东阳光长江药业(01558) - 2019 - 中期财报

Financial Highlights This section outlines the key financial performance for the six months ended June 30, 2019, highlighting significant revenue and profit growth, primarily driven by core product Kewei | Metric | Six Months Ended June 30, 2019 (RMB in thousands) | Six Months Ended June 30, 2018 (RMB in thousands) | | :--- | :--- | :--- | | Revenue | 3,071,259 | 1,482,428 | | Gross Profit | 2,620,820 | 1,243,433 | | Operating Profit | 1,257,067 | 747,383 | | Profit Before Taxation | 1,172,634 | 746,863 | | Profit Attributable to Equity Shareholders of the Company | 968,424 | 634,544 | | Basic/Diluted Earnings Per Share (RMB cents) | 215 | 140 | | Total Assets | 9,131,251 | 4,572,321 | | Total Liabilities | 4,865,688 | 1,012,594 | | Net Assets | 4,265,563 | 3,559,727 | | Gross Profit Margin | 85.3% | 83.9% | | Operating Profit Margin | 40.9% | 50.4% | | Net Profit Margin | 31.3% | 41.2% | - For the six months ended June 30, 2019, revenue increased by 107.2% year-on-year to RMB 3,071,259 thousand[7] - Profit attributable to equity shareholders of the Company increased by 52.6% year-on-year to RMB 968,424 thousand[7] Corporate Profile The company is a pharmaceutical enterprise specializing in antiviral, endocrine, metabolic, and cardiovascular treatments, with its core product Kewei being a leading anti-influenza drug - The company specializes in the research, development, production, and sale of pharmaceutical products for antiviral, endocrine and metabolic, and cardiovascular diseases[8][13] - Core product Kewei (Oseltamivir Phosphate) is a first-line drug for clinical anti-influenza virus application in China, with its granule formulation being the company's exclusive patented product, included in national medical insurance and essential drug lists[10][12] - As of June 30, 2019, the company produced, promoted, and sold 38 pharmaceutical products domestically, supported by over 3,000 professional sales personnel[10][12] - Strategic partnerships have been established with Lannett Company, Inc., TaiGen Biopharmaceutical Holdings Limited, and Sinopharm Group Accord Pharmaceutical Co., Ltd. for generic insulin development, combination drug clinical trials, and business expansion[11][13] Management Discussion and Analysis This section details the company's operating results, financial position, industry review, R&D progress, significant events, and future outlook, highlighting substantial growth from core product sales and strategic initiatives I. Industry Review China's pharmaceutical market is expanding, with government reforms driving industry consolidation, favoring companies with strong R&D, diverse products, mature production, and excellent marketing - In 2018, China's overall pharmaceutical market exceeded RMB 1,300 billion, growing by 8% year-on-year, with an anticipated annual growth rate of 3-6% from 2019-2023[14][16] - The government is deepening drug review reforms, accelerating approvals for clinically urgent and rare disease drugs, encouraging R&D innovation, and promoting generic drug consistency evaluations[15][16] - The National Healthcare Security Administration continues to advance centralized drug procurement to reduce drug prices and medical insurance expenditure, with the new national essential drug list including more life-saving medications[15][16] - Healthcare reform will lead to industry differentiation, creating development opportunities for pharmaceutical companies with strong R&D capabilities, rich product pipelines, mature production systems, strong brand advantages, and excellent marketing teams[16][17] II. Business Review The Group achieved significant business growth in H1 2019, driven by strong core product sales and new generic drug contributions, alongside R&D advancements in consistency evaluations and clinical trials Summary of Overall Results For H1 2019, the Group's revenue surged by 107.2% to RMB 3,071.3 million, driven by a 116.5% increase in core product Kewei sales, with profit attributable to equity shareholders rising by 52.6% H1 2019 Overall Performance Overview (RMB in millions) | Metric | H1 2019 | H1 2018 | Year-on-year Growth | | :--- | :--- | :--- | :--- | | Revenue | 3,071.3 | 1,482.4 | 107.2% | | Core Product Kewei Sales | 2,930.3 | 1,353.5 | 116.5% | | Profit Attributable to Equity Shareholders of the Group | 968.4 | 634.5 | 52.6% | - Revenue contributions from Kewei, Ertongshu, Oumeining, Linluoxing, and Xining accounted for 95.4%, 1.2%, 0.9%, 0.8%, and 0.6% of total revenue, respectively[18][20] - Of the six generic drug portfolios acquired in 2018, five have obtained production approvals, contributing a total revenue of RMB 30.5 million in the current period[19][21] - Among the 27 generic drug portfolios acquired from Guangdong HEC Pharmaceutical in February 2019, 23 marketing authorization applications have been submitted to the NMPA, pending approval to further enrich the product portfolio[19][21] Summary of Sales Team The Group has established four specialized sales teams for various healthcare channels, comprising 3,123 personnel as of June 30, 2019, to support comprehensive product distribution - The Group has established four sales teams responsible for distributing academic products in secondary and above hospitals, academic products in general practitioner-led medical institutions, core products in pharmacies, and general products across all medical institutions[22][25] - As of June 30, 2019, the Group's sales personnel totaled 3,123 individuals[22][25] R&D Progress The Group has achieved significant R&D progress, including consistency evaluation approval for Oseltamivir Phosphate capsules, completion of anti-HCV new drug Phase III trials, and a robust insulin product pipeline Consistency Evaluation of Generic Drugs The Group's Oseltamivir Phosphate capsules (75mg) received NMPA approval for consistency evaluation, becoming the first and exclusive product in China to pass, with granule evaluation ongoing - Oseltamivir Phosphate capsules (75mg) have been approved by the NMPA for consistency evaluation, making it the first and exclusive product in China to pass this evaluation[23][26] - Oseltamivir Phosphate is a first-line treatment recommended by the National Health Commission for influenza and was included in the National Essential Drug List in November 2018[23][26] - The R&D team is fully advancing the consistency evaluation work for Oseltamivir Phosphate granules[23][26] Anti-hepatitis C Therapeutic Area Significant progress in anti-HCV includes Class 1 innovative drug Yimitasvir Phosphate/Sofosbuvir completing Phase III trials and submitting a marketing application, and Volasvir/Yimitasvir Phosphate initiating Phase III trials - The Class 1 innovative drug, non-structural protein (NS) 5A inhibitor Yimitasvir Phosphate in combination with Sofosbuvir, has completed Phase III clinical trials, with its new drug marketing application submitted and accepted[24] - The NS3/4A protease inhibitor Volasvir in combination with Yimitasvir Phosphate has initiated Phase III clinical trials, with a new drug marketing application expected to be submitted in 2020[24] Endocrine and Metabolic Diseases Area The Group is dedicated to insulin R&D in endocrine and metabolic diseases, with a complete product line covering second and third-generation insulins, and multiple candidates in clinical trials or new drug application stages - The Group is committed to insulin product R&D in the endocrine and metabolic diseases area, with a complete insulin product line planning covering second and third-generation insulins[28] Latest Progress of Insulin Series Products | Key Endocrine and Metabolic Products | Current Stage | Planned Listing Time | | :--- | :--- | :--- | | Recombinant Human Insulin Injection | New Drug Marketing Application Submitted | 2019 | | Protamine Recombinant Human Insulin Injection (Premixed 30R) | Phase III Clinical Trial | 2021 | | Insulin Glargine Injection | Phase III Clinical Trial | 2020 | | Insulin Aspart Injection | Phase I Clinical Trial | 2021 | | Insulin Aspart 30 Injection | Phase III Clinical Trial | 2021 | III. Operating Results and Analysis This section analyzes the Group's H1 2019 operating performance, showing significant revenue and gross profit growth driven by core product Kewei sales, alongside increased distribution and finance costs 1. Revenue For H1 2019, Group revenue surged by 107.2% to RMB 3,071.3 million, primarily from a 116.5% increase in core product Kewei sales, driven by enhanced influenza treatment awareness Revenue and Proportion by Therapeutic Area (RMB in thousands) | Therapeutic Area | Six Months Ended June 30, 2019 | Proportion | Six Months Ended June 30, 2018 | Proportion | Year-on-year Change | | :--- | :--- | :--- | :--- | :--- | :--- | | Antiviral Drugs | 2,932,847 | 95.5% | 1,357,171 | 91.6% | 116.1% | | Of which: Key Product Kewei | 2,930,316 | 95.4% | 1,353,523 | 91.3% | 116.5% | | －Kewei Granules | 2,135,267 | 69.5% | 953,196 | 64.3% | 124.0% | | －Kewei Capsules | 795,049 | 25.9% | 400,327 | 27.0% | 98.6% | | Cardiovascular Drugs | 44,602 | 1.5% | 54,607 | 3.7% | -18.3% | | Endocrine and Metabolic Drugs | 38,677 | 1.3% | 41,549 | 2.8% | -6.9% | | Others | 55,133 | 1.7% | 29,101 | 1.9% | 89.5% | | Total | 3,071,259 | 100% | 1,482,428 | 100.0% | 107.2% | - The growth in Kewei sales primarily stemmed from the nationwide popularization of influenza treatment concepts and the gradual adoption of Oseltamivir as a first-line treatment option[32][33] 2. Cost of Sales For H1 2019, cost of sales increased by 88.5% to RMB 450.4 million, primarily due to expanded sales volume, comprising raw materials, labor, manufacturing overheads, and royalties Cost of Sales and Proportion by Therapeutic Area (RMB in thousands) | Therapeutic Area | Six Months Ended June 30, 2019 | Proportion | Six Months Ended June 30, 2018 | Proportion | Year-on-year Change | | :--- | :--- | :--- | :--- | :--- | :--- | | Antiviral Drugs | 432,140 | 95.9% | 220,248 | 92.2% | 96.2% | | Of which: Key Product Kewei | 431,439 | 95.8% | 219,312 | 91.8% | 96.7% | | －Kewei Granules | 296,778 | 65.9% | 140,446 | 58.8% | 111.3% | | －Kewei Capsules | 134,661 | 29.9% | 78,866 | 33.0% | 70.7% | | Cardiovascular Drugs | 5,196 | 1.2% | 6,025 | 2.5% | -13.8% | | Endocrine and Metabolic Drugs | 4,021 | 0.9% | 4,293 | 1.8% | -6.3% | | Others | 9,082 | 2.0% | 8,429 | 3.5% | 7.7% | | Total | 450,439 | 100% | 238,995 | 100.0% | 88.5% | - The increase in cost of sales was primarily due to expanded sales volume[37][40] 3. Gross Profit For H1 2019, gross profit increased by 110.8% to RMB 2,620.8 million, primarily due to a significant increase in sales of the high-margin product Kewei Gross Profit Contribution and Proportion by Therapeutic Area (RMB in thousands) | Therapeutic Area | Six Months Ended June 30, 2019 | Proportion | Six Months Ended June 30, 2018 | Proportion | Year-on-year Change | | :--- | :--- | :--- | :--- | :--- | :--- | | Antiviral Drugs | 2,500,707 | 95.4% | 1,136,923 | 91.4% | 120.0% | | Of which: Key Product Kewei | 2,498,877 | 95.4% | 1,134,211 | 91.2% | 120.3% | | －Kewei Granules | 1,838,489 | 70.2% | 812,750 | 65.4% | 126.2% | | －Kewei Capsules | 660,388 | 25.2% | 321,461 | 25.8% | 105.4% | | Cardiovascular Drugs | 39,406 | 1.5% | 48,582 | 3.9% | -18.9% | | Endocrine and Metabolic Drugs | 34,656 | 1.3% | 37,256 | 3.0% | -7.0% | | Others | 46,051 | 1.8% | 20,672 | 1.7% | 122.8% | | Total | 2,620,820 | 100% | 1,243,433 | 100.0% | 110.8% | - The growth in gross profit was primarily due to a significant increase in sales of the high-margin product Kewei during the reporting period[42][43] 4. Other Income For H1 2019, other income was RMB 10.4 million, an increase of RMB 1.1 million, primarily due to higher interest income, including government grants and miscellaneous items Other Income (RMB in millions) | Metric | H1 2019 | H1 2018 | | :--- | :--- | :--- | | Other Income | 10.4 | 9.3 | - The increase in other income was primarily due to higher interest income[47][50] 5. Expenses Analysis For H1 2019, total expenses increased by RMB 888.9 million to RMB 1,396.7 million, driven by higher distribution, administrative, and finance costs, while R&D investment decreased by 25.1% to RMB 114.0 million Major Expense Components (RMB in thousands) | Expense Category | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | Year-on-year Change | | :--- | :--- | :--- | :--- | | Distribution Costs | 1,117,203 | 332,759 | 235.7% | | Administrative Expenses | 195,058 | 174,490 | 11.8% | | Finance Costs | 84,433 | 520 | 16,137.1% | | Total | 1,396,694 | 507,769 | 175.1% | - The increase in distribution costs was primarily due to expanded product sales volume, higher marketing and travel expenses, and sales team expansion[52][54] - The increase in administrative expenses was mainly due to higher labor costs, taxes and surcharges, and professional fees[53][54] - The significant increase in finance costs was primarily due to increased accrued interest on new convertible bonds[54][55] - Total R&D investment amounted to RMB 114.0 million, representing 3.7% of revenue, a 25.1% decrease from the same period last year, mainly due to reduced R&D expenditure on the anti-HCV new drug project[53][55] 6. Other Net Expenses For H1 2019, other net expenses were RMB 61.8 million, mainly due to exchange losses from USD/RMB fluctuations, increased USD debt exposure, and fair value changes of convertible bonds Other Net Expenses (RMB in millions) | Metric | H1 2019 | H1 2018 | | :--- | :--- | :--- | | Other Net Expenses | 61.8 | 1.9 (Income) | - Other net expenses were primarily due to exchange losses resulting from USD/RMB exchange rate fluctuations and increased USD-denominated debt exposure, as well as fair value changes of convertible bonds[56][61] 7. Profit Before Taxation For H1 2019, the Group's profit before taxation totaled RMB 1,172.6 million, a 57.0% increase from the prior year Profit Before Taxation (RMB in millions) | Metric | H1 2019 | H1 2018 | Year-on-year Growth | | :--- | :--- | :--- | :--- | | Profit Before Taxation | 1,172.6 | 746.9 | 57.0% | 8. Income Tax For H1 2019, income tax expense was RMB 212.5 million, a 56.1% increase, primarily due to the growth in profit before taxation Income Tax Expense (RMB in millions) | Metric | H1 2019 | H1 2018 | Year-on-year Growth | | :--- | :--- | :--- | :--- | | Income Tax Expense | 212.5 | 136.1 | 56.1% | - The increase in income tax expense was primarily due to the growth in profit before taxation[57][62] 9. Profit for the Reporting Period For H1 2019, the Group's net profit was RMB 960.2 million, a 57.2% increase from the prior year Net Profit for the Reporting Period (RMB in millions) | Metric | H1 2019 | H1 2018 | Year-on-year Growth | | :--- | :--- | :--- | :--- | | Net Profit | 960.2 | 610.8 | 57.2% | 10. Profit and Total Comprehensive Income for the Period Attributable to Equity Shareholders of the Company For H1 2019, profit and total comprehensive income attributable to equity shareholders (considering convertible bond impact) was RMB 968.4 million, a 52.6% increase Profit and Total Comprehensive Income for the Period Attributable to Equity Shareholders of the Company (RMB in millions) | Metric | H1 2019 | H1 2018 | Year-on-year Growth | | :--- | :--- | :--- | :--- | | Considering Convertible Bond Impact | 968.4 | 634.5 | 52.6% | | Excluding Convertible Bond Impact | 1,095.9 | 634.5 | 72.7% | IV. Financial Position This section outlines the Group's financial position as of June 30, 2019, showing significant increases in total assets and net current assets, good cash flow, but also a higher gearing ratio 1. Overview As of June 30, 2019, the Group's total assets were RMB 9,131.3 million, total liabilities RMB 4,865.7 million, and shareholders' equity RMB 4,265.6 million Financial Position Overview (RMB in millions) | Metric | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | 9,131.3 | 4,560.9 | | Total Liabilities | 4,865.7 | 882.0 | | Shareholders' Equity | 4,265.6 | 3,678.9 | 2. Net Current Assets As of June 30, 2019, net current assets significantly increased to RMB 3,241.2 million, driven by higher sales increasing current assets and accrued dividends/expenses increasing current liabilities Net Current Assets (RMB in thousands) | Metric | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | 5,214,230 | 1,785,364 | | Total Current Liabilities | 1,973,034 | 812,798 | | Net Current Assets | 3,241,196 | 972,566 | - Current assets increased by RMB 3,428.9 million, and current liabilities increased by RMB 1,160.2 million, resulting in a net increase in current assets of RMB 2,268.6 million[68][69] 3. Gearing Ratio and Quick Ratio As of June 30, 2019, the Group's gearing ratio increased to 74.6% from 1.5%, while the quick ratio rose from 2.0 times to 2.6 times Gearing Ratio and Quick Ratio | Metric | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Gearing Ratio | 74.6% | 1.5% | | Quick Ratio | 2.6 times | 2.0 times | 4. Cash Flow Analysis For H1 2019, net cash from operating activities was RMB 1,057.5 million, net outflow from investing activities was RMB 1,522.3 million, and net inflow from financing activities was RMB 2,727.6 million, leading to a net increase of RMB 2,262.8 million in cash and cash equivalents Cash Flow Situation (RMB in thousands) | Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net Cash Generated from Operating Activities | 1,057,505 | 631,882 | | Net Cash Outflow from Investing Activities | (1,522,318) | (89,529) | | Net Cash Generated from/(Outflow from) Financing Activities | 2,727,616 | (75,158) | | Net Increase in Cash and Cash Equivalents | 2,262,803 | 467,195 | - The increase in net cash from operating activities was primarily due to sales growth during the reporting period[72][74] - The increase in net cash outflow from investing activities was mainly due to increased payments for property, plant, and equipment, and increased prepayments for intangible assets[72][75] - Net cash inflow from financing activities was primarily due to bank loans and proceeds from the issuance of convertible bonds[73][75] 5. Bank Loans As of June 30, 2019, the Group's bank loan balance was RMB 356.2 million, an increase of RMB 302.8 million, with good liquidity, no repayment risk, and all loans being RMB-denominated from domestic banks - As of June 30, 2019, the Group's bank loan balance was RMB 356.2 million, an increase of RMB 302.8 million from December 31, 2018[74] - The Group maintains good liquidity, sufficient funds, and no repayment risk, with all bank loans being RMB-denominated from domestic banks in China[74] 6. Capital Structure As of June 30, 2019, total equity attributable to equity shareholders was RMB 4,062.4 million, an increase of RMB 628.4 million, primarily due to increased net assets from higher operating profit - As of June 30, 2019, the Group's total equity attributable to equity shareholders of the Company was RMB 4,062.4 million, an increase of RMB 628.4 million from December 31, 2018[74] - This increase was primarily due to higher net assets resulting from increased operating profit[74] 7. Capital Expenditure For H1 2019, capital expenditure totaled RMB 1,169.3 million, an increase of RMB 731.3 million, primarily for a RMB 590 million capital injection into Yichang Pharmaceutical and acquisition of IP from Guangdong HEC Pharmaceutical - For the six months ended June 30, 2019, the Group's capital expenditure totaled RMB 1,169.3 million, an increase of RMB 731.3 million from the same period last year[76][78] - The company plans to inject RMB 590 million of its own funds into its wholly-owned subsidiary, Yichang HEC Pharmaceutical Co., Ltd., for production and operation construction[76][78] - To enrich its product portfolio, the company acquired all China-based intellectual property, industrial property, and ownership rights related to several pharmaceutical products from Guangdong HEC Pharmaceutical[76][78] 8. Major Purchases and Sales On February 25, 2019, the Company agreed to acquire IP and ownership rights for 27 pharmaceutical products from Guangdong HEC Pharmaceutical for RMB 1,626,434,600, approved by shareholders on May 10, 2019 - On February 25, 2019, the Company entered into an acquisition agreement with Guangdong HEC Pharmaceutical to acquire all China-based intellectual property, industrial property, and ownership rights for 27 pharmaceutical products[77][79] - The total consideration was RMB 1,626,434,600, including prepayments, milestone payments, and remaining balances[77][79] - The acquisition was approved by the Company's independent shareholders at an extraordinary general meeting held on May 10, 2019[77][79] 9. Contingent Liabilities As of June 30, 2019, the Group had no external guarantees - As of June 30, 2019, the Group had no external guarantees[80][85] 10. Pledge of the Group's Assets As of June 30, 2019, the Group had no pledged assets except for bills receivable used to secure certain bank loans - As of June 30, 2019, the Group had no other pledged assets except for bills receivable used to secure certain bank loans[81][85] 11. Foreign Exchange and Exchange Rate Risk The Group primarily operates in China and faces no other significant direct foreign exchange fluctuation risks, except for convertible bonds and foreign currency-denominated bank deposits - The Group primarily operates in China and faces no other significant direct risks from foreign exchange fluctuations, except for convertible bonds and foreign currency-denominated bank deposits[82][86] 12. Employee and Remuneration Policies As of June 30, 2019, the Group employed 4,595 staff, with employee costs of approximately RMB 356.6 million for H1 2019, and remuneration policies are regularly reviewed to incentivize and retain talent - As of June 30, 2019, the Group employed a total of 4,595 employees[83][86] - For the six months ended June 30, 2019, staff costs (including directors' emoluments) amounted to approximately RMB 356.6 million[83][86] - The Group's remuneration policy aims to incentivize and retain outstanding employees, with regular reviews based on overall industry salary conditions and employee performance[83][86] 13. Hedging Transactions For H1 2019, the Group did not engage in any hedging transactions for foreign exchange or interest rate risks - For the six months ended June 30, 2019, the Group did not enter into any hedging transactions for foreign exchange or interest rate risks[84] 14. Future Plans for Material Investments or Capital Expenditure As of the report date, the Group had no material investment or capital expenditure plans beyond those already disclosed - Except for investments and capital expenditures mentioned elsewhere in this report, the Group had no other material investment or capital expenditure plans as of the report date[84] V. Other Significant Events This section discloses important events during the reporting period, including Oseltamivir Phosphate's consistency evaluation approval, USD 400 million H-share convertible bond issuance, and H-share repurchases 1. Passing of Consistency Evaluation for Oseltamivir Phosphate During the reporting period, the Company's Oseltamivir Phosphate capsules (75mg) received NMPA approval for generic drug quality and efficacy consistency evaluation - The Company's Oseltamivir Phosphate capsules (75mg) have been approved by the National Medical Products Administration for consistency evaluation of generic drug quality and efficacy[87][88] 2. Completion of the Issue of USD400,000,000 3.0% H Share Convertible Bonds to The Blackstone Group L.P. and its Affiliates On February 20, 2019, the Company issued USD 400 million H-share convertible bonds at 3.0% annual interest to Blackstone, aiming to introduce strategic investors and fund drug acquisitions, capital expenditures, and sales network expansion - On February 20, 2019, the Company issued H-share convertible bonds with a total principal of USD 400 million, an annual interest rate of 3.0%, and an initial conversion price of HKD 38 per share[89][92][127] - The issuance of H-share convertible bonds aimed to introduce The Blackstone Group L.P. and its affiliates as long-term strategic investors to facilitate drug acquisitions, advance development strategies, enhance operations and management, strengthen international cooperation, and improve corporate governance and investor relations[91][92] Use of Proceeds from H-Share Convertible Bonds (As of June 30, 2019) | Item | Percentage of Net Proceeds | Remaining Net Proceeds to be Used for the Item (USD in millions) | | :--- | :--- | :--- | | For Acquisition of Pharmaceutical Products and Other Pharmaceutical Products (Including APIs) | 60% – 70% | 162.78 | | For Capital Expenditure on Production Facilities | 20% – 30% | 46.51 | | For Expansion of Sales and Distribution Network and Other Purposes | 10% – 20% | 23.25 | | Total | 100% | 234.54 | - As of June 30, 2019, USD 161.90 million of net proceeds had been utilized, with the remaining USD 234.54 million expected to be fully used within 2019[100] 3. Repurchase of H Shares of the Company ("H Shares") From May 7 to June 6, 2019, the Company completed ten H-share repurchases, totaling 3,202,800 H shares - From May 7, 2019, to June 6, 2019, the Company conducted ten H-share repurchases[102][106] - A total of 3,202,800 H shares were repurchased[158] VI. Events After Reporting Period This section discloses significant post-reporting period events, including the acquisition of HEC Biological Pharmacy, cancellation of repurchased H shares, and establishment of a joint venture, impacting future operations 1. Acquisition of HEC Biological Pharmacy Co. ("HEC Biological Pharmacy Co.") On September 12, 2019, the Company acquired all equity in HEC Biological Pharmacy Co. from Shenzhen HEC Industrial Development Co., Ltd. for RMB 78,161,200 - On September 12, 2019, the Company entered into an equity transfer agreement with Shenzhen HEC Industrial Development Co., Ltd. to acquire all equity in HEC Biological Pharmacy Co.[104][108] - The total consideration was RMB 78,161,200[104][108] 2. Cancellation of Repurchased H Shares On July 16, 2019, the Company canceled 3,202,800 repurchased H shares, resulting in 448,820,050 total issued shares - On July 16, 2019, the Company canceled 3,202,800 repurchased H shares[105][109] - As of the report date, the Company's total issued shares were 448,820,050 (including 222,620,050 H shares and 226,200,000 domestic shares)[105][109] 3. Establishment of Joint Venture On July 24, 2019, the Company established Yichang HEC Pharmaceutical Technology Promotion Service Co., Ltd. with Yidu Guijun Pharmaceutical Technology Co., Ltd., contributing RMB 46.50 million for a 93% equity stake in the RMB 50 million registered capital joint venture - On July 24, 2019, the Company entered into a capital contribution agreement with Yidu Guijun Pharmaceutical Technology Co., Ltd. to jointly establish Yichang HEC Pharmaceutical Technology Promotion Service Co., Ltd.[110][114] - The joint venture's total registered capital is RMB 50 million, with the Company contributing RMB 46.50 million in cash for a 93% equity stake[110][114] VII. Business Prospects of the Group for the Second Half of the Year The Group expects continued benefits from industry transformation in H2 2019, with Kewei's high growth supporting short-term performance, generic drug reviews enriching the portfolio, and insulin/anti-HCV applications driving medium-to-long-term development, alongside R&D and sales enhancements - China's pharmaceutical industry faces unprecedented transformation and consolidation, creating significant development opportunities for high-quality pharmaceutical enterprises[111][115] - The sustained high growth in sales of core product Kewei lays the foundation for the Group's stable short-to-medium-term performance growth[112][115] - The progressive completion of review procedures for the recently acquired 33 generic drugs will enrich the product portfolio and optimize the revenue structure[112][115] - The application and approval of insulin products and anti-HCV drugs will further diversify therapeutic areas, providing impetus for medium-to-long-term development[112][115] - In the second half of the year, the Group will continue to drive R&D innovation, enrich its product portfolio, strengthen production management, and enhance sales team building to achieve long-term stable development[113][115] VIII. Use of Proceeds This section details the use of proceeds from the global offering and H-share convertible bond issuance, with global offering net proceeds reallocated for a new insulin plant and working capital, and convertible bond proceeds for drug acquisitions and sales network expansion 1. Proceeds from the Global Offering The global offering raised net proceeds of approximately RMB 1,095.4 million, with unutilized funds reallocated for a new insulin plant, working capital, and general corporate purposes, and RMB 1,045.39 million utilized as of June 30, 2019 - The global offering raised net proceeds of approximately HKD 1,307.5 million (approximately RMB 1,095.4 million)[116][118] - The Board resolved to reallocate approximately RMB 701.4 million of unutilized net proceeds, initially allocated for a new oral formulation production plant and product promotion/marketing, to fund a new insulin production plant, working capital, and general corporate purposes[117][118] Details of Net Proceeds from Global Offering (As of June 30, 2019, RMB in millions) | Use | Revised Allocation | Amount Utilized | | :--- | :--- | :--- | | New Oral Formulation Production Plant | 300.00 | 270.51 | | New Insulin Production Plant | 328.70 | 328.55 | | Promotion and Marketing Activities | 136.10 | 136.06 | | Working Capital and General Corporate Purposes | 330.60 | 310.27 | | Total | 1,095.40 | 1,045.39 | - The net proceeds from the global offering are expected to be fully utilized within 2019[119][120] 2. Completion of the Issue of USD400,000,000 3.0% H Share Convertible Bonds to The Blackstone Group L.P. and its Affiliates On February 20, 2019, the Company issued USD 400 million H-share convertible bonds at 3.0% annual interest to Blackstone, with proceeds for drug acquisitions, capital expenditures, and sales network expansion; USD 234.54 million remained unutilized as of June 30, 2019 - On February 20, 2019, the Company issued H-share convertible bonds with a total principal of USD 400 million, an annual interest rate of 3.0%, and an initial conversion price of HKD 38 per share[121][123][127] - The proceeds from the issuance are intended for drug acquisitions, production facility capital expenditures, expansion of sales and distribution networks, and other purposes[122][123] Use of Proceeds from H-Share Convertible Bonds (As of June 30, 2019) | Item | Percentage of Net Proceeds | Remaining Net Proceeds to be Used for the Item (USD in millions) | | :--- | :--- | :--- | | For Acquisition of Pharmaceutical Products and Other Pharmaceutical Products (Including APIs) | 60% – 70% | 162.78 | | For Capital Expenditure on Production Facilities | 20% – 30% | 46.51 | | For Expansion of Sales and Distribution Network and Other Purposes | 10% – 20% | 23.25 | | Total | 100% | 234.54 | - As of June 30, 2019, USD 161.90 million of net proceeds had been utilized, with the remaining USD 234.54 million expected to be fully used within 2019[129] Corporate Governance and Other Information This section details the Company's corporate governance practices, director and shareholder interests, share repurchases, dividend policy, and post-reporting personnel changes, confirming compliance and proposing an interim dividend Compliance with Corporate Governance Code For H1 2019, the Company consistently complied with all code provisions of the Corporate Governance Code in Appendix 14 of the Listing Rules - For the six months ended June 30, 2019, the Company consistently complied with all code provisions of the Corporate Governance Code set out in Appendix 14 to the Listing Rules of the Stock Exchange[130][133] Compliance with Code for Securities Transactions The Company adopted the Model Code for Securities Transactions by Directors of Listed Issuers, with all directors and supervisors confirming full compliance - The Company adopted the Model Code for Securities Transactions by Directors of Listed Issuers, as set out in Appendix 10 of the Listing Rules, as the code of conduct for directors and supervisors in their securities transactions of the Company[131][134] - Following specific inquiries to all directors and supervisors of the Company, each director and supervisor confirmed full compliance with the required standards set out in the Model Code for the six months ended June 30, 2019[131][134] Audit Committee The Audit Committee, comprising Mr. Tang Jianxin (Chairman), Mr. Li Zhiming, and Mr. Tang Xinfa, reviewed the Group's 2019 interim results announcement, interim report, and unaudited interim financial statements - The Audit Committee comprises three members: Mr. Tang Jianxin (Independent Non-executive Director, Chairman), Mr. Li Zhiming (Independent Non-executive Director), and Mr. Tang Xinfa (Non-executive Director)[132][135] - The Audit Committee has reviewed the Group's 2019 interim results announcement, interim report, and unaudited interim financial statements for the six months ended June 30, 2019, prepared in accordance with International Financial Reporting Standards[132][135] Share Capital As of June 30, 2019, the Company's total share capital was RMB 452,022,850, comprising 452,022,850 shares of RMB 1.00 each, including 226,200,000 domestic shares and 225,822,850 H shares - As of June 30, 2019, the Company's total share capital was RMB 452,022,850, divided into 452,022,850 shares of RMB 1.00 each[132][135] - This includes 226,200,000 domestic shares and 225,822,850 H shares[132][135] Interests and Short Positions of Directors, Supervisors and Chief Executive in Shares, Underlying Shares and Debentures As of June 30, 2019, several directors and supervisors held H shares, with Mr. Tang Xinfa holding 65,200 shares, and others holding between 16,000 and 33,600 shares Interests of Directors and Supervisors in Shares (As of June 30, 2019) | Name | Class of Shares | Capacity | Number of Shares Held (shares) | Approximate Percentage of Relevant Class of Share Capital (%) | Approximate Percentage of Total Issued Share Capital (%) | | :--- | :--- | :--- | :--- | :--- | :--- | | Directors | | | | | | | Tang Xinfa | H Shares | Beneficial Owner | 65,200 (L) | 0.029% | 0.014% | | Chen Yangui | H Shares | Beneficial Owner | 33,200 (L) | 0.015% | 0.007% | | Li Shuang | H Shares | Beneficial Owner | 33,400 (L) | 0.015% | 0.007% | | Wang Danjin | H Shares | Beneficial Owner | 33,600 (L) | 0.015% | 0.007% | | Jiang Juncai | H Shares | Beneficial Owner | 33,400 (L) | 0.015% | 0.007% | | Supervisors | | | | | | | Wang Shengchao | H Shares | Beneficial Owner | 16,000 (L) | 0.007% | 0.004% | | Luo Zhonghua | H Shares | Beneficial Owner | 33,400 (L) | 0.015% | 0.007% | Substantial Shareholders' Interests in Shares As of June 30, 2019, Guangdong HEC Technology, North & South Brother Pharmacy, and Blackstone were substantial shareholders, holding significant domestic or H shares, some through controlled corporations or equity derivatives Substantial Shareholders' Interests in Shares (As of June 30, 2019) | Shareholder Name | Class of Shares | Capacity | Number of Shares Held (shares) | Approximate Percentage of Relevant Class of Share Capital (%) | Approximate Percentage of Total Issued Share Capital (%) | | :--- | :--- | :--- | :--- | :--- | :--- | | Guangdong HEC Technology Holding Co., Ltd. | Domestic Shares | Beneficial Owner | 226,200,000 (L) | 100% (L) | 50.04% (L) | | Shenzhen HEC Industrial Development Co., Ltd. | Domestic Shares | Interest of Controlled Corporation | 226,200,000 (L) | 100% (L) | 50.04% (L) | | North & South Brother Pharmacy Investment Company Limited | H Shares | Beneficial Owner | 81,456,400 (L) | 36.07% (L) | 18.02% (L) | | North & South Brother Investment Holdings Limited | H Shares | Interest of Controlled Corporation | 81,456,400 (L) | 36.07% (L) | 18.02% (L) | | Mr. MO Kif (毛杰先生) | H Shares | Interest of Controlled Corporation | 81,456,400 (L) | 36.07% (L) | 18.02% (L) | | Stephen A. SCHWARZMAN | H Shares | Interest of Controlled Corporation | - | 36.59% (L) | 18.28% (L) | | The Blackstone Group L.P. | H Shares | Interest of Controlled Corporation | - | 36.59% (L) | 18.28% (L) | | Blackstone Dawn Pte. Ltd. | H Shares | Beneficial Owner | 80,978,946 (L) | 35.86% (L) | 17.91% (L) | - The Blackstone Group L.P. and its affiliates are deemed to have an interest in 82,631,578 underlying shares through the conversion rights of H-share convertible bonds[149][34] Purchase, Sale or Redemption of Listed Securities of the Company For H1 2019, the Company repurchased 3,202,800 H shares on the Stock Exchange for HKD 119,022,882, which were subsequently canceled on July 16, 2019 Details of H-Share Repurchases (For the Six Months Ended June 30, 2019) | Period of Repurchase | Total Number of H Shares Repurchased | Price Paid Per Share (Highest) | Price Paid Per Share (Lowest) | Total Consideration (HKD) | | :--- | :--- | :--- | :--- | :--- | | May 2019 | 3,024,400 | 39.05 | 35.95 | 112,696,362 | | June 2019 | 178,400 | 35.70 | 35.25 | 6,326,520 | | Total | 3,202,800 | | | 119,022,882 | - The repurchased H shares were canceled on July 16, 2019[159][160] Pledging of Shares by the Controlling Shareholder For H1 2019, the controlling shareholder did not pledge any Company shares as security for debts or to obtain guarantees - For the six months ended June 30, 2019, the Company's controlling shareholder did not pledge any shares of the Company as security for the Company's debts or to obtain guarantees or support for the Company[161][164] Loan Agreements or Financial Assistance of the Company For H1 2019, the Company provided no financial assistance or guarantees to affiliates requiring disclosure, nor did it enter into loan agreements with controlling shareholder covenants or breach any loan terms - For the six months ended June 30, 2019, the Company did not provide any financial assistance or guarantees to its affiliates requiring disclosure under Listing Rule 13.16[162][164] - The Company did not enter into any loan agreements with covenants related to specific obligations of its controlling shareholder, nor did it breach any terms of any loan agreement[162][164] Share Option Scheme The Company has not adopted any share option scheme - The Company has not adopted any share option scheme[163][165] Interim Dividend The Board proposes an interim dividend of RMB 1.0 per share (tax inclusive) for H1 2019, totaling approximately RMB 448.8 million, subject to shareholder approval and tax withholding based on relevant laws - The Board resolved to recommend an interim dividend of RMB 1.0 per share (tax inclusive) for the six months ended June 30, 2019, totaling approximately RMB 448.8 million[163][165] - The interim dividend is expected to be paid on or around November 15, 2019, subject to shareholder approval at the extraordinary general meeting on October 11, 2019[163][165] - The Company will withhold 10% corporate income tax for non-resident enterprise shareholders and generally 10% individual income tax for H-share individual shareholders, with specific rates varying based on tax treaties and nationality[166][167][168] - For dividends and bonuses obtained by mainland individual investors through Shenzhen-Hong Kong Stock Connect investing in H shares, the Company will withhold individual income tax at a rate of 20%; for mainland corporate investors, no withholding will occur, and they are responsible for self-declaration and payment[169][171] Closure of Register of Members The H-share registrar will suspend transfer registration from September 11-October 11 and October 17-October 22, 2019, to determine eligibility for the EGM and the proposed 2019 interim dividend - The H-share registrar will suspend transfer registration from September 11 to October 11, 2019 (both dates inclusive), to determine shareholders' eligibility to attend and vote at the extraordinary general meeting[172] - The H-share registrar will suspend transfer registration from October 17 to October 22, 2019 (both dates inclusive), to determine shareholders' eligibility to receive the proposed 2019 interim dividend[172] Change in Information of Directors, Supervisors and Senior Management Mr. Lei Xiantong resigned as CFO, succeeded by Mr. Zhang Qiang (effective February 25, 2019); Ms. Huang Fangfang resigned as Supervisor and Chairwoman, and Mr. Tang Jinlong was appointed Supervisor (effective June 6, 2019) - Mr. Lei Xiantong resigned as the Company's Chief Financial Officer due to health reasons, effective February 25, 2019[172] - Mr. Zhang Qiang was appointed as the Company's Chief Financial Officer, effective February 25, 2019[172] - Ms. Huang Fangfang resigned as the Company's Supervisor and Chairwoman of the Supervisory Committee due to work arrangement adjustments, effective June 6, 2019[172] - Mr. Tang Jinlong was appointed as the Company's Supervisor, effective June 6, 2019[173] Review Report KPMG reviewed Yichang HEC Changjiang Pharmaceutical Co., Ltd.'s interim financial report for H1 2019, concluding no material non-compliance with IAS 34 based on Hong Kong Standard on Review Engagements 2410 - KPMG has reviewed the Company's interim financial report, which includes the consolidated statement of financial position as of June 30, 2019, and the related consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity, and consolidated cash flow statement[176][178] - The review was conducted in accordance with Hong Kong Standard on Review Engagements 2410, issued by the Hong Kong Institute of Certified Public Accountants[180][182] - The review concluded that nothing has come to the reviewer's attention that causes them to believe the interim financial report is not prepared, in all material respects, in accordance with International Accounting Standard 34 Interim Financial Reporting[181][183] Consolidated Statement of Profit or Loss and Other Comprehensive Income This consolidated statement presents the Group's H1 2019 financial performance, with revenue of RMB 3,071,259 thousand, net profit of RMB 960,170 thousand, and basic/diluted EPS of RMB 2.15 Summary of Consolidated Statement of Profit or Loss and Other Comprehensive Income (For the Six Months Ended June 30, 2019, RMB in thousands) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Revenue | 3,071,259 | 1,482,428 | | Cost of Sales | (450,439) | (238,995) | | Gross Profit | 2,620,820 | 1,243,433 | | Other Income | 10,352 | 9,291 | | Distribution Costs | (1,117,203) | (332,759) | | Administrative Expenses | (195,058) | (174,490) | | Other (Expenses)/Income, Net | (61,844) | 1,908 | | Operating Profit | 1,257,067 | 747,383 | | Finance Costs | (84,433) | (520) | | Profit Before Taxation | 1,172,634 | 746,863 | | Income Tax | (212,464) | (136,072) | | Profit for the Period | 960,170 | 610,791 | | Profit Attributable to Equity Shareholders of the Company | 968,424 | 634,544 | | Non-controlling Interests | (8,254) | (23,753) | | Basic and Diluted Earnings Per Share (RMB) | 2.15 | 1.40 | Consolidated Statement of Financial Position This consolidated statement presents the Group's assets, liabilities, and equity as of June 30, 2019, with total assets of RMB 9,131,300 thousand, liabilities of RMB 4,865,688 thousand (influenced by convertible bonds), and total equity of RMB 4,265,563 thousand Summary of Consolidated Statement of Financial Position (As of June 30, 2019, RMB in thousands) | Metric | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Non-current Assets | | | | Property, Plant and Equipment | 1,554,630 | 1,351,479 | | Intangible Assets | 752,241 | 498,604 | | Goodwill | 75,896 | 75,896 | | Prepayments | 1,468,494 | 817,509 | | Deferred Tax Assets | 65,760 | 32,088 | | Total Non-current Assets | 3,917,021 | 2,775,576 | | Current Assets | | | | Inventories | 165,027 | 164,286 | | Trade and Other Receivables | 1,831,759 | 1,027,332 | | Fixed Deposits with Maturity Over Three Months | 100,000 | – | | Other Financial Assets | 260,000 | – | | Cash and Cash Equivalents | 2,857,444 | 593,746 | | Total Current Assets | 5,214,230 | 1,785,364 | | Current Liabilities | | | | Trade and Other Payables | 1,488,584 | 676,250 | | Contract Liabilities | 15,365 | 8,095 | | Bank Loans | 356,235 | 53,399 | | Deferred Income | 4,379 | 4,379 | | Current Taxation | 108,471 | 70,675 | | Total Current Liabilities | 1,973,034 | 812,798 | | Net Current Assets | 3,241,196 | 972,566 | | Total Assets Less Current Liabilities | 7,158,217 | 3,748,142 | | Non-current Liabilities | | | | Interest-bearing Borrowings | 2,825,580 | – | | Deferred Income | 67,074 | 69,214 | | Total Non-current Liabilities | 2,892,654 | 69,214 | | Net Assets | 4,265,563 | 3,678,928 | | Capital and Reserves | | | | Share Capital | 452,023 | 452,023 | | Treasury Shares | (105,515) | – | | Reserves | 3,715,877 | 2,981,933 | | Total Equity Attributable to Equity Shareholders of the Company | 4,062,385 | 3,433,956 | | Non-controlling Interests | 203,178 | 244,972 | | Total Equity | 4,265,563 | 3,678,928 | Consolidated Statement of Changes in Equity This consolidated statement illustrates the Group's equity changes for H1 2019, with total equity attributable to equity shareholders increasing from RMB 3,433,956 thousand to RMB 4,062,385 thousand, influenced by profit, share-based payments, and repurchases Summary of Consolidated Statement of Changes in Equity (For the Six Months Ended June 30, 2019, RMB in thousands) | Metric | Share Capital | Capital Reserve | Treasury Shares | Statutory Reserve | Retained Earnings | Total (Attributable to Equity Shareholders) | Non-controlling Interests | Total Equity | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Balance as of January 1, 2019 | 452,023 | 1,476,578 | - | 232,676 | 1,272,679 | 3,433,956 | 244,972 | 3,678,928 | | Equity-settled Share-based Transactions | - | - | - | - | 36,734 | 36,734 | (33,540) | 3,194 | | Profit and Total Comprehensive Income for the Period | - | - | - | - | 968,424 | 968,424 | (8,254) | 960,170 | | Repurchase of Shares | - | - | (105,515) | - | - | (105,515) | - | (105,515) | | Dividends Approved for Prior Year | - | - | - | - | (271,214) | (271,214) | - | (271,214) | | Balance as of June 30, 2019 | 452,023 | 1,476,578 | (105,515) | 232,676 | 2,006,623 | 4,062,385 | 203,178 | 4,265,563 | Consolidated Cash Flow Statement This consolidated statement presents the Group's H1 2019 cash flows, with net cash generated from operating activities of RMB 1,057,505 thousand, net outflow from investing activities of RMB 1,522,318 thousand, and net inflow from financing activities of RMB 2,727,616 thousand, resulting in a net increase of RMB 2,262,803 thousand in cash and cash equivalents Summary of Consolidated Cash Flow Statement (For the Six Months Ended June 30, 2019, RMB in thousands) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net Cash Generated from Operating Activities | 1,057,505 | 631,882 | | Net Cash Outflow from Investing Activities | (1,522,318) | (89,529) | | Net Cash Generated from/(Outflow from) Financing Activities | 2,727,616 | (75,158) | | Net Increase in Cash and Cash Equivalents | 2,262,803 | 467,195 | | Cash and Cash Equivalents as of January 1 | 593,746 | 887,183 | | Effect of Foreign Exchange Rate Changes | 895 | 1,525 | | Cash and Cash Equivalents as of June 30 | 2,857,444 | 1,355,903 | Notes to the Unaudited Interim Financial Information This section provides detailed explanations and supplementary information for the unaudited interim financial information, covering preparation basis, accounting policy changes, segment reporting, profit before tax, income tax, EPS, balance sheet items, capital management, fair value, capital commitments, related party transactions, and post-reporting events 1 Basis of Preparation This interim financial report is prepared under HKEX Listing Rules and IAS 34, reviewed by KPMG, and adopts 2018 annual accounting policies, with exceptions noted in sections 2