CTI.L Regulatory News (CTI)

Cathay International Holdings Limited

Interim Results for the Six Months Ended 30 June 2011

Hong Kong, 25 August 2011:Cathay International Holdings Limited ("Cathay" or "the Group") (LSE: CTI.L), an investment holding company and a leading investor in the growing healthcare sector in the People's Republic of China, today announces its interim results for the six months ended 30 June 2011. Year to date highlights include:

Operational highlights

·; Haotian completed the production facilities expansion for inositol and commenced its trial production runs

·; Lansen reported 9% growth in revenues, benefiting from the continuing strong growth in the Chinese pharmaceutical market, with 19% growth in its key anti-rheumatic products Pafulin, Tuoshu and mycophenolate mofetil

·; Starry, an associated company, achieved high growth in profits from strong demand for the contrast agent iohexal for X-rays and CT scans

·; The Hotel reported a 35% increase in sales and more than tripled its operating profits due to the successful implementation of its repositioning strategy to target highend business travellers

Financial highlights

·; Group revenue declined 7% to USD38.5million (H1 2010: USD41.5million) mainly from a strategic decision at Haotian to withdraw temporarily from non-inositol products other than bilberry

·; Gross profit increased to USD20.1million (H1 2010: USD19.7million)

·; Operating profit of USD3.7million (H1 2010: USD5.8million but USD2.6million excluding a one-time reversal of a warranty provision)

·; Net loss after non-controlling interests of USD127,000 (H1 2010: net profit of USD1.475million but net loss of USD1.723million excluding the above mentioned one-time reversal item)

Commenting on the interim results, Mr. Lee Jin-Yi, CEO of Cathay International Holdings Limited, said: "We have made good progress in Lansen and our Hotel with strong revenue growth despite the challenging market conditions during the first half of 2011. We believe the Group will continue to improve operations in its three core businesses, with Haotian operations set to progress with the forthcoming commercialization of inositol and DCP. Cathay is well positioned to capitalize on the continued growth seen in the Chinese economy and we remain confident about our future targets for the second half of 2011."

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About Cathay International Holdings Limited

Cathay International Holdings Limited, focused on the People's Republic of China ("PRC"), is an investment holding company and a leading investor in the growing healthcare sector in China. The Group now employs more than 1,700 people across the PRC, including over 30 specialist corporate and business development staff based at the holding company's headquarters in Hong Kong and Shenzhen.

The Group aims to identify investment opportunities with emphasis on high growth healthcare markets and build them into market sector leaders, with a clear exit strategy. The Group has demonstrated a strong track record of identifying potential high-growth investment opportunities in this area, including: Lansen Pharmaceutical Holdings Limited, a leading specialty pharmaceutical company focused on rheumatology and Haotian Holdings Limited, a company engaged in the manufacture, marketing and sale 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.

The Group also has a private equity investment arm focused on minority investment opportunities and a hotel investment.

CHAIRMAN'S STATEMENT

The Group focused on improving its operations during a demanding first half of 2011. Within Haotian, we have completed the production facilities expansion for diet supplement product inositol and are now conducting trial production runs. Haotian is also working to grow its customer base, preparing for sales of inositol and the associated by-product dicalcium phosphate ("DCP"). Lansen registered solid revenue growth of 19% in its key products Pafulin, Tuoshu and mycophenolate mofetil. Our Hotel recorded a 223% growth in operating profits, benefiting from its recent strategic repositioning and from an improvement in overall market conditions that increased occupancy rates.

Although there was solid revenue growth in Lansen and our Hotel during the first half of 2011, the Group's revenue declined by 7% to USD38,517,000 (2010: USD41,527,000). This was mainly from a substantial decrease in the sales of Haotian's non-inositol products. As previously indicated, Haotian has made a strategic decision to concentrate its non-inositol business on bilberry and other potential diet supplement ingredient products that offer better cost control and market access. As a result, Haotian has temporarily stopped the manufacture and sales of all non-inositol products other than bilberry.

Despite better operating performances, we report a small net loss after non-controlling interests of USD127,000 for the first six months of 2011, compared with a net profit of USD1,475,000 a year ago. However, there was a one-time reversal of the expired warranty provision (USD3,198,000) relating to the disposal of Stonehill in last year's interim results. Excluding the reversal, our underlying businesses achieved an improvement of USD1,596,000.

Since the financial crisis in 2009, the Chinese Government has relied on large public spending and loose credit policies to help stimulate the economy. China enjoyed GDP growth in 2010 of 10.3%, one of the highest in the world. The stimulus package also generated inflation along with this growth and as a result, the Government has been cautiously raising interest rates and tightening its banking credit during the past six months. The inflation and rising interest rates have put pressure on costs of our China businesses.

On the other hand, the healthcare and pharmaceutical markets in China continue to enjoy an annualized growth rate of around 15% due to the strong economy and increased availability of healthcare services and products. In March 2011, the Government announced its second batch of price cuts and implemented further guidelines to manage down healthcare costs in the country, which added pressure to Chinese pharmaceutical stocks, and in August 2011 the Government announced its third batch of price cuts, with effect from 1 September 2011. Lansen has not been directly affected by these price reductions. Riding on the pharmaceutical market growth and with its effective cost control measures, Lansen anticipates being able to minimize the effect of inflation and rising interest rates on its business.

Given the current global market uncertainty and inflationary pressures within the Chinese economy, we will tightly manage our labour and raw material costs in the second half of 2011. The Chinese healthcare and pharmaceutical markets, in which the Group operates, should continue to grow at a healthy pace. The Group has slowed down its search for new acquisition opportunities in the face of steep asset pricing, in the expectation that the difficult market environment and rising interest rates will bring more attractive potential targets within the next 12-18 months.

FINANCIAL PERFORMANCE

Total revenues of the Group fell from USD41.5 million to USD38.5 million. This fall mainly reflects Haotian's strategic decision to temporarily stop the manufacture and sales of all non-inositol products other than bilberry. Lansen and our Hotel registered revenue growth of 9% and 35% respectively. Gross profits of Lansen and the Hotel also improved, while gross profit of Haotian declined because of the contraction in its non-inositol business.

Total operating profits declined by USD2,105,000. However, excluding the reversal of the expired warranty provision of USD3,198,000 in relation to the disposal of Stonehill in last year's interim results, total operating profits increased by USD1,093,000. Lansen showed a decline in operating profits that is addressed below.

Total financing costs dropped by USD599,000, mainly due to the lower interest rate environment that prevailed in the interim period compared to the six months ended 30 June 2010.

Zhejiang Starry Pharmaceutical Co. Limited ("Starry"), acquired in 2010, achieved high growth in profits compared to the first half of 2010, mainly due to sales growth of iohexal for non-ionic contrast agents for X-rays and CT scans. Starry contributed USD1,210,000 to the Group's profits.

The Group's after tax profit before non-controlling interests for the six month period was USD2,859,000 (2010: USD2,990,000). The large tax expense was a result of the increase in taxable profit of the Group's subsidiaries operating as different entities, not being offset by losses in loss-making entities.

The Group's loss after non-controlling interests for the six month period was USD127,000 (2010: profit of USD1,475,000). Excluding the reversal of the expired warranty provision of USD3,198,000 in relation to the disposal of Stonehill in last year's interim results, our underlying businesses, including Lansen, Haotian and the Hotel, achieved an improvement of USD1,596,000.

Lansen Group

Revenue for the six months ended 30 June 2011 increased by 9% to USD31,005,000 (2010: USD28,402,000). Revenue from prescription western pharmaceuticals for rheumatic indications increased by 11% to USD20,929,000 (2010: USD18,782,000). Revenue for the other pharmaceuticals increased by 5% to USD10,076,000 (2010: USD9,620,000).

Increase in revenue was mainly due to the steady growth of its two core rheumatic specialty prescription western pharmaceutical products - Pafulin and Tuoshu and the agency product introduced last year, the immunosuppressant mycophenolate mofetil ("MMF"). With the Chinese Government promoting further reform of healthcare, health insurance coverage continues to expand, which will drive further expansion of the pharmaceutical market and sustain growth. Lansen's sales and distribution network continues to extend into second and third tier cities in China. Lansen also deepened its relationship with the Chinese Rheumatology Association and worked closely with doctors and experts, specializing in rheumatic conditions, throughout China. These initiatives should stimulate further growth of Lansen's sales of Pafulin, Tuoshu and MMF.

For the six months ended 30 June 2011, Lansen's gross profit increased by 3% to USD19,076,000 (2010: USD18,578,000). Lansen's gross profit margin decreased 3.9% to 61.5% (2010: 65.4%), mainly due to higher raw material and packaging costs; higher production costs from compliance with various new regulatory and quality standards requirements introduced by the State Food and Drug Administration; and a new levy of the state urban construction tax and supplemental education tax.

For the first half of 2011, Lansen's operating profit decreased by 6% to USD6,316,000 (2010: USD6,693,000). This was mainly due to an increase in the selling and distribution expenses which primarily include: forum and conference promotion costs and related expenses, staff costs and rental expenses. In the first half of 2011 selling and distribution expenses increased by 20% to USD10,442,000 (2010: USD8,709,000) reflecting Lansen's commitment to continue to raise the visibility of Pafulin and Tuoshu in its core markets. During the period, Lansen held more seminars, and actively engaged in patient education activities to explain the autoimmune rheumatic diseases and to promote the use of its disease-modifying products. Lansen believes that these promotional activities will bring a lasting benefit. The selling and distribution expense to revenue ratio for the first six months in 2011 of 33.7% was still lower than the same ratio for year 2010, which was 34.9%.

A promising development of Lansen's increased marketing effort is the growth in sales of MMF, a new immunosuppressant under distribution agency that was launched last year.

During the period, Starry recorded profit growth driven by the sales of iohexal for use in non-ionic contrast agents for X-ray/CT scans. Starry's contribution to Lansen amounted to USD1,126,000 this period (2010: not applicable as the investment in Starry was only completed in November 2010).

For the first half of 2011, Lansen's profit before non-controlling interests increased by 22% to USD6,136,000 (2010: USD5,028,000).

During the period, Lansen began the construction of a new quality control and product development centre to enable it to continue to enhance product development and improve its product quality testing standards. Lansen also started the expansion of the Pafulin extract production plant and bulk pharmaceutical production line to optimize its production and management efficiency in order to meet the strong increase in demand for these products.

In March 2011, the Chinese Government implemented a further price reduction which included 162 antibiotics and cardiovascular drugs with an average downward price adjustment of 21%. In August 2011, the Chinese Government announced another price reduction which included 82 hormonal, endocrine and nervous system drugs with an average downward price adjustment of 14%. None of Lansen's products were included in either of these price reductions. The Government also announced new good manufacturing procedures ("GMP") policies which require drug manufacturers to meet the new standard in five years. As a high quality drug manufacturer, Lansen welcomes these initiatives. Lansen will continue to monitor the process closely and map out its actions once the GMP implementation guidelines are published.

Haotian Group

For the first six months ended 30 June 2011, Haotian's non-inositol business revenue decreased by 80% to USD1,745,000 (2010: USD8,849,000). This significant decrease reflects Haotian's strategic decision to temporarily cease manufacture and sales of all non-inositol products other than bilberry. In addition Haotian experienced reduced production and sales of bilberry extracts as a result of unfavorable weather conditions last year in the northern European countries that led to a significant decrease in the supply and an increase in the cost of bilberry.

Gross profit of Haotian's non-inositol business has dropped to USD198,000 (2010: USD707,000), as a result of the decrease in business volume. The gross profit margin increased to 11.3% (2010: 8.0%) reflected Haotian's strategic decision described above. Haotian is working on adjustments to its product mix at the Yangling facility and conducting extensive market research and trial productions to identify new products with higher profit margins.

Haotian recorded a reduced operating loss of USD394,000 (2010: loss of USD856,000). The main reason for the decrease was a Government grant (USD965,000) received as an investment incentive in the Jilin development district.

Haotian's main focus in 2011 has been on the expansion of the inositol production facilities. Haotian has now completed the construction phase, comprising the expansion of the inositol production facility at Jilin Haizi to an annual design capacity of 2,500 tonnes and building a new phytin (raw material of inositol) production facility (annual design capacity 9,600 tonnes) at Gongzhuling. This is a major addition to Haotian's existing four phytin production facilities (in Siping, Linqing, Leling and Huxian). Haotian is also working on the construction of a sixth phytin production facility and expects it to become operational in the fourth quarter of this year. Haotian has commenced trial production of phytin in Gongzhuling and of inositol and DCP in Jilin Haizi. Haotian is focusing on training workers, refining the production process, enhancing place production management system, tuning equipment and establishing transportation logistics. So far, the output of the trial production has been sold to target customers at the prevailing market price, albeit the quantities sold are not yet significant. Haotian is expected to gradually build up the production scale of inositol and DCP during the fourth quarter of this year.

Research and Product Development

The research and product development divisions of the Group, Botai and Longbai, continue to work on feasibility studies to bring two healthcare and pharmaceutical related products to the Chinese market: collagen for cosmetic use, and misoprostol for inducing labor.

During the period, Botai submitted required materials for the product registration license for the collagen product and expects to complete the process within six months. Longbai is conducting the clinical trial of misoprostol and targets to apply for the product registration license towards the end of 2011.

Hotel Operations

The Shenzhen region of China has been enjoying a buoyant period and this has benefited our Hotel, the Crowne Plaza Hotel & Suites Landmark Shenzhen. In the first half of 2011, revenue in the Hotel increased by 35% to USD5,767,000 (2010: USD4,276,000) and room occupancy increased by 29% to 54.7% (2010: 42.5%). The average room rate has increased by 4% to USD132 (2010: USD127).

As a result of higher room occupancy, the Hotel's food and beverage operations also grew well with reported revenue of USD1,713,000 (2010: USD1,256,000), which was helped by a strong catering and banqueting business.

The Hotel's profit from operations before finance costs for the first six months of 2011 increased substantially to USD698,000 (2010: USD216,000). Overall, costs have been controlled but employment expenses have risen by an average of about 20%. Of this, about 10% was a salary increment in line with the market, about 5% was from the housing fund for the PRC employees introduced by the Government at the beginning of the year and about 5% was from a higher head count.

The Hotel is well poised for a better second half as Shenzhen continues to attract buoyant commercial trade. We are expecting to grow our average room rate and secure new room clients as the year progresses.

Corporate Office

Corporate Office expenses were USD2,488,000 (2010: USD3,178,000). The decrease in corporate expenses was mainly due to the absence of a foreign exchange loss of USD1,300,000 incurred in the comparable period in 2010. This foreign exchange loss was subsequently recovered in late 2010. Excluding this loss, corporate expenses were higher, mainly due to additional staff costs of about USD550,000.

Cathay International Capital ("CIC")

The Group has slowed down CIC's investment activities, mainly due to steep asset pricing and the uncertain market outlook in China. With tight bank credit availability and increasing cost pressure in China, we expect more potential acquisition opportunities at reasonable pricing in 2012.

GRANT OF SHARE OPTIONS

On 16 March 2011, the Company granted 921,176 options to the Company's Chief Executive Officer, Mr. Lee Jin-Yi, under the share option plan (the 'Share Option Plan') approved by shareholders of the Company on 4 June 2010.

On 31 March 2011, the Company granted 4,250,000 options under a Share Option Plan approved by shareholders of the Company on 4 June 2010. The number of options granted to date to the Group's management and employees represents approximately 43% of the options currently available under the Share Option Plan.

OUTLOOK

The Group will continue to improve operations in all three of its core businesses - Haotian, Lansen and the Hotel. Once Haotian begins commercial production of inositol and DCP, it should start to contribute towards the Group's earnings. The Hotel should continue to reap further benefits from the improving market in Shenzhen as well as the impact of the recent repositioning. While Lansen is facing more cost pressure and stringent Government control over drug prices, it will continue to enjoy the robust growth in the Chinese pharmaceutical markets and is expected to expand its lead over other drug competitors in disease-modifying anti-rheumatic drugs.

The Group will not be immune to anticipated future market turbulence, both in China and globally. However our focus remains on being cost competitive and on risk management for the coming year. In the meantime, we will search for attractive investment opportunities in the Chinese healthcare and pharmaceutical markets that can further enhance our earnings potential.

Sum Soon Lim

Chairman

25 August 2011

CONSOLIDATED INCOME STATEMENT

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 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") and under the historical cost convention, modified where appropriate to incorporate a professional valuation of certain fixed assets.

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 2010, except for the adoption of the new and revised 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), as described below:

The impact of these new and revised IFRSs on the Interim Financial Statements is not significant.

The Group has not early applied new or revised standards that have been issued but not yet effective.

2. SEGMENT INFORMATION

The Group's operating segments reconciled to the entity's profit before income tax are presented in its condensed consolidated 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 PRC during the period.

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

The basic and diluted (loss)/earnings per share is based upon the loss attributable to owners of the parent of USD127,000 (2010: profit of USD1,475,000) and the following weighted average number of shares of A shares and Common shares in issue during the period:

For the period ended 30 June 2011 and 2010, the computation of diluted (loss)/earnings per share does not assume the exercise of the Company's outstanding share options, as the exercise price of those options is higher than the average market price for shares.Nor does it include the 1,292,353 Common Shares contingently issuable to Mr. Lee Jin-Yi, as the conditions for their issue were not met as at 30 June 2011.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

Each of the directors confirms 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.

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 Services Authority. The figures for the year ended 31 December 2010 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 UK Transfer Agents, Capita Registrars, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU.

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