Annual Results for the year ended 31 December 2019

Cathay International Holdings Limited

("Cathay" or the "Company" or together with its subsidiaries, the "Group")

Annual Results for the year ended 31 December 2019

Hong Kong, 1 April 2020 - Cathay International Holdings Limited (LSE: CTI.L), an operator and investor in the growing healthcare sector in the People's Republic of China (the "PRC"), today announces its Annual Results for the year ended 31 December 2019.

Group Operational Highlights

During 2019, the Group continued to focus on the development of its pharmaceutical, healthcare and cosmetic businesses.

Pharmaceutical

• The pharmaceutical business was a key contributor to the Group's performance in 2019

• With a greater emphasis on developing its own products, Lansen saw sales of its key product, Pafulin, increased by 17.7% or USD5.7 million, compensating for the exit of the agency products business, with an improved sales margin

• The Group is working to broaden market coverage and penetration in large hospitals, smaller hospitals and retail markets

• In line with the Group's market penetration strategy, Zhejiang, Lansen's home province, will be the first province to implement the full product range and the market penetration strategy

Healthcare

• The healthcare business is still in the early stage of development

• Building business relationships with large customers of key plant extract products, Natural Dailyhealth improved its market share of a number of key products and improved its overall utilisation rate of its production facilities

• The Group continued to work on the development of healthcare food products and routinely review its operating strategy as required

• The market price of inositol decreased in 2019.The Group continued to reduce its production costs of inositol, whilst continuing to develop high quality and high value-added co-products 

Cosmetics

• The cosmetic business is still in the early stage of development

• The Group has been working on developing sales channels and enriching the product portfolio

• Continued to develop synergies between the cosmeceutical business (sales of Fillderm) and the skincare business

• Building a professional core team to implement the business strategy

Hotel

• The Hotel was impacted by the trade war between China and the United States and social unrest in Hong Kong

• Occupancy rates reduced to 73.9% (2018: 78.0%) and overall income decreased by 13.1%

• Room rates were reduced during 2019 to remain competitive

• The Hotel continues to provide high-end services and continues to be one of the best valued hotels in Shenzhen

Group Financial Highlights

• Revenue decreased to USD79.8 million (2018: USD84.3 million) due to decrease in inositol sales and Hotel revenue

• Gross profit increased to USD33.0 million (2018: USD30.4 million) due to higher sales of own products in pharmaceutical

• Average gross margin improved to 41.4% (2018: 36.1%) due to a higher proportion of sales of high margin own products in pharmaceutical

• Operating loss increased to USD21.9 million (2018: USD13.6 million) due to increase in provision for impairment of property, plant and equipment and no reversal of executive share option expenses

• Disposal of 6.6% interest in Starry during 2019 resulted in a net gain of USD25.5 million (2018: USD5.1 million)

• Group finance costs increased to USD11.7 million (2018: USD10.5 million) due to an increase in the effective interest rate

• Loss after finance costs and tax was USD11.3 million (2018: USD18.3 million)

• Group net bank borrowings reduced to USD131.1 million (2018: USD164.1 million) and amount due to an intermediate parent undertaking increased to USD29.1 million (2018: USD11.5 million)

Recent Outbreak of Coronavirus

• The Chinese government limited travel within China and extended the Chinese New Year holiday period, in an attempt to control the spread

• The Group acted swiftly to ensure the health and safety of employees and production stopped during the extended Chinese New Year holiday period

• Production gradually started to resume in late February and, at present, all of our plants have resumed production

• The business disruption is not expected to have a significant adverse impact on the performance of our pharmaceutical, healthcare and cosmetic businesses during the above period

• The Hotel has seen a marked reduction in occupancy and bookings resulting from the travel restrictions within China and this will have a material impact on the Hotel's performance during the first half of 2020, and potentially beyond. To mitigate this negative impact, the Hotel has implemented an action plan to reduce its operating costs until the market recovers

There remains uncertainty as to how the pandemic will develop in China and worldwide and the severity of the impact on the economy and our businesses. The Company is committed to addressing challenges in the China markets and reviewing its business strategy as required in order to create long term competitiveness and deliver value to shareholders.

- ENDS -

For further enquiries, please contact:

Cathay International Holdings Limited

Eric Siu (Finance Director) Tel: +852 2828 9289

Patrick Sung (Director and Controller)

Consilium Strategic Communications

Mary-Jane Elliott/Matthew Neal/Lindsey Neville Tel: +44 (0) 203 709 5702

About Cathay

Cathay International Holdings Limited (LSE: CTI.L) is a main market listed investment holding company and an operator and investor in the healthcare sector in the People's Republic of China (the "PRC"). The Company and its subsidiaries (collectively the "Group") aim to leverage on investment opportunities in the growing domestic demand for high quality healthcare products in the PRC and build portfolio companies into market sector leaders with competitive edge. Cathay has already demonstrated a track record of identifying investment opportunities in this area including: Lansen, a leading specialty pharmaceutical company focused on rheumatology and dermatology in the PRC; Haizi, a company engaged in the manufacture, marketing and sales of inositol and phosphate related products; Natural Dailyhealth, a company engaged in production and sales of plant extracts for use as key active ingredients in healthcare products; and Botai, a company engaged in collagen related products.

CHAIRMAN'S STATEMENT

The Group continues to focus on the development of its pharmaceutical, healthcare and cosmetic businesses. The Group's largest contribution comes from the pharmaceutical business with the healthcare and cosmetic businesses still in the early stages of growth.

In the pharmaceutical business, following the reforms of the healthcare system in the PRC, the development of medical reforms has been accelerated by the declaration of a series of policies by the Chinese Government, such as tightened control over medical insurance expenses and making medical resources easily accessible to the public. In addition, we place a greater emphasis on developing our own products, broadening coverage in large hospitals, deepening penetration to smaller hospitals through our commercial team and increasing our retail market share through our over-the-counter ("OTC") team. Zhejiang, Lansen's home province, will be used as the pilot province for Lansen to implement our full product range and the market penetration strategy.

In the healthcare business, we continue to work with, and develop relationships with, large customers of key plant extract products. In 2019, we started to work on healthcare food products,  reviewing the operating strategy as we progressed. We have also seen competition with inositol producers which has had an adverse impact on our performance. We are, therefore, continuing to reduce production costs of inositol and are developing a series of high quality and high value-added products that meet market needs.

In the cosmetic business, we are working on growing sales channels and enriching the product portfolio. Our aim is to achieve synergies between the cosmeceutical business (sales of Fillderm) and the skincare business.

As the Hotel is located in Louhu, an older district in Shenzhen, the room rates were reduced during 2019 to remain competitive. The Hotel was ranked within the top 10 on TripAdvisor in Shenzhen in 2019, we continue to provide high-end services and to be one of the best valued hotels in Shenzhen.

Group results

Group revenue decreased by 5.4% to USD79.8 million (2018: USD84.3 million). The Group recorded a net loss of USD11.3 million (2018: USD18.3 million). This net loss included an impairment provision of USD10.5 million on plant and machinery which no longer be suitable for production as Haizi changed its production method at the inositol plant. The Group's loss attributable to owners of the parent increased to USD20.0 million (2018: USD18.6 million).

During the year, the Group disposed 6.6% of its investment in Starry which resulted in a net gain of USD25.5 million (2018: USD5.1 million).

With the proceeds from the sale of Starry shares, the Group repaid some of its loans and reduced its net bank borrowings to USD131.1 million (2018: USD164.1 million) mainly due to a net decrease of USD32.1 million at Lansen level. Amount due to an intermediate parent undertaking increased to USD29.1 million (2018: USD11.5 million). Net gearing ratio for the Group was 151.2% (2018: 138.0%) as the decrease in net asset value was in a higher extent than the reduction in net debts. Net gearing ratio for Lansen was 12.6% (2018: 60.7%).

Pharmaceutical business

In the pharmaceuticals business, Lansen has implemented a number of strategic initiatives to manage challenges from regulatory reforms in the PRC in recent years. Lansen has seen some benefits in its strategy to emphasise its own product sales, such as Pafulin and Sicorten Plus, rather than on sales of agency products. Sales of its key products, Pafulin and Sicorten Plus, increased by 21.9% or USD7.7 million contributing to an overall increase in sales of its own products, which compensated for the exit of the agency product business and also improved sales margin.

Anticipating the PRC government policies to reduce the pressure on the already heavy loaded tier one hospitals and steer patients towards smaller hospitals and drug stores, Lansen will continue its existing strategy in strengthening academic promotion and expanding the coverage in large hospitals, while broadening the coverage of grassroots hospitals through partners, driving OTC sales coverage and using Zhejiang to be the pilot province for implementing its full product range and market penetration strategy. Lansen has restructured its sales force and built a commercial team and OTC team to widen the penetration in hospitals and drug stores. Lansen also closely monitors its selling and marketing expenses, including those to be incurred during the building of the commercial team and OTC team. Contributions from implementing these strategies should begin to gradually be reflected in 2020 performance.

At the same time, Lansen continued to increase investment in research and development of its core products. For Pafulin, it has successfully obtained an implied permission for the clinical trial for indication in Sjogren's syndrome.

Healthcare business

In 2019, the Group continued to develop its healthcare business platform at Natural Dailyhealth. With the support of the "Great Health" national strategy, which puts more emphasis on enhancing the immunity of the population by promoting the healthcare industry, Natural Dailyhealth has been actively working on, and implementing, its "key products and key customers" marketing strategy for its plant extract business. In 2019, Natural Dailyhealth improved market share of some of its key products and overall utilisation rate of its production facilities. In 2019, the Group started to work on healthcare food products, reviewing the operating strategy as it progressed. Natural Dailyhealth continued to follow up with the China Food and Drug Administration regarding applications for the registration of several of its healthcare products in order to build its future product portfolio.

During 2019, Haizi continued to face a competitive market for inositol and further reduction in prices and was not able to produce at full capacity. Haizi's approach is to build its competitiveness through researching and developing a series of high quality and high value- added products that meet market needs, which achieved substantial progress in 2019, and manage down the production costs to enhance the overall performance. In 2019, Haizi managed to decrease the overall unit cost of inositol by USD1.3 per kg mainly due to reduced labour costs and raw material cost.

Cosmetic business

In the cosmetic business, the Group is working to achieve synergies between its cosmeceutical business (sales of Fillderm) and its skincare business. The Group has established a professional core team to implement the strategy and the team will be expanded as and when necessary.

Cosmeceuticals

The Group plans to market Fillderm through a network of cosmeceutical clinics, which form part of the treatment packages to the clinics' clients. Further, cross selling and marketing of the Group's skincare products will be made in the clinics as a package together with Fillderm, gaining access to more potential customers.

Skincare products

The Group is building a series of skincare products. Several products have been developed by cooperating with Tianjin Robustnique Biotechnology Co., Limited, an associate of the Group, the first of these being San Parietti which was launched in the market in the second half of 2019. Additional products from the Group's skincare range will be gradually launched in the market in due course. The Group intends to establish its own flagship beauty salons to market and sell the skincare products with the aim of developing its own skincare products franchise. Customers from the beauty salons will also be introduced to Fillderm.

Investment

During the year, Lansen disposed of 9.7 million shares (2018: 2.4 million shares) in Starry, realising a net gain of USD25.5 million (2018: USD5.1 million). As at 31 December 2019, Lansen still holds 4.0% interest, or 6.7 million shares, in Starry.

Hotel

The Hotel is located in an older district in Shenzhen. In addition, as the centre of hi-tech firms and financial institutions, Shenzhen was adversely affected by the trade war between China and the United States since March 2019. Alongside this, the social unrest in Hong Kong started in mid-2019 which affected the Hong Kong travellers and overseas travellers going to Shenzhen via Hong Kong.

To respond to these impacts, the Hotel lowered its average room rates to attract more business. As a result, the Hotel's full year revenue per available room was behind last year by 13.0%. The decrease in revenue mainly resulted from transient, local corporate business and meetings. Occupancy rates decreased to 73.9% from 78.0% and overall income decreased by 13.1%. Food & Beverage revenue was also behind last year by 12.4% mainly due to poor banqueting business.

Outlook

Due to the outbreak of coronavirus, the Chinese government limited travel within China and extended the Chinese New Year holiday period in an attempt to control spread of the infection. The Group coordinated and acted swiftly with multiple authorities, deployed prevention and control measures in a timely manner, and purchased protective materials in an effort to ensure the health and safety of employees.

The Group stopped production during the extended Chinese New Year holiday period until late February when the Group gradually resumed businesses and productions. At present, our pharmaceutical, healthcare and cosmetic businesses and production at all of our plants has been resumed.

The disruption to the businesses is not expected to have a significant adverse impact on our pharmaceutical, healthcare and cosmetic performance during the above period. However, there remains uncertainty as to how the pandemic will develop in China and worldwide and how severly that will impact the economy and our businesses.

The Hotel showed a marked reduction in occupancy and bookings which resulted from the travel restrictions within China. This will have a material impact on the Hotel's performance for this year. To mitigate the negative impact, we have implemented an action plan to reduce operating costs whilst still being able to respond in a timely manner when the market recovers.

The Group will continue to implement the current strategy of its pharmaceutical, healthcare and cosmetic businesses.

Finally, I would once again like to express my gratitude to our shareholders and the directors for their long-term support. We have continued to encounter many challenges in the Chinese market and the management team has initiated a number of new strategic initiatives in order to address these challenges and to create long term competitiveness and deliver value to shareholders.

FINANCIAL AND OPERATION REVIEW GROUP RESULTS

The Group's revenue decreased by 5.4% to USD79.8 million compared to USD84.3 million last year. Due to the implementation of operating strategies to focus on own branded products and an emphasis on efficient working capital management, the pharmaceutical business recorded an increase in sales this year. Lansen's sales were USD54.2 million (2018: USD54.7 million) with higher sales of own branded products to compensate for the loss of agency products sales. Haizi's sales of inositol and di-calcium phosphate ("DCP") were USD5.4 million (2018: USD7.8 million) mainly due to the continued low price of inositol in 2019. The average price of inositol in 2019 was USD3 per kg (2018: USD5 per kg). Natural Dailyhealth's sales increased to USD7.1 million (2018: USD6.9 million) and the Hotel's revenue lowered to USD12.9 million (2018: USD14.8 million).

The Group's gross profit increased by 8.5% to USD33.0 million (2018: USD30.4 million) mainly due, again, to higher sales of own branded pharmaceutical products. Gross profit at Lansen increased to USD33.3 million (2018: USD30.3 million) and the gross loss at Haizi was similar to last year at USD2.8 million (2018: USD2.9 million). Botai's gross profit decreased to USD0.1 million (2018: USD0.2 million). Natural Dailyhealth's gross profit decreased to USD0.3 million (2018: USD0.5 million). The Hotel's gross profit decreased to USD2.2 million (2018: USD3.1 million). The Group's gross profit margin increased to 41.4% (2018: 36.1%) mainly due to the higher proportion of sales of high margin pharmaceutical products.

The Group recorded a higher operating loss of USD21.9 million (2018: USD13.6 million) mainly due to an increase in administration expenses, resulting from an increase in provision for impairment of property, plant and equipment, and no reversal of share option expenses in 2019.

The Group's finance costs increased by 12.1% to USD11.7 million (2018: USD10.5 million) due to an increase in the effective interest rate to 5.8% (2018: 5.3%) on the rise of LIBOR and the Group's borrowing rate in PRC.

The Group's share of profits from Starry, a 4.0% owned associate company primarily engaged in the production and sales of iohexal for X-CT scanners, was USD2.0 million (2018: USD1.7 million). During the period, the Group disposed 6.6% interest in Starry and recognised a net gain of USD25.5 million (2018: USD5.1 million) on such partial disposal.

The Group's loss after finance costs and tax was USD11.3 million (2018: USD18.3 million). After deducting the minority interests of Lansen, the Group's loss for the year attributable to owners of the parent was USD20.0 million (2018: USD18.6 million).

Group's Net Assets and Gearing

The Group's net assets at 31 December 2019 were USD92.0 million (2018: USD117.1 million). Net assets per share at 31 December 2019 were USD0.24 (2018: USD0.31).

The Group's cost of investment in Starry was USD9.2 million under the equity accounting basis. Based on Starry's closing price on 31 December 2019, the market value of the investment in Starry was approximately USD40.9 million. The difference between the book value and the market value of Starry was not included in the consolidated financial statements.

The Group decreased its net bank borrowings to USD131.1 million (2018: USD164.1 million) mainly due to a net decrease of USD32.1 million at Lansen. Amount due to an intermediate parent undertaking increased to USD29.1 million (2018: USD11.5 million). Net gearing ratios for the Group and Lansen were 151.2% (2018: 138.0%) and 12.6% (2018: 60.7%). Taking Starry's market value as at 31 December 2019 into consideration, the Group's net gearing ratio was 112.5%.

Lansen

Lansen's revenue decreased to USD54.3 million from USD56.9 million.

Sales from pharmaceutical products increased by 5.2% to USD50.5 million (2018: USD48.1 million), of which the sales of Pafulin and Sicorten Plus were up by 17.7% to USD38.2 million (2018: USD32.4 million) and 74.9% to USD4.5 million (2018: USD2.6 million) respectively. Sales of Lansen's agency product, MMF tablets, were down 40.5% to USD2.0 million (2018: USD3.4 million) and sales of generic drugs were down by 33.2% to USD5.8 million (2018: USD8.6 million).

Lansen is strategically focusing on developing and marketing its self-owned products to reduce its reliance on agency products. In the second half of 2018, Lansen stopped marketing Yuze brand skincare products and, as a result, sales of cosmeceutical products decreased by 92.1% to USD0.2 million (2018: USD2.3 million). In 2019, Lansen started to build its cosmeceutical team to market its own skincare products branded "San Parietti" including a series of skincare products and a facial mask series. The team aims to launch other series of skincare products, included teenager series under this brand in 2020. To accelerate Fillderm sales, Lansen continues to work with cosmetology institutions and other distribution channels to serve their customers.

Sales of healthcare products (including plant extracts and healthcare products) decreased by 45.4% to USD3.5 million (2018: USD6.5 million) due to a decrease in sales of combined granules and health supplement extracts.

Lansen's gross profit increased by 10.1% to USD33.3 million (2018: USD30.3 million) mainly due to an increase in sales of its self-owned products, Pafulin and Sicorten Plus, and an enhancement in its working capital cycle. The gross profit margin increased to 61.4% (2018: 53.2%) mainly due to a higher proportion of high gross margin, Pafulin and Sicorten Plus, sales. Lansen's operating profit was USD4.5 million (2018: operating loss of USD0.1 million). Operating profit margin was 8.2% (2018: -0.1%) due to higher profit margin of self-owned products. Administrative expenses were USD14.7 million (2018: USD15.3 million).

During the year, Lansen disposed of 9.7 million shares (2018: 2.4 million shares) in Starry and made a gain of USD25.5 million (2018: USD5.1 million). As at 31 December 2019, Lansen still holds 4.0% interest or 6.7 million shares in Starry. Certain intangible assets of USD4.5 million (2018: USD1.2 million) were impaired and provision for impairment of interest in an associate of USD0.4 million was made during the year. Net effects of one-off items were USD20.6 million (2018: USD5.9 million).

Botai

Botai is currently reviewing the marketing strategy for Fillderm and has, in the meantime, begun the process of launching the collagen facial masks into the market.

Botai's revenue was USD0.2 million (2018: USD0.3 million). Its gross profit was USD0.1 million (2018: USD0.2 million) and its operating loss was USD1.7 million (2018: USD0.8 million) mainly due to written off expired Fillderm.

Natural Dailyhealth

Following the realignment of the plant extract and health supplement businesses between Lansen and Natural Dailyhealth, Natural Dailyhealth's revenue remained steady at USD7.5 million (2018: USD7.4 million). Gross profit was USD0.3 million (2018: USD0.5 million) and operating loss was USD2.7 million (2018: USD2.6 million).

Natural Dailyhealth will continue to develop a high-end customer base across key products such as ginkgo, bilberry, ginseng and choline glycerophosphate extracts.

Haizi

During the year, Haizi produced 1,392 tonnes (2018: 1,273 tonnes) and sold 1,092 tonnes (2018:

1,247 tonnes) of inositol and produced 8,353 tonnes (2018: 8,179 tonnes) and sold 8,592 tonnes

(2018: 8,601 tonnes) of DCP.

During the second half of 2019, Haizi suffered from aggressive inositol price competition. Haizi's revenue decreased by 30.2% to USD5.4 million (2018: USD7.8 million) due to lower sales volume and price of inositol. Although Haizi managed to reduce its unit cost of inositol by 17.2%, Haizi's gross loss was USD2.8 million (2018: USD2.9 million) and operating loss increased to USD18.1 million (2018: USD6.9 million) due to higher administration expenses caused by inventory and certain plant and equipment provisions related to outdated plant and machinery which no longer be suitable for production as Haizi changed its production method.

Haizi will continue to improve its costs by improving capacity utilisation whilst reducing expenses.

Hotel Operations

Due to the slowdown in China's economic growth, the Hotel lowered its room rates to protect its market share. Its revenue decreased by 13.1% to USD12.9 million (2018: USD14.8 million). Room revenue decreased by USD1.4 million to USD8.6 million (2018: USD10.0 million). Average room rate was at USD108 (2018: USD118) and revenue per room was USD80 (2018: USD92).

Room occupancy decreased to 73.9% (2018: 78.0%) due to an decrease in transient and local corporate customers. Food and beverage revenue decreased to USD3.9 million (2018: USD4.4 million) mainly due to a decrease in the banqueting business.

The Hotel's gross profit decreased by 30.1% to USD2.2 million (2018: USD3.1 million) and operating profit decreased by 25.5% to USD2.2 million (2018: USD3.0 million). The gross profit margin increased to 16.9% (2018: 21.1%) resulting from lower room rates.

Colliers International (Hong Kong) Limited, an independent firm of qualified professional valuers, revalued the Hotel at USD135.2 million (2018: USD148.6 million). The Company has considered that the hotel's current room configuration might not be optimal and is reviewing alternative options. The existing revaluation is based on a best use scenario. The Company and the hotel management team are working on a reconfiguration development.

The Hotel continues to provide a high quality service to its customers and was consistently rated as one of the top 10 hotels in Shenzhen on TripAdvisor.

The Hotel will continue to improve its quality of service by conducting staff training and continuing to address customers' needs. It will also focus on increasing the number of high-end corporate clients to improve average room rates and its food and beverage business.

Since the beginning of 2020, the hotel's business has been adversely impacted by the outbreak of novel coronavirus. The occupancy rate for first two months of 2020 was approximately 28.6% (2019: 68.8%). The Company anticipates this will continue to impact the hotel business during the first half of 2020, and potentially beyond.

Analysis of the Group's Revenue and Gross Profit by Business Sectors

The Group's revenue and gross profit, classified into three focused business sectors, namely, pharmaceutical, healthcare and cosmetics; together with the hotel, were as follows:

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

NOTES:

1. BASIS OF PREPARATION

The preliminary results and consolidated financial statements have been prepared in accordance with all applicable International Financial Reporting Standards, International Accounting Standards ("IASs") and Interpretations (hereinafter collectively referred to as "IFRSs") issued by the International Accounting Standards Board. The consolidated financial statements also comply with IFRSs as issued by the IASB as adopted by the European Union. The differences between IFRSs as adopted by the European Union and IFRSs as issued by the IASB have not had a material impact on the consolidated financial statements for the years presented.

The consolidated financial statements have been prepared under historical cost basis except for hotel properties, certain unlisted equity investments and financial liabilities that are measured at fair values at the end of each of the reporting period. The consolidated financial statements are presented in United States Dollars ("USD"), which is the same as the functional currency of the Company. All values are rounded to the nearest thousand except when otherwise indicated.

The Group has incurred a net loss of USD11,264,000 during the year ended 31 December 2019 and, as of that date, the Group's current liabilities exceeded its current assets by USD55,957,000 (2018: USD83,521,000). The consolidated financial statements have been prepared based on the assumption that the Group can operate as a going concern and will have sufficient working capital to finance its operations in the next twelve months from 31 December 2019.

As in the past, the Group will start negotiation with the relevant banks on extension or renewal of the bank borrowings a few months prior to their respective maturities and obtain the approvals from the relevant banks before their respective maturities. Notwithstanding the positive operating cash flow from certain of its subsidiaries, as at the end of reporting period, the Group has commenced discussions with few banks. The Group does not foresee that the bank borrowings will not be renewed or extended before maturity as the fair values of pledged assets outweighs the amount of bank borrowings. The Group is also exploring options to secure long term funding, including debt and/or equity, to re-finance part of the bank borrowings. Accordingly, the Group should be able to meet in full its financial obligations as and when they fall due for the next twelve months from 31 December 2019 without significant curtailment of operations. The directors of the Company are accordingly satisfied that it is appropriate to prepare the consolidated financial statements on a going concern basis.

Should the Group be unable to continue in business as a going concern, adjustments would have to be made to the consolidated financial statements to reduce the values of the assets to their net realisable amounts, to provide for any further liabilities which might arise and to reclassify non-current assets and non-current liabilities to current assets and current liabilities respectively. No such adjustments were reflected in the consolidated financial statements.

2. ADOPTION OF NEW OR REVISED IFRSs

2.1 Adoption of new or revised IFRSs that has been issued by IASB and has been endorsed for use in the European Union - effective from 1 January 2019

Except for as explained below, the adoption of these new or revised IFRSs has no material impact on the Group's consolidated financial statements.

IFRS 16, Leases ("IFRS 16")

(i) Impact of the adoption of IFRS 16

IFRS 16 brings significant changes in accounting treatment for lease accounting, primarily for accounting for lessees. It replaces IAS 17, Leases ("IAS 17"), IFRIC-Int 4, Determining whether an Arrangement contains a Lease  ("IFRIC-Int 4"), SIC-Int 15, Operating Leases - Incentives  and SIC-Int 27, Evaluating the Substance of Transactions Involving the Legal Form of a Lease. From a lessee's perspective, almost all leases are recognised in the statement of financial position as right-of-use assets and lease liabilities, with the narrow exception to this principle for leases which the underlying assets are of low-value or are determined as short-term leases. From a lessor's perspective, the accounting treatment is substantially unchanged from IAS 17. For details of IFRS 16 regarding its new definition of a lease, its impact on the Group's accounting policies and the transition method adopted by the Group as allowed under IFRS 16, refer to note (ii) to (v) below.

The Group has applied IFRS 16 using the cumulative effect approach and recognised all the cumulative effect of initially applying IFRS 16 as an adjustment to the opening balance of profit and loss account at the date of initial application. The comparative information presented in 2018 has not been restated and continues to be reported under IAS 17 and related interpretations as allowed by the transition provision in IFRS 16.

The following table summarised the impact of transition to IFRS 16 on the consolidated statement of financial position as at 31 December 2018 to that as at 1 January 2019 as follows:

Note: Upfront payments for leasehold lands in the PRC were classified as prepaid land lease payment as at 31 December 2018. Upon adoption of IFRS 16, the current and non-current portion of prepaid land lease payment amounting to USD112,000 and USD4,175,000 respectively were reclassified to right-of-use assets.

The following reconciliation explains how the operating lease commitments disclosed applying IAS 17 at the end of 31 December 2018 could be reconciled to the lease liabilities at the date of initial application recognised in the consolidated statement of financial position as at 1 January 2019:

The weighted average lessee's incremental borrowing rate applied to lease liabilities recognised in the consolidated statement of financial position as at 1 January 2019 was 4.88%.

(ii) The new definition of a lease

Under IFRS 16, a lease is defined as a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. A contract conveys the right to control the use of an identified asset for a period of time when the customer, throughout the period of use, has both: (a) the right to obtain substantially all of the economic benefits from use of the identified asset; and (b) the right to direct the use of the identified asset.

For a contract that contains a lease component and one or more additional lease or non-lease components, a lessee shall allocate the consideration in the contract to each lease component on the basis of the relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components, unless the lessee apply the practical expedient which allows the lessee to elect, by class of underlying asset, not to separate non-lease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component.

The Group does not elect to account for all each lease component and any associated non-lease components as a single lease component.

(iii) Accounting as a lessee

Under IAS 17, a lessee has to classify a lease as an operating lease or a finance lease based on the extent to which risks and rewards incidental to ownership of a lease asset lie with the lessor or the lessee. If a lease is determined as an operating lease, the lessee would recognise the lease payments under the operating lease as an expense over the lease term. The asset under the lease would not be recognised in the consolidated statement of financial position of the lessee.

Under IFRS 16, all leases (irrespective of they are operating leases or finance leases) are required to be capitalised in the consolidated statement of financial position as right-of-use assets and lease liabilities, but IFRS 16 provides accounting policy choices for an entity to choose not to capitalise

(i) leases which are short-term leases and/or (ii) leases for which the underlying asset is of low-value. The Group has elected not to recognise right-of-use assets and lease liabilities for low-value assets and leases for which at the commencement date have a lease term less than 12 months. The lease payments associated with those leases have been expensed on straight-line basis over the lease term.

The Group recognised a right-of-use asset and a lease liability at the commencement date of a lease.

Right-of-use asset

The right-of-use asset should be recognised at cost and would comprise: (i) the amount of the initial measurement of the lease liability; (ii) any lease payments made at or before the commencement date, less any lease incentives received; (iii) any initial direct costs incurred by the lessee; and (iv) an estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset to the condition required by the terms and conditions of the lease, unless those costs are incurred to produce inventories.

The Group measures the right-of-use assets by applying cost model. Under the cost model, the Group measures the right-of-use assets at cost, less any accumulated depreciation and any impairment losses, and adjusted for any remeasurement of lease liability.

The Group recognised right-of-use assets in relation to lease of office premise and office equipment which had previously been classified as operating lease. In addition, the Group's prepaid land lease payment was reclassified as right-of-use assets on adoption of IFRS 16.

Lease liability

The lease liability should be recognised at the present value of the lease payments that are not paid at the date of commencement of the lease. The lease payments shall be discounted using the interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined, the Group shall use the Group's incremental borrowing rate.

The following payments for the right-to-use the underlying asset during the lease term that are not paid at the commencement date of the lease are considered to be lease payments: (i) fixed payments less any lease incentives receivable; (ii) variable lease payments that depend on an index or a rate, initially measured using the index or rate as at commencement date; (iii) amounts expected to be payable by the lessee under residual value guarantees; (iv) the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and (v) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease.

Subsequent to the commencement date, a lessee shall measure the lease liability by: (i) increasing the carrying amount to reflect interest on the lease liability; (ii) reducing the carrying amount to reflect the lease payments made; and (iii) remeasuring the carrying amount to reflect any reassessment or lease modifications, e.g., a change in future lease payments arising from change in an index or rate, a change in the lease term, a change in the in-substance fixed lease payments or a change in assessment to purchase the underlying asset.

(iv) Accounting as a lessor

As the accounting under IFRS 16 for a lessor is substantially unchanged from the requirements under IAS 17, the adoption of IFRS 16 does not have significant impact on these financial results.

(v) Transition

As mentioned above, the Group has applied IFRS 16 using the cumulative effect approach and recognised all the cumulative effect of initially applying IFRS 16 as an adjustment to the opening balance of profit and loss account at the date of initial application (1 January 2019). The comparative information presented in 2018 has not been restated and continues to be reported under IAS 17 and related interpretations as allowed by the transition provision in IFRS 16.

The Group has recognised the lease liabilities at the date of 1 January 2019 for leases previously classified as operating leases applying IAS 17 and measured those lease liabilities at the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate at 1 January 2019.

The Group has elected to recognise the right-of-use assets at 1 January 2019 for leases previously classified operating leases under IAS 17 as if IFRS 16 had been applied since the commencement date, but discounted using the lessee's incremental borrowing rate at the date of initial application. For all these right-of-use assets, the Group has applied IAS 36, Impairment of Assets at 1 January 2019 to assess if there was any impairment as on that date.

The Group has also applied the following practical expedients: (i) applied a single discount rate to a portfolio of leases with reasonably similar characteristics; (ii) applied the exemption of not to recognise right-of-use assets and lease liabilities for leases of low-value assets; (iii) exclude the

Initial direct costs from the measurement of the right-of-use asset at 1 January 2019; and (iv) used hindsight in determining the lease terms if the contracts contain options to extend or terminate the leases.

Other than the above, the Group has applied the practical expedients such that: (i) IFRS 16 is applied to all of the Group's lease contracts that were previously identified as leases applying IAS 17 and IFRIC-Int 4 and (ii) not to apply IFRS 16 to contracts that were not previously identified as containing a lease under IAS 17 and IFRIC-Int 4.

2.2 New or revised IFRSs that have been issued by IASB but are not yet effective or yet to be endorsed for use in the European Union

The following new or revised IFRSs, potentially relevant to the Group's consolidated financial statements, have been issued, but are not yet effective and have not been early adopted by the Group.