LIVZON PHARMACEUTICAL GROUP INC. 2004 Annual Report …

LIVZON PHARMACEUTICAL GROUP INC. 2004 Annual Report (Summary)


§1 IMPORTANT NOTICE 1.1 The board of directors (the "Board") of the Company confirms that there are no misleading statements, or misrepresentation, or material omissions contained in this report. The board accepts joint and several responsibilities for the truthfulness, accuracy and completeness of the contents of this report. This abstract is extracted from the text of the annual report of the Company. Investors should carefully read the whole text of the annual report for details of the contents.

1.2 Director Guo Jiaxue, director Zhang Yu, and director Wang Xiaobin were absent from the Board meeting

and all appointed director Zhu Baoguo to attend and vote on their behalves; Director Wang Yisheng, director

Gu Yueyue, and independent director Jiang Jian were absent from the Board meeting and respectively

appointed director Yi Zhenqiu, director Xiao Siyang and independent director Qi Zhan to attend and vote on

their behalves.

1.3 A standard audit report without qualification has been prepared by BDO International Certified Public Accountants for the Company.

1.4 Chairman of the Company Mr. Zhu Baoguo, Financial Controller Mr. An Ning and Chief Accountant Ms. Si

Yanxia have declared that they are responsible for the truthfulness and completeness of the financial statements

in this Annual Report.

1.5 Chinese version shall prevail over English version in case of any inconsistencies occur.

§2 COMPANY PROFILES 2.1 Basic information Short form of the stock: Livzon Group, Livzon-B Stock Code 000513, 200513 Stock exchange listing Shenzhen Stock Exchange

Registered address: No. 132, Guihua North Road, Gongbei, Zhuhai, Guangdong

Office address: Livzon Bldg., No. 132 Guihua North Road, Gongbei, Zhuhai, Guangdong

Post code Registered Address: 519020 Office Address: 519020

Company’s internet website http://www.livzon.com Email: [email protected]. 2.2 Contact person and correspondence

Secretary to the Board Representative of securities affairs Name Wang Wuping Hong Lu Addres Livzon Building, Guihua Road North,

Gongbei, Zhuhai Livzon Building, Guihua Road North, Gongbei, Zhuhai

Telephone 0756-8135888 0756-8135888 Facsimile 0756-8886002 0756-8886002 Email [email protected] [email protected]


§3 ABSTRACT OF ACCOUNTING DATA AND INDEXES 3.1 Major accounting data

(Unit:RMB’000)

Indication items 2004 2003 (after retrospective

adjustment)

Revenue 1,554,788 1,811,914

Gross profit 761,193 892,615

Share of profit of associates 1,791 1,484

Profit before tax 154,938 159,423

Income tax expense (19,945) (36,234)

Profit after tax 134,993 123,189

Minority interests (10,687) (29,266)

Net profit for the year 124,306 93,923

Total share capital 306,035 306,035

Capital and reserves 1,125,364 1,029,958

Total assets 2,173,959 2,101,070

Net cash from operating activities 181,747 297,067

Net increase (decrease) in cash and cash equivalents (120,464) 128,932

Earnings per share RMB0.41 RMB0.31

Rate of return on net asset 11.05% 9.12%

Net cash flow per share raised from operating activities 0.59 0.97 Note: 1. The data were audited by BDO International Certified Public Accountants according to IAS, for

reference to investors of B share only.

3.2 Difference between domestic and international accounting standards

vApplicable ? Not Applicable (Unit:RMB’000)

Domestic Accounting Standard International Accounting Standard Net profit 124,058 124,306 Explanation of differences

The Company’s net profit for 2004 was 124,058(RMB’000) and 124,306(RMB’000), respectively, as audited by Reanda Certified Public Accountants according to PRC Accounting Rules and Regulations and BDO International Certified Public Accountants according to the International Accounting Standards. Such difference of 248(RMB’000) were mainly due to the corrections made to depreciation of property, plant and equipment which decreased profit by 535(RMB’000), to Amortisation of negative goodwill which increased profit by 295(RMB’000), and to long term deferred and prepaid expenses which increased profit by 488(RMB’000) according to the International Accounting Standards.

§4 CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS

4.1 Change in share capital

Unit: Share

Before the change

Increase/decrease during the year (+, - )

Subtotal After the change

I. Non-circulating shares


1. Promoters’ shares 29,138,670 0 29,138,670 Including: 0 0 0 State-owned shares 0 0 0 Domestic legal person shares 29,138,670 0 29,138,670 Overseas legal person shares 0 0 0 Others 0 2. Legal shares 38,917,518 0 38,917,518 3. Staff shares 0 0 0 4. Preference share or others 0 0 0 Total non-circulating shares 68,056,188 0 68,056,188 II. Circulating shares 1. Ordinary shares denominated in RMB

115,672,310 0 115,672,310

2. Domestic listed foreign shares 122,306,984 0 122,306,984

3. Overseas listed foreign shares 0 0 0

4. Others 0 0 0 Total circulating shares 237,979,294 0 237,979,294 III. Total shares 306,035,482 0 306,035,482

Number of shares for fund placement shares, desk transaction company staff shares, strategic investor placement shares and ordinary legal placement shares shall be disclosed respectively. ? Applicable v Not Applicable 4.2 Particulars of shares held by the top ten shareholders, including the top ten shareholders of circulating shares The total number of shareholders as at the end of the reporting period 42,142 (13,711 were holders of B

shares) Particulars of shares held by the top ten shareholders

Full name of shareholders

Increase / decrease in

the year

Number of shares held at the end of the year

Percentage to total share capital

Class of shares (Circulating or

Non-circulating)

Number of shares pledged/ frozen

Nature of shareholder

(State-owned shareholder or foreign

shareholder) Xi’an Topsun Group Company Limited 38,917,518 38,917,518 12.72% Non-circulating 0 Other

Tiancheng Industrial Company Limited 0 34,284,870 11.20% circulating 0 Foreign

sharesholder Joincare Pharmaceutical Industry (Group) Company Limited

0 32,285,116 10.55%

Non-circulating: 22,379,239 circulating: 9,905,877

0 Other

China Construction Bank - Huabao Xingye Multi-strategies Growth Securities Investment Fund

7,045,652 7,045,652 2.30% circulating

0 Other

Shenzhen Haibin Pharmaceutical Company Limited

0 6,752,435 2.21% circulating 0 Other

Guangzhou Baokeli Trading Company 0 6,059,428 1.98% Non-circulating 6,059,428 Other


China Industrial and Commercial Bank – Shenyin-Wanguo Paris Shengli Premium Securities Investment Fund

3,481,196 3,481,196 1.14% circulating

0 Other

China Industrial and Commercial Bank - Tianyuan Securities Investment Fund

3,000,000 3,000,000 0.98% circulating

0 Other

China Industrial and Commercial Bank - Pufeng Securities Investment Fund

779,244 2,612,278 0.85% circulating

0 Other

China Industrial and Commercial Bank – Guolianan Desheng Small Caps Prime Securities Investment Fund

2,454,523 2,454,523 0.80% circulating

0 Other

Particulars of shares held by the top ten shareholders Full name of shareholders Number of

shares held at the end of the reporting period

Type of shares (A, B, H Shares or others)

Tiancheng Industrial Company Limited 34,284,870 B Shares Joincare Pharmaceutical Industry (Group) Company Limited 9,905,877 A Shares China Construction Bank - Huabao Xingye Multi-strategies Growth Securities Investment Fund 7,045,652 A Shares

Shenzhen Haibin Pharmaceutical Company Limited 6,752,435 A Shares China Industrial and Commercial Bank – Shenyin-Wanguo Paris Shengli Premium Securities Investment Fund 3,481.196 A Shares

China Industrial and Commercial Bank - Tianyuan Securities Investment Fund 3,000,000 A Shares

China Industrial and Commercial Bank - Pufeng Securities Investment Fund 2,612,278 A Shares

China Industrial and Commercial Bank – Guolianan Desheng Small Caps Prime Securities Investment Fund

2,454,523 A Shares

Yuan Lanxiang 2,161,983 B Shares Tai He Securities Investment Fund 1,802,400 A Shares Explanations of the connected relations or concerted actions of the aforementioned shareholders

1) On 26 November 2004, China China Everbright (Group) Corp. (“China Everbright”) entered into a Share Transferral Agreement with Xi’an Topsun Group Company Limited (“Xi’an Topsun”), pursuant to which China Everbright agreed to transfer 38,917,518 designated legal person shares in the Company held by it (representing 12.72% of the Company’s total share capital) to Xi’an Topsun. The nature of shares was changed to designated domestic legal person share. On 2 December 2004, the Company published the said transferral on the designated information disclosure newspaper.

2) Both Tiancheng Industrial Company Limited and Shenzhen Haibin Pharmaceutical Company Limited are subsidiaries of Joincare Pharmaceutical Industry (Group) Company Limited, which directly and indirectly holds 100% equity interests therein.

3) On 2 January 2004, Joincare Pharmaceutical Industry (Group) Company Limited, Guangzhou Baokeli Trading Company and Zhuhai Lishi Investment Company Limited entered into a Share Transfer, Custody and Mortgage Agreement, and Joincare


Pharmaceutical Industry (Group) Company Limited and Guangzhou Baokeli Trading Company entered into a Share Transfer and Custody Agreement as well as the Share Mortgage Agreement, pursuant to which Guangzhou Baokeli Trading Company agreed to directly transfer, place on custody and mortgage its 6,059,428 domestic legal person shares in the Company, representing 1.98% of the Company’s total share capital, to Joincare Pharmaceutical Industry (Group) Company Limited. As at 31 December 2003, Joincare Pharmaceutical Industry (Group) Company Limited and its subsidiaries held and controlled 79,381,849 shares of the Company in aggregation, representing 25.94% of the Company total issued share capital, and became the Company’s ultimate shareholder. 4) As of 31 December 2004, among the top ten circulating shareholders, apart from Joincare Pharmaceutical Industry (Group) Company Limited and its connected enterprises, the Company is not aware of any connected relations among them, nor aware of any persons acting in concert belonging to as stipulated in the Information Disclosure Management Method of Shareholder Changes of Listed Companies.

4.3 Information on the controlling shareholder and ultimate shareholder of the Company 4.3.1 Changes in controlling shareholder or ultimate shareholder of the Company ? Applicable v Not applicable 4.3.2 Controlling shareholder and other ultimate shareholders of the Company Joincare Pharmaceutical Industry (Group) Co., Ltd. Legal Representative: Zhu Baoguo Date of establishment: December 18, 1992 Business scope: R&D, manufacturing and operation of nutritious and healthcare essence, healthcare soluble table and granule (not including canned and Tetra-pak goods or under administration of export license), Chinese patent medicine, oral liquid, tablet, capsule, granule, hormonal troche, food, nutrition-added and healthcare foods; import and export activities (under SMJZ Zi [2001] No.1231 Qualification Certificate); investment in pharmaceutical industries and projects, high-tech projects and industrial projects (subject to approval for specific project); operations in domestic industries, supply and marketing of materials (not including goods under exclusive operation, control or distribution). Registered capital: RMB609.93 million Equity structure: Total share capital of 609,930,000 shares, including 452,430,000 legal person shares and 157,500,000 A shares in circulation. Details of Joincare Pharmaceutical Industry (Group) Company Limited’s controlling shareholder Name of the controlling shareholder: Shenzhen Beiyeyuan Investment Company Limited Legal representative: Liu Guangli Date of establishment: 21 January 1999 Principal businesses: investment and setting up industrial projectss, domestic trading and supply and marketing of materials Registered capital: RMB80,000,000 Equity structure: Zhu Baoguo’s capital contribution: RMB72,000,000, constituting 90% of the total capital amount; Liu Guangxia’s capital contribution: RMB8,000,000, constituting 10% of the total capital amount. Mr.Zhu Baoguo:Chinese nationality, does not have the residentship in any other country or region.


4.3.3 Illustration of Shareholdings and Controlling Relations among the Company and the Ultimate Shareholder §5. DETAILS OF DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT 5.1 Changs in shares held by Directors, Supervisors and Senior Management

Name Title Gender Age Term of appointment

Number of shares

held at the beginning of the year

Number of shares held at the end of the

year

Reasons for the

changes

Zhu Baoguo Chairman of the Board

Male 42 2002.06.26-2005.06.30 0 0 -

Yi Zhenqiu Vice Chairman of the Board

Male 60 2002.06.26-2005.06.30 0 0 -

Guo Jiaxue Vice Chairman of the Board

Male 38 2002.06.26-2005.06.30 0 0 -

Gu Yueyue Director Female 54 2002.06.26-2005.06.30 0 0 - Xiao Siyang Director Male 42 2003.01.27-2005.06.30 0 0 -

Wang Xiaobin

Director Male 50 2002.06.26-2005.06.30 0 0 -

Zhang Yu Director Male 44 2002.06.262005.06.30 0 0 - Wang

Yisheng Director Male 53 2003.05.23-2005.06.30 0 0 -

An Ning Director Male 32 2003.05.23-2005.06.30 0 0 - Dong

Shaozhi Director Male 63 2003.05.23-2005.06.30 0 0 -

Hua Independent Male 59 2003.05.23-2005.06.30 0 0 -

11.20%

Zhu Baoguo Liu Miao Liu Gangxia

Taitai Pharmaceutical Industry Group Limited

Shenzhen Beiyeyuan Investment Company Limited

Hongxin Limited

Joincare Pharmaceutical Industry (Group) Company Limited

Shenzhen Haibin Pharmaceutical Company Limited

Tiancheng Industrial Company Limited

Livzon Pharmaceutical Group Inc.

10% 90% 100%

99.9% 0.1%

18.54% 55.63%

100% 100%

2.21%

Hold: 10.55%

Place on custody: 1.98%


Yizheng Director An

Chengxin Independent

Director Male 65 2002.06.26-2005.06.30 0 0 -

Jiang Jian Independent Director

Male 34 2002.06.26-2005.06.30 0 0 -

Gao Dianhe Independent Director

Male 61 2002.06.26-2005.06.30 0 0 -

Qi Zhan Independent Director

Male 39 2002.06.26-2005.06.30 0 0 -

Yuan Guoliu

Chairman of the Supervisory Committee

Male 58 2002.06.26-2005.06.30 0 0

-

Wang Bo Supervisor Male 38 2002.06.26-2005.06.30 0 0 - Cao

Pingwei Supervisor Male 45 2003.01.27-2005.06.30 0 0 -

Wang Congxin

Supervisor Male 44 2002.06.26-2005.06.30 0 0 -

Qiu Qingfeng

Supervisor Male 33 2002.06.26-2005.06.30 0 0 -

Xiao Siyang President Male 42 2002.12.26-2005.06.30 0 0 -

An Ning Vice President Male 32 2003.01.27-2005.06.30 0 0 - Liu Shuqing Vice President Female 41 2002.06.26-2005.06.30 0 0 -

Fu Gang Vice President Male 34 2004.02.13-2005.06.30 0 0 - Wang

Wuping Secretary to the

Board Male 38 2002.06.26-2005.06.30 0 300 Increase

Note: In August 2004, Mr. Dong Shaozhi resigned as Vice Chairman of the Company. He is currently the Chief

Executive of Dawnrays Pharmaceutical (Holding) Company Limited. On 20 January 2005, he resigned as

Director of the Company for reason of busy work in existing work.

On 13 February 2004, the Twelfth Meeting of the Fourth Board was held which considered and approved the

Resolution in relation to the appointment of Mr. Fu Gang as the Vice Chairman of Sales Division of Livzon

Pharmaceutical Group Inc. and appointed Mr. Fu Gang as the Vice Chairman of Sales Division of Livzon

Pharmaceutical Group Inc..

5.2 Particulars of directors and supervisors holding position as shareholders of the Company

Name Name of holders of the Company's shares

Position held as shareholders of the Company

Term of appointment

Whether receiving

allowance or not (Yes / No)

Zhu Baoguo Joincare Pharmaceutical Industry (Group) Company Limited Chairman From November

1999 Yes

Guo Jiaxue Xi’an Topsun Group Company Limited Chairman From March 2000 Yes

Gu Yueyue Joincare Pharmaceutical Industry (Group) Company Limited

Deputy General Manager

From October 1997 Yes


Cao Pingwei Joincare Pharmaceutical Industry (Group) Company Limited

Deputy General Manager

From January 1993 Yes

Qiu Qingfeng

Joincare Pharmaceutical Industry (Group) Company Limited

Secretary to the board of directors

From November 1999 Yes

Wang

Congxin Xi’an Topsun Group Company

Limited Director From March 2003 Yes

5.3 Remunerations of directors, supervisors and senior management for the year Unit: RMB’000

Total remunerations in the year 6,636.57 The top three directors in terms of remuneration in total

270.0

The top three senior management staff in terms of remuneration in total

4,209.86

Allowance of independent directors 72.00 RMB’000/person/year

Other benefits of independent directors Nil Name of directors and supervisors not receiving remunerations or allowance from the Company

Nil

Range of remuneration Number of person 90 RMB’000（for directors or supervisors） 3

36 – 72 RMB’000（for directors or supervisors） 17

400 RMB’000（senior management members） 4

150 - 400 RMB’000（senior management members） 2

§6. REPORT OF DIRECTORS

6.1 Discussions and analysis of business operation as a whole during the reporting period

Year 2004 witnessed the further in-depth reform of Livzon Group. Following its practical, innovative and

efficient operating philosophy, we overcame adverse impacts from a series of factors including price decrease

of antibiotic raw medicines and preparations, expiry of agency distribution of D-Cal and Dages, and decline in

sales of anti-cold granule and Roxithromycin due to aftermath of SARS. We made achievements in fields such

as overall implementation of planned management, management restructuring, optimisation of resource

allocation, improvements in investment and asset operation and promotion of key products, product

restructuring, implementation of share placement plan, standardized and efficient production and operation, etc.

Net profit for 2004 amounted to RMB124.31 million, a year-on-year growth of 32.35%. Earnings per share

amounted to RMB0.41, while the net cash flow per share from operating activities amounted to RMB0.59.

Return on net asset amounted to 11.05%.

In 2004, the revenue of major products such as Shenqi Fuzheng for Injection, Ceftriaxone and Livzon Deles

series increased 81.15%, 29.58% and 15.36% respectively compared with 2003. Despite the average price

decrease of more than 20% of antibiotic preparations including Cefurorime sodium , the Company minimized

its adverse impact through scale sales, with an increase of 83.89% in sales revenue over 2003. In addition, the


Company improved its control on operating expenses and administrative expenses, both recording a

year-on-year decrease.

6.2 Principal operations by industries or products (Unit:RMB’000)

Principal operations by industries By industries or products

Revenue from principal operations

Cost from principle operations

Profit Margin(%)

Changes in revenue compared with the corresponding period last year (%)

Changes in cost compared with the corresponding period last year (%)

Changes in profit margin compared with the corresponding year (%)

Manufacture of chemical crude medicine

404,446 348,183 13.91% 2.59% 6.52% Decrease 3.17 percentage points

Manufacture of chemical preparations

851,137 328,332 61.42% -16.24% -11.12% Decrease 2.23 percentage points

Chinese medicine & Chinese patent medicine

261,734 99,716 61.90% -11.86% -21.40% Increase 4.62 percentage points

Other Industries 37,470 15,277 59.23% -64.15% -83.30% Increase 46.74

percentage points Including: connected transaction

32,957 14,558 55.83%

Principle operations by products Livzon Dele Series 148,867 15.36%

Ceftriaxone raw medicine 140,894 29.58%

Anti-cold granules 100,341 -36.12%

Shenqi Fuzheng for Injection

61,966 81.15%

Cefoperazone Sodium 60,020 17.12%

Ampicillin trihydrate raw medicines

59,531 -18.75%

6-APA raw medicine 54,866 -18.82%

Mevastatin raw medicine 44,793 4.32%

Bifidobiogen cap.

42,550 -4.38%

valaciclovir hydrochloride tab.

39,775 -12.01%

Including: connected

transactions 31,096 46.21%


Pricing principles in connected transaction

Prices of connected transactions are negotiated and entered into with reference to market prices and on an arm’s length and fair basis

Necessity of ongoing connected transaction

Connected transaction is necessary for the normal business activities of the Company.

Including: During the reporting period, the amount of connected transactions in relation to the selling of products or provision of services to controlling shareholder and its subsidiaries by the Company is 6,316.9(RMB'000). 6.3 Principle operations by geographical areas: Unit: (RMB’000)

Geographical areas Revenue from principle operations

Changes compared with the corresponding period last year

Northeast region 110,320.80 3.33%Northern region 256,417.83 -9.82%Central region 177,623.47 0.44%Eastern region 202,846.57 -35.10%Southern region 450,078.91 -8.00%Southwestern region 206,311.00 -16.58%Northwestern region 67,228.35 -18.56%Export 67,321.22 43.60%

6.4 Suppliers and customers Unit: (RMB’000) Total purchase from the top five suppliers 196,763.14 Percentage of total purchase 24.11%

Total sales to the top five customers 156,053.95 Percentage of total sales 10.04% 6.5 Operating performance of investee companies ? Applicable v Not applicable 6.6 Reasons of material changes in principal operations and structure thereof ? Applicable v Not applicable 6.7 Reasons of material changes in profitability (profit margin) of principal operations as compared with those of last year ? Applicable v Not applicable 6.8 Reasons of material changes in results and profit structure as compared with those of last year v Applicable ? Not applicable Net profit RMB124.31 million as compared with RMB93.92 million last year had increased by RMB30.38 million (32.35%), mainly due to the increase in the investment income, decrease in losses of minority and lowering of income tax. Reasons of material changes in overall financial position as compared with those of last year ? Applicable v Not applicable 6.9 Material changes in operating environment, macro policies or laws which had, have or will have any material impact on the Company's financial position or operating results ? Applicable v Not applicable 6.10 Completion of the estimated profit ? Applicable v Not applicable 6.11 Completion of business plan


? Applicable v Not applicable 6.12 Use of raised funds ? Applicable v Not applicable Alteration of project ? Applicable v Not applicable 6.13 Projects not financed by raised funds v Applicable ?Not applicable

Unit: (RMB’000) Projects Amounts Project in progress Profits Cooperation with Tongyi Chaoshang (Taiwan) Company Limited to found a joint venture company c 17,500.00Currently the registration procedures

were completed -

Acquisition of equity interest in Shanghai Livzon dongfeng Biotechnical Company Limited 6,000.00Currently the registration procedures

were completed -

Acquisition of equity interest in Zhuhai Livzon Meidaxin Technology Development Company Limited 640.00Currently the registration procedures

were completed -

Acquisition of shanghai Lijin Bio-chemical Product Company Limited 1,535.70Currently the registration procedures

were completed -

Acquisition of Equity Interest in Zhuhai Free Trade Zone Livzon Integrated Pharmacy Manufacturing Company Limited and in Zhuhai Free Trade Zone Lida Pharmaceutical Company Limited held by Kang Jian Investment Company Limited

17,099.50Currently the registration procedures were completed -

Acquisition of Additional Equity Interest in Sichuan Everbright Pharmaceutical Company Limited

58,349.00Currently the registration procedures were completed

-

Subscription of 2004 China Petroleum & Chemical Corporation's corporate bonds at fixed interest rate in a term of 10 years

140,000.00The subscription of bonds was completed. -

Total 241,124.20 - - 6.14 Explanation of the Board to ‘non-standard opinion’ of the accountant ? Applicable v Not applicable 6.15 Business plan of the Board for the next year (if any) v Applicable ? Not applicable In 2005, the Company will focus on the following aspects: 1. Comprehensive implementation of its planned management system and reasonable utilisation of resources. In 2005 the Company will continue to fully carry out its planned management. Based on the business plan of 2005 and the breakdown of business planning indices for sales, profit and expense carefully prepared by its departments and subsidiaries, the Group will follow such indices to monitor and manage its subsidiaries and department, so as to optimize its resource allocation for better completion of the sales indices and maximisation of its benefits.

2. Implementation of innovative reform in marketing system

In light of its fundamental R&D and innovation strategy focusing on four major fields including chemical medicine, Chinese medicine, biological medicine and raw medicine, the Company will futher promote innovations and reforms in its marketing system.

For medicine preparations, the Company will continue its marketing strategy of brand highlighting and cohesion. Taking efforts in market planning and promotion for its major brands such as Livzon Dele series (including Weisanlian, Xindele), anti-cold granule, Shenqi Fuzheng for Injection, Compound Cinnarizine Cap. , Valaciclovir Hydrochloride Tab. , etc . the Company will also attach importance to market exploration of key products including Bifidobiogen Cap., Prostant Suppository, cerebroprotein hydrolysate for injection, Pancreatic Kininogenase Enteric -coated tab. and Compoud sodium ferulate Cap.. By reasonably utilizing resources, elaborating brand advantages and expanding key products, the Company will optimize its product


mix, aiming at a rapid growth in sales revenue and improvement in product competitiveness and profitabilities.

For antibiotics, Lovastatin category medicines and aminoglycoside raw medicines, the Company will capture opportunies in reform of marketing system and take full use of its overall advantages in talents and technologies. By virtue of acquisition of production license, purchasing strains and more investment, the Company strives to enhance its products' core competitive edges, so as to foster its scale and low-cost advantages in commercial production of raw medicines, aiming at a fast expanding market share.

3. In-depth adoption of supply chain management and comprehensive integration of human resources

In 2005, the Company will further promote the supply chain management with emerging effects, as well as the ongoing comprehensive integration of human resources. Such two task, being part of our innovative reform, will contribute to the improvement in our core competitiveness and its effect which will in turn lead to our improving daily decision-making efficiency and high morale of the staff, laying a foundation for the Group to achieve exellent performance.

4. Actively upgrading the level of quality and production technology and implementation the requirements in safety, environmental protection and healthcare

Through integration internal technological workforce and experiences, production technology and quality were actively upgrade to reach an advance level within the Industry. Acting as a leader, the requirements for national and internal safety, environmental protection and healthcare were fully implemented so as to build up a strong and competitive workforce for the future.

5. Further enhance the pace of placing as to develop capital for reserve of the Group

In 2005, we will complete the placing financing for raising development capital of the Group. In support of sufficient capital, large projects can proceed speedily, resulting in the growth of new profit point.

Estimated profit for the next year ? Applicable v Not applicable 6.16 Directors. Proposal for Profit Distribution or capitalisation of public reserve for the Period vApplicable ? Not applicable Pursuant to the PRC’s relevant accounting rules and based on the parent company’s net profit of RMB141,071,615.11 for 2004 as audited by Reanda Certified Public Accountants (“Reanda”), the Company intends to respectively appropriate 10% of the net profit (RMB14,107,161.51) as statutory public reserve and statutory welfare fund. Subsidiaries intend to appropriate profits of RMB10,852,548.72 in aggregation into their statutory public reserves, statutory welfare funds and corporate development funds. A total of RMB39,066,871.74 of profits will be appropriated into surplus reserves. Net profit for 2004 as audited by the domestic auditor amounted to RMB124,058,279.08, pursuant to which undistributed profit attributable to shareholders for 2004, after including the said appropriation of surplus reserve of RMB39,066,871.74 and based on the undistributed profit of RMB70,825,772.41 at the beginning of the year, net of other in-transferral of RMB6,694,695.96 and payable dividends of RMB30,603,548.20 for ordinary shares, amounted to RMB118,518,935.59. Net profit for 2004 as audited by the overseas auditor amounted to 124,306(RMB’000), pursuant to which undistributed profit attributable to shareholders for 2004, after including appropriation of surplus reserve of 45,761(RMB’000) (including 39,067(RMB’000) of new surplus reserve and 6,694(RMB'000) of negative adjustment thereto) and based on the undistributed profit of 59,586(RMB’000) at the beginning of the year and after deducting 30,603(RMB’000) of dividend for 2003, amounted to 107,528(RMB’000). In accordance with the principle of a lower amount of profit attributable to shareholders, profit attributable to


shareholders of 107,528(RMB’000) as audited by the overseas auditor is adopted as a basis. As a result, the Company will distribute cash RMB1.5 (before tax) for every 10 shares, pursuant to which profit to be distributed amounts to RMB45,905,322.3. The balance of retained earnings of RMB72,613,613.29 as audited by the domestic auditor (retained earnings as audited by the overseas auditor: 61,623(RMB’000)) will be carried forward to the next year. Neither bonus shares nor transfer of any public reserve to capital is recommended for 2004. Profit of the Company during the period which has not yet put forth dividend and profit distribution proposal. ? Applicablev Not applicable §7. SIGNIFICANT EVENTS 7.1 Acquisition of assets v Applicable ? Not applicable

Unit: (RMB’000)

Parties of Transaction

Assets acquired

Date of Acquisition

Consideration of

Acquisition

Net Profit contributed to the Company from the date of acquisition to the end of this year

Whether a connected transaction

Pricing Principle

Whether Assets

Transfer Procedures completed

Whether involved creditor’s

right debt had

transferred

Fuzhou Pharmaceutical and Chemical Industry Administration Office

100% equity interests of Fuzhou Fuxing Pharmaceutical Company Limited

19 October 2004 102,000.00 0.00No

Base on the result audited and evaluated by Fuyuan Accountant Company Limited) as on 29 February 2004, Fuzhou Finance Bureau approved the net asset value as pricing principle

Yes Yes

7.2 Disposal of assets vApplicable Not applicable

Unit: (RMB’000)

Parties of Transaction

Assets Disposed

Date of Disposal

Consideration of Disposal

Net Profit contributed to the Company from the date of disposal to the beginning of this year

Income and loss arising from disposal

Whether a connected transaction

Pricing Principle

Whether Assets

Transfer Procedures completed

Whether involved creditor’s right

debt had transfe

rred

Shangha Sansheng Hongye (group) Co.,Ltd. and ShanghaiS

100% equity interests of Suzhou Xinbao Pharmaceutical Factory of Livzon Group

2 Dec. 2004 7,480.00 0.00 -2,435.00No

Base on the net assets of Suzhou Xinbao

Yes Yes


ansheng House PropertyCo.,Ltd.

Beijing Lianhe Weihua Technology Co.,Ltd.

100% equity interests of Bejing Xinghao Modern Pharmaceutical Company Limited

20 Dec. 2004 3,711.1 0.00 0.00No

Primary investment amount as pricing base

No No

— —

Subscription of 2004 China Petroleum & Chemical Corporation's corporate bonds at fixed interest rate in a term of 10 years

Between 2004.11.2 to 2005.1.27

135,159.80 0.00 -4,840.21No Base on Market value

Yes Yes

The matters involved in 7.1, 7.2 had no influence on the continuity of the Company’s business and stability of management. The above mentioned related matters of acquisition and the disposal of assets had no influence on continuity of the Company's business and stability of management. 7.3 Guaranty of material importance v Applicable ? Not applicable (Unit: RMB’000)

The guaranty of the Company granted to outside companies (excluding those to controlling subsidiaries)

Guaranty granted to

Guaranty Date(the signing date of

agreement)

Guaranty Amount

Type of Guaranty

Period of

Guaranty

Whether expired

Whether guaranty

by connected parties (Yes/No

) Fuzou Yihua Chemical Company Limited 2001.12.20 3,000.0 Under joint

liabilities 3 No No

Fuzou Yihua Chemical Company Limited 2001.12.20 3,000.0 Under joint

liabilities 4 No No

Fuzou Yihua Chemical Company Limited 2001.12.20 6,000.0 Under joint

liabilities 5 No No

Fujian Yatong New Material Technology Company Limited 2004.4.29 5,710.0 Under joint

liabilities 1 No No


liabilities 1 No No


liabilities 1 No No

Fujian Yatong New Material Technology Company Limited

2004.8.27 3,740.0 Under joint liabilities

1 No No


Technology Company Limited liabilities Fujian Yatong New Material Technology Company Limited

2004.9.14 1,260.0 Under joint liabilities 1 No No

Fuzhou Boiler Factory 2003.12.15 1,000.0 Under joint liabilities 1 No No

Total guaranty amount involved during reporting period 20,710.0

Guaranty balance as at the end of reporting period 33,710.0

Guaranty granted to controlling subsidiaries by the Company

Amount granted to controlling subsidiaries during reporting period 77,498.0

Amount granted to controlling subsidiaries as at the end of reporting period 39,898.0

The total amount of guaranty granted by the Company

Total Amount of Guaranty 73,608.0

The ratio of guaranty amount representing the net asset of the Company 6.46%

Guaranty granted to controlling shareholders and other connected parties in which below 50% of equities are held by the Company 0.00

Directly or indirectly provide debt guaranty to those guaranteed parties whose gearing ratio are over 70% 12,000.0

Whether Guaranty Amount more than 50% of net assets(Yes or No) No

7.4 Material connected transaction 7.4.1 Connected sale and purchase v Applicable ? Not applicable

Unit (RMB’000)

Selling products and providing services to connected parties

Purchase products and accept services from connected parties

Connected Parties Transaction Amount

Proportion to the same type of transactions in terms of amount

Transaction Amount

Proportion to the same type of transactions in terms of amount

Guangdong Lanbao Pharmaceutical Company Limited 29,343.56 1.89% 1,206.38 0.15%

Shenzhen Haibin Pharmaceutical Company Limited 6,316.90 0.41% 7,385.24 0.90%

Livzon(Group) Suzhou Xinbao Pharmaceutical Factory 648.25 0.04% 1,203.56 0.15%

Livzon(Group) Changzhou Kangli Pharmaceutical Company Limited 16,960.21 2.08%

Total 36,308.71 2.34% 26,755.39 3.28% 7.4.2 Connected creditor’s right and debt v Applicable ? Not applicable

Unit (RMB’000)

Providing capital to connected parties

Connected parties provided capital to the Companies Connected parties

Amount involved

Balance Amount involved

Balance


Guangdong Lanbao Pharmaceutical Company Limited 3,921.49 29.86 0.00 0.00Shanghai Livzon Dongfeng Biotechnical Company Limited 0.00 604.31 0.00 0.00Suzhou Xinbao Pharmaceutical Factory of Livzon Group 678.27 0.00 5,704.73 0.00Total 4,599.76 634.17 5,704.73 0.00

Inculding: The Company provided to controlling shareholders and its subsidiaries with capital of RMB0.00 and balance of RMB0.00 during the reporting period. 7.5 Asset management in trust ? Applicable v Not applicable 7.6 Implementation of undertakings v Applicable ? Not applicable 1. The Company entered into a Patent License Agreement with Korea Yiyang Medicine Company Limited (“Yiyang”), pursuant to which both parties agreed that the Company was granted an exclusive and irrevocable patent use right of PPI compound and an exclusive use of Yiyang’s patent in PRC (including Hong Kong and Macau) for the relevant production, manufacture and sales. Under the agreement, a transferral fee of US$2.5 million is payable by the Company, of which US$1.575 million have been paid and US$0.925 million (equivalent to RMB7,655,762.50) remain outstanding. The Company agreed to pay Yiyang 10% of sales in respect of this tablet product in the first three years since the commencing date of its sales, 8% of its sales within the five years following the aforesaid three years, and afterward 6% of its sales until 22 July 2014 (expiring date of the agreement). 2. Pursuant to the Notice of Certain Issues in Capital Transactions between Listed Companies and Associates thereof and Guaranties granted to Outside Companies (ZJF (2003) Circular No.56, "Circular No.56") promulgated by CSRC, the Company undertook on 27 September 2004 that: (1) as at the date of filing applications for share placement, no violation of Circular No.56 occurred for the Company as an issuer; (2) after the filing date for the proposed placement, no violation of any provision set out in Circular No.56 will occur for the Company; (3) in event of any violation of Circular No.56 during the approval time for the proposed placement, the Company will revoke the placement application on its own initiative. 3. Joincare Pharmaceutical Industry (Group) Company Limited (“Joincare Pharmaceutical Industry”), the shareholder of the Company, undertook and guaranteed on 27 September 2004 as follows: 1) As at the date of this undertaking, among the products manufactured and sold by Joincare Pharmaceutical Industry and other shareholding subsidiaries excluding Livzon Group ("other shareholding subsidiaries"), save for Ampicillin sodium/Sulbactam and Quanying being same (in terms of their chemical structure) as Sulbactam Sodium/ Cefoperazone Sodium for Injection / New Sulbactam Sodium/New Cefoperazone Sodium for Injection which were produced and manufactured by Livzon Group, Joincare Pharmaceutical Industry and other shareholding subsidiaries were not engaged in production and manufacturing of any product as same as or capable of substituting the products of Livzon Group. Joincare Pharmaceutical Industry operated no business which were competitive with and had material impact on Livzon Group's profitability. In event of any material impact by the said products on the profitability of Livzon Group at any time following the date of this undertaking, Joincare Pharmaceutical Industry and other shareholding subsidiaries will adopt measures (including but not limited to paid transferal of relevant assets/business/interest to Livzon Group and other independent third parties), so as to avoid the competitive situation occurred to the production and manufacturing of Livzon Group as a result of the production and sale for such products. 2) From the date of this undertaking, Joincare Pharmaceutical Industry and other shareholding subsidiaries will not directly or indirectly engaged or involve in development or investment in any product as same (in terms of chemical structure) as those produced or sold by Livzon Group, so as to avoid business competition with Livzon Group either directly or indirectly. Joincare Pharmaceutical Industry and its shareholding subsidiaries will grant Livzon Group the pre-emptive right of development or investment should there be any form of development or investment in those products capable of substituting the products produced and sold by Livzon Group.


Approvals from half of the members or more of the independent directors shall be obtained prior to a decision of Livzon Group as to whether the said pre-emptive right shall be exercised. Joincare Pharmaceutical Industry and its related persons as the connected parties of Livzon Group shall abstain from voting. Joincare Pharmaceutical Industry shall not use its controlling power or any other relationship over Livzon Group to run any business which was harmful to benefits of Livzon Group and other shareholders of Livzon Group. 3) From the date of this undertaking: (1) In case of that Joincare Pharmaceutical Industry or other shareholding subsidiaries conduct proprietary researches / introduce from overseas / cooperate with others new pharmaceutical technologies which are connected to products with major contribution to profit of Livzon Group, Livzon Group shall be entitled to paid permission on using such technology exclusively. (2) In case of that Joincare Pharmaceutical Industry or other shareholding subsidiaries intend to dispose assets, business or interests which have material impact on Livzon Group's business, Livzon Group shall have the right of first refusal. Joincare Pharmaceutical Industry guarantees to grant Livzon Group the conditions which are not less favourable to those granted to any independent third parties at any time. In event of the above circumstances, Joincare Pharmaceutical Industry will give written notice to Livzon Group as soon as possible and provide Livzon Group information at its reasonable request. Livzon Group may decide whether it will exercise its right within 45 days upon receipt of the notice. 4) Joincare Pharmaceutical Industry confirms that: (1) From the date of signature and chopping, this undertaking will bind for Joincare Pharmaceutical Industry and other shareholding subsidiaries; (2) Each undertaking stated in this undertaking is independently practicable. Invalidation or termination of any of the undertakings shall not affect the effectiveness of any other undertakings. 4. Joincare Pharmaceutical Industry (Group) Company Limited, the controlling shareholder of the Company, undertook on 16 September 2004 that: (1) it will subscribe by cash all the placing shares in Livzon Group in 2004 based on the underlying shares directly or indirectly held or controlled by Joincare Pharmaceutical Industry. As at 31 December 2003, Joincare Pharmaceutical Industry directly or indirectly held or controlled 79,381,849 shares in the Company, representing 25.94% of total share of the Company. (2) prior to completion of the share placement and within 12 months following the completion, it will remain as the ultimate controlling shareholder of the Company. 5. On 27 September 2004, the Company undertook to the CSRC that: (1) within the application period for the issuance, the Company will not offer any capital, goods or other benefits to the Approval Committee directly or indirectly and that the Company will not affect the judgment of Approval Committee towards the issuers by means of illegal methods; (2) the Company will not disturb the approval work of Approval Committee by any way; (3) With response to the enquiry at the meetings with Approval Committee, the statement and representation are true, objective, accurate and concise without any irrelevant matters for the proposed issuance subject to approval; (4) Should the Company violate any regulation mentioned above, the Company will accept all legal responsibilities incurred therefrom. 6. The Company undertook on 28 September 2004 that: if the Company completes the proposed share placement in 2005, the return on net assets (fully diluted in the issuance year) will not lower than the bank deposit rate for the same period of time. 7. All members of the Board of Directors have read the full set of application files for the proposed share placement and undertook on 26 September 2004 that: there are no misleading statements or misrepresentation or material omissions contained in the applic ation files, and the Directors individually and collectively accept responsibility for the truthfulness, accuracy and completeness of the application files.


7.7 Material litigation and arbitration ? Applicable v Not applicable 7.8 Duties performed by independent directors Attendance of independent directors to board meeting

Name of Independent

Director

No. of Board Meeting to be attended this year Present in person Present by

Proxy Absence Remark

Mr. An Chengxin 7 7 Mr. Qi Zhan 7 7 Mr. Jiang Jian 7 6 1 Mr. Gao Dianhe 7 7 Mr. Hua Yizheng 7 7

Objection by the independent directors to the related matters of the company v Applicable ? Not applicable Name of

Independent Director

Objection Matter Specific Content of objection Remark

Jiang Jian

At the 17th meeting of the 4th Board, he abstained from voting regarding Resolution in Relation to the Authorization of the management of the Company to fully acquire Fuzhou Fuxing Pharmaceutical Company Limited

The business and profit growth of that Company is ordinary. He is of the opinion that the upper limit of premium 50% is too high. It is more suitable to be not higher than 30%.

§8 REPORT OF SUPERVISORY COMMITTEE ? Applicable v Not Applicable


§9 FINANCIAL REPORT 9.1 Auditing Opinion Auditing opinion: Standard unqualified auditing opinion 9.2 Financial Statement

LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司

CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 31ST DECEMBER 2004

2004 2003 RMB’000 RMB’000 Revenue 1,554,788 1,811,914 Cost of sales (793,595) (919,299)

Gross profit 761,193 892,615 Other operating income 10,042 11,479 Selling expenses (417,779) (515,908) Administrative expenses (213,339) (234,383) Other operating expenses (7,090) (6,871) Profit from operations 133,027 146,932 Finance costs (9,048) (2,925) Profit from investments 29,168 13,932 Share of profit of associates 1,791 1,484 Profit before tax 154,938 159,423 Income tax expense (19,945) (36,234)

Profit after tax 134,993 123,189 Minority interests (10,687) (29,266)

Net profit for the year 124,306 93,923

Dividend - -

Earnings per share – basic RMB0.41 RMB0.31



CONSOLIDATED BALANCE SHEET AT 31ST DECEMBER 2004

2004 2003 RMB’000 RMB’000 Assets Non-current assets

Property, plant and equipment 761,970 717,559 Construction in progress 209,254 61,450 Goodwill 85,016 25,796 Negative goodwill - (1,292) Intangible assets 30,342 26,877 Investments in associates 18,087 17,080 Other investments 23,981 190,973 1,128,650 1,038,443

Current assets Inventories 212,618 188,001 Trade and other receivables 403,007 373,223 Amounts due from associates 11,101 16,867 Other investments 115,108 60,464 Bank balances and cash 303,475 424,072

1,045,309 1,062,627

Total assets 2,173,959 2,101,070

Equity and liabilities Capital and reserves

Share capital 306,035 306,035 Reserves 819,329 723,923

1,125,364 1,029,958 Minority interests 31,710 129,497 1,157,074 1,159,455 Non-current liabilities

Bank loans – due after one year 90,180 25,000 Current liabilities

Trade and other payables 476,027 395,038 Amounts due to assoc iates 818 4,335 Tax liabilities 1,634 24,742 Bank loans – due within one year 448,226 492,500 926,705 916,615

Total equity and liabilities 2,173,959 2,101,070



CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2004

2004 2003 RMB’000 RMB’000 Operating activities: Profit from operations 133,027 146,932 Adjustments for: Negative goodwill released to income (295) (934) Construction in progress written-off 934 3,567 Amortization of intangible assets 13,110 15,017 Depreciation of property, plant and equipment 145,086 78,550 Amortization of goodwill - 2,936 Loss/(profit) on disposal of property, plant and equipment 420 (86) Operating cash flows before movements in working capital

292,282

245,982 Movements in working capital (99,853) 78,773 Cash generated from operations 192,429 324,755

Income tax paid (1,634) (24,742) Interest paid (9,048) (2,946)

Net cash from operating activities 181,747 297,067 Investing activities Movements in profit and loss from investments 9,883 3,927

Disposal of investments 241,425 92,565 Proceeds on disposal of property, plant and equipment, intangible assets and

other assets

11,755 8,020 Purchases of property, plant and equipment, intangible assets and other

assets

(146,481) (104,125) Purchases of investments (281,579) (268,430) Net cash used in investing activities (164,997) (268,043)

Financing activities Dividend and interests paid (53,843) (73,828) New bank loans raised 941,129 693,675 Repayments of bank loans (1,024,500) (519,939)

Net cash (used in) / from financing activities (137,214) 99,908 Net (decrease)/ increase in cash and cash equivalents (120,464) 128,932 Effect of exchange differences (133) (137) Cash and cash equivalents at beginning of year 424,072 295,277 Cash and cash equivalents at end of year

Bank balances and cash 303,475 424,072


9.3 Specific explanation with respect to the changes occurred in relation to accounting policy, accounting estimation and auditing methods as compared with the latest reporting year. ? Applicable v Not Applicable 9.4 Material accounting errors in terms of contents, corrected amounts, reasons and its impact ? Applicable v Not Applicable 9.5 Specific explanation in respect of the changes occurred in consolidated scope as compared with latest reporting year. ? Applicable v Not Applicable Company names Contents of changes Reasons Hubei Keyi Pharmaceutical Company Limited Decrease Equity transfer Hubei Liyi Pharmaceutical Tech Company Limited ("Liyi") Decrease Equity transfer Zhu Hai Mei Hao Technology Investment Company Limited Decrease Liquidation Zhu Hai Li Ao Microzoology Product Company Limited Decrease Liquidation Livzon (Group) Advertising Co., Ltd. Decrease Liquidation Zhuhai Free Trade Zone Lida Pharmaceutical Company Limited Increase Newly established Livzon Group Fuzhou Fuxin Pharmaceutical Company Limited Increase Acquisition of equity Shanghai Lijin Bio-chemical Product Company Limited Increase Increase in shareholdings

Livzon Pharmaceutical Group Inc. Chairman: Zhu Baoguo

22 February 2005

LIVZON PHARMACEUTICAL GROUP INC. 2004 Annual Report …

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