Report of the
Board of Directors

Report of the Board of Directors

The Board is pleased to present its report together with the audited consolidated financial statements of the Group for the year ended 31 December 2017.

PRINCIPAL BUSINESS

Our Group is the largest distributor of pharmaceutical and healthcare products, and a leading supply chain services provider in the PRC; it also operates the largest national pharmaceutical distribution network in the PRC according to the information of China Association of Pharmaceutical Commerce. The Group has been able to rapidly increase its market share and profits in a highly fragmented industry by taking advantage of its economies of scale and nationwide distribution network, through which the Group offers a wide range of value-added supply chain services for its customers and suppliers.

The Group has integrated operations in the following business segments, namely:

  • Pharmaceutical distribution segment: Pharmaceutical distribution is the Group’s principal business. The Group provides distribution, logistics and other value-added services for domestic and international pharmaceutical and healthcare products manufacturers and other suppliers. The Group differentiates itself from its competitors in China by its strengths of geographic coverage, the breadth of its product portfolio and the comprehensive supply chain services provided to its customers and suppliers, etc.
  • Retail pharmacy segment: The Group has established a network of retail drug stores in major cities of China via direct operations and franchises.
  • Other business segment: The Group is also engaged in the distribution of medical devices, financial leasing, production and sale of pharmaceutical products, chemical reagents and laboratory supplies.

RESULTS

The operating results of the Group during the Reporting Period are set out in the consolidated income statement on page 95 of this annual report.

DIVIDENDS

Relevant resolution was passed at a meeting of the Board held on 23 March 2018 to propose to distribute a final dividend of RMB0.57 per share (tax inclusive) for the year ended 31 December 2017 (the “Final Dividend”), totalling approximately RMB1,577,244,000. If the proposal of profit distribution is approved by shareholders at the 2017 annual general meeting to be held on Thursday, 28 June 2018 (the “AGM”), the Final Dividend will be distributed to the shareholders whose names appear on the register of members of the Company on Wednesday, 11 July 2018 no later than 28 August 2018.

According to the articles of association of the Company, the Final Dividends will be denominated and declared in Renminbi. Final Dividend on domestic shares of the Company and for investors investing in the H shares of the Company through Shanghai Hong Kong Stock Connect or Shenzhen Hong Kong Stock Connect (the “Southbound Trading”) (the “Southbound Trading Shareholders”) will be paid in Renminbi, and the Final Dividend for other holders of H shares of the Company will be paid in Hong Kong dollars. The amount of the Final Dividend payable in Hong Kong dollars shall be calculated based on the average exchange rate of Renminbi to Hong Kong dollars as announced by the People’s Bank of China for the calendar week prior to 28 June 2018 (being the date of declaration of the Final Dividend).

For the Southbound Trading Shareholders, the Company will enter into the Agreement on Distribution of Cash Dividends of H Shares for Southbound Trading with China Securities Depository and Clearing Corporation Limited, pursuant to which, the Shanghai Branch and Shenzhen Branch of China Securities Depository and Clearing Corporation Limited, each of which as a nominee of the holders of H shares for Southbound Trading, will receive all the Final Dividend distributed by the Company and distribute the Final Dividend to the relevant Southbound Trading Shareholders through their depositary and clearing systems.

Pursuant to the Corporate Income Tax Law of the PRC and its implementing regulations (hereinafter collectively referred to as the “CIT Law”), the tax rate of the corporate income tax applicable to the income of non-resident enterprise deriving from the PRC is 10%. For this purpose, any H shares registered under the name of non-individual enterprise, including the H shares registered under the name of HKSCC Nominees Limited, other nominees or trustees, or other organizations or entities, shall be deemed as shares held by non-resident enterprise shareholders as defined under the CIT Law. The Company will distribute the Final Dividend to non-resident enterprise shareholders subject to a deduction of 10% corporate income tax withheld and paid by the Company on their behalf.

Any resident enterprise as defined under the CIT Law which has been legally incorporated in the PRC or which has established effective administrative entities in the PRC pursuant to the laws of foreign countries (regions) and whose name appears on the register of the members of H shares of the Company should deliver a legal opinion ascertaining its status as a resident enterprise furnished by a qualified PRC lawyer (with the official chop of the issuing law firm affixed thereon) and relevant documents to Computershare Hong Kong Investor Services Limited in due course, if they do not wish to have the 10% corporate income tax withheld and paid on their behalf by the Company.

Pursuant to the Notice on the Issues on Levy of Individual Income Tax after the Abolishment of GuoShui Fa [1993] No. 045 Document (the “Notice”) issued by the State Administration of Tax on 28 June 2011, the dividend to be distributed by the PRC non-foreign invested enterprises which has issued shares in Hong Kong to the overseas resident individual shareholders, is subject to the individual income tax with a tax rate of 10% in general. However, the tax rates for respective overseas resident individual shareholders may vary depending on the relevant tax agreements between the countries of their residence and Mainland China.

Thus, 10% personal income tax will be withheld by the Company from the Final Dividend payable to the individual H-share shareholders whose names appear on the register of members of the Company on Wednesday, 11 July 2018, unless otherwise stated in the relevant taxation regulations, taxation agreements or the Notice.

Pursuant to the “Notice on Taxation Policies concerning the Pilot Program of an Interconnection Mechanism for Transactions in the Shanghai and Hong Kong Stock Markets” (Cai Shui [2014] No.81) and the “Notice on Taxation Policies concerning the Pilot Program of an Interconnection Mechanism for Transactions in the Shenzhen and Hong Kong Stock Markets” (Cai Shui [2016] No.127) jointly promulgated by the Ministry of Finance, the State Administration of Taxation and the China Securities Regulatory Commission, for dividends derived by Mainland individual investors from investing in H-share listed on the Hong Kong Stock Exchange through Shanghai Hong Kong Stock Connect or Shenzhen Hong Kong Stock Connect, H-share companies shall withhold individual income tax at a tax rate of 20% for the investors. For Mainland securities investment funds investing in shares listed on Hong Kong Stock Exchange through Shanghai Hong Kong Stock Connect or Shenzhen Hong Kong Stock Connect, the above rules also apply and individual income tax shall be levied on dividends derived therefrom. Dividends derived by Mainland enterprise investors from investing in shares listed on Hong Kong Stock Exchange through Shanghai Hong Kong Stock Connect or Shenzhen Hong Kong Stock Connect shall be reported and paid by the enterprise investors themselves. H-share companies will not withhold or pay enterprise income tax on their behalf in the distribution of dividends.

The Company will have no liability in respect of any claims arising from any delay in, or inaccurate determination of the status of the shareholders or any disputes over the mechanism of withholding.

The Board is not aware of any shareholders who have waived or agreed to waive any dividends.

PURCHASE, SALE AND REDEMPTION OF LISTED SECURITIES

During the Reporting Period, the trustee (the “Trustee”) of the share award scheme effective on 18 October 2016 (the “Scheme”), pursuant to the rules of the Scheme, purchased on the open market a total of 6,570,000 H shares of the Company at a total consideration of approximately RMB203.29 million. In addition, as three incentive recipients resigned from the Group, making them unqualified for the Scheme, the Trustee sold 230,000 H shares of the Company to the secondary market during the second half of 2017. Save as disclosed above, during the Reporting Period, the Company and its subsidiaries had not purchased, sold or ransomed any of the listed shares of the Company.

PRINCIPAL SUBSIDIARIES

Details of the names, principal places of business, places of incorporation and issued share capital of the Company’s principal subsidiaries are set out in Note ** to the Consolidated Financial Statements.

RESERVES

Details of movements in reserves of the Group during the Reporting Period are set out in the consolidated statement of changes in equity on page ** of this annual report and Note ** to the Consolidated Financial Statements.

DISTRIBUTABLE RESERVES

In accordance with the Company Law of the PRC, the Company may only distribute dividends out of its distributable annual profits (i.e. the Company’s profit after tax after offsetting: (i) the accumulated losses brought forward from the previous years; and (ii) the allocations to the statutory surplus reserve and, if any, the discretionary common reserve (in such order of priorities)).

According to the Articles of Association, for the purpose of determining profit distribution, the profit distribution of the Company is the lesser of its profit after tax determined in accordance with: (i) the PRC accounting standard and regulations; and (ii) the HKFRS.

In 2017, the distributable reserves of the Company, calculated based on the above principles, amounted to approximately RMB17,173.37 million, which is prepared in accordance with the HKFRSs.

PROPERTY, PLANT, EQUIPMENT AND INVESTMENT PROPERTIES

Details of changes in investment properties and property, plant and equipment of the Group during the Reporting Period are set out in Notes ** and ** to the Consolidated Financial Statements.

BORROWINGS

In order to facilitate the adjustment of the debt structure of the Group and reduce financing costs, the Group issued corporate bonds of RMB1 billion and super short-term financing bonds of RMB3 billion during the Reporting Period.

Details of issued bonds of the Group are set out in Note ** to the Consolidated Financial Statements.

DEBENTURE

Details of borrowings of the Group are set out in Note ** to the Consolidated Financial Statements.

MAJOR CUSTOMERS AND SUPPLIERS

During the Reporting Period, purchases of goods and services from its 5 largest suppliers were less than 30% of the Group’s total purchases and the goods and services sold to its 5 largest customers were less than 30% of the Group’s total sales.

For the year ended 31 December 2017, none of the Directors, Supervisors, their respective associates and any shareholder of the Company (who to the knowledge of the Board owns more than 5% of the share capital of the Company) had any interest in the 5 largest customers or the 5 largest suppliers of the Group.

PERMITTED INDEMNITY PROVISIONS

The Company has maintained directors’ liability insurance to protect the Directors of the Company against any potential losses arising from his/her actual or alleged misconduct.

CONNECTED TRANSACTIONS

Pursuant to the requirements of the Listing Rules, the transactions between the Company and the connected person (as defined under the Listing Rules) of the Company constitute connected transactions of the Company. The Company regulates and manages such transactions in compliance with the Listing Rules. The following are the non-exempt connected transactions conducted by the Group during the Reporting Period.

NON-EXEMPT CONTINUING CONNECTED TRANSACTIONS

For the year of 2017, the annual caps for and the actual transaction amounts of the non-exempt continuing connected transactions by the Group are set out below:

Transactions between the Group and the CNPGC Group under  the Master Procurement and Master Sales Agreement Annual cap for the year
2017/the revised
annual cap
(RMB million)
Actual transaction
amounts for the year ended
31 December 2017
(RMB million)
Transactions between the Group and the CNPGC Group under  the Master Procurement Agreement 10,000 3,400
Transactions between the Group and the CNPGC Group under  the Master Sales Agreement 2,800 897

Transactions between the Group and Sinopharm Group Finance Co. under the Financial Services Framework Agreement Annual caps for 2017
(RMB million)
Actual transaction
amounts for the year ended
31 December 2017
(RMB million)
Maximum daily balance of the deposits placed with Sinopharm  Group Finance Co. by the Group 3,500 3,483
Interests/service fees incurred by the Group for the provision of  other financial services by Sinopharm Group Finance Co. 200 110

Transaction between the Group and the CNPGC Group under the EPC General Contracting Services Framework Agreement Annual caps for 2017
(RMB million)
Actual transaction
amounts for the year ended
31 December 2017
(RMB million)
Amount payable by the Group to the CNPGC Group under the EPC General Contracting Services Framework Agreement 500 7

The continuing connected transactions between the Group and the CNPGC Group under the Master Procurement Agreement

In order to regulate the continuing connected transactions in respect of the procurement of pharmaceutical products between the Group and CNPGC and its subsidiaries and associates (the “CNPGC Group”), the Company and the CNPGC renewed the Master Procurement Agreement of Pharmaceutical Products, Personal-care Supplies and Medical Equipment (“Master Procurement Agreement”) on 7 November 2014, and set up the annual caps for the three years ending 31 December 2017 of the continuing connected transactions under the Master Procurement Agreement. The annual caps for the continuing connected transactions contemplated under the Master Procurement Agreement for the three years ending 31 December 2017 will amount to RMB6,000 million, RMB8,000 million and RMB10,000 million, respectively. Pursuant to the Listing Rules, the Master Procurement Agreement and the annual caps for the continuing connected transactions contemplated thereunder for the three years ending 31 December 2017 have been approved by the independent shareholders of the Company.

Pursuant to the Listing Rules, the annual caps of three years ended 31 December 2017 of the continuing connected transactions under the Master Procurement Agreement were approved by the Group’s independent sharehodlers.

Pursuant to the Master Procurement Agreement, the Group has agreed to purchase pharmaceutical products, personal-care supplies and medical equipment as well as the related services from the CNPGC Group. The related services to be provided by the CNPGC Group under the Master Procurement Agreement mainly include the transportation services, storage services, equipment maintenance and repair services, as well as other related and ancillary services.

Under the Master Procurement Agreement, the price shall be determined in accordance with the following pricing principles: (i) The price of pharmaceutical products, personal-care supplies and medical equipment procured by the Group from the CNPGC Group under the renewed Master Procurement Agreement will be offered by members of the CNPGC Group based on the bidding price of the relevant products, which is won by relevant member of the CNPGC Group through it’s participation in the public bidding process of such products conducted by the tender office of Chinese government or hospitals, deducting the gross profit of distributors at each level; (ii) where Relevant members of the GNPGC Group will on a regular basis, provide the Company and its subsidiaries with the procurement price list of all types of the above-mentioned products for distributors at each level. The company and/or its subsidiaries, after considering comprehensively a lot of factors relating to the specific product, including but not limited to the price, quality, credit period, delivery method, after-sales service, gross profit and average price in the industry and going through all necessary internal review and approval procedures covering the president and various departments including procurement department, finance department, operation department and quality department of the company and/or its subsidiaries, will determine whether to accept the procurement price of specific product as offered by members of the CNPGC Group. If the company and/or its subsidiaries, after taking into consideration all the above-mentioned factors, consider that the procurement price offered by members of the CNPGC Group is not in the best interest of the Company and its shareholders, or is not fair and reasonable, they will make the decision not to procure such products from the CNPGC Group.

The Master Procurement Agreement is for a term of three years with effect from 1 January 2015 and ending on 31 December 2017. Upon expiry, the Master Procurement Agreement will, subject to compliance with the relevant requirements under the Listing Rules and agreement of the parties, be renewed for a further term of three years. Details for the transactions were set out in an announcement dated 7 November 2014, and a circular dated 12 November 2014 published on the websites of Hong Kong Stock Exchange and the Company.

CNPGC is the ultimate controlling shareholder of the Company and connected person of the Company under the Listing Rules. The transactions under the Master Procurement Agreement between the Company and the CNPGC constitute continuing connected transactions of the Company.

During the Reporting Period, the proposed annual caps for and the actual transaction amounts under the Master Procurement Agreement payable to CNPGC Group by the Group were RMB10,000 million and RMB3,400 million, respectively.

As the annual caps for the above-mentioned Master Procurement Agreement and the continuing connected transactions thereunder will expire on 31 December 2017, therefore on 27 October 2017, the Company and the CNPGC renewed the Master Procurement Agreement for a further term of three years from 1 January 2018 to 31 December 2020. The renewed Master Procurement Agreement was renamed to Procurement Framework Agreement. The annual caps for the continuing connected transactions contemplated under the Procurement Framework Agreement for the three years ending 31 December 2020 will amount to RMB6,000,000,000, RMB8,000,000,000 and RMB10,000,000,000, respectively. Details for the transactions were set out in an announcement dated 27 October 2017 published on the websites of Hong Kong Stock Exchange and the Company.

The continuing connected transactions between the Group and the CNPGC Group under the Master Sales Agreement

In order to regulate the continuing connected transactions in respect of the sales of pharmaceutical products between the Group and the CNPGC Group, the Company and the CNPGC renewed the Master Sales Agreement of Pharmaceutical Products, Personal-care Supplies, Medical Equipment, Chemical Reagents and Laboratory Supplies (“Master Sales Agreement”) on 7 November 2014, and set up the annual caps for the three years ending 31 December 2017 of the continuing connected transactions under the Master Sales Agreement. The annual caps for the continuing connected transactions contemplated under the renewed Master Sales Agreement for the three years ending 31 December 2017 will amount to RMB1,650 million, RMB2,200 million and RMB2,800 million, respectively.

Pursuant to Master Sales Agreement, the Group has agreed to sell pharmaceutical products, personal-care supplies, medical equipment, chemical reagents and laboratory supplies as well as the related services to the CNPGC Group. The related services to be provided by the Group under the Master Sales Agreement mainly include the transportation services, storage services, equipment maintenance and repair services, as well as other related and ancillary services.

Under the Master Sales Agreement, the price shall be determined in accordance with the following pricing principles: (i) The price of pharmaceutical products, personal-care supplies, medical equipment, chemical reagent, chemical reagents or laboratory supplies sold by the Group to the CNPGC Group under the renewed Master Sales Agreement will be offered by members of the Group based on the bidding price of the relevant products, which is won by relevant member of the Group through it’s participation in the public bidding process of such products conducted by the tender office of Chinese government or hospitals, deducting the gross profit margin of distributors at each level; (ii) The finance department of the Company will be responsible for collecting data of the continuing connected transactions conducted by itself or any of its subsidiaries on a regular basis and examining and comparing specific agreements for such continuing connected transactions with those entered into with independent third parties, so as to ensure that the pricing policies of the relevant products offered by the Company and/or its subsidiaries to the CNPGC Group are comparable to those offered to independent third parties.

The Master Sales Agreement is for a term of three years with effect from 1 January 2015 and ending on 31 December 2017. Upon expiry, the Master Sales Agreement will, subject to compliance with the relevant requirements under the Listing Rules and agreement of the parties, be renewed for a further term of three years. Details for the transactions were set out in an announcement dated 7 November 2014 published on the websites of Hong Kong Stock Exchange and the Company.

CNPGC is the ultimate controlling shareholder of the Company and a connected person of the Company under the Listing Rules. The transactions under the Master Sales Agreement between the Company and the CNPGC constitute continuing connected transactions of the Company.

During the Reporting Period, the proposed annual caps for and the actual transaction amounts under the Master Sales Procurement Agreement payable to the Group by the CNPGC Group were RMB2,800 million and RMB897 million, respectively.

As the annual caps for the above-mentioned Master Sales Agreement and the continuing connected transactions thereunder will expire on 31 December 2017, therefore on 27 October 2017, the Company and the CNPGC renewed the Master Sales Agreement for a further term of three years from 1 January 2018 to 31 December 2020. The renewed Master Sales Agreement was renamed to Procurement Framework Agreement. The annual caps for the continuing connected transactions contemplated under the Procurement Framework Agreement for the three years ending 31 December 2020 will amount to RMB1,400,000,000, RMB2,000,000,000 and RMB2,800,000,000, respectively. Details for the transactions were set out in an announcement dated 27 October 2017 published on the websites of Hong Kong Stock Exchange and the Company.

The continuing connected transactions between the Group and Sinopharm Group Finance Co. under the Financial Services Framework Agreement

In order to regulate the continuing connected transactions in respect of the utilization of financial services between the Group and Sinopharm Group Finance Co., the Company and Sinopharm Group Finance Co. (a subsidiary of the ultimate controlling shareholder of the Company and a connected person of the Company) entered into the Financial Services Framework Agreement on 7 November 2014, and set up the annual caps for the continuing connected transactions thereunder for the three years ending 31 December 2017. The maximum daily balance of the deposits under the renewed Financial Services Framework Agreement for each of the three years ending 31 December 2017 will amount to RMB2,000 million, and the annual caps for the interests/service fees paid for the provision of other financial services under the renewed Financial Services Framework Agreement for each of the three years ending 31 December 2017 will amount to RMB200 million.

Taking into the account the historical transaction figures, and based on the anticipated demand of the Group, the Board expects the existing 2016 and 2017 annual caps for the continuing connected transactions under the Financial Services Framework Agreement in respect of the maximum daily balance of the deposits placed with Sinopharm Group Finance Co. by the Group will be insufficient for the Group’s requirements and resolved the same to be revised on 9 November 2016. The revised annual caps for the continuing connected transactions under the Financial Services Framework Agreement in respect of the maximum daily balance of the deposits placed with Sinopharm Group Finance Co. by the Group for each of the two years ending 31 December 2017 is RMB3,500 million.

Pursuant to the Financial Services Framework Agreement, the Company and/or its subsidiaries will, from time to time, utilize the following financial services available from Sinopharm Group Finance Co. as is deemed necessary: (i) deposit services; (ii) loan and entrustment loan services; (iii) other financial services including bill discounting and acceptance services, finance lease services, settlement services and entrustment loan agency services; and (iv) other services as approved by China Banking Regulatory Commission.

Fees and charges payable by the Company and/or its subsidiaries to Sinopharm Group Finance Co. under the Financial Services Framework Agreement are determined on the following basis: (1) Deposit services: interest rates shall not be lower than each of (i) the interest rates floor promulgated by the People’s Bank of China from time to time for the same category of deposits; (ii) the interest rates offered to other members of the CNPGC Group by Sinopharm Group Finance Co. for the same category of deposits; and (iii) the interest rates offered to the Company and/or its subsidiaries by commercial banks for the same category of deposits. (2) Loan services: interest rates shall not be higher than each of (i) the interest rates cap promulgated by the People’s Bank of China from time to time for the same category of loans; (ii) the interest rates offered to other members of the CNPGC Group by Sinopharm Group Finance Co. for the same category of loans; and (iii) the interest rates offered to the Company and/or its subsidiaries by commercial banks for the same category of loans. (3) Other financial services: the interests or service fees charged for other financial services shall (i) comply with the standard rates as promulgated by the People’s Bank of China or China Banking Regulatory Commission from time to time (if applicable); (ii) be not higher than the interests or service fees charged by commercial banks for comparable services; and (iii) be not higher than the interests or service fees charged by Sinopharm Group Finance Co. for comparable services to other members of the CNPGC Group. Sinopharm Group Finance Co. may provide other services to the Company and/or its subsidiaries as may be approved by China Banking Regulatory Commission in the future. The fees and charges for such services to be provided shall: (i) comply with the standard rates as promulgated by the People’s Bank of China or China Banking Regulatory Commission from time to time (if applicable) for such kind of services; (ii) be not higher than the fees charged by commercial banks for comparable services; and (iii) be not higher than the fees charged by Sinopharm Group Finance Co. for comparable services to other members of the CNPGC Group.

The Financial Services Framework Agreement is effective from 1 January 2015 to 31 December 2017. Details for the transactions were set out in an announcement dated 7 November 2014 and 9 November 2016 published on the websites of Hong Kong Stock Exchange and the Company.

Sinopharm Group Finance Co. is a subsidiary of the ultimate controlling shareholder of the Company and a connected person of the Company under the Listing Rules. Therefore, the transactions under the Financial Services Framework Agreement between the Company and Sinopharm Group Finance Co. constitute continuing connected transactions of the Company.

During the Reporting Period, under the Financial Services Framework Agreement, the maximum daily balance of the deposits placed with Sinopharm Group Finance Co. by the Group was RMB3,500 million, while the actual amounts was RMB3,483 million; the annual cap for the interests/service fees incurred by the Group for the provision of other financial services by Sinopharm Group Finance Co. was RMB200 million, while the actual amount was RMB110 million.

As the annual caps for the above-mentioned Financial Services Framework Agreement and the continuing connected transactions thereunder will expire on 31 December 2017, therefore on 27 October 2017, the Company and the CNPGC renewed the Financial Services Framework Agreement for a further term of three years from 1 January 2018 to 31 December 2020. The maximum daily balance of the deposits under the renewed Financial Services Framework Agreement for each of the three years ending 31 December 2020 will amount to RMB3,500,000,000, and the annual caps for the interests/service fees paid for the provision of Other Financial Services under the renewed Financial Services Framework Agreement for each of the three years ending 31 December 2020 will amount to RMB200,000,000. Details for the transactions were set out in an announcement dated 27 October 2017 published on the websites of Hong Kong Stock Exchange and the Company.

The continuing connected transactions between the Group and the CNPGC Group under the EPC General Contracting Service Framework Agreement

In order to regulate the continuing connected transactions in respect of the EPC general contracting service between the Group and the CNPGC Group, the Company and the CNPGC entered into the EPC General Contracting Service Framework Agreement (“EPC Service Agreement”) on 15 October 2015, and set up the annual caps for the three years ending 31 December 2017 of the continuing connected transactions under the EPC Service Agreement. The annual caps for the continuing connected transactions contemplated under the EPC Service Agreement for the three years ending 31 December 2017 will amount to RMB300 million, RMB400 million and RMB500 million, respectively. Pursuant to the Listing Rules, the EPC Service Agreement and the annual caps for the continuing connected transactions contemplated thereunder for the three years ending 31 December 2017 have been approved by the Board of the Company.

Pursuant to the EPC Service Agreement, the CNPGC Group will provide EPC (Engineering, Procurement, and Construction) general contracting services to the Group according to the engineering project general contracting agreements obtained by CNPGC through bidding process.

Under the EPC Service Agreement, the price shall be determined in accordance with the following pricing principles: (i) T Under the EPC General Contracting Service Framework Agreement, the service provider and the price of EPC general contracting services shall be determined through a bidding process in principle and in compliance with applicable laws, regulations and rules. The CNPGC Group shall bid by stringently following the steps and/or measurements as stipulated by The Invitation And Submission of Bids Law of the PRC and the specific requirements in bidding invitation documents made by the Group; (ii) The bid invitation documents made by the Group include all substantial requirements and all key terms for the conclusion of contracts, including: the project’s technical requirements, the criteria for examination of the contractors, the requirements for the bid price and the standard of evaluation of the bid and etc. The Group’s tender committee is responsible for (i) adhering the process is in accordance with The Invitation And Submission of Bids Law of the PRC; (ii) reviewing, evaluating and monitoring documents from outsourcing service providers based on the technical, commercial and pricing criteria and payment terms of relevant service fees, which will ensure the terms obtained by the Group from the CNPGC Group is no less favorable than those available from independent third parties; and (iii) grading the service providers and writing recommendation advice. The Group’s tender committee is responsible for deciding which service provider will be awarded the EPC General Contracting Service Framework Agreement.

The EPC Service Agreement is for a term of three years with effect from 1 January 2015 and ending on 31 December 2017. Upon expiry, the EPC Service Agreement will, subject to compliance with the relevant requirements under the Listing Rules and agreement of the parties, be renewed for a further term of three years. Details for the transactions were set out in an announcement dated 15 October 2015 published on the websites of Hong Kong Stock Exchange and the Company.

CNPGC is the ultimate controlling shareholder of the Company and a connected person of the Company under the Listing Rules. The transactions under the EPC Service Agreement between the Company and the CNPGC constitute continuing connected transactions of the Company.

During the Reporting Period, the proposed annual caps and the actual amounts under the EPC Service Agreement payable by the Group to the CNPGC Group were RMB500 million and RMB7 million, respectively.

As the annual caps for the above-mentioned EPC General Contracting Service Framework Agreement and the continuing connected transactions thereunder will expire on 31 December 2017, therefore on 27 October 2017, the Company and the CNPGC renewed the EPC General Contracting Service Framework Agreement for a further term of three years from 1 January 2018 to 31 December 2020. The annual caps for the continuing connected transactions contemplated under the renewed EPC General Contracting Service Framework Agreement for each of the three years ending 31 December 2020 will amount to RMB500,000,000. Details for the transactions were set out in an announcement dated 27 October 2017 published on the websites of Hong Kong Stock Exchange and the Company.

The Company has conformed that the execution and enforcement of the implementation agreements under the continuing connected transactions set above for the year ended 31 December 2017 has followed the pricing principles of such continuing connected transactions.

The Independent non-executive Directors had reviewed the above continuing connected transactions and confirmed that these transactions had been entered into:

  1. in the ordinary and usual course of business of the Company;
  2. either on normal commercial terms or, if there are not sufficient comparable transactions to judge whether they are on normal commercial terms, on terms no less favorable to the Company than terms available to or from (as appropriate) independent third parties; and
  3. in accordance with relevant agreements governing them on terms that are fair and reasonable and in the interests of the shareholders of the Company as a whole.

The auditors of the Company had informed the Board and confirmed that the above-mentioned continuing connected transactions:

  1. were approved by the Board;
  2. were in accordance with pricing policy of the Company;
  3. were entered into in accordance with relevant agreements governing the transactions; and
  4. did not exceed the annual caps disclosed in the relevant announcements of the Company.

NON-EXEMPT CONNECTED TRANSACTION

On 27 November 2017, the Company entered into the equity transfer agreement with China National Pharmaceutical Group Co., Ltd., the ultimate controlling shareholder of the Company, in respect of the acquisition of 100% equity interest in Shanghai Pudong New Area Medicines and Herbs Co., Ltd. (including its wholly-owned subsidiary Shanghai Yanghetang Pharmacy Chain Operation Co., Ltd.) at a cash consideration of RMB217,473,000. Upon completion of the acquisition, Shanghai Pudong New Area Medicines and Herbs Co., Ltd. became a wholly-owned subsidiary of the Company. For details, please refer to the announcement of the Company published on the websites of the Company and the Hong Kong Stock Exchange on 11 November 2017.

Save as disclosed above, for the year ended 31 December 2017, there is no other related party transaction or continuing related party transaction set out in Note XX to the Financial Statements which constitutes discloseable connected transaction or continuing connected transaction under the Listing Rules. In respect of the connected transactions and the continuing connected transactions, the Company has complied with the disclosure requirements of the Listing Rules (as amended from time to time).

DIRECTORS’ AND SUPERVISORS’ SERVICE CONTRACTS

Each of the Directors and Supervisors has entered into a service contract with the Company. None of the Directors and Supervisors has entered into any service contract with the Company which is not determinable by the Company within one year without payment of compensation (other than statutory compensation).

BIOGRAPHIES OF DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT

Biographies of the Directors, Supervisors and senior management are set out from page ** to ** of this annual report.

REMUNERATIONS OF DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND FIVE HIGHEST PAID INDIVIDUALS

The remuneration committee determines and makes recommendation to the Board (as appropriate) on the remuneration and other benefits payable to the Directors. The committee regularly oversees the remuneration of all Directors to ensure that their remuneration and compensation are at appropriate level. The Group maintains competitive remuneration packages with reference to the industry standard and according to the business development of the Group, and determines remuneration of the Directors based on their qualifications, experience and contributions, to attract and retain its Directors as well as to control costs.

Details of the remuneration of the Directors and Supervisors in 2017 are set out in Note ** to the Consolidated Financial Statements.

Details of the five highest paid individuals of the Group in 2017 are set out in Note ** to the Consolidated Financial Statements on page ** of this annual report.

Details of the remuneration of the current senior management of the Company by band for the year ended 31 December 2017 are set out as follows:

Range Number of individuals
RMB nil to RMB2,000,000 1
RMB2,000,001 to RMB3,000,000 5
RMB3,000,000 and above 3

INTERESTS OF DIRECTORS AND SUPERVISORS IN TRANSACTION, ARRANGEMENT OR CONTRACT

Save as the non-exempt continuing connected transactions and the non-exempt connected transactions disclosed in this annual report, for the year ended 31 December 2017, there was no transaction, arrangement and contract of significance to which the Company, its holding company, its subsidiary or a subsidiary of its holding company was a party and in which a Director, Supervisor or their releveant party has or had at any time during that period, in any way, whether directly or indirectly, a material interest.

INTERESTS OF DIRECTORS IN COMPETING BUSINESS

As at 31 December 2017, three non-executive Directors, namely Mr. Chen Qiyu, Mr. Wang Qunbin and Mr. Li Dongjiu had interest in businesses which compete or are likely to compete, either directly or indirectly, with the business of the Group. Mr. Wang Qunbin is a non-executive director of Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (“Fosun Pharma”). Mr. Chen Qiyu is an executive director and the chairman of the board of Fosun Pharma and a director of some of the Fosun Production Companies. Mr. Li Dongjiu is a senior vice president of Fosun Pharma and a director of certain distribution, manufacture and retail companies of Fosun.

For the year ended 31 December 2017, the Group’s total revenue from sales of pharmaceutical products to Fosun Pharma and its subsidiaries was approximately RMB140 million and total costs from purchase of pharmaceutical products from Fosun Pharma and its subsidiaries was approximately RMB1,531 million, accounting for 0.05% and 0.60%, respectively, of the Group’s audited total revenue and total costs for the same period.

Certain Fosun Production Companies are wholly-owned or controlled by Fosun Pharma. A summary of the facts and circumstances regarding the Fosun Production Companies are set out below:

Description of business

The Fosun Production Companies principally engage in the production of pharmaceutical products in the PRC. The core business of the Group is the distribution of pharmaceutical products in the PRC, not production of medicines. For the year ended 31 December 2017, the Group’s revenue from the production of pharmaceutical products only accounted for approximately 0.31% of the Group’s total audited revenue. Furthermore, because there is a clear delineation between the medicines produced by the Group and those produced by the Fosun Production Companies, the Directors believe that there is no competition between the Fosun Production Companies and the Group.

Independence

The Company is financially independent from the Fosun Production Companies. Given the insignificant proportion of sales of pharmaceutical products to/purchase of pharmaceutical products from certain Fosun Production Companies to the Group’s total audited revenue/costs, therefore, the Group is also operationally independent from the Fosun Production Companies.

As mentioned above, Mr. Chen Qiyu and Mr. Li Dongjiu, who are non-executive Directors, are directors of certain Fosun Production Companies. Apart from the above two non-executive Directors, who are not involved in the day-to-day operations and management of the Company, none of the other Directors and members of senior management of the Company concurrently hold any director and/or senior management positions in any of the Fosun Production Companies. In light of the above, the Directors are of the view that the Directors and senior management of the Company are independent from those of the Fosun Production Companies.

DIRECTORS’, SUPERVISORS’ AND CHIEF EXECUTIVE’S INTERESTS AND SHORT POSITIONS IN SHARES, UNDERLYING SHARES AND DEBENTURES OF THE COMPANY AND ITS ASSOCIATED CORPORATIONS

As at 31 December 2017, none of the Directors, Supervisors and the chief executive of the Company had any interests or short positions in the shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) (the “SFO”)) as recorded in the register required to be kept under Section 352 of the SFO or as otherwise notified to the Company and the Hong Kong Stock Exchange pursuant to the requirements of the Model Code.

Names Class of
shares
Nature of
interest
Number of
shares held
Approximate
percentage
to the total
number of
shares of
the Company
(%)
Approximate
percentage
to the relevant
class of shares
(%)
Long position/
short position/
shares
available
for lending
Li Zhiming H shares Beneficial owner 260,000 0.01 0.02 Long
Liu Yong H shares Beneficial owner 210,000 0.01 0.02 Long
Jin Yi H shares Beneficial owner 1,200 0.00 0.00 Long

Save as disclosed above, none of the Directors, Supervisors and the chief executive of the Company had any interests or short positions in the shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) (the “SFO”)) as recorded in the register required to be kept under Section 352 of the SFO or as otherwise notified to the Company and the Hong Kong Stock Exchange pursuant to the requirements of the Model Code.

RIGHTS TO PURCHASE SHARES OR DEBENTURES OF DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVE

No arrangements to which the Company, any of its subsidiaries, its holding company or any subsidiary of its holding company is or was a party enabling the Directors, Supervisors and the chief executive of the Company to acquire benefits by means of acquisitions of shares or debentures of the Company or any other body corporate subsisted during the Reporting Period.

SUBSTANTIAL SHAREHOLDERS’ INTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYING SHARES OF THE COMPANY

As at 31 December 2017, so far as was known to the Directors, the interests or short positions of the following persons (other than the Directors, Supervisors or the chief executive of the Company) in the shares and underlying shares of the Company as recorded in the register required to be kept under section 336 of the SFO were as follows:

Names Class of
shares
Nature of
interest
Number of
shares held
Approximate
percentage
to the total
number of
shares of
the Company
(%)
Approximate
percentage
to the relevant
class of shares
(%)
Long position/
short position/
shares
available
for lending
CNPGC Domestic shares Beneficial owner 2,728,396
(Note 2)
0.10 0.17 -
Domestic shares Interest of controlled  corporation 1,571,555,953
(Note 1 and 2)
56.79 99.83 -
Sinopharm Investment Domestic shares Beneficial owner 1,571,555,953
(Note 1 and 2)
56.79 99.83 -
Fosun Pharma Domestic shares Interest of controlled  corporation 1,571,555,953
(Note 1 and 3)
56.79 99.83 -
Fosun High Technology Domestic shares Interest of controlled  corporation 1,571,555,953
(Note 1 and 4)
56.79 99.83 -
Fosun Company Domestic shares Interest of controlled  corporation 1,571,555,953
(Note 1 and 5)
56.79 99.83 -
Fosun Holdings Domestic shares Interest of controlled  corporation 1,571,555,953
(Note 1 and 6)
56.79 99.83 -
Fosun International  Holdings Domestic shares Interest of controlled  corporation 1,571,555,953
(Note 1 and 7)
56.79 99.83 -
Mr. Guo Guangchang Domestic shares Interest of controlled  corporation 1,571,555,953
(Note 1 and 8)
56.79 99.83 -
BlackRock, Inc. H shares Interest of controlled  corporatio
(Note 10)
74,561,353 2.69 6.25 Long position
601,600 0.02 0.05 Short position
Matthews International Capital Management, LLC H shares Investment manager 60,109,600 2.17 5.03 Long position
JPMorgan Chase & Co. H shares Beneficial owner,

263,194,761

9.51

22.06

Long position

Investment manager, 1,275,200 0.05 0.10 Short position
Custodian/approved
lending agent
(Note 10)
249,218,719 9.01 20.89 Shares available for lending
Oppenheimer Developing Markets Fund H shares Beneficial owner 167,530,000 6.05 14.04 Long position
FIL Limited H shares Interest of controlled  corporation (Note 11) 59,697,600 2.16 5.00 Long position

Notes:

The information was disclosed based on the data available on the HKExnews website of the Hong Kong Stock Exchange (www.hkexnews.hk).

  1. Such 1,571,555,953 domestic shares belong to the same batch of shares.
  2. CNPGC is interested in 2,728,396 domestic shares directly and 1,571,555,953 domestic shares indirectly through Sinopharm Industrial Investment Co., Ltd. (“Sinopharm Investment”). As CNPGC owns 51% equity interest in Sinopharm Investment, it is deemed to be interested in the shares held by Sinopharm Investment for the purposes of the SFO.
  3. Fosun Pharma is the beneficial owner of 49% equity interest in Sinopharm Investment and, therefore, Fosun Pharma is deemed to be interested in the domestic shares owned by Sinopharm Investment for the purposes of the SFO.
  4. Fosun High Technology (Group) Co., Ltd. (“Fosun High Technology”) is the beneficial owner of 37.94% equity interest in Fosun Pharma and, therefore, Fosun High Technology is deemed to be interested in the domestic shares owned by Sinopharm Investment for the purposes of the SFO.
  5. Fosun International Ltd. (“Fosun Company”) is the beneficial owner of 100% equity interest in Fosun High Technology and, therefore, Fosun Company is deemed to be interested in the domestic shares owned by Sinopharm Investment for the purposes of the SFO.
  6. Fosun Holdings Ltd. (“Fosun Holdings”) is the beneficial owner of 71.68% equity interest in Fosun Company and, therefore, Fosun Holdings is deemed to be interested in the domestic shares owned by Sinopharm Investment for the purposes of the SFO.
  7. Fosun International Holdings Ltd. (“Fosun International Holdings”) is the beneficial owner of 100% equity interest in Fosun Holdings and, therefore, Fosun International Holdings is deemed to be interested in the domestic shares owned by Sinopharm Investment for the purposes of the SFO.
  8. Mr. Guo Guangchang is the beneficial owner of 65.45% equity interest in Fosun International Holdings and 0.005% equity interest in Fosun Pharma and, therefore, Mr. Guo Guangchang is deemed to be interested in the domestic shares owned by Sinopharm Investment for the purposes of the SFO.
  9. JPMorgan Chase & Co. is interested, directly and indirectly through a series of controlled corporations, in an aggregate of long positions of 263,194,761 H shares (of which 249,218,719 are H shares available for lending) and short positions of 1,275,200 H shares of the Company.
  10. BlackRock, Inc. is interested in long positions of 74,561,353 and short positions of 601,600 H shares of the Company indirectly through a series of controlled corporations.
  11. FIL Limited is interested in long positions of 59,697,600 H shares of the Company indirectly through a series of controlled corporations.

Save as disclosed above, to the best knowledge of the Directors, as at 31 December 2017, no person (other than the Directors, Supervisors or the chief executive of the Company) had any interests or short positions in the shares or underlying shares of the Company as recorded in the register required to be kept under section 336 of the SFO.

PRE-EMPTIVE RIGHTS

There are no provisions for pre-emptive rights under the Articles of Association and the laws of the PRC which oblige the Company to offer pre-emptive rights of new shares to existing shareholders on their shareholding proportion.

SUFFICIENCY OF PUBLIC FLOAT

Based on the information that is publicly available to the Company and to the best knowledge of all Directors, there was sufficient public float of more than 25% of the Company’s issued shares as required under the Listing Rules in the financial year of 2017 and prior to the issue of this annual report.%的充足公众持股量。

MANAGEMENT CONTRACT

There was no contract concerning the management or administration of the whole or any substantial part of the business of the Company which was entered into or existed during the Reporting Period.

PENSION SCHEME

During the Reporting Period, details of the pension scheme of the Group are set out in Note ** to the Consolidated Financial Statements.[XX]。

DONATION

During the Reporting Period, details of the donation are set out in Note ** to the Consolidated Financial Statements.

ENTRUSTED DEPOSIT AND MATURED TIME DEPOSIT

As at 31 December 2017, the Company had not held any deposits under trust or any time deposit in any financial institution in the PRC which could not be withdrawn upon maturity.

TAX RELIEF AND EXEMPTION

Save as disclosed in this annual report, the Company is not aware that any holders of securities of the Company are entitled to any tax relief or exemption by reason of their holding of such securities.

CONFIRMATION OF INDEPENDENCY BY INDEPENDENT NON-EXECUTIVE DIRECTORS

The Company had received annual confirmation of independence from each independent non-executive Director. Based on the confirmation, the Company considered that all independent non-executive Directors were independent.

AUDITOR

The financial statements set out in this annual report have been audited by Ernst & Young.

By Order of the Board
Sinopharm Group Co. Ltd.
Li Zhiming
Chairman

Shanghai, PRC
23 March 2018

EN
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