CTI.L Regulatory News (CTI)

14 Mar 2008 10:26

Cathay International Holdings Ld14 March 2008 14 March 2008 Cathay International Holdings Limited Update on Investment in Xian Haotian Group Further to the announcement made on 29 October 2007 regarding the initialinvestment of US$6.5 million in the Xian Haotian Group (the "First Announcement"), Cathay International Holdings Limited ("Cathay" or the "Company") would liketo announce that, through a wholly-owned subsidiary, it has proceeded with partof the anticipated first phase of the further capital investment in the XianHaotian Group by way of an equity investment in the amount of US$2.36 million inthe Xian Haotian Group for the development of its new product, Inositol,(comprising herbal extracts derived from corn, and as referred to in the FirstAnnouncement). CIH has also provided a working capital loan of US$1.10 millionto the Xian Haotian Group. The working capital loan is of one year term andbears interest at 6.70% per annum payable semi-annually. Cathay also intends to provide, through a wholly-owned subsidiary, an additionalworking capital loan of US$2.54 million to the Xian Haotian Group under the sameterms for Inositol and for general working capital. It is expected that thisadditional working capital facility will be drawn down by the Xian Haotian Groupover the next couple of weeks. As stated in the First Announcement, in the event that the full scalefeasibility studies on the New Products (including Inositol, and as referred totherein) are to the satisfaction of Cathay and Cathay is prepared to proceedwith further investments in the Xian Haotian Group, the aggregate considerationof such further investments would result in a Class 1 transaction and wouldrequire shareholder approval under the UK listing rules. Accordingly, ifrequired, a shareholder circular detailing the further investments in the XianHaotian Group, will be dispatched to all shareholders of the Company at therelevant time. As stated in the First Announcement, in the event that the conditions to furtherinvestments in Xian Haotian are not satisfied or Cathay decides not to proceedwith such further investments, after nine months from 22 October 2007 (the dateof the first capital subscriptions of US$6.5 million to the Xian Haotian Group)the Put and Call Option Agreement (as referred therein) effectively enablesCathay to recoup the US$6.5 million investment in the Xian Haotian Group. ThePut and Call Option Agreement also applies to the equity investment of US$2.36million. If the Put and Call Option were to be exercised, any investments madeor working capital loans provided to the Xian Haotian Group by the Companytogether with interest accrued, if any, would become immediately repayable bythe Xian Haotian Group. In the event that Cathay proceeds with further investments in the Xian HaotianGroup, such working capital loans will effectively constitute part of suchfurther investments. The First Announcement contained information on Xian Haotian, on its whollyowned subsidiary, Yangling Haotian Bio-Engineering Technology Co. Ltd,("Yangling Haotian"), on the senior management of the Xian Haotian Group and thereasons for and benefits of the transaction. Such information is repeated belowfor ease of reference and in order to comply with the UK Listing Rulesrequirements in respect of this announcement. "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 Inositol (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. Heis 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. 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 END This information is provided by RNS The company news service from the London Stock Exchange