CTI.L Regulatory News (CTI)

Cathay International Holdings Limited ("Cathay" or the "Company")

Interim Results for the Six Months Ended 30 June 2019

Hong Kong, 30 August 2019 - Cathay International Holdings Limited (LSE: CTI.L), an operator and 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 2019.

Group Operational Highlights

• The Group has been executing on its business plan by:

• Further integrating its operations

• Enhancing its internal controls, including restructuring and centralising its sales force for healthcare products

• Consolidating the Group's internal audit and company secretarial functions

• Lansen, reacting to further medical reforms in China, has further refined its business strategy to:

• Focus on research and development of its own products to replace agency products

• Manage cost of sales and shortening working capital cycle to improve cash flow

• Widen market coverage by hiring key account managers in large cities to improve hospitals penetration, especially grass root hospitals which have not been directly targeted by Lansen,

strengthening commercial teams and establishing an OTC sales team to target drug store chains.

• Gradual increase in Lansen's pharmaceutical segments profits during the period compared to the same period last year, and an increase in revenue from Lansen's own specialty pharmaceutical products (including Pafulin and Sicorten Plus) compared to the same period last year

• Lansen is in the process of launching the San Parietti skin care product range, which are expected to gradually bring in revenue for the Group in H2 2019.

• Haizi reduced its inositol production costs and the new phytin facility, of its associated company, commenced production in March 2019; however, Haizi's cost reduction has not been sufficient to neutralise the further drop in inositol price.

• In Q2 2019, Natural Dailyhealth launched its first health food product, Langzunzun, which contains ingredients that could relieve symptoms associated with drinking alcohol.

Group Financial Highlights

• Revenue decreased to USD38.3 million (H1 2018: USD49.2 million)

• Gross profit decreased to USD16.2 million (H1 2018: USD20.6 million)

• Group operating income decreased by USD6.8 million to an operating loss of USD5.7 million (H1 2018: profit of USD1.1 million), mainly due to lower gross profits and increase of administration expenses including stock provision and write off, and professional fees.

• Average gross margin improved to 42.4% (H1 2018: 41.8%)

• Post-tax non-operating profit of USD7.9 million (H1 2018: USD6.1 million) mainly due to more Starry shares sold resulting in a gain of USD7.9 million (H1 2018: USD5.2 million)

• Higher finance costs of USD5.9 million (H1 2018: USD5.2 million) due to increased effective interest rate to 5.8% (H1 2018: 4.9%)

• After-tax loss before non-controlling interests for the period was USD2.8 million (H1 2018: profit of USD3.3 million) and the Group's loss attributable to owners of the parent for the period was USD5.1 million (H1 2018: USD1.9 million)

Commenting on the interim results, Mr. Lee Jin-Yi, CEO of Cathay International Holdings Limited said: "We are continuing to execute our business strategy and make the necessary operational changes within the company in order to be able to better position ourselves in the fast-changing Chinese market. I believe that we are now seeing some traction resulting from work of the previous years, particularly strategies implemented at Lansen. As always, I would like to thank our shareholders for their support as we continue to re-align the business and I am hopeful we will return to a position of growth cover the coming years."

- Ends -

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About Cathay

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

The Group employs approximately 1,500 people across the PRC, including over 20 specialist corporate and business development staff based at the holding company's offices in Hong Kong and Shenzhen. Cathay also has a hotel investment in Shenzhen. For more information please visit the Company's website: http://www.cathay-intl.com.hk.

 Management Discussion and Analysis

BUSINESS REVIEW

Over the period, the Group has been working on efficiently executing its business plan by further integrating its operations, enhancing its internal controls, including restructuring and centralising its sales force for healthcare products, and consolidating the Group's internal audit and company secretarial functions, whilst continuing to develop its three core businesses: pharmaceutical, cosmeceutical and healthcare.

Reacting to further medical reforms in China, the Group has refined its business strategy for its pharmaceutical business to focus more on its own products, tapping into business opportunities arising from China's medical reforms in order to widen drug penetration to smaller hospitals and second tier cities. Such efforts include development of OTC and agency distribution teams to market its own products.

In healthcare, Haizi has reduced its inositol production costs and the new phytin facility, of its associated company, has commenced production. Natural Dailyhealth is actively expanding its product portfolio and developing new customers.

In the cosmeceutical business unit, the Group focused on promotion of its Fillderm and San Parietti branded products whilst ensuring it continues to review its strategy on an ongoing basis to optimise performance.

The Hotel experienced a decrease in both rooms and food and beverage businesses resulting from the slow economic growth in China, partly due to the trade war.

Further details of each business segment are set out below.

Pharmaceutical segment

The Group has been focused on adjusting its business strategy for pharmaceuticals by developing its own products to replace agency products, managing cost of sales and shortening its working capital cycle to improve cash flow.

During the period, Lansen has been affected by further medical reform in China, including tightened control over medical insurance expenses by the introduction of graded diagnosis and treatments and accelerated resources to secondary hospitals. In this macro environment, Lansen has continued to implement the strategies formulated by the Group last year, with a priority to focus on the distribution and acceleration of research and development of its own products.

Lansen is also focusing on expanding market coverage of its products to increase overall sales by hiring additional key account managers in large cities to improve hospitals penetration, especially grass root hospitals which have not been directly targeted by Lansen; strengthening its commercial team to enhance management of distributors and promote products in new territories; establishing an OTC sales team to promote sales in drug store chains and building a strong sales force to increase sales in its home base, the Zhejiang province.

Whilst these adjustments and policies are still starting to take effect, we are beginning to see positive results and momentum, as seen by a gradual increase in Lansen's pharmaceutical segments profits during the period compared to the same period last year, and an increase in revenue from Lansen's own specialty pharmaceutical products (including Pafulin and Sicorten Plus) compared to the same period of last year.

Healthcare segment

During the first half, the corn starch industry in China was affected by adverse market conditions. As a result, corn starch factories supplying corn fluid to Haizi's facilities brought forward their maintenance schedule, resulting in a reduction in corn fluid supply and therefore a reduction in phytin production. The decreased phytin supply for inositol production, however, was partly mitigated by the commencement of operation of new phytin plant at Haizi's associate. Together with its phytin inventory, Haizi managed to increase its inositol production during the period. The new phytin plant commenced operation in March 2019.

Haizi is continuing to streamline its production processes of both phytin and inositol and has managed to reduce the overall production cost of its inositol by 18% in Renminbi ("RMB") terms over the same period last year. Of this, phytin production costs decreased by 12%, mainly due to the reduction of labor costs arising from job optimisation; lowering the cost of corn fluid and ancillary raw materials and implementation of a new incentive program to motivate staff.

The intense price competition has led to a further price drop of inositol and, reacting to this, Haizi has lowered the price of its inositol further to protect its market share. However, despite Haizi's cost reduction process, this has not been sufficient to neutralise the impact from the further drop in inositol price.

Going forward, Haizi will continue to lower its production costs by further modifying its production process. Haizi is also continuing test marketing of its food grade di-calcium phosphate ("DCP").

During the first half, Natural Dailyhealth has been actively working to expand its product portfolio and develop new customers. Natural Dailyhealth continues to modify its sourcing and production process and implement its "key products and key customers" marketing strategy for its healthcare products. During the period, it has followed up with the China Food and Drug Administration regarding applications for the registration of several of its healthcare products in order to build its future product portfolio.

In Q2 2019, Natural Dailyhealth launched its first health food product, Langzunzun, which contains ingredients that could help relieve symptoms associated with drinking alcohol. Natural Dailyhealth is actively promoting this product through food and beverage industry associations as well as via experienced distribution agents. Natural Dailyhealth will continue to build its health food and drink product portfolio, aiming to improving the gross margin over that achieved in its existing plant extract product portfolio.

The Group's strategy is to develop and build its own cosmeceutical product portfolio, thereby reducing its reliance on agency products, and the Group is currently focused on promotion of its skin care products, Fillderm and San Parietti.

During the period, Lansen completed its minority investment in Tianjin Robustnique Biotechnology Co., Limited ("Robustnique"). With Robustnique's R&D capability and Botai's collagen, Lansen developed the San Parietti branded skin care products, including an anti-aging series of collagen essence products. Lansen is in the process of launching of the San Parietti skin care product range, which are expected to gradually bring in revenue for the Group in H2 2019.

For Fillderm, the Group continues to build alliances with doctors and cosmetic institutions through which Fillderm, and San Parietti branded products, will be marketed to customers.

Whilst the domestic cosmeceutical market offers great business potential, it is not without risk and uncertainties for the Group. In order to remain competitive, the Group will continue to review its cosmeceutical business strategy

Due to the slow growth of the Chinese economy, hotels in Shenzhen reduced pricing in an attempt to gain more market share. In addition, room sales from large multi-national and local companies, mostly affected by the impact of the macro trade environment, declined over the period. As such, the hotel recorded a slightly lower room occupancy rate than last year and a decrease in its food and beverage businesses.

We anticipate that the hotel business will remain soft in the second half of 2019. The Shenzhen tourism bureau, and the hotel association, has recently launched a promotion to help restaurants and hotels in the city. We have also re-structured our catering and event teams so that we can implement new strategies and actions in response to market changes, as they happen.

During the period, the Group's performance was mainly driven by the pharmaceutical business at Lansen.

On 30 June 2019, the Group's revenue decreased to USD38.3 million (H1 2018: USD49.2 million). The implementation of the management and operational changes have had a follow on effect in Lansen's operations. Sales in Haizi and Natural Dailyhealth dropped slightly. The Hotel has also been adversely affected by lower room rates and occupancy level.

The Group's gross profit decreased to USD16.2 million (H1 2018: USD20.6 million). Average gross margin improved to 42.4% (H1 2018: 41.8%) mainly due to an increase in gross profit margin of pharmaceutical product sales, but partly offset by a decrease in gross profit margin of plant extract products. The Group's pharmaceutical business is on track and performance is improving. The gross margin of Lansen's own specialty pharmaceutical products improved during the period and Lansen's strategy to focus on its own products has resulted in an increase in proportionate sales of these products. As a result, the overall gross margin of the pharmaceutical business has improved.

The Group's operating profit decreased by USD6.8 million to an operating loss of USD5.7 million (H1 2018: profit of USD1.1 million) mainly due to an increase in administration expenses but partly offset by a decrease in selling expenses. The increase in administration expenses was primarily due to an increase in stock provision and a write off of USD2.4million, an increase in professional fees mainly relating to the disposal of Starry shares, the FCA fine and related expenses of USD0.6million and a reversal of USD0.5 million on executive share options lapsed in the prior period but not in the current period.

The Group recorded a post-tax non-operating income of USD7.9 million (H1 2018: USD6.1 million) mainly due to the sale of more Starry shares resulting in a gain of USD7.9 million (H1 2018: USD5.2 million).

The Group incurred higher finance costs of USD5.9 million (H1 2018: USD5.2 million) due to increased effective interest rate to 5.8% (H1 2018: 4.9%) on the rise of LIBOR and the PRC lending rates.

The Group's after tax loss before non-controlling interests for the period was USD2.8 million (H1 2018: profit of USD3.3 million). The Group's loss attributable to owners of the parent for the period was USD5.1 million (H1 2018: USD1.9 million).

Lansen

Lansen recorded a 27.2% decrease in revenue to USD26.2 million (H1 2018: USD35.9 million). The decrease in sales was mainly due to a reduction in sales of agency products such as Yuze products, mycophenolate mofetil dispersible tablets, bazhen granules and Hepai leflunomide tablets. Excluding the impact of devaluation of RMB, revenue of Lansen's own specialty pharmaceutical products increased by 4.4% in RMB terms compared to last year.

Gross profit margin was USD16.1 million (H1 2018: USD19.1 million) and the gross profit margin was 61.5% (H1 2018: 53.2%), mainly due to increased sales in higher margin products.

Lansen's operating profit decreased to USD0.9 million (H1 2018: USD5.3 million) mainly due to (i) increase in administration expenses to USD7.9 million (H1 2018: USD4.0 million), resulting from stock provision and write off, but (ii) partly mitigated by decrease in selling and distribution expenses by 18.3% to USD8.1 million (H1 2018: USD10.0 million).

Lansen's shareholding in Starry dropped to 7.6% as a result of further sales of 3% interest in Starry during the period (detailed below). Although the percentage of shareholding in Starry decreased, Starry recorded increase in net income, the profit contribution to Lansen increased to USD1.3 million (H1 2018: USD1.2 million).

Lansen's profit before non-controlling interests was USD5.0 million (H1 2018: USD10.9 million).

Starry

During the period, Lansen disposed of 3,600,000 shares in Starry, an associated company whose shares are listed on the Shanghai Stock Exchange and made a gain of USD7.9 million. As at 30 June 2019, Lansen has 7.6% equity interests in Starry. The investment was recorded under equity accounting at USD17.9 million (31 December 2018: USD24.0 million) on the Group's balance sheet. Based on Starry's closing price of RMB23.1 per share as at 30 June 2019, the market value of Lansen's 7.6% interest in Starry was approximately USD30.8 million. The difference of USD12.9 million between the book value and the market value of Starry has not been reflected in the financial statements.

Haizi

During the period, Haizi recorded USD2.8 million (H1 2018: USD3.3 million) from sales of inositol and DCP. Haizi produced 762 tonnes (2018: 695 tonnes) and 4,365 tonnes (H1 2018: 3,977 tonnes) of inositol and feed grade DCP respectively and sold 449 tonnes (H1 2018: 434 tonnes) and 4,391 tonnes (H1 2018: 3,188 tonnes) of feed grade DCP. The average selling price of inositol was lower at approximately USD4.46 per kg (H1 2018: USD6.4 per kg) due to a further drop in the market price of Inositol.

Haizi's gross loss was USD0.9 million (H1 2018: USD0.6 million) and its gross loss margin was -32.1% (H1 2018: -17.9%) primarily due to a lower selling price of inositol, countering the effort made in reducing production costs. Haizi's operating loss was USD2.9 million (H1 2018: USD2.0 million) and its net loss was USD3.5 million (H1 2018: USD2.6 million).

Natural Dailyhealth

Natural Dailyhealth's revenue decreased to USD2.9 million (H1 2018: USD3.2 million) partly due to RMB devaluation during the period and its gross profit was USD0.1 million (H1 2018: USD0.5 million). The operating loss increased to USD1.0 million (H1 2018: USD0.6 million).

Botai

Botai did not record sales in the first half of 2019 (H1 2018: USD0.1 million) due to the review of the marketing strategy for Fillderm. The operating loss was USD0.7 million (H1 2018: USD0.7 million).

In the meantime, Botai is developing a collagen related product - facial mask and aims to launch to the market in H2 of 2019.

Hotel Operations

Hotel revenue decreased by 12.7% in the first half to USD6.6 million (H1 2018: USD7.6 million), due to a reduction in average room rate, occupancy level and banqueting sales. The hotel average room rate dropped to USD111 (H1 2018: USD117) and room occupancy went down to 73.9% (H1 2018: 77.1%).

The Hotel's food and beverage sales dropped by 10.2% to USD2.0 million (H1 2018: USD2.2 million), due to weaker market demand and price competition from other hotels in wedding and banqueting services.

The Hotel's operating profit was USD1.0 million (H1 2018: USD1.5 million) due to lower room and food and beverage profit margins. The Hotel continues to strive for high service quality and is frequently rated by TripAdvisor as one of the top five hotels in Shenzhen. Corporate office

Corporate overheads increased by USD1.1 million to USD3.3 million (H1 2018: USD2.2 million) due to the reversal of USD0.5 million on share option lapsed in the prior period and an increase in professional fees, and the FCA fine and related expenses in the current period.

Borrowings

As at 30 June 2019, the Group's net borrowings increased to USD164.8 million (31 December 2018: USD164.1 million) due to increase in the Hotel and Haizi's borrowings but offset by a decrease in Corporate and Lansen's borrowings. Net gearing increased to 144.4% (31 December 2018: 138.0%).

PRINCIPAL RISKS AND UNCERTAINTIES

The directors do not consider that the principal risks and uncertainties, as set out on pages 13 to 19 of the annual report for the year ended 31 December 2018, have changed materially since its publication.

Condensed Consolidated Statement of Profit or Loss

Condensed Consolidated Statement of Comprehensive Income

Condensed Consolidated Statement of Financial Position

Condensed Consolidated Statement of Changes in Equity

Condensed Consolidated Statement of Cash Flows

Notes to the Condensed Consolidated Interim Financial Statements

1. BASIS OF PREPARATION

The unaudited condensed consolidated interim financial statements of Cathay International Holdings Limited (the "Company") and its subsidiaries (hereinafter collectively known as the "Group") for the six months ended 30 June 2019 (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 preparation of the Interim Financial Statements in compliance with IAS 34 requires the use of certain judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses on a year to date basis. Actual results may differ from these estimates. The areas where significant judgments and estimates have been made in preparing the financial statements and their effect are disclosed in Note 3.

These Interim Financial Statements are presented in United States Dollars ("USD"), unless otherwise stated. The Interim Financial Statements contain condensed consolidated financial statements and selected explanatory notes. The notes include an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the group since the 2018 annual financial statements. The Interim Financial Statements do not include all of the information required for a complete set of financial statements prepared in accordance with International Financial Reporting Standards ("IFRSs") (which collective term includes all individual International Financial Reporting Standards and Interpretations as approved by the IASB, and all individual International Accounting Standards and Interpretations as originated by the Board of the International Accounting Standards Committee and adopted by the IASB), and should be read in 2018 consolidated financial statements. The Interim Financial Statements are neither audited nor reviewed by the Group's auditor.

The Interim Financial Statements have been prepared with the same accounting policies adopted in the 2018 annual financial statements, except for those that relate to new standards or interpretations effective for the first time for periods beginning on or after 1 January 2019. Save as disclosed in the changes in accounting policies for the adoption of IFRS 16 in Note 2(b), the application of other new and revised IFRSs in the current period has no material effect on the amount reported and/or disclosures set out in the Interim Financial statements.

At the end of reporting period, its current liabilities exceeded its current assets by USD77,871,000. The Interim Financial Statements have been prepared based on the assumption that the Group can be operated as a going concern and will have sufficient working capital to finance its operation in the next twelve months from 30 June 2019.

As in the past, the Group will start negotiation with the relevant banks on extension or renewal of the bank borrowings a few months prior to their respective maturities and obtain the approvals from the relevant banks before their respective maturities. The Group does not foresee that the bank borrowings will not be renewed or extended before maturity as the fair value of pledged assets outweighs the amount of bank borrowings. The Group is also exploring options to secure long term funding, including debt and/or equity, to re-finance part of the bank borrowings and further partial disposals of equity interest in an associate. 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 2019 without significant curtailment of operations. The directors of the Company are accordingly satisfied that it is appropriate to prepare the Interim Financial Statements on a going concern basis.

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

2. CHANGES IN ACCOUNTING POLICIES

(a) Overview

In the current interim period, the Group has applied, for the first time, the following new interpretations and amendments to IFRSs issued by the IASB that are effective for the annual period beginning on or after 1 January 2019 for the preparation of the Interim Financial Statements.