Half Yearly Report

30th Sep 2009 07:00



Taihua plc

("Taihua" or the "Company")

Interim Results 

for the Six Months ended 30 June 2009

Chairman's Statement

As your newly appointed Chairman, I am of course delighted by the excellent news of the past couple of days - the confirmation that Taihua has won clearance to sell its active pharmaceutical ingredients for the anti-cancer drug Paclitaxel into the European market. Looking forward, this opens promising new horizons for the Company, and it marks a step forward that I know has been eagerly anticipated by our long-term shareholders. But looking back at the first half of 2009, I am sorry to report that the tough trading conditions faced by the Company during 2008 continued to impact our financial performance. Against the backdrop of the continuing slowdown of economic activity in key markets, our progress suffered under three major influences: the previously-announced tightening of our credit policy, decreases in the sales volume and market prices of our key active pharmaceutical ingredients - Paclitaxel and Homoharringtonine - and foreign exchange rate fluctuations that affected stated income from our key overseas markets of Russia and South America. As a result of these pressures, the sales revenue and profit before tax of the Company in Renminbi for the first six months of 2009 decreased by 73% and 96.5% respectively compared with the same period in 2008. Sales fell to RMB 8.1 million (RMB29.8 million), with pre-tax profits of RMB 0.52 million (RMB 14.65 million). Gross profit margins during the period fell to 39%, down from 63% during the first half of 2008, squeezed mainly by the sharp market pressures on the prices of Paclitaxel and Homoharringtonine. 

I can, however, report that in response to these continuing challenges, the Board has already moved to relax our credit policy once more, and to lower our selling prices to customers in line with the market. These moves have already shown early benefits by arresting the decline in sales volumes, and since the end of June sales of Paclitaxel and Homoharringtonine APIs have both improved (combined sales for July and August 2009, as set out in the Company's unaudited management accounts for that period, were RMB 4.2m).

While Paclitaxel and Homoharringtonine APIs remained the Company's principal products during the period, sales of Paclitaxel fell to 4,750 grams, a decrease of 59% compared to the first half of 2008, with Homoharringtonine sales dropping to 1,620 grams, a decrease of 75%. The scale of these reductions indicates why we have now eased our previously-tightened credit policy, acting in the belief that the decreased volume of sales resulted largely from the cash flow difficulties faced by key customers suffering a limited supply of credit during the "credit crunch". During the period, and before the decision to relax its credit terms again, the Company continued to refuse orders from what it perceived to be high risk customers unable to pay up front. In addition, as a measure to maintain cash flow, Taihua offered discounts for cash-on-delivery payment terms for other customers. 

 

The severe pricing pressures imposed by the combination of the credit difficulties faced by customers and the resulting price cuts by other suppliers led to sharp year-on-year declines in the market prices of Paclitaxel and Homoharringtonine. The average selling price of Paclitaxel during the period fell to RMB 769.23 per gram down from RMB1,033.68 per gram a year earlier. Similarly, the average selling price of Homoharringtonine fell to RMB 1,709.40, down substantially from RMB 2,498.59 during first-half of 2008. Having fallen sharply from the corresponding period of 2008, however, prices stabilised during the period, and have not fallen further since, and our performance during the second quarter was stronger than in the first, possibly reflecting improved sales of finished drugs by our customers as the general economy picked up. Sales revenues of our traditional Chinese Medicines (TCMs) are also recovering, and accounted for 20.84% of the total sales revenue during the period. Although levels have yet to recover to the point reached ahead of the Chinese-government's temporary ban on TCM sales during 2008, they also rose during the second quarter. As prices fell in every sector, our production costs remained largely unchanged. 

With the disappointments of the first half behind us, however, the Company is now actively addressing the exciting new opportunities created by this week's confirmation that the European Directorate for the Quality of Medicines (EDQM) has granted Taihua a Certificate of Suitability for its Paclitaxel APIs. This clears the way for us to sell our Paclitaxel into the European market, and we have for several months now been planning our approach, aiming to set up a distribution network hopefully by the first half of next year. The Board is exploring the options both for direct sales to drugs manufacturers, and for sales through sales agents, some of which already work elsewhere with Taihua. We have already established a broad understanding of the European market, and with production capacity at our Luonan factory to produce up to 50,000 grams of Paclitaxel a year, we are well-positioned to meet anticipated demand well within our own timeframes. As we have reported before, we anticipate that sales into Europe will generate higher margins than in our established markets, and we are also confident that with access to our own supplies of raw materials we shall be strongly positioned to begin adding new value for shareholders by the end of 2010.

The Board has also been moving forward with plans to expand its presence in the domestic Chinese market, where, as shareholders are aware, the Company's sales are currently limited to Homoharringtonine and Traditional Chinese Medicines. We have already started the process of applying for a Drug Registration licence for injectible Paclitaxel and we are awaiting early test results for inclusion in material to be submitted to the State Food and Drug Administration (SFDA). As things stand, we would hope to submit formal application documents during the first half of 2010. At the same time, we are also in the early preparatory stages to apply for Drug Registration Licences for Paclitaxel API, so that we can sell non-injectible Paclitaxel domestically, and for injectible Homoharringtonine 

It is also encouraging to note that at the end of the period, the Company had retained cash reserves of RMB 87.1 million, providing a strong underpinning to our balance sheet, and positioning us well to meet our planned objective of further growth through acquisition. The Board has identified several possible targets, and continues to monitor opportunities. Meanwhile, we continue working to consolidate our established position, adopting strict quality control procedures, maintaining close business relationships with our main customers and strengthening our research and development to deliver new products. We conduct regular reviews and inspection of our production process to ensure compliance with regulatory requirements, and maintain close links with the relevant regulatory authorities. We are also maintaining our long term supply agreements with our main suppliers, whilst at the same time continuing to develop our nurseries and plantations for the supply of Taxus (yew) trees in the Qinling Mountains of Shaanxi Province.

Finally, I wish to thank our former Chairman Richard Tanner and Hong Kong-based Non-Executive Director Lauren Lau, who both stepped down after the end of the period and whose contribution towards the development of the Company following its December 2006 admission to AIM is highly valued. Along with my new Non-Executive colleague Cao Chong, a native Mandarin-speaking lawyer who has been working in the UK for 4 years, I look forward to using my own previous experience as a Mandarin-speaker in China to help the Company move forward from here. Among other matters, during our first scheduled meeting with the full Board at the Company's Xi'an headquarters during early October, we are expecting to resolve the outstanding issues surrounding payment of the dividend which was first announced in 2007. Despite the setbacks of the past year and a half, and buoyed by our successful application to commence sales in Europe, we shall be working to rebuild our sales growth steadily during the months ahead.

For more information please contact:

Nicholas Lyth, Chairman, Taihua plc	+44 (0)776 990 6686
Katy Mitchell, WH Ireland Limited	+44 (0)161 832 2174

INDEPENDENT REVIEW REPORT TO TAIHUA PLC

We have been engaged by the company to review the condensed set of financial statements in the half-yearly report for the six months ended 30 June 2009 which comprises the unaudited consolidated statement of comprehensive income, unaudited consolidated statement of financial position, unaudited consolidated statement of changes in equity, unaudited consolidated statement of cash flows and the related notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with the terms of our engagement. Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.

Directors' responsibilities

The half-yearly report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly report in accordance with the AIM Rules of the London Stock Exchange. 

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly report has been prepared using accounting policies consistent with those to be applied in the next annual financial statements.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly report for the six months ended 30 June 2009 is not prepared, in all material respects, in accordance with the AIM Rules of the London Stock Exchange.

PKF (UK) LLP

Leeds, UK

29 September 2009

UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 

FOR THE SIX MONTHS ENDED 30 JUNE, 2009

		Six months ended		Six months ended		Year ended
		30 June, 2009		30 June, 2008		31 December, 2008
		(unaudited)		(unaudited)		(audited)
		RMB'000		RMB'000		RMB'000
Revenue		8,114		29,800		42,301
Cost of sales		(4,916	)	(11,005	)	(17,177	)
Gross profit		3,198		18,795		25,124
Other revenue		146		307		523
Selling expenses		(1,183	)	(2,502	)	(5,463	)
General and administrative expenses		(1,643	)	(1,955	)	(3,810	)
Operating profit		518		14,645		16,374
Finance costs		(2	)	-		-
Profit before income tax		516		14,645		16,374
Income tax expense		(489	)	(4,031	)	(5,261	)
Profit for the period/year		27		10,614		11,113
Other comprehensive income for the period/year
Foreign currency translation		(201	)	(82	)	(32	)
Total comprehensive income for the period/year		(174	)	10,532		11,081
Total profit for the period/year attributable to equity holders of the company		27		10,614		11,113
Total comprehensive income for the period/year attributable to equity holders of the company		(174	)	10,532		11,081
Earnings per share :
Basic (RMB per share)		0.00		0.13		0.14
Diluted (RMB per share)		0.00		0.13		0.14

UNAUDITED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE, 2009

	As at		As at		As at
	30 June, 2009		30 June, 2008		31 December, 2008
	(unaudited)		(unaudited)		(audited)
	RMB'000		RMB'000		RMB'000
ASSETS
NON-CURRENT ASSETS
Property, plant and equipment	2,559		3,138		2,830
Land use rights	1,543		1,582		1,562
Biological assets	830		830		830
	4,932		5,550		5,222
CURRENT ASSETS
Inventories	11,902		4,898		8,953
Trade receivables	10,083		17,603		14,872
Other receivables	633		662		593
Deposits and prepayments	17,764		18,788		17,193
Amounts due from related companies	27		27		27
Land use rights	39		39		39
Cash and cash equivalents	87,125		82,271		82,435
	127,573		124,288		124,112
TOTAL ASSETS	132,505		129,838		129,334
LIABILITIES
CURRENT LIABILITIES
Trade payables	1,604		531		180
Receipts in advance	169		156		169
Accrued expenses and other payables	3,821		3,904		4,413
Amounts due to directors	2,885		65		342
Income tax payable	543		1,935		632
	9,022		6,591		5,736
NET CURRENT ASSETS	118,551		117,697		118,376
TOTAL LIABILITIES	9,022		6,591		5,736
NET ASSETS	123,483		123,247		123,598
EQUITY
CAPITAL AND RESERVES ATTRIBUTABLE TO
EQUITY HOLDERS OF THE COMPANY
Share capital	12,347		12,347		12,347
Other reserves	18,536		20,640		18,678
Retained profits	92,600		90,260		92,573
TOTAL EQUITY	123,483		123,247		123,598

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 30 JUNE, 2009

													Foreign
			Merger				Reverse		General		Enterprise		currency				Share
	Share		relief		Share		acquisition		reserve		expansion		translation		Warrants		options		Retained
	capital		reserve		premium		reserve		fund		fund		reserve		reserve		reserve		profits		Total
	RMB'000		RMB'000		RMB'000		RMB'000		RMB'000		RMB'000		RMB'000		RMB'000		RMB'000		RMB'000		RMB'000
At 1 January, 2008	12,347		64,364		3,935		(63,408)		9,297		4,648		(1,226)		762		374		81,460		112,553
Profit for the period	-		-		-		-		-		-		-		-		-		10,614		10,614
Foreign currency translation	-		-		-		-		-		-		(82)		-		-		-		(82)
Total comprehensive income for the period	-		-		-		-		-		-		(82)		-		-		10,614		10,532
Share-based payments	-		-		-		-		-		-		-		-		162		-		162
Transferred to statutory reserves	-		-		-		-		1,209		605		-		-		-		(1,814)		-
At 30 June, 2008	12,347		64,364		3,935		(63,408)		10,506		5,253		(1,308)		762		536		90,260		123,247
Profit for the period	-		-		-		-		-		-		-		-		-		499		499
Foreign currency translation	-		-		-		-		-		-		50		-		-		-		50
Total comprehensive income for the period	-		-		-		-		-		-		50		-		-		499		549
Share-based payments	-		-		-		-		-		-		-		-		(198)		-		(198)
Reversal of transfer to statutory reserves	-		-		-		-		(1,209)		(605)		-		-		-		1,814		-
At 31 December, 2008	12,347		64,364		3,935		(63,408)		9,297		4,648		(1,258)		762		338		92,573		123,598
Profit for the period	-		-		-		-		-		-		-		-		-		27		27
Foreign currency translation	-		-		-		-		-		-		(201)		-		-		-		(201)
Total comprehensive income for the period	-		-		-		-		-		-		(201)		-		-		27		(174)
Share-based payments	-		-		-		-		-		-		-		-		59		-		59
At 30 June, 2009	12,347		64,364		3,935		(63,408)		9,297		4,648		(1,459)		762		397		92,600		123,483

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED 30 JUNE, 2009

	Six months ended		Six months ended		Year ended
	30 Jun, 2009		30 Jun, 2008		31 Dec, 2008
	(unaudited)		(unaudited)		(audited)
	RMB'000		RMB'000		RMB'000
CASH FLOWS FROM OPERATING ACTIVITIES
Operating profit	518		14,645		16,374
Adjustments for :-
Reversal of provision for bad debts	(283)		-		(323	)
Amortisation on land use rights	19		19		39
Depreciation	278		373		681
Share-based payments	59		162		(36	)
Interest income	(146	)	(307	)	(523	)
Provision for impairment of inventories	-		-		517
Operating cash flows before working capital changes	445		14,892		16,729
(Increase)/decrease in inventories	(2,949	)	3,206		(1,366	)
Decrease in trade receivables	5,072		3,300		6,352
(Increase)/decrease in other receivables	(40	)	27		98
(Increase)/decrease in deposits and prepayments	(571	)	(239	)	1,356
Decrease in amounts due from related companies	-		2		2
Increase/(decrease) in trade payables	1,530		229		(122	)
Increase in receipts in advance	-		-		13
(Decrease)/increase in accrued expenses and other Payables	(700	)	(312	)	197
(Decrease)/increase in amounts due to directors	-		(21	)	256
Cash generated from operations	2,787		21,084		23,515
Interest received	146		307		523
Profits tax paid	(578	)	(3,484	)	(6,017	)
NET CASH GENERATED FROM OPERATING ACTIVITY	2,355		17,907		18,021
CASH FLOWS FROM INVESTING ACTIVITY
Purchase of fixed assets	(7	)	-		-
NET CASH USED IN INVESTING ACTIVITY	(7	)	-		-
CASH FLOWS FROM FINANCING ACTIVITY
Cash advance from a director	2,543		-		-
NET CASH GENERATED FROM FINANCING ACTIVITY	2,543		-		-
NET INCREASE IN CASH AND CASH EQUIVALENTS	4,891		17,907		18,021
CASH AND CASH EQUIVALENTS AS AT 1 JANUARY	82,435		64,446		64,446
Effect of foreign exchange change	(201	)	(82	)	(32	)
CASH AND CASH EQUIVALENTS AS AT 30 JUNE/ 31 DECEMBER	87,125		82,271		82,435
ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS
Cash and bank balances	87,125		82,271		82,435

NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 30 JUNE, 2009 

1. ACCOUNTING POLICIES

Basis of preparation

The half-yearly financial information for the six months ended 30 June, 2009 is unaudited and that for the equivalent period in 2008 is unaudited. The comparatives for the full year ended 31 December, 2008 are not the Group's full statutory accounts for that year. The financial statements for the year ended 31 December, 2008 contained an unqualified auditors' report in accordance with s235 of the Companies Act 1985. 

The half-yearly financial statements were approved by the board on 29 September 2009.

The annual financial statements of Taihua plc for the year ending 31 December, 2009 will be prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted for use in the European Union. Accordingly the half-yearly financial information has been prepared using accounting policies consistent with those which will be adopted by the group in the financial statements.

In the current year the Group will adopt International Accounting Standard 1 (revised) and International Financial Reporting Standard 8.

IAS 1 (revised) requires the preparation of a statement of comprehensive income (which includes other items of comprehensive income previously not included in the income statement) or a separate primary statement showing other items of comprehensive income. The Group has adopted the first approach, extending the previously presented income statement for the current and prior periods.

IFRS 8 requires the company to reconsider its segmental analysis which must now be based around the information that is made available to the management team in making their decisions.

Foreign currency translation

The functional currency of the subsidiary undertakings is Renminbi ("RMB"), and the financial statements of the subsidiary undertakings have been drawn up in RMB. As sales and purchases are denominated primarily in RMB and receipts from operations are usually retained in RMB, the Directors are of the opinion that RMB reflects the economic substance of the underlying events and circumstances relevant to the Group. Monetary assets and liabilities maintained in currencies other than RMB are translated into RMB at the approximate rates of exchange ruling at the balance sheet date. Transactions in currencies other than RMB are translated at rates ruling on the transaction dates.

The financial statements of the Company and its BVI subsidiary are translated into the Company's presentation currency using the year-end / period-end rates of exchange for the statement of financial position items and the average rates of exchange for the year / period for the statement of comprehensive income items.

The presentation currency of the Group is RMB and therefore items denominated in foreign currency have been translated from GBP and HKD to RMB at the following exchange rates:

	Period end rates	Average rates
30 June 2009	£1 = RMB11.3074	£1 = RMB10.2199
	HKD 1 = RMB0.8832	HKD1 = RMB0.8828

2. REVENUE

Revenue on sale of goods represents the invoiced value of goods sold, net of value added tax ("VAT"), consumption tax ("CT") and other sales taxes, after allowances for goods returns and trade discounts.

An analysis of the Group's turnover and other revenue is set out below :-

	Six months ended		Six months ended		Year ended
	30 June, 2009		30 June, 2008		31 December, 2008
	(unaudited)		(unaudited)		(audited)
	RMB'000		RMB'000		RMB'000
Revenue	8,114		29,800		42,301
Other income
Interest income	146		307		523
Total revenue	8,260		30,107		42,824

 

3.  OPERATING SEGMENTS

The Group's reportable segments under IFRS 8 Operating Segments are as follows:

Paclitaxel - Paclitaxel is extracted from the bark of the yew tree (Taxus). This drug is one of the main-stream treatments for cancer of the ovaries, breast, certain types of lung cancer, and a cancer of the skin and mucous membranes more commonly found in patients with acquired immunodeficiency syndrome (AIDS).

Homoharringtonine - Homoharringtonine is an alkaloid extracted from the branches and leaves of the Cephalotaxus tree. This drug has been prescribed for acute myeloid leukaemia and other cancers in China.

TCM products - Traditional Chinese Medicine has recognition as a viable alternative health treatment and has been recognised by the World Health Organisation for its effectiveness in the treatment of certain forms of illnesses and diseases. The Company currently manufactures seven TCM products including Gengnianan Tablet, Duzhong Pingya Tablet, Zaoren Anshen Keli, Bunao Anshen Tablet, Jiangzi Jianfei Tablet, Dabaidu Capsule and Runing Tablet.

The Group's revenues are not significantly impacted by seasonality.

Segment revenues and costs of sales

The following is an analysis of the Group's revenue and cost of sales by reportable segments:

	Paclitaxel	Homoharringtonine	TCM Products	Consolidated
Six months ended 30 June 2009 (unaudited)	RMB'000	RMB'000	RMB'000	RMB'000
Revenue	3,654	2,769	1,691	8,114
Cost of sales	2,819	1,127	970	4,916
Gross profit	835	1,642	721	3,198

	Paclitaxel	Homoharringtonine	TCM Products	Consolidated
Six months ended 30 June 2008 (unaudited)	RMB'000	RMB'000	RMB'000	RMB'000
Revenue	12,094	16,490	1,216	29,800
Cost of sales	6,211	4,134	660	11,005
Gross profit	5,883	12,356	556	18,795

	Paclitaxel	Homoharringtonine	TCM Products	Consolidated
Year ended 31 December 2008	RMB'000	RMB'000	RMB'000	RMB'000
Revenue	16,406	21,881	4,014	42,301
Cost of sales	9,147	5,849	2,181	17,177
Gross profit	7,259	16,032	1,833	25,124

The management of the Company take into account revenue and costs of sales as the Key Performance Indicators when they make management decisions. Other costs are not allocated to operating segments as these are considered to be central operating costs of the business. Assets and liabilities are not considered to be specific to individual operating segments and therefore separate analysis is not undertaken.

4. INCOME TAX EXPENSE

The tax charge represents the charge to PRC Income Tax on the assessable profits for the period at the rate of 25%.

5. EARNINGS PER SHARE

Basic earnings per share

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period.

 

	Six months ended		Six months ended		Year ended
	30 June, 2009		30 June, 2008		31 December, 2008
	(unaudited)		(unaudited)		(audited)
	RMB'000		RMB'000		RMB'000
Profit attributable to equity holders of the company	27		10,614		11,113
Weighted average number of ordinary shares in issue (thousands)	81,647		81,647		81,647
Earnings per share (RMB per share	0.00		0.13		0.14

Diluted earnings per share

The Company has two categories of dilutive potential shares - share options and warrants. A calculation is done to determine the number of shares that could have been acquired at fair value based on the monetary value of the subscription rights attached to outstanding share options and warrants. It is compared with the number of shares that would have been issued assuming the exercise of the share options and warrants.

 

	Six months ended		Six months ended		Year ended
	30 June, 2009		30 June, 2008		31 December, 2008
	(unaudited)		(unaudited)		(audited)
	RMB'000		RMB'000		RMB'000
Profit attributable to equity holders of the Company	27		10,614		11,113
Weighted average number of ordinary shares in issue  (thousands)	81,647		81,647		81,647
Adjustment for share options and warrants (thousands)	-		683		298
Weighted average number of ordinary shares for diluted earnings (thousands)	-		82,330		81,945
Diluted earnings per share (RMB per share)	0.00		0.13		0.14

For the period ended 30 June, 2009, diluted earnings per share is equal to the basic earnings per share because the potential shares are antidilutive, as the exercise price of the company's share options and warrants were higher than the average market price of the company's shares.

6. AMOUNTS DUE TO DIRECTORS

	30 June, 2009		30 June, 2008		31 December, 2008
	(unaudited)		(unaudited)		(audited)
	RMB'000		RMB'000		RMB'000
Chun Chai	26		26		26
Yunwu Liu	21		24		21
Liyi Chen	2,838		15		295
	2,885		65		342

The amounts are interest-free, unsecured and repayable on demand. The Directors consider the carrying amounts of amounts due to Directors approximates their fair value.

ENDIR PUUBWBUPBGAB

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