758,075, % 100% Manufacturing and sale of TCM granules Sichuan Shunli Technology Development Co., Ltd. ( Sichuan Shunli )* The PRC RMB10,000, % 95.20% Manufacturing and sale of medical instrument * The Group dissolved Sichuan Shunli on 6 June On 25 November 2016, the Group disposed of its 100% equity interest in an inactive subsidiary, Sichuan Neo-green Modern TCM Development Co., Ltd. to Sichuan Green Pharmaceutical Technology Development Co., Ltd. ( Sichuan Green )( ) for a cash consideration of RMB52. The carrying amount of the net asset of Sichuan Neo-green Modern TCM Development Co., Ltd. was RMB52 on the disposal date. 16 Inventories (a) Inventories in the combined statements of financial position comprise: As at 31 December RMB 000 RMB 000 RMB 000 Raw materials 189, , ,521 Work in progress 106,152 46,531 75,155 Finished goods 44, , ,737 Others 6,866 8,268 8, , , ,709 (b) The analysis of the amount of inventories recognised as an expense and included in profit or loss is as follows: Years ended 31 December RMB 000 RMB 000 RMB 000 Carrying amount of inventories sold 279, , ,209 I-31

351 APPENDIX I ACCOUNTANTS REPORT 17 Trade and other receivables As at 31 December RMB 000 RMB 000 RMB 000 Trade debtors 376, , ,273 Less: allowance for doubtful debts (note(b)) (14,486) (23,576) (34,568) 362, , ,705 Bills receivable 4,139 5,987 13,277 Other receivables 27,484 28,279 29,786 Less: allowance for doubtful debts (note(b)) (2,072) (4,968) (8,169) 25,412 23,311 21,617 Deposits and prepayments 9,351 4,793 8, , , ,537 All of the trade and other receivables are expected to be recovered or recognized as expense within one year. (a) Ageing analysis As of the end of the reporting period, the ageing analysis of trade debtors and bills receivable (which are included in trade and other receivables), based on the invoice date and net of allowance for doubtful debts, is as follows: As at 31 December RMB 000 RMB 000 RMB 000 Within 1 month 92, , ,421 1 to 3 months 130, , ,378 3 to 6 months 95, , ,485 6 to 12 months 29, , ,112 1 to 2 years 16,081 26,394 88,430 2 to 3 years 2,809 5,832 8,156 Over 3 years 366, , ,982 Trade debtors are due within 30 to 270 days from the date of billing. No interests are charged on the trade receivables. Further details on the Group s credit policy are set out in note 27(a). (b) Impairment of trade debtors and other receivables Impairment losses in respect of trade debtors, bills receivable and other receivables are recorded using an allowance account unless the Group is satisfied that recovery of the amount is remote, in which case the impairment loss is written off against trade debtors and other receivables directly (see note 2(i)). I-32

352 APPENDIX I ACCOUNTANTS REPORT The movement in the allowance for doubtful debts during the Relevant Periods, including both specific and collective loss components, is as follows: As at 31 December RMB 000 RMB 000 RMB 000 Trade debtors bad debt allowance At 1 January 12,957 14,486 23,576 Impairment loss recognized 1,529 9,090 11,326 Uncollectible amounts written off (334) At 31 December 14,486 23,576 34,568 Other receivables bad debt allowance At 1 January 984 2,072 4,968 Impairment loss recognized 1,088 2,896 3,201 At 31 December 2,072 4,968 8,169 At 31 December 16,558 28,544 42,737 (c) Trade debtors and bills receivable that are not impaired The ageing analysis of trade debtors, and bills receivable that are neither individually nor collectively considered to be impaired are as follows: As at 31 December RMB 000 RMB 000 RMB 000 Neither past due nor impaired 258, , ,904 Less than 3 months past due 63, , , , , ,561 Trade debtors and bills receivable that were neither past due nor impaired relate to a wide range of customers for whom there was no recent history of default. 18 Cash and cash equivalents (a) Cash and cash equivalents comprise: As at 31 December RMB 000 RMB 000 RMB 000 Cash on hand Cash at bank 126,018 96, , ,040 96, ,042 I-33

353 APPENDIX I ACCOUNTANTS REPORT (b) Reconciliation of profit before taxation to cash generated from operations: Year ended 31 December Note RMB 000 RMB 000 RMB 000 Profit before taxation 212, , ,759 Adjustments for: Depreciation and amortization 6(c) 9,858 20,550 22,326 Amortization of deferred income 22 (594) (1,664) (1,023) Changes in biological assets 14 (373) (140) (400) Impairment of trade and other receivables 6(c) 2,617 11,986 14,527 Finance costs 6(a) 13,061 25,045 16,477 Interest income on financial assets not at fair value through profit or loss 5 (707) (2,052) (1,928) Loss on sale of property, plant and equipment 5 6,040 1,755 4,633 Foreign exchange loss/(gain) 4 (46) (18) Changes in working capital: (Increase)/decrease in inventories 45,380 (27,726) (185,291) (Increase)/decrease in trade and other receivables (117,461) (316,163) (273,024) Increase/(decrease) in trade and other payables (52,324) 29, ,815 Increase/(decrease) in current taxation 24(a) 119 1,684 (57) Increase in provision for sales return 25 7,496 14,559 16,628 Cash generated from operations 125, , , Other financial assets As at 31 December RMB 000 RMB 000 RMB 000 Investment in wealth management products issued by banks, classified as Loans and receivables 50,000 Available-for-sale financial assets 40,000 Total 90, Trade and other payables As at 31 December RMB 000 RMB 000 RMB 000 Trade creditors 238, , ,733 Accrued payroll and benefits 4,628 3,662 4,283 Receipts in advance 915 1,291 1,769 Payables and accruals for procurement of property, plant and equipment 38,497 32,590 36,894 VAT and other tax payables 4,297 18,617 30,650 Others 11,317 9,099 19, , , ,198 I-34

354 APPENDIX I ACCOUNTANTS REPORT All of the trade and other payables are normally settled or recognized as income within one year or are repayable on demand. As of the end of the reporting period, the ageing analysis of trade creditors (which are included in trade and other payables), based on the invoice date, is as follows: As at 31 December RMB 000 RMB 000 RMB 000 Within 6 months 148, , ,079 6 months to 1 year 43,489 13,712 74,492 1 to 2 years 35,004 1,429 10,048 More than 2 years 10, , , , Bank loans The analysis of the carrying amount of bank loans is as follows: As at 31 December RMB 000 RMB 000 RMB 000 Non-current Non-current bank borrowings secured 400, , ,000 Less: current portion of non-current borrowings (40,000) (120,000) (160,000) 360, ,000 80,000 Current Current bank borrowings secured 30,000 50,000 unsecured 40,000 Add: current portion of non-current borrowings 40, , ,000 70, , ,000 Total 430, , ,000 At 31 December 2014, 2015 and 2016, the bank loans were repayable as follows: As at 31 December RMB 000 RMB 000 RMB 000 Within 1 year or on demand 70, , ,000 After 1 year but within 2 years 120, ,000 80,000 After 2 years but within 5 years 240,000 80, , , ,000 The Group s bank borrowings carried weighted average interest rates of 6.47%, 5.67% and 4.79% per annum for the years ended 31 December 2014, 2015 and 2016 respectively. I-35

355 APPENDIX I ACCOUNTANTS REPORT As at 31 December 2014, 2015 and 2016, the banking loans of the Group were secured by mortgages over land and buildings with an aggregate carrying value of RMB36,298,000, RMB39,860,000 and RMB38,920,000 respectively. The carrying value of assets pledged against bank loans as at the end of each reporting period is analysed as follows: As at 31 December RMB 000 RMB 000 RMB 000 Interests in leasehold land held for own use under operating leases 25,821 29,688 29,052 Property, plant and equipment 10,477 10,172 9,868 36,298 39,860 38,920 As at 31 December 2014, 2015 and 2016, the secured loans amounting to RMB30,000,000, RMB50,000,000 and nil are also guaranteed by the related parties, further details of guarantee provided by related parties are set out in note 29(e). As at 31 December 2014, 2015 and 2016, the secured loans amounting to RMB400,000,000, RMB360,000,000 and RMB240,000,000 are also guaranteed by two third party companies. As at 31 December 2014, 2015 and 2016, none of the banking facilities were subject to the fulfilment of covenants relating to any of the balance sheet ratios of the Group. Further details of the Group s management of liquidity risk are set out in note 27(b). 22 Deferred income As at 31 December RMB 000 RMB 000 RMB 000 At beginning of year 19,439 25,475 24,810 Additions 6,630 1,000 1,000 Credited to profit or loss (594) (1,664) (1,023) At the end of year 25,475 24,811 24,787 Representing Current portion 965 1,024 1,024 Non-current portion 24,510 23,787 23,763 As at 31 December 2014, 2015 and 2016, deferred incomes of the Group mainly included various government grants for research and development projects of pharmaceutical technique and subsidies relating to purchase of leasehold land and construction of property, plants and equipment. Government grants relating to compensation of assets are recognised as income on a straight-line basis over the expected useful life of the relevant assets. 23 Equity Settled Share-based Transactions The Group provided certain employees of Neo-green Pharmaceutical, including three directors of the Company, with a non-cash benefit to subscribe Neo-green Pharmaceutical s newly increased registered capital at a discounted price. Pursuant to the capital increase agreement dated on 2 August 2016 ( Capital Increase Agreement ), these employees paid RMB1,104,000 in total to subscribe newly increased registered capitals of RMB736,000, representing 0.103% of total registered capitals of Neo-green Pharmaceutical. I-36

356 APPENDIX I ACCOUNTANTS REPORT The fair value of the above employees subscribed equity interest of Neo-green Pharmaceutical is RMB7,357,000, with reference to the market price of the third parties investors purchase price stipulated in the Capital Increase Agreement which represents the price that knowledgeable, willing market participant would pay for the same equity interest. The discount of RMB6,253,000 is recorded as non-cash benefit staff cost in the profit or loss and credited reserve. 24 Income tax in the combined statements of financial position (a) Current taxation in the combined statements of financial position represents: As at 31 December RMB 000 RMB 000 RMB 000 PRC Corporate Income Tax At 1 January 3,672 3,791 5,475 Charged to profit or loss 3,987 6,120 8,786 Payments during the year (3,868) (4,436) (8,843) At 31 December 3,791 5,475 5,418 (b) Deferred tax assets recognized (i) Movement of each component of deferred tax assets The components of deferred tax assets recognized in the combined statements of financial position and the movements during the Relevant Periods are as follows: Government grants RMB 000 At 1 January ,916 Credited to profit or loss 761 At 31 December ,677 Charged to profit or loss (109) At 31 December ,568 Charged to profit or loss (4) At 31 December ,564 (c) Deferred tax liabilities not recognized According to PRC corporate income tax laws and its implementation rules, dividends receivable by non-prc corporate residents from PRC enterprises are subject to withholding tax at a rate of 10%, unless reduced by tax treaties or arrangements, for profits earned since 1 January Pursuant to the Directors resolution dated 16 June 2017, the retained earnings of Neo-green Pharmaceutical earned prior to 23 February 2017, the completion date of Neo-green Pharmaceutical s equity transfer as part of the Reorganization, belong to the prior shareholders and the retained earnings of Neo-green Pharmaceutical up to 31 December 2016 will be distributed to the prior shareholders in the foreseeable future. For the other distributable reserve and retained earnings, no deferred tax liabilities were recognized as at 31 December 2016 as the Company controls the dividend policy of the subsidiaries. I-37

357 APPENDIX I ACCOUNTANTS REPORT 25 Provisions Provision for sales return As at 31 December RMB 000 RMB 000 RMB 000 At 1 January 15,326 22,822 37,381 Additional provisions made 22,822 37,381 54,009 Provisions utilised/reversed (15,326) (22,822) (37,381) At 31 December 22,822 37,381 54,009 Product return is permitted in limited circumstances, including situations where (i) the TCM granules do not meet applicable quality standards; and (ii) customers may demand product return not related to quality issues, provided that such customers must provide us a written statement setting forth the reason(s) for requesting return and subsequently obtain the Group s consent. Provision is therefore made for the best estimate of the expected sales return in respect of sales made during the Relevant Periods. The amount of provision was determined based on the Group s historical statistic of sales return as a percentage of revenue per annum. 26 Capital, reserves and dividends (a) Share capital For the purposes of this report, the capital of the Group as at 1 January 2014, 31 December 2014, 2015 and 2016 represented the aggregate amount of the paid-in capital of the companies now comprising the Group after the elimination of investments in subsidiaries. The Company was incorporated as an exempted company with limited liability in the Cayman Islands on 22 June 2016 with an authorized share capital of HK$380,000 divided into 380,000 shares with par value of HK$1.00 each. On 7 September, 2016, each issued and unissued share with par value of HK$1.00 in the share capital of the Company was subdivided into 100 Shares with par value of HK$0.01 each, such that the authorized share capital of the Company is changed to HK$380,000 divided into 38,000,000 shares with par value of HK$0.01 each. As at 31 December 2016, 100 issued shares of the Company have been paid with par value of HK$0.01 each. (b) Dividends No dividend has been declared by the Company since its incorporation. During the year ended 31 December 2015, Neo-green Pharmaceutical declared dividend of RMB570,000,000, which was subsequently transferred to the share capital. During the year ended 31 December 2016, Neo-green Pharmaceutical declared cash dividend of RMB402,534,000, of which RMB260,153,000 was paid as at 31 December I-38

358 APPENDIX I ACCOUNTANTS REPORT (c) Nature and purpose of reserves (i) Capital reserves Capital reserve of the Group and the Company mainly represented premium arising from capital injection from equity owner. From June 2016 to September 2016 the then shareholders of Neo-green Pharmaceutical entered into several agreements to increase the registered capital of Neo-green Pharmaceutical to RMB758,075,000 by converting the capital reserves of RMB41,482,300 into registered capital. (ii) PRC statutory reserve According to the PRC Company Law, the PRC subsidiaries of the Group are required to transfer 10% of their profit after taxation, as determined under the PRC Accounting Regulations, to the statutory surplus reserve until the reserve balance reaches 50% of their registered capital. The transfer to this reserve must be made before distribution of a dividend to shareholders. Statutory reserve fund can be used to cover previous years losses, if any, and may be converted into share capital by the issue of new shares to shareholders in proportion to their existing shareholdings or by increasing the par value of the shares currently held by them, provided that the balance after such issue is not less than 25% of the registered capital. (d) Capital management The Group s primary objectives when managing capital are to safeguard the Group s ability to continue as a going concern, so that it can continue to provide returns for equity shareholder and benefits for other stakeholders, by pricing rental and management fee commensurately with the level of risk and by securing access to finance at a reasonable cost. The Group s overall strategy remains unchanged throughout the Relevant Periods. The capital structure of the Group consists of bank loans less cash and cash equivalents, and equity of the Group, comprising issued share capital, retained profits and other reserves. The directors of the Company review the capital structure periodically. Based on the operating budgets, the directors consider the cost of capital and the risks associated with each class of capital and balances its overall capital structure through the payment of dividends, new share issues as well as the issue of new debt or the redemption of existing debts. The Group is not subject to externally imposed capital requirements throughout the Relevant Periods. 27 Financial risk management and fair values of financial instruments Exposure to credit, liquidity and interest rate arises in the normal course of the Group s business. The Group s exposure to these risks and the financial risk management policies and practices used by the Group to manage these risks are described below. (a) Credit risk The Group s credit risk is primarily attributable to trade and other receivables, Management has a credit policy in place and the exposures to these credit risks are monitored on an ongoing basis. In respect of trade and other receivables, individual credit evaluations are performed on all customers requiring credit. These evaluations focus on the customer s past history of making payments when due and current ability to pay, and take into account information specific to the customer as well as pertaining to the economic environment in which the customer operates. Trade receivables are due within 30 to 270 days from the date of the billing. Normally, the Group does not obtain collateral from customers. I-39

359 APPENDIX I ACCOUNTANTS REPORT The Group s exposure to credit risk is influenced mainly by the individual characteristics of each customer rather than the industry or country in which the customers operate, and therefore significant concentrations of credit risk primarily arise when the Group has significant exposure to individual customers. As at 31 December 2014, 2015 and 2016, 25%, 27%, and 21% of trade and other receivables were due from the Group s five largest customers. The Group does not provide any other guarantees which would expose the Group to the credit risk. Further quantitative disclosures in respect of the Group s exposure to credit risk arising from trade and other receivables are set out in note 17. (b) Liquidity risk The Group s policy is to regularly monitor its liquidity, the expected cash inflows and outflows, and maturity of loans and borrowings in order to ensure that it maintains sufficient reserves of cash and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer term. The following tables show the remaining contractual maturities at the end of the reporting period of the Group s financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on rates current at the end of the reporting period) and the earliest date the Group can be required to pay: Within 1 year or on demand As at 31 December 2014 Contractual undiscounted cash outflow More than 1 year but less than 2 years More than 2 years but less than 5 years More than 5 years Total Carrying amount at 31 December RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 Bank loans 133, , , , ,000 Amount due to a related party 19,647 19,647 19, , , , , ,647 Within 1 year or on demand As at 31 December 2015 Contractual undiscounted cash outflow More than 1 year but less than 2 years More than 2 years but less than 5 years More than 5 years Total Carrying amount at 31 December RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 Bank loans 186, ,057 81, , ,000 Amount due to a related party 6,000 6,000 6, , ,057 81, , ,000 I-40

360 APPENDIX I ACCOUNTANTS REPORT Within 1 year or on demand As at 31 December 2016 Contractual undiscounted cash outflow More than 1 year but less than 2 years More than 2 years but less than 5 years More than 5 years Total Carrying amount at 31 December RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 Bank loans 210,362 81, , ,000 Amount due to a related party 6,026 6,026 6, ,388 81, , ,026 (c) Interest rate risk The Group s interest rate risk arises primarily from interest-bearing borrowings. Borrowings issued at variable rates and at fixed rates expose the Group to cash flow interest rate risk and fair value interest rate risk respectively. The Group defines net borrowings as being interest-bearing financial liabilities less interest-bearing investments (excluding cash held for short-term working capital purposes). The Group s interest rate profile as monitored by management is set out in (i) below. The Group is not exposed to significant interest rate risk for cash and cash equivalents because the interest rates of cash at bank are not expected to change significantly. (i) Interest rate profile The following table details the interest rate profile of the Group s net borrowings (as defined above) at the end of the reporting period, after taking into account the effect of interest rate swaps designated as cash flow hedging instruments. Effective Interest rate % As at 31 December Effective Interest rate % Effective Interest rate % RMB RMB RMB Net fixed rate borrowings: Bank loans 8% 30,000 Other financial asset 3.9% (50,000) 30,000 (50,000) Variable rate borrowings: Bank loans 6.4% 400, % 6.4% 410, % 5.25% 280,000 Available-for-sale investment 4.5% 4.55% (40,000) 400, , ,000 Total net borrowings 430, , ,000 Net fixed rate borrowings as a percentage of total net borrowings 7.0% 0% 0% I-41

361 APPENDIX I ACCOUNTANTS REPORT (ii) Sensitivity analysis The following table details the effect on the Group s profit after tax for each year of the Relevant Periods and retained profits as at the end of each reporting period that an increase/ decrease of 100 basis points in interest rates would have. An increase of 100 basis points in interest rates A decrease of 100 basis points in interest rates An increase of 100 basis points in interest rates A decrease of 100 basis points in interest rates An increase of 100 basis points in interest rates A decrease of 100 basis points in interest rates RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 Effect on: Profit after tax (3,400) 3,400 (3,145) 3,145 (2,380) 2,380 Retained profits (3,400) 3,400 (3,145) 3,145 (2,380) 2,380 The sensitivity analysis above indicates the instantaneous change in the Group s profit after tax (and retained profits) and other components of combined equity that would arise assuming that the change in interest rates had occurred at the end of the reporting period and had been applied to re-measure those financial instruments held by the Group which expose the Group to fair value interest rate risk at the end of the relevant period. In respect of the exposure to cash flow interest rate risk arising from floating rate non-derivative instruments held by the Group at the end of the reporting period, the impact on the Group s profit after tax (and retained profits) and other components of combined equity is estimated as an annualised impact on interest expense or income of such a change in interest rates. (d) Fair value measurement (i) Fair value hierarchy The following table presents the fair value of the Group s financial instruments measured at the end of the reporting period on a recurring basis, categorised into the three-level fair value hierarchy as defined in IFRS 13, Fair value measurement. The level into which a fair value measurement is classified is determined with reference to the observability and significance of the inputs used in the valuation technique as follows: Level 1 valuations: Fair value measured using only Level 1 inputs i.e. unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. Level 2 valuations: Fair value measured using Level 2 inputs i.e. observable inputs which fail to meet Level 1, and not using significant unobservable inputs. Unobservable inputs are inputs for which market data are not available. Level 3 valuations: Fair value measured using significant unobservable inputs. As at 31 December 2014 Level 1 Level 2 Level 3 Total RMB 000 RMB 000 RMB 000 RMB 000 Available-for-sale financial assets: I-42

362 APPENDIX I ACCOUNTANTS REPORT As at 31 December 2015 Level 1 Level 2 Level 3 Total RMB 000 RMB 000 RMB 000 RMB 000 Available-for-sale financial assets: 40,000 40,000 As at 31 December 2016 Level 1 Level 2 Level 3 Total RMB 000 RMB 000 RMB 000 RMB 000 Available-for-sale financial assets: Information about Level 3 fair value measurements 28 Commitments Unlisted available-for-sale financial asset Valuation techniques Discounted cash flows: The valuation model considers the present value of future benefits, discounted using a risk-adjusted discount rate. Significant unobservable inputs Forecast future benefit. Risk-adjusted discount rate. (a) Capital commitments outstanding at 31 December 2014, 2015 and 2016 not provided for in the Historical Financial Information were as follows: As at 31 December RMB 000 RMB 000 RMB 000 Contracted for 2,759 Authorised but not contracted for 17,217 17,217 2,759 (b) At 31 December 2014, 2015 and 2016, the total future minimum lease payments under non-cancellable operating leases are payable as follows: As at 31 December Properties Others Properties Others Properties Others RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 Within 1 year 1,845 1,310 1,443 After 1 year but within 5 years 1, After 5 years 3,433 1,334 1,469 I-43

363 APPENDIX I ACCOUNTANTS REPORT 29 Material related party transactions (a) Key management personnel remuneration Remuneration for key management personnel of the Group, including amounts paid to the Company s directors as disclosed in note 8 and certain of the highest paid employees as disclosed in note 9, is as follows: As at 31 December RMB 000 RMB 000 RMB 000 Short-term employee benefits 1,331 2,133 2,345 Post-employment benefits Equity compensation benefits 4,553 1,411 2,359 7,109 Total remuneration is included in staff costs (see note 6(b)). (b) Identity of related parties Name of party Mr. Zhou Houcheng Mr. Zhou Xiang Ms. Zhou Qiaomin Ms. Xiao Xue Mr. Xu Liming Ms. Wang Jie Sichuan Green ( ) Sichuan Neo-green Pharmaceutical Group Co., Ltd. (Previously known as Panzhihua Yishoutang Pharmaceutical Co., Ltd and Sichuan Houyu Pharmaceutical Group Co., Ltd. ) ( ) Chengdu Shi Wei Mechanical Equipment Co., Ltd. ( ) Dujiangyan Hengda Agricultural Development Co., Ltd. ( ) Chengdu Jia Qiang Building Materials Co., Ltd. ( ) Relationship with the Group Executive director and one of Controlling Shareholders One of Controlling shareholders and the son of Mr. Zhou Houcheng The daughter of Mr. Zhou Houcheng The spouse of Mr. Zhou Xiang Executive director Executive director Company controlled by Mr. Zhou Houcheng Company controlled by Ms. Wang Jie in 2014 and 2015; Company over which Mr. Zhou Xiang has significant influence in 2016 Company controlled by a close family member of Mr. Zhou Houcheng in 2014 and 2015; Subsidiary of Sichuan Houyu Pharmaceutical Group Co., Ltd. in 2016 Company controlled by Ms. Wang Jie in 2014 and 2015; Company over which Ms. Wang Jie has significant influence in 2016 Company over which a close family member of Mr. Zhou Houcheng has significant influence I-44

364 APPENDIX I ACCOUNTANTS REPORT Name of party Sichuan Zhongrui Tianyue Industrial Co., Ltd. ( ) Xinjiang Rainbow Mining Investment Co., Ltd. ( ) Relationship with the Group Company controlled by Mr. Zhou Xiang Company over which Mr. Zhou Xiang has significant influence (c) Significant related party transactions Year ended 31 December RMB 000 RMB 000 RMB 000 Purchases of goods from: Sichuan Green 2,288 Funding arrangements*: Mr. Zhou Houcheng (1,630) Mr. Zhou Xiang (3,007) Dujiangyan Hengda Agricultural Development Co., Ltd. 24,000 39,500 Chengdu Jia Qiang building materials Co., Ltd. (7,000) 7,000 Chengdu Shi Wei Mechanical equipment Co., Ltd. 15,000 (9,000) Sichuan Green 19,418 Sichuan Zhongrui Tianyue Industrial Co., Ltd. 5,000 * During the Relevant Periods, the Group had funding arrangements from/(to) the related parties, the net cash inflows/(outflows) of which are as above. (d) Balance with related parties As at 31 December RMB 000 RMB 000 RMB 000 Amounts due from: Non-trade related: Sichuan Green 75,282 75,282 75,282 Dujiangyan Hengda Agricultural Development Co., Ltd. 39,500 Chengdu Jia Qiang Building Materials Co., Ltd. 7,000 7,000 Sichuan Zhongrui Tianyue Industrial Co., Ltd. 5,000 Xinjiang Rainbow Mining Investment Co., Ltd Others ,743 82,874 75,895 I-45

365 APPENDIX I ACCOUNTANTS REPORT As at 31 December RMB 000 RMB 000 RMB 000 Amounts due to: Non-trade related: Dividend payable due to: Sichuan Green 138,920 Other payables due to: Mr. Zhou Houcheng 1,630 Mr. Zhou Xiang 3,007 Chengdu Shi Wei Mechanical Equipment Co., Ltd. 15,000 6,000 6,000 Others ,647 6, ,946 Amount due from/to related parties are unsecured and interest-free. The directors of the Company confirm that the non-trade nature balance will be settled before the [REDACTED] of the Company s shares on the Stock Exchange. (e) Guarantee provided by related parties As at 31 December RMB 000 RMB 000 RMB 000 Bank loans Guaranteed by Mr. Zhou Houcheng 30,000 Guaranteed by Mr. Zhou Houcheng, Mr. Zhou Xiang, Ms. Zhou Qiaomin, Ms. Xiao Xue jointly 50,000 Guarantees provided by the related parties for the Group s bank loans have been released in Immediate and ultimate controlling party At 31 December 2016, the directors consider the immediate parent to be Ever Peace Limited and Neo Era Limited. At 31 December 2016, the directors consider the ultimate controlling shareholders of the Group to be Mr. Zhou Houcheng and Mr. Zhou Xiang. The Ever Peace Limited and Neo Era Limited are incorporated in British Virgin Islands. These entities do not produce financial statements available for public use. I-46

366 APPENDIX I ACCOUNTANTS REPORT 31 Possible impact of amendments, new standards and interpretations issued but not yet effective for the year ended 31 December 2016 Up to the date of issue of this report, the IASB has issued a number of amendments and new standards which are not yet effective for the year ended 31 December 2016 and which have not been adopted in the Historical Financial Information. These include the following which may be relevant to the Group. Effective for accounting periods beginning on or after Amendments to IAS 7, Disclosure Initiative 1 January 2017 Amendments to IAS 12, Recognition of Deferred Tax Assets for Unrealised Losses 1 January 2017 IFRS 15, Revenue From Contracts with Customers 1 January 2018 IFRS 9, Financial Instruments 1 January 2018 Amendments to IFRS 2, Classification and Measurement of Share-based Payment Transactions Amendments to IFRS 10 and IAS 28, Sale or Contribution of Assets between an Investor and its Associate or Joint Venture 1 January 2018 To be determined * IFRS 16, Leases 1 January 2019 * The effective date for these amendments was deferred indefinitely. Early adoption continues to be permitted. The Group is in the process of making an assessment of what the impact of these amendments and new standards is expected to be in the period of initial application. So far the Group has identified some aspects of the new standards which may have a significant impact on the combined financial statements except for the following. IFRS 15, Revenue from contracts with customers IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognized. It replaces existing revenue recognition guidance, including IAS 18, Revenue, IAS 11 Construction contracts and IFRIC 13 Customer Loyalty Programmes. It also includes guidance on when to capitalise costs of obtaining or fulfilling a contract not otherwise addressed in other standards, and includes expanded disclosure requirements. For certain contracts that permit the customer to return an item, revenue is currently recognized when a reasonable estimate of the returns can be made, provided that all other criteria for revenue recognition are met. If a reasonable estimate cannot be made, then revenue recognition is deferred until the return period lapses or a reasonable estimate of returns can be made. Under IFRS 15, revenue will be recognized for these contracts to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. As a consequence, for those contracts for which the Group is unable to make a reasonable estimate of return, revenue is expected to be recognized sooner than when the return period lapses or a reasonable estimate can be made. A refund liability and an asset for recovery will be recognized for these contracts and presented separately in the statement of financial position. The Group anticipate that the application of IFRS 15 in the future may have impact on the amounts reported and disclosures made in the Group s consolidated financial statements and, given the Group has not completed its assessment of their full impact on the Group, their possible impact on the Group s results of operations and financial position has not been quantified. I-47

367 APPENDIX I ACCOUNTANTS REPORT 32 Subsequent events (a) Group reorganization The companies now comprising the Group underwent the Reorgnization to rationalise the Group s structure in preparation for the [REDACTED] of the Company s shares on the Main Board of the Stock Exchange. The Reorgnization was completed on 8 June 2017, as set out in the section headed Our History, Reorgnization and Corporate Structure to the document. As a result of the Reorgnization, the Company became the holding company of the Group. SUBSEQUENT FINANCIAL STATEMENTS No audited financial statements have been prepared by the Company and its subsidiaries comprising the Group in respect of any period subsequent to 31 December I-48

368 APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION [REDACTED] II-1

369 APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION [REDACTED] II-2

370 APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION [REDACTED] II-3

371 APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION [REDACTED] II-4

372 APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION [REDACTED] II-5

373 APPENDIX III PROPERTY VALUATION REPORT The following is the text of letter, summary of valuation and valuation certificates, prepared for the purpose of incorporation in this document, received from Grant Sherman Appraisal Limited, an independent property valuer, in connection with their valuation as at 30 April 2017 of the property interests held by the Group in the People s Republic of China. Unit 1005, 10/F., AXA Centre, 151 Gloucester Road, Wanchai, Hong Kong The Directors Neo-green Pharmaceutical Technology Development (Cayman) Limited PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands Dear Sirs, 21 June 2017 In accordance with your instructions for us to value the property interests held by Neo-green Pharmaceutical Technology Development (Cayman) Limited (the Company ) and its subsidiaries (together referred to as the Group ) in the People s Republic of China (the PRC ), we confirm that we have carried out inspections, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the market value of such property interests as at the 30 April 2017 ( date of valuation ) for the purpose of incorporation into the document issued by the Company on the date hereof. Our valuation is our opinion of the market value of the property interests where we would define market value as intended to mean the estimated amount for which an asset or liability should exchange on the date of valuation between a willing buyer and a willing seller in an arm s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. Market Value is understood as the value of a property estimated without regard to costs of sale or purchase (or transaction) and without offset for any associated taxes or potential taxes. In valuing the property interests in Group I and Group II which are held by the Group for self-occupation and for investment purposes respectively in the PRC, we have adopted a combination of the market and depreciated replacement cost approach in assessing the land III-1

374 APPENDIX III PROPERTY VALUATION REPORT portion of the property and the buildings and structures standing on the land respectively. Hence, the sum of the two results represents the market value of the property as a whole. In the valuation of the land portion, reference has been made to the standard land price in Chengdu City and the sales evidence as available to us in the locality. As the nature of the buildings and structures cannot be valued on the basis of market value, they have therefore been valued on the basis of their depreciated replacement costs. The depreciated replacement cost approach considers the current cost of replacement (reproduction) of the buildings and improvements less deductions for physical deterioration and all relevant forms of obsolescence and optimisation. The depreciated replacement cost approach generally furnishes the most reliable indication of value for properties in the absence of a known market based on comparables sales. The approach is subject to adequate potential profitability of the business. Our valuation has been made on the assumption that the owner sells the property interests on the open market in its existing state without the benefit of a deferred terms contract, leaseback, joint venture, management agreement or any similar arrangement which would serve to increase the values of the property interests. In addition, no forced sale situation in any manner is assumed in our valuation. We have been provided with copies of extracts of title documents relating to the properties in the PRC. However, we have not caused title searches to be made for the property interests at the relevant government bureaus in the PRC and we have not inspected the original documents to verify the ownership, encumbrances or the existence of any subsequent amendments which may not appear on the copies handed to us. In undertaking our valuation for the property interests in the PRC, we have relied on the legal opinion ( the PRC legal opinion ) provided by the Group s PRC legal adviser, Commerce & Finance Law Offices. We have relied to a considerable extent on information provided by the Group and have accepted advice given to us by the Group on such matters as planning approvals or statutory notices, easements, tenure, occupancy, lettings, site and floor areas and in the identification of the properties and other relevant matter. We have no reason to doubt the truth and accuracy of the information provided to us by the Company which is material to the valuation. We have also been advised by the Group that no material facts had been concealed or omitted in the information provided to us and have no reason to suspect that any material information has been withheld. All documents have been used for reference only. We consider that we have been provided with sufficient information to reach an informed view. All dimensions, measurements and areas included in the valuation certificates are based on information contained in the documents provided to us by the Group and are approximations only. No on-site measurement has been taken. We have inspected the exteriors, and where possible, the interiors of the properties, in the course of our inspection, we did not note any serious defects. However, we have not carried out a structural survey nor have we inspected woodwork or other parts of the structures which are covered, unexposed or inaccessible and we are therefore unable to report that any such parts of the property are free from defect though in the course of our inspections we did not note any serious defects. No tests were carried out on any of the services. III-2

375 APPENDIX III PROPERTY VALUATION REPORT We have not carried out investigation to determine the suitability of the ground conditions or the services for any property developments to be erected thereon. Our valuation is on the basis that these aspects are satisfactory and that no extraordinary expense or delay will be incurred during the construction period. Moreover, it is assumed that the utilisation of the land and improvements will be within the boundaries of the sites held by the owner or permitted to be occupied by the owner. In addition, we assumed that no encroachment or trespass exits, unless noted in the valuation certificates. No allowance has been made in our valuation for any charges, mortgages or amounts owing on the property interests nor for any expenses or taxation which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the property interests are free from encumbrances, restrictions and outgoings of an onerous nature which could affect their values. In valuing the property interests, we have fully complied with the HKIS Valuation Standards (2012 Edition) published by The Hong Kong Institute of Surveyors (HKIS) and the requirements set out in Chapter 5 of and Practice Note 12 to the Rule Governing the [REDACTED] of Securities issued by The Stock Exchange of Hong Kong Limited. Unless otherwise stated, all money amounts stated are in Renminbi (RMB). The exchange rate adopted in valuing the property interest in the PRC as at 30 April 2017 was HK$1: RMB There has been no significant fluctuation in the exchange rate for this currency against Hong Kong Dollars between that date and the date of this letter. We enclose herewith our summary of valuation together with the valuation certificates. Respectfully submitted, For and on behalf of GRANT SHERMAN APPRAISAL LIMITED Lawrence Chan Ka Wah MRICS MHKIS RPS(GP)MHIREA Director Real Estate Group Note: Mr. Lawrence Chan Ka Wah is a member of the Royal Institution of Chartered Surveyors, a member of the Hong Kong institute of Surveyors and Registered Professional Surveyors in the General Practice Section, who has over 13 years experience in the valuation of properties in Hong Kong, Macau, the PRC and the Asian Rim. III-3

376 APPENDIX III PROPERTY VALUATION REPORT SUMMARY OF VALUATION Interest Property Market Value in existing state as at 30 April 2017 attributable to the Group GroupI-Property interests held by the Group in the PRC for self-occupation purpose Market Value in existing state attributable to the Group as at 30 April The land and buildings located at Pengzhou Industrial Development Zone, Chengdu City, Sichuan Province, the PRC RMB372,700,000 (equivalent to approximately HK$420,700,000) 100% RMB372,700,000 (equivalent to approximately HK$420,700,000) Group II - Property interests held by the Group in the PRC for investment purpose 2. The land and buildings located at No. 96 Chaoyang Road South, Tianpeng Town, Pengzhou County, Chengdu City, Sichuan Province, the PRC RMB16,000,000 (equivalent to approximately HK$18,100,000) 100% RMB16,000,000 (equivalent to approximately HK$18,100,000) Total RMB388,700,000 (equivalent to approximately HK$438,800,000) RMB388,700,000 (equivalent to approximately HK$438,800,000) III-4

377 APPENDIX III PROPERTY VALUATION REPORT VALUATION CERTIFICATE GroupI Property interests held by the Group in the PRC for self-occupation purpose Property 1. The land and buildings located at Pengzhou Industrial Development Zone, Chengdu City, Sichuan Province, the PRC Description and Tenure Particulars of Occupancy Market Value in existing state as at 30 April 2017 Interest attributable to the Group Market Value in existing state attributable to the Group as at 30 April 2017 The property comprises a parcel of land together with 20 single to 4-storey buildings and structures completed in about 2015 and 2016 erected thereon. The site area and total gross floor area of the property are approximately 147, sq.m. and 86, sq.m. respectively. The property was occupied by the Company for industrial and ancillary uses as at the date of valuation. RMB372,700,000 (equivalent to approximately HK$420,700,000) 100% RMB372,700,000 (equivalent to approximately HK$420,700,000) The land use rights of the property were granted for a term expiring on 4 February 2063 for industrial use. Notes: 1. Pursuant to a State-owned Land Use Rights Grant Contract (Document No.: ) entered into between the State-owned Land Resources Bureau of Pengzhou County, Sichuan Province (Party A) and Sichuan Neo-green Pharmaceutical Technology Development Co., Ltd. (Party B) dated 28 January 2013, the land use rights of the property with a site area of approximately 147, sq.m. were granted from Party A to Party B for a term of 50 years commencing on the date the handover of the land parcel of the property at a consideration of RMB26,531,040 for industrial use. The relevant development limitation of the land parcel of the property are summarised as below: Permitted Land Use : Industrial Plot Ratio : Less than or equal to 0.8 Site Coverage : Less than or equal to 60% but not less than 40% Greenery Ratio : Not less than 20% 2. Pursuant to a State-owned Land Use Certificate (Document No.: Peng Guo Yong (2013) No. 8892), the land use rights of the property were granted to Sichuan Neo-green Pharmaceutical Technology Development Co., Ltd. for a term expiring on 4 February 2063 for industrial use. III-5

378 APPENDIX III PROPERTY VALUATION REPORT 3. Pursuant to 14 Building Ownership Certificates, the ownership of 17 buildings of the property with a total gross floor area of approximately 65, sq.m. are vested in Sichuan Neo-green Pharmaceutical Technology Development Co., Ltd.. Building Ownership Certificates (Documents Nos.) Designed Use Approximate Gross Floor Area (sq.m.) Peng Fang Quan Zheng Jian Zheng Zi No Workshop 6, Peng Fang Quan Zheng Jian Zheng Zi No Office 4, Peng Fang Quan Zheng Jian Zheng Zi No Workshop 6, Peng Fang Quan Zheng Jian Zheng Zi No Workshop 6, Peng Fang Quan Zheng Jian Zheng Zi No Quality Check Centre 3, Peng Fang Quan Zheng Jian Zheng Zi No Workshop 6, Peng Fang Quan Zheng Jian Zheng Zi No Research Centre 2, Peng Fang Quan Zheng Jian Zheng Zi No Workshop 24, Peng Fang Quan Zheng Jian Zheng Zi No Guard Room Peng Fang Quan Zheng Jian Zheng Zi No Dangerous Goods Down Peng Fang Quan Zheng Jian Zheng Zi No Electricity Room Peng Fang Quan Zheng Jian Zheng Zi No Guard Room Peng Fang Quan Zheng Jian Zheng Zi No Guard Room Peng Fang Quan Zheng Jian Zheng Zi No Ancillary use Coal Storeroom Coal Corridor Ash Storeroom 3, Total 65, According to the information provided by the Company, the property comprises three 2 to 3-storey buildings completed in about 2016 with a total gross floor area of approximately 20, sq.m. without Building Ownership Certificates. 5. In the course of our valuation, we have ascribed no commercial value to the 3 buildings stated in Note 4 due to the absence of the Building Ownership Certificates, hence they are not entitled to be transferred, leased and mortgaged. However, for indicative purpose, the depreciated replacement costs of the buildings of the property as at the date of valuation is RMB63,300,000 (equivalent to approximately HK$71,500,000) by assuming that the buildings have obtained the relevant title documents and are legal transferrable in the market. 6. According to a Mortgage Contract of Maximum Amount (Document No.: Year 2013 Shi Qu (Di) Zi No. 003) dated 3 June 2013, the land portion of the property is subject to a mortgage in favour of Business Department of Agricultural Development Bank of China Sichuan Province Branch ( ). 7. The Property was inspected by our Mr. Jimmy Lee (M.Sc.) on 23 May 2017, the external and internal conditions of the Property were reasonable. 8. According to the information provided by the Company, Sichuan Neo-green Pharmaceutical Technology Development Co., Ltd. is a joint stock company with limited liability established under the laws of the PRC on 16 January The property is situated in the Pengzhou Industrial Development Zone, buildings in the locality are low to medium rise industrial complexes mainly occupied for light manufacturing businesses. It takes about 10-minute driving distance to the downtown of Pengzhou City and takes about an hour driving distance to Chengdu downtown. Taxis and buses are accessible to the property. 10. The average unit rate of industrial land parcel in the locality as at the date of valuation is in the range of RMB150 per sq.m. to RMB210 per sq.m. III-6

379 APPENDIX III PROPERTY VALUATION REPORT 11. We have been provided with a legal opinion on the property prepared by the Group s PRC legal adviser, Commerce & Finance Law Offices, which contains, inter alia, the following information: (a) The current register owner of the property is Sichuan Neo-green Pharmaceutical Technology Development Co., Ltd. is entitled to be occupied, transferred, lease and mortgaged; (b) (c) (d) (e) The land portion of the property is subject to a mortgage in favour of Business Department of Agricultural Development Bank of China Sichuan Province Branch, the property cannot be remortgaged, leased and transferred without consent from mortgagee; As confirmed by the Company. the property is free from mortgage and other form of encumbrances that may cause adverse effects on the ownership of the property other than the mortgage; The buildings stated in Note 4 are under application of Building Ownership Certificates; and The following legal documents were obtained: (i) State-owned Land Use Certificate Yes (ii) Building Ownership Certificates (Except buildings stated in Note 4) Yes III-7

380 APPENDIX III PROPERTY VALUATION REPORT Group II Property interests held by the Group in the PRC for investment purpose Property 2. The land and buildings located at No. 96 Chaoyang Road South, Tianpeng Town, Pengzhou County, Chengdu City, Sichuan Province, the PRC Description and Tenure Particulars of Occupancy Market Value in existing state as at 30 April 2017 Interest attributable to the Group Market Value in existing state attributable to the Group as at 30 April 2017 The property comprises a parcel of land together with 6 single to 2-storey buildings completed in between 2003 and 2010 erected thereon. The site area and total gross floor area of the property are approximately 15, sq.m. and 5, sq.m. respectively. The property was vacant as at the date of valuation. RMB16,000,000 (equivalent to approximately HK$18,100,000) 100% RMB16,000,000 (equivalent to approximately HK$18,100,000) The land use rights of the property were granted for a term expiring on 7 May 2051 for industrial use. Notes: 1. Pursuant to a State-owned Land Use Certificate (Document No.: Peng Guo Yong (2016) No. 6140), the land use rights of the property with a site area of approximately 15, sq.m. were granted to Sichuan Neo-green Pharmaceutical Technology Development Co., Ltd. for a term expiring on 7 May 2051 for industrial use. 2. Pursuant to 6 Building Ownership Certificates, the ownership of 6 buildings of the property with a total gross floor area of approximately 5, sq.m. are vested in Sichuan Neo-green Pharmaceutical Technology Development Co., Ltd.. Building Ownership Certificates (Documents Nos.) Designed Use Approximate Gross Floor Area (sq.m.) Peng Fang Quan Zheng Jian Zheng Zi No Guard Room Peng Fang Quan Zheng Jian Zheng Zi No Workshop Peng Fang Quan Zheng Jian Zheng Zi No Bathroom Toilet Peng Fang Quan Zheng Jian Zheng Zi No Electricity Room Peng Fang Quan Zheng Jian Zheng Zi No Storage room 1, Peng Fang Quan Zheng Jian Zheng Zi No Workshop 4, Total 5, According to a Mortgage Contract of Maximum Amount (Document No.: D ) dated 8 October 2016, the property is subject to a mortgage in favour of Bank of Chengdu Co., Ltd. Pengzhou Branch ( ). III-8

381 APPENDIX III PROPERTY VALUATION REPORT 4. According to a tenancy agreement entered into between the Company and Sichuan Lvse Zhongyao Yinpian Co., Ltd. (the Tenant ) dated 19 June 2017, the Property with a site area of 15, sq.m. and total gross floor area of 5, sq.m. was leased by the Company to the Tenant for a term of 3 years commencing on 1 January 2017 and expiring on 31 December 2019 at an annual rent of RMB512,600. According to the information provided by the Company, the Tenant is indirectly wholly-owned by Mr. Zhou, the executive director, chairman of the board and controlling shareholder of the Company. 5. The property was inspected by our Mr. Jimmy Lee (M.Sc.) on 23 May 2017, the external and internal conditions of the property were reasonable. 6. According to the information provided by the Company, Sichuan Neo-green Pharmaceutical Technology Development Co., Ltd. is a joint stock company with limited liability established under the laws of the PRC on 16 January The property is situated along Chaoyang Road South, buildings in the locality are medium to high-rise residential and commercial buildings. It takes about an hour driving distance to Chengdu downtown. Taxis and buses are accessible to the property. 8. The average unit rate of industrial land parcel in the locality as at the date of valuation is in the range of RMB150 per sq.m. to RMB210 per sq.m. 9. We have been provided with a legal opinion on the property prepared by the Group s PRC legal adviser, Commerce & Finance Law Offices, which contains, inter alia, the following information: (a) The current register owner of the property is Sichuan Neo-green Pharmaceutical Technology Development Co., Ltd. is entitled to be occupied, transferred, lease and mortgaged; (b) (c) (d) The property is subject to a mortgage in favour of Bank of Chengdu Co., Ltd. Pengzhou Branch, the property cannot be remortgaged, leased and transferred without consent from mortgagee; As confirmed by the Company. the property is free from mortgage and other form of encumbrances that may cause adverse effects on the ownership of the property other than the mortgage; and The following legal documents were obtained: (i) State-owned Land Use Certificate Yes (ii) Building Ownership Certificates Yes III-9

382 APPENDIX IV STATUTORY AND GENERAL INFORMATION 1. FURTHER INFORMATION ABOUT OUR COMPANY A. Incorporation Our Company was incorporated in the Cayman Islands as an exempted company on June 22, Our registered address is at Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our Company has established a place of business in Hong Kong at 31/F., 148 Electric Road, North Point, Hong Kong, and is registered as a non-hong Kong company in Hong Kong under Part 16 of the Companies Ordinance on April 27, Mr. Kwok Siu Man has been appointed as the authorized representative of our Company for the acceptance of service of process in Hong Kong. As our Company is incorporated in the Cayman Islands, our operation is subject to relevant laws and regulations of the Cayman Islands and the Company s constitution which comprises the Memorandum of Association and the Articles of Association. A summary of the relevant laws and regulations of the Cayman Islands and of our constitution is set out in Appendix V Summary of the Constitution of our Company and Cayman Companies Law in this document. B. Changes in Our Share Capital and Shareholding Structure On the date of its incorporation, the authorized share capital of our Company is HKD380,000 divided into 380,000 ordinary shares of HKD1.00 each. The following sets out the changes in our Company s issued share capital since the date of its incorporation: At the time of the incorporation, Mapcal Limited subscribed for one Share in the capital of our Company. On the same date, the said issued one Share was transferred to Mr. Zhou at par value. On September 7, 2016, each issued and unissued Share with par value of HK$1.00 in the share capital of our Company was subdivided into 100 Shares with par value of HK$0.01 each, such that the authorized share capital of our Company is changed to HK$380,000 divided into 38,000,000 Shares with par value of HK$0.01 each, after which the then total issued 100 Shares of our Company with par value of HK$0.01 were owned by Mr. Zhou. On the same date, Mr. Zhou transferred all the 100 issued Shares to Ever Peace. On September 18, 2016, our Company issued and allotted 999,900 new Shares, namely, 457,163 to Ever Peace, 280,000 to Neo Era, 240,000 to Sincere Nation, 8,792 to Lasting Accomplishment, 6,977 to First Professional, 2,791 to Golden Era, 1,944 to Licorice Thirteen, 698 to UPLI Limited, 698 to Bona Fides, 558 to Root Limited and 279 to Great Expectation, respectively. On June 8, 2017, Ever Peace transferred 10,000 Shares held by it to Golden Cache at nil consideration. Immediately following the completion of the Capitalization Issue and the [REDACTED] (assuming the [REDACTED] is not exercised), the authorized share capital of our Company IV-1

383 APPENDIX IV STATUTORY AND GENERAL INFORMATION will be [HK$[REDACTED]] divided into [REDACTED] Shares, of which [REDACTED] Shares will be issued fully paid or credited as fully paid, and [REDACTED] Shares will remain unissued. Save as aforesaid and as disclosed in the section headed Our History, Reorganization and Group Structure in this document, there has been no alteration in the share capital or shareholding structure of our Company since the date of its incorporation. C. Written Resolutions Passed by Our Shareholders Written resolutions were passed by our Shareholders on [ ], 2017, pursuant to which, among other matters: (a) (b) (c) our Company approved and adopted the Memorandum of Association with effect from the [REDACTED]; the authorized share capital of our Company was increased from HK$380,000 divided into 38,000,000 Shares of HK$0.01 each to [REDACTED] divided into [REDACTED] Shares of [REDACTED] each by the creation of [REDACTED] Shares of [REDACTED] each, which shall rank pari passu in all respects with the Shares in issue as at the date of the resolution; conditional upon (i) the Listing Committee of the Stock Exchange granting the listing of, and permission to deal in, on the Main Board, our Shares in issue and to be issued (pursuant to the Capitalization Issue, the [REDACTED], the [REDACTED]) as mentioned in this document; and (ii) the obligations of the [REDACTED] under the [REDACTED] becoming unconditional (including, if relevant, as a result of the waiver of any condition(s)) by the [REDACTED] (on behalf of the [REDACTED]) and not being terminated in accordance with the terms of the [REDACTED] or otherwise: (i) (ii) our Company approved and adopted the Articles of Association with effect from the [REDACTED]; conditional on the share premium account of our Company being credited as a result of the [REDACTED], the sum of [REDACTED] be capitalized and applied in paying up in full at par value [REDACTED] Shares for allotment and issue to our Shareholders whose names were on the register of members of our Company in proportion (as nearly as possible without involving fractions) to the then existing shareholder(s) in our Company and such Shares (or as they may direct) to be allotted and issued pursuant to this resolution shall rank pari passu in all respect with the existing issued Shares; (iii) the [REDACTED] and the [REDACTED] were approved and our Directors were authorized to allot and issue the [REDACTED] and the Shares as may be required to be allotted and issued upon the exercise of the [REDACTED] on and subject to the terms and conditions stated in this document and in the relevant [REDACTED]; IV-2

384 APPENDIX IV STATUTORY AND GENERAL INFORMATION (iv) the rules of the Share Option Scheme were approved and adopted, and our Directors or any committee thereof established by the Board were authorised, at their sole discretion, to: (i) administer the Share Option Scheme; (ii) modify/amend the Share Option Scheme from time to time as requested by the Stock Exchange; (iii) grant options to subscribe for Shares under the Share Option Scheme up to the limits referred to in the Share Option Scheme; (iv) allot, issue and deal with Shares pursuant to the exercise of any option which may be granted under the Share Option Scheme; (v) make application at the appropriate time or times to the Stock Exchange for the listing of, and permission to deal in, any Shares or any part thereof that may hereafter from time to time be issued and allotted pursuant to the exercise of the options granted under the Share Option Scheme; and (vi) take all such actions as they consider necessary, desirable or expedient to implement or give effect to the Share Option Scheme; (v) a general unconditional mandate was given to our Directors to exercise all the powers of our Company to allot, issue and deal with (including the power to make an offer or agreement, or grant securities which would or might require Shares to be allotted and issued), otherwise than by way of Rights Issue, or pursuant to any scrip dividend schemes or similar arrangements providing for the allotment and issue of Shares in lieu of the whole or part of a dividend on Shares in accordance with the Articles or pursuant to the issue of Shares upon the exercise of any subscription rights attached to any warrants of our Company or pursuant to the exercise of options granted under the Share Option Scheme or any other option scheme(s) or similar arrangement for the time being adopted for the grant or issue to Directors and/or officers and/or employees of our Group or rights to acquire Shares or pursuant to a specific authority granted by our Shareholders in general meeting, the Shares with an aggregate nominal amount not exceeding 20% of the aggregate nominal amount of the share capital of our Company in issue immediately following completion of the Capitalization Issue and the [REDACTED] but before any exercise of the [REDACTED] and any options which may be granted under the Share Option Scheme, until the conclusion of the next annual general meeting of our Company, unless renewed by an ordinary resolution of our Shareholders in a general meeting, either unconditionally or subject to conditions or the expiration of the period within the next annual general meeting of our Company is required by the Articles of Association or any applicable law of the Cayman Islands to be held or the passing of an ordinary resolution by our Shareholders in general meetings of our Company varying or revoking the authority given to the Directors, whichever occurs first; For the purpose of this paragraph, Rights Issue means an offer of shares in our Company, or offer or issue of warrants, options or other securities giving rights to subscribe for shares open for a period fixed by our Directors to holders of shares in our Company on the register on a fixed record date in proportion to their holdings of shares (subject to such exclusion or other arrangements as our Directors may deem necessary or expedient in relation to fractional entitlements, or having regard to any restrictions or obligations IV-3

385 APPENDIX IV STATUTORY AND GENERAL INFORMATION under the laws of, or the requirements of, or the expense or delay which may be involved in determining the existence or extent of any restrictions or obligations under the laws of, or the requirements of, any jurisdiction applicable to our Company, or any recognized regulatory body or any stock exchange applicable to our Company); (vi) a general unconditional mandate be and is hereby given to our Directors to exercise all powers of our Company to repurchase on the Stock Exchange, or on any other stock exchange on which the securities of our Company may be listed and which is recognized by the SFC and the Stock Exchange for this purpose, such number of Shares with an aggregate nominal value not exceeding 10% of the aggregate nominal amount of the share capital of our Company in issue immediately following completion of the Capitalization Issue and the [REDACTED] but before the exercise of the [REDACTED], until the conclusion of the next annual general meeting of our Company, unless renewed by an ordinary resolution of our Shareholders in a general meeting, either unconditionally or subject to conditions or the expiration of the period within which the next annual general meeting of our Company is required by the Article of Association of our Company or any applicable law of the Cayman Islands to be held or the passing of an ordinary resolution by our Shareholders in a general meeting of our Company varying or revoking the authority given to the Directors, whichever occurs first; (vii) the extension of the general mandate to allot, issue and deal with Shares as mentioned in paragraph (c)(v) above by the addition to the aggregate nominal value of the share capital of our Company which may be allotted or agreed conditionally or unconditionally to be allotted by our Directors pursuant to such general mandate of an amount representing the aggregate nominal value of the share capital of our Company repurchased by our Company pursuant to paragraph (c)(vi) above, provided that such extended amount shall not exceed 10% of the aggregate of the total nominal value of the share capital of our Company in issue immediately following completion of the Capitalization Issue and the [REDACTED] but before the exercise of the [REDACTED] be and is approved; and Each of the general mandates referred to in paragraphs (c)(v), (c)(vi) and (c)(vii) above will remain in effect until whichever is the earliest of: (1) the conclusion of our next annual general meeting, unless renewed by an ordinary resolution of our Shareholders in a general meeting, either unconditionally or subject to conditions; (2) the expiration of the period within which our Company is required by any applicable law or the Articles of Association to hold our next annual general meeting; or (3) the time when such mandate is varied or revoked by an ordinary resolution of our Shareholders in a general meeting. IV-4

386 APPENDIX IV STATUTORY AND GENERAL INFORMATION D. Repurchase of our Shares This section includes information relating to the repurchases of securities, including information required by the Stock Exchange to be included in this document concerning such repurchase. (a) Provisions of the Listing Rules The Listing Rules permit companies whose primary listing is on the Stock Exchange to repurchase their securities on the Stock Exchange subject to certain restrictions, the most important restrictions are summarized below: (i) Shareholders approval All proposed repurchases of Shares must be approved in advance by an ordinary resolution of our Shareholders in a general meeting, either by way of general mandate or by specific approval in relation to a particular transaction. Pursuant to the written resolutions passed on [ ], 2017 by the then Shareholders, a general unconditional mandate (the Repurchase Mandate ) was given to our Directors to exercise all powers of our Company to repurchase Shares (Shares which may be listed on the Stock Exchange) with a total nominal value of not more than 10% of the aggregate nominal value of our share capital in issue or to be issued immediately following completion of the [REDACTED] (excluding Shares which may be issued pursuant to the exercise of the [REDACTED] and any options which may be granted under the and the Share Option Scheme), further details of which have been described above in the paragraph headed 1. Further information about our Company 3. Written resolutions Passed by our Shareholders in this Appendix. (ii) Source of funds Any repurchases of Shares by us must be paid out of funds legally available for the purpose in accordance with our Articles of Association, the Listing Rules and the Companies Law. We are not permitted to repurchase our Shares on the Stock Exchange for a consideration other than cash or for settlement otherwise than in accordance with the trading rules of the Stock Exchange from time to time. (iii) Shares to be repurchased The Listing Rules provide that the Shares which are proposed to be repurchased by us must be fully-paid up. (b) Reasons for repurchases Our Directors believe that it is in the best interests of our Company and our Shareholders for our Directors to have general authority from our Shareholders to enable them to repurchase Shares in the market. Such repurchases may, depending on market IV-5

387 APPENDIX IV STATUTORY AND GENERAL INFORMATION conditions and funding arrangements at the time, lead to an enhancement of the net asset value per Share and/or earnings per Share and will only be made where our Directors believe that such repurchases will benefit our Company and our Shareholders. (c) Funding of repurchases In repurchasing Shares, we may only apply funds legally available for such purpose in accordance with the Articles of Association, the Listing Rules and the applicable laws and regulations of the Cayman Islands. On the basis of our Company s current financial position as disclosed in this document and taking into account its current working capital position, our Directors consider that, if the Repurchase Mandate is exercised in full, it might have a material adverse effect on our working capital and/or gearing position as compared with the position disclosed in this document. However, our Directors do not propose to exercise the Repurchase Mandate to such an extent as it would, in the circumstances, have a material adverse effect on our working capital requirements or the gearing levels which in the opinion of our Directors are from time to time appropriate for us. (d) General None of our Directors nor, to the best of their knowledge having made all reasonable enquiries, any of their close associates (as defined in the Listing Rules) currently intends to sell any Shares to us. Our Directors have undertaken to the Stock Exchange that, so far as the same may be applicable, they will exercise the Repurchase Mandate in accordance with the Listing Rules and the applicable laws and regulations of the Cayman Islands. If, as a result of any repurchase of Shares, a shareholder s proportionate interest in the voting rights is increased, such increase will be treated as an acquisition for the purposes of the Takeovers Code. Accordingly, a shareholder or a group of shareholders acting in concert could obtain or consolidate control of us and become obliged to make a mandatory offer in accordance with rule 26 of the Takeovers Code. Save as aforesaid, our Directors are not aware of any consequences which would arise under the Takeovers Code as a consequence of any repurchases pursuant to the Repurchase Mandate. We have not made any repurchases of our own securities in the past six months. No core connected person has notified us that he/she has a present intention to sell Shares to us, or has undertaken not to do so, if the Repurchase Mandate is exercised. E. Corporate Reorganization Our Group underwent certain reorganization in preparation for the [REDACTED]. See Our History, Reorganization and Corporate Structure Corporate Reorganization. IV-6

388 APPENDIX IV STATUTORY AND GENERAL INFORMATION F. Our Principal Subsidiaries For further details of our principal subsidiaries, see Appendix I Accountants Report. G. Changes in Share Capital of Our Subsidiaries Neo-green Pharmaceutical The following sets out the changes in the share capital and shareholding structure of Neo-green Pharmaceutical within the two years immediately preceding the date of this document: (a) (b) (c) (d) On July 9, 2015, the registered capital of Neo-green Pharmaceutical was increased from RMB136,642,900 to RMB706,642,900 by converting and issuing the accrued dividends of RMB570 million to Sichuan Green as registered capital. Upon completion of such registered capital increase, Neo-green Pharmaceutical was owned as to % by Sichuan Green, 3.606% by Mr. Zhou, 1.751% by Mr. Zhou Xiang, 1.791% by Ms. Zhou Qiaomin, 0.708% by Beijing Zhongrui and 1.633% by certain minority shareholders, respectively; In August 2016, the registered capital of Neo-green Pharmaceutical was increased from RMB706,642,900 to RMB758,075,200 by certain minority shareholders (including Gou Yuquan, Peng Yong, Zhao Liang, Huang Xiaoyan, Xu Liming, Hu Changjiang, Gu Jian, Luo Yurui, Tang Shuqing, Chen Chunchao, Luo Xianzhi, Chang Zhensong and Li Gang) subscribing for and contributing a total of RMB9,950,000 as registered capital and by converting the capital reserves of RMB41,482,300 into registered capital. At the same time, Ma Lirong transferred all his equity interest in Neo-green Pharmaceutical to Gu Jian. As a result and immediately prior to the Corporate Reorganization, Neo-green Pharmaceutical was owned as to % by Sichuan Green, 3.556% by Mr. Zhou, 1.727% by Mr. Zhou Xiang, 1.766% by Ms. Zhou Qiaomin and 2.273% by other minority shareholders; On September 5, 2016, Sichuan Green and Golden Cache (Hong Kong) entered into an equity transfer agreement, pursuant to which Sichuan Green agreed to transfer 1% equity interest in Neo-green Pharmaceutical held by Sichuan Green to Golden Cache (Hong Kong) for a consideration of RMB7.65 million, which was determined by reference to the net asset value of Neo-green Pharmaceutical as of December 31, Such equity interest transfer was completed on December 27, Upon completion of such equity transfer, Neo-green Pharmaceutical became a Sinoforeign equity joint venture; and On December 30, 2016, the then shareholders of Neo-green Pharmaceutical and Ever Sound (Hong Kong) entered into an equity transfer agreement, pursuant to which, the then shareholders of Neo-green Pharmaceutical (except for Golden Cache (Hong Kong)) agreed to transfer an aggregate of 99% equity interest in Neo-green Pharmaceutical held by them to Ever Sound (Hong Kong) for a total consideration of RMB million, which was determined by reference to the net IV-7

389 APPENDIX IV STATUTORY AND GENERAL INFORMATION Sichuan Shunli asset value of Neo-green Pharmaceutical as of December 31, Such equity interest was completed on February 23, 2017, after which Neo-green Pharmaceutical became owned as to 99% by Ever Sound (Hong Kong) and 1% by Golden Cache (Hong Kong). Sichuan Green and Neo-green Pharmaceutical entered into a share transfer agreement dated June 3, 2015, under which Sichuan Green shall transfer all of its 95.20% equity interest in Sichuan Shunli to us for a consideration of RMB9.52 million. Since June 26, 2015, Sichuan Shunli has become a non-wholly-owned subsidiary of Neo-green Pharmaceutical. Sichuan Shunli was dissolved on June 6, Neo-green Modern TCM On August 8, 2016 and November 25, 2016, Neo-green Pharmaceutical and Sichuan Green entered into an equity transfer agreement and an supplemental agreement, respectively, pursuant to which Neo-green Pharmaceutical agreed to transfer its 100% equity interest in Neo-green Modern TCM to Sichuan Green for a consideration of approximately RMB51, being the net asset value of Neo-green Modern TCM as of October 31, Such equity interest transfer was completed on August 16, 2016, after which Neo-green Modern ceased to be a subsidiary of our Group. NGP Holdings NGP Holdings was incorporated as a limited liability company in the BVI on July 5, 2016 with an authorized share capital of US$50,000 divided into 50,000 shares with par value of US$1.00 each. On the same day, one share of NGP Holdings was allotted and issued to our Company as fully paid at par value. On March 30, 2017, 49,999 new shares of NGP Holdings were further allotted and issued to our Company as fully paid at par value. Ever Sound (Hong Kong) Ever Sound (Hong Kong) was incorporated as a limited company in Hong Kong on June 29, 2016 with a total share capital of HK$1.00. At the time of its incorporation, Mr. Zhou was the sole shareholder of Ever Sound (Hong Kong). On 29 March 2017, the total share capital of Ever Sound (Hong Kong) was transferred to NGP Holdings. Golden Pharma Golden Pharma was incorporated as a limited liability company in the BVI on June 27, 2016 with an authorized share capital of US$50,000 divided into 50,000 shares with par value of US$1.00 each. On the same day, one share of Golden Pharma was allotted and issued to Golden Cache as fully paid at par value. On June 8, 2017, Golden Cache transferred the said one share to NGP Holdings, after which Golden Pharma has been wholly owned by our Group. IV-8

390 APPENDIX IV STATUTORY AND GENERAL INFORMATION Golden Cache (Hong Kong) Golden Cache (Hong Kong) was incorporated as a limited company in Hong Kong on June 29, 2016 with a total share capital of HK$1.00 and has been wholly owned by Golden Pharma since its incorporation. Save as disclosed above and in the section headed Our History, Reorganization and Corporate Structure in this document, there has been no alteration in the registered share capital of any of our subsidiaries within two years immediately preceding the date of this document. 2. FURTHER INFORMATION ABOUT OUR BUSINESS A. Summary of Our Material Contracts We have entered into the following contracts (not being contracts entered into in the ordinary course of business) within two years preceding the date of this document which are or may be material: (a) an equity transfer agreement entered into by and between Neo-green Pharmaceutical and Sichuan Green dated August 8, 2016, pursuant to which Neo-green Pharmaceutical agreed to transfer its 100% equity interest in Neo-green Modern TCM to Sichuan Green; (b) (c) (d) a supplemental agreement to the equity transfer agreement mentioned in paragraph (a) above entered into by and between Neo-green Pharmaceutical and Sichuan Green dated November 25, 2016, pursuant to which the consideration of the transfer of 100% equity interest in Neo-green Modern TCM was set at RMB51.53, being the net asset value of Neo-green Modern TCM as of October 31, 2016; an equity transfer agreement entered into by and between Sichuan Green and Golden Cache (Hong Kong) dated September 5, 2016, pursuant to which Sichuan Green agreed to transfer 1% equity interest in Neo-green Pharmaceutical held by Sichuan Green to Golden Cache (Hong Kong) for a consideration of RMB7.65 million, which was determined by reference to the net asset value of Neo-green Pharmaceutical as of December 31, 2015; an equity transfer agreement entered into by and among Ever Sound (Hong Kong), Sichuan Green, Beijing Zhongrui, Mr. Zhou, Mr. Zhou Xiang, Ms. Zhou Qiaomin, Qiu Kairong ( ), Li Gang ( ),Zhang Liling ( ), Zhao Jun ( ), Lai Mei ( ), Wang Ling ( ), Gou Yuquan ( ), Peng Yong ( ), Huang Xiaoyan ( ), Zhao Liang ( ), Hu Changjiang ( ), Xu Liming ( ), Gu Jian ( ), Luo Yurui ( ), Tang Shuqing ( ), Chen Chunchao ( ), Luo Xianzhi ( ) and Chang Zhengsong ( ) (together the Original Shareholders ) dated December 30, 2016, pursuant to which the Original Shareholders transferred an aggregate of 99% equity interest in Neo-green Pharmaceutical held by them to Ever Sound (Hong Kong) for a total consideration IV-9

391 APPENDIX IV STATUTORY AND GENERAL INFORMATION of RMB million, which was determined by reference to the net asset value of Neo-green Pharmaceutical as of December 31, 2015; (e) (f) (g) a share transfer agreement entered into by and among Golden Cache, NGP Holdings and our Company dated June 8, 2017, pursuant to which Golden Cache agreed to transfer the entire issued share capital of Golden Pharma held by it to NGP Holdings in consideration for our Company crediting the 10,000 nil-paid Shares held by Golden Cache as fully paid; the Non-competition Agreement; and the [REDACTED]. B. Our Intellectual Property Rights (a) Trademarks As of the Latest Practicable Date, we registered the following trademarks which are material to our business: No. Trademark Registration No. Class Date of Registration August 28, March 7, October 7, April 7, April 7, December 7, 2007 Owner Neo-green Pharmaceutical Neo-green Pharmaceutical Neo-green Pharmaceutical Place of Registration Expiration Date PRC August 27, 2023 PRC March 6, 2024 PRC October 6, 2020 Our Company Hong Kong April 6, 2025 Our Company Hong Kong April 6, 2025 Our Company Hong Kong December 6, 2027 IV-10