Half Yearly Report

Taihua plc

("Taihua" or the "Company")

Interim Results for the Six Months Ended 30 June 2011

Highlights

·; Sales RMB 16.324m (H1 2010: RMB 13.939m), increase of 17% compared to same period last year

·; Pre Tax Profit RMB 5.4m (H1 2010: RMB 14.7m)

·; Pre Tax Profit, after deduction of the valuation for the Company's biological assets (the plantation) RMB 2.758m(2010: RMB 1.706m) an increase of 62% compared to same period last year

·; Traditional Chinese Medicine Sales RMB 5.335m (H1 2010: RMB 2.124m) an increase of 151% compared to same period last year

Chairman's Statement

I am pleased to be able to report a continuation of the growth of the Company and improvement in its financial performance during the first six months of 2011.

Particularly encouraging was the performance of Traditional Chinese Medicines ("TCMs"), which I believe supports the Board's decision to increase focus and investment in this sector.

Total sales were RMB 16.324m (2010 H1: RMB 13.939m) and pre-tax profit after adjustments for plantation valuations was RMB 2.758m (2010 H1: RMB 1.706m)

Overall gross margins improved to 46.4% (2010 H1: 42.5%) due, we believe, to increasing high margin TCM sales but this was offset by an increase in sales overheads associated with the rapid increase in TCM sales.

TCMs

TCM sales in the period (RMB 5.335m (H1 2010: RMB 2.124m)) were dominated by the launch of our new anti-constipation product "Bian Tong Pian". Sales of this product were approximately RMB 3.196m (2010 H1: nil), 119,200 boxes which was 7% ahead of our forecast for the period. As previously announced on 16 November 2010, our 2011 full year forecast for Bian Tong Pian is approximately 330,000 boxes of which 111,100 was forecasted to be sold in H1 and 218,900 in H2. The Company has achieved its H1 forecast and the Board is hopeful that the H2 forecast can be similarly met.

The increase in Sales overheads in 2011 was largely as a result of commissions payable in respect of Bian Tong Pian sales

Our pre-existing TCM range meanwhile, had sales in the period of RMB 2.139m (2010 H1: RMB 2.124m) an increase of 0.7%.

Overall, the average TCM gross margin in the period increased to 69.7% (2010 H1: 47.8%) due to the effect of Bian Tong Pian sales. These sales were made at a gross margin of 80.5% compared to our pre-existing range's gross margin of 47.8% in the period. However, there are significant sales costs associated with the launch and sale of Bian Tong Pian and they have offset, to an extent, the higher gross margins generated.

The Board is encouraged by the successful launch of Bian Tong Pian and will continue to search for other TCMs to add to its range.

Forsythia

Following the completion of the long term lease for a forsythia plantation, announced on 12 January 2011, the Company has been responsible for the maintenance and control of the plantation. The approximate cost of this in the period was RMB 280,000 (2010 H1: nil) as well as amortisation of 6 months of lease cost being RMB 650,000 (2010 H1: nil). These amounts were taken to inventories and will be charged to profit upon the sale of the forsythia product.

The Board has continued to closely monitor the wholesale price of forsythia. Based on information from the wholesale market the Board believes the current price to be stable at RMB 34.5/kg compared to RMB30/kg in 2010.

The forsythia will be harvested approximately from mid September to mid October and we expect to sell the harvest in November and December.

The Board is currently in preliminary discussions with the local government on leasing the second half of the forsythia plantation. It is hoped that this transaction can be concluded in 2011 although it cannot be certain.

Active Pharmaceutical Ingredients ("APIs")

Supply statistics for Paclitaxel (all kg) were as follows:

Supply statistics for Homoharringtonine (all kg) were as follows:

Paclitaxel sales in the period were RMB 5.946m (2010 H1: RMB 5.593m). The gross margin on sales was 15.7% (2010 H1: 22.7%). The reason for the fall in the gross margin was an increase in cost of the raw material and chemicals.

The Company has applied to the local government to commence harvesting from its own plantation this Autumn. As this supply develops the Company will recognise a gain on the biological asset at the point of harvest representing the difference between the fair value (ie. current market price) of the harvest achieved and the costs of harvesting, which in turn is added to inventories. The gross margin reported in the financial statements will therefore continue to reflect the current market price of raw material purchases.

However, the gain achieved on harvest, which will be presented below gross profit, within the overall gain or loss on biological assets, should be taken into account when comparing the gross margin achieved with that historically achieved when all raw materials were externally sourced. This gain will also have positive cash flow effects in future as the harvested product replaces raw material purchases.

Each gram of paclitaxel requires approximately 3.3kg of yew tree to produce. The saving associated with using our own plantation is expected to be approximately RMB 50.5/kg. The full benefit of growing our own raw materials will only be seen as more of our yew trees reach maturity. If all raw material costs in the current period reflected the current estimated cost saving per kg the gross profit margin reported on Paclitaxel would be 37.4% (before any adjustment to reflect the capital cost and subsequent revaluation of the plantation) compared to the current 15.7%.

Homoharringtonine sales in the period were RMB 5.043m (2010 H1: 6.222m) a reduction of 18.9%. The Board believe that the reason for the reduction is the temporary suspension of production by some injectable Homoharringtonine suppliers during facilities upgrades required by the relicensing process.

Since the end of the period under review, the Company has announced the suspension and subsequently the withdrawal of its Certificate of Suitability for paclitaxel. This is undoubtedly a setback to the Company's ambitions to succeed in the European market. The Company remains fully committed to the European market both in APIs and injectables and is working closely with its Application Agent to either appeal or reapply as quickly as possible.

Consolidated Statement of Financial Position

The directors believe that a key strength of the Company is its financial position. At the end of the period, cash balances were RMB 71.990m (2010 H1: 86.263m). Most of this reduction was due to the RMB 26m consideration payment to purchase the long term forsythia lease, announced on 12 January 2011 and included under non-current assets. The Company continues to investigate other potential opportunities and acquisitions, although there is no guarantee that any transaction will complete.

Summary

Overall, I am pleased to be able to report a continuing improvement in the Company's financial performance. Particularly encouraging are the returns being generated from TCMs which the Board believes is a sector that will continue to expand in the future.

The forsythia plantation nears harvest and this represents an exciting addition to the Company's range of products.

Progress on APIs has been slower than we had hoped and the Certificate of Suitability revocation for Paclitaxel will delay our penetration into the European market. However, the inaugural harvest from our yew tree plantation is expected to take place this year which should improve our cost structure.

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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 financial report for the six months ended 30 June 2011 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 financial 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 2011 is not prepared, in all material respects, in accordance with the AIM Rules of the London Stock Exchange.

PKF (UK) LLP

Leeds, UK

TAIHUA PLC

UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 30 JUNE, 2011

TAIHUA PLC

UNAUDITED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE, 2011

TAIHUA PLC

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 30 JUNE, 2011

TAIHUA PLC

UNAUDITED CONSOLIDATED STATEMENT OFCASH FLOWS

FOR THE SIX MONTHS ENDED 30 JUNE, 2011

Notes to the Unaudited Consolidated Financial Statements for the six months ended 30 June, 2011 

1. ACCOUNTING POLICIES

Basis of preparation

The annual financial statements of Taihua plc for the year ending 31 December, 2011 will be prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted for use in the European Union. Accordingly the interim financial information has been prepared using accounting policies consistent with those which will be adopted by the group in the financial statements.

The interim financial information for the six months ended 30 June, 2011 is unaudited and that for the equivalent period in 2010 is unaudited. The comparatives for the full year ended 31 December, 2010 are not the Group's full statutory accounts for that year. A copy of the financial statements for the year ended 31 December, 2010 has been delivered to the Registrar of Companies and contained an unqualified auditor's report and did not contain a statement under sections 498(2) or 498(3) of the Companies Act 2006.

Foreign currency translation

The functional currency and the presentation currency of the Company are GBP and RMB respectively.

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 presentation currency of the Group is RMB and therefore the financial statements have been translated from GBP and HKD to RMB at the following exchange rates:

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 :-

3. OPERATING SEGMENTS

For the purposes of resources allocation and performance assessment, the chief operating decision maker, who is the Executive Director, regularly reviews revenue and cost of sales for each product.  The financial information provided to the Executive Director contains profit or loss information of each product line.  Therefore, the operation of the Group constitutes four reportable segments, being the manufacture and sales of three classes of pharmaceutical drugs and one of Traditional Chinese Medicine ("TCM") raw materials.

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 eight TCM products which are Gengnianan Tablet, Duzhong Pingya Tablet, Zaoren Anshen Keli, Bunao Anshen Tablet, Jiangzi Jianfei Tablet, Dabaidu Capsule,Runing Tablet and Bian Tong Pian.

·; TCM raw materials - In addition to supplying finished TCM products, the company also sells raw materials used in TCM manufacture. The company currently has one such raw material, forsythia, which is ultimately processed into TCMs used to combat the symptoms of colds and influenza. This segment has not generated any income during the period and therefore does not appear in the analysis below.

The Group's revenues are currently not significantly effected by seasonality, however, TCM raw materials and the group's Chinese Yew tree plantation are commonly harvested and sold in the second half of the year.

Segment revenues and costs of sales

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