Interim results for six months ended 30 June 2014

Cathay International Holdings Limited

("Cathay" or the "Company")

Interim results for the six months ended 30 June 2014

Hong Kong, 29 August 2014 - Cathay International Holdings Ltd. (LSE: CTI.L), an investment holding company and a leading investor and operator in the growing healthcare sector in the People's Republic of China, today announces its Interim Results for the six months ended 30 June 2014.

Highlights

Group

· Revenue grew by 39.2% to USD74.7 million (2013 H1: USD53.7 million)

· Gross profit increased by 30.9% to USD35.9 million (2013 H1: USD27.4 million)

· Operating profit increased by 170.9% to USD9.5 million (2013 H1: USD3.5 million)

· Net profit before non-controlling interests increased to USD3.7 million (2013 H1: USD0.03 million)

· Net profit attributable to owners of the parent was USD0.2 million, a turnaround from last period (2013 H1: loss of USD3.1 million)

Lansen

· Revenue increased by 19.3% to USD55.4 million (2013 H1: USD46.4 million)

· 12.1% growth in sales of core rheumatic products (Pafulin, Tuoshu, and MMF)

· Gross profit increased by 15% to USD30.4 million (2013 H1: USD26.4 million)

· Gross margin decreased to 54.9% (2013 H1: 56.9%)

· Operating profit increased by 18.3% to USD10.2 million (2013 H1: USD8.6 million)

· Net profit increased by 13.9% to USD7.6 million (2013 H1: USD6.7 million)

· Acquired Sicorten PlusTM from Novartis and obtained distribution rights for Kefumei from Xian Juzi Biology Gene Technology Company Limited. Combined products contributed profits of USD0.5 million

Haizi

· Revenue of USD10.7 million (2013 H1: nil)

· Gross profit USD4.2 million (2013 H1: nil)

· Overall gross margin was 39.3% (2013 H1: nil)

· Operating profit USD1.9 million (2013 H1: loss of USD0.5 million)

· Net profit USD1.0 million (2013 H1: loss of USD0.6 million)

· Inositol production reached an average of 122 tonnes per month in the second quarter, from 100 tonnes per month at end of 2013

Yangling

· Revenue increased by 382.3% to USD3.3 million (2013 H1: USD0.7 million)

· Gross profit of USD0.3 million (2013 H1: gross loss of USD0.02 million)

· Gross margin 8.4% (2013 H1: negative 3.2%)

· Operating loss reduced to USD1.1 million (2013 H1: USD1.7 million)

Botai

· Operating loss decreased to USD0.5 million (2013 H1: USD0.6 million)

· Expansion and modification of collagen production facilities will commence in H2 2014

Hotel

· Revenue increased by 3.5% to USD6.8 million (2013 H1: USD6.6 million)

· Occupancy rate increased to 65.2% (2013 H1: 53.7%)

· Average room rate decreased to USD133 (2013 H1: USD148)

· Gross margin dropped to 14.7% (2013 H1: 15.3%)

· Food and beverage sales dropped to USD1.9 million (2013 H1: USD2.1million)

· Operating profit was USD0.9 million (2013 H1: USD1.0 million)

Commenting on the interim results, Mr. Lee Jin-Yi, CEO of Cathay International Holdings Limited, said: "Despite the slower growth in China in the first half of the year, Cathay has achieved several important milestones during the period. Haizi has continued to increase its monthly production of inositol and we were very pleased to hit a record high of 130 tonnes in April 2014. Lansen has expanded its product pipeline with the addition of dermatology and skincare products. The management team has continued to work hard by streamlining and forming important synergies across different subsidiaries. Although we expect the next six months to be challenging due to pricing pressures in the region, we are confident that Cathay is well positioned to achieve further performance growth and deliver value to shareholders."

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About Cathay

Cathay International Holdings Limited (LSE: CTI.L), focused on the People's Republic of China ("PRC"), is an investment holding company and a leading investor and operator in the growing healthcare sector in the PRC. The Group employs more than 2,000 people across the PRC, including over 30 specialist corporate and business development staff based at the holding company's offices in Hong Kong and Shenzhen.

Cathay aims to identify business opportunities with emphasis on high growth healthcare markets and build them into market sector leaders, with a clear exit strategy. Cathay has demonstrated a strong track record of identifying high-growth potential investment opportunities in this area including: Lansen, China's leading specialty pharmaceutical company focused on rheumatology and dermatology; Haizi, a company engaged in the manufacture, marketing and sale of inositol and DCP; and Yangling, a company engaged in the extract and trading of key active ingredients for healthcare products, including inositol. To complement its healthcare portfolio, Cathay has a research and product development business focused on bringing new products to the growing Chinese market.

Cathay also has a hotel investment. For more information please visit the Company's website: www.cathay-intl.com.hk

Chairman's Statement

Against a backdrop of unfavorable environment in the region, Cathay has been able to achieve several important milestones in the first six months of 2014. The environment saw the following challenges during the period: growth of China's economy slowed to 7.4 percent; growth in Chinese pharmaceutical sales also dropped to 13% as pharmaceutical companies had to stop production in order to pass new GMP standards and a new round of hospital bidding began later than expected. The inositol market remained flat with several new supply capacities, including Haizi, entering the market and causing price pressure despite a 21.3% growth in the export of China plant extracts to reach USD1.4 billion in 2013. We are confident that such adverse impact caused by reforms and market competition are transitory and will lead to long term growth of the Chinese healthcare and pharmaceutical markets.  

Lansen successfully expanded its specialty drug portfolio from products used to treat autoimmune disorders in the field of rheumatology to also include pharmaceutical products for use in dermatological indications. During the period, Lansen acquired Sicorten Plus, a corticosteroid cream marketed and sold in China, from Novartis; and also obtained the exclusive distribution rights for Kefumei, a collagen dressing product used in medical skincare, from Xi'an Juzi Biology Gene Technology Co., Ltd. Lansen is also working with Botai to explore business synergies on the marketing and sales of collagen injectable fillers. These dermatology and medical skincare products not only create another pillar and strengthen Lansen's specialty drug business, but will bring immediate revenue growth. Lansen also acquired the development rights of Tofacitinib in China, currently approved for the treatment of rheumatoid arthritis in the US and Russia, from Guangzhou EGG Biotechnology Co., Ltd and, although the final China SFDA approval is not expected for another five years, this transaction signifies Lansen's first cooperation with a major contract research organisation (CRO).

Haizi has been gradually increasing its inositol production level from approximately 100 tonnes per month in December 2013, to an average of 122 tonnes per month for the second quarter and a record high of 130 tonnes in April 2014. It has resolved the previous 'bottle neck' with phytin production and expects to reach approximately 150 tonnes per month by the end of this year. Haizi sold its inositol at an average price of USD17.2 per kg during the period. However, due to new supply capacities in the market, Haizi has recently seen a drop in inositol price to USD12-14 per kg. Haizi will continue to focus on cost reduction, streamlining and efficiencies, including the modification of its processes to produce the higher margin food grade DCP by-product, to improve its competitiveness.

Our hotel continues to outperform the competition in terms of occupancy rate and is ranked ninth from 1,961 hotels in Shenzhen by Tripadvisor.

For the first half of 2014, driven by the good performance of Lansen's specialty drugs and Haizi's inositol, Group revenue grew by 39.2% to USD74.7 million. Group gross profit rose by 30.9% to USD35.9 million and Group operating profit increased by 170.9% to USD9.5 million. Group finance costs increased 72.5% to USD3.7 million. Group profit for the period before non-controlling interests rose to USD3.7 million, compared to USD31,000 in the last period. As Lansen remained the most profitable operation of Cathay during the period, after deducting Lansen's minority interests, Group profit for the period attributable to owners of the parent was only USD150,000, but nevertheless, was a turnaround from the loss of USD3.1 million for the same period in 2013.

The Group's net bank borrowings as at 30 June 2014 increased to USD132.7 million (31 December 2013: USD121.0 million) and net gearing increased to 64.1% (31 December 2013: 59.2%). In July, the Group refinanced certain of its bank facilities with an USD60.5 million 5-years secured term loan with a substantial portion of the principal repayment at final maturity in 2019, which effectively extended the repayment schedules originally to mature in 2015.

Whilst the business is in one of its strongest ever positions operationally and financially, we remain cautious in the second half of the year with anticipated continued price volatility in the inositol market, price cutting pressures on Tuoshu, one of Lansen's specialty drugs, as well as an expected increase in marketing expenses at Lansen for the launch of both Sicorten Plus and Kefumei. As we complete further bank refinancing, the Group also expects to see higher finance costs.

We will continue to build synergies amongst our different subsidiaries. The collaboration between Lansen and Yangling's plant extract business should show positive results in product marketing and production. We aim to complete the expansion of Botai's facilities by the end of this year and are exploring possibilities to leverage on Lansen's infrastructure to distribute the collagen fillers. Lansen will lead the Group's venture into the healthcare products market by initially building a small production facility and obtaining licenses for a couple of bilberry/ginseng related products.

The Group is well positioned for strong revenue growth in the coming years. Our challenge still remains in the declining trend of our product prices. As well as reducing our production costsandmanaging down our expenses, we will continue to build the efficiencies, scale and synergies in order to maintain healthy margins.

Sum Soon Lim

Chairman

28 August 2014

OPERATION REVIEW

Financial Performance

For the first six months of 2014, the Group made a significant turnaround compared to the same period last year, driven by Haizi's sales of inositol and DCP (Haizi did not commence volume business until November 2013); resumed production at Yangling, and the improved performance at Lansen.

Group revenue grew by USD21,013,000 (up 39.2%) to USD74,681,000, mainly driven by Haizi's sales of USD9,539,000 and the increase in Lansen's sales by USD8,963,000 (up 19.3%). Yangling resumed some business volume and sales increased by USD2,280,000 (up 332.8%). Hotel's revenue grew slightly during the period.

Group gross profit rose by USD8,467,000 (up 30.9%) to USD35,867,000, of which USD4,203,000 was from Haizi and the increase in Lansen's gross profit was USD3,970,000 (up 15.0%). Yangling recorded a small turnaround in gross profit to USD276,000.

Group operating profit increased by USD5,985,000(up 170.9%) to USD9,487,000. Lansen contributed an increase in operating profit of USD1,577,000 (up 18.3%) to USD10,197,000; while Haizi achieved an operating profit of USD1,893,000, a turnaround from the loss of USD488,000 in the last period. Yangling also reduced its operating loss by USD670,000 to USD1,071,000.There was lesscorporate overhead at USD1,961,000, a decrease of USD1,247,000 from the last period, mainly due to the reversal of share option costs of USD766,000 on share options lapsed in the current period; and, in the last period, there was a bank charge of USD720,000 on bank facilities.

Group finance costs increased by USD1,572,000 (up 72.5%) to USD3,741,000, resulting from the increase in the Group's bank borrowings, the increase in average interest rate at 4.4% p.a. (2013 H1: 4.1% p.a.); and no further interest expense was capitalised during the period (2013 H1: USD773,000).

Group's after tax profit before non-controlling interests for the period was USD3,721,000 (2013 H1: USD31,000). The Group's profit attributable to owners of the parent for the period was USD150,000 (2013 H1: loss of USD3,073,000).

Group's Gearing

The Group's net bank borrowings increased to USD132,728,000 compared to USD120,966,000 as at 31 December 2013, mainly due to Lansen's increased debt finance for the acquisition of Sicorten Plus from Novartis. Net gearing increased to 64.1% (31 December 2013: 59.2%). In July 2014, the Group secured an USD60.5 million 5-years term loan to refinance certain bank borrowings.

Lansen

Lansen recorded an overall 19.3% top line growth, driven by 12.4% growth in the specialty pharmaceuticals sales, 35.5% growth inplant extracts, and 21.0% growth in other pharmaceutical products. Growth in the specialty pharmaceuticals sales was attributable to core rheumatic drugs sales, of which Pafulin sales grew by 11.0%; Tuoshu, 20.5%; while immunosuppressant mycophenolate mofetil ("MMF")was about the same as last period due to temporarily disruption of supplier's production plant during GMP certification.  The strong growth in plant extracts was due to increasing demand in the fast growing modern Chinese medicines. The growth in other pharmaceutical products was mainly due to growth in sales of Bazhenkeli (for women healthcare) which was included in the Chinese essential drug list.

Lansen's gross profit increased by 15.0% to USD30,384,000.  There was a decrease in the overall gross margin to 54.9% (2013 H1: 56.9%) due to the reduced gross margin of core rheumatic drugs to 73.8% (2013 H1: 76.6%) as a result of increase in Pafulin's production costs; and higher proportionate sales in the lower margin plant extracts and other pharmaceutical products.

Lansen's operating profit rose by 18.3% to USD10,197,000.  Lansen continues to manage down its selling and distribution expenses to 28.8% of revenue (2013 H1: 30.1%).

Lansen's associate, Zhejiang Starry Pharmaceutical Co. Limited ("Starry"), achieved improved contribution to USD689,000 (2013 H1: USD499,000), due to disruption in production last period upon new GMP certification.

Lansen's profit before non-controlling interests only increased by 13.9% to USD7,586,000, at a slower rate than increase in operating profit as a result of increased finance costs.

In first half this year, Lansen acquired Sicorten Plus™ from Novartis and obtained the distribution right of Kefumei from Xi'an Juzi Biology Gene Technology Company Limited. These dermatology and skincare products contributed profits of USD455,000in the current period.

In May 2014, the National Development and Reform Commission ("NDRC") issued the "Notice concerning Improving Price Management of Low-price Drugs", which means the cap on the maximum retail price of low end medicines will be removed. This will have a positive impact on Lansen's other pharmaceutical products such as Bazhenkeli.

Although the new healthcare reform continues to improve the nationwide medical insurance coverage, efforts to control the nation's healthcare spendingare simultaneously stepping up, resulting in downward pressure on drug prices and a more competitive environment. As a result, Lansen expects to see some price volatility on Tuoshu.

Haizi

During the period, Haizi recorded revenue of USD10,696,000 (2013 H1: nil) from sales of inositol and by-product, DCP. Haizi gradually increased its monthly inositol production to a record high of 130 tonnes in April 2014 and an average of 122 tonnes per month in the second quarter. The average selling price of inositol was approximately USD17.2 per kg during the period. With the steady increase in the phytin supply, inositol production should continue to climb and reach a production run rate of more than 1,800tonnes per annum (72% of design capacity of 2,500 tonnes) by the end of this year.

Haizi's gross profit was USD4,203,000 (2013 H1: nil) and its overall gross margin was 39.3% (2013 H1: nil). Haizi's operating profit was USD1,893,000 (2013 H1: loss of USD488,000) and its net profit was USD1,031,000 (2013 H1: loss of USD597,000).

With the entry of new supply capacities into the market, Haizi has started to see some price volatility of inositol, with a drop to the price range of USD12-14 per kg. Haizi continues to streamline its production process to be more cost competitive and will work on modifying its processes to produce higher margin food grade DCP to improve profits.

Yangling

Yangling's non-inositol business volume began to pick up and its revenue, mainly agency sales of a part of Haizi's inositol, bilberry extracts and ginseng extracts,increased by 382.3% to USD3,304,000 (2013 H1: USD685,000). It achieved a gross profit of USD276,000(2013 H1: gross loss of USD22,000). Yangling's gross margin was 8.4% (2013 H1: negative gross margin of 3.2%) due to improvement in its bilberry extracts margin and recovery of sales of certain obsolete stock previously written off. The operating loss of Yangling was reduced to USD1,071,000 (2013 H1: USD1,741,000).

Yangling continues to search for suitable plant extract products and build its competitive advantage by tailoring high quality standard products. Yangling is also working with Lansen on business synergy in health supplement and plant extract products.

Botai

Botai's operating loss decreased to USD494,000 (2013 H1: USD634,000).

The expansion and modification of the collagen production facilities is underway and will commence in the second half of this year. Botai is exploring ways to cooperate with Lansen on thedistribution of its collagen injectable fillers.

Hotel Operations

During the period, the Hotel's revenue increased by 3.5% to USD6,807,000, mainly due to increased room occupancy of 65.2% (2013 H1: 53.7%) . The average room rate decreased to USD133 (2013 H1:USD148) because of an increase in room sales to large multinational corporate clients at preferential corporate rates.  As a result, the gross margin dropped to 14.7% (2013 H1: 15.3%). The Hotel outperformed its peers in the Lowu district in Shenzhen in terms of room occupancy, which saw an average 5.0% drop in the period. Currently the Hotel is ranked number 9 amongst 1,961 hotels in Shenzhen by Tripadvisor, reflecting customer satisfaction of the Hotel's high quality service.

The Hotel's food and beverage sales dropped by 8.5% to USD1,929,000, due to decrease of USD205,000 in its banqueting business.

The Hotel's operating profitwas USD923,000 (2013 H1: USD953,000).

The Hotel will continue its strategy of maintaining high quality service through extensive staff training and will grow in both the business and transient segments in the domestic market through proactive marketing.

GRANT OF SHARE OPTIONS

On 1 April 2014, the Company granted 7,390,353 options under a Share Option Plan approved by shareholders of the Company on 3 June 2010. The number of options granted to date to the Group's management and employees represents approximately 79% of the options currently available under the Share Option Plan.

PRINCIPAL RISKS AND UNCERTAINTIES

The directors do not consider that the principal risks and uncertainties, as set out on pages 13 to 17 of annual report for the year ended 31 December 2013, have changed since its publication.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors confirm that, to the best of his knowledge:

i the condensed set of financial statements, which has been prepared in accordance with the International Financial Reporting Standards and IAS 34 Interim Financial Reporting, gives a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer, or the undertakings included in the consolidation as a whole;

ii the interim management report includes a fair review of the information required by the Disclosure and Transparency Rules 4.2.7R; and

iii the interim management report includes a fair review of the information required by the Disclosure and Transparency Rules 4.2.8R.

On behalf of the Board By order of the Board

Patrick Sung Yip Pui Ling Rebecca

Director Secretary

28 August 2014 28 August 2014

Condensed Consolidated Statement of Profit or Loss

Condensed Consolidated Statement of Comprehensive Income

Condensed Consolidated Statement of Financial Position

Consolidated Statement of Changes in Equity

Condensed Consolidated Statement of Cash Flows

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PREPARATION

The unaudited condensed consolidated interim financial statements (the "Interim Financial Statements") have been prepared in accordance with International Accounting Standard ("IAS") 34 "Interim Financial Reporting" issued by the International Accounting Standards Board (the "IASB").

The accounting policies adopted in the Interim Financial Statements are consistent with those used in the preparation of the Group's annual financial statements for the year ended 31 December 2013, which have been prepared in accordance with International Financial Reporting Standards ("IFRSs") (which collective term includes all applicable individual International Financial Reporting Standards and Interpretations as approved by the IASB, and all applicable individual International Accounting Standards and Interpretations as originated by the Board of the International Accounting Standards Committee and adopted by the IASB).

The Interim Financial Statements have been prepared under the historical cost convention as modified by the revaluation of hotel properties and financial instruments. 

The Interim Financial Statements have been prepared on a going concern basis which assumes the realisation of assets and satisfaction of liabilities in the ordinary course of business notwithstanding that the Group had net current liabilities of USD37,641,000 as at 30 June 2014.

In July 2014, the Group secured an USD60.5 million 5-year term loan to refinance certain bank borrowings. Also, as in the past, the Group will start negotiation with the banks on extension or renewal of the banks borrowings a few months prior to their maturities and will obtain the bank approvals before maturity. The Group does not foresee that the bank borrowings will not be renewed or extended before maturity. The Group is also exploring options to secure long term funding, including debt and/or equity, to refinance 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 30 June 2014 without significant curtailment of operations and are satisfied that it is appropriate to prepare the financial statements on a going concern basis on the assumption that the Group will have sufficient working capital to finance its operation in the next twelve months from 30 June 2014.

Should the Group be unable to continue in business as going concern, adjustments would have to be made to the financial statements accordingly.

In the current interim period, the Group has applied, for the first time number of new or revised standards and interpretations ("new or revised IFRSs") issued by the IASB. The application of the new or revised IFRSs in the current interim period has no material effect on the amounts reported in these Interim Financial Statements and/or disclosures set out in theses Interim Financial Statements.

The Group has early adopted the amendments to IAS36 Recoverable Amount Disclosures for Non-Financial Assets for the first time in the Group's annual financial statements for the year ended 31 December 2013.

2. SEGMENT INFORMATION

The totals presented for the Group's operating segments reconciled to the entity's key financial figures as presented in its Interim Financial Statements as follows:

3. INCOME TAX EXPENSE

The provision for current tax has been made in respect of the assessable profits arising in the People's Republic of China during the period.

4. EARNINGS/(LOSSES) PER SHARE attributable to owners of the parent

The calculation of the basic and diluted earnings/(losses) per share attributable to the owners of the Company is based on the following data:

For the period ended 30 June 2014 and 2013, the computation of diluted earnings/(losses) per share does not include the 1,292,353 Common Shares contingently issuable to Mr. Lee Jin-Yi, as the conditions for their issue were not met throughout the period.

For the period ended 30 June 2014 and 2013, the computation of diluted earnings/(losses) per share did not assume the exercise of the Company's outstanding share options as the performance condition of those options was not satisfied.

PUBLICATION OF NON-STATUTORY ACCOUNTS

The unaudited interim results do not constitute full accounts prepared in accordance with the listing rules of the UK Financial Conduct Authority. The figures for the year ended 31 December 2013 have been based on the full accounts of the Group which were prepared under IFRS and which included an unqualified audit report. The interim financial information in this report has been neither audited nor reviewed by the Group's auditor.

Copies of this report have been sent to shareholders and are available to the public from the Company's registrars and transfer office at Capita Asset Services, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU.