CTI.L Regulatory News (CTI)

29 Oct 2007 11:22

Cathay International Holdings Ld29 October 2007 29 October 2007 Cathay International Holdings Limited Investment in Xian Haotian Group Cathay International Holdings Limited ("Cathay" or the "Company") is pleased toannounce that, through its wholly-owned subsidiaries, it entered intoconditional agreements (the "Share Subscription Agreements") to subscribe newshares in Xian Haotian Bio-Engineering Technology Co. Ltd. ("Xian Haotian") andYangling Haotian Bio-Engineering Technology Co. Ltd. ("Yangling Haotian", awholly owned subsidiary of Xian Haotian). The Share Subscription Agreements comprise: (i) a subscription of new shares in Xian Haotian for cash of RMB27.6 million (approximately US$3.68 million). As a result of the subscription, Cathay effectively owns 51% of the enlarged issued share capital of Xian Haotian; and (ii) a subscription of new shares in Yangling Haotian for cash of RMB21.2 million (approximately US$2.82 million). As a result of the subscription in Yangling Haotian and the subscription to its parent, Xian Haotian (as described above), Cathay effectively owns 84.27% of the enlarged issued share capital of Yangling Haotian. The Share Subscription Agreements are conditional on, inter alia, the regulatoryapprovals of relevant authorities in China. The final condition to the ShareSubscription Agreements was satisfied today. The Company has financed the total share subscription of US$6.5 million underthe Share Subscription Agreements with internal cash resources and bankfacilities currently available to the Company on market terms. Xian Haotian andYangling Haotian will apply approximately US$3.7 million of the sharesubscription proceeds to commence the projects (as described in the sectionheaded "Information on Xian Haotian"), at the minimum starting production scale,on two of the New Products (as defined below), namely Inostiol and HydroxypropylMethylcellulose ("HPMC"), and the remaining share subscription money to repayexisting debts of Xian Haotian. Information on Xian Haotian Established in 2003, Xian Haotian is engaged in manufacturing, marketing andsale of plant extracts as various active ingredients for pharmaceuticals, food,beverages, cosmetics, dietary supplements and health products. Currently,approximately 90% of the sales are export sales to the United States, Europe andJapan, and the rest is in China. Xian Haotian also owns a number ofsubsidiaries, including Yangling Haotian, which together (the "Xian HaotianGroup") form a vertically integrated operation in the plant extract business. Xian Haotian's products include coenzyme Q10, bilberry plant extract, grape seed(skin) extract, octacosanol (derived from sugar cane and wheat germ), blacksoybean hull extract, and 5-hydroxytryptophan (derived from seeds of a WestAfrican medicinal plant).According to China Chamber of Commerce for Import and Export of Medicines andHealth Products, based on the statistics from the China Customs, Xian Haotianwas ranked the third largest herbal extract company by revenue in China in 2006. The core technologies of Xian Haotian are semi-synthetic coenzyme Q10 processingtechnology, water soluble coenzyme Q10 processing technology and chromatographysegregation technology, which are applied in the production of various plantextract products. The water soluble coenzyme Q10 processing technology is aproprietary technology of Xian Haotian. Xian Haotian also owns conventionaltechnologies in plant extraction, refining and purification process. XianHaotian has patents in China relating to the production of three plant extractproducts using its core technologies. Xian Haotian has an experienced management team, including a team of 42professionals researching and developing plant extraction, chemical synthesisand fermentation technologies. In each of the past three years, Xian Haotianallocated approximately 2% of its turnover to the research and development ofnew technologies and products. Xian Haotian is planning to expand its range of plant extract products which areactive ingredients for use in diet supplements and health products (the "NewProducts"). Amongst the New Products, Xian Haotian is preparing for projects inrelation to production of Inostiol (derived from corn) and HPMC (derived fromcotton). Xian Haotian's latest audited accounts prepared under PRC GAAP for the financialyear ended 31 December 2006 reported turnover of RMB82.9 million (US$11million), with a loss of RMB6.4 million (US$0.85 million). As at 31 December2006, Xian Haotian had gross assets and net assets of RMB95.2 million (US$12.69million) and RMB25.2 million (US$3.36m) respectively. Information on Yangling Haotian Yangling Haotian was established in 2005, as a wholly owned subsidiary of XianHaotian, to house the main production facilities of the Xian Haotian Group. Itis engaged in the production of plant extracts via extraction, refining andpurification. The production facilities for Yangling Haotian commencedoperation in September 2007, comprising plant extraction facilities with anannual production capacity of 100 tonnes and facilities using water solubleproduction technology with an annual production capacity of 20 tonnes.Currently, the plant extraction facilities are mainly used for the production ofbilberry plant extract at an annual production of approximately 50 tonnes. Yangling Haotian's latest audited accounts prepared under PRC GAAP for thefinancial year ended 31 December 2006 did not report any turnover and results asYangling Haotian had not yet commenced production in 2006. As at 31 December2006, Yangling Haotian had gross assets and net assets of RMB17.3 million(US$2.31 million) and RMB10.0 million (US$1.33 million) respectively. Senior management of Xian Haotian Group The senior management of Xian Haotian has extensive experience and expertise inthe production, marketing and sale of plant extract products. Set out below aredetails of the three key individuals of the Xian Haotian Group. It is notproposed that these individuals be appointed to the Company's board ofdirectors. Mr. Zhang Chengwen is the Chairman and General Manager of Xian Haotian. He isthe Deputy Chairman of the China Herbal Extract Association and Deputy Head ofthe China Society of Natural Resources. He was awarded a National Scientific andTechnological Progress Prize (First Class) by the National Bureau of Quality andTechnical Supervision and a National Scientific and Technological Progress Prize(Second Class) by the Ministry of Agriculture in China. He has over 12 years'experience in the management of herbal extract businesses. Mr. Kou Yufeng is the Deputy General Manager of Xian Haotian. He was formerlyhead of the sales department, head of the research institute, deputy director ofproduction, and deputy director of Xi'an Tiancheng Medical and Bio-engineeringCompany, Ltd. He has over 13 years' experience in the marketing and sales ofherbal extract products. Mr. Dong Yingjie is the Senior Engineer and General Manager of ShenyangHaotian-Wanjia Medical Technology Company, Ltd, a subsidiary of Xian Haotian.He is a director of the Biological Research Department at Liaoning ProvincialMedical Industry Research Institute. He has been involved in researching newmedicines for 17 years. He has worked on over 20 nationally-approved healthfood products and a number of patents in Chinese and Western medical and healthproducts. Conditional Agreements The Company, through its wholly owned subsidiaries, has also entered intoconditional agreements (the "Conditional Agreements") regarding furtherinvestments in the Xian Haotian Group. The Conditional Agreements are subjectinitially to, inter alia, the completion of the full scale feasibility studieson the New Products to the satisfaction of Cathay. The Conditional Agreements comprise: (i) a conditional share purchase agreement for Cathay to effectively acquire a further 23.39% of Xian Haotian for cash of US$11.5 million from some of its existing shareholders. Upon completion of the share purchase, Cathay will effectively own 74.39% of Xian Haotian and the remaining 25.61% shareholders of Xian Haotian (the "Senior Management") are core members of the senior management of the Xian Haotian Group; and (ii) a conditional shareholder agreement with the Senior Management detailing (a) first phase capital investment of US$23.5 million in the Xian Haotian Group for the New Products; (b) allotment of up to US$12.59 million of new shares in Dragon Diligent Holdings Limited ("Dragon Diligent", the investment holding subsidiary established by Cathay for the investment in the Xian Haotian Group), as shares to the Senior Management, provided that the aggregate effective holding by the Senior Management in the Xian Haotian Group, via Dragon Diligent and/or directly, shall not exceed 23.28%; (c) allotment of additional new shares in Dragon Diligent as earnout shares to the Senior Management based on future results performance of the Xian Haotian Group in 2008, 2009 and 2010; and (d) conditional second phase capital investment of US$15 million subject to the completion of feasibility studies to the satisfaction of Cathay and, if necessary, subject to shareholders' approval of Cathay. In the event that the full scale feasibility studies on the New Products are tothe satisfaction of Cathay and Cathay is prepared to proceed with thetransactions under the Conditional Agreements, the aggregate consideration ofsuch transactions would result in a Class 1 transaction and would requireshareholder approval under the listing rules. Accordingly, a shareholdercircular detailing the Conditional Agreements, would be dispatched to allshareholders of the Company at the relevant time. Put and Call Options In the event that the conditions to the Conditional Agreements are not satisfiedor Cathay decides not to proceed with the transactions under the ConditionalAgreements, after nine months from the date of the first subscription, on 22October 2007, under the Share Subscription Agreements (the "Expiry Date"): (i) within one month from the Expiry Date, Cathay has the right (the "Put Options") to (a) require the existing shareholders of Xian Haotian to buy back Cathay's effective investment in Xian Haotian at cost of US$3.68 million plus interest at LIBOR + 2%; and (b) require Xian Haotian to buy back Cathay's effective investment in Yangling Haotian at cost of US$2.82 million plus interest at LIBOR + 2%;and (ii) if Cathay has not exercised its right described above, within one month from the expiry of the Put Options, the existing shareholders of Xian Haotian have the right to require Cathay to sell back to them Cathay's effective investment in Xian Haotian at cost of US$3.68 million plus interest at LIBOR + 2%; and Xian Haotian has the rights to require Cathay to sell back to it Cathay's effective investment in Yangling Haotian at cost of US$2.82 million plus interest at LIBOR + 2% (together, the "Call Options"). REASONS FOR AND BENEFITS OF THE TRANSACTION The investment in the Xian Haotian Group is an important milestone in thedevelopment and growth of the Cathay group's pharmaceutical business. Theinvestment should enable Cathay to expand into the manufacturing (using advancedand cost effective extraction technologies) and sale of plant extracts, widelyused as active ingredients in medical products, diet supplements and healthproducts, food, beverages and cosmetics industries in both the internationalmarkets and the China domestic market. Economic development in China has led to an increasingly affluent population andan increased awareness of the value of diet supplements and health products.The fast growing market in diet supplements and health products in China offersgood business growth potential. Cathay believes that it will also benefit fromthe investment, via the Xian Haotian Group, in the manufacturing and sale ofactive ingredients for diet supplements and health products sold in China. World demand for diet supplements and health product ingredients is expected toincrease due to clinical and scientific evidence of their health benefits andthe increasing demand for diet supplements and health products. China iscurrently one of the largest production countries after the United States ofactive ingredients for diet supplements and health products. The Xian HaotianGroup has established and maintained a good business network with its overseascustomers and this should provide a platform to expand further its exportbusiness. One of Cathay's business targets is to increase, via the Xian HaotianGroup, its market share in the global supply of active ingredients for dietsupplements and health products. The senior management team of Xian Haotian has extensive experience, expertiseand market knowledge in the plant extract business in China and in overseasmarkets. As Xian Haotian is one of the leading plant extract companies in China,Cathay's investment in the Xian Haotian Group is expected to position Cathay tobe potentially one of the key players in the industry in China. The investmentin the Xian Haotian Group should also pave the way to expand Cathay'spharmaceutical arm into the international arena. The Company believes that Xian Haotian's professional research and developmentteam should continue to improve Xian Haotian's core technologies and ensure thatXian Haotian will maintain and build upon its market position. The New Products will be used as active ingredients in diet supplements andhealth products in China and in overseas markets. In the event that the Companyproceeds with further investments in the Xian Haotian Group as contemplatedunder the Conditional Agreements, the Company is expected to be able to developand benefit from the production, marketing and sale of the New Products in thefast growing diet supplement and health product markets, in addition to theexisting products of Xian Haotian. The investment in the Xian Haotian Group is expected to be earnings neutral inthe year ending 31 December 2007 but is expected to be earnings enhancing fromyear 2008. This statement is not intended to constitute a profit forecast andshould not be interpreted to mean that the actual earnings of the Groupfollowing the acquisitions will necessarily match or exceed the historicpublished earnings. For further information, please contact: Stephen HuntDeputy Chairman, Cathay International HoldingsTel: +852 2828 9289 This information is provided by RNS The company news service from the London Stock Exchange