The Stock Exchange of Hong Kong Limited and the Securities and Futures Commission take no responsibility for the contents of this Application Proof, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this Application Proof. Application Proof of B.J.ZH.F.Panther Medical Equipment Co., Ltd. 北京派爾特醫療科技股份有限公司 (the “Company”) (a joint stock company incorporated in the People’s Republic of China with limited liability)
WARNING
The publication of this Application Proof is required by The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) and the Securities and Futures Commission (the “Commission”) solely for the purpose of providing information to the public in Hong Kong.
This Application Proof is in draft form. The information contained in it is incomplete and is subject to change which can be material. By viewing this document, you acknowledge, accept and agree with the Company, its sole sponsor, advisors or members of the underwriting syndicate that:
(a) this document is only for the purpose of providing information about the Company to the public in Hong Kong and not for any other purposes. No investment decision should be based on the information contained in this document;
(b) the publication of this document or supplemental, revised or replacement pages on the Stock Exchange’s website does not give rise to any obligation of the Company, its sole sponsor, advisors or members of the underwriting syndicate to proceed with an offering in Hong Kong or any other jurisdiction. There is no assurance that the Company will proceed with the offering;
(c) the contents of this document or supplemental, revised or replacement pages may or may not be replicated in full or in part in the actual final listing document;
(d) the Application Proof is not the final listing document and may be updated or revised by the Company from time to time in accordance with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited;
(e) this document does not constitute a prospectus, offering circular, notice, circular, brochure or advertisement offering to sell any securities to the public in any jurisdiction, nor is it an invitation to the public to make offers to subscribe for or purchase any securities, nor is it calculated to invite offers by the public to subscribe for or purchase any securities;
(f) this document must not be regarded as an inducement to subscribe for or purchase any securities, and no such inducement is intended;
(g) neither the Company nor any of its affiliates, its sole sponsor, advisors or members of its underwriting syndicate is offering, or is soliciting offers to buy, any securities in any jurisdiction through the publication of this document;
(h) no application for the securities mentioned in this document should be made by any person nor would such application be accepted;
(i) the Company has not and will not register the securities referred to in this document under the United States Securities Act of 1933, as amended, or any state securities laws of the United States;
(j) as there may be legal restrictions on the distribution of this document or dissemination of any information contained in this document, you agree to inform yourself about and observe any such restrictions applicable to you; and
(k) the application to which this document relates has not been approved for listing and the Stock Exchange and the Commission may accept, return or reject the application for the subject public offering and/or listing.
If an offer or an invitation is made to the public in Hong Kong in due course, prospective investors are reminded to make their investment decisions solely based on the Company’s prospectus registered with the Registrar of Companies in Hong Kong, copies of which will be distributed to the public during the offer period. THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. IMPORTANT
If you are in any doubt about any of the contents of this document, you should obtain independent professional advice.
B.J.ZH.F.Panther Medical Equipment Co., Ltd. 北京派爾特醫療科技股份有限公司 (a joint stock company incorporated in the People’s Republic of China with limited liability)
[REDACTED] Number of [REDACTED] under the : [REDACTED] H Shares (subject to the [REDACTED] [REDACTED]) Number of [REDACTED] : [REDACTED] H Shares (subject to adjustment) Number of [REDACTED] : [REDACTED] H Shares (subject to adjustment and the [REDACTED]) Maximum [REDACTED] : HK$[REDACTED] per H Share, plus brokerage of 1.0%, Stock Exchange trading fee of 0.005% and SFC transaction levy of 0.0027% (payable in full in Hong Kong dollars on application subject to refund on final [REDACTED]) Nominal Value : RMB1.00 per H Share Stock Code : [REDACTED] Sole Sponsor
[REDACTED] [REDACTED]
Hong Kong Exchanges and Clearing Limited, The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this document, make no representation as to its accuracy or completeness, and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this document. A copy of this document, having attached thereto the documents specified in “Appendix VII—Documents Delivered to the Registrar of Companies in Hong Kong and Available for Inspection—A. Documents Delivered to the Registrar of Companies”, has been registered by the Registrar of Companies in Hong Kong as required by section 342C of the Companies (Winding Up and Miscellaneous Provisions) Ordinance of Hong Kong (Chapter 32 of the Laws of Hong Kong). The Securities and Futures Commission and the Registrar of Companies in Hong Kong take no responsibility for the contents of this document or any other document referred to above. The [REDACTED] is expected to be fixed by agreement between the [REDACTED] (on behalf of the [REDACTED]) and us on the [REDACTED]. The [REDACTED] is expected to be on or about [REDACTED] and, in any event, not later than [REDACTED]. The [REDACTED] will be not more than HK$[REDACTED] per H Share and is currently expected to be not less than HK$[REDACTED] per H Share. If, for any reason, the [REDACTED] (on behalf of the [REDACTED]) and us are unable to reach an agreement on the [REDACTED], the [REDACTED] will not proceed and will lapse. The [REDACTED] (on behalf of the [REDACTED], and with our consent) may reduce the number of [REDACTED] and/or the indicative [REDACTED] range that stated in this document at any time prior to the morning of the last day for lodging applications under the [REDACTED]. In such a case, a notice of the reduction in the number of [REDACTED] and/or the indicative [REDACTED] range will be published in the [South China Morning Post] (in English) and [Hong Kong Economic Times] (in Chinese) as well as the website of the Stock Exchange at www.hkexnews.hk and our website at www.pantherhealthcare.com not later than the morning of the last day for lodging applications under the [REDACTED]. Further details are set forth in “[REDACTED]” and “[REDACTED]” in this document. If applications for [REDACTED] have been submitted prior to the day which is the last day for lodging applications under the [REDACTED], then such applications can be subsequently withdrawn if the number of [REDACTED] and/or the indicative [REDACTED] range is so reduced. We are incorporated, and substantially all of our businesses are located, in the PRC. Potential investors should be aware of the differences in legal, economic and financial systems between the PRC and Hong Kong and that there are different risk factors relating to investments in PRC-incorporated companies. Potential investors should also be aware that the regulatory framework in the PRC is different from the regulatory framework in Hong Kong and should take into consideration the different market nature of our H Share. Such differences and risk factors are set out in “Risk Factors”, “Appendix III—Taxation and Foreign Exchange”, “Appendix IV—Summary of Principal Legal and Regulatory Provisions” and “Appendix V—Summary of the Articles of Association”. Prior to making an investment decision, prospective investors should consider carefully all the information set forth in this document, including the risk factors set forth in “Risk Factors”. The obligations of the [REDACTED] under the [REDACTED] to subscribe for, and to procure applicants for the subscription for, the [REDACTED], are subject to termination by the [REDACTED] (on behalf of the [REDACTED]) if certain grounds arise prior to 8:00 a.m. on the day that trading in the H Shares commences on the Stock Exchange. Such grounds are set out in “[REDACTED]”. It is important that you refer to that section for further details. The [REDACTED] have not been and will not be registered under the U.S. Securities Act or any state securities law in the United States and may not be offered, sold, pledged or transferred within the United States, except that the [REDACTED] may be offered, sold or delivered (i) within the United States in reliance on an exemption from registration under the U.S. Securities Act provided by, and in accordance with the restrictions of, Rule 144A under the U.S. Securities Act or another exemption from registration under the U.S. Securities Act; and (ii) in offshore transactions outside the United States in reliance on Regulation S under the U.S. Securities Act.
ATTENTION We have adopted a fully electronic application process for the [REDACTED]. We will not provide printed copies of this document or printed copies of any [REDACTED] to the public in relation to the [REDACTED]. This document is available at the websites of the Stock Exchange (www.hkexnews.hk) and our Company (www.pantherhealthcare.com). If you require a printed copy of this document, you may download and print from the website addresses above.
[REDACTED] THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. IMPORTANT
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–vi– THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. CONTENTS
IMPORTANT NOTICE TO INVESTORS
This document is issued by B.J.ZH.F.Panther Medical Equipment Co., Ltd. solely in connection with the [REDACTED] and does not constitute an offer to sell or a solicitation of an offer to buy any security other than the [REDACTED] offered by this document pursuant to the [REDACTED]. This document may not be used for the purpose of, and does not constitute, an offer or a solicitation of an offer to subscribe for or buy, any security in any other jurisdiction or in any other circumstances. No action has been taken to permit a [REDACTED] of the [REDACTED] or the distribution of this document in any jurisdiction other than Hong Kong. The distribution of this document and the [REDACTED] of the [REDACTED] in other jurisdictions are subject to restrictions and may not be made except as permitted under the applicable securities laws of such jurisdictions pursuant to registration with or authorization by the relevant securities regulatory authorities or an exemption therefrom.
You should rely only on the information contained in this document to make your investment decision. We have not authorized anyone to provide you with information that is different from what is contained in this document. Any information or representation not made in this document must not be relied on by you as having been authorized by us, the Sole Sponsor, the [REDACTED], the [REDACTED], the [REDACTED], any of the [REDACTED], any of our or their respective directors, officers or representatives, or any other person or party involved in the [REDACTED].
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EXPECTED TIMETABLE...... iv
CONTENTS ...... vii
SUMMARY ...... 1
DEFINITIONS AND ACRONYMS ...... 11
GLOSSARY OF TECHNICAL TERMS ...... 30
FORWARD-LOOKING STATEMENTS ...... 36
RISK FACTORS ...... 38
WAIVERS FROM STRICT COMPLIANCE WITH THE LISTING RULES .... 109
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INFORMATION ABOUT THIS DOCUMENT AND THE [REDACTED]...... 111
DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE [REDACTED]...... 116
CORPORATE INFORMATION ...... 120
INDUSTRY OVERVIEW ...... 122
REGULATORY OVERVIEW ...... 136
HISTORY AND CORPORATE STRUCTURE ...... 156
BUSINESS ...... 181
RELATIONSHIP WITH CONTROLLING SHAREHOLDERS ...... 266
CONNECTED TRANSACTIONS ...... 270
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT ...... 274
SHARE CAPITAL ...... 294
SUBSTANTIAL SHAREHOLDERS...... 300
FINANCIAL INFORMATION...... 303
FUTURE PLANS AND [REDACTED] ...... 346
[REDACTED]...... 350
[REDACTED]...... 365
[REDACTED]...... 377
APPENDIX I – ACCOUNTANTS’ REPORT ...... I-1
APPENDIX II – UNAUDITED PRO FORMA FINANCIAL INFORMATION...... II-1
APPENDIX III – TAXATION AND FOREIGN EXCHANGE ...... III-1
APPENDIX IV – SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS ...... IV-1
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APPENDIX V – SUMMARY OF THE ARTICLES OF ASSOCIATION ...... V-1
APPENDIX VI – STATUTORY AND GENERAL INFORMATION...... VI-1
APPENDIX VII – DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES IN HONG KONG AND AVAILABLE FOR INSPECTION ...... VII-1
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This summary aims to give you an overview of the information contained in this document. As this is a summary, it does not contain all the information that may be important to you. You should read this document in its entirety before you decide to invest in the [REDACTED]. There are risks associated with any investment. Some of the particular risks in investing in the [REDACTED] are set out in “Risk Factors.” You should read that section carefully before you decide to invest in the [REDACTED].
OUR MISSION Our mission is to reduce the pain of patients through our MISIA products by helping achieve higher success rates of surgeries, less surgical trauma and faster post-surgery recovery, at lower cost.
OVERVIEW We are a leading provider of intelligent minimally invasive surgical solutions in the PRC. We design, develop, manufacture and market surgical devices, with a focus on surgical staplers, and provide customized surgical training services. According to F&S, we rank first among domestic stapler manufacturers in the PRC in terms of sales volume (including export) in 2020, representing 14.3% of total sales volume by domestic stapler manufacturers. Our products were sold to more than 60 countries and regions around the world in 2020, such as Brazil, Spain, Turkey, Italy and Canada. According to F&S, we ranked first among Chinese stapler brands in terms of export sales volume for five consecutive years from 2016 to 2020. After nearly two decades of development, we have built a comprehensive product portfolio, comprising (i) staplers, including endoscopic staplers, smart staplers and open staplers, applicable to multiple surgical specialties, ranging from gastrointestinal, gynecologic and thoracic surgeries to sleeve gastrectomy surgeries for weight control, and (ii) other instruments and accessories for minimally invasive and open surgeries, such as ultrasonic scalpels and disposable fixation devices for hernia repair. We also market and distribute sutures, hernia meshes and blood vessel titanium clips manufactured by third parties as part of our integrated product offerings to our customers, and manufacture and sell certain products to OEM customers. As of the Latest Practicable Date, we had over 300 models of products on offer. As of the same date, 3 and 61 of our products had been certified as Class III and Class II medical devices in China, respectively, and our key products had received FDA approvals for 7 products, CE Marks for 21 products and MDSAP recognitions for 11 products. We have also developed a robust new product pipeline, including a laparoscopic surgical robot, which we expect to launch in 2024, if approved. As of the Latest Practicable Date, we had 19 product candidates, including 6 potential Class III medical devices and 13 potential Class II medical devices. As of the same date, we had two products that had received CE Marks and were in product registration process in China. With our comprehensive product portfolio, we aim to provide an “all-in-one” surgical toolkit that can make MIS safer, simpler, faster and more affordable. R&D capability represents one of the most important engines driving our growth. We master a number of industry-leading core technologies, which together form a MISIA technology platform. Based on these technologies, we have developed various advanced and cost-effective products. As of the Latest Practicable Date, we had 243 patents in China (including 93 invention patents), 2 in Europe, 5 in the US and 1 in Japan. As of the same date, we had 54 patent applications pending approval. Our “Key Technologies and Applications of Minimally Invasive Abdominal Surgery Robots and Instruments (腹腔微創手術機器人與器械 關鍵技術及應用)” project was awarded the National Technology Invention Second Prize (國家 技術發明獎二等獎) and our “Establishment, Clinical Research and Application of China’s Comprehensive Minimally Invasive Lung Cancer Treatment System (中國肺癌微創綜合診療體 系的建立、臨床基礎研究和應用推廣)” project was awarded the National Scientific Progress Second Prize (國家科學技術進步獎二等獎).
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Over the years, we have established an extensive sales network in China that covers all provinces, laying a solid foundation for the promotion of our products. In addition to a stable in-house sales team, we have an extensive distributor network, composed of over 400 distributors as of December 31, 2020. In 2020, we sold our products to more than 1,200 hospitals nationwide, of which more than 400 were Grade IIIA hospitals. According to F&S, we had the largest sales network among domestic surgical stapler manufacturers in terms of the number of hospitals covered as of December 31, 2020. In overseas markets, we have built up a sales network composed of over 70 distributors to promote both our own brands and OEM products, and have sold our products to over 60 countries and regions. The proportion of our revenue contributed by overseas sales continued to grow from 22.7% in 2018 to 29.0% in 2019, and further to 40.0% in 2020. According to F&S, China’s MIS market is expected to grow significantly. As a result, the PRC MISIA market is also expected to grow rapidly, at a CAGR of 17.1% from 2020 to 2025, far higher than the global average of 7.5%. Endoscopic and smart staplers represent the largest part of the MISIA market and are projected to account for 30.2% of the PRC MISIA market in terms of revenue in 2025. Further, domestically manufactured endoscopic and smart staplers are expected to account for 43.0% of the endoscopic and smart stapler market in the PRC by 2025, representing a significant increase as compared with 2020. Leveraging our leading position in the PRC MISIA market, we believe that we are well positioned to seize the momentum of accelerating domestic substitution and capture a larger share in the fast-growing market. In 2018, 2019 and 2020, our revenue was RMB228.9 million, RMB302.5 million and RMB308.5 million, respectively, and our net profit was RMB31.6 million, RMB41.8 million and RMB34.4 million, respectively. A substantial majority of our revenue during the Track Record Period was derived from our surgical staplers, which amounted to RMB203.9 million, RMB276.9 million and RMB260.8 million in 2018, 2019 and 2020, respectively, accounting for 89.1%, 91.6% and 84.5% of our total revenue, respectively. OUR STRENGTHS We believe that our principal competitive strengths include (i) leading provider of intelligent MIS solutions in China serving a large and fast-growing market; (ii) continuously enriched and iterated product portfolio providing comprehensive solutions for MIS; (iii) forward-looking R&D strategy, cutting-edge technologies and strong commercialization capabilities; (iv) extensive sales network and outstanding academic promotion capabilities; and (v) seasoned management team, comprehensive talent development scheme and strong shareholder support. OUR STRATEGIES We plan to implement the following strategies: (i) continue to expand our market share and solidify our industry position; (ii) further enrich product pipeline, accelerate the commercialization of product candidates and pursue acquisition opportunities; (iii) expand manufacturing capacity and enhance intelligent manufacturing capability; (iv) further enhance our brand awareness; and (v) attract and retain outstanding talent. OUR BUSINESS MODEL During the Track Record Period, we generated a vast majority of our revenue from sales of our self-manufactured products, such as surgical staplers, disposable fixation devices for hernia repair and other surgical instruments and accessories. In addition, we also derived a small portion of revenue from distribution of products manufactured by third parties, including sutures, hernia meshes and blood vessel titanium clips. The following table sets forth a breakdown of our revenue by source of products for the years indicated:
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For the year ended December 31, 2018 2019 2020 (RMB’000) (%) (RMB’000) (%) (RMB’000) (%) Self-manufactured products 205,991 90.0 279,277 92.3 291,691 94.5 Products manufactured by third parties 22,878 10.0 23,192 7.7 16,831 5.5
Total 228,869 100.0 302,469 100.0 308,522 100.0
OUR PRODUCT PORTFOLIO We focus on the design, development, manufacturing and marketing of an extensive range of surgical devices. As of the Latest Practicable Date, we had registered 61 Class II medical devices and 3 Class III medical devices in China. As of the same date, we had received FDA approvals for 7 products, CE Marks for 21 products and MDSAP recognitions for 11 products. We offer surgical staplers and other medical instruments and accessories, and a substantial majority of our revenue during the Track Record Period was derived from surgical staplers. In response to market opportunities arising from the COVID-19 pandemic, we also manufactured and sold masks and medical isolation gowns in 2020. See “Business—Our Product Portfolio.” The following table sets forth a summary of our commercialized products: Product Type Description
Surgical Staplers Endoscopic staplers Our self-developed endoscopic staplers are mainly used for removing part of an organ (resection), cutting through organs and tissues (transection) or creating connections between structures (anastomoses) in laparoscopic, thoracoscopic and many other MIS. Smart staplers Our self-developed smart staplers are powered endoscopic staplers with advanced features and easy to use, which can reduce reliance on surgical suturing skills while ensuring precision and improving reliability of stapling effects. Open staplers Our self-developed open staplers are used in open surgery which typically is invasive and involves creating a large incision in the skin through which tissues and organs are cut around. We offer circular staplers, linear cutter staplers, circular staplers for hemorrhoidal prolapse, linear staplers and linear staplers with knife. Ultrasonic scalpels Our self-developed ultrasonic scalpels are widely used for cutting, coagulation, grasping and dissection of soft tissues in one step in both minimally invasive and traditional open surgeries to save surgery time. Masks and medical In response to market opportunities arising from the isolation gowns COVID-19 pandemic, we have developed and manufactured a variety of protective products for individuals and medical professionals in 2020. Sutures We market and distribute sutures manufactured by a third-party medical device company. Sutures are widely used for ligation, stitching, structural reconstruction and incision closure of soft tissues in cardiovascular, general, genealogical and orthopedic surgeries.
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Product Type Description
Hernia repair products Disposable fixation devices Our self-developed disposable fixation devices with titanium tacks are used to hold hernia meshes and ensure tissue alignment during laparoscopic hernia repair surgeries and other related surgical fields. Hernia meshes We primarily market and distribute hernia meshes manufactured by a third-party medical device manufacturer and manufacture and market a limited amount of self-developed hernia meshes. Hernia mesh is a medical device that supports damaged or weakened tissue or abdominal wall around hernias as the tissue heals and is most commonly used in the surgical repair and treatment of inguinal hernias and abdominal wall hernias. Other surgical instruments and We offer other types of surgical instruments and accessories accessories, primarily including self-developed disposable trocars, disposable blood vessel titanium clips a third-party medical device manufacturer and self-developed disposable polymer clips.
The following table sets forth a breakdown of our revenue by product type for the years indicated:
For the year ended December 31, 2018 2019 2020 (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Surgical staplers 203,917 89.1 276,911 91.6 260,817 84.5 Endoscopic staplers 138,355 60.5 194,163 64.2 200,464 65.0 Smart staplers – – – – 178 0.1 Open staplers 65,562 28.6 82,748 27.4 60,175 19.4 Masks and medical isolation gowns – – – – 27,331 8.9 Sutures 11,931 5.2 12,841 4.2 10,083 3.3 Hernia repair products 5,238 2.3 5,451 1.8 3,564 1.2 Disposable fixation devices 721 0.3 526 0.2 939 0.3 Hernia meshes 4,517 2.0 4,925 1.6 2,625 0.9 Other surgical instruments and accessories(1) 7,783 3.4 7,266 2.4 6,727 2.1
Total 228,869 100.0 302,469 100.0 308,522 100.0
(1) Other surgical instruments and accessories primarily include disposable trocars, disposable blood vessel titanium forceps and disposable polymer clips.
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Product Candidates We focus on R&D of surgical staplers, ultrasonic scalpels and other surgical instruments and accessories to improve our current products and expand our product portfolio to satisfy surgeons’ clinical needs. As of the Latest Practicable Date, we had 19 product candidates (including our first generation smart stapler and first generation ultrasonic scalpel) under development in China. The development process primarily comprises product registration testing, clinical trial (if required), registration application filing and approval. In addition, we have obtained CE Marks and commercialized our first generation smart stapler and first generation ultrasonic scalpel in Europe. We plan to launch the same products in China in 2021 and 2022, respectively, if approved. Our laparoscopic surgical robot is in the product design and development stage, and expected to be launched in 2024. We believe that our product candidates can further supplement and upgrade our existing product portfolio to support a more extensive range of surgical procedures. SALES, DISTRIBUTION AND CUSTOMERS We have an extensive sales network. Our products, including products manufactured by ourselves and third parties, are primarily sold to domestic and overseas distributors, while a small portion are sold to hospitals in China directly or overseas OEM customers. Through our sales network, our products were ultimately sold to over 1,200 hospitals in all provinces in China and over 60 countries and regions overseas. The following table sets forth the breakdown of our revenue by geographic market for the years indicated: For the year ended December 31, 2018 2019 2020 (RMB’000) (%) (RMB’000) (%) (RMB’000) (%) Greater China 176,910 77.3 214,899 71.0 185,025 60.0 Europe(1) 23,691 10.4 43,179 14.3 64,286 20.8 South America(2) 13,224 5.8 14,144 4.7 30,053 9.7 Other regions in Asia(3) 13,002 5.7 26,065 8.6 20,939 6.8 North America(4) 1,301 0.6 3,044 1.0 4,470 1.4 Africa(5) 741 0.2 1,138 0.4 3,749 1.3
Total 228,869 100.0 302,469 100.0 308,522 100.0
(1) During the Track Record Period, we derived revenue from 24 countries in this region, such as Turkey and Spain. (2) During the Track Record Period, we derived revenue from seven countries in this region, such as Brazil and Ecuador. (3) During the Track Record Period, we derived revenue from 22 countries in this region, such as Iran and Saudi Arabia. (4) During the Track Record Period, we derived revenue from ten countries in this region, such as Canada and Panama. (5) During the Track Record Period, we derived revenue from six countries in this region, such as South Africa and Egypt. We primarily sell our products through an extensive network of distributors, which is in line with industry practice, according to F&S. As of December 31, 2018, 2019 and 2020, we had 413, 489 and 495 distributors, respectively, which contributed to 94.0%, 94.1% and 96.4% of our total revenue in 2018, 2019 and 2020, respectively. During the Track Record Period, to the best of our Directors’ knowledge, except Panther Brazil, Panther Canada, Beijing Hongchengjijia Technology Co., Ltd. (北京宏承吉佳科技有限公司) and Qingdao Kaiyujia Material Co., Ltd. (青島凱譽佳物資有限公司), all of our distributors were Independent Third Parties, and none was controlled by our current or former employees. The following table sets forth the change in numbers of our distributors as of the dates and for the years indicated: As of/for the year ended December 31, 2018 2019 2020
Domestic Beginning of the year 312 413 489 Increase in domestic distributors(1) 165 212 151 Decrease in domestic distributors(2) 124 136 145
End of the year 413 489 495
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As of/for the year ended December 31, 2018 2019 2020
Overseas Beginning of the year 48 50 66 Increase in overseas distributors(1) 22830 Decrease in overseas distributors(2) –1216
End of the year 50 66 80
(1) The increase in the number of distributors represents those distributors that made purchases from us in the year indicated but did not purchase from us in the year immediately preceding the year indicated. (2) The decrease in the number of distributors represents those distributors that made purchases from us in the year immediately preceding the year indicated but did not purchase from us in the year indicated. In 2018, 2019 and 2020, the aggregated sales revenue derived from our five largest customers, substantially all of whom are distributors, amounted to RMB44.3 million, RMB70.5 million and RMB67.5 million, respectively, representing 19.4%, 23.3% and 21.9% of our total revenue. In 2018, 2019 and 2020, the sales revenue derived from our largest customer was RMB9.8 million, RMB19.8 million and RMB16.0 million, respectively, representing 4.3%, 6.5% and 5.2% of our total revenue, respectively. RAW MATERIALS AND SUPPLIERS The raw materials and products we purchased from our suppliers during the Track Record Period mainly include (i) medical-grade stainless steel, anvil, titanium tacks, polycarbonate particles, packaging materials and cartridges which are used for manufacturing our self- developed products; (ii) suture, polymer clips and hernia mesh manufactured by third parties and sold by us; and (iii) raw materials for our masks and medical isolation gowns in 2020 such as melt blown fabric, nonwoven fabric and electrostatic cotton. During the Track Record Period, we purchased all of our raw materials in China, except for titanium wires, which we imported from the United States. Such procurement of materials from the United States was not specific to any customer orders and were purchases for our inventory. In 2018, 2019 and 2020, purchases from our five largest suppliers amounted to RMB36.2 million, RMB39.4 million and RMB46.4 million, respectively, accounting for 42.5%, 35.4% and 32.2% of our total purchases, respectively. In 2018, 2019 and 2020, purchases from our single largest supplier amounted to RMB11.8 million, RMB11.2 million and RMB10.1 million, respectively, accounting for 13.8%, 10.0% and 7.0% of our total purchases, respectively. RESEARCH AND DEVELOPMENT R&D efforts are critical to our continued business growth. Our market-driven and customer-centric R&D efforts focus on developing new products and production technologies to respond to the evolving needs of surgeons and patients in the PRC and overseas. We also actively work on upgrading existing products by further improving product performance and quality. We conduct our R&D activities through our internal R&D team, as well as in collaboration with external research partners from time to time on specific research topics. Our R&D expenses was RMB13.8 million, RMB18.0 million and RMB17.2 million, accounting for 6.0%, 6.0% and 5.6% of our total revenue in 2018, 2019 and 2020, respectively. BUSINESS ACTIVITIES IN COUNTRIES SUBJECT TO INTERNATIONAL SANCTIONS During the Track Record Period, we sold our non-U.S. origin surgical devices to customers in the Relevant Regions including certain Comprehensively Sanctioned Countries, namely, Iran, Syria and Cuba. The revenue generated from such Comprehensively Sanctioned Countries was RMB7.2 million, RMB20.8 million and RMB10.9 million, representing 3.1%, 6.9% and 3.5% of our total revenue in 2018, 2019 and 2020, respectively. See “Risk Factors—Risks Relating to Extensive Government Regulations—We could be adversely affected as a result of any sales we made to certain countries that are, or become subject to, sanctions administered by the United States, EU, the United Kingdom, UN, Australia and other relevant sanctions authorities” and “Business—Compliance and Legal Proceedings—Business Activities with Customers in Relation to Countries Subject to International Sanctions.”
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As advised by our International Sanctions Legal Advisors after performing the procedures they consider necessary, (i) our business dealings in Cuba, Iran and Syria do not appear to be unlawful under the restrictive measures of International Sanctions; and (ii) we did not engage in Primary Sanctioned Activity, other than certain historical U.S. dollar denominated transactions with Syria authorized by OFAC general license, or any Secondary Sanctionable Activity during the Track Record Period, and thus would not result in material sanctions risks. Our Directors confirm that we do not have present intention to undertake new business involving the Comprehensively Sanctioned Countries. Upon completing our existing contractual obligations in relation to Comprehensively Sanctioned Countries and prior to the earlier of November 31, 2021 or the [REDACTED], we will cease all sales involving the Comprehensively Sanctioned Countries. Further, we will not knowingly or intentionally conduct any future business with persons, entities or organizations designated on the SDN List, or any business in any Comprehensively Sanctioned Countries and we will not use the proceeds from the [REDACTED] to finance or facilitate, directly or indirectly, activities or business with, or for the benefit of, the Comprehensively Sanctioned Countries or Sanctioned Target. In addition, we have given certain undertakings to the Stock Exchange regarding sanctions- related matters. To identify and monitor our exposure to risks associated with sanctions laws relating to these sales, we have implemented relevant internal control measures to protect the interests of our Group and our Shareholders. See “Business—Compliance and Legal Proceedings—Business Activities with Customers in Relation to Countries Subject to International Sanctions.”
SUMMARY FINANCIAL INFORMATION
The summary historical data of financial information set forth below have been derived from, and should be read in conjunction with, our consolidated financial statements, including the accompanying notes, set forth in the Accountants’ Report set out in Appendix I to this document, as well as the information set forth in “Financial Information.”
Summary of Consolidated Statements of Profit or Loss Items
For the year ended December 31, 2018 2019 2020 %of %of %of Amount revenue Amount revenue Amount revenue (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Revenue 228,869 100.0 302,469 100.0 308,522 100.0 Cost of sales (79,833) (34.9) (103,132) (34.1) (115,164) (37.3)
Gross profit 149,036 65.1 199,337 65.9 193,358 62.7 Profit before taxation 39,330 17.2 49,914 16.5 42,166 13.7
Profit for the year 31,623 13.8 41,759 13.8 34,358 11.1
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Summary of Consolidated Statements of Financial Position Items As of December 31, 2018 2019 2020 (RMB’000) Total non-current assets 54,484 71,724 112,240 Total current assets 225,203 258,463 269,597 Total current liabilities (62,375) (92,132) (104,426) Net current assets 162,828 166,331 165,171 Total non-current liabilities (16,354) (24,528) (29,887) Net assets 200,958 213,527 247,524
Summary of Consolidated Statements of Cash Flow Items
For the year ended December 31, 2018 2019 2020 (RMB’000) Net cash flows from operating activities 39,496 63,075 36,300 Net cash flows used in investing activities (21,570) (9,827) (45,181) Net cash flows from/(used in) financing activities (11,936) (25,475) 3,664
Net increase/(decrease) in cash and cash equivalents 5,990 27,773 (5,217) Cash and cash equivalents at beginning of year 88,671 96,861 125,326 Effect of foreign exchange rate changes, net 2,200 692 (6,154)
Cash and cash equivalents as of the end of year 96,861 125,326 113,955
Key Financial Ratios As of/for the year ended December 31, 2018 2019 2020
Gross profit margin 65.1% 65.9% 62.7% Net profit margin 13.8% 13.8% 11.1% Return on average equity 16.6% 20.1% 14.9% Return on average asset 12.5% 13.7% 9.7% Current ratio 3.6 2.8 2.6 Quick ratio 2.7 2.1 1.8
Please see “Financial Information—Key Financial Ratios” for the definitions and analysis of the key financial ratios above. OUR CONTROLLING SHAREHOLDERS
Immediately following the [REDACTED] (without taking into account any Shares which may be issued upon the exercise of the [REDACTED]), our Controlling Shareholders as a group, namely, Mr. Qu and his spouse, Ms. Liu, will be beneficially interested in an aggregate of [REDACTED]% of the issued share capital of our Company. Mr. Qu and Ms. Liu, our Controlling Shareholders, are both our executive Directors. For further background of Mr. Qu and Ms. Liu, see “Directors, Supervisors and Senior Management.” Our Controlling Shareholders are not interested in any business which is, whether directly or indirectly, in competition with our business. For more information, see “Relationship with Controlling Shareholders.”
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CONTINUING CONNECTED TRANSACTIONS Our Group has entered into a framework agreement with a party who will, upon completion of the [REDACTED], become our connected person, and the transactions will constitute continuing connected transactions of our Company under Chapter 14A of the Listing Rules upon [REDACTED]. See “Connected Transactions” for more information. [REDACTED] STATISTICS The statistics in the following table are based on the assumptions that: (i) the [REDACTED] is completed and [REDACTED] H Shares are to be [REDACTED] pursuant to the [REDACTED]; (ii) the [REDACTED] is not exercised; and (iii) [REDACTED] Shares are [REDACTED] and outstanding upon completion of the [REDACTED] and [REDACTED]: Based on an Based on an [REDACTED] of [REDACTED] of HK$[REDACTED] HK$[REDACTED] per [REDACTED] per [REDACTED]
Market capitalization of our Shares HK$[REDACTED] HK$[REDACTED] million million Market capitalization of our H Shares HK$[REDACTED] HK$[REDACTED] million million Unaudited pro forma adjusted consolidated net HK$[REDACTED] HK$[REDACTED] tangible assets per Share(Note)
Note: The unaudited pro forma adjusted consolidated net tangible assets per Share as at December 31, 2020 is calculated after making the adjustments referred to in “Appendix II—Unaudited Pro Forma Financial Information.” [REDACTED] We estimate that we will receive net [REDACTED] from the [REDACTED]of approximately RMB[REDACTED] million, after deducting [REDACTED] commissions, fees and estimated expenses payable by us in connection with the [REDACTED], and assuming an [REDACTED] of RMB[REDACTED] per H Share, which is the [REDACTED]ofthe indicative [REDACTED] range stated in this document. We currently intend to apply these net [REDACTED] for the following purposes: (i) approximately [REDACTED]%, or RMB[REDACTED], will be used to expand the production capacity of our surgical staplers and further automate existing production lines to strengthen our manufacturing capabilities; (ii) approximately [REDACTED]%, or RMB[REDACTED], will be used to fund our R&D activities; (iii) approximately [REDACTED]%, or RMB[REDACTED], will be invested in our sales and marketing activities; (iv) approximately [REDACTED]%, or RMB[REDACTED], will be used to fund potential strategic investment and acquisitions; (v) approximately [REDACTED]%, or RMB[REDACTED], will be used to improve our IT system; and (vi) approximately [REDACTED]%, or RMB[REDACTED], will be used for our working capital and general corporate purposes. DIVIDENDS We declared and paid dividends of RMB7.5 million, RMB30.6 million and nil in 2018, 2019 and 2020, respectively. We do not have a specific dividend policy or a predetermined dividend payout ratio. The decision to pay dividends in the future will be made by our Shareholders in general meetings and will be based on our profits, cash flows, financial condition, capital requirements and other conditions that our Board deems relevant. The payment of dividends may be limited by other legal restrictions and agreements that we may enter into in the future. [REDACTED] EXPENSES [REDACTED] expenses to be borne by us are estimated to be approximately HK$[REDACTED] (including [REDACTED] commission and other expenses), assuming an [REDACTED] of HK$[REDACTED] per H Share, which is the mid-point of the indicative [REDACTED] range stated in this document. Approximately HK$[REDACTED] is expected to be charged to our consolidated statements of profit or loss and other comprehensive income, and approximately HK$ [REDACTED] is expected to be accounted for as a deduction from equity upon the [REDACTED]. We did not incur [REDACTED] expenses in 2020. The [REDACTED] expenses above are the latest practicable estimate for reference only, and the actual amount may differ from this estimate. Our Directors do not expect such [REDACTED] expenses to have a material adverse impact on our results of operations for the year ending December 31, 2021.
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RECENT DEVELOPMENT AND NO MATERIAL ADVERSE CHANGE Further Investment in Vincente Medical On April 26, 2021, our Company entered into an investment agreement with shareholders of Vincente Medical to make a further capital contribution of RMB67,346,900 in Vincente Medical with consideration to be paid with our internal funds by installments. In May 2021, Vincente Medical became our non-wholly owned subsidiary and was owned as to 51% by our Company. See “History and Corporate Structure—Acquisition and Disposal During Track Record Period—Acquisitions During Track Record Period—Vincente Medical.” Declaration of Dividend On June 25, 2021, our Company declared a dividend of an aggregate amount of RMB6.2 million, or RMB0.1 per Share. The dividend will be distributed out of our retained profit as of December 31, 2020, and will be paid to the then existing Shareholders within two months after declaration of such dividend. COVID-19 Pandemic Toward the end of 2019, a highly infectious novel coronavirus, namely, COVID-19, was reported. In March 2020, the World Health Organization characterized the outbreak of COVID-19 a pandemic. During the COVID-19 pandemic, most hospitals, domestic and overseas, postponed elective surgeries, and the number of hospital visits drastically decreased in first-tier cities in China, especially the number of away-from-home hospital visits. Even after June 2020, the number of admitted patients, admission process and surgical flow in hospitals are strictly restricted by government, and thus the number of surgeries significantly decreased. As a result, our operations were adversely affected. In addition, as hospitals adopted measures to limit visitors, we experienced difficulties in conducting in-hospital medical and nursing trainings and product demonstrations, attending surgeries and providing technical support. We also experienced delays in deliveries of and increase in logistic costs due to international and domestic transportation restrictions. Our product registration progress was affected as the relevant governmental agencies gave priority to pandemic prevention supplies. To protect our employee and slow down the spread of the virus in strict compliance with government instructions, we temporarily suspended our clinical trial and sales and marketing activities and substantially reduced our manufacturing activities after the end of Chinese New Year holidays in 2020. Although we have resumed operations, the COVID-19 pandemic has negatively impacted our business and our financial performance. Our revenue in 2020 was affected by the COVID-19 pandemic as the sales of our surgical staplers and other surgical instruments decreased primarily due to the limitations on numbers of elective surgeries during the pandemic. Financial Performance For the first four months ended April 30, 2021, based on our internal financial data, our revenue and gross profit increased compared to the same period in 2020. Our Directors have confirmed that, save as disclosed above, up to the date of this document, there has been no material adverse change in our financial or trading position or prospects since December 31, 2020, the date of our latest audited consolidated financial statements, and there has been no event since December 31, 2020 which materially affects the information in the Accountants’ Report in Appendix I to this document. RISK FACTORS There are certain risks in our operations and in connection with the [REDACTED], many of which are beyond our control. We believe the most significant risks we face include but not limit to: (i) we may not be able to develop new products that are competitive in the market, or in a timely manner or at all; (ii) our business operation depends significantly on the revenue generated from the sales of our surgical staplers; (iii) we may not be successful in the public tender process for centralized volume procurement, and lower bidding prices of our competitors and volume-based discounts and/or lower ex-factory prices offered by these competitors may undermine our position in the public tender process for centralized volume procurement and in turn adversely impact our sales performance; (iv) there may be quality defects in our products, which may cause safety issue and expose us to product liability lawsuits that could cause us to incur substantial liabilities; and (v) we rely on relationships with KOLs, physicians, hospitals and medical associations in the development and marketing of our products. See “Risk Factors.”
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In this document, unless the context otherwise requires, the following terms shall have the meanings set out below. Certain other terms are explained in the section entitled “Glossary of Technical Terms” in this document.
“Aoer Medical” Changzhou Aoer Medical Equipment Co., Ltd. (常州奧爾 醫療器械有限公司), a company established in the PRC with limited liability on May 12, 2010 and a subsidiary of our Company from July 2018 to May 2019 prior to disposal by our Company, details of which are set out in “History and Corporate Structure—Acquisitions and Disposal During Track Record Period”;
“Articles of Association” or the articles of association of our Company adopted on “Articles” June 3, 2021, which will become effective upon the [REDACTED], as amended from time to time, a summary of which is set out in Appendix V;
“associates” has the meaning ascribed to it under the Listing Rules;
“Beijing Binghong” Beijing Binghong Jiasheng Venture Capital Co., Ltd. (北京秉鴻嘉盛創業投資有限公司), a limited liability company established in the PRC on January 29, 2013 and our Shareholder, particulars of which are set forth in “History and Corporate Structure—Pre-[REDACTED] Investments—Information Relating to Our Pre-[REDACTED] Investors”;
“Beijing MPA” the Beijing Municipal Administration for Market Regulation (北京市市場監督管理局) (formerly the Beijing Food and Drug Administration (北京市食品藥品 監督管理局) and the Beijing Medical Products Administration (北京市藥品監督管理局));
“Beijing Zhongling” Beijing Zhongling Yanyuan Venture Capital Investment Centre (Limited Partnership) (北京中嶺燕園創業投資中 心(有限合夥)), a limited partnership established in the PRC on April 14, 2015 and our Shareholder, particulars of which are set forth in “History and Corporate Structure—Pre-[REDACTED] Investments—Information Relating to Our Pre-[REDACTED] Investors”;
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“BIS” the Bureau of Industry and Security;
“Board” or “Board of Directors” the board of Directors of our Company;
“Business Day” or “business any day (other than a Saturday, Sunday or public holiday) day” on which banks in Hong Kong are generally open for normal banking business to the public;
“Cadyson Medical” Cadyson (Suzhou) Medical Technology Co., Ltd. (凱迪森 (蘇州)醫療科技有限公司), a limited liability company established in the PRC on November 22, 2019 and owned as to 18% by our Company, 65.6% by Mr. Zhang Xincheng (張新成) (a substantial shareholder of Vincente Medical) and 16.4% by Ms. Guo Hongtao (郭洪濤) (an Independent Third Party);
“CAGR” compound annual growth rate;
“CBC IV Investment” CBC IV Investment Five Limited, a company incorporated in Hong Kong with limited liability on December 6, 2018 and our Shareholder, particulars of which are set out in “History and Corporate Structure—Pre-[REDACTED] Investments—Information Relating to our Pre-[REDACTED] Investors”;
[REDACTED]
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[REDACTED]
“China” or “PRC” the People’s Republic of China, but for the purpose of this document and for geographical reference only, references in this document to “China” and the “PRC” do not include Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan of the PRC;
“ChiNext Market” the ChiNext Market (創業板) of the Shenzhen Stock Exchange;
“close associate(s)” has the meaning ascribed to it under the Listing Rules;
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“CNIPA” the China National Intellectual Property Administration (國家知識產權局);
“Companies Ordinance” the Companies Ordinance (Chapter 622 of the Laws of Hong Kong), as amended, supplemented or otherwise modified from time to time;
“Companies (Winding up and the Companies (Winding Up and Miscellaneous Miscellaneous Provisions) Provisions) Ordinance (Chapter 32 of the Laws of Hong Ordinance” Kong), as amended, supplemented or otherwise modified from time to time;
“Company”, “our Company” or B.J.ZH.F.Panther Medical Equipment Co., Ltd. (北京派 “Panther” 爾特醫療科技股份有限公司), a limited liability company established in the PRC on September 25, 2002 and converted into a joint stock company with limited liability on September 24, 2015;
“Comprehensively Sanctioned Cuba, Iran, North Korea, Syria and the Crimea Region of Countries” Ukraine/Russia;
“connected person(s)” has the meaning ascribed to it under the Listing Rules;
“Controlling Shareholder(s)” has the meaning ascribed to it under the Listing Rules and, unless the context requires otherwise, refers to Mr. Qu and Ms. Liu;
[REDACTED]
“core connected person(s)” has the meaning ascribed to it under the Listing Rules;
“Countries subject to any country or territory subject either to a general and International Sanctions” comprehensive embargo or a more limited set of export, import, financial or investment restrictions under sanctions related laws or regulation of the Relevant Jurisdiction;
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“COVID-19” the contagious respiratory illness caused by a newly identified coronavirus;
“CSDC” China Securities Depository and Clearing Corporation Limited;
“CSDC (Hong Kong)” China Securities Depository and Clearing (Hong Kong) Company Limited;
“CSRC” the China Securities Regulatory Commission (中國證券 監督管理委員會), a regulatory body responsible for the supervision and regulation of the PRC national securities markets;
“Deed of Indemnity” the deed of indemnity dated [●], 2021 executed by our Controlling Shareholders in favor of our Company (for ourselves and for each of our subsidiaries), as further described under “Appendix VI—Statutory and General Information—D. Other Information—2. Tax and Other Indemnities”;
“Director(s)” the director(s) of our Company;
“Domestic Share(s)” ordinary share(s) in our capital, with a nominal value of RMB1.00 each, which are subscribed for and paid up in Renminbi;
“EEA” the European Economic Area;
“EIT Law” the Enterprise Income Tax Law of the PRC (中華人民共 和國企業所得稅法), as amended, supplemented or otherwise modified from time to time;
“EMA” the European Medicines Agency;
“EU” the European Union;
“EUIPO” the European Union Intellectual Property Office;
“Exchange Participant(s)” a person: (a) who, in accordance with the Listing Rules, may trade on or through the Stock Exchange; and (b) whose name is entered in a list, register or roll kept by the Stock Exchange as a person who may trade on or through the Stock Exchange;
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“Extreme Conditions” extreme conditions caused by a super typhoon as announced by the government of Hong Kong;
“FDA” the U.S. Food and Drug Administration;
“Foreign Share(s)” the Share(s) issued by our Company and subscribed by foreign investors with foreign currency;
“F&S” Frost & Sullivan (Beijing) Inc., Shanghai Branch Co., an independent market, research and consulting company
“Fuhai Bohui” Fuhai Bohui (Hangzhou) Health Intelligent Medical Equity Investment Fund Partnership (Limited Partnership) (富海博暉(杭州)健康智慧醫療股權投資基金 合夥企業(有限合夥)), a limited partnership established in the PRC on September 6, 2015 and our Shareholder, particulars of which are set forth in “History and Corporate Structure—Pre-[REDACTED] Investments—Information Relating to Our Pre-[REDACTED] Investors”;
“GDP” gross domestic product;
“GFA” gross floor area;
[REDACTED]
“Greater China” for the purpose of this document, includes mainland China, Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan of the PRC;
[REDACTED]
“Group” or “our Group” our Company and, except where the context otherwise requires, all of its subsidiaries or where the context refers to any time prior to its incorporation, the business which its predecessors or the predecessors of its present subsidiaries were engaged in and which were subsequently assumed by it;
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[REDACTED]
“HKSCC” Hong Kong Securities Clearing Company Limited, a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited;
“HKSCC Nominees” HKSCC Nominees Limited, a wholly-owned subsidiary of HKSCC;
“HK$” Hong Kong dollars, the lawful currency of Hong Kong;
“Hong Kong” the Hong Kong Special Administrative Region of the PRC;
[REDACTED]
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“H Share(s)” overseas listed Foreign Share(s) in our ordinary share capital with a nominal value of RMB1.00 each, to be subscribed for and traded in Hong Kong dollars and listed on the Stock Exchange;
[REDACTED]
“IFRSs” International Financial Reporting Standards, which include standards, amendments and interpretations promulgated by the International Accounting Standards Board;
“Independent Third Party” an individual or a company who, as far as the Directors are aware after having made all reasonable enquiries, is not a connected person of the Company within the meaning of the Listing Rules;
[REDACTED]
“International Sanctions” all applicable laws and regulation to economic sanctions, export controls, trade embargoes and wider prohibitions and restrictions on international trade and investment related activities, including those adopted administered and enforced by the U.S. government, EU and its member states, the United Kingdom, UN or Government of Australia;
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“International Sanctions Legal Hogan Lovells, our legal advisors as to International Advisors” Sanctions law in connection with the [REDACTED];
[REDACTED]
“IT” information technology;
“Jinruifu” Beijing Jinruifu Investment Center (Limited Partnership) (北京金睿富投資中心(有限合夥)), a limited partnership established in the PRC on November 25, 2007 and our Shareholder, particulars of which are set forth in “History and Corporate Structure—Pre-[REDACTED] Investments—Information Relating to Our Pre-[REDACTED] Investors”;
“Kaiderui” Beijing Kaiderui Investment Management Center (Limited Partnership) (北京凱德瑞投資管理中心(有限合 夥)), a limited partnership established in the PRC on October 19, 2011 as a platform for our share incentive scheme, particulars of which are set out in “History and Corporate Structure—Our Corporate Development—Our Company—Adoption of Share Incentive Scheme”;
“Kunshan Qingsen” Kunshan Qingsen Jiemei Machine Manufacturing Co., Ltd. (昆山青森潔美機械製造有限公司), a limited liability company established in the PRC on September 9, 2016 and a wholly-owned subsidiary of our Company;
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“Latest Practicable Date” June 22, 2021, being the latest practicable date for the purpose of ascertaining certain information in this document prior to its publication;
“Lianyungang Yongcheng” Lianyungang Yongcheng Equity Investment Partnership (Limited Partnership) (連雲港涌誠股權投資合夥企業(有 限合夥)), a limited partnership established in the PRC on March 10, 2016 and our Shareholder, particulars of which are set forth in “History and Corporate Structure —Pre-[REDACTED] Investments—Information Relating to Our Pre-[REDACTED] Investors”;
[REDACTED]
“Listing Rules” or “Hong Kong the Rules Governing the Listing of Securities on The Listing Rules” Stock Exchange of Hong Kong Limited, as amended, supplemented or otherwise modified from time to time;
“Main Board” the stock exchange (excluding the option market) operated by the Stock Exchange, which is independent from and operated in parallel with GEM of the Stock Exchange;
“Mandatory Provisions” the Mandatory Provisions for Articles of Association of Companies to be Listed Overseas (《到境外上市公司章 程必備條款》), as promulgated by the State Council Securities Commission and the State Restructuring Commission on August 27, 1994 and became effective on the same date, as the same may be amended and supplemented or otherwise modified from time to time;
“MISIA” minimally invasive surgical instrument(s) and accessory(ies);
“MOF” the Ministry of Finance of the PRC (中華人民共和國財政 部);
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“MOFCOM” the Ministry of Commerce of the PRC (中華人民共和國 商務部) or its predecessor, the Ministry of Foreign Trade and Economic Cooperation of the PRC (中華人民共和國 對外貿易經濟合作部);
“Mr. Qu” Mr. Qu Chao (曲超), the chairman of our Board, an executive Director, one of our Controlling Shareholders and the spouse of Ms. Liu;
“Ms. Liu” Ms. Liu Qing (劉青), our general manager and executive Director, one of our Controlling Shareholders and the spouse of Mr. Qu;
“NDRC” the National Development and Reform Commission of the PRC (中華人民共和國國家發展和改革委員會);
“NEEQ” the National Equities Exchange and Quotations Co., Ltd. (全國中小企業股份轉讓系統有限責任公司);
“Ningbo Chunyuan” Ningbo Chunyuan Hongda Equity Investment Partnership (Limited Partnership) (寧波淳元弘達股權投資合夥企業 (有限合夥)), a limited partnership established in the PRC on April 30, 2015 and our Shareholder, particulars of which are set forth in “History and Corporate Structure—Pre-[REDACTED] Investments— Information Relating to Our Pre-[REDACTED] Investors”;
“Ningbo Xinquan” Ningbo Xinquan Investment Management Centre (Limited partnership (寧波新權投資管理中心(有限合 夥)), a limited partnership established in the PRC on March 29, 2016 and our Shareholder, particulars of which are set forth in “History and Corporate Structure—Pre-[REDACTED] Investments— Information Relating to Our Pre-[REDACTED] Investors”;
“NMPA” the National Medical Products Administration (國家藥品 監督管理局) and its predecessor the China Food and Drug Administration (國家食品藥品監督管理總局), including its sub-division, such as the Center for Medical Device Evaluation (國家藥品監督管理局醫療器械技術審 評中心);
“OFAC” the United States Department of Treasury’s Office of Foreign Assets Control;
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[REDACTED]
“Panther Brazil” Panther Healthcare Brasil Distribuidora de Produtos Médicos Ltda, a company incorporated in Brazil with limited liability on May 28, 2012 and an associate of our Company, which is owned as to 51% by our Company, 24.5% by Clodoaldo Kors Reis and 24.5% by Eduardo Paes de Barros, all being Independent Third Parties;
“Panther Canada” Panther Medical Canada Inc., a company incorporated in Canada with limited liability on July 10, 2018 and an associate of our Company, which is owned as to 33.3% by our Company, 33.33% by 1230840 Ontario Inc., 16.67% by Medihub International Inc. and 16.67% by AVI Sohal Ventures Inc., all being Independent Third Parties;
“Panther India” B.J.ZH.F. Panther Medical Equipment India Private Limited, a company incorporated in India with limited liability on August 28, 2018 and a wholly-owned subsidiary of our Company;
–22– THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. DEFINITIONS AND ACRONYMS
“Panther Hong Kong” Panther Healthcare International Development Limited (派爾特醫療國際發展有限公司), a company incorporated in Hong Kong with limited liability on March 2, 2021 and a wholly-owned subsidiary of our Company;
“Panther Mexico” Panther Healthcare Mexico S. de R. L. de C.V., a company incorporated in Mexico with limited liability on April 15, 2021 and a non-wholly owned subsidiary of our Company, which is owned as to 70% by our Company, and 30% by Pedro Loarca Caldero´n (an Independent Third Party);
“Panther Suzhou” Panther (Suzhou) Medical Technology Co., Ltd. (派爾特 (蘇州)醫療科技有限公司), a limited liability company established in the PRC on November 28, 2017 and a wholly-owned subsidiary of our Company;
“Panther US” Panther Medtech Inc, a corporation incorporated in the State of New York, the United States with limited liability on November 2, 2017 and a wholly-owned subsidiary of our Company;
“PBOC” the People’s Bank of China (中國人民銀行), the central bank of the PRC;
“PRC GAAP” generally accepted accounting principles in the PRC;
“PRC Legal Advisors” King & Wood Mallesons, our legal advisors as to PRC law;
“PRC Securities Law” the Securities Law of the PRC (中華人民共和國證券法), as enacted by the 6th meeting of the 9th Standing Committee of the NPC on December 29, 1998 and became effective on July 1, 1999, as amended, supplemented or otherwise modified from time to time;
[REDACTED]
–23– THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. DEFINITIONS AND ACRONYMS
[REDACTED]
“Primary Sanctioned Activity” any activity in a Comprehensively Sanctioned Country or (i) with; or (ii) directly or indirectly benefiting or involving the property or interests in property of, a Sanctioned Target by the Company incorporated or located in a Relevant Jurisdiction or which otherwise has a nexus with such jurisdiction with respect to the relevant activity, such that it is subject to the relevant sanctions law and regulation;
[REDACTED]
“province” a province or, where the context requires, a provincial level autonomous region or municipality under the direct supervision of the PRC Government;
[REDACTED]
“Regulation S” Regulation S under the U.S. Securities Act;
“Relevant Jurisdiction” any jurisdiction that is relevant to the Company and has sanctions-related law or regulation restricting, among other things, its nationals and/or entities which are incorporated or located in that jurisdiction from directly or indirectly making assets or services available to or otherwise dealing in assess or certain countries, governments, person or entities targeted by such law or regulation;
“Relevant Persons” means the Company, together with its investors and shareholders and persons who might directly or indirectly, be involved in permitting the [REDACTED], [REDACTED] clearing and settlement of its shares including the Stock Exchange and related group companies;
–24– THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. DEFINITIONS AND ACRONYMS
“Relevant Regions” Cuba, Iran, Syria, Egypt, Hong Kong, Lebanon, Libya, Myanmar, Russia (excluding Crimea), Tunisia, Turkey and Ukraine (excluding Crimea);
“Reporting Accountant” KPMG;
“RMB” Renminbi, the lawful currency of the PRC;
“Rule 144A” Rule 144A under the U.S. Securities Act;
“R&D” research and development;
“SAFE” the State Administration of Foreign Exchange of the PRC (中華人民共和國國家外匯管理局);
“Sanctioned Persons” certain person(s) and identity(ies) listed on OFAC’s Specially Designated Nationals and Blocked Persons List or other restricted parties lists maintained by the United States, EU, the United Kingdom, UN or Australia;
“Sanctioned Target” any person or entity (i) designated on any list of targeted persons or entities issued under the sanctions-related law or regulation of a Relevant Jurisdiction; (ii) that is, or is owned or controlled by, a government of a Country subject to International Sanctions; or (iii) that is the target of sanctions under the law or regulation of a Relevant Jurisdiction because of a relationship of ownership, control, or agency with a person or entity described in (i) or (ii);
“SAT” the State Administration of Taxation of the PRC (中華人 民共和國國家稅務總局);
“SBCVC Fund” SBCVC Fund III Company Limited, a company incorporated in Hong Kong with limited liability on July 7, 2008 and our Shareholder, particulars of which are set out in “History and Corporate Structure—Pre-[REDACTED] Investments— Information Relating to Our Pre-[REDACTED] Investors”;
“SDN” individuals and entities that are listed on the SDN List;
–25– THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. DEFINITIONS AND ACRONYMS
“SDN List” the list of Specially Designated Nationals and Blocked Persons maintained by OFAC, which sets forth individuals and entities that are subject to its sanctions and restricted from dealing with U.S. persons;
“Secondary Sanctionable certain activity by the Company that may result in the Activity” imposition of sanctions against the Relevant Person(s) by a Relevant Jurisdiction (including designation as a Sanctioned Target or the imposition of penalties), even though the Company is not incorporated or located in that Relevant Jurisdiction and does not otherwise have any nexus sutra that Relevant Jurisdiction;
“Securities and Futures the Securities and Futures Ordinance (Chapter 571 of the Ordinance” or “SFO” Laws of Hong Kong), as amended, supplemented or otherwise modified from time to time;
“SFC” the Securities and Futures Commission of Hong Kong;
“Shanghai Hongcheng” Shanghai Hongcheng Venture Capital Partnership (Limited Partnership) (上海泓成創業投資合夥企業(有限 合夥)), a limited partnership established in the PRC on September 10, 2010 and our Shareholder, particulars of which are set forth in “History and Corporate Structure—Pre-[REDACTED] Investments— Information Relating to Our Pre-[REDACTED] Investors”;
“Shanghai Yongtong” Shanghai Yongtong Investment Joint Venture (Limited Partnership) (上海涌彤投資合夥企業(有限合夥)), a limited partnership established in the PRC on March 24, 2016 and our Shareholder, particulars of which are set forth in “History and Corporate Structure—Pre-[REDACTED] Investments— Information Relating to Our Pre-[REDACTED] Investors”;
“Shanghai-Hong Kong Stock a securities trading and clearing links program developed Connect” by the Hong Kong Stock Exchange, SSE, HKSCC and China Securities Depository and Clearing Corporation Limited for mutual market access between Hong Kong and Shanghai;
“Share(s)” shares in the share capital of our Company, with a nominal value of RMB1.00 each, comprising our Domestic Shares and our H Shares;
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“Shareholder(s)” holder(s) of our Shares;
“Shenzhen-Hong Kong Stock a securities trading and clearing links program developed Connect” by the Hong Kong Stock Exchange, Shenzhen Stock Exchange, HKSCC and China Securities Depository and Clearing Corporation Limited for mutual market access between Hong Kong and Shenzhen;
[REDACTED]
“Sole Sponsor” Haitong International Capital Limited, a licensed corporation to conduct Type 6 (advising on corporate finance) of the regulated activity for the purpose of SFO, being the sole sponsor to the [REDACTED];
“Special Regulations” the Special Regulations of the State Council on the Overseas Offering and Listing of Shares by Joint Stock Limited Companies (國務院關於股份有限公司境外募集 股份上市的特別規定), promulgated by the State Council on August 4, 1994;
“sq.m.” square meter, a unit of area;
[REDACTED]
“STAR Market” the Science and Technology Innovation Board (科創板) of the SSE;
“State Council” the State Council of the PRC (中華人民共和國國務院);
“Stock Exchange” or The Stock Exchange of Hong Kong Limited; “Hong Kong Stock Exchange”
“subsidiary(ies)” has the meaning ascribed to it under the Listing Rules;
“substantial shareholder(s)” has the meaning ascribed to it under the Listing Rules;
“Supervisor(s)” member(s) of the Supervisory Committee;
“Supervisory Committee” the supervisory committee of our Company;
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“SSE” the Shanghai Stock Exchange
“SZSE” the Shenzhen Stock Exchange;
“Track Record Period” the period comprising the years ended December 31, 2018, 2019 and 2020;
“UN” the United Nations;
[REDACTED]
“United States”, “US” or “U.S.” the United States of America, its territories, its possessions and all areas subject to its jurisdiction;
“U.S. Securities Act” the United States Securities Act of 1933, as amended;
“US$” or “USD” United States dollars, the lawful currency of the United States;
“VAT” value added tax;
“Vincente Medical” Suzhou Vincente Medical Robot Co., Ltd. (蘇州威森特醫 療機器人有限公司), a limited liability company established in the PRC on August 23, 2019 and a non- wholly owned subsidiary of our Company which is owned as to 51% by our Company, 18.99% by Mr. Zhang Xincheng (張新成), 15.93% by Mr. Pang Jian (龐建), 9.19% by Mr. Xie Yi (謝毅) and 4.90% by Beijing Winside Enterprise Management Center (Limited Partnership) (北 京溫思德企業管理中心(有限合夥)), all being Independent Third Parties (save for their shareholdings in Vincente Medical);
“Woodlawn Investments” Woodlawn Investments HK Limited (偉倫投資香港有限 公司), a company incorporated in Hong Kong with limited liability on April 27, 2015 and our Shareholder, particulars of which are set forth in “History and Corporate Structure—Pre-[REDACTED] Investments— Information Relating to Our Pre-[REDACTED] Investors”;
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“Zibo Taige” Zibo Taige Yingke Venture Capital Centre (Limited Partnership) (淄博泰格盈科創業投資中心(有限合夥)), a limited partnership established in the PRC on April 15, 2016 and our Shareholder, particulars of which are set forth in “History and Corporate Structure—Pre-[REDACTED] Investments— Information Relating to Our Pre-[REDACTED] Investors”;
“%” percent;
“2010 Investment” the investment made by SBCVC Fund in 2010, details of which are set forth in “History and Corporate Structure—Our Corporate Development—2010 Investment”;
“2015 Investments” the investments made by Ningbo Chunyuan, Woodlawn Investments and Beijing Binghong in 2015, details of which are set forth in “History and Corporate Structure—Our Corporate Development—2015 Investments”;
“2017 Investments” the investments made by a number of institutional investors, including Lianyungang Yongcheng, Jinruifu, Fuhai Bohui, Ningbo Xinquan, Beijing Zhongling, Zibo Taige and Shanghai Yongtong in 2017, details of which are set forth in “History and Corporate Structure—Our Corporate Development—2017 Investments”;
“2019 Investment ” the investment made by CBC IV Investment in 2019, details of which are set forth in “History and Corporate Structure—Our Corporate Development—2019 Investment”.
Unless the content otherwise requires, references to “2018,” “2019” and “2020” in this document refers to our financial year ended December 31 of such year.
Certain amounts and percentage figures included in this document have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures preceding them.
For ease of reference, the names of the PRC laws and regulations, governmental authorities, institutions, natural persons or other entities (including certain of our subsidiaries) have been included in the document in both the Chinese and English languages and in the event of any inconsistency, the Chinese versions shall prevail. English translations of official Chinese names are for identification purpose only.
–29– THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. GLOSSARY OF TECHNICAL TERMS
In this document, unless the context otherwise requires, explanations and definitions of certain terms used in this document in connection with our Group and our business shall have the meanings set out below. The terms and their meanings may not correspond to standard industry meaning or usage of these terms.
“anastomosis” a connection made surgically between adjacent blood vessels, parts of the intestine or other channels of the body;
“anvil” part of a surgical stapler, usually a metal plate attached to the base, onto which the underside of the staple is pressed during the stapling process;
“blood vessel titanium clip” a small vessel clamp made of titanium and used to occlude thin blood vessels or to perform vascular anastomoses;
“cartridge” a small unit container that holds staples to be inserted into a surgical stapler;
“CE Mark” a certification mark that indicates conformity with health, safety and environmental protection standards for products sold within the European Economic Area;
“centralized volume a procurement regime in which government authorities procurement” organize bids and centrally purchase a guaranteed volume of products from bid-winning manufacturers;
“circular stapler” a surgical stapler used mainly for end-to-end and end-to- side anastomoses of the esophagus, stomach and rectum;
“circular stapler for hemorrhoidal a circular stapler designed for rectal prolapse and prolapse” hemorrhoid disease;
–30– THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. GLOSSARY OF TECHNICAL TERMS
“Class I/II/III medical devices” medical devices classified into three classes according to the degree of risk under the Regulations on the Supervision and Administration of Medical Devices (《醫 療器械監督管理條例》). Class I medical devices have lower risks, and the implementation of routine management can ensure safety and effectiveness. Class II medical devices have moderate risks, and strict control and management are needed to ensure safety and effectiveness. Class III medical devices have higher risks and special measures are needed to strictly control and manage them to ensure safety and effectiveness;
“elective surgery” a surgery that the patient chooses to have for a better quality of life, not for the treatment of a life-threatening condition, which may or may not include cancer;
“endoscope” an illuminated optical, typically slender and tubular instrument used to look deep into the body for diagnostic or therapeutic purposes;
“endoscopic linear cutter stapler” a linear cutter stapler used in endoscopic surgeries;
“endoscopic stapler” a mechanical surgical stapler used in endoscopic surgeries;
“fascial closure device” a surgical device that closes peritoneum and fascial layers through trocar;
“FFP2/FFP3 folding cup-shaped an FFP (filtering facepiece) graded mask that can be mask” folded. An FFP2 mask protects against solid and liquid irritating aerosols with minimum filter efficiency of 92%. An FFP3 mask protects against solid and liquid toxic aerosols with minimum filter efficiency of 98%;
“fixation device for hernia a medical device used to repair hernia by appropriate repair” tissue capture and penetration;
“gastrointestinal surgery” a surgical specialty that involves the treatment for diseases of the parts of body involved in digestion, which includes esophagus, stomach, small intestine, large intestine, rectum, liver, gallbladder and pancreas;
–31– THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. GLOSSARY OF TECHNICAL TERMS
“general surgery” a surgical specialty that involves the performance of laparoscopic procedures and focuses on abdominal contents including esophagus, stomach, small intestine, large intestine, liver, pancreas, gallbladder, appendix and bile ducts, and often the thyroid gland, as well as diseases involving skin, breast, soft tissue, trauma, peripheral vascular disease and hernias; and involves the performance of endoscopic procedures;
“GMP” good manufacturing practices, the aspect of quality assurance that ensures that medicinal products are consistently manufactured and controlled to the quality standards appropriate to their intended use and as required by the product specification;
“Grade IIIA hospitals” top-level hospitals in China, as hospitals in China are divided into three classes by National Health Commission of the PRC (中華人民共和國國家衛生健康 委員會), among which, Class III hospitals are at the highest level, typically having more than 500 beds, providing high-level specialist medical and healthcare services to several regions and performing advanced teaching and research tasks. Class III hospitals are divided into Special, A, B and C grades;
“gynecology” a surgical specialty that focuses on diseases and routine physical care of the reproductive system of women;
“hemostasis” a physiological process that stops bleeding at the site of an injury while maintaining normal blood flow elsewhere in the circulation;
“hepatobiliary surgery” a surgical specialty that involves the treatment for liver and bile, bile ducts and gallbladder;
“hernia mesh” a mesh product, such as polyester mesh and polypropylene mesh, used to reinforce herniorrhaphy procedures for femoral, crural, inguinocrural or large recurrent inguinal hernias;
“hernia repair” a surgical procedure to fix a hernia, also known as herniorrhaphy;
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“KOL(s)” key opinion leaders, being surgeons with influence on their peers’ medical practice, such as prescribing behavior, surgical procedures preference and residency training focus;
“laparoscope” a fibre-optic instrument inserted through the abdominal wall to view the organs in the abdomen or permit small-scale surgery;
“linear cutter stapler” a surgical stapler loaded with two double staggered rows of titanium staples, which can simultaneously cut and divide tissues between the two double rows;
“linear stapler” a surgical stapler loaded with two staggered rows of titanium staples used for anastomosis;
“linear stapler with knife” a linear stapler with cutting blade integrated, which can simultaneously cut and staple tissues;
“MDSAP recognition” recognition by Medical Device Single Audit Program, an audit program confirming a medical device manufacturer’s quality management system satisfies the requirements of multiple regulatory jurisdiction through a single regulatory audit;
“medical isolation gown” a protective garment used to protect individual from medium to high risk of contamination;
“minimally invasive surgery” or a sub-segment of the generalized concept of minimally “MIS” invasive operation, which is a surgical procedure performed through small incisions instead of large openings. MIS is widely used in surgical specialties of general surgery, obstetrics and gynecology, urology, thoracic surgery and orthopedics, among others;
“non-absorbable cardiovascular a suture used on heart or blood vessels, which is not suture” affected by the biological activities of the body tissues, and therefore permanent unless removed, such as nylon, silk and polypropylene;
“OEM” an original equipment manufacturer, which manufactured products to be marketed by another company;
“open stapler” a surgical stapler used in open surgery;
–33– THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. GLOSSARY OF TECHNICAL TERMS
“open surgery” a surgical procedure where the surgeon has a full view of the structure or organs from the cutting of skin and tissues;
“orthopedics” a surgery specialty that involves the preservation and restoration of the function of skeletal system, its articulations, and associated structures;
“plastic surgery” a surgical specialty involving the restoration, reconstruction, or alteration of the function, shape and appearance of human body;
“polymer clip” a medical device made of nonabsorbable polymer used to ligate tissues or thick blood vessels;
“purse-string forceps” a reusable, stainless steel, ring-handled specialized instrument that cardiovascular and gastrointestinal surgeons use to clamp major vessels and digestive tract;
“rectum” the final straight portion of the large intestine from the sigmoid colon to the anus;
“reload unit” a component of surgical stapler equipped with cartridge and other accessories;
“sleeve gastrectomy surgery” a surgical weight-loss procedure in which the stomach is reduced to about 15% of its original size, by surgical removal of a large portion of the stomach along the greater curvature;
“smart stapler” a powered surgical stapler used in endoscopic surgery;
“SMO(s)” site management organization, an organization that provides clinical trial related services to medical device companies having adequate infrastructure and staff to meet the requirements of the clinical trial protocol;
“soft tissue” tissue that typically connects, supports or surrounds bone and internal organs, such as tendon, muscle, skin and fat;
“staple” a component of a surgical stapler used in place of sutures to close skin wounds or connect or remove parts of the bowels or lungs;
–34– THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. GLOSSARY OF TECHNICAL TERMS
“surgical gown” a personal protective garment intended to be worn by healthcare personnel during surgical procedures to protect both the patient and healthcare personnel from the transfer of microorganisms and body fluids, among other things;
“surgical robot” a robotic device that performs surgical procedures under the control and supervision of a surgeon;
“suture” a stitch or a series of stitches used to hold body tissues together after an injury or surgery;
“thoracic surgery” a surgical specialty that involves treatment for organs in the chest, including heart, lungs and esophagus;
“thoracoscopy” a medical procedure involving the examination within the pleural cavity by means of a thoracoscope;
“trocar” a medical device intended to be percutaneously inserted through the abdominal wall or the chest to create an access port for endoscopes or other surgical instruments during MIS;
“ultrasonic scalpel” a surgical instrument used in MIS to cut and seal vessels;
“urology” a surgical specialty focused on the function and disorder of the urinary system.
–35– THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. FORWARD-LOOKING STATEMENTS
We have included in this document forward-looking statements. Statements that are not historical facts, including statements about our intentions, beliefs, expectations or predictions for the future, are forward-looking statements.
We have included in this document forward-looking statements that are not historical facts but relate to our intentions, beliefs, expectations or predictions for future events and conditions which may not occur. Even though these statements have been made by our Directors after due and careful consideration and on bases and assumptions that we believe are fair and reasonable at the time, they nevertheless involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Some of the risks are listed in the section entitled “Risk Factors” and elsewhere in this document. In some cases, you can identify these forward-looking statements by words such as “aim,” “anticipate,” “believe,” “continue,” “could,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “propose,” “seek,” “should,” “will,” “would” or similar expressions, or their negatives. These forward-looking statements include, without limitation, statements relating to:
• any changes in the laws, rules and regulations of the central and local governments in the PRC and the rules, regulations and policies of the relevant governmental authorities relating to all aspects of our business and our business plans;
• our business and operating strategies and our ability to implement such strategies;
• our ability to control or reduce costs;
• expected growth of and changes in the PRC medical device industry and PRC MISIA industry;
• our future business development, results of operations and financial condition;
• the future competitive environment for the PRC medical device industry and PRC MISIA industry;
• our capability to identify and integrate suitable acquisition targets;
• determination of the fair value of our Shares;
• our dividend policy;
• capital market development;
• exchange rate fluctuations and restrictions; and
• risks identified under “Risk Factors.”
–36– THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. FORWARD-LOOKING STATEMENTS
This document also contains market data and projections that are based on a number of assumptions. The markets may not grow at the rates projected by the market data, or at all. The failure of the markets to grow at the projected rates may materially and adversely affect our business and the market price of our Shares. In addition, due to the rapidly changing nature of the PRC economy and the medical device industry, projections or estimates relating to the growth prospects or future conditions of the markets are subject to significant uncertainties. If any of the assumptions underlying the market data prove to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward looking statements.
We do not guarantee that the transactions and events described in the forward-looking statements in this document will happen as described, or at all. Actual outcomes may differ materially from the information contained in the forward-looking statements as a result of a number of factors, including, without limitation, the risks and uncertainties set forth in the “Risk Factors.” You should read this document in its entirety and with the understanding that actual future results may be materially different from what we expect. The forward-looking statements made in this document relate only to events as of the date on which the statements are made or, if obtained from third-party studies or reports, the dates of the respective studies or reports. Since we operate in an evolving environment where new risks and uncertainties may emerge from time to time, you should not rely upon forward-looking statements as predictions of future events. We undertake no obligation, beyond what is required by law, to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made, even when our situation may have changed.
–37– THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. RISK FACTORS
You should carefully consider all of the information set out in this document, including the risks and uncertainties described below, before making an investment in our Shares. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks and uncertainties. The trading price of our Shares could decline due to any of these risks, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us, or not expressed or implied below, or that we deem immaterial, could also harm our business, financial condition and results of operations.
RISKS RELATING TO OUR BUSINESS AND THE INDUSTRY
We may not be able to develop new products that are competitive in the market, or in a timely manner or at all.
The markets for surgical staplers and other MISIA are competitive in China and overseas. Our success therefore depends on our ability to anticipate industry trends and continuously identify, develop and market in a timely manner new and advanced products that meet our customers’ demand. We expect the high-end surgical staplers and other MISIA markets to evolve towards newer and more advanced products, some of which we do not currently manufacture. Developing new products in a timely manner can be difficult, particularly because product designs can change with market conditions and hospitals’ and physicians’ preferences. Our R&D efforts may not lead to new products that will be commercially successful. We may also experience delays or be unsuccessful in any stage of product development, manufacturing, clinical trials, product registration, marketing or pricing. Even if we are able to launch new products, it takes time for the new product to gain market acceptance. We may not be able to successfully market our new products or our end customers may not be receptive to our new products.
The success of any of our new product offerings will depend on several factors, including our ability to:
• properly identify and anticipate industry trends and market demand;
• complete product development process successfully in a timely manner;
• optimize our manufacturing and procurement processes to predict and control costs;
• manufacture and deliver new products in a timely manner;
• minimize the time and costs required to obtain required regulatory approvals;
• anticipate and compete effectively with other medical device developers, manufacturers and marketers;
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• price our products at both competitive and commercially justifiable levels; and
• increase end-customer awareness and acceptance of our new products.
We may not be successful in developing, enhancing or adapting to new technologies and methodologies.
The medical device industry is characterized by rapid changes in technology, constant enhancement of industrial know-how and frequent emergence of new products. Future technological improvements and continual product developments in the medical device industry may render existing products distributed by us obsolete or affect our viability and competitiveness. Therefore, we must keep pace with new technologies and methodologies to maintain our competitive position. We must continue to invest significant amounts of human and capital resources to develop or acquire technologies that will allow us to enhance the scope and quality of our clinical trials. We intend to continue to enhance our technical capabilities in research, development and manufacturing, which are capital- and time-intensive. We cannot assure you that we will be able to develop, enhance or adapt to new technologies and methodologies, successfully identify new technological opportunities, develop and bring new or enhanced products to market, obtain sufficient or any patent or other intellectual property protection for such new or enhanced products, or obtain the necessary regulatory approvals in a timely and cost-effective manner, or, if such products are introduced, that those products will achieve market acceptance. Any failure to do so could harm our business and prospects.
Our revenue depends significantly on the sales of our surgical staplers.
Revenue generated from sales of surgical staplers accounted for 89.1%, 91.6%, and 84.5% of our total revenue for the years ended December 31, 2018, 2019 and 2020, respectively. Our business is therefore highly dependent on the demand for our surgical staplers. We cannot assure you that our customers will continue to place purchase orders with us for our surgical staplers. If our customers procure surgical staplers from other suppliers, our business, financial condition and results of operations may be materially and adversely affected.
We are subject to intense competition from domestic and international competitors, and we may be unable to maintain or enhance our market share in this industry for a variety of reasons.
The high-end surgical stapler and other MISIA industry is highly competitive. We face competition from both domestic and international competitors across most of our product lines based on safety and functionality, the timing and scope of regulatory approvals, prices, sales and marketing capabilities, the availability and cost of supply, patent position and other factors. In general, we face price competition from domestic competitors, and competition on product quality and brand recognition from international competitors. In particular, some of our domestic competitors may have, among other things, greater pricing flexibility and more robust sales networks, which may enable them to offer products with similar functions but lower
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In addition, some of our competitors may have, among other things:
• greater financial and other resources;
• a greater variety of products;
• brands and products that are better recognized by physicians who recommend products to patients;
• more extensive R&D and technical capabilities and human resources;
• stronger manufacturing capabilities;
• more extensive sales networks; or
• better support in terms of technical training provided.
We may not be successful in the public tender process for centralized volume procurement, and lower bidding prices of our competitors and volume-based discounts and/or lower ex-factory prices offered by these competitors may undermine our position in the public tender process for centralized volume procurement and in turn adversely impact our sales performance.
In July 2019, China formally proposed centralized volume procurement of high-value medical supplies by category to reinforce the standardized management of high-value medical supplies. In January 2020, 18 categories of products, including surgical staplers (with staples), were listed in the first batch of national key governance of high-value medical supplies list. In November 2020, National Healthcare Security Administration (國家醫療保障局) issued the second batch of national key governance of high-value medical supplies list, primarily consisting of six categories of products, including artificial hip joints, artificial knee joints, defibrillator, occluder, orthopedics materials, and surgical staplers. As of the Latest Practicable Date, some provincial governments in China have adopted policies regarding centralized volume procurement of surgical staplers.
A small portion of our sales are made to public hospitals through public tender processes under the centralized volume procurement regimes established within their respective regions. We are responsible for participating in such public tender processes to secure the right to sell our products to the public hospitals and other not-for-profit medical institutions within a particular region. The procedures of public tenders vary from hospital to hospital and from region to region, and there could be uncertainties with respect to the timing of such procedures.
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As a result, we are primarily dependent on experienced local distributors to assist us during such procedures. However, we may not always be able to locate a sufficient number of experienced local distributors to sell our products to hospitals and other medical institutions. After the completion of such processes, if our products win the bids, such products would be qualified for future procurement by public hospitals and not-for-profit medical institutions in that particular region, and our bidding prices generally determine our maximum retail prices. See “Regulatory Overview—Overview of PRC Regulations—Procurement and Pricing Procedure for Medical Devices.” The public tender process requirements may negatively impact our sales and hinder our ability to expand our overall sales network, and in turn, materially and adversely affect our business and results of operations.
Our bids during the public tender process may not be successful and our products may not be chosen for a number of reasons, including among other things:
• our prices are not competitive. For example, our competitors may have lower bidding prices. We face pressure to set competitive bidding prices compared to competitors that offer lower ex-factory prices to their distributors, which may undermine our position on pricing in the public tender process and in turn may negatively impact our sales performance. See “—Risks Relating to Our Business and the Industry—Our pricing strategy and downward change in pricing of our products may have a material adverse effect on our business and results of operations” in this section;
• our products specifications and parameters fail to meet the public tender requirements;
• our product quality or any other aspect of our operation fails to meet the relevant requirements;
• even if our products win the bids and are qualified for procurement by public hospitals and other not-for-profit medical institutions in a particular region, there is no guarantee that such entities would purchase our products, as they have the sole discretion to select between our products and other qualified competing products; or
• our reputation is adversely affected by unforeseeable events.
Failure to achieve broad market acceptance could have a material adverse impact on our business and results of operations.
Physicians and hospitals play important roles in recommending and deciding what products to use. Physician and hospital reception of our products depends on our ability to convince them as to the distinctive characteristics, advantages, safety and cost-effectiveness of our products as compared to our competitors’ products, as well as to train physicians and hospitals in the proper application of our products accompanied by our distributors. If our
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Physicians face a learning process to become proficient in the use of some of our products and product candidates, which may take longer than expected and therefore affect our ability to sell our products. Encouraging physicians to dedicate the time and energy necessary for adequate training remains challenging, and we may not be successful in these efforts. If physicians are not properly trained, they may misuse or ineffectively use our products. This may also result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us, any of which could have a significant adverse effect on our reputation, business, financial condition, results of operations and prospects. Following completion of training, we also rely on trained physicians to advocate the benefits of our products in the marketplace. If we do not receive support from such physicians, other physicians and hospitals may not use our products, and our results of operations may be adversely affected.
The success of our sales and marketing strategy also depends on our ability to attract, motivate and retain qualified and professional employees in our sales and marketing team who are able to communicate effectively with medical professionals. If we are unable to attract, motivate and retain a sufficient number of qualified sales personnel, sales volumes or margin of our existing and future products may be adversely affected.
There may be quality defects in our products, which may cause safety issue and expose us to product liability lawsuits or administrative proceedings that could cause us to incur substantial liabilities and have a material adverse impact on our business and results of operations.
Our products are designed to be used in surgeries, which are life-critical, and any quality defect may result in serious clinical incidents and product liability claims. Product liability claims against our products may include allegations of defects in design and manufacturing, improper handling or transportation of products, negligence, strict liability and a breach of warranties. We may be subject to product liability claims if our products have latent quality issues as a result of a number of factors, many of which are outside of our control. These factors include potential complications not revealed in clinical trials, unusual but severe complications and adverse events in isolated cases, defective products not detected by our quality control system or misuse of our products. Even if our products do not have latent defects, other factors that are out of our control, such as the quality and skill of physicians using our products, the surgery methodology and the choice of products used during surgery, may affect the safety and outcome of the surgery. Patients may still initiate legal proceedings against us, and the hospitals and physicians may claim, with or without merit, that our products have latent defects. Regardless of the merits or eventual outcome, liability claims may result in:
• decreased demand for our products;
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• damage to our reputation;
• withdrawal of clinical trial participants;
• costs to defend the related litigation;
• costs to indemnify our distributors for products sold to them;
• a diversion of management’s time and our resources;
• revocation of regulatory approvals for the relevant products or the relevant production facilities;
• substantial monetary compensation to hospitals or patients;
• product recalls, product withdrawals or marketing or promotion restrictions;
• loss of revenue;
• the inability to commercialize our product candidates; and
• a decline in our Share price.
We currently maintain life science comprehensive liability, among other things. However, such insurance may be insufficient to cover all product liability claims. See “—Risks Relating to Our Operations—Our insurance coverage may not completely cover the risks relating to our business and operations” in this section. In any such event, our business, financial condition and results of operations would be adversely and materially affected.
If our products cause, or are perceived to cause severe adverse events, our reputation, revenue and profitability could be materially and adversely affected.
Our products may be perceived to cause severe adverse events if one or more regulators, such as the NMPA and/or the EMA, determine that other companies’ products containing the same or similar key parts or using the same delivery technologies as our products’ cause or are perceived to have caused severe adverse events. If our products cause, or are perceived to cause, severe adverse events, we may face a number of consequences, including:
• a severe decrease in the demand for, and sales of, the relevant products;
• the recall or withdrawal of the relevant products;
• revocation of regulatory approvals for the relevant products or the relevant production facilities;
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• damage to the brand name of our products and the reputation of our Company;
• failure to include our products into the relevant medical insurance coverage; and/or
• exposure to lawsuits and regulatory investigation relating to the relevant products that result in liabilities, fines or penalties.
As a result of these consequences, our sales, profitability and prospects could be materially and adversely affected.
Our pricing strategy and downward change in pricing of our products may have a material adverse effect on our business and results of operations.
We generally price our products and product candidates (upon commercialization) by taking into consideration a variety of factors, including pricing guidance set by the government authorities, bargaining power and preferences of hospitals, prices of similar products offered by our competitors, our operating costs and the continuous upgrades of existing products, among others, and some of which are beyond our control:
• If the PRC government issues pricing guidance for our products and product candidates (upon commercialization), it may negatively affect the price at which we can sell our products and therefore have a material adverse effect on our business and results of operations. We may also face downward pricing pressure if our products are included in the medical insurance reimbursement list, even if such inclusion in the medical insurance reimbursement list is expected to increase the sales volume of our products.
• Also, when setting the prices for our products, hospitals may gain more bargaining power depending on the availability of alternative products, demands of patients and the preferences of physicians. If hospitals seek to lower retail prices of our products and therefore reduce the profitability of our distributors, our distributors may have less incentive to purchase and promote our products, and we may need to lower the order price we set for our distributors.
• Furthermore, along with our increasing efforts to promote our product candidates, as well as our competitors’ continuous development of these product candidates, awareness of these products is expected to increase. More competing products may become available, which will offer alternatives for hospitals and patients to choose.
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• In addition, with the development of technologies and increasing competition in the industry, we may experience reduced pricing from our existing products, particularly along with the launch of new products that can replace or further improve the safety and efficacy profile of our existing products, while the manufacturing and material costs may remain constant or increase. If we are unable to successfully introduce more advanced and/or more profitable new products to the market, or if we fail to effectively control our operating and manufacturing costs, our business, financial condition and results of operations could be materially and adversely affected.
We may experience reduced pricing power and gross profit margin erosion from our existing products generally as their sales in a given mature market, while manufacturing and material costs may remain constant or increase. Our profitability depends on our ability to successfully launch new products, enter new markets, control costs during the manufacturing process by increasing the efficiency of our manufacturing processes and increasing production yields. If we are unable to successfully design, develop, manufacture and market new products, which typically generate higher gross margins, or if we fail to effectively increase the efficiency of our manufacturing processes or control manufacturing costs, our business, financial condition and results of operations could be harmed.
Our products might not be eligible for coverage under reimbursement schemes or other national or regional pricing guidelines and may be subject to price controls. As a result, our sales may decline or not achieve our expected levels.
Demand for, prices of, and our ability to sell, our high-end surgical staplers and other MISIA depend largely on whether and the extent of which our products and related treatments are covered by reimbursement schemes and national or regional pricing guidelines, which control the prices charged by hospitals for medical devices. We may strategically develop and position our products taking into consideration these schemes and standards. However, if the reimbursement status of our products and coverage under the pricing guidelines is not favorable, we may not be able to successfully commercialize our products. Moreover, China’s healthcare system is undergoing reform.
We cannot assure you that our products and product candidates (upon commercialization) will be included in the medical insurance reimbursement list at all times, if at all. To the extent that our products are not included in the medical insurance reimbursement list or if any such insurance schemes are changed or canceled which result in any removal of our products from medical insurance catalog, our sales may be adversely impacted or not able to achieve our expected levels, which may lead to a material and adverse effect on our business, results of operations and financial condition
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In addition, a key policy objective in the medical device industry is cost containment. There have been and may continue to be proposals from legislators, regulators and third party payors to lower medical costs. Legislators, regulators, and third-party payors have attempted and may continue to attempt to control costs by limiting the scope of reimbursement schemes and/or the amount of reimbursement for medical devices, including MISIA. Moreover, third-party payors are increasingly requiring that companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. Such continuing efforts to contain or reduce medical costs could restrict our end-users’ ability to obtain adequate coverage and reimbursement and therefore harm our business and results of operations by adversely affecting the demand for our products or the price at which we can sell our products.
We mainly rely on our production facilities in Beijing for the manufacturing of our products and product candidates; any disruptions to the operation of our production facilities could materially adversely affect our business, financial condition and results of operations. Our pricing strategy and downward change in pricing of our products may have a material adverse effect on our business and results of operations.
We manufacture, assemble and test our products at our production facility located in our leased properties in Beijing. During the Track Record Period, we primarily manufactured disposable surgical staplers and accessories in our Beijing production facility. The operation of our production facilities may be substantially interrupted due to a number of factors, many of which are outside of our control, including but not limited to fires, floods, earthquakes, power outages, fuel shortages, mechanical breakdowns, terrorist attacks and wars, loss of licenses, certifications and permits, changes in governmental planning for the land underlying these facilities, and regulatory changes.
If the operation of any of our production facilities is substantially disrupted, we may not be able to replace the equipment at such facilities, or use a different facility to continue production in a timely and cost-effective manner. As a result, we may fail to fulfill contract obligations or meet market demand for our products, and our business, revenue and profitability could be materially adversely affected.
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Our business and financial performance will be materially and adversely affected if we cannot maintain good relationships with, and provide high quality products and services to, our customers.
Our growth and future success is reliant upon our ability to maintain good relationships with our customers by further diversifying our product portfolio and solidifying our market position. Our ability to maintain good relationships with existing customers and attract new customers significantly depends on, among others, our ability to (i) continuously anticipate and effectively respond to changing customers’ demands and preferences, (ii) anticipate and respond to changes in the competitive and changing landscape of the industry, (iii) identify and adopt evolving technologies to facilitate customers’ purchasing or procurement experience with us and (iv) develop and upgrade our value-added services that cater to the needs of our existing and potential customers. In the event that we cannot (i) maintain good relationships with our customers, (ii) maintain or guarantee the high quality of the products we distribute, or (iii) meet the needs of our customers (particularly the hospital and healthcare institution customers), our business and financial performance will be adversely affected.
Any failure to maintain effective quality control over our products could have a materially adverse effect our business.
The quality of our products is critical to the success of our business, and such quality to a large extent depends on the effectiveness of our quality control system. We cannot completely eliminate the risk of errors, defects or failures. We may fail to detect or cure defects as a result of a number of factors, many of which are outside our control, including:
• technical or mechanical malfunctions in the production process;
• human error or malfeasance by our quality control personnel;
• tampering by third parties; and
• defective raw materials.
Failure to detect quality defects in our products could result in harm to our assets, customer dissatisfaction, or other problems that could seriously harm our reputation and business, expose us to liability, and adversely affect our revenue and profitability.
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We are exposed to risks of product returns or exchange which may adversely affect our business and financial performance and our results of operations.
We generally accept returns or exchange for defective products to maintain our end-customers’ satisfaction. During the Track Record Period, we did not have any product recall incidents and the total product returns and compensation claims were insignificant. However, we cannot assure you that we will not be exposed to risks associated with product returns in the future. Any product returns or recalls in the future may result in unexpected capital expenditure and could adversely impacted our operating profit and cash flows.
Our business may be affected by the availability of warehouse facilities and the related rental expenses
As at the Latest Practicable Date, we rented four warehouses with total GFA of approximately 3,475 sq.m. in Beijing for the storage of our products sourced from our suppliers and we did not own any warehouse. The tenancy agreements for the warehouses we currently occupy are for a fixed duration. It is uncertain whether these tenancy agreements can be renewed at all upon expiry or on terms acceptable to us. Even if we are able to renew or extend the tenancy agreements, the rental expenses may increase significantly and any increase in rental expenses will increase our costs of operation and may therefore adversely affect our business and financial performance if we are unable to pass on the increased costs to our customers. In addition, the landlords of the warehouses may exercise their right of early termination to terminate the tenancy agreements in accordance with the terms of respective tenancy agreements. In such cases, we may be unable to find suitable locations to relocate our warehouses in a timely manner and on commercially acceptable terms, or at all, which could have an adverse impact on our business due to our decreased warehousing and storage space.
If we fail to increase our production capacity as planned, our business prospects could be materially and adversely affected.
We plan to expand our manufacturing capacity in our production facilities. Changes in the manufacturing process or procedure, including a change in the location where the product is manufactured, require prior review by regulatory authorities and/or approval of the manufacturing process and procedures in accordance with applicable requirements.
Other than the risks relating to application of requisite licenses and permits, we could also face other risks in implementing our expansion plan, including construction delays, failure to adopt new manufacturing techniques, implement effective quality control, or recruit a sufficient number of qualified staff to support the increase in production capacity. Given the complexity of our products and product candidates, competition for qualified manufacturing staff is intense. New manufacturing staff are generally required to undergo approximately three to six months of training before they can commence work on our production lines. There can be no assurance that we will be able to increase our overall production capacity, develop advanced manufacturing techniques, process controls in the manner we contemplate or recruit a sufficient number of qualified manufacturing staff, or at all. In the event we fail to increase
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There can be no assurance that our existing and future production facilities will manufacture products in sufficient volumes in the event of any significant change in market demand. In such event, we may not be able to find external subcontractors to help manufacture our products, and even if we could engage third parties to manufacture a portion of such products, we would be exposed to the risks of increased pricing for our sub-contracted production and that the third parties may not manufacture products meeting our specifications or in sufficient volumes to meet market demand. As a result, our sales volumes and margins for the relevant products could be materially and adversely affected, and we could be subject to liabilities if such third parties deliver products and product candidates with latent defects.
An increase in the market price and/or shortage of our raw materials and components and/or shortage of raw materials and components may adversely affect our profitability.
Our production processes require substantial amounts of raw materials and components. Some raw materials and components have been susceptible to fluctuations in price and availability. Significant fluctuations in raw material and component prices and availability will have a direct and negative impact on our gross margins. The prices of our raw materials may be affected by a number of factors, including market supply and demand, the PRC or international environmental and regulatory requirements, natural disasters such as fires, outbreak of epidemics or diseases and the PRC and global economic conditions. A significant increase in the costs of raw materials may increase our cost of sales and negatively affect our profit margins and, more generally, our business, financial conditions, results of operation and prospects.
RISKS RELATING TO OUR CLINICAL PRODUCT DEVELOPMENT
Clinical product development involves a lengthy and expensive process with an uncertain outcome.
In China, medical devices are classified according to a catalog issued by the NMPA into three different categories, Class I, Class II and Class III, depending on the degree of risk associated with each medical device and the extent of control needed to ensure safety and effectiveness. We need to complete record-filings to commercialize Class I medical devices. To obtain product registration for Class II and Class III medical devices in China, we may need to conduct, at our own expense, properly designed and conducted clinical trials to demonstrate the safety and efficacy of our products.
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Clinical testing is expensive and can take several years to finish, and its outcome is inherently uncertain. There can be no assurance that these trials or procedures will be completed in a timely or cost-effective manner or result in a commercially viable product or expanded indication. We may experience numerous unexpected events before and during the clinical trials that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates, including but not limited to: (i) regulators or ethics committees may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site; (ii) our inability to reach agreements on acceptable terms with prospective SMOs and hospitals as trial centers, the terms of which can be subject to extensive negotiation and may vary significantly among different SMOs and hospitals as trial centers; (iii) manufacturing issues, including problems with manufacturing, supply quality, or obtaining sufficient quantities of a product candidate for use in a clinical trial, clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs; (iv) the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment may be insufficient or slower than we anticipate; (v) our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all; (vi) we might have to suspend or terminate clinical trials of our product candidates for various reasons, including a finding of unexpected characteristics or a finding that participants are being exposed to unacceptable health risks (including deaths in the worst case scenario); (vii) regulators or ethics committees may require that we or our investigators suspend or terminate clinical research or not rely on the results of clinical research for various reasons, including noncompliance with regulatory requirements; (viii) the cost of clinical trials of our product candidates may be greater than we anticipate; and (ix) the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate.
Any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process, and jeopardize our ability to commence product sales and generate related revenues for that candidate. Any of these occurrences may harm our business, financial condition and prospects significantly.
If clinical trials of our product candidates fail to demonstrate safety and efficacy to the satisfaction of regulatory authorities or do not otherwise produce positive results in a timely manner or at all, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.
During the clinical trial process, failure can occur at any time. The results of preclinical studies and feasibility clinical trial of our product candidates may not be predictive of the results of confirmatory clinical trial. Product candidates in confirmatory clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and/or feasibility clinical trials. In some instances, there can be significant variability in safety and/or efficacy results between different trials of the same product candidate due to
–50– THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. RISK FACTORS numerous factors, including changes in trial procedures set forth in protocols, and differences in the physical conditions of the patient populations. We cannot assure that our future clinical trial results of our product candidates may be favorable. Even if our future clinical trial results show favorable efficacy, not all patients may benefit. For our certain product candidates, it is likely that they may not suit the conditions of certain patients, and severe adverse events and complications may occur for some patients after the procedure. If we are required by competent government authorities such as the NMPA to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, or if we are unable to successfully complete clinical trials of our product candidates or other testing, or if the results of these trials or tests are not positive or are only modestly positive or if they raise safety concerns, we may (i) be subject to substantial liabilities, (ii) be delayed in obtaining regulatory approval for our product candidates, (iii) not be able to obtain regulatory approval at all, (iv) obtain approval for indications that are not as broad as intended, (v) have the product removed from the market after obtaining regulatory approval, (vi) be subject to additional post- marketing testing requirements, (vii) be subject to restrictions on how the product is distributed or used; or (viii) be unable to obtain reimbursement for use of the product. Any of such events could materially and adversely affect our ability to commercialize the subject products and generate sales revenues.
Our products and product candidates may cause undesirable adverse events which could interrupt, delay or halt clinical trials, delay or prevent regulatory approval, limit the commercial profile of an approved production label, or result in significant negative consequences following any regulatory approval.
Undesirable adverse events caused by our products or product candidates, including but not limited to side effects, safety issues and other serious adverse events, could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the NMPA, EMA or other comparable regulatory authority, or could result in limitations or withdrawal following approvals. For example, in the event that results of our trials reveal a high and unacceptable severity or prevalence of adverse events, our trials may be suspended or terminated by the NMPA or the EMA and other comparable regulatory authorities could order us to cease further development of, or deny approval of, our product candidates.
Adverse events may be reported in our clinical trials, which may affect patient recruitment or the ability of enrolled subjects to complete the trial, and may result in potential product liability claims. Any of these occurrences may harm our reputation, business, financial condition and prospects significantly.
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Additionally, if our product candidates receive regulatory approval, and undesirable side effects caused by such product candidates are identified after such approval, a number of potentially significant negative consequences could follow, including, among others:
• we may be required to suspend marketing or remove relevant products from the marketplace;
• regulatory authorities may withdraw approvals of the product;
• we may be required to change the way our products are distributed or administered, conduct additional clinical trials, change the labeling or add additional warnings on the labeling of such products;
• we may be required to develop risk evaluation and mitigation measures for the product or, if risk evaluation and mitigation measures are already in place, to incorporate additional requirements under the risk evaluation and mitigation measures;
• we may be subject to regulatory investigations and government enforcement action;
• a severe decrease in the demand for, and sales of, the relevant products;
• we could be sued and held liable for harm caused to subjects or patients; and
• our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of the particular pipeline product, and could significantly harm our business, results of operations and prospects.
If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.
The timely completion of clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient number of patients who remain in the trial until its conclusion. We may experience difficulties in relation to patient enrollment in our clinical trials for a variety of reasons, including:
• the size and nature of the patient population;
• the patient eligibility criteria defined in the protocol;
• the size of the study population required for analysis of the trial’s primary endpoints;
• the proximity of patients to trial sites;
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• the design of the trial;
• our ability to recruit clinical trial investigators with the appropriate competencies and experience;
• the patients’ perceptions as to the potential advantages and side effects of the product candidates being studied in relation to other available product, product candidates or therapies; and
• the risk that patients enrolled in clinical trials may drop out or fail to return for posttreatment follow-up at a higher rate than anticipated.
Our clinical trials will likely compete with other clinical trials for product candidates that are in the same therapeutic areas as our product candidates. This competition will reduce the number and types of patients available to us as some patients who might have opted to enroll in a trial being conducted by one of our competitors instead of ours. We conduct some of our clinical trials at the same clinical trial sites that some of our competitors use, which may reduce the number of patients who are available for our clinical trials at such clinical trial sites. Even if we are able to enroll a sufficient number of patients in our clinical trials, delays in patient enrollment may result in increased costs or may affect the timing or outcome of the planned clinical trials, which could prevent completion of these trials and adversely affect our ability to advance the development and timely commercialization of our product candidates.
The initial or interim results of clinical trials may not be predictive of the final clinical trial results and may be subject to adjustments.
We have successfully completed feasibility clinical trial for smart stapler in May 2020. We subsequently started a confirmatory clinical trial in China for smart stapler to evaluate its safety and efficacy in November 2020. As of the Latest Practicable Date, we had completed an around three- to ten-day follow-up study on the patients enrolled in the clinical trial for digestive tract operations, three- to five-day follow-up study for lung operations, or one- to three-day follow-up study for the confirmatory clinical trial, and are currently in the process of conducting data analysis and preparing the clinical trial report. Some of such data and results of clinical trials may be slightly different from the raw data observed from the clinical trial, because as set forth in the protocols of the clinical trial and in line with industry practice, the data generated from certain patients may be excluded. As a result, when preparing the final report of such confirmatory clinical trial, it is possible that medical institutions participating in the confirmatory clinical trial may need to make additional adjustments to the clinical data depending on their judgments, and may make other necessary adjustments following the relevant rules promulgated by the NMPA. We cannot assure you that the interim clinical trial results will be the same as those in the final clinical trial report. As such, you are cautioned not to place undue reliance on the interim data.
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RISKS RELATING TO OUR FINANCIAL PERFORMANCE
Our historical operating results may not be representative of future performance.
Our revenue increased from RMB228.9 million in 2018 to RMB302.5 million in 2019 and further to RMB308.5 million in 2020, representing a CAGR of 16.1%. We cannot assure you that our revenue will continue to grow at current level. We may experience fluctuations in the CAGR of our revenue if we fail to expand our sales channel, increase our market share or advance our R&D progress as planned due to the adverse changes in the macroeconomic environment, the continued impact of the COVID-19 pandemic, increased market competition. In addition, we cannot assure you that our historical operating results, such as our revenue, gross profit, net profit, gross profit margin and net profit margin, will be indicative of future performance for various reasons, including uncertainties of the success of our existing and new products, and in the market and the regulatory environment, as well as our ability to expand production capacity and improve manufacturing capabilities as planned, and manage our sales network and intensified competition in the high-end surgical staplers and MISIA market in China. Investors should not rely on our historical results as an indication of our future financial or operating performance.
We are subject to credit risk of our distributors, and our inability to collect on our trade receivables from our distributors may have a material adverse effect on our cash flows and operations.
We sell our products primarily to third-party distributors across China. We generally require our distributors to make full payment to us before we make shipment and only grant credit terms to distributors in limited circumstances. As of December 31, 2018, 2019 and 2020, we had trade and bill receivables of RMB21.6 million, RMB31.1 million and RMB39.6 million, respectively. For the years ended December 31, 2018, 2019 and 2020, our trade receivable turnover days were 27 days, 32 days and 42 days, respectively. Our sales and marketing employees monitor and manage our distributors and are responsible for collecting amounts due from distributors. We cannot assure you that our distributors could settle trade receivables in a timely manner, or at all, or that we can properly assess and respond in a timely manner to changes in their credit profile and financial condition. Adverse changes in their financial conditions may negatively affect the length of time that it will take us to collect associated trade receivables or impact the likelihood of ultimate collection, which would in turn have an adverse and material effect on our business, financial condition and results of operations. Moreover, as we continue to grow our business, the amount of trade receivables we record may increase, which may have a negative impact on our cash flow.
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Our other receivables, in particular VAT deductible and prepayments, may not be recoverable.
Value-added tax deductible, or VAT deductible, represents our VAT input credit, resulting from the difference between our VAT input tax (arising from our purchase of construction services and goods, including raw materials, consumables and other inventories) and our VAT output tax (arising from our sales of products). As of December 31, 2018, 2019 and 2020, our VAT deductible was RMB0.2 million, RMB2.0 million and RMB2.3 million, respectively, as the input tax exceeds the output tax for the periods. In general, VAT deductible will be deducted from future VAT payables, for which we consider to have relatively low credit risk. However, the majority of such excess VAT cannot directly result in a refund, instead, it may be carried forward and used to offset output VAT generated in future. Under such circumstance, it may limit our liquidity efficiency and we cannot guarantee the recoverability of the deductible VAT, and to what extent it may affect our financial positions in the future.
In addition, there are uncertainties about the recoverability of our deposits and prepayments which primarily represented the prepaid fees to suppliers and service providers. As of December 31, 2018, 2019, and 2020, we recorded prepayments and other receivables of RMB5.1 million, RMB11.8 million and RMB11.6 million, respectively. However, there is no guarantee that the suppliers and service providers will perform their obligations in a timely manner and we are subject to credit risk in relation to deposits and prepayments. We conduct assessments on the recoverability of deposits and prepayments based on, among others, our historical settlement records, our relationship with relevant counterparties, payment terms, current economic trends and to a certain extent, the larger economic and regulatory environment, which involve the use of various judgments, assumptions and estimates by our management. However, there is no assurance that our expectations or estimates will be entirely accurate for the future, as we are not in control of all the underlying factors affecting such deposits and prepayments. Therefore, if we are not able to recover the deposits and prepayments as scheduled, our financial position and results of operations may be adversely affected.
Fair value changes for our financial assets at fair value through profit or loss (FVTPL) may materially and adversely affect our financial condition and results of operations.
As of December 31, 2018, 2019 and 2020, we recorded financial assets at fair value through profit or loss of nil, RMB8.0 million and RMB21.0 million, respectively. Our financial assets at FVTPL represent our investment in Vincente Medical in 2019 and 2020 and investment in Cadyson Medical in 2020 as part of our business development strategy. According to applicable accounting policies, financial assets at FVTPL are recorded in the consolidated statements of financial position at fair value with net changes in fair value recognized in the consolidated statements of profit or loss and other comprehensive income. Such treatment of gain or loss may cause significant volatility in, or materially and adversely affect, our period-to-period earnings, financial condition and results of operations.
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The discontinuation of any of the preferential tax treatments currently available to use could reduce our profitability.
In 2010, we qualified as a High and New Technology Enterprise (高新技術企業) and extended its High and New Technology Enterprise certificate in 2019 for a period of three years to 2022. As a High and New Technology Enterprise, we enjoy a lower EIT rate of 15%, instead of the standard EIT rate of 25%. Accordingly, our income tax expenses amounted to RMB7.7 million, RMB8.2 million and RMB7.8 million in 2018, 2019 and 2020, respectively. Continued eligibility to these preferential tax treatment is subject to review and evaluation by the relevant government authorities in the PRC, for example, the qualification as a High and New Technology Enterprise is subject to review by the relevant Chinese authorities every three years. We cannot assure you that we will continue to receive such preferential tax treatment at historical levels, or at all. In the event that any of the preferential tax treatment currently enjoyed by us is reduced, discontinued or withdrawn by the government authorities, and the affected subsidiaries fail to obtain any alternative preferential tax treatment, our results of operations and growth prospects may be materially and adversely affected.
Our business requires certain amount of capital to finance our ongoing operations and expansion. Raising additional capital may restrict our operations or require us to relinquish rights to our technologies or product candidates. Failure to manage our liquidity and cash flows or inability to obtain additional financing may adversely affect our business, financial condition and results of operations.
Maintaining our competitiveness and implementing our growth strategies both require us to obtain sufficient capital funds. Historically, we have financed our business activities primarily through cash generated from our operations. If our current sources are insufficient to satisfy our cash requirements, we may seek additional debt or equity financing, enter into collaboration or licensing arrangements, or obtain a credit facility. Such financing may not be available on commercially reasonable terms, or at all, especially if a recession occurs or other events causing volatility in the capital markets worldwide arise.
Our ability to obtain additional capital on acceptable terms is subject to, among other things, investors’ perception of and demand for our securities, our financial performance and gearing ratio, and the economic, market, political and regulatory conditions in the PRC. Any failure by us to raise additional funds that are necessary for our operations on terms favorable to us could have a material adverse effect on our liquidity and financial condition.
To the extent that we raise additional capital through the issuance of new Shares, sale of equity, equity linked securities or convertible debt securities, other than on a pro rata basis to existing Shareholders, the percentage of ownership of our existing Shareholders in our Company, the earnings per H Share and the net asset value per H Share may be reduced, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a holder of our Shares.
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The incurrence of additional indebtedness, the issuance of certain equity securities or obtaining credit facilities could result in increased fixed payment obligations and could also result in certain additional restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. In addition, issuance of additional equity securities, or the possibility of such issuance, may cause the market price of our Shares to decline.
In the event that we enter into collaborations or licensing arrangements in order to raise capital, we may be required to accept unfavorable terms, including relinquishing or licensing to a third party on unfavorable terms our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves or potentially reserve for future potential arrangements when we might be able to achieve more favorable terms.
RISKS RELATING TO INTELLECTUAL PROPERTY RIGHTS
If third parties claim that we infringe upon their intellectual property rights, we may incur liabilities and financial penalties and may have to redesign or discontinue selling the affected product.
The medical device industry is litigious with respect to patents and other intellectual property rights. Companies operating in our industry routinely seek patent protection for their product designs, and many of our principal competitors have large patent portfolios. Companies in the medical device industry have used intellectual property litigation to gain a competitive advantage. Whether a product infringes a patent involves an analysis of complex legal and factual issues, the determination of which is often uncertain. We face the risk of claims that we have infringed on third parties’ intellectual property rights in the countries where we operate, principally China. In addition, a number of our employees have previously worked for one or more of our competitors. There can be no assurance that such employees have not used, or will not use in the future, their previous employers’ proprietary know-how or trade secrets in their work for us, which could result in litigation against us. Prior to developing major new products, we evaluate existing intellectual property rights. However, our competitors may also have filed for patent protection which is not as yet a matter of public knowledge or claim trademark rights that have not been revealed through our searches of relevant public records. Our efforts to identify and avoid infringing on third parties’ intellectual property rights may not always be successful. Any claims of patent or other intellectual property infringement, even those without merit, could:
• be expensive and time consuming to defend;
• result in us being required to pay significant damages to third parties;
• cause us to cease making or selling products that incorporate the challenged intellectual property;
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• require us to redesign, reengineer or rebrand our products, if feasible;
• require us to enter into royalty or licensing agreements in order to obtain the right to use a third party’s intellectual property, which agreements may not be available on terms acceptable to us or at all;
• divert the attention of our management; or
• result in hospitals and physicians terminating, deferring or limiting their purchase of the affected products until resolution of the litigation.
In addition, new patents obtained by our competitors could threaten a product’s continued life in the market even after it has already been introduced.
We could be unsuccessful in obtaining or maintaining adequate patent protection for our products and product candidates through intellectual property rights, or if the scope of such intellectual property rights obtained is not sufficiently broad, third parties may compete directly against us.
Our commercial success will depend, in large part, on our ability to obtain, maintain and enforce our intellectual property rights, including patent rights to protect our proprietary technology, products and product candidates. We seek to protect the technology, products and product candidates that we consider commercially important by filing patent applications in the PRC, EU and other countries, relying on trade secrets or medical regulatory protection or employing a combination of these methods. This process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. We cannot be certain that patents will be issued or granted with respect to our patent applications that are currently pending, or that issued or granted patents will not later be found to be invalid and/or unenforceable, be interpreted in a manner that does not adequately protect our product candidates, or otherwise provide us with any competitive advantage. As a result, we may not be able to prevent competitors from developing and commercializing competitive products in all such fields and territories.
Patents may be invalidated and patent applications may not be granted for a number of reasons, including known or unknown prior deficiencies in the patent application or the lack of novelty of the underlying invention or technology. We may also fail to identify patentable aspects of our R&D output in time to obtain patent protection. Moreover, the patent position of medical devices companies is generally uncertain because it involves complex legal and factual considerations. Patent applications we had applied may not be granted in the end. As such, we do not know the degree of future protection that we will have on our products and technology, if any, and a failure to obtain adequate intellectual property protection with respect to our product candidates could have a material adverse impact on our business.
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Although we enter into non-disclosure and confidentiality agreements or include such provisions in our relevant agreements with parties who have access to confidential or patentable aspects of our R&D output, such as our employees, consultants, advisors and other third parties, any of these parties may breach such agreements and disclose such output before a patent application is filed, jeopardizing our ability to seek patent protection. In addition, publications of discoveries in the scientific literature often lag behind the actual discoveries. Invention patent applications in China and other jurisdictions are typically not published until 18 months after filing, or in some cases, not at all.
The issuance of a patent is not conclusive as to its inventor, scope, validity or enforceability, and our patents may be challenged in the courts or patent offices in PRC, the United States and other countries. We may be subject to a third-party pre issuance submission of prior art to the CNIPA, EUIPO, USPTO or other related intellectual property offices, or become involved in post-grant proceedings such as opposition, derivation, revocation and reexamination, or inter partes review, or interference proceedings or similar proceedings in foreign jurisdictions challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology, products or product candidates and compete directly with us without payment to us, or result in our inability to manufacture or commercialize products and product candidates without infringing, misappropriating or otherwise violating third-party patent rights. Moreover, we may have to participate in interference proceedings declared by the CNIPA, EUIPO, USPTO or other related intellectual property offices to determine priority of invention or in post-grant challenge proceedings, such as oppositions in a foreign patent office, that challenge the priority of our invention or other features of patentability of our patents and patent applications. Such challenges may result in loss of patent rights, loss of exclusivity, or in patent claims being narrowed, invalidated, or held unenforceable, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology, products and product candidates. Such proceedings also may result in substantial costs and require significant time from our R&D personnel, experts and management, even if the eventual outcome is favorable to us. Consequently, we do not know whether any of our technologies, products or product candidates will be protectable or remain protected by valid and enforceable patents. Our competitors or other third parties may be able to circumvent our patents by developing similar or alternative technologies or products in a non-infringing manner.
Furthermore, although various extensions may be available, the life of a patent and the protection it affords is limited. We may face competition for any approved product candidates even if we successfully obtain patent protection once the patent life has expired for the product. The issued patents and pending patent applications, if issued, for our products and product candidates are expected to expire on various dates as described in “Business—Intellectual Property.” Upon the expiration of our issued patents or patents that may issue from our pending patent applications, we will not be able to assert such patent rights against potential competitors and our business and results of operations may be adversely affected.
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Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such product candidates might expire before or shortly after such product candidates are commercialized. As a result, our patents and patent applications may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. Moreover, some of our patents and patent applications are, and may in the future be, co-owned with third parties. If we are unable to obtain an exclusive license to any such third-party co-owners’ interest in such patents or patent applications, such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market competing products and technology. In addition, we may need the cooperation of any such co-owners of our patents in order to enforce such patents against third parties, and such cooperation may not be provided to us. Any of the foregoing could have a material adverse effect on our competitive position, business, financial conditions, results of operations and prospects.
Failure to adequately protect our intellectual property rights may adversely affect our reputation and disrupt our business.
Filing, prosecuting, maintaining and defending patents on products and product candidates in all countries throughout the world could be prohibitively expensive for us, and our intellectual property rights in some countries can have a different scope and strength from those in some other countries. In addition, the laws of certain countries do not protect intellectual property rights to the same extent as the laws of certain other countries do. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries, or from selling or importing medical products made using our inventions in and into certain jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to certain jurisdictions where we have patent protection but where enforcement rights are not as strong as those in certain other countries. These products may compete with our products and product candidates and our patent rights or other intellectual property rights may not be effective or adequate to prevent them from competing.
As of the Latest Practicable Date, we owned 243 patents and had 54 pending patent applications in China. To facilitate our strategy to enter overseas market, we also owned one patent in Europe and one patent in the United States. All of the patents that we owned or applied for are related to self-developed technologies by our in-house R&D team. In addition, as of the Latest Practicable Date, we also owned 18 trademarks in China and overseas. If we are unsuccessful in obtaining trademark protection for our primary brands, we may be required to change our brand names, which could materially adversely affect our business. Moreover, as our products mature, our reliance on our trademarks to differentiate us from our competitors will increase, and as a result, if we are unable to prevent third parties from adopting, registering or using trademarks and trade dress that infringe, dilute or otherwise violate our trademark rights, our business could be materially adversely affected.
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Many companies have encountered significant problems in protecting and defending intellectual property rights in countries such as China. The legal system in these countries could make it difficult for us to stop the infringement, misappropriation or other violation of our patents or other intellectual property rights, or the marketing of competing products in violation of our proprietary rights in these countries. Proceedings to enforce our intellectual property and proprietary rights could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
We may become involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time consuming and unsuccessful and may delay us from developing or commercializing our product candidates. Our patent rights relating to our products and product candidates could be found invalid or unenforceable if being challenged.
Competitors may infringe our patent rights or misappropriate or otherwise violate our intellectual property rights. To counter infringement or unauthorized use, litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of our own intellectual property rights or the proprietary rights of others. This can be expensive and time consuming. Any claims that we assert against perceived infringers could also provoke these parties to assert counterclaims against us alleging that we infringe their intellectual property rights. Third parties may also raise similar claims before administrative bodies in China or abroad, even outside the context of litigation. Such proceedings could result in revocation or amendment to our patents in such a way that they no longer cover and protect our products or product candidates. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property. An adverse result in any litigation proceeding could put our patents, as well as any patents that may issue in the future from our pending patent applications, at risk of being invalidated, held unenforceable or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, some of our confidential information could be compromised by disclosure during this type of litigation.
If third parties bring successful claims against us for infringement of their intellectual property rights, we may be subject to injunctive or other equitable relief, which could prevent us from developing and commercializing one or more of our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would substantially divert resources from our business. In the event of a successful claim against us of infringement or misappropriation, or a settlement by us of any such claims, we may have to pay substantial damages, in the case of willful infringement, pay royalties or redesign our infringing product candidates, which may be impossible or require substantial time and cost.
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In the event of an adverse result in any such litigation, or even in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates. Any such license might not be available on reasonable terms or at all. In the event that we are unable to obtain such a license, we would be unable to further develop and commercialize one or more of our product candidates, which could harm our business significantly. We may also elect to enter into license agreements in order to settle patent infringement claims or to resolve disputes prior to litigation, and any such license agreements may require us to pay royalties and other fees that could significantly harm our business.
Even if litigation or other proceedings are resolved in our favor, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, this could have a substantial adverse effect on the market price of our Shares. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.
Our patent rights relating to our products and technologies may be found to be invalid or unenforceable.
Despite measures we take to obtain patent protection with respect to our major products and technologies, any of our granted patents could be challenged or invalidated. For example, if we were to initiate legal proceedings against a third party to enforce a patent covering one of our products, the defendant could counterclaim that our patent is invalid and/or unenforceable. Although we believe that we have conducted our patent prosecution in accordance with the duty of candor and in good faith, the outcome following legal assertions of invalidity and unenforceability during patent litigation is unpredictable. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, or perhaps all, of the patent protection on a product or technology. Even if a defendant does not prevail on a legal assertion of invalidity and/or unenforceability, our patent claims may be construed in a manner that would limit our ability to enforce such claims against the defendant and others. Any loss of patent protection could have a material adverse impact on one or more of our major products and technologies and our business.
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Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment, and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for noncompliance with these requirements.
Periodic maintenance fees on any issued patent are due to be paid to the CNIPA and other patent agencies in several stages over the lifetime of the patent. The CNIPA and various governmental patent agencies require compliance with a number of procedural, documentary, fee payment, and other similar provisions during the patent application process. Although an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Noncompliance events that could result in abandonment or lapse of a patent or patent application include failure to respond to official actions within prescribed time limits, nonpayment of fees, and failure to properly legalize and submit formal documents. In any such event, our competitors might be able to enter the market, which would have a material adverse effect on our business.
We may face intellectual property dispute with our business partners.
We may from time to time establish or seek strategic alliances that we believe will complement or augment our development and commercialization efforts with respect to our product candidates and any future product candidates that we may develop and we will seek to enjoy the intellectual property rights through intellectual property delegation, join intellectual property application or in-licensing arrangements. We cannot assure that we will not be subject to intellectual property claims brought by our business partners or any third party. We may be subject to injunctions, damages or other reliefs if such claims are successful, which could prevent us from developing and commercializing such product candidates.
If we are unable to protect the confidentiality of our trade secrets, or if our employees wrongfully use or disclose alleged trade secrets of their former employers, our business would be harmed.
In addition to our issued patent and pending patent applications, we rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position and to protect our products and product candidates. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements or include such undertakings in the agreement with parties that have access to them, such as our employees, external scientific collaborators, external advisors, sponsored researchers, consultants, advisors and other third parties. We also enter into employment agreement or consulting agreement with our employees and consultants that includes undertakings regarding assignment of inventions and discoveries. However, any of these parties may breach such agreements and disclose our proprietary information, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive and time-consuming, and the outcome is unpredictable. If any of our trade secrets were lawfully obtained or independently developed by a competitor, we would have no right to prevent them from using that technology or information to compete with us and our competitive position would be harmed.
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Furthermore, many of our employees, including our senior management, were previously employed at other medical device companies, including our competitors or potential competitors. Although we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s former employer. We are not aware of any material threatened or pending claims related to these matters or concerning the agreements with our senior management, but in the future litigation may be necessary to defend against such claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.
In addition, while we typically require our employees and consultants involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our own, which may result in claims by or against us related to the ownership of such intellectual property. If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to our management and scientific personnel.
Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our product candidates.
The scope of patent protection in various jurisdictions is uncertain. Changes in either the patent laws or their interpretation in China or other countries may diminish our ability to protect our inventions, obtain, maintain, defend, and enforce our intellectual property rights and, more generally, could affect the value of our intellectual property or narrow the scope of our patent rights. We cannot predict whether the patent applications we are currently pursuing and may pursue in the future will issue as patents in any particular jurisdiction or whether the claims of any future granted patents will provide sufficient protection from competitors. The coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance. Even if patent applications we own currently or in the future issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors or other third parties from competing with us, or otherwise provide us with any competitive advantage. In addition, the patent position of medical device companies generally is highly uncertain, involves complex legal and factual questions, and has been the subject of much litigation in recent years. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain.
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If our trademarks, trade names and other proprietary rights are not adequately protected, we may not be able to build name recognition in our markets of interest and our business may be adversely affected.
We own a number of trademarks in China for our brand name “Panther.” As of the Latest Practicable Date, we had registered 14 trademarks in China and 4 trademarks overseas and filed applications for 5 trademarks in China and 4 trademarks overseas, which we believe are material to our business. See “Business—Intellectual Property.” Other than our OEM products, all of our products are offered to the market under our “Panther” brand. Our registered or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition among potential partners or customers in our markets of interest. During the Track Record Period, some of our distributors used our trademarks and brand name when conducting sales and marketing activities on our behalf or promoting our products. We may not be able to prevent unauthorized use of our trademarks and trade names by distributors, which may harm our brand and reputation. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. Moreover, we cannot assure you that our trademarks will not be imitated, or there will be no counterfeits sold to our customers under our trademarks. End users may suffer from safety incidents caused by counterfeit products, which may subject us to costly investigations and counterfeit crack downs, and materially and adversely affect our business and reputation. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets, domain names, copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely affect our competitive position, business, financial condition, results of operations, and prospects.
RISKS RELATING TO OTHER PARTIES
We may fail to maintain or renew relationships with distributors, or further expand our network of distributors.
We rely on third-party distributors to distribute our products. Our ability to maintain and expand our business will depend on our ability to maintain effective distributor networks that ensure timely distribution of our products to the relevant markets where we generate market demand through our sales and marketing activities. We rely on our distribution agreements to manage our distributors. However, our distributors are all third parties over whom we have limited control. Moreover, in line with industry practice, we typically enter into agreements with our distributors for a term of one year, which requires us to continually renew distribution agreements across our distributor network in order to maintain the relationship with our distributors. Our distributors might elect not to renew their agreements with us or otherwise terminate their business relationships with us for various reasons, including in the event that PRC pricing regulations or other factors limit the margins our distributors can obtain through the resale of our products to hospitals and medical institutions. See “Business—Sales, Marketing and Distribution.”
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For the years ended December 31, 2018, 2019 and 2020, the aggregate sales to our five largest customers were RMB44.3 million, RMB70.5 million and RMB67.5 million, representing 19.4%, 23.3% and 21.9% of our total revenue, respectively. Sales to the largest customer in 2018, 2019 and 2020 were RMB9.8 million, RMB19.8 million and RMB16.0 million, representing 4.3%, 6.5% and 5.2% of our total revenue, respectively. Substantially all of our five largest customers in 2018, 2019 and 2020 were our distributors. We believe alternative distributors are readily available in China and overseas. However if any of our large distributors, or a significant number of our distributors, voluntarily or involuntarily suspend or terminate their relationships with us, or we are otherwise unable to maintain and expand our distributor network effectively, our sales volume and business prospects could be adversely affected. See “Business—Customers.”
In addition, although we typically require distributors to make payments in full before shipment, however, if we ever experience any delays in collecting payments from distributors, our cash flows and operations could be adversely affected and we could be required to terminate our relationships with distributors in a manner that will impair the effective distribution of our products.
We have relied on and expect to continue to rely on third parties to supply raw materials for manufacture of our products and R&D, and our business could be harmed if we are unable to obtain such raw materials in sufficient quantities or at acceptable quality or prices.
The principal raw materials for our products include medical-grade stainless steel, anvil, titanium tacks, polycarbonate particles, packaging materials and cartridges. During the Track Record Period, we procured most of our raw materials in China, except for titanium wires, which we sourced from the United States. During the Track Record Period, we also relied on third parties to supply raw materials used in R&D, and the manufacturing of product candidates for clinical trials. We expect to continue to rely on third parties to supply raw materials for the research, development and commercialization of our product candidates. See “Business—Raw Materials and Suppliers—Our Raw Materials.” Any disruption in production or inability of our suppliers to manufacture adequate quantities to meet our needs could impair our ability to manufacture products as scheduled and to operate our business on a day-to-day basis. Moreover, we expect our demand for such raw materials to increase as we expand our business scale and commercialize our products, and we cannot guarantee that current suppliers have the capacity to meet our demand. We are also exposed to the possibility of increased costs, which we may not be able to pass on to customers, and as a result, lower our profitability.
Although we have implemented quality inspection procedures on such materials before they are used in our manufacturing process and require our suppliers to maintain high quality standards, we cannot guarantee that we will be able to detect all quality issues in the supplies we use. We also cannot assure you that these third parties will be able to maintain and renew all licenses, permits and approvals necessary for their operations or comply with all applicable laws and regulations. Some of our suppliers are based overseas and may need to maintain export or import licenses to continue supplying to us. In addition, due to the rigorous
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We rely on third parties to conduct certain aspects of our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or successfully commercialize our product candidates and our business could be substantially harmed.
As is common practice in our industry, we have engaged and plan to continue to engage third parties, including leading academic institutions, hospitals, clinics, experienced physicians and SMOs, to assist us in designing, implementing and monitoring our preclinical research and conducting clinical trials. If such third parties with which we contract for preclinical research and clinical trials do not perform in an acceptable manner, or if we suffer setbacks in these preclinical studies or clinical trials, we may be unable to develop and successfully commercialize our product candidates as anticipated. Therefore, we have less control over the quality, timing and cost of these studies and the ability to recruit trial subjects than if we conducted these trials wholly by ourselves. If we are unable to maintain or enter into agreements with these third parties on favorable terms to us, or if any such engagement with us is terminated, we may be unable to enroll patients on a timely basis or otherwise conduct our trials in the manner we anticipate, and the development of the product candidates covered by those agreements could be substantially delayed.
In addition, there is no guarantee that these third parties may devote adequate time and resources to our studies or perform as required under their contractual obligations, meet the expected deadlines, maintain of clinical trial information regarding our future product candidates or in accordance with regulatory requirements, including clinical, laboratory and manufacturing guidelines. Our reliance on these third parties may result in delays in completing, or in failing to complete, these studies if they fail to perform in accordance with the contractual arrangements. If these third parties fail to meet expected deadlines, fail to timely transfer to us any regulatory information, fail to adhere to protocols or fail to act in accordance with regulatory requirements or our agreements with them, or if they otherwise perform in a substandard manner or in a way that compromises the quality and/or accuracy of their activities and/or the data they obtain, then clinical trials of our future product candidates may be extended, delayed or terminated, or our data generated by those studies may be rejected
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If our distributors fail to expand or maintain their sales network, or if we fail to educate or manage our distributors effectively, our sales may decline.
In the medical device industry, it is customary to rely on distributors for sale of medical devices to hospitals. Consistent with the industry practice, we sell our surgical staplers and other MISIA to third party distributors in China and overseas, which then sell these devices to hospitals. We intend to continue engaging distributors to sell our products and product candidates (upon commercialization) in the foreseeable future. However, we may not be able to identify or engage a sufficient number of distributors with an extensive sales network. If our distributors fail to expand or maintain their sales network, or otherwise encounter any difficulties in selling our products, our sales will decline and our business, results of operations and prospects may be materially and adversely affected.
In addition to ensuring that our reputation is associated with high quality products and responsive services, our highly trained sales team works with our distributors to help them become more effective. We also provide our distributors with technical support, including training in the basic technologies of our products, participating in presentations to physicians and hospitals, and assisting in preparing documents for contracts awarded through competitive biddings and tenders. Our distributors face a learning process with respect to our products and product candidates, particularly for those newly introduced to the market. We cannot assure you that our distributors will be able to gain the required knowledge in order to market our products and product candidates (upon commercialization) effectively in a timely manner or at all.
Our business operation may be affected if our distributors breaches applicable laws and regulations.
We have limited control over the operations and actions of our distributors, all of whom, to the best of our Directors’ knowledge, are Independent Third Parties during the Track Record Period. We rely on the distribution agreements and the policies and measures we have in place to manage our distributors, including their compliance with laws, rules, regulations and our policies. See “Business—Sales, Marketing and Distribution—Sales to Distributors—Management and Control of Distributors.” We cannot guarantee that we will be able to effectively manage our distributors, or that our distributors would not breach our agreements and policies. If our distributors take one or more of the following actions, our business, results of operations, prospects and reputation may be adversely affected:
• breaching the distribution agreements or our policies and measures, including by selling products outside their designated territories;
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• failing to adequately promote our products;
• failing to provide proper training and after-sales services to our end-users;
• failing to maintain the requisite licenses, permits or approvals, or failure to comply with applicable regulatory requirements when selling our products; or
• violating anti-corruption, anti-bribery, competition or other laws and regulations of China or other jurisdictions.
Any violation or alleged violation by our distributors of the distribution agreements, our policies or any applicable laws and regulations could result in the erosion of our goodwill, a decrease in the market value of our brand and an unfavorable public perception about the quality of our products, resulting in a material adverse effect on our business, financial condition, results of operations and prospects.
Actions taken by our distributors in violation of the distribution agreements or taken by the distributors with whom we have not entered into distribution agreements could materially and adversely affect our business, prospects and reputation.
During the Track Record Period, we did not enter into written distribution agreement, which would set forth various terms and restrictions, such as geographical restrictions and product range restrictions, with every distributor we worked with. As a result, their legal obligations to us and our legal recourse against them are limited, and we may not be able to effectively manage and control their activities.
Moreover, some of our distributors engage sub-distributors to distribute our products. Historically, we did not require all distributors to seek our approval before engaging such sub-distributors. We do not engage these sub-distributors directly or maintain contractual relationships with them, and mainly rely on our distributors to manage and control their sub-distributors in accordance with regulatory requirements, the terms of the distribution agreements we entered into with our distributors and our policies and measures that our distributors agree to comply with. As a result, we have a more limited control over these sub-distributors. There is no assurance that the sub-distributors will comply with the geographical restrictions we have agreed with our distributors, distribute only to authorized hospitals or other medical institutions or comply with other distribution requirements under our distribution agreements and policies. Furthermore, we cannot assure you that we will be able to identify or correct all the sub-distributors’ practices that are detrimental to our business in a timely manner or at all, which may adversely affect our results of operations and reputation. As there is no contractual relationship between us and these sub-distributors, we have no direct legal recourse against them if their activities cause harm to our business or reputation.
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We may not be able to avoid the occurrence of channel stuffing among our distributors.
We put continuous efforts to prevent the occurrence of channel stuffing. In general, we maintain a buyer-seller relationship with most of our distributors where they are responsible for their profits and losses. We require most of our distributors to make full payment to us before we make shipment. We do not allow distributors to return any unsold goods unless there are quality defects or upon termination of the distribution agreements. We will monitor the performances of our distributors by making regular visits and reviewing reports on their distribution flow and inventory levels. Such policy, however, will require the cooperation of our distributors (i) to manage their sub-distributors (if applicable) and (ii) to accurately and timely report and submit the relevant data to us, and we may not be able to fully ensure the accuracy of the data provided by our distributors. Despite the efforts we make to avoid channel stuffing, we cannot guarantee that we can accurately monitor the inventory level of our distributors or to identify or prevent any excessive inventory buildup of products distributed by us.
We rely on relationships with KOLs, physicians, hospitals and medical associations in the development and marketing of our products.
Our relationships with KOLs, physicians, hospitals and medical associations play an important role in our R&D and sales and marketing activities. We implement a clinical demand-oriented and highly responsive R&D strategy by establishing extensive interaction channels with KOLs, physicians, hospitals and medical associations to gain first-hand knowledge of unmet clinical needs, surgeons’ preferences and clinical practice trends, which is critical to our ability to develop new market-responsive products and improve our existing products. In addition, we engage with KOLs, physicians, hospitals and medical associations as a part of our academic promotion and marketing strategy, which enables us to establish a quality end-user base, especially with Grade IIIA hospitals with MIS capabilities. See “Business—Competitive Strengths” and “Business—Sales, Marketing and Distribution—Marketing.”
We cannot assure you that we will be able to maintain or strengthen our relationships with these industry participants, or that our efforts to maintain or strengthen such relationships will yield the successful development of new products or increased sales. These industry participants may leave their roles, change their business or practice focus, choose to no longer cooperate with us or cooperate with our competitors instead. Even if they continue to cooperate with us, their market insights and perceptions, which we take into account in our R&D process, may be inaccurate and lead us to develop products that do not have significant market potential. Even if their insights and perceptions are correct, we may fail to develop commercially viable products. Moreover, we cannot assure you that our academic promotion and marketing strategy will continue to serve as an effective marketing strategy. Industry participants, particularly in the surgical specialties, may no longer want to collaborate with us or attend our conferences, and our marketing strategy may no longer be able to yield larger hospital coverage or increased sales commensurate to our efforts spent. In addition, the KOLs, physicians and hospitals that we focus on may not continue to have a significant demand for surgical staplers and other MISIA covered by our product lines. If we are unable to develop new products or generate returns from our relationships with industry participants as anticipated, or at all, our business, financial condition and results of operations may be materially and adversely affected.
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We have entered into collaboration, and may establish or seek collaborations or strategic alliances or equity investment or enter into licensing arrangements in the future, and we may not timely realize the benefits of such collaborations, alliances or licensing arrangements.
We may from time to time establish or seek strategic alliances, form joint ventures or collaborations, equity investment, or enter into licensing arrangements with third parties that we believe will complement or augment our development and commercialization efforts with respect to our product candidates and any future product candidates that we may develop. As of the Latest Practicable Date, we had collaborated with a university to develop surgical instruments designed specifically for thoracoscopic surgical instruments, endoscopic staplers and open staplers. See Business—Research and Development—Collaboration with Third Parties. In addition, Panther Brazil and Panther Canada are associates of our Company.
We face significant competition in seeking appropriate strategic partners and the negotiation process for the collaboration, alliances or licensing arrangements can be time- consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for our product candidates because they may be deemed to be at too early of a development stage for collaborative effort and third parties may not view our product candidates as having the requisite potential to demonstrate safety and efficacy or commercial viability. If and when we collaborate with a third party for development and commercialization of a pipeline product, we can expect to relinquish some or all of the control over the future success of that pipeline product to the third party. Any of these relationships may require us to incur non-recurring and other charges, increase our near and long-term expenditures, issue securities that dilute our existing Shareholders, or disrupt our management and business. For any products or product candidates that we may seek to in-license from third parties, we may face significant competition from other medical device companies with greater resources or capabilities than us, and any agreement that we do enter may not result in the anticipated benefits.
Acquisitions or strategic partnerships may increase our capital requirements, dilute our Shareholders, cause us to incur debt or assume contingent liabilities, and subject us to other risks.
To enhance our growth, we may acquire businesses, products, technologies or know-how or enter into strategic partnerships that we believe would benefit us in terms of product development, technology advancement or distribution network, among others. Any completed, in-process or potential acquisition or strategic partnership may entail numerous risks, including:
• increased operating expenses, including R&D expenses due to an increased number of product candidates, administrative expenses as well as selling expenses, which result in an increased cash requirements;
• the assumption of additional indebtedness or contingents;
• the issuance of our equity securities;
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• assimilation of operations, intellectual property and products of an acquired company, including difficulties associated with integrating new personnel;
• the diversion of our management’s attention from our existing product programs and initiatives in pursuing such a strategic merger or acquisition;
• retention of key employees, the loss of key personnel, and uncertainties in our ability to maintain key business relationships;
• risks and uncertainties associated with the other party to such a transaction, including the prospects of that party and their existing products and product candidates and regulatory approvals; and/or
• our inability to generate revenue from acquired technology and/or products sufficient to meet our objectives in undertaking the acquisition or even to offset the associated acquisition and maintenance costs.
We may also discover deficiencies in internal controls, data adequacy and integrity, product quality and regulatory compliance, and product liabilities in businesses we acquire which we did not uncover prior to such acquisition. As a consequence, we may become subject to penalties, lawsuits or other liabilities. Further, any difficulties in the integration of acquired businesses, product or technologies or unexpected penalties, lawsuits or liabilities in connection with such businesses, product or technologies could have a material adverse effect on our business, financial condition and results of operation. In addition, if we undertake acquisitions, we may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses and acquire intangible assets that could result in significant future amortization expense.
Delivery delays and poor handling by third-party logistics service providers may adversely affect our business, financial condition and results of operations.
We rely on our third-party logistics service providers for the transportation of most of our products. The services provided by these logistics service providers may be suspended and cause interruption to the supply of our products due to unforeseen events. Delivery delays may occur for various reasons beyond our control, including poor handling by our logistics companies, labor disputes or strikes, acts of war or terrorism, health epidemics, earthquakes and other natural disasters, and could lead to delayed or lost deliveries. Poor handling of our products could also result in product contamination or damage, which may in turn lead to product recalls, product returns or exchanges, product liability, increased costs and damage to our reputation, thereby adversely affect our business, financial condition and results of operations.
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RISKS RELATING TO EXTENSIVE GOVERNMENT REGULATIONS
The medical device industry is highly regulated in China and other countries where our products are exported. Any change in the applicable laws, regulations or standards may hinder or restrict us from undertaking certain of our businesses or subject us to increased compliance cost.
The medical device industry is highly regulated in China and other countries where our products are exported. See “Regulatory Overview—Overview of PRC Regulations.” Our operations are regulated by a number of local, regional and national regulations in various aspects, including license and certificate requirements, procedures, operations and safety standards for manufacturers of interventional medical devices as well as environmental regulations. We rely on a number of laws, regulations, standards or policies in foreign countries, the changes of which may hinder or restrict us from undertaking certain of our existing scopes of business.
Our future production or distribution of any medical device may be subject to any prohibition or restriction imposed by competent authorities as a result of change in laws, regulations, standards or policies. Such changes may also lead to increased compliance cost. Any changes in the relevant laws, regulations or standards or their promulgation may have material adverse effects on our business, financial conditions and results of operations.
The regulatory approval processes are lengthy, time-consuming and inherently unpredictable.
All jurisdictions in which we conduct our research, development and commercialization activities regulate these activities in great depth and detail. We intend to focus our activities in the major markets of China. These geopolitical areas all have comprehensive regulation on medical devices, and in doing so they employ broadly similar regulatory strategies, including regulation of product development, approval, manufacturing, sales and marketing and distribution of medical devices. For example, we are required to obtain and renew registrations and licenses with the NMPA for the commercialization and manufacturing of our products, as well as with competent regulatory authorities in other jurisdictions where we sell our products. However, there are differences in the regulatory regimes in different regions, which make regulatory compliance more complex and costly for companies like us that plan to operate in each of these regions. The regulatory approval processes are generally lengthy and time- consuming.
We currently market and intend to continue to market a substantial portion of our products in China in the foreseeable future. We are required to obtain the NMPA or the local counterparts approval before we can market our products in China. Significant time, effort and expense are required to bring our products to market in compliance with the regulatory process, and we cannot assure you that any of our products will be approved for sale. In addition, as the PRC government has been increasing the level of regulatory control over the medical device industry in recent years, the regulatory approval process tends to take a longer time to complete than before. We are also required to report any serious or potentially serious incidents involving our products to the NMPA or the local counterparts. Even if regulatory approval or clearance of our products is granted, the approval or clearance could limit the uses for which
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Furthermore, results of the regulatory approval process are unpredictable. We could fail to receive regulatory approval for product candidates for many reasons, including: (i) failing to begin or complete clinical trials; (ii) failing to demonstrate that a product candidate is safe and effective; (iii) failing to deliver clinical trial results to meet the level of statistical significance required for approval; (iv) encountering data integrity issues related to our clinical trials; (v) encountering government authority’s disagreement with our interpretation of data from pre-clinical studies or clinical trials; and (vi) failing to conduct a clinical trial in accordance with regulatory requirements or our clinical trial protocols, among other factors. The NMPA or a comparable regulatory authority may require more information, including additional pre-clinical or clinical data, to support approval, which may delay or prevent approval and our commercialization plans, or we may decide to abandon the development program.
In addition, before selling our products in international markets, we are required to obtain various governmental approvals in the relevant jurisdictions. Foreign regulations may vary from jurisdiction to jurisdiction and may be different from PRC regulations and NMPA requirements. Medical devices may be marketed in the United States or EU for which they have been approved or cleared. We cannot assure you that we will be able to meet regulatory requirements of different jurisdictions or that our products will be approved for sale in those jurisdictions. Additional time, effort and expense may be required to bring our products to the international markets in compliance with different regulatory processes. The regulators in these jurisdictions may not approve or clear products that are necessary or desirable for successful commercialization. The regulators may refuse our requests for clearance or pre-market approval of new products, or modifications to previously approved or cleared products. Moreover, any clearances or approvals we obtain may not be sufficiently broad to permit successful commercialization. Our clearances or approvals can be revoked if safety or effectiveness problems develop. Any of these outcomes could materially and adversely affect our competitiveness in the marketplace, and therefore our revenue and profitability. In addition, the relevant regulatory authorities may introduce additional requirements or procedures that delay or prolong the approval of licenses or registrations for our existing or new products. In either event, our revenue and profitability could be materially affected
Our failure to comply with applicable regulatory requirements could result in governmental agencies taking actions in the relevant jurisdictions, including imposing fines and penalties on us, preventing us from manufacturing or selling our products, bringing criminal charges against us, delaying the introduction of our new products into the market, recalling or seizing our products, and/or withdrawing or denying approvals or clearances for our products. We could also be subject to civil liabilities if we fail to comply with applicable regulatory requirements. If any or all of the foregoing were to occur, we may not be able to meet the demands of hospitals and physicians which use our products and they may cancel orders or purchase products from our competitors.
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Our products and product candidates will be subject to ongoing regulatory obligations and continued regulatory review even if we receive regulatory approval for our product candidates, which may result in significant additional expense and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our products and/or product candidates.
Our products and any additional product candidates that are approved by the regulators are and will be subject to ongoing regulatory requirements with respect to manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record-keeping, conducting post-market studies, submission of safety, efficacy, and other post-market information, and other requirements of regulatory authorities in China and other applicable jurisdictions where the products are approved. For example, manufacturers and manufacturers’ facilities are required to comply with extensive regulatory requirements from the NMPA, the EMA and/or other comparable authorities. As such, we are and will be subject to continual review and inspections by the regulators in order to assess our compliance with applicable laws and requirements and adherence to commitments we made in any application materials with the NMPA, the EMA or other authorities.
The NMPA, the EMA and other regulatory authorities strictly regulate the marketing, labeling, advertising and promotion of products placed on the market. The regulatory approvals for our products and any approvals that we receive for our product candidates are and may be subject to limitations on the indicated uses for which our product may be marketed. Products may be promoted only for their approved indications and for use in accordance with the provisions of the approved label. The approvals we obtain may also be subject to other conditions which may require potentially costly post-marketing testing and surveillance to monitor the safety and efficacy of our products or product candidates. Such limitations and conditions could adversely affect the commercial potential of our products.
The NMPA, the EMA or comparable regulatory authorities may seek to impose a consent decree or withdraw marketing approval if we fail to maintain compliance with these ongoing regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with our products or product candidates including adverse events of unanticipated severity or frequency, or with our manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling or requirements to add new safety information, imposition of post-market studies or clinical studies to assess new safety risks, or imposition of distribution restrictions or other restrictions under a risk evaluation and mitigation program. Other potential consequences include, among other things:
• restrictions on the marketing or manufacturing of our products, withdrawal of the product from the market, or voluntary or mandatory product recalls;
• fines, untitled or warning letters, or holds on clinical trials;
• refusal by the NMPA, the EMA, or comparable regulatory authorities to approve pending applications or supplements to approved applications filed by us or suspension or revocation of license approvals or withdrawal of approvals;
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• product seizure or detention, or refusal to permit the import or export of our products and product candidates; and/or
• injunction or the imposition of civil or criminal penalties.
We cannot predict the likelihood, nature or extent of governmental policies or regulations that may arise from future legislation or administrative actions in China or overseas, where the regulatory environment is constantly evolving. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are unable to maintain regulatory compliance, we may lose any regulatory approval that we have obtained and we may not achieve or sustain profitability. In addition, if we were able to obtain conditional approval of any of our product candidates, the NMPA, the EMA, and other regulatory authorities may require us to conduct a confirmatory study to verify the predicted clinical benefit and additional safety studies. The results from the confirmatory study may not support the clinical benefit, which would result in the approval being withdrawn. While operating under conditional approval, we will be subject to certain restrictions that we would not be subject to upon receiving regular approval.
Failure to pass regulatory inspections and any other disruption or suspension of manufacturing activities may affect our business and results of operations.
We manufacture, assemble and test our products at our manufacturing facilities in Beijing. Our manufacturing facilities are subject to regular inspections by the relevant government authorities as part of the process of maintaining or renewing the permits, licenses and certificates required for our business and operations. Such inspections require us to comply with, among other things, GMP regulations. We cannot guarantee that we will be able to adequately follow and document our adherence to such GMP regulations or other regulatory requirements. When inspecting our manufacturing facilities, the NMPA or other comparable regulatory authorities may cite GMP deficiencies. Remediating deficiencies can be laborious, time consuming and costly. Moreover, the NMPA or other comparable regulatory authorities will generally re-inspect the facility to determine whether the deficiency was remediated to its satisfaction, and may note further deficiencies during re-inspection. We may be required to delay, suspend or cease manufacturing activities if we fail to pass these regulatory inspections, which will affect our ability to fulfill product orders and sell our products, and in turn, have a material and adverse effect on our business, financial condition and results of operations.
We may also encounter problems with maintaining consistent and acceptable production costs, experience shortages of qualified personnel and raw materials, unexpected damage to our facilities and equipment malfunction. Furthermore, if contaminants are discovered in our raw materials, products or in the manufacturing facilities, our manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. In these cases, we may be required to delay, suspend or cease manufacturing activities. We may be unable to secure temporary, alternative manufacturers for our products with the terms, quality and costs acceptable to us, or at all. Moreover, we may spend significant time and costs to remedy these deficiencies before we can continue production at our manufacturing facilities.
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If we fail to maintain or renew the necessary permits, licenses and certificates required for the development, production, sales and distribution of our products, our ability to conduct our business could be materially impaired.
We are required to obtain, maintain and renew various permits, licenses and certificates to develop, manufacture, promote and sell our products, including but not limited to the Registration Certificate for Medical Device (醫療器械註冊證) and the Medical Device Production License (醫療器械生產許可證) and the Certificate for Exportation of Medical Products (醫療器械產品出口銷售證明). See “Regulatory Overview—Overview of PRC Regulations.” Furthermore, third parties, such as research institutions, distributors and suppliers on whom we may rely to develop, manufacture, promote, sell and distribute our products, may be subject to similar requirements. We and third parties on whom we rely may be also subject to regular inspections, examinations, inquiries or audits by regulatory authorities, and an adverse outcome of such inspections, examinations, inquiries or audits may result in the loss or non-renewal of the relevant permits, licenses and certificates. Moreover, the criteria used in reviewing applications for, or renewals of permits, licenses and certificates may change from time to time, and there can be no assurance that we or the third parties on whom we rely will be able to meet new criteria that may be imposed to obtain or renew the necessary permits, licenses and certificates. Many of such permits, licenses and certificates are material to the operation of our business, and if we or parties on whom we rely fail to maintain or renew material permits, licenses and certificates, our ability to conduct our business could be materially impaired. Furthermore, if the interpretation or implementation of existing laws and regulations change, or new regulations come into effect, requiring us or parties on whom we rely to obtain any additional permits, licenses or certificates that were previously not required to operate our business, there can be no assurance that we or parties on whom we rely will successfully obtain such permits, licenses or certificates in a timely manner or at all.
We could be subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business, if we fail to comply with environmental, health and safety laws and regulations.
We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of wastes. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination from these materials. In the event of contamination resulting from our wastes, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties. We may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or manufacturing activities. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.
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Recently enacted and future legislations may increase the difficulty and cost for us to obtain regulatory approval of or successfully commercialize our product candidates and therefore adversely affect our business.
In China and some other jurisdictions, a number of legislative and regulatory changes and proposed changes regarding healthcare could prevent or delay regulatory approval of our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell our products and any product candidates for which we obtain regulatory approval. In recent years, there have been and will likely continue to be efforts to enact administrative or legislative changes to healthcare laws and policies, including measures which may result in more rigorous coverage criteria and downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or successfully commercialize our product candidates.
Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for medical devices. We cannot be sure whether additional legislative changes will be enacted, or whether NMPA regulations, guidance or interpretations will be changed, or what the impact of such changes on the regulatory approvals of our product candidates, if any, may be. For example, according to the Regulations on the Supervision and Administration of Medical Devices (醫療器械監督管理條 例) effective on June 1, 2021, medical device companies are required to establish a quality management system and monitor and evaluate post-approval risks and adverse events caused by the products. The impact of these more specific requirements and whether it will adversely affect the registration of our products with the NMPA is yet to be observed.
According to the Notice on Opinions on the Implementation of the “Two Invoice System” in Drug Procurement by Public Medical Institutions (for Trial Implementation) (《關於在公立醫療機構藥品採購中推行“兩票制”的實施意見(試行)的通知》), the Notice on Consolidating the Achievements of Canceling Drug Markups and Deepening Comprehensive Reforms in Public Hospitals (《關於鞏固破除以藥補醫成果持續深化公立醫院綜合改革的通 知》) and the Notice on the Reform Plan for the Management of High-value Medical Consumables (《治理高值醫用耗材改革方案的通知》), as of the Latest Practicable Date, a few provinces have implemented the “Two Invoice System” in the field of medical consumables. See “Regulatory Overview—Overview of PRC Regulations—Dual Invoicing System.” As the implementation of the “two-invoice system” is still at an early stage, and the interpretation and enforcement of such system in the medical device industry are evolving and subject to uncertainty, we cannot predict how the implementation and enforcement will evolve in different provinces in China. If we fail to adjust our distribution channels in a timely manner in accordance with the “Two Invoice System”, our sales performance, financial condition and business prospects may be adversely affected.
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We are subject to stringent privacy laws, information security policies and contractual obligations related to data privacy and security, and we may be exposed to risks related to our management of the medical data of patients or subjects enrolled in our clinical trials and other personal or sensitive information.
We routinely receive, collect, generate, store, process, transmit and maintain medical data, treatment records and other personal details of the subjects enrolled in our clinical trials, along with other personal or sensitive information. As such, we are subject to the relevant local, national and international data protection and privacy laws, directives regulations and standards that apply to the collection, use, retention, protection, disclosure, transfer and other processing of personal data in the various jurisdictions in which we operate and conduct our clinical trials, as well as contractual obligations. These data protection and privacy law regimes continue to evolve and may result in ever-increasing public scrutiny and escalating levels of enforcement and sanctions and increased costs of compliance. Failure to comply with any of these laws could result in enforcement action against us, including fines, imprisonment of company officers and public censure, claims for damages by customers and other affected individuals, damage to our reputation and loss of goodwill, any of which could have a material adverse effect on our business, financial condition, results of operations or prospects.
Data protection and privacy laws and regulations generally require clinical trial sponsors and operators and their personnel to protect the privacy of their enrolled subjects and prohibit unauthorized disclosure of personal information. If such institutions or personnel divulge the subjects’ private or medical records without their consent, they will be held liable for damage caused thereby. The personal information of patients or subjects for our clinical trials is highly sensitive and we are subject to strict requirements under the applicable privacy protect regulations in the relevant jurisdictions. Whilst we have adopted security policies and measures to protect our proprietary data, data leakage incidents might not be avoided due to hacking activities, human error, employee misconduct or negligence or system breakdown. We also cooperate with third parties including hospitals, SMOs and other third-party contractor and consultants for our clinical trials and operations. Any leakage or abuse of patient data by our third-party partners may be perceived by the patients as a result of our failure. In particular, certain industry-specific laws and regulations may affect the collection and transfer of personal data in China, including The Interim Measures for the Administration of Human Genetic Resources (《人類遺傳資源管理暫行辦法》) and the implementation guidelines issued by the Ministry of Science and Technology and Ministry of Health. See “Regulatory Overview—Overview of PRC Regulations—Gathering and Collection of Human Genetic Resources.” It is possible that these laws and regulations may be interpreted and applied in a manner that is inconsistent with our clinical trial practices, potentially resulting in confiscation of human genetic resources samples and associated data and administrative fines. Furthermore, any change in such laws and regulations could affect our ability to use medical data and subject us to liability for the use of such data for previously permitted purposes. Any failure or perceived failure by us to prevent information security breaches or to comply with privacy policies or privacy-related legal obligations, or any compromise of information security that results in the unauthorized release or transfer of personally identifiable information or other patient data, could cause our customers to lose trust in us and could expose us to legal claims.
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Complying with all applicable laws, regulations, standards and obligations relating to data privacy, security, and transfers may cause us to incur substantial operational costs or require us to modify our data processing practices and processes. Noncompliance could result in proceedings against us by data protection authorities, governmental entities or others, including class action privacy litigation in certain jurisdictions, which would subject us to significant fines, penalties, judgments and negative publicity. In addition, if our practices are not consistent or viewed as not consistent with legal and regulatory requirements, including changes in laws, regulations and standards or new interpretations or applications of existing laws, regulations and standards, we may become subject to audits, inquiries, whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions and reputational damage. Any of the foregoing could have a material adverse effect on our competitive position, business, financial conditions, results of operations and prospects.
The manufacture of our products is highly exacting and complex process and subject to strict quality controls. Our business could suffer if our products and product candidates are not manufactured in compliance with all the applicable quality standards.
The manufacture of our products is highly complex and subject to strict quality controls. In addition, quality is extremely important due to the serious and costly consequences of a product failure. We have established a quality control and assurance system and adopted standardized operating procedures in order to prevent quality issues with respect to our products and operation processes. See “Business—Quality Management.” Despite our quality control and assurance system and procedures, we cannot eliminate the risk of product defects or failure. Problems can arise during the manufacturing process for a number of reasons, including equipment malfunction, failure to follow protocols and procedures, defects or other issues in raw material, or human error. If problems arise during the production of a batch of product, that batch of product may have to be discarded and we may experience product shortages or incur added expenses. This could, among other things, lead to increased costs, lost revenue, damage to customer relationships, time and expense spent investigating the cause and, depending on the cause, similar losses with respect to other batches or products. If problems are not discovered before the product is released to the market, recall and product liability costs may also be incurred.
Furthermore, if contaminants are discovered in our supply of our products or product candidates or in the manufacturing facilities, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. Stability failures and other issues relating to the manufacture of our products or product candidates could occur in the future. Although closely managed, disruptions can occur during implementation of new equipment and systems to replace aging equipment, as well as during production line transfers and expansions.
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As we expand into new markets, we may face unanticipated surges in demands for our products which could strain our production capacity. If these problems arise or if we otherwise fail to meet our internal quality standards or those of the NMPA or other applicable regulatory body, which include detailed record-keeping requirements, our reputation could be damaged, we could become subject to a safety alert or a recall, we could incur product liability and other costs, product approvals could be delayed, and our business could otherwise be adversely affected.
Any noncompliance with competition laws and regulations in the PRC may result in significant monetary fines and other liabilities and negative impacts on our reputation.
We operate our business in a highly competitive industry. Although the current products we distribute are well established in the market, it is possible that products with similar functions may be developed and marketed as direct substitutes. If such substitutes are successfully launched in the market and these substitutes are not distributed by us, our profitability may be adversely and materially affected. In addition, national and international distributors engaged in the distribution of substitute products may have more resources, such as a wider distribution network or more experience in distribution. Competition is likely to intensify if (i) the number of distributors of substitute or similar products increases due to increased market demand or increased prices; (ii) competitors drastically reduce prices due to oversupply of products; or (iii) competitors distribute new products or substitute products having comparable surgical applications that may be used as direct substitutes for the products we distribute and such new or substitute products are more effective with prices comparable to or lower than the products we distribute. If any of the above occurs, our business and financial performance may be adversely affected.
Further, our business is also subject to the PRC competition laws and regulations. In the event of our noncompliance with present or future competition laws or regulations, we may be subject to inspections or fines from relevant governmental authorities or business interruptions, and our management might be subject to relevant liabilities as well. We may also be subject to adverse damage to our reputation. See “Business—Compliance and Legal Proceedings.”
We may be subject, directly or indirectly, to applicable anti-kickback, false claims laws, physician payment transparency laws, fraud and abuse laws or similar healthcare and security laws and regulations in China and other jurisdictions, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.
Healthcare providers, physicians and others play a primary role in the recommendation of any products for which we obtain regulatory approval. Our operations are subject to various applicable anti-kickback, false claims laws, physician payment transparency laws, fraud and abuse laws or similar healthcare and security laws and regulations in China and other jurisdictions we operate, including, without limitation, the Criminal Law of the PRC, Law of the PRC Against Unfair Competition, the Regulations on the Supervision and Administration of Medical Devices (《醫療器械監督管理條例》) and the Administrative Measures for the
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Registration of Medical Devices (《醫療器械註冊管理辦法》). These laws and regulations may impact, among other things, our proposed sales, marketing and education programs. In addition, we may be subject to patient privacy regulation. Violations of fraud and abuse laws may be punishable by criminal and/or civil sanctions, including penalties, fines and/or exclusion or suspension from governmental healthcare programs and debarment from contracting with the PRC government.
Neither the PRC government nor the PRC courts have provided definitive guidance on the applicability of fraud and abuse laws to our business. Law enforcement authorities are increasingly focused on enforcing these laws, and some of our practices may be challenged under these laws. Efforts to ensure that our business arrangements with third parties comply with applicable healthcare laws and regulations will involve substantial costs. Governmental authorities could conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, disgorgement, monetary fines, possible exclusion from participation in governmental healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations. In addition, we are subject to equivalents of each of the healthcare laws described above in other jurisdictions, among others, some of which may be broader in scope and may apply to healthcare services reimbursed by any source, not just governmental payors, including private insurers. There are ambiguities as to what is required to comply with these requirements, and if we fail to comply with an applicable law requirement, we could be subject to penalties.
We may be exposed to fraud, bribery or other misconduct committed by our employees or third parties that could subject us to financial losses and sanctions imposed by governmental authorities, which may adversely affect our reputation. During the Track Record Period and up to the Latest Practicable Date, we were not aware of any instances of fraud, bribery, and other misconduct involving employees and other third parties that had any material and adverse impact on our business and results of operations. However, we cannot assure you that there will not be any such instances in future. Although we consider our internal control policies and procedures to be adequate, we may be unable to prevent, detect or deter all such instances of misconduct. Any such misconduct committed against our interests, which may include past acts that have gone undetected or future acts, may have a material adverse effect on our business and results of operations.
If any of the physicians or other providers or entities with whom we do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs, which may also adversely affect our business.
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We are subject to anti-corruption laws in the jurisdictions in which we operate including anti-corruption laws in the relevant jurisdictions. Any failure to comply with these laws could result in penalties which could harm our reputation and materially adversely affect our business, results of operations and financial condition.
We are subject to anti-corruption laws in the jurisdictions in which we operate, including anti-corruption laws of China and the United States Foreign Corrupt Practices Act of 1977, or the FCPA, that generally prohibits companies and their intermediaries from making payments to government officials for the purpose of obtaining or retaining business or securing any other improper advantage. We have implemented policies and procedures designed to ensure that we, our employees, distributors and other intermediaries comply with the FCPA and other anti-corruption laws to which we are subject. However, these policies or procedures may not work effectively or protect us against liability under the FCPA or other laws for actions of our employees, distributors and other intermediaries with respect to our business or any businesses that we may acquire.
Since we have limited ability to manage the activities of our distributors, who are independent from us, we cannot be sure that they will not violate such anti-corruption laws in connection with the marketing or sale of our products. If our distributors violate the applicable laws in China or elsewhere or otherwise engage in illegal practices with respect to their sales or marketing of our products, we could be liable for actions taken by our distributors and could be required to pay damages or fines, which could materially and adversely affect our business, financial condition and results of operations. In addition, our reputation, our sales activities or the price of our Shares could be adversely affected if our Company becomes the target of any negative publicity as a result of actions taken by our distributors.
We operate in the medical device industry in China and other jurisdictions, many of which pose elevated risks of anti-corruption violations, and generally sell our products domestically and internationally through distributors to our end customers, including government-owned hospitals. This puts us and our distributors in frequent contact with persons who may be considered “foreign officials” under the FCPA, resulting in an elevated risk of potential FCPA violations. In addition, as competition intensifies in our industry, we may lose potential customers or sales if our competitors engage in such practices or other illegal activities. For example, in order to secure more orders, our competitors or their respective agents or distributors may engage in corrupt practices in order to influence doctors, hospital personnel or other decision-makers in violation of anti-corruption laws of China, the FCPA or other applicable laws of other countries.
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Failure to comply with anti-corruption laws could disrupt our business and lead to severe criminal and civil penalties, including imprisonment, criminal and civil fines, loss of our export licenses, suspension of our ability to do business with the government, denial of government reimbursement for our products and/or exclusion from participation in government healthcare programs, all of which could adversely impact our business, financial condition, results of operations and liquidity. Any investigation of any potential violations of the FCPA or other anti-corruption laws by the United States or foreign authorities could materially adversely affect our business, financial condition and results of operations. Other remedial measures could include further changes or enhancements to our procedures, policies, and controls and potential personnel changes and/or disciplinary actions, any of which could have a material adverse effect on our business, financial condition, results of operations and liquidity.
It is also possible that the PRC government or other governmental authorities in places where we sell our products could adopt new or different regulations affecting the way in which medical devices are sold to address anti-corruption or other concerns. Any new or different regulations in this regard being adopted in China or our other principal markets could possibly increase the cost incurred by our distributors in selling our products or impose restrictions on their sales and marketing activities, which could reduce the number of distributors that are willing to sell and in turn increase the selling costs of our products. Because we currently depend partially distributors for the sale of our products, any misconduct by our distributors or changes in the regulatory environment for the sale of medical devices could have a material adverse impact on our business, financial condition, results of operations, prospects and reputation.
We could be adversely affected as a result of any sales we made to certain countries that are, or become subject to, sanctions administered by the United States, EU, the United Kingdom, UN, Australia and other relevant sanctions authorities.
The United States and other jurisdictions or organizations, including EU, the United Kingdom, UN and Australia, have, through executive order, passing of legislation or other governmental means, implemented measures that impose economic sanctions against such countries or against targeted industry sectors, groups of companies or persons, and/or organizations within such countries.
During the Track Record Period, we had sold our non-United States origin surgical devices to customer/distributors in the Relevant Regions. The revenue generated from such transactions related to the Relevant Regions was RMB10.1 million, RMB31.6 million and RMB31.6 million, representing 4.4%, 10.4% and 10.2% of our total revenue in 2018, 2019 and 2020, respectively. We had previously sold a small amount of non-United States origin surgical devices to customers/distributors located in Cuba, Iran and Syria, which are Comprehensively Sanctioned Countries. During the Track Record Period, among our activities with Cuba, Iran and Syria, only our sales to Syria involved USD payments but those activities were consistent with the United States sanctions. See “Business—Compliance and Legal Proceedings—Business Activities with Customers in Relation to Countries Subject to
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International Sanctions.” To our knowledge, none of the customers for our past sales in Cuba, Iran and Syria was designated as SDN by OFAC or has been designated on other restricted parties lists maintained by the United States, EU, the United Kingdom, Australia or UN. Based on our current understanding and as advised by Hogan Lovells, our International Sanctions Legal Advisors, we believe that USD payments for Syria-related sales were authorized by an OFAC general license in light of the nature of the products at issue for the reasons as explained in “Business—Compliance and Legal Proceedings—Business Activities with Customers in Relation to Countries Subject to International Sanctions”, we do not believe that we are subject to sanctions risk that could have a material adverse effect on our business from our past sales to Syria due to the minimal value compared with the total revenue during the Track Record Period and the nature of the sales. In addition, we have adopted enhanced internal control and risk management measures which we believe enable us to monitor and evaluate our business to address economic sanction risks.
However, we are unable to predict the interpretation or implementation of the International Sanctions with respect to any past activities by us. If any government agencies or organizations were to determine that we engaged in prohibited or sanctionable activities targeted by the International Sanctions, we could be subject to certain sanctions or penalties and our reputation and future business prospects could be adversely affected. In addition, because economic sanctions programs are constantly evolving, new requirements or restrictions could come into effect, or relevant regulatory authorities may interpret current sanctions in such a manner, that might increase scrutiny on our business or result in one or more of our business activities being deemed to have violated sanctions or being sanctionable. Our internal control and risk management measures may not be able to react timely or comprehensively to such changes. There is no assurance that our activities in any particular country will be in compliance with evolving applicable rules and regulations or that they will not result in negative media attention or reputational damage.
RISKS RELATING TO OUR OPERATIONS
Our business, results of operations and financial position could be adversely affected by the outbreak of COVID-19.
Since early 2020, a growing number of countries and regions around the world have encountered an outbreak of COVID-19, a highly contagious disease known to cause respiratory illness. The disease quickly spread within the PRC and globally, and the affected cases and death tolls continued to increase. The World Health Organization (the “WHO”) declared the outbreak a Public Health Emergency of International Concern on January 30, 2020, and on March 11, 2020, amid the escalating situation, the WHO further characterized COVID-19 as a global pandemic. The spread of COVID-19 continues to affect China, as well as certain other countries and regions where we operate.
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Our business, including our existing and future clinical and preclinical trials, as well as our ability to continue to manage it effectively, could be impacted by the current pandemic or future continuance or reoccurrence of COVID-19 in numerous ways. During the COVID-19 pandemic, most hospitals, domestic and overseas, postponed elective surgeries, and the number of hospital visits drastically decreased in first-tier cities in China, especially the number of away-from-home hospital visits. Even after June 2020, the number of admitted patients, admission process, and surgical flow in hospitals are strictly restricted by government, and thus the number of surgeries significantly decreased. As a result, our operations were adversely affected. In addition, as hospitals adopted measures to limit visitors, we experienced difficulties in conducting in-hospital medical and nursing trainings and product demonstrations, attending surgeries and providing technical support. We also experienced delays in deliveries and increase in logistic costs due to international and domestic transportation restrictions. Our product registration progress was affected as the relevant governmental agencies gave priority to pandemic prevention supplies.
Certain other regions where we operate, particularly India, continue to be severely affected. For example, since the exacerbation of the pandemic situation in India in April 2021, we temporarily suspended our sales and marketing activities until June 2021. As a result, our revenue from sales to India was significantly impacted.
To protect our employee and slow down the spread of the virus in strict compliance with national governments’ instructions, we temporarily suspended our clinical trial development and sales and marketing activities and substantially reduced our manufacturing activities, after the end of Chinese New Year holidays in 2020. Although we have resumed operations, the COVID-19 pandemic has negatively impacted our business and our financial performance. Our revenue in 2020 was affected by the COVID-19 pandemic as the sales of our surgical staplers and other surgical instruments decreased primarily due to the limitations on numbers of elective surgeries during the pandemic. The COVID-19 outbreak has a negative impact on the local, national and global economy and financial and market conditions.
The full effects of the current COVID-19 pandemic or future outbreaks on our business or our industry will depend on a number of factors outside our control, including the extent to which the current pandemic continues to spread, particularly in India and the other countries where we operate, and the level of the medical resources needed to treat COVID-19 patients in those countries, as well as the impact of the COVID-19 pandemic on our employees, subject participating in our clinical trials, the personnel that are necessary to continue our clinical trials and our SMOs, and such effects could be material. Furthermore, we cannot predict when the COVID-19 outbreak will become completely under control and we cannot guarantee that the COVID-19 outbreak will not worsen. Having considered that the past occurrences of epidemics, depending on their scale, have caused different degrees of damage to the national and local economies in China, the COVID-19 outbreak and any other public health crisis in China especially in the cities where we have presence, may result in material disruptions to our operations, which in turn may materially and adversely affect our financial condition and results of operations.
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We may not be successful in implementing our business strategy.
Our business objectives and strategies as set out in this document are based on our existing plans and intentions. However, our objectives and strategies are based on prevailing circumstances and the development trends of our industry currently known to our Directors, the bases and assumptions that certain circumstances will or will not occur, as well as the risks and uncertainties inherent in various stages of development. There are significant challenges and uncertainties involved in our strategic plans, including whether (i) we will be able to complete these plans, such as expansion of our production capacity, product portfolio and sales and marketing capabilities, on schedule and within the anticipated budget, or at all; (ii) we will be able to generate anticipated revenues and profits from these plans to cover our indebtedness, costs or contingent liabilities associated with such plans; and (iii) these plans will be in line with the market demand and national and local policies in the future. Our future prospects should be considered in light of the risks, expenses and difficulties which may be encountered by us in our various stages of development of business. We cannot assure you that we will be successful in implementing our strategies or that our strategies, even if implemented, will lead to successful achievement of our objectives. If we are not able to implement our strategies effectively, our business, financial condition and results of operations may be adversely affected.
We are subject to the risks of doing business globally.
In 2020, we exported our products to over 60 countries and regions, primarily through overseas distributors. Our sales outside Greater China accounted for 22.7%, 29.0% and 40.0% of our total revenue in 2018, 2019 and 2020, respectively. We expect to continue to expand our global presence. Accordingly, our business and financial results in the future could be adversely affected due to a variety of factors, including but not limited to:
• changes in a specific country’s or region’s political and cultural climate or economic condition;
• unexpected changes in or difficulties or failure to comply with laws and regulatory requirements in local jurisdictions;
• difficulty of effective enforcement of contractual provisions in local jurisdictions;
• potential disputes with foreign parties we work with;
• exposure to litigation or third-party claims outside of China;
• concerns of local governments and regulators on our research and products and on the relevant management arrangements;
• inadequate intellectual property protection in certain countries;
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• economic sanctions, trade restrictions, discrimination, protectionism or unfavorable policies against PRC companies;
• enforcement of anti-corruption and anti-bribery laws, such as the FCPA;
• the effects of applicable local tax regimes, royalties and other payment obligations owed to local governments, and potentially adverse tax consequences; and
• significant adverse changes in local currency exchange rates.
Our future success depends on our ability to retain key executives and to attract, hire, retain and motivate other qualified and highly skilled personnel.
Although we have not historically experienced unique difficulties attracting and retaining qualified employees, we could experience such problems in the future. Competition for qualified employees in the medical device industry is intense and the pool of qualified candidates is limited. We may not be able to retain the services of our senior management or key R&D personnel, or attract and retain experienced senior management or key R&D personnel in the future. If one or more of our senior management or key clinical and scientific personnel are unable or unwilling to continue in their present positions or joins a competitor or forms a competing company, we may not be able to replace them in a timely manner or at all, and our product development progress may be disrupted as a result, which will have a material and adverse effect on our business and results of operations. In addition, we will need to hire additional employees as we expand our commercialization and manufacturing teams. We may not be able to attract and retain qualified employees on acceptable terms. Our business and growth depend on the continued service of our senior management and personnel in our R&D team to develop product candidates and our sales and marketing team to promote our products. Although we have formal employment agreements with each of our employees, these agreements do not prevent them from terminating their employment with us at any time. We do not maintain key person insurance for any of our executives or other employees. The loss of the services of any of these persons could impede the achievement of our research, development and commercialization objectives.
To induce valuable employees to remain at our Group, in addition to salary and cash incentives, we have invited our employees to participate in our share incentive scheme. The value to employees of these equity grants may be significantly affected by movements in the Share price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies. Although we have employment agreements with our key employees including the non-competition arrangements for key scientific employees as required under the Listing Rules, any of our employees could leave our employment at any time, with or without notice. In addition, we expect to engage consultants and advisors, including R&D and clinical advisors, to assist us in formulating our discovery, clinical development and commercialization strategy. The loss of the services of our executive officers or other key employees and consultants could impede the achievement of our research, development and commercialization objectives and seriously harm our ability to successfully implement our business strategy.
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Furthermore, replacing executive officers, key employees or consultants may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to successfully develop, gain regulatory approval of and commercialize products. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these key personnel or consultants on acceptable terms given the competition among numerous medical device companies for similar personnel. Our consultants and advisors may be engaged by our competitors and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. If we are unable to continue to attract and retain high quality personnel, our ability to pursue our growth strategy will be limited.
We may experience labor shortages or increases in labor costs.
Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees. Increasing market competition may cause market demand and competition for qualified employees to intensify. If we face labor shortages or significant increases in labor costs caused by the intense competition, higher employee turnover rates, increases in wages or other employee benefit costs or changes to labor laws and regulations, our operating costs could increase significantly, which could materially and adversely affect our results of operations.
We cannot assure you that labor disputes will not occur between us and our employees in the future. If such incidents do occur, we may be subject to fines by relevant governmental authorities and may incur settlement costs in order to resolve labor disputes. In addition, we may become subject to higher labor costs in the future when recruiting new employees due to the reputational damage caused by labor disputes. Such potential incidents could disrupt our operations, harm our reputation and divert our management’s attention, which may have a material and adverse effect on our business, financial condition and results of operations.
We may encounter difficulties in managing our growth and expanding our operations successfully.
As we seek to advance our product candidates through clinical trials, we will need to expand our development, regulatory, manufacturing, marketing and sales capabilities or contract with third parties to provide these capabilities for us. As our development and commercialization plans and strategies evolve, we need to recruit a significant number of additional managerial, operational, manufacturing, sales, marketing, financial and other personnel. As our operations expand, we expect that we will need to manage additional relationships with various strategic partners, suppliers and other third parties. Future growth will impose significant added responsibilities on members of management. Our recent growth and any future growth will impose significant added responsibilities on members of management, including:
• identifying, recruiting, integrating, maintaining and motivating additional employees;
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• managing our internal development efforts effectively, including the clinical and regulatory authority review process for our product candidates, while complying with our contractual obligations to contractors and other third parties; and
• improving our operational, financial and management controls, reporting systems and procedures.
Our future financial performance and our ability to develop and commercialize our products and product candidates and to compete effectively will depend, in part, on our ability to effectively manage our recent growth and any future growth, and our management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities.
We currently rely, and for the foreseeable future will continue to rely on certain independent organizations, advisors and consultants to provide certain services. There can be no assurance that the services of these independent organizations, advisors and consultants will continue to be available to us on a timely basis when needed, or that we can find qualified replacements. There can be no assurance that we will be able to manage our existing consultants or find other competent outside contractors and consultants on economically reasonable terms, if at all.
If we are not able to effectively manage our growth and further expand our organization by hiring new employees and expanding our groups of consultants and contractors as needed, we may not be able to successfully implement the tasks necessary to further develop and commercialize our products and product candidates and, accordingly, may not achieve our research, development and commercialization goals. To that end, we must be able to manage our development efforts and clinical trials effectively and hire, train and integrate additional management, administrative and sales and marketing personnel. We may not be able to accomplish these tasks, and our failure to accomplish any of them could prevent us from successfully growing our Company.
Future acquisitions of businesses, products, technologies or know-how could materially and adversely affect our business, financial condition and results of operation if we fail to integrate the acquired businesses, products, technologies or know-how successfully into our existing operations or if we discover previously undisclosed liabilities.
To enhance our growth, we may acquire businesses, products, technologies or know-how that we believe would benefit us in terms of product development, technology advancement or distribution network. Our ability to grow through acquisitions depends upon our ability to identify, negotiate, complete and integrate suitable acquisitions and to obtain necessary financing. Given our limited experience with significant acquisitions, even if we carry on further acquisitions, we may experience:
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• difficulties in integrating any acquired companies, technologies, personnel or products into our existing business, particularly integrating different quality management, customer service and other business functions;
• delays or failures in realizing the benefits of the acquired company, products or know-how, which could result from, for example, delays in receiving governmental approvals for products developed by the acquired businesses;
• diversion of our management’s time and attention from other business concerns;
• higher costs of integration than we anticipated;
• difficulties in retaining key employees of the acquired business who are necessary to manage these acquisitions; or
• write-off of goodwill.
An acquisition could also materially impair our results of operations by causing us to incur debt or amortize acquired intangible assets. We may also discover deficiencies in internal controls, data adequacy and integrity, product quality and regulatory compliance, and product liabilities in the businesses we acquire which we did not uncover prior to such acquisition. Consequently, we may become subject to penalties, lawsuits or other liabilities. Any difficulties in the integration of acquired businesses, products or technologies or unexpected penalties, lawsuits or liabilities in connection with such businesses, products or technologies could have a material adverse effect on our business, financial condition and results of operations.
International expansion may be costly, time consuming and difficult. If we do not successfully expand internationally, our profitability and prospects would be materially and adversely affected.
We plan to grow our international business by expanding our existing international markets and entering new key international markets. We intend to enter new international markets by cultivating new distributor relationships in selected regions. In expanding our business internationally, we have entered and intend to continue to enter markets in which we have limited or no experience and in which our company may not be recognized. Our targeted countries may withhold approval for the sale of our products due to differences in regulatory standards or protectionist trade policies. We may be unable to attract a sufficient number of distributors or at all in such markets, and our selected distributors may not be suitable for selling our products. Furthermore, we may fail to anticipate competitive conditions in new markets that are different from those in our existing markets. These competitive conditions may make it difficult or impossible for us to effectively operate in these new markets. If our expansion efforts in existing and new markets are unsuccessful, our profitability and prospects will be materially and adversely affected.
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We may not be able to efficiently manage our inventory risks. If we fail to accurately project demand for our products, we may encounter problems of inadequate supply or oversupply, which would materially and adversely affect our financial condition and results of operations, as well as damage our reputation.
As of December 31, 2018, 2019 and 2020, our inventories were RMB55.8 million, RMB64.3 million and RMB83.0 million, respectively. Our scale and business model require us to manage a large volume of inventory effectively. In addition, we depend on our demand forecasts to make production decisions and to manage our inventory. We project demand for our products based on rolling projections of sales based on purchase orders from distributors. The fluctuating sales and purchasing cycles of our customers, however, make it difficult for us to forecast future demand accurately at all times.
It is difficult for us to accurately project the demand of our product in domestic and international market because it is hard for us to have adequate information available, on which to base our projections. If we overestimate demand, we may purchase more raw materials or components than required. If we underestimate demand, our suppliers may have inadequate raw materials or product component inventories, which could interrupt our manufacturing and delay shipments, and could result in lost sales. Our inability to accurately predict our demand and to timely meet our demand could materially and adversely affect our financial conditions and results of operations as well as damage our reputation and corporate brand.
In the event that the purchase volume from our customers differs significantly from that we purchase from our suppliers or in the quantities we expect, our inventory level might increase or decrease to an excessive level. Further, there is no assurance that our customers will not cancel orders with us and if it happens, we may not be able to resell those products or to sell the products in stock before their respective expiry dates. For the years ended December 31, 2018, 2019 and 2020, our inventory turnover days were 255 days, 213 days and 233 days, respectively.
Failure to manage our inventory effectively would materially and adversely affect our financial condition, results of operations and cash flows.
To operate our business successfully and meet our customers’ demands and expectations, we must manage our inventory for our products effectively to ensure immediate delivery when required. Our inventory consists of raw materials, work in progress and finished goods. We regularly monitor our inventory to reduce the risk of overstocking. We physically count all of our raw materials, work in progress and finished goods on a rolling basis to identify products that are damaged, expired or soon-to-be expired. As our inventories are subject to impairment if their net realizable value falls before we sell them, a high inventory level would subject us to significant risk of impairment if there is a significant decrease in the net realizable value of our raw materials, work in progress, or finished goods within a short period of time. Any unexpected change in circumstances, such as a shift in market demand, decline in selling price, or default by or loss of a customer, could materially and adversely affect the net realizable value of our inventories.
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Furthermore, as we will not be able to recoup our cash paid for raw materials during the production process until the finished products are sold to customers and the purchase price is settled, our business is subject to significant working capital requirements given the high inventory level and inventory turnover days. See “Business—Inventory Management.” We cannot assure you that these measures will be effective and our inventory level will not increase in the future. If our inventory level increases in the future, our financial condition and cash flow could be materially and adversely affected.
If we become subject to litigation, legal or contractual disputes, governmental investigations or administrative proceedings, our management’s attention may be diverted and we may incur substantial costs and liabilities.
From time to time, we may be involved in claims, disputes and legal proceedings in our ordinary course of business. These may concern issues relating to, among others, product liability, environmental matters, breach of contract, share incentive scheme or other employment or labor disputes and infringement of intellectual property rights. On-going or threatened litigation, legal or contractual disputes, investigations or administrative proceedings may divert our management’s attention and consume their time and our other resources. In addition, any similar claims, disputes or legal proceedings involving us or our employees may result in damages or liabilities, as well as legal and other costs and may cause a distraction to our management. Furthermore, any litigation, legal or contractual disputes, investigations or administrative proceedings which are initially not of material importance may escalate and become important to us, due to a variety of factors, such as the facts and circumstances of the cases, the likelihood of loss, the monetary amount at stake and the parties involved. If any verdict or award is rendered against us or if we settle with any third parties, we could be required to pay significant monetary damages, assume other liabilities and even to suspend or terminate the related business projects. In addition, negative publicity arising from litigation, legal or contractual disputes, investigations or administrative proceedings may damage our reputation and adversely affect the image of our brands and products. Consequently, our business, financial condition and results of operations may be materially and adversely affected.
Failure of our IT systems could disrupt our operations.
Our IT systems play a significant part in our operations. We rely on our IT systems to effectively manage accounting and financial functions, product orders, inventory, and our R&D data. We also rely on our IT systems to collect and store data and information we obtain in the ordinary course of our business. Our IT systems are vulnerable to (i) damage or interruptions from earthquakes, fire, flood and other natural disasters; (ii) attacks from computer viruses or hackers, power loss; and (iii) computer system, Internet, telecommunications or data network failure. We could be subject to risks caused by misappropriation, misuse, leakage, falsification or intentional or accidental release or loss of information maintained in our information systems. If a material breach of our IT systems occurs, market perception of the effectiveness of our security measures could be harmed and our reputation and credibility could be damaged. We could be required to expend significant amounts of money and other resources to repair or
–93– THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. RISK FACTORS replace information systems and be subject to regulatory actions and/or claims involving privacy issues related to data collection and use practices and other data privacy laws and regulations. The failure of our IT systems to perform as we anticipate could disrupt our business and product development and could result in decreased sales and increased overhead costs, all of which could materially and adversely affect our business, financial condition and results of operations.
We may be subject to risks in relation to our leased properties.
As of the Latest Practicable Date, we had leased one parcel of land and nine premises. See “Business—Properties—Leased Property.” As of the same date, the lessors of the land parcel and of seven of the leased premises, which are mainly used as ancillary facilities, had not obtained the real property title certificate. Due to such title defect, the relevant lease agreements may be deemed void and the leased premises and the land parcel may be expropriated or demolished by the government in city planning, both of which could materially and adversely affect our business, financial condition and results of operations.
In addition, we had not completed lease registration with the relevant regulatory authorities for eight of the nine premises. Our PRC Legal Advisors are of the view that the non-registration of lease agreements will not affect the validity of such lease agreements, but the relevant local housing administrative authorities can require us to complete registrations within a specified timeframe and we may be subject to a fine between RMB1,000 and RMB10,000 per lease for any delay in making these registrations. Therefore, we have the right to use such properties in accordance with the lease agreement but we may be subject to the risks of fines if the lease registration is not completed as required by the relevant local housing administrative authorities.
Failure to make adequate statutory social welfare contribution for our employees may subject us to penalties.
Pursuant to PRC laws and regulations, we are required to participate in the employee social welfare plan administered by local governments. Such plan consists of pension insurance, medical insurance, work-related injury insurance, maternity insurance, unemployment insurance and housing provident fund. The amount we are required to contribute for each of our employees under such plan should be calculated based on the employee’s actual salary level of previous year, and be subject to a minimum and maximum level as from time to time prescribed by local authorities. During the Track Record Period, we failed to fully make social insurance and housing provident fund contribution for our employees based on their actual salary level. As a result, we may be required by competent authorities to pay the outstanding amount, and could be subject to late payment penalties or enforcement application made to the court. As of the Latest Practicable Date, no competent government authorities had imposed administrative action, fine or penalty to us with respect to this non-compliance incident nor had any competent government authorities required us to settle the outstanding amount of social insurance payments and housing provident fund contributions. We have made full provisions for the outstanding balance of relevant social
–94– THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. RISK FACTORS insurance payments and housing provident fund contributions according to applicable PRC regulations. As of December 31, 2018, 2019 and 2020, our provision amount were RMB3.2 million, RMB4.0 million and RMB2.7 million for social insurance underpayment and housing provident fund underpayment, respectively. See “Business—Employees.”
On July 20, 2018, the General Office of the Communist Party of China Central Committee and the General Office of the State Council of the PRC issued the Reform Plan of the State Tax and Local Tax Collection Administration System (《國稅地稅徵管體制改革方案》) (the “Reform Plan”). Pursuant to the Reform Plan, starting from January 1, 2019, tax authorities shall be responsible for the collection of social insurance contributions in the PRC. However, no specific implementing rules for the Reform Plan have been issued, and the effect of the Reform Plan is uncertain at the current stage. We cannot guarantee that the amount of social insurance contributions we would be required to pay will not increase, nor that we would not be required to pay any shortfalls or be subject to any penalties or fines, any of which may have a material adverse effect on our business and results of operations.
We cannot assure you that the competent local government authorities will not require us to pay the outstanding amount within a specified time limit or impose late fees or fines on us, which may materially and adversely affect our financial condition and results of operations.
Our insurance coverage may not completely cover the risks relating to our business and operations.
Our operations are subject to hazards and risks associated with our research and manufacturing operations, which may cause significant harm to persons or damage to properties. We maintain different types of insurance policies, such as life science comprehensive liability insurance. See “Business—Insurance.” We maintain insurance policies that are required under PRC laws and regulations as well as based on our assessment of our operational needs and industry practice. Our insurance coverage may be insufficient to cover any claim for product liability, damage to our fixed assets or employee injuries. There is no assurance that our insurance policies will be adequate to cover all losses incurred. Losses incurred and associated liabilities may have a material adverse effect on our results of operation if such losses or liabilities are not covered by our insurance policies.
Specifically, we currently carry life science comprehensive liability insurance covering our clinical trials. Although we maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.
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Our business significantly depends on our reputation and customer perception of us, and any negative publicity on us or other harm to our reputation or failure to maintain and enhance our recognition and reputation may materially and adversely affect our business, financial condition and results of operations.
Our reputation and customer perception of our brand are critical to our business. Maintaining and enhancing our reputation and recognition depend primarily on the quality and consistency of our products, as well as continued promotion efforts.
Our promotion efforts may be expensive and ineffective. In addition, our reputation and customer perception of our Company could suffer in events that:
• our products fail to gain acceptance by patients, doctors and hospitals;
• our products are defective or malfunction;
• lawsuits or regulatory investigations are instituted against us or relating to our products or industry;
• we provide poor or ineffective customer service; or
• we are subject to product liability claims.
If we are unable to maintain and further enhance our reputation and recognition, our ability to attract and retain customers may be impeded and our business prospects may be materially adversely affected. Any negative incident or negative publicity concerning us, our products, our management, our employees, and our distributors or sub-distributors, regardless of its veracity, could harm our image and diminish the trust from our customers and the market, which could in turn result in decreased sales of our products and materially and adversely affect our business.
We cannot assure you that negative publicities about us or any of our Controlling Shareholder, our affiliates or any entity that shares the “Panther” name of the Company would not damage our brand image and such unauthorized use of our brand name by any third parties may adversely affect the value of our brand name, reputation and business. Any damage to the “Panther” brand name and any failure to protect the “Panther” brand name could harm our reputation and result in the loss of our competitive advantage and materially and adversely affect our reputation, business, financial condition, results of operations and prospects.
Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.
Our operations, and those of our distributors, suppliers and other business partners, could be subject to natural or man-made disasters, health epidemic, or business interruptions, for which we are predominantly self-insured. The occurrence of any of these business disruptions
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Although we maintain insurance policies that cover losses arising from accidents and natural disasters in respect of our owned properties, our insurance might not cover all losses under such circumstances and our business may be seriously harmed by such delays and interruption.
We may be subject to natural disasters, acts of war or terrorism or other factors beyond our control.
Natural disasters, acts of war or terrorism or other factors beyond our control may adversely affect the economy, infrastructure and livelihood of the people in the regions where we conduct our business. Our operations may be under the threat of floods, earthquakes, sandstorms, snowstorms, fire or drought, power, water or fuel shortages, failures, malfunction and breakdown of information management systems, unexpected maintenance or technical problems, or are susceptible to potential wars or terrorist attacks. Serious natural disasters may result in loss of lives, injury, destruction of assets and disruption of our business and operations. Acts of war or terrorism may also injure our employees, cause loss of lives, disrupt our business network and destroy our markets. Any of these factors and other factors beyond our control could have an adverse effect on the overall business sentiment and environment, cause uncertainties in the regions where we conduct business, cause our business to suffer in ways that we cannot predict and materially and adversely impact our business, financial conditions and results of operations.
RISKS RELATING TO DOING BUSINESS IN THE PRC
The medical device industry in China is highly regulated and such regulations are subject to change which may affect approval and commercialization of our product candidates.
We conduct the majority of our operations in China. The medical device industry in China is subject to comprehensive government regulation and supervision, encompassing the approval, registration, manufacturing, packaging, licensing and marketing of new devices. See “Regulatory Overview—Overview of PRC Regulations.” In recent years, the regulatory framework in China regarding the medical device industry has undergone significant changes, and we expect that it will continue to undergo significant changes. Any such changes or amendments may result in increased compliance costs on our business or cause delays in or prevent the successful development or commercialization of our product candidates in China and reduce the benefits we believe are available to us from developing and manufacturing
–97– THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. RISK FACTORS products in China. PRC authorities have become increasingly vigilant in enforcing laws in the medical device industry and any failure by us or our partners to maintain compliance with applicable laws and regulations or obtain and maintain required licenses and permits may result in the suspension or termination of our business activities in China. We believe our strategy and approach is aligned with the PRC government’s policies, but we cannot ensure that our strategy and approach will continue to be aligned.
PRC economic, political, social conditions as well as government policies could materially and adversely affect our business, financial condition, results of operations and prospects.
Due to our extensive operations in China, our business, results of operations, financial condition and prospects may be influenced to a significant degree by economic, political, legal and social conditions in China. China’s economy differs from the economies of developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources.
While the PRC economy has experienced significant growth over the past 30 years, growth has been uneven across different regions and among various economic sectors of China. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are currently applicable to us. In addition, in the past the PRC government implemented certain economic control measures, including interest rate increases. These measures may cause decreased economic activity in China, which may adversely affect our business and results of operation. More generally, if the business environment in China deteriorates from the perspective of domestic or international investment, our business in China may also be adversely affected.
There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.
The majority of our operations are conducted in China, and are governed by PRC laws, rules and regulations. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value. Since 1979, the PRC government began to promulgate a comprehensive system of laws, rules and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investment in China. However, China has not developed a fully integrated legal system, and recently enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities in China or may be subject to significant degrees of interpretation by PRC regulatory agencies. In particular, because these laws, rules and regulations are relatively new and often give the relevant regulator significant
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Additionally, the medical reform and the medical device registration and approval system may face implementation challenges. The timing and full impact of such reforms is uncertain and could prevent us from commercializing our product candidates in a timely manner. In addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business, financial condition and results of operations.
Restrictions on currency exchange may limit our ability to utilize our revenue effectively, to pay dividends and other obligations, and affect the value of your investment.
The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. A substantial majority of our future revenue is expected to be denominated in Renminbi. Shortages in availability of foreign currency may then restrict our ability to remit sufficient foreign currency to our offshore entities for our offshore entities to pay dividends or make other payments or otherwise to satisfy our foreign currency denominated obligations. The RMB is currently convertible under the “current account,” which includes trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans. Currently, we and our PRC subsidiaries may purchase foreign currency for settlement of “current account transactions,” without the approval of SAFE by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. Any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to holders of our Shares. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities or commercial banks. If we fail to obtain approval from SAFE to convert Renminbi into any foreign currency, our capital expenditure plans and our business, operating results and financial position may be materially and adversely affected.
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Fluctuation in the value of the Renminbi may result in foreign currency exchange losses.
We are subject to foreign exchange fluctuations. Certain of our cash and cash equivalents are denominated in foreign currencies, and are exposed to foreign currency risk. We recorded net foreign exchange gains of RMB2.3 million, RMB1.2 million in 2018 and 2019, respectively and net foreign exchange loss of RMB6.9 million in 2020. The exchange rate of the Renminbi against U.S. dollar and other foreign currencies fluctuates and is affected by, among other things, the policies of the PRC government and changes in China’s and international political and economic conditions, as well as supply and demand in the local market. It is difficult to predict how market forces or government policies may impact the exchange rate between the Renminbi and the Hong Kong dollar, U.S. dollar or other currencies in the future. In addition, the PBOC may intervene in the foreign exchange market to limit fluctuations in Renminbi exchange rates and achieve policies goals.
There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which, together with domestic policy considerations, could result in a significant appreciation of Renminbi against U.S. dollar, the Hong Kong dollar or other foreign currencies.
Our [REDACTED] from the [REDACTED] will be received in Hong Kong dollars. As a result, any appreciation of the Renminbi against U.S. dollar, the Hong Kong dollar or any other foreign currencies may result in the decrease in the value of our [REDACTED] from the [REDACTED]. Conversely, any depreciation of the Renminbi may adversely affect the value of, and any dividends payable on, our Shares in foreign currency. In addition, there are limited instruments available for us to reduce our foreign currency risk exposure at reasonable costs. All of these factors could materially and adversely affect our business, financial condition, results of operations and prospects, and could reduce the value of, and dividends payable on, our Shares in foreign currency terms.
Investors will be subject to PRC taxation on dividends and on gains on sale or other disposition of their H Shares.
Pursuant to the Circular on Some Policy Questions Concerning Individual Income Tax from the MOF and the SAT (Caishuizi [1994] No. 020) (《關於個人所得稅若干政策問題的通 知》), the incomes in relation to dividends from foreign invested enterprises are exempt from individual income tax for individual foreigners. Therefore, holders of H shares may have the opportunity to exempt individual income tax from the dividends distributing by us. However, it may difficult to distinguish individual investors and enterprise investors in practice, under this circumstance the PRC enterprises with foreign investment will usually withhold individual tax at a rate of 10% when distributing dividends to non-PRC resident individual holders. Notwithstanding the above, withholding tax on distributions paid by us to non-PRC resident individuals may be imposed at other rates pursuant to applicable tax treaties (up to 20% if no tax treaty is applicable) if the identity of the individual holder of H shares and the tax rate applicable thereto are known to us.
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In addition, under the Individual Income Tax Law of the PRC and its implementing regulations, non-PRC resident individual holders of H Shares are subject to individual income tax at a rate of 20% on gains realized upon the sale or other disposition of H Shares. To our knowledge, as at the date of this Document, in practice the PRC tax authorities have not sought to collect individual income tax on non-PRC resident individual holders for such gains. If such tax is collected in the future, the value of such individual holders’ investments in H Shares may be adversely affected.
Under the EIT Law and its implementing regulations, non-PRC resident enterprises (referring to those enterprises which do not establish any organization or maintain any venue in China, or even with an established organization or held venue in China, do not have any actual connections with such organization or venue) are generally subject to enterprise income tax at a rate of 10% with respect to its PRC-sourced income, including dividends received from a PRC company and gains derived from the disposition of equity interests in a PRC company, subject to reductions under any special arrangement or applicable treaty between the PRC and the jurisdiction of taxation residency of the non-PRC resident enterprise; the payable income taxes that a non-resident enterprise earns shall be withheld by income sources, with the payer acting as the obligatory withholder. The tax amount shall be withheld by the obligatory withholder from each payment or payment due.
Further, there are uncertainties regarding the interpretation and implementation of the EIT Law and its implementing rules by the PRC tax authorities, including whether and how enterprise income tax on gains derived from the sale or other disposition of H Shares will be collected from non-PRC resident enterprise holders of H Shares. If such tax is collected in the future, the value of such non-PRC resident enterprise holders’ investments in H Shares may be adversely affected.
Payment of dividends is subject to restrictions under PRC law and regulations.
Under PRC law and regulations, we may only pay dividends out of distributable profits. Distributable profits are our after-tax profits, less any recovery of accumulated losses and appropriations to statutory and other reserves that we are required to make. As a result, we may not have sufficient or any distributable profit to enable us to make dividend distributions to our Shareholders, including in periods for which our financial statements indicate we are profitable. Any distributable profit not distributed in a given year is retained and available for distribution in subsequent years.
You may experience difficulty in effecting service of legal process, enforcing foreign judgments or bringing original actions in China or Hong Kong based on foreign laws against us, our Directors and senior management.
All of our assets, and a significant portion of the assets of our Directors and senior management are located in China. Therefore, it may not be possible for investors to effect service of process upon us or those persons inside China. China has not entered into treaties or arrangements providing for the recognition and enforcement of judgments made by courts
– 101 – THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. RISK FACTORS of most other jurisdictions. On July 14, 2006, Hong Kong and China entered into the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region Pursuant to Choice of Court Agreements Between Parties Concerned (關 於內地與香港特別行政區法院相互認可和執行當事人協議管轄的民商事案件判決的安排) (the “Arrangement”), pursuant to which a party with a final court judgment rendered by a Hong Kong court requiring payment of money in a civil and commercial case according to a choice of court agreement in writing may apply for recognition and enforcement of the judgment in China. Similarly, a party with a final judgment rendered by a PRC court requiring payment of money in a civil and commercial case pursuant to a choice of court agreement in writing may apply for recognition and enforcement of such judgment in Hong Kong. A choice of court agreement in writing is defined as any agreement in writing entered into between parties after the effective date of the Arrangement in which a Hong Kong court or a PRC court is expressly designated as the court having sole jurisdiction for the dispute. Therefore, it may not be possible to enforce a judgment rendered by a Hong Kong court in China if the parties in the dispute do not agree to enter into a choice of court agreement in writing. As a result, it may be difficult or impossible for investors to effect service of process against our assets or Directors in China in order to seek recognition and enforcement of foreign judgments in China.
The current trade war between the United States and China, and on a larger scale internationally, may dampen growth in China and other markets where the majority of our customers reside, and our activities and results may be negatively impacted.
The United States government has imposed tariffs on specified products imported from China to penalize China for what it characterizes as unfair trade practices and China has responded by imposing tariffs on specified products imported from the United States. The actions taken by the United States government to date include tariffs on steel and aluminum imports as well as tariffs on various Chinese imports. The Chinese government in retaliation has announced tariffs on the United States airplanes, automobiles, soybeans, etc. It remains unclear what additional actions, if any, the governments of the United States and Chinese governments will take in respect of their bilateral trade, and what the timing may be of any such actions. The actions taken to date, as well as any future tariffs, new regulations or other burdens on international trade, may cause escalating response through the use of local regulations, tariffs or other requirements on exports and imports. The current and future actions or escalations by either the United States or China that affect trade relations may cause global economic turmoil and potentially have a negative impact on our business, financial condition and results of operations.
The relationships between China and other countries may affect our business operations.
During the Track Record Period, certain of our raw materials were sourced overseas, and our distribution networks covers more than 60 countries and regions overseas. In addition, we have engaged certain third parties for commercial collaboration in foreign countries and regions. Our business is therefore subject to constantly changing international economic, regulatory, social and political conditions, and local conditions in those foreign countries and
– 102 – THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. RISK FACTORS regions. Tensions, political concerns and trade frictions between China and the relevant foreign countries or regions may adversely affect our business, financial condition, results of operations, cash flows and prospects.
China’s political relationships with those foreign countries and regions may affect the prospects of our relationship with third parties, such as customers, suppliers, and global partners. There can be no assurance that our existing or potential service providers or collaboration partners will not alter their perception of us or their preferences as a result of adverse changes to the state of political relationships between China and the relevant foreign countries or regions. Any tensions, political concerns, and trade frictions between China and the relevant foreign countries or regions may cause a decline in the demand for our services and adversely affect our business, financial condition, results of operations, cash flows and prospects.
RISKS RELATING TO THE [REDACTED]
Purchasers of our H Shares in the [REDACTED] will experience immediate dilution and may experience further dilution if we issue additional Shares in the future.
The [REDACTED] of our H Shares is higher than the consolidated net tangible assets per share immediately prior to the [REDACTED]. Therefore, purchasers of our H Shares in the [REDACTED] will experience an immediate dilution in unaudited pro forma adjusted consolidated net tangible assets of HK$[REDACTED] per H Share, based on the maximum [REDACTED] of HK$[REDACTED] per [REDACTED].
In order to expand our business, we may consider offering and issuing additional Shares in the future. Purchasers of our H Shares may experience dilution in the net tangible assets value per H Share of their investments in the H Shares if we issue additional Shares in the future at a price which is lower than the net tangible asset value per H Share prior to the issuance of such additional Shares.
There has been no prior public market for our H Shares
Prior to the [REDACTED], there was no public market for our H Shares. The initial [REDACTED] price range for our H Shares was the result of negotiations among us and the [REDACTED] on behalf of the [REDACTED], and the [REDACTED] may differ significantly from the market price for our H Shares following the [REDACTED]. We have applied for [REDACTED], and [REDACTED], our H Shares on the Stock Exchange. A [REDACTED] on the Stock Exchange, however, does not guarantee that an active [REDACTED] market for our H Shares will develop, or if it does develop, will be sustained following the [REDACTED] or that the market price of our H Shares will not decline following the [REDACTED].
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The liquidity and market price of our H Shares may be volatile, which may result in substantial losses for investors subscribing for or purchasing our H Shares pursuant to the [REDACTED].
The price and trading volume of our H Shares may be volatile as a result of the following factors, as well as others, which are discussed in this “Risk Factors” section or elsewhere in this document, some of which are beyond our control:
• actual or anticipated fluctuations in our results of operations (including variations arising from foreign exchange rate fluctuations);
• news regarding recruitment or loss of key personnel by us or our competitors;
• announcements of competitive developments, acquisitions or strategic alliances in our industry;
• changes in earnings estimates or recommendations by financial analysts;
• potential litigation or regulatory investigations;
• changes in general economic conditions or other developments affecting us or our industry; and
• price movements on international stock markets, the operating and stock price performance of other companies, other industries and other events or factors beyond our control.
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are not related or disproportionate to the operating performance of particular companies. For instance, during the global economic downturn and financial market crisis begun around the middle of 2008, the global stock markets witnessed drastic price drops with heavy unprecedented selling pressure. Many stocks fell significantly from their highs in 2007. Similar stock price movements were observed in the second half of 2011 as certain recent adverse financial developments have affected the global securities and financial markets. These developments include a general global economic downturn, substantial volatility in equity securities markets, and volatility and tightening of liquidity in credit markets. While it is difficult to predict how long these conditions will last, they could continue to present risks for an extended period of time, in interest expenses on our bank borrowings, or reduction of the amount of banking facilities currently available to us. If we experience such fluctuations, results of operations and financial position could be materially and adversely affected. Moreover, market fluctuations may also materially and adversely affect the market price of our H Shares.
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Future issues, offers or sales of our Shares may adversely affect the prevailing market price of our H Shares
Future issues of the Shares by our Company or the disposal of the Shares by any of our Shareholders or the perception that such issues or sale may occur, may negatively affect the prevailing market price of the H Shares. Moreover, future sales or perceived sales of a substantial amount of our H Shares or other securities relating to our H Shares in the public market may cause a decrease in the market price of our H Shares, or adversely affect our ability to raise capital in the future at a time and at a price which we deem appropriate. Our Shareholders may experience dilution in their holdings in the event we issue additional securities in future offerings.
Upon the completion of the [REDACTED] and [REDACTED], assuming the [REDACTED] is not exercised, there will be (i) [REDACTED] unlisted Domestic Shares, representing [REDACTED] of the total issued share capital of the Company; (ii) [REDACTED] newly issued H Shares, representing [REDACTED]% of the total issued share capital of the Company; and (iii) [REDACTED], representing [REDACTED] of the total issued share capital of the Company. In addition, our unlisted Domestic Shares may be converted into H Shares, and such converted H Shares may be [REDACTED]or [REDACTED] on an overseas stock exchange, provided that prior to the [REDACTED] and [REDACTED] of such converted Shares, any requisite internal approval processes shall have been duly completed and the approval from the relevant regulatory authorities, including CSRC, shall have been obtained in accordance with the regulations of the State Council’s securities regulatory authorities as well as regulations, requirements and procedures of relevant overseas stock exchanges. No class shareholder vote is required for the conversion of such Shares and the [REDACTED] and [REDACTED] of the converted Shares on an overseas stock exchange. Future [REDACTED], or [REDACTED], of the converted Shares may adversely affect the [REDACTED] price of H Shares.
The market price of our H Shares when [REDACTED] begins could be lower than the [REDACTED] as a result of, among other things, adverse market conditions or other adverse developments that could occur between the time of sale and the time [REDACTED] begins.
The [REDACTED] will be determined on the [REDACTED]. However, the [REDACTED] will not commence [REDACTED] on the Stock Exchange until they are delivered, which is expected to be on the fifth business day after the [REDACTED]. As a result, investors may not be able to sell or otherwise [REDACTED] the [REDACTED] during that period. Accordingly, holders of the [REDACTED] are subject to the risk that the price of the [REDACTED] when [REDACTED] begins could be lower than the [REDACTED]asa result of adverse market conditions or other adverse developments that may occur between the time of sale and the time trading begins.
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Our Controlling Shareholders may have substantial influence over our Company and their interests may not be aligned with the interests of our other Shareholders.
Our Controlling Shareholders have substantial influence over our business, including matters relating to our management, policies and decisions regarding acquisitions, mergers, expansion plans, consolidations and sales of all or substantially all of our assets, election of Directors and other significant corporate actions. Immediately after completion of the [REDACTED], assuming the [REDACTED] is not exercised, our Controlling Shareholders will hold [REDACTED]% of the issued share capital in our Company. Our Controlling Shareholders will, through their voting power at the Shareholders meetings and their delegates on the Board, have substantial influence over our business and affairs, including decisions in respect of mergers or other business combinations, acquisition or disposition of assets, issuance of additional shares or other equity securities, timing and amount of dividend payments, and our management. Our Controlling Shareholders may not act in the best interests of our minority Shareholders. This concentration of ownership may also discourage, delay or prevent a change in control of our Company, which could deprive other Shareholders of an opportunity to receive a premium for their Shares as part of a sale of our Company and might reduce the price of our Shares. These events may occur even if they are opposed by our other Shareholders. In addition, the interests of our Controlling Shareholder may differ from the interests of our other Shareholders. It is possible that our Controlling Shareholder may exercise its substantial influence over us and cause us to enter into transactions or take, or fail to take, actions or make decisions that conflict with the best interests of our other Shareholders.
There may be dilution because of issuance of new shares or equity securities.
We may require additional funds due to changes in business conditions or other future developments relating to, inter alia, our existing operations or any future expansions. The amount and timing of such additional financing needs will vary depending on the timing of investments in and/or acquisitions of new businesses from third parties, and the amount of cash flow from our operations. If our resources are insufficient to satisfy our cash requirements, we may seek additional financing or debt securities or obtaining a credit facility through selling additional equity. The sale of additional equity securities could result in additional dilution to our Shareholders. If additional funds are raised by way of issuance of new shares or equity linked securities other than on a pro rata basis to existing shareholders, the percentage of ownership of our existing Shareholders in our Company, the earnings per share and the net asset value per share may be reduced.
We may not declare dividends on our H Shares in the future.
Our ability to declare future dividends will depend on the availability of dividends, if any, received from our operating subsidiaries. Under applicable laws and the constitutional documents of our operating subsidiaries, the payment of dividends may be subject to certain limitations. The calculation of certain of our or our operating subsidiaries’ profit under applicable accounting standards differs in certain respects from the calculation under IFRSs. As a result, our Company or our operating subsidiaries may not be able to pay a dividend in a given year even if they have profit as determined under IFRSs. Accordingly, since we derive part of our earnings and cash flows from dividends paid by our operating subsidiaries, we may not have sufficient distributable profit to pay dividends to our Shareholders.
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In addition, any future dividend declaration and distribution will be at the discretion of our Directors and will depend on our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that our Directors deem relevant. Any declaration and payment as well as the amount of dividends will also be subject to our Articles of Association and PRC laws, including (where required) the approvals from our Shareholders and our Directors. Our Shareholders at a general meeting must approve any declaration of dividends, which must not exceed the amount recommended by our Board. Moreover, our Directors may from time to time pay such interim dividends as our Board considers to be justified by our profits and overall financial requirements, or special dividends of such amounts and on such dates as they think appropriate. As a result, we cannot assure you that we will make any dividend payments on our Shares in the future.
We have significant discretion as to how we will use the net [REDACTED] of the [REDACTED], and you may not necessarily agree with how we use them.
Our management may spend the net [REDACTED] from the [REDACTED] in ways with which you may not agree or which do not yield a favorable return to our Shareholders. We plan to use the net [REDACTED] from the [REDACTED] to fund our ongoing R&D, manufacturing activities, sales and marketing activities, IT systems, as well as strategic investment and acquisition. See “Future Plans and [REDACTED].” However, our management will have discretion as to the actual application of our net [REDACTED]. You are entrusting your funds to our management, whose judgment you must depend on, for the specific uses we will make of the net [REDACTED] from this [REDACTED].
Certain statistics contained in this document are derived from a third-party report and publicly available official sources and facts, forecasts and statistics in this document relating to the medical device industry in and outside China may not be fully reliable.
Facts, forecasts and statistics in this document relating to China, the PRC economy and the industry in which we operate are derived from various sources that we believe are reliable, including official government publications as well as a report prepared by F&S that we commissioned. We have taken reasonable care in the reproduction or extraction of the official government publications or other third-party reports for the purpose of disclosure in this document, however, we cannot guarantee the quality or reliability of such source materials. Neither we, the Sole Sponsor, the [REDACTED], the [REDACTED], the [REDACTED], the [REDACTED] nor our or their respective affiliates or advisors have verified the facts, forecasts and statistics nor ascertained the underlying economic assumptions relied upon in those facts, forecasts and statistics obtained from these sources. Due to possibly flawed or ineffective collection methods or discrepancies between published information and factual information and other problems, the industry statistics in this document may be inaccurate and you should not place undue reliance on it. We make no representation as to the accuracy of such facts, forecasts and statistics obtained from various sources. Moreover, these facts, forecasts and statistics involve risk and uncertainties and are subject to change based on various factors and should not be unduly relied upon.
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You should read the entire document carefully, and we strongly caution you not to place any reliance on any information contained in press articles or other media regarding us or the [REDACTED].
Subsequent to the date of this document but prior to the completion of the [REDACTED], there may be press and media coverage regarding us and the [REDACTED], which may contain, among other things, certain financial information, projections, valuations and other forward- looking information about us and the [REDACTED]. We have not authorized the disclosure of any such information in the press or media and do not accept responsibility for the accuracy or completeness of such press articles or other media coverage. We make no representation as to the appropriateness, accuracy, completeness or reliability of any of the projections, valuations or other forward-looking information about us. To the extent such statements are inconsistent with, or conflict with, the information contained in this document, we disclaim responsibility for them. Accordingly, prospective investors are cautioned to make their investment decisions on the basis of the information contained in this document only and should not rely on any other information.
You should rely solely upon the information contained in this document, the [REDACTED] and any formal announcements made by us in Hong Kong in making your investment decision regarding our Shares. We do not accept any responsibility for the accuracy or completeness of any information reported by the press or other media, nor the fairness or appropriateness of any forecasts, views or opinions expressed by the press or other media regarding our Shares, the [REDACTED] or us. We make no representation as to the appropriateness, accuracy, completeness or reliability of any such data or publication. Accordingly, prospective investors should not rely on any such information, reports or publications in making their decisions as to whether to invest in our [REDACTED]. By applying to purchase our Shares in the [REDACTED], you will be deemed to have agreed that you will not rely on any information other than that contained in this document and the [REDACTED].
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In preparation for the [REDACTED], we have sought the following waivers from strict compliance with the relevant provisions of the Listing Rules:
MANAGEMENT PRESENCE IN HONG KONG
According to Rule 8.12 and Rule 19A.15 of the Listing Rules, an issuer must have a sufficient management presence in Hong Kong and in normal circumstances, at least two of the issuer’s executive directors must be ordinarily resident in Hong Kong. Currently, all of our executive Directors reside in the PRC.
Our core business and operations are based and conducted in the PRC. It would be practically difficult and commercially unnecessary for us to relocate two of our executive Directors to Hong Kong. We have applied to the Stock Exchange for, and the Stock Exchange [has granted] us, a waiver from strict compliance with Rule 8.12 and Rule 19A.15 of the Listing Rules. The following measures have been adopted by us:
(1) pursuant to Rule 3.05 of the Listing Rules, we have appointed two authorized representatives, Mr. Qu, the chairman of our Board and our executive Director, and Ms. Liu, our executive Director and our general manager who will act as our Company’s principal channel of communication with the Stock Exchange. Although Mr. Qu and Ms. Liu reside in the PRC, they possess valid travel documents and are able to renew such travel documents when they expire to travel to Hong Kong. In addition, Ms. Fung Po Ting (馮寶婷)(“Ms. Fung”), our company secretary who is ordinarily resident in Hong Kong, has been appointed as the alternate to the two authorized representatives. Each of our authorized representatives and the alternate authorized representative will be available to meet with the Stock Exchange in Hong Kong within a reasonable time frame upon the request of the Stock Exchange and will be readily contactable by telephone, facsimile and/or email. Each of our authorized representatives and the alternate authorized representative is authorized to communicate on our behalf with the Stock Exchange. Our Company has been registered as a non-Hong Kong Company under Part 16 of the Companies Ordinance and Ms. Fung has also been authorized to accept service of legal process and notices in Hong Kong on behalf of our Company;
(2) both our authorized representatives and the alternate authorized representative have means to contact our Directors (including our non-executive Director and independent non-executive Directors) promptly at all times as and when the Stock Exchange wishes to contact our Directors for any matters. Our Directors who are not ordinarily resident in Hong Kong possess or can apply for valid travel documents to visit Hong Kong and will be able to meet with the Stock Exchange within a reasonable period of time, when required. Each of our Directors has provided his/her mobile phone number, residential phone number, fax number and email address to our authorized representatives and the alternate authorized representative. In the event that a Director expects to travel, he/she will endeavor to provide the phone number of the place of his/her accommodation to our authorized representatives and
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the alternate authorized representative or maintain an open line of communication via his/her mobile phone. Each of our Directors, the authorized representatives and the alternate authorized representative has also provided his/her mobile number, office phone number, fax number and email address to the Stock Exchange;
(3) in compliance with Rules 3A.19 and 19A.05 of the Listing Rules, we have appointed Haitong International Capital Limited as our compliance advisor (the “Compliance Advisor”), which has access at all times to our authorized representatives, Directors, senior management and other officers of our Company, and will act as an additional channel of communication with the Stock Exchange. Our Company will keep the Stock Exchange up to date in respect of any change to such details. The authorized representatives, Directors and other officers of our Company will provide promptly such information and assistance as the Compliance Advisor may reasonably require in connection with the performance of the Compliance Advisor’s duties as set forth in Chapter 3A and Rule 19A.06 of the Listing Rules. There will be adequate and efficient means of communication between our Company, the authorized representatives, our Directors and other officers and the Compliance Advisor, and to the extent reasonably practicable and legally permissible, our Company will keep the Compliance Advisor informed of all communications and dealings between our Company and the Stock Exchange; and
(4) meetings between the Stock Exchange and our Directors could be arranged through our authorized representatives or the Compliance Advisor, or directly with our Directors within a reasonable time frame. We will inform the Stock Exchange as soon as practicable in respect of any change of our authorized representatives and/or the Compliance Advisor.
CONTINUING CONNECTED TRANSACTIONS
We have entered into a framework agreement which will constitute continuing connected transactions for our Company under the Listing Rules after [REDACTED]. We have applied to the Stock Exchange for, and the Stock Exchange [has granted] us, a waiver from strict compliance with the announcement and independent shareholders’ approval requirements under Chapter 14A of the Listing Rules in respect of the continuing connected transactions as disclosed in “Connected Transactions—(A) Continuing Connected Transaction Subject to the Reporting, Annual Review and Announcement Requirements but exempt from the Independent Shareholders’ Approval Requirement.” See “Connected Transactions” for details.
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[REDACTED]
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[REDACTED]
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[REDACTED]
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[REDACTED]
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[REDACTED]
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DIRECTORS
Name Residential Address Nationality
Executive Directors Mr. Qu Chao (曲超) Villa 22, Area 7 Chinese Fengshu Jiayuan Dongsha Gezhuang Beiqijia Town Changping District Beijing PRC
Ms. Liu Qing (劉青) Villa 22, Area 7 Chinese Fengshu Jiayuan Dongsha Gezhuang Beiqijia Town Changping District Beijing PRC
Mr. Liu Libo (劉立波) Flat 1601, Unit 1, Court No. 5 Chinese Banqiao North Street Zhaoquanying Town Shunyi District Beijing PRC
Non-executive Director Mr. Jiang Min (江敏) Room 101, 1/F Chinese No. 67 of Lane 100 Wanding Road Minghang District Shanghai PRC
Independent non-executive Directors Mr. Chan Ka Kit (陳家傑) Flat C2, 9/F, Oxford Court Chinese 24 Braemar Hill Road North Point Hong Kong
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Name Residential Address Nationality
Ms. Zhang Ran (張然) Room 501, Unit 3, Block 28 Chinese New Xinjiayuan, Wanliuwanquan Haidian District Beijing PRC
Mr. Gong Yuzhen (宮玉振) Room 1703, Block 5 Chinese Jingshiyuan Community No. 9 Lincui Road Chaoyang District Beijing PRC
SUPERVISORS
Name Residential Address Nationality
Mr. Wang Jianzhong (王建中) 3-1402, 12/F Chinese District 7 Jingwangjiayuan Chaoyang District Beijing PRC
Mr. Guo Jingxiang (郭敬祥) Room 301, Unit 2 Chinese Block 3 Yannan Yuan Area 2 of Yinhua Garden Shunyi District Beijing PRC
Ms. Ge Ruina (葛蕊娜) Room 102, Unit 3 Chinese Block 5 Huayuting Changping District Beijing PRC
For further information regarding our Directors and Supervisors, see “Directors, Supervisors and Senior Management.”
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PARTIES INVOLVED IN THE [REDACTED]
Sole Sponsor Haitong International Capital Limited Suites 3001-3006 and 3015-3016 One International Finance Centre No. 1 Harbour View Street Central Hong Kong
[REDACTED]
Legal advisors to our Company as to Hong Kong and US law: Sidley Austin Level 39, Two International Finance Centre 8 Finance Street Central Hong Kong
as to PRC law: King & Wood Mallesons 18th Floor, East Tower World Financial Center No. 1 Dongsanhuan Zhonglu Chaoyang District Beijing PRC
as to Brazilian law: Gabriel Quintanilha Advogados Law Firm 479, Tabapuã St, CJ.41 Itaim Bibi São Paulo/SP 04533-011 Brazil
as to international sanctions law: Hogan Lovells 11th Floor, One Pacific Place 88 Queensway Hong Kong
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Legal advisors to the Sole Sponsor and as to Hong Kong and US law: the [REDACTED] Paul Hastings 21-22/F, Bank of China Tower 1 Garden Road Hong Kong
as to PRC law: Jingtian & Gongcheng 34/F, Tower 3 China Central Place 77 Jianguo Road Chaoyang District Beijing PRC
Auditor and reporting accountants KPMG Certified Public Accountants 8/F, Prince’s Building 10 Chater Road Central Hong Kong
Compliance advisor Haitong International Capital Limited Suites 3001-3006 and 3015-3016 One International Finance Centre No. 1 Harbour View Street Central Hong Kong
Industry consultant Frost & Sullivan (Beijing) Inc., Shanghai Branch Co. Suite 2504 Wheelock Square 1717 Nanjing West Road Shanghai PRC
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Headquarters in the PRC Panther International Center No. 8 Shangcheng Road Hongfu Pioneer Park Changping District Beijing PRC
Registered office in the PRC 3/F, Block 1 No. 28 Huoju Avenue Technology Park Changping District Beijing PRC
Principal place of business in Hong Kong Room 1901, 19/F, Lee Garden One 33 Hysan Avenue Causeway Bay Hong Kong
Company’s website address www.pantherhealthcare.com (information on this website does not form part of this document)
Company secretary Ms. Fung Po Ting (馮寶婷) (a member of the Hong Kong Institute of Chartered Secretaries and the Chartered Governance Institute in the United Kingdom) Room 1901, 19/F, Lee Garden One 33 Hysan Avenue Causeway Bay Hong Kong
Authorized representatives Mr. Qu Chao (曲超) Villa 22, Area 7 Fengshu Jiayuan Dongsha Gezhuang Beiqijia Town Changping District Beijing PRC
Ms. Liu Qing (劉青) Villa 22, Area 7 Fengshu Jiayuan Dongsha Gezhuang Beiqijia Town Changping District Beijing PRC
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Alternate to the authorized representatives
Ms. Fung Po Ting (馮寶婷) Room 1901, 19/F, Lee Garden One 33 Hysan Avenue Causeway Bay Hong Kong
Audit committee Mr. Chan Ka Kit (陳家傑) (Chairperson) Ms. Zhang Ran (張然) Mr. Gong Yuzhen (宮玉振)
Remuneration committee Ms. Zhang Ran (張然) (Chairperson) Ms. Liu Qing (劉青) Mr. Gong Yuzhen (宮玉振)
Nomination committee Mr. Qu Chao (曲超) (Chairperson) Ms. Zhang Ran (張然) Mr. Gong Yuzhen (宮玉振)
[REDACTED]
Principal bank Bank of Beijing (Asian Game Branch) 1st Floor, Block A Unit 309, Tianchuang Shiyuan Huizhongbei Lane, Chaoyang District Beijing, PRC
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Certain information and statistics set out in this section and elsewhere in this document relating to the industry in which we operate are derived from the F&S Report prepared by F&S, an independent industry consultant, which was commissioned by us. The information extracted from the F&S Report should not be considered as a basis for investments in our Company or as an opinion of F&S as to the value of any securities or the advisability of investing in our Company. We believe that the sources of such information and statistics are appropriate for such information and statistics and have taken reasonable care in extracting and reproducing such information and statistics. We have no reason to believe that such information and statistics are false or misleading or that any fact has been omitted that would render such information and statistics false or misleading in any material respect. No independent verification has been carried out on such information and statistics by us, the Sole Sponsor, [REDACTED], the [REDACTED], the [REDACTED], the [REDACTED] or any other parties (other than F&S) involved in the [REDACTED] or their respective directors, officers, employees, advisors, or agents, and no representation is given as to the accuracy or completeness of such information and statistics. Accordingly, you should not place undue reliance on such information and statistics. Unless and except for otherwise specified, the market and industry information and data presented in this “Industry Overview” section is derived from the F&S Report.
THE MEDICAL DEVICE MARKET IN THE PRC Market Size
Driven by the aging population and increasing healthcare sector investment from government, China’s medical device market has grown rapidly. The size of China’s medical device market grew from RMB370 billion in 2016 to RMB770 billion in 2020, representing a CAGR of 20.1%. The size of China’s medical device market is expected to reach RMB1,294 billion in 2025, with a CAGR of 10.9% from 2020 to 2025. China’s medical device market is still underdeveloped as compared to that of developed countries. The per capita expenditure on medical devices in the PRC has been increasing significantly, reaching RMB545 in 2020, representing a CAGR of 19.5% from 2016 to 2020. In comparison, the per capita expenditure on medical devices of the United States was RMB4,695 in 2020. Key Growth Drivers and Trends
China’s economy continues to grow, with a GDP growth rate of 2.3% in 2020. The economic growth and increasing per capita disposable income have enabled more patients in China to spend on better healthcare service. In addition, the government has issued several policies in recent years to promote the development of China’s medical device market. For example, in 2016, the government promulgated “Health China 2030,” focusing on accelerating the approval process of innovative and urgently needed medical devices. In addition, many local governments provide tax relief and medical device product registration and innovation subsidies for medical device products. It is believed that government policies will stimulate the innovation of medical devices and further benefit the industry in a long term. THE MISIA MARKET IN THE PRC
MIS, compared with open surgeries which leave large wounds that are painful and difficult to heal, involve surgical techniques that limit the size of incisions and therefore lessen the wound healing time, pain and risk of infection. MIS mainly consist of laparoscopic, thoracoscopic surgeries. MIS are widely used in surgical specialties of obstetrics and gynecology (OBGYN) surgery, urologic surgery, thoracic surgery, orthopedics and other general surgeries. MISIA are the primary medical devices used in MIS. MISIA can be sorted into smart MISIA and other instruments such as clamps, cannulas, sutures, trocars and dissectors. Smart MISIA primarily include smart staplers, ultrasonic scalpels and electrotome instruments. Based
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The size of China’s MISIA market experienced rapid increase in the past five years. The size of China’s MISIA market increased from RMB12 billion in 2016 to RMB19 billion in 2020 at a CAGR of 13.1%, and is expected to reach RMB42 billion in 2025, representing a CAGR of 17.1% from 2020 to 2025. The size of China’s endoscopic and smart stapler market, being the largest market in the MISIA market, represents 27.9% of the total MISIA market in China in 2020 and is expected to reach 30.2% in 2025. The size of China’s ultrasonic scalpel market represents 10.4% of the total MISIA market in China in 2020 and is expected to reach 14.4% in 2025. The following charts set forth the historical and forecasted size and penetration rate of the MISIA market in China for the periods indicated: Historical and Forecasted Market Size of China’s MISIA Market, 2016-2025E
Period CAGR 2016-2020 13.1% 2020-2025E 17.1% 21.8% Million RMB 19.6% Ex-factory Price 17.5% 15.8% 14.2% 12.2% 12.8% 11.4% 10.2% 8.8% 42,343 36,863 31,705 27,032 22,893 19,243 15,971 18,327 11,772 13,787
20162017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
MISIA Market Penetration Rate of MIS(1)(2)
(1) For the purpose of this chart, MIS includes laparoscopic surgery and thoracoscopic surgery, but not arthroscopic surgery.
(2) Penetration rate of MIS is calculated as the number of MIS performed during a certain period divided by the total number of surgeries performed during the same period. Source: Annual Report, Expert Interview, NHC, F&S analysis
The penetration rate of MIS in China was 12.8% in 2020, significantly lower than the 50.7% penetration rate in the US. In addition, the penetration rates of MIS in China were uneven among different hospitals. The penetration rate of MIS in China in 2020 was 14.1%, 11.4%, 3.4% in Grade III general hospitals, Grade II general hospitals and other hospitals, respectively. Market Drivers and Trends
The key growth drivers and future trends of the MISIA market in China primarily include the following: • Increasing penetration of MIS. MIS are generally accepted by patients and surgeons given their advantages over open surgeries. Substantially all Grade IIIA hospitals provide endoscopic surgeries. In 2020, the penetration rate of MIS in the United States and China was 50.7% and 12.8%, respectively. The penetration rate of MIS in China is expected to further increase, promoting the MISIA market.
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• Technology breakthrough. Innovative products developed by Chinese companies have reached technological levels similar to products developed by foreign companies in the smart device market. China’s MISIA market is further expanding with huge technological improvements. • Favorable policies. China has issued a series of policies of to encourage R&D of innovative medical devices and promote the MISIA market. Registration application of products with prominent clinical value will receive preferential review and approval and thus can be approved within a shorter period of time. • Expanding export market. With quality MISIA products developed after years of R&D and price advantages, domestic manufactures will become more competitive in export markets including India, Southeast Asia, and Southern America. Entry Barriers
The entry barriers to the MISIA market in China primarily include the following: • Technology barrier. To achieve product safety, stability and effectiveness, the development of MISIA requires expertise in multiple areas including material, mechanical engineering, product design and manufacturing to guarantee safety, stability and effectiveness. For smart MISIA, the requisite advanced technologies, such as automation, make the entry barriers even higher. • Marketing barrier. To establish quality end-user base, especially Grade IIIA hospitals with MIS capabilities, academic promotion and marketing capability are key for MISIA manufacturers. However, such academic promotion and marketing capability requires an experienced team, which is difficult and time-consuming for new entrants. • Investment barrier. The development of original products is time-consuming and costly, taking approximately three to five years for a product to go from design planning to final product registration. New players may not have sufficient capital resources and stable revenue during the product development. • Registration barrier. NMPA adopted strict licensing regulations for medical device manufacturing and product registration regime. The product registration process for Class II and Class III medical devices can take one to two years. Due to the long product registration cycle, new entrants will face uncertainties and investment risks. • Learning curve. Surgeon and hospitals are more willing to use products that have already been proved to be safe and effective and in line with their operational habits. The design and development of MISIA products with a shallow learning curve requires a thorough understanding of surgeries and an experienced R&D team. Therefore, it may prevent new players from entering the market. THE SURGICAL STAPLER MARKET
Surgical stapler is a medical device that replaces manual suture. Similar to a normal stapler, it uses titanium staples to anastomose the tissue. Surgical staplers can be classified into open staplers, endoscopic staplers and smart staplers. Open staplers are used in open surgeries while endoscopic staplers are mainly used in endoscopic surgeries. Based on different applications, open staplers can be further classified into linear staplers, circular staplers, skin staplers, purse-string staplers and linear cutting staplers. Endoscopic staplers are mainly used for removing part of an organ (resection), cutting through organs and tissues (transection) or creating connections between structures (anastomoses) in laparoscopic, thoracoscopic and many other types of MIS. Smart staplers are powered endoscopic staplers with intelligent functions such as tissue detection and smart firing.
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Size of the Global Surgical Stapler Market
The global surgical stapler market grew from US$6,439 million in 2016 to US$7,574 million in 2020, representing a CAGR of 4.1%. Among the global surgical stapler market, the global smart stapler market, accounting for 15.0% of total market size in 2020, grew from US$827 million in 2016 to US$1,139 million in 2020, representing a CAGR of 8.3%. It is estimated that the global smart stapler market will reach US$2,614 million in 2025 and account for 23.4% of the entire global surgical stapler market, representing a CAGR of 18.1% from 2020 to 2025. The following charts set forth the historical and forecasted size of the global surgical stapler market for the periods indicated: Historical and Forecasted Market Size of Global Surgical Stapler Market, 2016-2025E
CAGR Period Open Stapler Endo StaplerSmart Stapler Total 2016-2020 -0.1% 6.7%8.3% 4.1% 2020-2025E 5.2% 6.4%18.1% 8.1%
Million US$ Ex-factory Price Open Stapler Endo Stapler Smart Stapler
10,525 11,179 9,143 9,845 8,137 8,387 2,223 2,614 7,571 7,574 1,596 1,885 6,439 7,006 1,196 1,349 944 1,070 1,139 827 4,632 4,857 5,020 3,894 4,034 4,357 2,849 3,196 3,542 3,686
2,763 2,866 2,960 3,047 2,748 3,004 3,190 3,328 3,445 3,545 2016 20172018 2019 2020 2021E 2022E 2023E 2024E 2025E
Source: Annual Report, Expert Interview, F&S analysis.
Size of the Surgical Stapler Market in Europe
Except a decrease due to the influence of COVID-19 in 2020, the size of the surgical stapler market in Europe has been increasing in the past five years. The size of surgical staplers market in Europe grew from US$2,049 million in 2016 to US$2,137 million in 2020, representing a CAGR of 1.1%. It is estimated that the surgical stapler market in Europe will reach US$2,896 million in 2025, representing a CAGR of 6.3% from 2020 to 2025. Size of the Surgical Stapler Market in the PRC
The size of open staplers market in China grew from RMB981 million in 2016 to RMB1,526 million in 2020, representing a CAGR of 11.7%. The size of the endoscopic stapler market in China grew from RMB2,584 million in 2016 to RMB4,379 million in 2020, representing a CAGR of 14.1%. The size of the smart stapler market in China grew from RMB322 million in 2016 to RMB988 million in 2020, representing a CAGR of 32.4% and accounting for 14.3% of total surgical stapler market in China in 2020. It is estimated that the size of the smart stapler market in China will reach RMB5,410 million in 2025, representing 35.6% of total market size.
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The penetration rate of endoscopic and smart staplers in China was 9.4% in 2020, significantly lower than the 41.5% penetration rate in the US. The following charts set forth the historical and forecasted size of China’s surgical stapler market and the penetration rate of endoscopic and smart staplers in China for the periods indicated: Historical and Forecasted Market Size of China’s Surgical Stapler Market, 2016-2025E
CAGR Period Open Stapler Endo StaplerSmart Stapler Total 2016-2020 11.7% 14.1%32.4% 15.4% 2020-2025E 9.6% 11.0%40.5% 17.2% Million RMB Ex-factory Price
11.1% 11.4% 10.6% 10.1% 9.7% 9.3% 9.4% 9.4% 9.4% 9.2% 15,211
13,291 2,413 11,461 2,253 9,801 2,081 8,288 1,907 7,387 6,649 6,893 6,802 5,708 1,731 4,782 1,597 1,526 6,195 3,887 1,388 5,616 1,174 4,992 981 4,285 4,379 5,410 3,793 4,235 2,584 3,220 3,185 1,565 2,277 322 388 526 768 988 2016 20172018 2019 2020 2021E 2022E 2023E 2024E 2025E Smart Stapler Endo Stapler Open Stapler Penetration Rate of Endoscopic and Smart Staplers*
(1) Penetration rate is calculated as the number of MIS performed with endoscopic or smart staplers during a certain period divided by the total number of MIS performed during the same period. Source: Annual Report, Expert Interview, F&S analysis By 2025 the size of China’s surgical stapler market is expected to reach RMB15,211 million, with a proportion of 48.4% contributed by domestic brands and 51.6% contributed by foreign brands. The following charts set forth the historical and forecasted sales revenue of foreign brand and domestic brand surgical stapler in China’s surgical stapler market for the periods indicated: Sales Revenue of China’s Surgical Stapler Market Breakdown by Foreign Brands and Domestic Brands, 2016-2025E
CAGR Period Foreign Brands Domestic Brands Total 2016-2020 12.4% 22.4% 15.4% 2020-2025E 11.8% 25.2% 17.2%
Million RMB Ex-factory Price 48.4% 45.5% 42.5% 39.5% 36.9% 15,211 34.3% 34.7% 32.1% 13,291 29.5% 27.4% 11,461 9,801 7,363 6,043 8,288 4,874 6,609 6,893 3,875 5,708 3,058 4,782 2,265 2,393 3,887 1,833 1,412 7,848 1,065 6,587 7,248 5,230 5,926 3,875 4,344 4,500 2,822 3,370
2016 20172018 2019 2020 2021E 2022E 2023E 2024E 2025E Foreign Brands Domestic Brands Proportion of Domestic Brands
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Source: Annual Report, Expert Interview, F&S analysis
The sales volume of domestic brands surgical staplers in China grew from 1.3 million in 2016 to 3.1 million in 2020, representing a CAGR of 23.5%. The sales volume of foreign brands surgical staplers grew from 1.7 million in 2016 to 2.9 million in 2020, representing a CAGR of 13.4%. The estimated total sales volume of surgical staplers in 2025 is 15.2 million, with a proportion of 65.9% contributed by domestic brands and 34.1% contributed by foreign brands. The following charts set forth the historical and forecasted sales volume of China’s surgical stapler market for the periods indicated: Historical and Forecasted Sales Volume of China’s Surgical Stapler Market, 2016-2025E
CAGR Foreign Domestic Period Total Brands Brands 2016-2020 13.4% 23.5% 18.2% 2020-2025E 12.7% 26.6% 20.7% 15.2 Million 12.9 10.8 8.9 10.0 7.3 8.1 6.5 5.6 5.9 4.7 5.1 3.8 4.0 2.9 3.1 3.0 2.3 1.8 1.3 4.3 4.7 5.2 2.9 3.3 3.8 1.7 2.1 2.4 2.7 20162017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
Foreign Brands Domestic Brands
Source: Annual Report, Expert Interview, F&S analysis.
Competitive Landscape
We rank first among domestic surgical stapler manufacturers in the PRC in terms of sales volume in 2020, representing 14.3% of total sales volume by domestic surgical stapler manufacturers. We were also the largest domestic surgical stapler player in terms of export sales volume from 2016 to 2020. We also had the largest hospital coverage in China in 2020 among domestic surgical stapler manufacturers. The following tables set forth the top five surgical stapler domestic players by sales volume and by export sales volume and the top three domestic surgical stapler players in terms of hospital coverage in 2020: Top Five Domestic Top Three Domestic Top Five Domestic Surgical Surgical Stapler Surgical Stapler Players by Stapler Players by Export Manufacturers by Sales Number of Hospitals Sales Volume Volume, 2020 Covered in China, 2020 in China, 2020 Company Sales Volume Number of Hospitals Covered Company Sales Volume (Thousand) Company in China (Thousand) Panther 629 Panther 1,200+ Panther 271
A 525 A 600+ B 140
B 464 B 500+ C 55
C 228 A 51
D 168 D 47
Source: Annual Report, Expert Interview, F&S analysis.
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Endoscopic Staplers
As of the Latest Practicable Date, our endoscopic staplers were one of the domestically developed endoscopic staplers that had been approved for commercialization in China. The key technical features of our endoscopic staplers include 60° articulation approved for 25 firings, 360° smooth articulation system and tissue atraumatic extra griping and less slippage. Smart Staplers
As of the Latest Practicable Date, our first generation and second generation smart staplers were one of the domestically developed smart staplers. The following chart summarizes our smart stapler candidate and major smart staplers that have been approved for commercialization in China:
Company Earliest NMPA Approval(1) Latest Key Technical Features(2)
• Uniform compression with gripping surface technology for better capture X (Foreign) 2013 • Better staple formation in thick tissue • Optimized firing speed and audible feedback • Fewer leaks at the staple line • Fully automated smart stapler • Tri-Staple technology that provides less stress on Y (Foreign) 2014 tissue during compression and clamping • Greater perfusion into the staple line and the ability to manage tissue variability • 3D staple design • 60° articulation offers better visibility and improve access for ultra low resection D 2018 • Better grip strength • Symmetrical ergonomic design to allow either hand operation • Fire up to 25 times by changing the single use loading units B 2019 • Powered adjustment of articulation joint • Integrated automatic & manual reset mode • Flexible compression with dual-side timer lock E 2020 • Buzzing sound as ready-to-fire signal • All series smart stapler platform F 2021 • Repetitive/disposable electric handle • Selecting the preset firing parameters according to different reloads • Prompting before firing according to the results of Panther N/A tissue thickness detection • Intelligently realtime adjusting firing speed & force to manage tissue variability • 15 times firing in single surgery
(1) Refers to the earliest trackable NMPA approval time. (2) Key features of latest approved products. Source: NMPA, F&S analysis
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THE ULTRASONIC SCALPEL MARKET
Introduced in the 1990s, ultrasonic scalpels are now widely used in MIS. The ultrasonic scalpels are used to cut and seal tissues or vessels simultaneously by utilizing ultrasonic vibrations. Ultrasonic scalpels are more gentle to tissues comparing to other surgical instruments due to their hemostasis features less thermal injury caused. Therefore, ultrasonic scalpels are suitable in many surgeries and operations. Size of the Global Ultrasonic Scalpel Market
The global ultrasonic scalpel market has been growing steadily. The size of the global ultrasonic scalpels market grew from US$2,319 million in 2016 to US$2,870 million in 2020, representing a CAGR of 5.5%. It is estimated that the size of the global ultrasonic scalpels market will reach US$4,633 million in 2025, with a CAGR of 10.1% from 2020 to 2025. The following charts set forth the historical and forecasted size of the global ultrasonic scalpel market for the periods indicated: Historical and Forecasted Market Size of Global Ultrasonic Scalpel Market, 2016-2025E
Period CAGR 2016-2020 5.5% 2020-2025E 10.1%
Million US$ Ex-factory Price 4,633 4,140 3,747 3,403 2,870 3,102 2,619 2,775 2,319 2,467
20162017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
Source: Annual Report, Expert Interview, F&S analysis
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Size of the Ultrasonic Scalpel Market in China
The ultrasonic scalpel market in China has been continuously growing. The size of domestic brand ultrasonic scalpels market in China grew from RMB12 million in 2016 to RMB205 million in 2020, representing a CAGR of 102.1%. The market size of foreign brand ultrasonic scalpels grew from RMB1,010 million in 2016 to RMB1,804 million in 2020, representing a CAGR of 15.6%. It is estimated that the market size of domestic brand and foreign brand ultrasonic scalpels in China will reach RMB2,204 million and RMB3,905 million in 2025, respectively. The penetration rate(1) of ultrasonic scalpels in China was 1.1% in 2020, while it reached 27.0% the same year in the US. The following charts set forth the historical and forecasted size of China’s ultrasonic scalpel market for the periods indicated: Historical and Forecasted Market Size of China’s Ultrasonic Scalpels Market, 2016-2025E
CAGR Domestic Foreign Period Total Brands Brands 2016-2020 102.1% 15.6% 18.4% 2020-2025E 60.8% 16.7% 24.9%
Million RMB Ex-factory Price Foreign Brands Domestic Brands 6,110 4,952 3,966 3,905 3,162 2,513 3,465 1,801 2,008 3,006 1,241 1,504 2,557 1,022 2,154 1,804 2,204 1,417 1,625 1,010 1,206 961 1,486 12 36 87 176 205 359 604 20162017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
Source: Annual Report, Expert Interview, F&S analysis.
Competitive Landscape
We expect to launch our first generation ultrasonic scalpels in China in 2022. The following chart summarizes our ultrasonic scalpel candidate and major ultrasonic scalpels that have been approved for commercialization in China:
Company Earliest NMPA Approval(1) Latest Key Technical Features(2)
• Seals vessels with diameter Յ7mm • Less thermal damage, fewer adhesions and faster X (Foreign) 2004 transection • Curved blade • Seals vessels with diameter Յ5mm • Cordless ultrasonic scalpel • Less thermal spread, lower maximum jaw Y (Foreign) 2014 temperature compared to Company Z’s ultrasonic scalpel • Faster dissection than Company A’s ultrasonic scalpel
(1) Penetration rate is calculated as the number of surgeries performed with ultrasonic scalpels during a certain period divided by the total number of surgeries performed during the same period.
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Company Earliest NMPA Approval(1) Latest Key Technical Features(2)
• Seals vessels with diameter Յ7mm • The first integration of both bipolar and ultrasonic Z (Foreign) 2004 energies for dissection, fast cutting, secure hemostasis and sealing • Unique tip shape design • Seals vessels with diameter Յ3mm B 2011 • A series of alarm signals and error codes to help identify and check errors • Integration of both bipolar and ultrasonic energies G 2013 • Compatibility matching the existing systems and transducers • Seals vessels with diameter Յ5mm H 2020 • Unique cutter head and powerful clamp design • Seals vessels with diameter Յ5mm • More efficient cutting and vascular coagulation Panther N/A with less thermal injuries • Special coating technology
(1) Refers to the earliest trackable NMPA approval time.
(2) Key features of latest approved products. Source: NMPA, F&S analysis.
THE SURGICAL ROBOT MARKET
Surgical robots, used in MIS, can achieve high operational precision, reproducibility and operational stability, resulting in significant clinical benefits for patients. It provides ultra-high definition visual systems in narrow and confined surgical spaces through high-resolution 3D stereopsis. Surgical robots are classified into four categories according to different sub-areas: laparoscopic robotics, surgical navigation robotics, vascular interventional robots, and natural orifice transluminal laparoscopic robotics. Laparoscopic Surgical Robots and Development Directions
Laparoscopic surgical robots have been widely used in clinical practice, mainly in urologic, general surgery, gynaecologic and thoracic departments. Laparoscopic surgical robots allow surgeons to perform minimally invasive laparoscopic procedures with precision, assisted by a computer console, a robotic arm system, robotic instruments and a high-definition camera system. Laparoscopic surgical robot is a type of surgical robot specifically used in laparoscopic and thoracoscopic surgeries. It involves key technologies including laparoscopic robotic human-computer interaction, laparoscopic robotic remote control and laparoscopic robotic systems and AI technology. The development directions of the key technologies include the following: • Tactile perception. During robot-assisted surgeries, it is difficult for surgeons, without touching tissues directly, to judge the elasticity, pulsatility, stiffness and toughness of blood vessels, tumors, and other tissues by tactile sensation. Thus, tactile perception will be an important development direction for surgical robots to improve surgical safety and feasibility. • Remote surgery. Capitalizing on the intelligent sensing, human-computer interactive technology and 5G communication technology, remote surgery and treatment with precision will be an important development direction.
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• Robotic systems big data application. The ability to record and analyze big data allows robotic surgery programs to be replicated, analyzed and applied in a much larger range. Therefore, the data analyzing capability of robotic systems will be an important development direction for surgical robots. • AI technology. The AI technology is expected to be applied to laparoscopic robots to enable multiple functions, including voice command, intra-abdominal visual recognition and navigation. Application of AI technology to enable more functions will be a primary direction for laparoscopic robots. Market Size
The number of robot-assisted laparoscopic surgeries performed in China has grown rapidly from 18,000 in 2016 to 47,400 in 2020 at a CAGR of 27.4%. The number of such surgeries performed in China is expected to grow exponentially at a CAGR of 59.0% from 2020 to 2025, reaching 481,100 in 2025. The penetration rate of robot-assisted laparoscopic surgeries in China was 0.5% in 2020, significantly lower than the 13.3% penetration rate in the US. The following charts set forth the historical and forecasted number of robot-assisted laparoscopic surgeries performed in China for the periods indicated: Historical and Forecast Number of Robot-Assisted Laparoscopic Surgeries in China, 2016-2025E
Period CAGR 2016-2020 27.4% 2020-2025E 59.0% 2.3% Thousand procedures 1.9% 481.1 1.4%
1.1% 337.2 0.8% 0.5%0.5% 0.5% 0.5% 216.1 0.4% 136.7 87.5 47.4 18.0 26.8 32.6 38.9 20162017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E Robot-assisted Surgery Volume Penetration Rate
(1) Penetration rate is calculated as the number of surgeries performed with laparoscopic surgical robots during a certain period divided by the total number of MIS performed during the same period. Source: Annual Report, Expert Interview, F&S analysis.
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The market size of laparoscopic surgical robots in China has grown rapidly. The laparoscopic surgical robots market consist of disposables, such as disposable surgical staplers and disposable ultrasonic scalpels, customer services and the robotic systems. The size of laparoscopic surgical robots market in China grew from RMB681 million in 2016 to RMB2,197 million in 2020, representing a CAGR of 34.0%. It is estimated that the market size of laparoscopic surgical robots in China will continuously grow at a CAGR of 43.0% from 2020 to 2025 and is expected to reach RMB13,133 million by 2025. The following charts set forth the historical and forecasted market size of China’s laparoscopic surgical robot market for the periods indicated: Historical and Forecast Market Size of China’s Laparoscopic Surgical Robots, 2016-2025E
CAGR 2016-2020 2020-2025E Overall 34.0% 43.0% 13,133.0 Services 31.1% 47.5% Disposables 26.4% 48.8% Systems 41.3% 37.8% 10,549.3
Million RMB 7,912.7 Ex-factory Price 5,667.8 3,851.3 2,022.6 2,196.9 680.7 700.4 787.0 2016 2017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E Overall market size 680.7 700.4 787.0 2,022.6 2,196.9 3,851.3 5,667.8 7,912.7 10,549.3 13,133.0 Market size of services 44.5 50.4 55.3 96.3 131.6 201.2 309.2 460.8 666.8 919.4 Market size of disposables 328.8 480.6 584.0 696.4 838.9 1,545.7 2,397.2 3,538.0 4,860.7 6,111.4 Market size of systems 307.3 169.4 147.6 1,229.9 1,226.4 2,104.4 2,961.4 3,913.8 5,021.7 6,102.1
Source: Annual Report, Expert Interview, F&S analysis.
Competitive Landscape
The following chart summarizes major laparoscopic surgical robots reaching clinical trial or commercialization stage in China:
Earliest NMPA NMPA Green Latest Key Company Approval(1) Channel NMPA Process Technical Features(2)
• 3D imaging, 4 robotic arms, surgical system with 7 degrees of 2018 – NMPA approval freedom • Tremor filtration O (Foreign) • Surgical simulation training, intraoperative fluorescence visualization 2011 – NMPA approval • Single hole surgical equipment, endo luminal specific ultrasound assistance • 3DHD vision system, 4 robotic Application arms I N/A Listed submitted • Tremor filtration J N/A Listed Clinical trials N/A K N/A Listed Clinical trials N/A L N/A Listed Clinical trials N/A M N/A N/A Clinical trials N/A
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Earliest NMPA NMPA Green Latest Key Company Approval(1) Channel NMPA Process Technical Features(2)
N N/A N/A N/A N/A • 3D imaging, 4 robotic arms, 7 degrees of freedom • ICG fluorescence imaging system Panther N/A N/A N/A • Tremor filtration • AI assistance • Compatible for 5G
Source: NMPA, F&S analysis
(1) Refers to the earliest trackable NMPA approval time. (2) Key features of latest approved products.
Market Drivers and Trends of the Surgical Robot Market in the PRC
The key growth drivers of the surgical robot market in China primarily include the following: • Increasing demand for surgical robots. When performing surgeries in narrow areas like prostate, or for complicated tissue situations of pancreas operations, surgical robots are more effective and more precise than surgeons. As the per capita disposable income increases and more and more people are concerned of their health, the demand for precise robotic surgeries will increase. • Favorable policies. In response to the vigorous robot industry, Chinese governments have formulated various policies to support the development of surgical robot operating systems and to promote the application of surgical robots in clinical practices. • Technology development. The tactile feedback system of surgical robots used to be incomplete, making it difficult for doctors to distinguish soft and hard tissue and increasing operational uncertainties and risks. Through development of combination of human-computer interaction system with intelligent perception, surgical robot’s capability and surgeon’s operational accuracy will improve. • Breaking the monopoly landscape. The world’s first surgical robot was introduced into China in 2006, and later became a monopoly in the surgical robots industry. With continuous scientific and technological development, domestic surgical robot manufacturers are launching new products with similar quality and lower price. The monopolistic position of multinational companies in the high-end medical device market will gradually disappear, and the market share of domestic surgical robots will gradually increase.
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HISTORICAL PRICES OF MAJOR RAW MATERIALS
Major raw materials used in MISIA include medical-grade stainless steel and polycarbonate particles. The average price of polycarbonate particles and medical-grade stainless steel fluctuated slightly from 2016 to 2020 but generally remained stable. The average price of medical-grade stainless steel generally remained stable during 2016 to 2020. Considering that (i) the average price of polycarbonate particles is relatively low; and (ii) labor costs may affect the cost structure of MISIA as well, the impact of price fluctuation of polycarbonate particles is relatively small. Therefore, the ex-factory prices of major products and profitability of MISIA manufacturers remained relatively stable. The following charts set forth the historical average prices of medical-grade stainless steel per ton and polycarbonate particles per kilogram for the periods indicated: Annual Average Price of Medical-grade Annual Average Price of Polycarbonate Stainless Steel in China, 2016-2020 Particles in China, 2016-2020 Thousand RMB/ton RMB/kg 35 20 30.5 15.8 15.8 15.4 30 14.7 26.2 15 25 19.5 20 18.2 13.0 21.0 10 15
10 5 5
0 0 20162017 20182019 2020 20162017 2018 2019 2020 Average Price Average Price
Source: F&S Report
SOURCE OF INFORMATION
In connection with the [REDACTED], we commissioned F&S, an Independent Third Party, to prepare a report on the global and China markets of MISIA and surgical robots. We have agreed to pay a total of RMB1.08 million in fees for the preparation of the F&S Report. F&S is a market research and consulting company founded in 1961 that provides market research on a variety of industries including healthcare. In preparing the report, F&S conducted primary and secondary research to collect data and deliver conclusions. In detail, F&S collected and reviewed publicly available data such as government-derived information, annual reports and industry association statistics, as well as market data collected by conducting interviews with key industry experts and leading industry participants. Primary research includes in-depth, telephone and face-to-face discussion with key industry experts and leading industry participants. Secondary research includes (i) information derived from government agencies, such as National Health and Family Planning Commission, FDA and NMPA, (ii) F&S in-house research, (iii) industry reports, (iv) industry literature and (v) annual reports of listed companies. The market projections in the commissioned report are based on key assumptions including (i) the overall social, economic and political environment in the PRC is expected to remainstable during the forecast period; (ii) China’s economic and industrial development is likely to maintain steady growth over the next decade; (iii) key industry drivers, such as accelerated aging population, growing demands from healthcare institutions, the increasing prevalence of chronic diseases, and continuous technology innovation are likely to drive the growth of China’s medical device market during the forecast period; and (iv) no extreme force majeure or industry regulation will dramatically or fundamentally affect the market. Except as otherwise noted, all data and forecasts in this section are derived from the F&S Report. Our Directors confirm that, to the best of their knowledge, after taking reasonable care, there has been no adverse change in market information since the date of the F&S Report which may qualify, contradict or impact the information disclosed in this section.
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OVERVIEW OF PRC REGULATIONS
The business of the Company has been and will continue to be governed by the laws and regulations of the PRC. Relevant laws and regulations are promulgated and implemented by the government authorities of the PRC, including national and local laws and regulations in relation to the research and development, production and sales of surgical medical devices. This section contains a summary of the prevailing regulatory and legal provisions relating to the Company’s business.
General Regulatory Framework
The medical device industry in the PRC is subject to strict and extensive regulation and inspection by government authorities. The major regulatory authority is the National Medical Products Administration (the “NMPA”) under the State Administration for Market Regulation, which is responsible for, among other things, the safety supervision and management, standards management, registration management, quality management and post-market risk management for medical devices, as well as organizing and guiding the supervision and inspection of medical devices. The medical device industry in the PRC is also subject to the supervision of the National Development and Reform Commission and the National Health Commission. In particular, the National Development and Reform Commission is mainly responsible for organizing the implementation of policies for medical device industry, conducting research on the proposed industry development plans, supervising the structural realignments within the industry and implementing industry management. The National Health Commission is responsible for draft laws, regulations, policies, and development plans of the health industry, and developing and organizing the implementation of relevant standards according to the laws.
Classification of Medical Devices
According to the Regulation on the Supervision and Administration of Medical Devices (《醫療器械監督管理條例》, which was promulgated by the State Council on January 4, 2000 and became effective on April 1, 2000, with the latest amendments coming into force on June 1, 2021), the PRC adopts classified administration over medical devices.
Class I medical devices refer to medical devices with low level of risk whose safety and effectiveness can be guaranteed through routine administration.
Class II medical devices refer to medical devices with medium level of risk which are subject to strict control and management in order to guarantee their safety and effectiveness.
Class III medical devices refer to medical devices with high level of risk which are subject to strict control through implementation of special measures in order to guarantee their safety and effectiveness.
At present, products of the Company include medical devices in Classes I, II and III.
Medical Device Registration Certificate
According to the Measures for the Administration of Registration of Medical Devices (《醫療器械註冊管理辦法》, which was promulgated by the NMPA on July 30, 2014 and became effective on October 1, 2014), Class I medical devices to be sold and used in the PRC are required to be filed with relevant drug administrative authorities at city level; Class II medical devices to be sold and used in the PRC are subject to the inspection and the grant of the medical device registration certificate upon approval by the drug administrative authorities at the provincial, autonomous region and municipality levels; Class III medical devices to be sold and used in the PRC are subject to the inspection and the grant of the medical device
– 136 – THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. REGULATORY OVERVIEW registration certificate upon approval by the NMPA. The medical device registration certificate is valid for five years, and the registrant shall apply for renewal within six months prior to its expiration. For Class II and Class III medical devices that have been registered, in the event of a change in the contents stated in the medical device registration certificate and its attachments, the registrant shall apply to the original registration department for registration changes and submit application materials in accordance with relevant requirements.
Clinical trial is required for the registration application of Class II and Class III medical devices but is exempted under any of the following circumstances:
(1) such medical devices have detailed operation mechanism, fixed design and mature production technology, and the same types of medical devices in the market have no record of severe adverse events after years of clinical application, and there are no changes on their ordinary usage;
(2) such medical devices are proven to be safe and effective through non-clinical evaluation; and
(3) such medical devices are proven to be safe and effective through clinical trials conducted on the same types of medical devices or through analytical evaluation on information obtained from clinical application.
The catalogue of medical devices exempted from clinical trials shall be formulated, updated and published by the NMPA. For Class III medical devices, NMPA’s approval for clinical trials is necessary where the clinical trials could pose relatively high risks to human. The catalogue of Class III medical devices whose clinical trials are subject to examination and approval shall be formulated, updated and published by the NMPA.
Medical Device Manufacturing License/Filing
According to the Regulation on the Supervision and Administration of Medical Devices (《醫療器械監督管理條例》), in addition to the required medical device registration certificates, manufacturers of medical devices shall file a record with or obtain a manufacturing license from drug administrative authorities at relevant level before commencing production. The medical device manufacturing license is valid for five years. Where the period of validity for the license needs to be extended upon expiry, the procedures for such extension shall be handled in accordance with the provisions of relevant laws on administrative licensing. For any changes to the contents stated in the manufacturing license, an application shall be submitted to relevant drug administrative authorities for registration of changes. For any changes to the contents stated in the recordation for manufacturing filing of Class I medical devices, the recordation shall be modified at the relevant recordation department.
According to the Measures for the Supervision and Administration of Medical Device Production (《醫療器械生產監督管理辦法》, which was promulgated by the NMPA on July 30, 2014 and became effective on October 1, 2014, and was amended and implemented on November 17, 2017), an enterprise engaging in the production of Class I medical devices shall complete record-filing with the drug administrative authorities under the city-level government with districts where it is located and submit information including a copy of filing certificate for the medical devices manufactured; an enterprise engaging in the production of Class II and Class III medical devices shall apply for a manufacturing license from the drug administrative authorities under the government of the province, autonomous region or municipality directly under the central government where it is located and submit information including copies of registration certificate and product technical requirement document for the medical devices manufactured.
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Permit for Medical Device Operation Enterprises
According to the Regulations on the Supervision and Administration of Medical Devices (《醫療器械監督管理條例》) and the Measures for the Supervision and Administration of Medical Devices (《醫療器械經營監督管理辦法》, which was promulgated by the NMPA on July 30, 2014 and became effective on October 1, 2014, and was amended and implemented on November 17, 2017), an enterprise engaging in the operations of Class I medical devices is not required to obtain approval or file a record. An enterprise engaging in the operations of Class II medical devices is required to file a record with the drug administrative authorities of the city with districts where it is located. An enterprise engaging in the operations of Class III medical devices shall obtain operation permit from the drug administrative authorities of the city with districts where it is located.
The term of validity of the operation permit for medical devices is five years. For renewal upon expiry, the holder of such permit shall submit an application to the drug administrative authority which issued the original permit for a renewal at least six months prior to its expiry.
No operation permit or record filing is required for the registrant, record holder or manufacturer of medical devices to sell its medical devices at its domicile or production sites; while it is required for it to store and sell medical devices in other places.
The medical device operation enterprise should adopt effective measures to ensure the transportation and storage process of medical devices complying with the requirements as specified in the specifications and labels of medical devices and maintain corresponding records to guarantee the quality and safety of medical devices.
Good Manufacturing Practice for Medical Devices
According to the Good Manufacturing Practice for Medical Devices (《醫療器械生產質 量管理規範》, which was promulgated by the NMPA on December 29, 2014 and became effective on March 1, 2015), the manufacturer of medical devices should abide by the requirements of this measures in the process of design, development, production, sales and after-sales service of medical devices. The manufacturer of medical devices shall, in accordance with the requirements of this measures and having taken into account product characteristics, establish and improve a quality management system that is compatible with the medical devices manufactured, and ensure their effective operation. The manufacturer of medical devices should implement risk management throughout the entire process of design, development, production, sales and after-sales service. The measures taken should be proportionate to the risks of the products.
Medical Insurance
The Notice on Issuing the Opinions on the Item Management, Medical Service Facilities Scope and Payment Standards of the Basic Medical Insurance for Urban Workers (《關於印發 城鎮職工基本醫療保險診療項目管理、醫療服務設施範圍和支付標準意見的通知》, which was issued by the Ministry of Labor and Social Security of the People’s Republic of China on June 30, 1999) prescribes the coverage of diagnosis and treatment where part of the fees is paid through the basic medical insurance scheme, including artificial organs and materials implanted within human body such as pacemakers, joint prosthesis, intraocular lens and intravascular stents, as well as disposable medical materials that can be charged separately as
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According to the Social Insurance Law of the People’s Republic of China (《中華人民共 和國社會保險法》, which was adopted by the Standing Committee of the National People’s Congress on October 28, 2010 and became effective on July 1, 2011, and was amended and implemented on December 29, 2018), the portion of medical fees incurred by insured persons that shall be settled with basic medical insurance funds shall be directly settled by social insurance management institutions with medical institutions and drug dealers. The labor protection administration department of each overall planning area shall prescribe their own specific percentage of the fees to be paid by patients.
Procurement and Pricing Procedure for Medical Devices
According to the Notice of the Ministry of Health on Further Strengthening the Administration of Centralized Procurement of Medical Devices (《衛生部關於進一步加強醫 療器械集中採購管理的通知》, which was issued by the Ministry of Health of the People’s Republic of China on June 21, 2007), all not-for-profit medical institutions under all levels of government and state-owned enterprises from different industries shall participate in the centralized procurement of medical devices.
According to the Notice of Opinions on Reform of Pricing System of Pharmaceuticals and Medical Services (《關於印發改革藥品和醫療服務價格形成機制的意見的通知》, which was issued by the National Development and Reform Commission, the Ministry of Health and the Ministry of Human Resources and Social Security of the People’s Republic of China on November 9, 2009), the management on the pricing of medical devices will be strengthened. For high value medical devices, especially for implantable and interventional medical devices, reasonable price formation can be guided by measures such as limiting the price difference rate in circulation links and publishing market price information.
According to the Good Practices for Centralized Procurement of High-Value Medical Consumables (for Trial Implementation) (《高值醫用耗材集中採購工作規範(試行)》, which was jointly issued by 6 departments including the Ministry of Health of the People’s Republic of China, the National Development and Reform Commission and the State Food and Drug Administration on December 17, 2012), high value medical consumables usually refer to medical devices that directly use on the human body, have strict requirements on safety, have large consumption for clinical use, have relatively high prices and have strong social response. Any qualified non-profit-making medical institutions established by the government at the county level or above or state-owned enterprises (including state-holding enterprises) must participate in the centralized procurement of high value medical consumables. The online centralized procurement of high value medical consumables will be led by government and conducted by each province (region and municipality). Medical institutions and medical consumables production and operation enterprises shall make procurement through the centralized procurement platform established by each province (region and municipality). The administrative authorities in charge of the centralized procurement in each province (region and municipality) shall be responsible for formulating and preparing a centralized procurement list of high value medical consumables within its administrative region. High value medical consumables listed on the centralized procurement list may be procured by way of public tenders and invitational tenders or by other means stipulated by laws and regulations of the State. A reasonable evaluation method shall be established for the centralized procurement with adherence to the principle of “quality first, reasonable price, appropriate price-performance
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Centralized Volume-based Procurement Policy
Pursuant to the Notice of the General Office of the State Council on Promulgation of the Reform Plan for the Control of High-value Medical Consumables (《國務院辦公廳關於印發治 理高值醫用耗材改革方案的通知》, which was issued by the General Office of the State Council on July 19, 2019), the State Council officially proposed to strengthen the standardized administration of high-value medical consumables. It was required to explore the classification of high-value medical consumables in accordance with the principles of volume-based procurement, volume-price linkage, and promotion of market competition, and conduct centralized procurement. Pursuant to the Key Control List of the First Batch of National High-value Medical Consumables (《第一批國家高值醫用耗材重點治理清單》, which was issued by the General Office of the National Health Commission on January 14, 2020), stapler was on the list. Pursuant to the Notice on the Rapid Collection of the Second Batch of High-value Medical Consumables Centralized Procurement Data and Price Monitoring (《關 於開展高值醫用耗材第二批集中採購數據快速採集與價格監測的通知》, which was issued by the National Medical Security Administration on November 20, 2020), the list of the second batch of medical consumables mainly included six kinds of high-value consumables, such as artificial hip joints, artificial knee joints, defibrillators, occluders, orthopedic materials and staplers.
Pursuant to the Opinions of General Office of the State Council on Promoting Normalization and Institutionalization of Centralized Drug Purchase (《國務院辦公廳關於推 動藥品集中帶量採購工作常態化制度化開展的意見》, which was issued by the General Office of the State Council on January 22, 2021), it was required to focus on including drugs with large consumption and high purchase prices into the scope of procurement under the national medical insurance drug catalogue, and gradually cover all kinds of clinically necessary, high-quality and reliable drugs on the market in China, so that all appropriate drugs could be procured under the catalogue. Enterprises participating in the centralized volume-based procurement shall give an undertaking on drug quality and supply guarantee. As of the date of execution of this document, the four-province alliances of Chongqing, Guizhou, Yunnan and Henan, Jiangsu, Hunan and Shanxi provinces have gradually commenced tendering for the volume-based procurement of staplers.
Dual Invoicing System
Pursuant to the Notice on Issuing the Implementing Opinions on Promoting the “Dual Invoicing System” for the Drug Procurement by Public Medical Institutions (for Trial Implementation) (《印發<關於在公立醫療機構藥品採購中推行“兩票制”的實施意見(試行)>的 通知》, which was issued by the Medical Reform Office of the State Council, the National Health and Family Planning Commission, the State Food and Drug Administration, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Commerce, the State Taxation Administration and the State Administration of Traditional Chinese Medicine on December 26, 2016), the “dual invoicing system” refers to the system that requires one invoice to be issued from pharmaceutical manufacturers to pharmaceutical distributors and the other invoice to be issued from pharmaceutical distributors to medical institutions. The wholly-owned or holding commercial company (only one commercial company is permitted in the whole country) or the domestic general agent for overseas drugs (only one domestic agent is permitted in the whole country)
– 140 – THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. REGULATORY OVERVIEW established by a pharmaceutical manufacturer or a group enterprise integrating science, industry and trade may be regarded as a manufacturer. The allocation of drugs between a pharmaceutical distribution group enterprise and its wholly-owned (holding) subsidiaries or among its wholly-owned (holding) subsidiaries may not be regarded as a process for which an invoice should be issued, but one invoice is allowed to be issued at most. Drug distribution enterprises are allowed to issue another invoice for drug purchase and sale on the basis of the “Dual Invoicing System” for the drugs distributed to rural (town) and village medical and health institutions which are particularly remote and inconvenient in transportation; In order to deal with special situations such as natural disasters, major epidemic situations, major emergencies and emergency (rescue) of patients, special treatment can be carried out for urgent purchase of drugs or national medicine reserve drugs; The circulation of narcotic drugs and psychotropic drugs of category I shall still be carried out in accordance with the current provisions of the state. Each province independently decides whether to implement the “dual invoicing system” policy in the field of medical devices.
Pursuant to the Notice on Consolidating the Achievements of Cancelling Drug Markups and Deepening Comprehensive Reforms in Public Hospitals (《關於鞏固破除以藥補醫成果持 續深化公立醫院綜合改革的通知》, which was issued by the National Health and Family Planning Commission, the Ministry of Finance, the National Development and Reform Commission, the Ministry of Human Resources and Social Security, the State Administration of Traditional Chinese Medicine and the Medical Reform Office of the State Council on March 5, 2018), a classified and centralized mechanism shall be implemented for the procurement of high-value medical consumables, and the “dual invoicing system” shall be carried out for the procurement and sale of high-value medical consumables. Pursuant to the Notice of the General Office of the State Council on Promulgation of the Reform Plan for the Control of High-value Medical Consumables (《國務院辦公廳關於印發治理高值醫用耗材改革方案的通 知》), provinces are encouraged to reduce the circulation of high-value medical consumables through the “dual invoicing system” and other methods based on actual conditions, and promote open and transparent purchase and sales.
Reform on the System for Review and Approval of Medical Devices
Pursuant to the Opinions of the State Council on the Reform of Review and Approval System for Drugs and Medical Devices (《國務院關於改革藥品醫療器械審評審批制度的意 見》, which was issued by the State Council on August 9, 2015), the method for review and approval of medical devices shall be reformed. It encourages the research, development and innovation of medical devices and includes the registration applications of innovative medical devices with core technical invention patent and significant clinic value into the scope of special review and approval in priority. It also states that medical device standards are required to be revised timely to improve the adoption rate of international medical device standards, thereby enhancing the quality of domestic medical device products, and the duties for the review and approval of some mature, safe and controllable medical devices shall be delegated from the NMPA to the medical products administration authorities at provincial level by adjusting product categories.
Pursuant to the Opinions of the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council on Deepening the Reform of Review and Approval System to Encourage Innovation in Drugs and Medical Devices (《中共中央辦公廳、國務院辦公廳關於深化審評審批制度改革鼓勵藥品醫療器械創新 的意見》, which was issued by the General Office of the CPC Central Committee and the General Office of the State Council on October 8, 2017), it was required to accelerate the review and approval of drugs and medical devices with urgent clinical needs, support the research and development of drugs and medical devices for treatment of rare diseases, improve the re-assessment system for medical devices and determine the legal liability of holders of medical device marketing licenses.
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Pursuant to the Notice of the State Council on Promoting the Reform of “Separating Operating Permits and Business Licenses” Nationwide (《國務院關於在全國推開“證照分離” 改革的通知》, which was promulgated by the State Council on September 27, 2018), the Reform of “Separating Operating Permits and Business Licenses” shall be implemented on the product registration of Class II medical devices, business license of Class III medical devices and manufacturing license of Class II and III medical devices, which simplifies approval procedures for medical device business operation.
Encouragement of Innovation in Medical Devices
Pursuant to the Opinions of the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council on Deepening the Reform of Review and Approval System to Encourage Innovation in Drugs and Medical Devices (《中共中央辦公廳、國務院辦公廳關於深化審評審批制度改革鼓勵藥品醫療器械創新 的意見》), in order to encourage the research and development of innovative medical devices, priority processing shall be given to the review and approval of those new drugs and innovative medical devices that are supported by the National Science and Technology Major Projects (國 家科技重大專項) and the National Key Research and Development Program (國家重點研發計 劃), and that pass the clinical trials carried out by the National Clinical Medical Research Center (國家臨床醫學研究中心) and obtain approvals from the administration department of the center.
Pursuant to the Regulation on the Supervision and Administration of Medical Devices (《醫療器械監督管理條例》), the PRC encourages the research and innovation of medical devices, to promote the promotion and application of new medical device technologies and promote the development of the medical device industry.
Pursuant to the Notice of the State Council on Promulgating “Made in China 2025” Plan (《國務院關於印發<中國製造2025的通知>》, which was issued by the State Council on May 8, 2015), the state encourages the innovation and industrialization of medical devices, focuses on the development of high-performance diagnostic and treatment equipment such as imaging equipment and medical robots, high-value medical consumables such as fully degradable vascular stent, and mobile medical products such as wearable and remote diagnosis and treatment.
Pursuant to the Notice of the State Council on Issuing the Deepening the Reform Plan of Medical and Health System in the “13th Five-Year Plan” (《國務院關於印發“十三五”深化醫 藥衛生體制改革規劃的通知》, which was issued by the State Council on December 27, 2016), through the market push and industrial policy guidance, enterprises are encouraged to improve innovation and research and development capabilities, promote excellence and strength and improve industrial concentration, achieve the quality of pharmaceutical medical equipment at or near the international advanced level, and build Chinese standards and Chinese brands, and the PRC will strengthen medical device innovation and strict medical device approval.
According to the Notice of General Office of Ministry of Science and Technology on Issuing the “13th Five-Year Plan for Scientific and Technological Innovation of Medical Devices” (《科技部辦公廳關於印發<“十三五”醫療器械科技創新專項規劃>的通知》, which was issued by the General Office of the Ministry of Science and Technology on May 26, 2017), enhancing the PRC ability to conduct independent innovation on medical devices and strengthening the application demonstration and promotion of domestic innovative medical equipment will provide an important support for establishing an efficient, hierarchical, coordinated, homogeneous and accessible medical and healthcare service system, improving the level of medical and health services and changing the model of health services.
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Encouragement Policies in Relation to Procurement of Domestic Medical Devices and Import of Alternative Products
Pursuant to the Guiding Opinions of the General Office of the State Council on Promoting the Sound Development of the Medical Industry (《國務院辦公廳關於促進醫藥產業健康發展 的指導意見》, which was issued by the General Office of the State Council on March 4, 2016), if domestically-manufactured drugs and medical devices can meet the requirements, government procurement projects must purchase domestically-manufactured products in principle, and gradually improve the level of domestic equipment allocation in public medical institutions.
Some provinces have issued encouragement policies in respect of procurement and use of domestic medical devices. For example:
In Heilongjiang Province, according to the Centralized Online Sunshine Procurement Implementation Plan of Medical Consumables of Medical Institutions in Heilongjiang Province (《黑龍江省醫療機構醫用耗材集中掛網陽光採購實施方案》, which was issued by six authorities including the Health and Family Planning Commission of Heilongjiang Province on May 9, 2016), medical and health institutions purchasing medical consumables should consider the brand, variety, quantity, price of medical consumables and the authentic and effective reference price provided by the supply enterprises, and medical and health institutions was encouraged to purchase domestic medical consumables.
In Hunan Province, the People’s Government of Hunan Province’s Notice on the Issuance of Pilot Program for Strengthening the Comprehensive Reform of the Medical and Healthcare System in Hunan Province (《湖南省人民政府關於印發<湖南省深化醫藥衛生體制綜合改革試 點方案>的通知》, which was issued by the People’s Government of Hunan Province on June 15, 2016), it was required to comprehensively carry out centralized procurement of high-value medical consumables, and public medical institutions are not allowed to purchase high-value medical consumables by themselves and encourages the procurement of domestically- manufactured high-value medical consumables on the premise of ensuring quality.
In Anhui Province, according to the General Office of the People’s Government of Anhui Province’s Notice on the Issuance of Implementation Plans for Promoting the Healthy Development of the Pharmaceutical Industry (《安徽省人民政府辦公廳關於印發促進醫藥產 業健康發展實施方案的通知》, which was promulgated by General Office of People’s Government of Anhui Province on July 7, 2016), if domestically manufactured drugs and medical devices can meet the requirements, government procurement projects must purchase domestically manufactured products in principle, and may not appoint imported products, and may not set specific parameters.
In Liaoning Province, according to the Rules on Management and Assessment of Procurement of Drugs, Medical Consumables and Medical equipment for Public Medical Institutions in Liaoning Province (Trial) (《遼寧省公立醫院醫療機構藥品、醫用耗材和醫療 設備採購管理與考核細則(試行)》, which was promulgated by the Health and Family Planning Commission Office of Liaoning Province on November 1, 2017), it was required to encourage the use of domestically manufactured products in the procurement of medical consumables and medical equipment.
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Export Registration and Free Sale Certificate for Medical Devices
Pursuant to the Measures for the Supervision and Administration of Medical Device Production (《醫療器械生產監督管理辦法》, which was promulgated by the State Food and Drug Administration on July 30, 2014 and became effective on October 1, 2014, and was amended and implemented on November 17, 2017), a manufacturer of medical devices for exportation purpose shall ensure that the medical devices it manufactures meet the requirements of the importing country (region), and the relevant information of the products shall be submitted to the drug administrative authorities of the city with districts where it is located for record.
According to the Announcement on Issuing the Provisions on the Administration of Medical Device Product Export Sales Certificates (《國家食品藥品監督管理總局關於發佈醫 療器械產品出口銷售證明管理規定的通告》, which was promulgated by the State Food and Drug Administration on June 1, 2015 and became effective on September 1, 2015), the food and drug administrative authorities shall issue a Free Sale Certificate for Exportation of Medical Devices Products to a production enterprise (hereinafter referred to as the enterprise) which has obtained a registration certificate of medical devices in China or has completed the registration and production record filing procedures of medical devices products. The enterprise shall ensure that the products for exportation meet the requirements of relevant regulations on the exportation of medical devices and relevant requirements of the importing country. All legal liabilities arising in the course of exportation shall be borne by the enterprise itself. The food and drug administrative authority of the province where the enterprise locates shall be responsible for the management of the Free Sale Certificate for Exportation of Medical Devices Products within its administrative region.
Customs
According to the Customs Law of the People’s Republic of China (《中華人民共和國海 關法》, which was passed by the Standing Committee of the National People’s Congress on January 22, 1987, with the latest amendments coming into force on April 29, 2021), the Customs of the PRC is the state’s entry and exit customs supervision and administration authority. Under the Customs Law of the PRC and other relevant laws and administrative regulations, the Customs is responsible for the supervision of the transport vehicles, goods, freight items, postal items and other items entering into and departing from the PRC and collecting tariff and other duties and charges. Import goods, throughout the period from the time of arrival in the territory to the time of customs clearance, export goods, throughout the period from the time of declaration to the customs to the time of departure from the territory, and transit, transhipment and through goods, throughout the period from the time of arrival in the territory to the time of departure from the territory shall be subject to the supervision of the Customs.
According to the Provisions of the Customs of the People’s Republic of China on the Administration of Registration of Customs Declaration Entities (《中華人民共和國海關報關單 位註冊登記管理規定》, which was issued by the General Administration of Customs on March 13, 2014 and became effective on March 13, 2014, with the latest amendments coming into force on July 1, 2018), registration of declaring entities shall be divided into the registration of declaring enterprises and the registration of consignees or consignors of imported or exported goods. A declaring enterprise shall not go through the declaration procedures at the customs unless it has been approved by the relevant competent authority directly under the General Administration of Customs or the authorized customs affiliate. A consignee or consignor of imported or exported goods may directly go through the registration procedures at the customs at the domicile of the consignee or consignor.
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Pursuant to the Regulation of the People’s Republic of China on Customs Inspection (《中華人民共和國海關稽查條例》, which was issued by the State Council on January 3, 1997, with the latest amendments coming into force on October 1, 2016), within three years from the date of clearance of imported and exported goods, or within the customs supervision period of bonded goods and tax-reduced imported goods, and within three years thereafter, the Customs shall inspect the accounting books, accounting vouchers, customs declaration documents and other relevant information of the enterprises and institutes directly related to the imported and exported goods, as well as the related imported and exported goods, and supervise the authenticity and legality of their import and export activities.
Gathering and Collection of Human Genetic Resources
The Interim Administrative Measures on Human Genetic Resources (《人類遺傳資源管 理暫行辦法》), promulgated by the Ministry of Science and Technology and the Ministry of Health on June 10, 1998, aimed at protecting and fair utilizing human genetic resources in the PRC. The Ministry of Science and Technology promulgated the Service Guide for Administrative Licensing Items concerning Examination and Approval of Sampling, Collecting, Trading or Exporting Human Genetic Resources, or Taking Such Resources out of the PRC (《人類遺傳資源採集、收集、買賣、出口、出境審批行政許可事項服務指南》)on July 2, 2015, according to which, the sampling, collection or research activities of human genetic resources by a foreign-invested sponsor fall within the scope of international cooperation, and the cooperating organization of China shall apply for approval of the China Human Genetic Resources Management Office through the online system. The Ministry of Science and Technology further promulgated the Circular on Optimizing the Administrative Examination and Approval of Human Genetic Resources (《關於優化人類遺傳資源行政審批 流程的通知》) on October 26, 2017, which became effective on December 1, 2017, simplifying the approval of sampling and collecting human genetic resources for the purpose of listing a drug in the PRC.
The Regulation of the People’s Republic of China on the Management of Human Genetic Resources (《中華人民共和國人類遺傳資源管理條例》), as promulgated by the State Council on May 28, 2019 and effective on July 1, 2019, further regulates the collection, preservation, usage and provision of human genetic resources. According to this regulation, “human genetic resource” includes human genetic resource materials and information. Human genetic resource materials refer to organs, tissues, cells and other genetic materials containing human genome, genes and other genetic materials. Human genetic resource information refers to information, such as data, generated by human genetic resources materials. The Administrative Department of Science and Technology under the State Council is responsible for the management of human genetic resources at the national level, and the administrative departments of science and technology under the provincial people’s governments are responsible for the management of human genetic resources at their respective scopes of duties. Foreign organizations, individuals and institutions established or actually controlled by foreign organizations and individuals are not allowed to collect or preserve human genetic resources (including organs, tissues, cells and other genetic materials of the human genome and genes) in China or provide human genetic resources abroad.
Intellectual Property
Pursuant to the Trademark Law of the People’s Republic of China (《中華人民共和國商 標法》, which was passed by the Standing Committee of the National People’s Congress on August 23, 1982 and became effective on March 1, 1983, with the latest amendments coming into force on November 1, 2019), any natural person, legal person or other organization that needs to obtain the exclusive right to use a trademark for its goods or services during
– 145 – THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. REGULATORY OVERVIEW production and business operations shall apply for trademark registration with the Trademark Office. The principle of good faith shall be upheld in the application for trademark registration and in the use of trademarks. The users of a trademark shall be responsible for the quality of their goods bearing that trademark. The period of validity of a registered trademark is ten years, commencing from the date of approval of registration. The trademark registrant shall complete the renewal procedures in accordance with regulations within 12 months prior to the expiry of a registered trademark for further use. Where the registrant fails to do so, a grace period of six months may be granted. The period of validity for each renewal of registration is ten years, commencing from the day immediately after the expiry of the preceding period of validity for the trademark. In the absence of a renewal upon expiry, the registered trademark shall be cancelled.
Pursuant to the Patent Law of the People’s Republic of China (《中華人民共和國專利 法》, which was passed by the Standing Committee of the National People’s Congress on March 12, 1984 and became effective on April 1, 1985, with the latest amendments coming into force on June 1, 2021), the patent administrative authority under the State Council is responsible for the administration of patent-related work nationwide. It accepts and examines patent applications in a uniform way and grants patent rights in accordance with the laws. The patent administrative departments of people’s governments of provinces, autonomous regions and municipalities are responsible for the administration of patent-related work in their respective administrative areas. Any invention or utility model for which a patent right is to be granted shall possess novelty, creativity and practical applicability. Any design for which a patent right is granted shall not be attributable to any existing design; and no entity or individual shall have filed an application with the patent administrative department under the State Council, with respect to such design before the filing date nor recorded such design on patent documents officially announced after the filing date. The duration of a patent right for invention shall be 20 years, the duration of a patent right for utility model shall be ten years, and the duration of a patent right for design shall be 15 years, all commencing from the date of application. Any entity or individual who uses the patent of a third party shall conclude a licensing agreement with the patentee and pay a patent royalty to the patentee. Use of the patent of a patentee without such patentee’s permission constitutes infringement of such patentee’s patent right.
Environmental Protection
Pursuant to the Law of the People’s Republic of China on Environmental Impact Assessment (《中華人民共和國環境影響評價法》, which was passed by the Standing Committee of the National People’s Congress on October 28, 2002 and became effective on September 1, 2003, with the latest amendments coming into force on December 29, 2018), the PRC implements classified management on environmental impact assessment of construction projects based on the level of environmental impact caused by the construction projects. If a construction project may result in a material impact on the environment, an environmental impact report is required, which thoroughly appraises the environmental impact generated. If a construction project may result in a slight impact on the environment, an environmental impact report form is required, which shall analyze or appraise the environmental impact generated. If a construction project may result in minimal impact on the environment, an environmental impact assessment is not required but an environmental impact registration form shall be filed. The environmental impact assessment reports and registration forms of construction projects shall be reported by the construction entity to the competent ecological environment authority with approval authority for approval in accordance with the provisions of the State Council. The PRC implements registration management on the environmental impact registration forms.
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Pursuant to the Catalogue for the Classified Administration of Environmental Impact Assessments for Construction Projects (2021 Edition) (《建設項目環境影響評價分類管理名 錄》, examined and adopted at the ministerial meeting of the Ministry of Ecology and Environment of the PRC on November 5, 2020 and became effective on January 1, 2021), for the medical equipment and apparatus manufacturing industry, an environmental impact report for the construction project shall be prepared when the production involves “electroplating, or the use of more than 10 tons of solvent-based coatings (including diluents) annually”; other projects (excluding projects that only involve segmentation, welding and assembly; and projects of which annual use of non-solvent-based coating of low VOCs concentration is less than 10 tons) need to prepare an environmental impact report form; construction projects not specified in this Catalogue will not be included in the management system of environmental impact assessment for construction projects.
Pursuant to the Regulation on the Administration of Permitting of Pollutant Discharges (《排污許可管理條例》, which was issued by the State Council on January 24, 2021, and became effective on March 1, 2021), a pollutant discharging entity is subject to classified administration according to factors such as the amount of pollutants generated, the amount of discharge, the degree of impact on the environment and other factors. Enterprises, institutions and other production operators that have a small amount of pollutants generated, small amount of discharge and a minimal impact on the environment shall fill in a pollutant discharge registration form and do not need to apply for a pollutant discharge license.
Product Quality
Pursuant to the Product Quality Law of the People’s Republic of China (《中華人民共和 國產品質量法》, which was passed by the Standing Committee of the National People’s Congress on February 22, 1993 and became effective on September 1, 1993, with the latest amendments coming into force on December 29, 2018), the PRC encourages the use of scientific quality management and advanced scientific technology and promotes that the quality of products should reach and be above the industry standards, the national standards and the international standards. An industrial product which may endanger human health and personal and property safety must meet the national standards and industry standards on protecting human health and personal and property safety. Where there are no national standards and industry standards in place, the product must meet the requirements on protecting human health and personal and property safety.
The manufacturer and seller of a product shall be liable for the quality of such product according to this law. Anyone who suffers from personal or property damages as a result of a defective product may claim compensation from the manufacturer or seller of such defective product. If the liability is with manufacturer, the seller shall, after paying the compensation, have the right to seek reimbursement from the manufacturer. If the liability is with the seller, the manufacturer shall, after paying the compensation, have the right to seek reimbursement from the seller. Non-compliance with the Product Quality Law may result in fines, ordered suspension of production and distribution, forfeiture of products manufactured and sold illegally, revocation of business license and other penalties. And if the case constitutes a crime, criminal liability shall be investigated in accordance with the law.
Pursuant to the Civil Code of the People’s Republic of China (《中華人民共和國民法 典》, which was passed by the National People’s Congress on May 28, 2020 and became effective on January 1, 2021), if a patient suffers damages due to defects of medicines, disinfection products, medical devices or unqualified blood transfusion, the patient may claim compensation from the drug marketing license holder, manufacturer, blood supplier, or medical institution. If a patient claims compensation from a medical institution, the medical institution, after paying the compensation, shall have the right to recover the compensation from the responsible drug marketing license holder, manufacturer and blood supplier.
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Review of Advertisements
Relevant PRC laws and regulations on regulating advertising of medical devices include the Advertising Law of the People’s Republic of China (《中華人民共和國廣告法》, which was passed by the National People’s Congress on October 27, 1994 and became effective on February 1, 1995, with the latest amendment coming into force on April 29, 2021), the Regulation on the Supervision and Administration of Medical Devices (《醫療器械監督管理條 例》), the Interim Administrative Measures for the Review of Advertisements for Drugs, Medical Devices, Health Food and Formula Food for Special Medical Purposes (《藥品、醫 療器械、保健食品、特殊醫學用途配方食品廣告審查管理暫行辦法》, which was issued by the State Administration for Market Regulation on December 24, 2019 and became effective on March 1, 2020), as well as other PRC regulations on advertising administration.
According to the Interim Administrative Measures for the Review of Advertisements for Drugs, Medical Devices, Health Food and Formula Food for Special Medical Purposes (《藥 品、醫療器械、保健食品、特殊醫學用途配方食品廣告審查管理暫行辦法》), this measures shall be applicable to the review of advertisements for drugs, medical devices, health food and formula food for special medical purposes. Advertising on drugs, medical devices, health food and formula food for special medical purposes is prohibited without approval. The validity period under the approval document for advertisements for drugs, medical devices, health food and formula food for special medical purposes shall be the same as the validity period as set out in product registration certificate, filing certificate or production permit, whichever shortest. In case no validity period is set out in product registration certificate, filing certificate or production permit, the validity period of the approval document for advertisements shall be two years. The contents of advertisements for medical devices shall be subject to the contents set out in the registration certificate, filing certificate, registered or filing product manual as approved by competent drug administrative authorities. The name, applicable scope, working mechanism or structure and composition of the medical device in the advertisement for medical device shall not exceed the scope as set out in the registration certificate, filing certificate, registered or filing product manual.
Labor and Social Protection
According to the Labor Law of the People’s Republic of China (《中華人民共和國勞動 法》, which was passed by the Standing Committee of the National People’s Congress on July 5, 1994 and became effective on January 1, 1995, with the latest amendments coming into force on December 29, 2018) and the Labor Contract Law of the People’s Republic of China (《中 華人民共和國勞動合同法》, which was passed by the Standing Committee of the National People’s Congress on June 29, 2007 and became effective on January 1, 2008, and was amended on December 28, 2012 and became effective on July 1, 2013), labor contracts in written form shall be executed to establish labor relationship between employers and employees. Employers shall establish and develop labor rules and systems in accordance with the laws to protect the rights of employees and ensure the performance of duties of employees. Employers shall also set up and develop the labor safety and health system in strict compliance with the regulations and standards of labor safety and sanitation of the PRC and provide education on labor safety and sanitation for the employees to prevent work-related accidents and occupational harm.
According to the Social Insurance Law of the People’s Republic of China (2018 Amendment) (《中華人民共和國社會保險法》, which was passed by the Standing Committee of the National People’s Congress on October 28, 2010 and became effective on July 1, 2011, and was amended and became effective on December 29, 2018), the Interim Regulation on the Collection and Payment of Social Insurance Premiums (《社會保險費徵繳暫行條例》, which was issued by the State Council on January 22, 1999, and amended and became effective on
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March 24, 2019), the Decision of the State Council on Establishment of a Basic Medical Insurance System for Urban Employees (《國務院關於建立城鎮職工基本醫療保險制度的決 定》, which was issued by the State Council and became effective on December 14, 1998), the Decision of the State Council for the Establishment of A Unified Basic Pension Plan for Enterprise Employees (《國務院關於建立統一的企業職工基本養老保險制度的決定》, which was issued by the State Council and became effective on July 16, 1997), the Regulation on Work-Related Injury Insurance (《工傷保險條例》, which was issued by the State Council on April 27, 2003 and became effective on January 1, 2004, and was amended on December 20, 2010 and became effective on January 1, 2011) and the Trial Measures for Maternity Insurance for Enterprise Employees (《企業職工生育保險試行辦法》, which was issued by the Ministry of Labor on December 14, 1994 and became effective on January 1, 1995), the state establishes social insurance systems such as basic pension insurance, basic medical insurance, work- related injury insurance, unemployment insurance and maternity insurance so as to protect the rights of citizens in receiving material assistance from the state and the society in accordance with the laws when getting old, sick, injured at work, unemployed and giving birth. The employers and employees shall pay their social insurance premiums in accordance with the laws.
On February 20, 2020, the Ministry of Human Resources and Social Security, the MOF and the SAT promulgated the Notice on the Temporary Reduction and Exemption of Social Insurance Premiums Payable by Enterprises (《關於階段性減免企業社會保險費的通知》). According to this Notice, as of February 2020, all provinces, autonomous regions, and municipalities directly under the Central Government (excluding Hubei province) and Xinjiang Production and Construction Corps (hereinafter collectively referred to as “provinces”) may, based on how they are affected by the COVID-19 and the affordability of funds, exempt micro, small and medium-sized enterprises from employers’ contributions to the premiums of three social insurances for not more than five months, and may reduce by half the contributions payable by large enterprises and other participating employers (excluding government offices and public institutions, here and below) to the premiums of three social insurances for not more than three months. As of February 2020, Hubei province may exempt various participating employers from employers’ contributions to premiums of three social insurances for not more than five months. Besides, the Ministry of Human Resources and Social Security, the MOF and the SAT promulgated the Notice on Extending the Implementation Period of the Policies Regarding the Temporary Reduction and Exemption of Enterprises’ Social insurance Contributions and Other Issues (《關於延長階段性減免企業社會保險費政策實施期限等問題 的通知》) on June 22, 2020. According to this Notice, the implementation period of the policies of exempting micro, small and medium-sized enterprises from employers’ contributions to three social insurance schemes in all provinces shall be extended until the end of December 2020. The implementation period of the policies of reducing by half the contributions payable by large enterprises and other participating employers to three social insurance schemes in all provinces (excluding Hubei province) shall be extended until the end of June 2020. The policies of reducing by half the contributions payable by large enterprises and other participating employers to three social insurance schemes in Hubei province shall continue to be implemented until the end of June 2020.
According to the Regulation on the Administration of Housing Accumulation Funds (《住 房公積金管理條例》, which was issued by the State Council and became effective on April 3, 1999, with the latest amendments coming into force on March 24, 2019), an employer shall complete the deposit registration for housing provident fund at a management center of housing provident fund. Upon being approved by the management center of housing provident fund, an employer shall also complete the procedures for opening its employee’s housing provident fund account at an entrusted bank. Each employee can only have one housing provident fund account.
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On February 21, 2021, Ministry of Housing and Urban-Rural Development, the MOF and PBOC promulgated the Notice on Implementing the Phased Support Policies Involving Housing Provident Fund to Properly Cope with the Novel Coronavirus-infected Pneumonia Epidemic (《關於妥善應對新冠肺炎疫情實施住房公積金階段性支持政策的通 知》). According to this Notice, enterprises affected by the novel coronavirus-infected pneumonia epidemic may apply for postponing contribution to the housing provident fund by June 30, 2020, and in regions with identified serious novel coronavirus-infected pneumonia epidemic, enterprises may voluntarily contribute to the housing provident fund by June 30, 2020 on the premise of full consultation with their employees.
According to the Work Safety Law of the People’s Republic of China (《中華人民共和 國安全生產法》, which was passed by the Standing Committee of the National People’s Congress on June 29, 2002 and became effective on November 1, 2002, with the latest amendments coming into force on September 1, 2021), production and operating entities should have production safety conditions required by this law and other relevant laws, administrative regulations, national standards or industrial standards. Entities that fail to provide such production safety conditions shall not engage in production or operation activities. Enterprises and institutions shall educate their employees regarding production safety. The labor union shall conduct supervision on production safety according to the laws. In addition, enterprises and institutions shall provide labor protective equipment that attains national standards or industrial standards to the employees, and supervise and educate them to use such equipment.
Labor Dispatch
According to the Interim Provisions on Labor Dispatch (《勞務派遣暫行規定》, which was issued by the Ministry of Human Resources and Social Security on January 24, 2014 and became effective on March 1, 2014), labor dispatch employment is a supplemental form which can only be adopted by employers for temporary, auxiliary or alternative job positions. Temporary positions are positions subsisting for no more than six months; auxiliary positions are positions of non-major business that serve positions of major businesses; and alternative positions are positions that can be held by substitute laborers for a certain period of time during which the laborers of the employers who originally hold such positions are unable to work as a result of full-time study, being on leave or other reasons. An employer is required to strictly control the number of dispatched laborers which may not exceed 10% of the total number of its workers.
Anti-corruption Laws
Since early 1990s, the legislative authorities at different levels in China have promulgated certain laws and regulations in respect of commercial bribery. According to the Anti-Unfair Competition Law of the People’s Republic of China (《中華人民共和國反不正當競爭法》, which was passed by the Standing Committee of the National People’s Congress on September 2, 1993 and became effective on December 1, 1993, with the latest amendments coming into force on April 23, 2019), operators practicing bribery by offering money or property or other means for the purposes of selling or buying goods commit criminal offence.
According to the Interim Provisions of the State Administration for Industry and Commerce on Prohibition of Commercial Bribery (《國家工商行政管理局關於禁止商業賄賂 行為的暫行規定》, which was issued the State Administration for Industry and Commerce on November 15, 1996), commercial bribery refers to an act of offering money or property or other means by a business operator to another entity or individual for the purposes of selling or buying goods, among which “other means” refer to the means used to provide any types of benefits other than money or property, such as offering domestic or international tours.
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According to the Anti-Unfair Competition Law of the People’s Republic of China (《中 華人民共和國反不正當競爭法》), regulatory authorities may impose fines of more than RMB100,000 and less than RMB3,000,000 depending on the seriousness of the cases, and if there is any illegal income, such income shall be confiscated. According to the Criminal Law of the People’s Republic of China (《中華人民共和國刑法》), anyone who offers money or property to national servants for the purposes of seeking illegitimate benefits may commit criminal offence and may be imposed on criminal penalty.
LICENSING AND DISTRIBUTION OF MEDICAL PRODUCTS IN BRAZIL
All medical equipment imported into Brazil must be registered by Agência Nacional de Vigilância Sanitária (“ANVISA”), the agency under the Brazilian Ministry of Health, which is responsible for the registration of health and related products (including dental implants, scalpels and medical equipment) in Brazil.
There are two basic legislations applicable to the import and distribution of medical devices in Brazil, namely, the Resolucão da Diretoria Colegiada – RDC Nº 81/2008, which sets out the technical regulations for the importation of goods and products for health regulatory purposes, and Law Nº 9.782/1999, which sets out the framework for the National Health Regulatory System in Brazil, including the creation of ANVISA and provides for ANVISA’s authority to approve the import and export of health products.
To obtain registration at ANVISA, product documents which include, among others, labels, packaging, technical data, biocompatibility and indications for use, are required to be submitted to ANVISA for its approval. ANVISA may further request for more information after its first review before it makes its decision to finally approve or reject the application for registration.
The import of medical products into Brazil shall also be pre-approved by ANVISA. Medical or human health-related products which are imported, sold or delivered in Brazil must meet the requirements provided under the Brazilian law in order to be authorized by ANVISA. ANVISA has also in place various registration, notification, enrollment, model authorization, exemption and other forms of control obligations for imported nmedical products which are intended for trade, commercial or consumption purposes in Brazil.
SANCTIONS LAWS AND REGULATIONS
Hogan Lovells, our International Sanctions Legal Advisors, have provided the following summary of the sanctions regimes imposed by their respective jurisdictions. This summary does not intend to set out the laws and regulations relating to the United States, EU, the United Kingdom, UN and Australian sanctions in their entirety.
United States
Treasury regulations
OFAC is the primary agency responsible for administering U.S. sanctions programmes against targeted countries, entities, and individuals. “Primary” U.S. sanctions apply to “U.S. persons” or activities involving a U.S. nexus (e.g., funds transfers in U.S. currency or activities involving U.S.-origin goods, software, technology or services even if performed by non-U.S. persons), and “secondary” U.S. sanctions apply extraterritorially to the activities of non-U.S. persons even when the transaction has no U.S. nexus. Generally, U.S. persons are defined as entities organized under U.S. law (such as companies and their U.S. subsidiaries); any U.S.
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Depending on the sanctions program and/or parties involved, U.S. law also may require a U.S. company or a U.S. person to “block” (freeze) any assets/property interests owned, controlled or held for the benefit of a sanctioned country, entity, or individual when such assets/property interests are in the United States or within the possession or control of a U.S. person. Upon such blocking, no transaction may be undertaken or effected with respect to the asset/property interest—no payments, benefits, provision of services or other dealings or other type of performance (in case of contracts/agreements)—except pursuant to an authorization or license from OFAC.
OFAC’s comprehensive sanctions programmes currently apply to Cuba, Iran, North Korea, Syria, and the Crimea region of Russia/Ukraine (the comprehensive OFAC sanctions programme against Sudan was terminated on October 12, 2017). OFAC also prohibits virtually all business dealings with persons and entities identified in the SDN List. Entities that a party on the SDN List owns (defined as a direct or indirect ownership interest of 50% or more, individually or in the aggregate) are also blocked, regardless of whether that entity is expressly named on the SDN List. Additionally, U.S. persons, wherever located, are prohibited from approving, financing, facilitating, or guaranteeing any transaction by a non-U.S. person where the transaction by that non-U.S. person would be prohibited if performed by a U.S. person or within the United States.
United Nations
The United Nations Security Council (the “UNSC”) can take action to maintain or restore international peace and security under Chapter VII of the United Nations Charter. Sanctions measures encompass a broad range of enforcement options that do not involve the use of armed force. Since 1966, the UNSC has established 30 sanctions regimes.
The UNSC sanctions have taken a number of different forms, in pursuit of a variety of goals. The measures have ranged from comprehensive economic and trade sanctions to more targeted measures such as arms embargoes, travel bans, and financial or commodity restrictions. The UNSC has applied sanctions to support peaceful transitions, deter non- constitutional changes, constrain terrorism, protect human rights and promote non- proliferation.
There are 14 ongoing sanctions regimes which focus on supporting political settlement of conflicts, nuclear non-proliferation, and counter-terrorism. Each regime is administered by a sanctions committee chaired by a non-permanent member of the UNSC. There are ten monitoring groups, teams and panels that support the work of the sanctions committees.
United Nations sanctions are imposed by the UNSC, usually acting under Chapter VII of the United Nations Charter. Decisions of the UNSC bind members of the United Nations and override other obligations of United Nations member states.
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EU
Under EU sanction measures, there is no “blanket” ban on doing business in or with a jurisdiction targeted by sanctions measures. It is not generally prohibited or otherwise restricted for a person or entity to do business (involving non-controlled or unrestricted items) with a counterparty in a country subject to EU sanctions where that counterparty is not a Sanctioned Person or not engaged in prohibited activities, such as exporting, selling, transferring or making certain controlled or restricted products available (either directly or indirectly) to, or for use in a jurisdiction subject to sanctions measures.
United Kingdom and United Kingdom overseas territories
Although the United Kingdom departed from the EU on January 31, 2020 and is no longer an EU member state, EU law including EU sanctions measures will continue to apply to and in the United Kingdom until December 31, 2020, unless further extended. EU sanctions measures have also been extended by the United Kingdom on a regime by regime basis to apply in the United Kingdom overseas territories, including the Cayman Islands.
Australia
The Australian restrictions and prohibitions arising from the sanctions laws apply broadly to any person in Australia, any Australian anywhere in the world, companies incorporated overseas that are owned or controlled by Australians or persons in Australia, and/or any person using an Australian flag vessel or aircraft to transport goods or transact services subject to United Nations sanctions.
REGULATIONS OF OVERSEAS LISTINGS
According to the Guidelines of China Securities Regulatory Commission on Regulation of Declaration Documents and Examination and Approval Procedures for Overseas Issuance of Shares and Listing by Companies Limited by Shares (《關於股份有限公司境外發行股票和上 市申報文件及審核程序的監管指引》, which was issued by the CSRC on December 20, 2012 and became effective on January 1, 2013), limited companies established in accordance with the Company Law of the People’s Republic of China may voluntarily submit an application to the CSRC for the issue and listing of shares outside China in compliance of the listing conditions of the overseas listing places. The CSRC will accept, review and make an administrative approval for application for administrative permission submitted by a company. The company may, upon receipt of the acceptance notice from the CSRC, submit a formal application for stock issuance and listing to overseas securities regulatory authority or stock exchange.
“FULL CIRCULATION” OF H SHARES
“Full circulation” means listing and circulating on the Stock Exchange of the domestic unlisted shares of an H-share listed company, including unlisted Domestic Shares held by domestic shareholders prior to overseas listing, unlisted Domestic Shares additionally issued after overseas listing, and unlisted shares held by foreign shareholders. On November 14, 2019, CSRC announced the Guidelines for the “Full Circulation” Program for Domestic Unlisted Shares of H-share Listed Companies (《H股公司境內未上市股份申請“全流通”業務指引》) (Announcement of the CSRC [2019] No. 22) (“Guidelines for the Full Circulation”).
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According to the Guidelines for the Full Circulation, shareholders of domestic unlisted shares may determine by themselves through consultation the amount and proportion of shares, for which an application will be filed for circulation, provided that the requirements laid down in the relevant laws and regulations and set out in the policies for state-owned asset administration, foreign investment and industry regulation are met, and the corresponding H-share listed company may be entrusted to file the said application for “full circulation”. To file an application for “full circulation”, an H-share listed company shall file the application with the CSRC according to the administrative licensing procedures necessary for the “examination and approval of public issuance and listing (including additional issuance) of shares overseas by a joint stock company”. An H-share listed company may apply for “full circulation” separately or when applying for refinancing abroad. An unlisted domestic joint stock company may apply for “full circulation” when applying for an overseas initial public offering. After the application for “full circulation” has been approved by the CSRC, an H-share listed company shall submit a report on the relevant situation to the CSRC within 15 days after the conversion registration with the China Securities Depository and Clearing Corporation Limited (“CSDC”) of the shares related to the application has been completed. After domestic unlisted shares are listed and circulated on the Stock Exchange, they may not be transferred back to China.
On December 31, 2019, CSDC and Shenzhen Stock Exchange (“SZSE”) jointly announced the Measures for Implementation of H-share “Full Circulation” Business (《H股“全 流通”業務實施細則》) (“Measures for Implementation”). The businesses of cross-border conversion registration, maintenance of deposit and holding details, transaction entrustment and instruction transmission, settlement, management of settlement participants, services of nominal holders, etc. in relation to the H-share “full circulation” business, are subject to the Measures for Implementation. Where there is no provision in the Measures for Implementation, it shall be handled with reference to other business rules of the CSDC and China Securities Depository and Clearing (Hong Kong) Company Limited (“CSDC (Hong Kong)”) and SZSE.
According to the Measures for Implementation, after having completed relevant information disclosure, the H-share listed companies with the approval of the CSRC to engage in the H-share “full circulation” business shall apply to the CSDC for the deregistration of part or all of the domestic unlisted shares, and shall transfer the fully circulated H-shares which are not pledged, frozen, restricted to transfer to the share register institutions in Hong Kong. Such shares shall become eligible for listing and circulation on the Stock Exchange. Relevant securities are centrally deposited in CSDC for settlement. As the nominal holder of the above-mentioned securities, CSDC handles the depository and holding details maintenance, cross-border clearing and settlement and other businesses involved in the “full circulation” of H-shares, and provides nominal holder services for investors. The H-share listed company shall be authorized by “fully-tradable” shareholders to choose domestic securities companies that participate in the “full circulation” business of H-shares. Investors submit trading instructions of H-shares “fully tradable” shares through domestic securities companies. Domestic securities companies shall select a Hong Kong securities company to submit trading instructions of the investors to the Stock Exchange for trading. After the transaction is concluded, CSDC and CSDC (Hong Kong) shall handle the cross-border clearing and settlement of relevant shares and funds. The settlement currency of H-share “full circulation” transaction business is Hong Kong dollars. Where an H-share listed company entrusts CSDC to distribute cash dividends, it shall file an application with CSDC. An H-share listed company distributing cash dividends may apply to the CSDC for the holding details of relevant “fully-tradable” shareholders on the securities registration date. The non-H-share “fully circulated” securities listed on the Stock Exchange obtained due to the distribution or conversion of H-shares “fully circulated”
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In order to fully promote the reform of H-shares “full circulation” and clarify the business arrangement and procedures for the relevant shares’ registration, custody, settlement and delivery, CSDC has promulgated the Circular on Issuing the Guide to the Program for Full Circulation of H-shares (《關於發布
DELISTING FROM NEEQ
The shares of our Company ceased to be quoted on the NEEQ from November 5, 2019. According to the Guidelines of the National Equities Exchange and Quotations for Quoted Companies’ Application for Terminating Quotation of Stocks and Withdrawing Termination of Quotation(《全國中小企業股份轉讓系統掛牌公司申請股票終止掛牌及撤回終止掛牌業務指 南》) (NEEQ Announcement [2019] No. 315, which is abolished on May 28, 2021), to apply to the NEEQ for terminating quotation of stocks or withdrawing termination of quotation, a quoted company shall convene a meeting of the board of directors and a shareholders’ meeting for deliberation of relevant matters, and two thirds or more of the voting rights held by shareholders present at a shareholders’ meeting must vote for adoption. A quoted company shall, while disclosing the announcement on the resolutions of the board of directors, disclose the temporary announcement on proposed termination of quotation, to explain the specific reasons for the termination of quotation, the arrangements for stock suspension, and the relevant arrangements for the measures for protecting dissenting shareholders, among others. A quoted company, shareholders or affiliates shall develop reasonable measures for protecting dissenting shareholders, make arrangements for the protection of shareholders’ rights and interests through stock repurchase, cash compensation, and other methods, and proactively contact dissenting shareholders to explain the protection measures.
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HISTORY AND DEVELOPMENT
Overview
Our history can be tracked back to 2002, when our Company was established and started to provide integrated surgical solutions in the PRC. After more than a decade of development, we became a leading provider of intelligent minimally invasive surgical solutions in the PRC. We design, develop, manufacture and market surgical devices, with a focus on surgical staplers, and provide customized surgical training services. According to F&S, we ranked first among domestic stapler manufacturers in the PRC in terms of sales volume (including export) in 2020, representing 14.3% of total sales volume by domestic stapler manufacturers. Over the years, we have established an extensive sales network in China that covers all provinces, laying a solid foundation for the promotion of our products. According to F&S, we had the largest sales network among domestic stapler manufacturers in terms of the number of hospitals covered as of December 31, 2020. Our products were sold to more than 60 countries and regions around the world in 2020, such as Brazil, Spain, Turkey, Italy and Canada. According to F&S, we ranked first among Chinese stapler brands in terms of export sales volume for five consecutive years from 2016 to 2020.
Business Development Milestones
The following events set forth the key milestones of our business development:
Year Event
2002 Our Company was established in Beijing.
2004 Our first patented open stapler was successfully developed.
2007 Our disposable stapler with automatic safety was successfully developed.
2010 Our circular stapler with til-top anvil was successfully developed.
2011 Completion of the 2010 Investment by SBCVC Fund.
2012 Our endoscopic stapler products were successfully developed.
2013 We won the second prize of the National Science and Technology Progress Award with disposable endoscopic cutting stapler.
2014 We won the first prize of Tianjin Science and Technology Invention with disposable endoscopic cutting stapler.
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Year Event
2015 We obtained the 2015 Investments.
Our Company was converted into a joint stock company in September 2015.
2016 Our Shares were quoted on the NEEQ.
2017 We obtained the 2017 Investments.
We commenced to set up factories in Suzhou.
2018 We launched our new generation of disposable endoscopic cutting stapler products.
2019 We set up our subsidiary in India.
We won the special prize of Tianjin Science and Technology Invention with our minimally invasive surgical robot.
Our revenue exceeded RMB300 million.
We voluntarily ceased to have the Shares quoted on the NEEQ in November 2019.
2020 We entered more than 60 countries and regions globally and achieved our revenue of international sales exceeding RMB120 million.
We obtained the EU CE certificates of the intelligent electric endoscopic stapler product and ultrasonic cutting hemostatic knife products.
We won the second prize of National Technology Invention Award with minimally invasive laparoscopic surgical robot.
2021 We set up our subsidiaries in Hong Kong and Mexico.
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OUR CORPORATE DEVELOPMENT
Our Company
Establishment and initial shareholding interests
Our Company was established in the PRC on September 25, 2002 as a limited liability company with an initial registered capital of RMB500,000. As of the date of its establishment, our Company was owned as to 80% by Ms. Liu and 20% by Ms. Zhang Xiulan (張秀蘭), the mother of Ms. Liu. Our Company has been principally engaged in design, development, manufacturing and marketing surgical devices since its establishment.
On April 20, 2006, Ms. Liu transferred 25% of the equity interest in our Company to Mr. Paul Conrad Freireich (“Mr. Freireich”), an Independent Third Party, at a consideration of RMB125,000, which was determined after arm’s length negotiations between the parties with reference to the paid-up registered capital of our Company at the time of such transfer. Upon completion of such equity transfer, our Company became owned as to 55% by Ms. Liu, 25% by Mr. Freireich and 20% by Ms. Zhang Xiulan.
On March 31, 2010, Mr. Freireich transferred 25% of the equity interest in our Company to Mr. Qu at a consideration of RMB150,000, which was determined after arm’s length negotiations between the parties with reference to the paid-up registered capital of our Company at the time of such transfer. Upon completion of such equity transfer, our Company became owned as to 55% by Ms. Liu, 25% by Mr. Qu and 20% by Ms. Zhang Xiulan.
On April 21, 2010, Ms. Zhang Xiulan transferred 10% of the equity interest in our Company to Ms. Liu at nil consideration. On the same date, Ms. Zhang Xiulan transferred her remaining 10% of the equity interest in our Company to Mr. Li Xuejun (李學軍) (a then employee of our Company) at nil consideration, as a recognition of his contribution to our Group and his achievement of the sales target of our surgical staplers. Upon completion of such equity transfer, our Company was owned as to 65% by Ms. Liu, 25% by Mr. Qu and 10% by Mr. Li Xuejun.
2010 Investment
On February 5, 2010, SBCVC Fund, an Independent Third Party, entered into an investment agreement with our Company, Ms. Liu, Mr. Qu and Mr. Li Xuejun, pursuant to which, among others, SBCVC Fund agreed to invest our Company by making a capital contribution to our registered capital. Accordingly, the parties entered into a capital increase agreement on July 1, 2010, pursuant to which SBCVC Fund agreed to make a capital contribution of RMB30,000,000 to the registered capital of our Company in exchange of 29.94% of the equity interest of our Company. The consideration was determined after arm’s length negotiations between the parties with reference to the appraised asset value of our Company assessed by an Independent Third Party valuer, and was settled on January 14, 2011. Upon completion of such capital injection, the registered capital of our Company was increased to RMB30,500,000 and our Company became owned as to 45.54% by Ms. Liu, 17.51% by Mr. Qu, 29.94% by SBCVC Fund and 7.01% by Mr. Li Xuejun. See “—Pre-[REDACTED] Investments” in this section for details of SBCVC Fund.
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Adoption of Share Incentive Scheme
In order to recognize the contributions of our eligible employees and consultants and to incentivize them to further promote our development, on September 9, 2011, our Company adopted a share incentive scheme. Kaiderui was established as a platform for the purpose of such scheme on October 19, 2011. Mr. Li Xuejun was the initial general partner of Kaiderui and the initial limited partners of Kaiderui consisted of nine then employees and three technical consultants (who provided advice on business development to our Group and had ceased to be limited partners by end of 2017). As of the Latest Practicable Date, Kaiderui was owned as to 0.01% by Ms. Han Ning (韓寧) (the general partner of Kaiderui and the niece of Mr. Qu); 17.57% by Ms. Liu , 4.04% by Mr. Liu Libo (劉立波), being our executive Directors; 0.30% by Mr. Wang Jianzhong (王建中), 0.20% by Mr. Guo Jingxiang (郭敬祥) and 0.20% by Ms. Ge Ruina (葛蕊娜), being our Supervisors; 6.00% by Mr. Li Yanduo (李硯鐸) 4.04% by Ms. Yang Xuelan (楊雪蘭) and 6.00% by Mr. Chu Gang (儲剛), being members of our senior management; and 61.64% by 22 existing and former employees. None of the limited partners held more than one-third of the interest in Kaiderui.
On May 28, 2015, Kaiderui entered into equity transfer agreements with each of SBCVC Fund, Mr. Qu, Ms. Liu and Mr. Li Xuejun, pursuant to which Kaiderui agreed to acquire an aggregate of 5% of the equity interest in our Company (including 0.41% from SBCVC Fund, 0.23% from Ms. Liu, 2.45% from Mr. Qu and 1.91% from Mr. Li Xuejun) at a total consideration of RMB2,550,000, which was determined after arm’s length negotiations between the parties based on an agreed multiple of the historical net profit of our Company, and was settled on June 11, 2021.
2015 Investments
On May 15, 2015, Woodlawn Investments, an Independent Third Party, entered into an equity transfer agreement with SBCVC Fund, pursuant to which Woodlawn Investments agreed to acquire 6% of the equity interest in our Company from SBCVC Fund at a consideration of RMB27,000,000, which was determined after arm’s length negotiations between the parties based on an agreed multiple of the then estimated net profit of our Company, and was settled by June 30, 2015.
On May 28, 2015, Ningbo Chunyuan, an Independent Third Party, entered into equity transfer agreements with each of Mr. Qu, Ms. Liu and Mr. Li Xuejun, pursuant to which Ningbo Chunyuan agreed to acquire 15% of the equity interest in our Company from Ms. Liu, Mr. Qu and Mr. Li Xuejun at a total consideration of RMB67,500,000, which was determined after arm’s length negotiations between the parties based on an agreed multiple of the then estimated net profit of our Company, and was paid by installments with the last installment fully settled on June 1, 2017.
On May 28, 2015, Beijing Binghong, an Independent Third Party, entered into an equity transfer agreement with Mr. Li Xuejun, pursuant to which Beijing Binghong agreed to acquire 3% of the equity interest in our Company from Mr. Li Xuejun at a consideration of RMB13,500,000, which was determined after arm’s length negotiations between the parties based on an agreed multiple of the then estimated net profit of our Company, and was settled by September 6, 2015.
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Upon completion of the above equity transfers, the shareholding of our Company was as follows:
Percentage of Name of the Shareholder shareholding
Ms. Liu 33.31% Mr. Qu 14.16% SBCVC Fund 23.53% Kaiderui 5% Ningbo Chunyuan 15% Woodlawn Investments 6% Beijing Binghong 3%
Total 100%
Conversion into a Joint Stock Company in September 2015 and Quotation on the NEEQ
On September 24, 2015, in preparation for our quotation on the NEEQ, our Company was converted from a limited liability company into a joint stock company with limited liability, and the share capital of our Company was increased to RMB60,000,000 divided into 60,000,000 Shares with a nominal value of RMB1.00 each.
On April 14, 2016, the shares of our Company became quoted on the NEEQ under the stock name “派爾特” (stock code: 835879). For details of our quotation on the NEEQ, see “—Prior Quotation on and Delisting from the NEEQ” in this section.
2017 Investments
On February 13, 2017, our Shareholders resolved to issue a maximum of 7,200,000 Shares to certain qualified investors at the price of RMB20.84 per Share. The issue price was determined with reference to the general prospects of our industry, our growth potential, the net assets per Share and the price-earnings ratio of our Company at the time of such transfer. Accordingly, on February 16, 2017, our Company entered into a share subscription agreement with each of Shanghai Hongcheng and Lianyungang Yongcheng, both Independent Third Parties, pursuant to which each of Shanghai Hongcheng and Lianyungang Yongcheng agreed to subscribe for 1,080,000 Shares at a subscription price of RMB22,507,200. On March 16, 2017, our Company entered into another share subscription agreement with Jinruifu, an Independent Third Party, pursuant to which Jinruifu agreed to subscribe for 240,000 Shares at a subscription price of RMB5,001,600. The aforesaid subscription prices were settled on March 17, 2017.
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During the same year, Ms. Liu, Ningbo Chunyuan and SBCVC Fund entered into a series of share transfer agreements with Lianyungang Yongcheng, Shanghai Hongcheng, Fuhai Bohui, Ningbo Xinquan, Beijing Zhongling, Zibo Taige and Shanghai Yongtong, pursuant to which those new investors, all being Independent Third Parties, agreed to acquire Shares from Ms. Liu, Ningbo Chunyuan and SBCVC Fund at a price of RMB20.84 per Share through the NEEQ. Details of such share transfers are set forth below:
Date on which Name of Investor/ Name of Number of Share consideration Transferee Transferor Transferred Consideration was fully settled (RMB)
Lianyungang Ms. Liu 360,000 7,502,400 February 24, 2017 Yongcheng Shanghai Hongcheng Ms. Liu 360,000 7,502,400 February 24, 2017 Fuhai Bohui Ms. Liu 720,000 15,004,800 April 27, 2017 Ningbo Xinquan Ms. Liu 720,000 15,004,800 April 27, 2017 Beijing Zhongling Ms. Liu 480,000 10,003,200 June 28, 2017 Zibo Taige Ningbo Chunyuan 530,000 11,045,200 April 27, 2017 Zibo Taige SBCVC Fund 920,000 19,172,800 May 18, 2017 Shanghai Yongtong Ningbo Chunyuan 360,000 7,502,400 October 13, 2017
Share Transfers by Ningbo Chunyuan through the NEEQ during April 2019 to May 2019
From April 2019 to May 2019, Ningbo Chunyuan transferred an aggregate of 6,667,000 Shares to a number of individuals, all being Independent Third Parties, which were conducted through quotation and trading by way of negotiated transfer on the NEEQ. None of these individuals hold more than 5% of the total number of Shares.
2019 Investment
On December 31, 2019, SBCVC Fund entered into a share transfer agreement with CBC IV Investment, an Independent Third Party, pursuant to which CBC IV Investment agreed to acquire 6,240,000 Shares from SBCVC Fund at a consideration of RMB79,996,800, which was determined after arm’s length negotiations between the parties with reference to the historical operating performance and growth potential of our Company as well as the prospects of the industry in which our Group operated, and was settled on April 16, 2020.
Our PRC Legal Advisors have confirmed that all necessary business registrations with the relevant PRC administration bureaus for market regulation and filings with the relevant PRC commerce departments in respect of the aforesaid capital increases and equity transfers had been completed and all necessary regulatory approvals had been obtained as of the Latest Practicable Date.
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Our Principal Subsidiaries
We carry out our business through various subsidiaries and details of the major corporate developments of such subsidiaries, which were material to our performance during the Track Record Period are set out below.
Panther Suzhou
Panther Suzhou was established in the PRC on November 28, 2017 as a limited liability company with a registered capital of RMB100,000,000. As of the date of its establishment, it was wholly owned by our Company. There has been no change in the shareholding of Panther Suzhou since then.
Panther Suzhou has been principally engaged in technical research and development, production and sales of medical devices and components.
Kunshan Qingsen
Kunshan Qingsen was established in the PRC on September 9, 2016 as a limited liability company with a registered capital of RMB10,000,000. As of the date of its establishment, it was wholly owned by our Company. There has been no change in the shareholding of Kunshan Qingsen since then.
Kunshan Qingsen has been principally engaged in the production of components of stapler products.
ACQUISITIONS AND DISPOSAL DURING TRACK RECORD PERIOD
Acquisitions During Track Record Period
Vincente Medical
On September 25, 2019, our Company entered into a capital increase agreement with Vincente Medical, Mr. Zhang Xincheng (張新成), Mr. Pang Jian (龐建) and Mr. Zhang Xiaoheng (張小恒), pursuant to which our Company agreed to make a capital contribution of RMB8,000,000 in Vincente Medical, among which RMB219,512 was contributed to the registered capital of Vincente Medical and RMB7,780,488 was contributed to its capital reserves. The consideration was determined after arm’s length negotiation with reference to potential profitability, business growth, prospects and net asset value of Vincente Medical at the time of such transfer and was fully settled on October 9, 2019. After completion of such investment, our Company held 18% of the equity interest in Vincente Medical.
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On April 26, 2021, our Company entered into a further investment agreement with Mr. Zhang Xincheng (張新成), Mr. Pang Jian (龐建), Mr. Xie Yi (謝毅) and Beijing Winside Enterprise Management Center (Limited Partnership) (北京溫思德企業管理中心(有限合夥)) (“Winside”), pursuant to which our Company agreed to make a further capital contribution of RMB67,346,900 in Vincente Medical, among which RMB821,304 was contributed to the registered capital of Vincente Medical and RMB66,525,596 was contributed to its capital reserves. The consideration was determined after arm’s length negotiation taking into account of profitability, prospects and appraised value of Vincente Medical as assessed by an Independent Third Party valuer as of December 31, 2020 and, has been or will be paid with our internal resources by seven installments as follows:
(i) within 15 business days after execution of the investment agreement and after our Company was registered as a shareholder holding 51% of the equity interest in Vincente Medical in May 2021 (upon which Vincente Medical became our non-wholly owned subsidiary and its financial results had since been consolidated into the financial statements of our Group), RMB12 million, representing 17.82% of the total consideration, was paid by our Company;
(ii) within 15 business days after the completion of testing of surgical robot samples of Vincente Medical, which is to be confirmed by our Company, RMB10 million, representing 14.85% of the total consideration, will be paid by our Company;
(iii) within 15 business days after the surgical robot of Vincente Medical reaches a detectable status and obtains necessary test report(s), which is to be confirmed by our Company, RMB10 million, representing 14.85% of the total consideration, will be paid by our Company;
(iv) within 15 business days after the surgical robot of Vincente Medical is ready to be launched and obtains trial report(s), which is to be confirmed by our Company, RMB15 million, representing 22.27% of the total consideration, will be paid by our Company;
(v) within 15 business days after Vincente Medical obtains clinical trial report in respect of its surgical robot, which is to be confirmed by our Company, RMB10 million, representing 14.85% of the total consideration, will be paid by our Company;
(vi) within 15 business days after Vincente Medical submits registration documents with relevant drug authorities in respect of the surgical robot by, obtains acknowledgement of aforesaid submission, which is to be confirmed by our Company, RMB5 million, representing 7.42% of the total consideration, will be paid by our Company; and
(vii) within 15 business days after Vincente Medical receives the registration acceptance number after filing the registration application with the relevant drug authorities in respect of its surgical robot of Vincente Medical, which is to be confirmed by our Company, RMB5.35 million, representing 7.94% of the total consideration, will be paid by our Company.
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Upon registration of our Company as a shareholder holding 51% of the equity interest in Vincente Medical in May 2021, Vincente Medical became our non-wholly owned subsidiary and was owned as to 51% by our Company, 18.99% by Mr. Zhang Xincheng, 15.93% by Mr. Pang Jian, 9.19% by Mr. Xie Yi and 4.90% by Winside.
Vincente Medical is a limited liability company established in the PRC on August 23, 2019 and is primarily engaged in the development, production and sales of medical robots and supporting consumables. We believe the acquisition of Vincente Medical would enable our Group for the expansion of our product portfolio to a full range of offerings of surgical medical devices. Each of Mr. Zhang Xincheng, Mr. Pang Jian, Mr. Xie Yi and Winside is an Independent Third Party.
Panther Brazil
In order to develop, market and sell our surgical medical devices in Brazil, on April 6, 2017, our Company entered into a shareholders’ agreement with Clodoaldo Kors Reis and Eduardo Paes de Barros, pursuant to which our Company (i) agreed to acquire one third of equity interest in Panther Brazil; and (ii) was entitled to subscribe for additional equity interest in Panther Brazil until our Company held an aggregate of 51% equity interest in Panther Brazil. In accordance with such shareholders’ agreement, on October 16, 2017 and November 22, 2019, our Company invested US$300,000 and US$248,000, respectively, in exchange of an aggregate of 51% equity interest in Panther Brazil. The consideration was determined after arm’s length negotiations between the parties with reference to the asset value at the time of transfer, potential profitability and business prospects of Panther Brazil and was settled in August 2018 and June 2020.
Panther Brazil is a limited liability company established in Brazil on May 28, 2012 with a paid-in capital of R$1,866,584.00 (equivalent to RMB2,422,826.03) divided into 1,866,584 shares of R$1.00 each and is primarily engaged in the import, provision and distribution of equipment and products for medical and surgical use in Brazil. Upon completion of such subscriptions, Panther Brazil was owned as to 51% by our Company, 24.5% by Clodoaldo Kors Reis and 24.5% by Eduardo Paes De Barros. Both Clodoaldo Kors Reis and Eduardo Paes de Barros are Independent Third Parties. Since certain corporate decisions of Panther Brazil require the approval from its shareholders holding more than two thirds of its share capital under the constitutional document of Panther Brazil, our Directors are of the view that (i) upon completion of the acquisition of one third of equity interest in Panther Brazil, our Company was only able to exercise joint control over the management and operations of Panther Brazil and thus Panther Brazil was then considered a joint venture of our Company; and (ii) upon completion of the acquisition of 51% equity interest in Panther Brazil, our Company is only able to make decisions together with any one of the other two shareholders in order to exercise control over the management and operations of Panther Brazil and thus Panther Brazil has since been considered an associate of our Company. Accordingly, the results of Panther Brazil are not consolidated into our financial statements.
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Cadyson Medical
On January 2, 2020, our Company entered into a capital increase agreement with Cadyson Medical, Mr. Zhang Xincheng (張新成) and Ms. Guo Hongtao (郭洪濤), pursuant to which our Company agreed to make a capital contribution of RMB12,600,000 in Cadyson Medical, among which RMB219,512 was contributed to the registered capital of Cadyson Medical and RMB12,399,512 was contributed to its capital reserves. The consideration for such capital injection was determined after arm’s length negotiations between the parties with reference to (i) the potential profitability, business growth and prospects of Cadyson Medical; and (ii) the price to earnings ratios with comparable companies engaging in similar business in the market, and was fully settled on January 6, 2020 with Cadyson Medical being owned as to 18% by our Company, 65.6% by Mr. Zhang Xincheng and 16.4% by Ms. Guo Hongtao since then. Mr. Zhang Xincheng is a substantial shareholder of Vincente Medical and Ms. Guo Hongtao is an Independent Third Party.
Cadyson Medical is a limited liability company established in the PRC on November 22, 2019 and is primarily engaged in the development, production and sales of ultrasonic blades and supporting consumables. We believed the investment in Cadyson Medical would enable our Group to expand our ultrasonic scalpel business, further enhance our business competitiveness and profitability, as well as eventually substantiate our profit growth.
Panther Canada
For the purpose of expanding our marketing presence in Canada and in line with our business development strategy, our Company entered into a shareholders’ agreement with 1230840 Ontario Inc., (ultimately controlled by Mr. David George Goossens) Medihub International Inc. (ultimately controlled by Mr. Mario Frederic Alfredo Cortis) and AVI Sohal Ventures Inc. (ultimately controlled by Mr. Avinash Sohal), all being Independent Third Parties, on February 29, 2020, pursuant to which our Company agreed to subscribe for a 33.33% shareholding interest in Panther Canada at a consideration of US$305,000. The consideration for such subscription was determined after arm’s length negotiations between the parties with reference to potential profitability, business growth, prospects as well as the net asset value of Panther Canada at the time of such transfer, and was fully settled on March 30, 2020.
Panther Canada is a company incorporated in Canada with limited liability on July 10, 2018 and is primarily engaged in the sales of medical devices including surgical devices and provision of value-added services. Upon completion of such acquisition, Panther Canada became an associate of our Company and was owned as to 33.33% by our Company, 33.33% by 1230840 Ontario Inc., 16.67% by Medihub International Inc. and 16.67% by AVI Sohal Ventures Inc.
Aoer Medical
Aoer Medical was established in the PRC on May 12, 2010 as a limited liability company with an initial registered capital of RMB2,000,000. Aoer Medical is primarily engaged in the sales of surgical devices including staplers.
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In order to expand our product offering in stapler categories as well as to enhance our industry competitiveness, on July 6, 2018, our Company entered into an equity transfer agreement and a capital increase agreement with Mr. Wu Yicheng (吳一成), Ms. Wu Di (吳迪), Ms. Jiang Yikai (蔣意凱), Ms. Hua Minjuan (華敏娟) and Mr. Xue Hui (薛輝), the then shareholders of Aoer Medical and Independent Third Parties (the “Aoer Medical Shareholders”), pursuant to which our Company agreed to (i) acquire an aggregate of 62.08% equity interests in Aoer Medical from the Aoer Medical Shareholders at a total consideration of RMB150,000; and (ii) contribute RMB500,000 to the registered capital in Aoer Medical. The consideration was determined after arm’s length negotiations between the parties with reference to net asset value at the time of such transfer, business qualification, potential profitability and business prospects of Aoer Medical, and was fully settled on July 19, 2018. Upon completion of such transfer and capital injection, Aoer Medical was owned as to 65.00% by our Company, 23.80% by Mr. Wu Yicheng, 6.42% by Ms. Wu Di, 2.80% by Ms. Jiang Yikai, 1.75% by Ms. Hua Minjuan and 0.23% by Mr. Xue Hui.
Disposal of Aoer Medical
On April 26, 2019, due to difficulty in post-acquisition business integration as well as failure to achieve the desired business synergy, our Company entered into an equity transfer agreement with the Aoer Medical Shareholders, pursuant to which our Company agreed to dispose of our entire equity interests in Aoer Medical to the Aoer Medical Shareholders at a consideration of RMB650,000, which was determined after arm’s length negotiations between the parties with reference to net asset value at the time of such transfer, and was settled on May 8, 2019. Upon completion of such disposal, our Company was no longer the shareholder of Aoer Medical.
As advised by our PRC Legal Advisors, we had legally and properly completed, settled, and obtained the requisite legal approvals and completed requisite governmental registration with the relevant governmental authorities in the PRC with respect to all the aforesaid capital increases and equity transfers as described in “—Acquisitions and Disposal During Track Record Period” in this section.
None of the applicable percentage ratios (as defined under the Listing Rules) in respect of any of the above acquisitions exceeds 25%. Accordingly, the relevant pre-acquisition financial information of the acquired companies is not required to be disclosed pursuant to Rule 4.05A of the Listing Rules.
Save as otherwise disclosed in “—Acquisitions and Disposal During Track Record Period” in this section, we did not conduct any other acquisition, disposal or merger during the Track Record Period and until the Latest Practicable Date.
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Principal Terms of the Pre-[REDACTED] Investments
2010 Investment 2015 Investments 2017 Investments 2019 Investment Name of Pre-[REDACTED] Woodlawn Ningbo Beijing Ningbo Beijing Shanghai investors SBCVC Fund Investments Chunyuan Binghong Shanghai Hongcheng Lianyungang Yongcheng Jinruifu Fuhai Bohui Xinquan Zhongling Zibo Taige Yongtong CBC IV Investment ITR N OPRT STRUCTURE CORPORATE AND HISTORY
Date of agreement: July 1, 2010 May 15, 2015 May 28, 2015 May 28, 2015 February 16, February 23, February 16, February 23, March 16, April 17, 2017 April 17, 2017 June 22, 2017 April 26, 2017 September December 31, 2019 2017 2017 2017 2017 2017 and May 17, 2017 2017 Date of settlement: January 14, 2011 June 30, 2015 June 1, 2017 September 6, February 17, February 24, February 17, February 24, March 17, April 27, 2017 April 27, 2017 June 28, 2017 April 27, 2017 October 13, April 16, 2020 2015 2017 2017 2017 2017 2017 and May 18, 2017 2017 Total Consideration (RMB): 30,000,000 27,000,000 67,500,000 13,500,000 22,507,200 7,502,400 22,507,200 7,502,400 5,001,600 15,004,800 15,004,800 10,003,200 30,218,000 7,502,400 79,996,800 Cost per Share (HK$)
(1) :[REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED]
Discount – 167 – to the [REDACTED] [REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED] (2) : Shareholding upon [REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED][REDACTED] [REDACTED]: Basis of determination of the With reference to the Based on an agreed multiple of the then With reference to the general prospect of our industry, our potential growth, the net assets per Share and the price-earnings ratio of our Company. With reference to consideration: appraised asset value estimated net profit of our Company after arm’s historical operating of our Company as length negotiations between the parties. performance, assessed by an potential growth of Independent Third our Company after Party valuer after arm’s length arm’s length negotiations between negotiations between the parties the parties ERA NCNUCINWT H ETO EDD“ANN”O H OE FTI DOCUMENT. THIS OF COVER MUST THE INFORMATION ON THE “WARNING” THAT HEADED AND CHANGE SECTION TO THE SUBJECT WITH AND CONJUNCTION INCOMPLETE IN FORM, READ DRAFT BE IN IS DOCUMENT THIS 2010 Investment 2015 Investments 2017 Investments 2019 Investment Name of Pre-[REDACTED] Woodlawn Ningbo Beijing Ningbo Beijing Shanghai investors SBCVC Fund Investments Chunyuan Binghong Shanghai Hongcheng Lianyungang Yongcheng Jinruifu Fuhai Bohui Xinquan Zhongling Zibo Taige Yongtong CBC IV Investment
Use of proceeds: For supplementing N/A N/A N/A For supplementing our working capital as well as financing research and N/A N/A N/A N/A N/A N/A our working capital, development of our new products. As of the Latest Practicable Date, all the financing business proceeds had been fully utilized. expansion and developing new products and technologies. As of the Latest Practicable Date, all the proceeds STRUCTURE CORPORATE AND HISTORY had been fully utilized. Strategic benefits: At the time of the Pre-[REDACTED] Investments, our Directors were of the view that our Group could benefit from Pre-[REDACTED] Investors’ commitment to our Group as their investment demonstrated their confidence in the operation and development of our Group and served as an endorsement of our Group’s performance and prospects. Lock-up: Pursuant to the applicable PRC law, all existing Shareholders (including the Pre-[REDACTED] Investors) are not permitted to dispose of any of the Shares held by them within 12 months following the [REDACTED]. Special rights: Including the right of first refusal, tag- along right, drag along right, pre- emptive right, price adjustment right, redemption right in certain circumstances, director nomination right, veto right relating to appointment of directors, supervisors 6 – 168 – and senior management, information andIncludingRedemption the N/A N/A N/A N/A N/A N/A N/A N/A N/A Tag along inspection right,right and of firstright in certain arrangement between liquidation rightrefusal, tag-circumstance CBC IV Investment along right, (4) (the transferee) and drag along SBCVC Fund (the right, pre- transferor) emptive right, redemption right in certain (5) circumstances, and information and inspection right
(4)
(4) ERA NCNUCINWT H ETO EDD“ANN”O H OE FTI DOCUMENT. THIS OF COVER MUST THE INFORMATION ON THE “WARNING” THAT HEADED AND CHANGE SECTION TO THE SUBJECT WITH AND CONJUNCTION INCOMPLETE IN FORM, READ DRAFT BE IN IS DOCUMENT THIS
Notes:
(1) Based on the percentage of equity interest acquired at the time of the investment and as adjusted to reflect subsequent capital increase, as applicable.
(2) The discount to the [REDACTED] is calculated based on the assumption that the [REDACTED] is HK$[REDACTED] per Share (being the mid-point of the indicative [REDACTED] range of HK$[REDACTED] to HK$[REDACTED]) and without taking into account of subsequent sale of Shares by the Pre-[REDACTED] Investors. ITR N OPRT STRUCTURE CORPORATE AND HISTORY (3) Without taking into account of subsequent sale of Shares by the Pre-[REDACTED] Investors.
(4) In accordance with an agreement entered into among our Company and our then Shareholders dated June 29, 2015, all special rights granted to SBCVC Fund, Ningbo Chunyuan and Woodlawn Investments were terminated immediately upon completion of our conversion into a joint stock company.
(5) Under the terms of the share transfer agreement in respect of the 2019 Investment, it was agreed between CBC IV Investment and SBCVC Fund that CBC IV Investment would be entitled to acquire from SBCVC Fund all the remaining Shares held by SBCVC Fund on the condition and in the event that CBC IV Investment is able to acquire 50% of the Shares held by Mr. Qu and Ms. Liu within 12 months from the date of completion of the 2019 Investment. Taking into account (i) the reputation and credentials of CBC IV Investments and (ii) the resources possibly brought in by CBC IV Investment’s controlling stake in our Group at the relevant time which in turn could benefit the long term development of our Group in the future, as a commercial decision, on January 7, 2020, Mr. Qu, Ms. Liu, Kaiderui and our Company entered into an agreement with CBC IV 6 – 169 – Investment (the “CBC IV Investment Acquisition Agreement”), pursuant to which, among others, Mr. Qu, Ms. Liu and Kaiderui agreed to sell their respective 6,811,200, 14,038,800 and 3,000,000 Shares to CBC IV Investment. Upon consideration of the views of the then minority Shareholders, Mr. Qu and Ms. Liu decided not to complete any sale of their Shares to CBC IV Investment pursuant to the CBC IV Acquisition Agreeement. Accordingly, the conditions precedent under the CBC IV Investment Acquisition Agreement had not been satisfied and disposal did not materialize. Given that CBC IV Investment had not been able to acquire any Shares from Mr. Qu and Ms. Liu within 12 months from the date of completion of the 2019 Investment, as confirmed by both CBC IV Investment and SBCVC Fund, CBC IV Investment’s right under the share transfer agreement in respect of the 2019 Investment for it to acquire further Shares from SBCVC Fund was no longer exercisable. THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. HISTORY AND CORPORATE STRUCTURE
Information Relating to Our Pre-[REDACTED] Investors
SBCVC Fund
SBCVC Fund is a limited liability company incorporated in Hong Kong, and an indirect subsidiary of SBCVC Fund III, L.P., a Cayman exempted limited partnership. SBCVC Fund III, L.P. is one of the USD funds of SB China Capital (an Independent Third Party). Established in 2000, SB China Capital is a leading venture capital and private equity firm. Its investment focuses on high-tech, high growth companies in technology, media and telecom (TMT), healthcare, clean technology, smart manufacturing across all stages of companies.
SBCVC Management III, L.P. is the general partner of SBCVC Fund III, L.P., and SBCVC Limited is the general partner of SBCVC Management III, L.P.. SBCVC Limited is held as to 90.1% by Star Pioneer Investment Holdings Limited, which is held as to 100% by Lin Ye Song (an Independent Third Party).
CBC IV Investment
CBC IV Investment is an investment holding company of CBC Group (an Independent Third Party) incorporated in Hong Kong on December 6, 2018 and owned as to 100% by C-Bridge IV Investment Five Limited, a wholly-owned subsidiary of C-Bridge Healthcare Fund IV, L.P. General partner of C-Bridge Healthcare Fund IV, L.P. is C-Bridge Healthcare Fund GP IV, L.P. which in turn is ultimately controlled by Mr. Fu Wei, an Independent Third Party, through Fu Family Trust. CBC Group is a healthcare-dedicated private equity firm focusing on the growth and buyout investment opportunities in mid and late stages of companies, and investing in general health sectors of the pharmaceutical/biotechnology, medical technology and healthcare services, with approximately US$4 billion assets under management (including joint investments).
Woodlawn Investments
Woodlawn Investments is an investment holding company incorporated in Hong Kong on April 27, 2015 and owned as to 100% by Woodlawn Investments Limited, which in turn is ultimately owned as to 50% by Tsz Ho Tony Lau and 50% by Pan Yuefeng through their respective wholly-owned holding company, 45 Yi Capital Holdings Co., Ltd. and Thalia Capital Holdings Co., Ltd., all being Independent Third Parties. Woodlawn Investments is primarily engaged in equity investment focusing on investments in medical and health sectors, across early, growth and late stages of companies.
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Beijing Binghong
Beijing Binghong is an investment company established in the PRC on January 29, 2013 and owned as to 28.15% by Huachuan Investment Co., Ltd. (華川投資有限公司) (which in turn is owned as to 90% by Mr. Chen Hongpeng (陳鴻鵬) and 10% by Ms. Yang Chunlian (楊春蓮)), 25% by Beijing Small-Middle Enterprises Service Center (北京市中小企業服務中心)(a state-owned public institution (事業單位)), 14% by Huawu (Beijing) Investment Management Co., Ltd. (華物(北京)投資管理有限公司) (which in turn is ultimately wholly-owned by Mr. He Wanqiang (何萬強)), 10% by Wutong Youzheng (Shanghai) Venture Capital Co., Ltd. (梧桐優 正(上海)創業投資有限公司) (which in turn is owned by four individual(s)), 9.35% by Shanghai Yuchang Management Consulting Co., Ltd. (上海雨暢管理諮詢有限公司), 7.50% by Linfen Sifang Binghong Investment Co., Ltd. (臨汾市四方秉鴻投資有限公司), 5.00% by Beijing Muren Investment Management Co., Ltd. (北京沐仁投資管理有限公司), 1% by Beijing Binghong Jiachen Venture Capital Management Co., Ltd. (北京秉鴻嘉辰創業投資管理有限公 司). Each of the shareholders of Beijing Binghong is an Independent Third Party. Beijing Binghong is primarily engaged in venture capital investment and related consulting and management services with its investment mainly focusing on early and growth stages of companies in the fields of energy, environmental protection, medical and Internet.
Zibo Taige
Zibo Taige is a limited partnership established in the PRC on April 15, 2016 and primarily engaged in venture capital investment and related consulting and management services. Zibo Tage is managed by Yingke Innovation Asset Management Co., Ltd. (盈科創新資產管理有限 公司)(“Yingke Innovation”) (the general partner of Zibo Taige), which in turn is ultimately controlled Mr. Qian Mingfei (錢明飛), an Independent Third Party. Zibo Tage has five limited partners, all being Independent Third Parties. Focusing on private equity investments in biomedicine and core technology, Yingke Innovation (Zibo Tage’s general partner) has invested in a number of companies, including medical companies whose shares are listed on the SZSE and SSE.
Ningbo Chunyuan
Ningbo Chunyuan is a limited partnership established in the PRC on April 30, 2015 and primarily engaged in equity investment and related management services. Ningbo Chunyuan is managed by Shanghai Chunyuan Private Equity Management Co., Ltd. (上海淳元私募基金管 理有限公司) (the general partner of Ningbo Chunyuan, “Shanghai Chunyuan”), which in turn is owned as to 52.5% by Ms. Fu Jiaying (傅佳瑩) and 47.5% by Mr. Wang Lei (王磊), all being Independent Third Parties. Ningbo Chunyuan has only one individual limited partner, who is also an Independent Third Party.
Shanghai Chunyuan focuses on investing companies in angel, growth and late stages, with its investments mainly in medical and health sectors, including medical devices and medical services. Selective investment projects of Shanghai Chunyuan include an innovative flow cytometer company, a high-tech enterprise producing high-value digestion and urinary consumables, an enterprise producing renal sympathetic denervation and a high-tech enterprise producing sports medicine series products.
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Lianyungang Yongcheng
Lianyungang Yongcheng is a limited partnership established in the PRC on March 10, 2016 and primarily engaged in equity investment and investment related consultancy. Lianyungang Yongcheng is managed by Shanghai Yonghua Investment Management Co., Ltd. (上海涌鏵投資管理有限公司)(“Yonghua Capital”) through a limited liability partnership, Lianyungang Yonghai Investment Management Partnership (Limited Partnership) (連雲港涌海 投資管理合夥企業(有限合夥)) (“Yonghai Investment,” the general partner of Lianyungang Yongcheng), which in turn is ultimately controlled by Ms. Chen Jinxia (陳金霞), an Independent Third Party. Lianyugang Yongcheng has six limited partners, including Shanghai Hongcheng (our Shareholder) and Shanghai Jinye Venture Capital Investment Partnership (Limited Partnership) (上海謹業創業投資合夥企業(有限合夥)), each holding 22.36% of interest in Lianyugang Yongcheng and both ultimately controlled by Ms. Chen Jinxia (controlling an aggregate of 45.57% of interest in Lianyugang Yongcheng). Each partner of Lianyungang Yongcheng is an Independent Third Party.
Shanghai Yongtong
Shanghai Yongtong is a limited partnership established in the PRC on March 24, 2016 and primarily engaged in equity investment and investment related consultancy. Shanghai Yongtong is managed by Yonghua Capital through a limited liability partnership, Shanghai Yongtai Investment Partnership (Limited Partnership) (上海涌泰投資合夥企業(有限合夥)) (“Yongtai Investment,” the general partner of Shanghai Yongtong), which in turn is ultimately controlled by Ms. Chen Jinxia, an Independent Third Party. Shanghai Yongtong has six limited partners, including Shanghai Hongcheng (our Shareholder) and Shanghai Jucheng Venture Capital Investment Partnership (Limited Partnership) (上海聚澄創業投資合夥企業(有限合 夥)), each holding 31.25% of interest in Shanghai Yongtong and both ultimately controlled by Ms. Chen (controlling an aggregate of 63.54% of interest in Shanghai Yongtong). Each partner of Shanghai Yongtong is an Independent Third Party.
Shanghai Hongcheng
Shanghai Hongcheng is a limited partnership established in the PRC on September 10, 2010 and primarily engaged in equity investment and investment related consultancy. Shanghai Hongcheng is managed by Shanghai Nano Venture Capital Co., Ltd. (上海納米創業投資有限 公司)(“Shanghai Nano,” the general partner of Shanghai Hongcheng and a shareholder of Yonghua Capital), which in turn is owned as to 75% by Ms. Chen Jinxia. Shanghai Hongcheng has five individual limited partners, all being Independent Third Parties.
Yonghua Capital is a fund management firm focusing on private equity investments. With nearly two decades of development, Yonghua Capital not only concentrated on private equity investments, but also expanded its investments in venture capital, overseas professional fields and incubators, covering sectors including high-end equipment and advanced manufacture, new energy and new material, information technology, communication technology, medicine and health, energy conservation and environmental protection, education, culture and sports big consumption. Several companies that Yonghua Capital invested have been listed on the SSE and SZSE.
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Fuhai Bohui
Fuhai Bohui is a limited partnership established in the PRC on September 6, 2015 and primarily engaged in equity investment and investment related consultancy. General partner of Fuhai Bohui is Shenzhen Oriental Fuhai Venture Capital Management Co., Ltd. (深圳市東方 富海創業投資管理有限公司), wholly owned by Shenzhen Oriental Fuhai Investment Management Co., Ltd. (深圳市東方富海投資管理股份有限公司)(“Oriental Fuhai Investment”), which in turn is ultimately controlled by Mr. Chen Wei (陳瑋), an Independent Third Party. Fuhai Bohui has 17 limited partners, all being Independent Third Parties. With approximately RMB25.2 billion under management, Oriental Fuhai Investment has invested more than 400 equity investments (including mergers and acquisitions) focusing on five core sectors of information technology, energy conservation and environmental protection, new materials and advanced manufacturing, health care, and cultural consumption, across early, growth and late stages of companies.
Ningbo Xinquan
Ningbo Xinquan is a limited partnership established in the PRC on March 29, 2016 and primarily engaged in equity investment and management as well as assets management. General partner of Ningbo Xinquan is Shenzhen Fuhai Minxiang Wealth Management Co., Ltd. (深圳市富海民享財富管理有限公司), which in turn is ultimately controlled by Ms. Li Xin (李 辛), an Independent Third Party. Limited partners of Ningbo Xinquan include four limited partnerships, all being Independent Third Parties.
Beijing Zhongling
Beijing Zhongling is a limited partnership established in the PRC on April 14, 2015 and primarily engaged in venture capital investment and investment related consultancy. General partner of Beijing Zhongling is Yanyuan Tongde (Beijing) Investment Fund Management Co., Ltd. (燕園同德(北京)投資基金管理有限公司), which in turn is ultimately controlled by Mr. Sun Fei (孫飛), an Independent Third Party. Limited partners of Beijing Zhongling include five limited partnerships, all being Independent Third Parties.
With approximately RMB250 million under management, Beijing Zhongling mainly focuses on investing companies in medical and health sectors, including medical devices, innovative drugs and medical services, across all stages of companies. Its investment projects include a technology company engaged in the research and development of new drugs, whose shares were listed on the SSE.
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Jinruifu
Jinruifu is a limited partnership established in the PRC on November 25, 2007 and primarily engaged in investment management and related consultancy. General partner of Jinruifu is Beijing Zhongfu Investment Management Co., Ltd. (北京中富投資管理有限公司 “Zhongfu Investment”), which in turn is ultimately controlled by Mr. Zhou Fei (周飛), an Independent Third Party. Jinruifu has 12 limited partners, all being Independent Third Parties. Focusing on investments in the equity of high-growth and innovative companies in the fields of information technology, medicine and medical treatment through its investment funds over RMB1 billion under management, Zhongfu Investment has invested dozens of companies including a data intelligence solution provider and a integrated circuit design company, whose shares are listed on the SSE.
Public Float and Lock-up
To the best of our Directors’ knowledge, information and belief, all Pre-[REDACTED] Investors are Independent Third Parties.
[REDACTED] Shares held by [REDACTED] existing Shareholders will all be counted towards the public float for the purpose of Rule 8.08 of the Listing Rules after the completion of the [REDACTED] and the [REDACTED]. The other Shares held by our existing Shareholders will not be considered as part of the public float as (i) [REDACTED] Shares are Domestic Shares which will not be converted into H Shares or [REDACTED] following the completion of the [REDACTED]; and (ii) [REDACTED] Shares (which will be converted into H Shares or [REDACTED] following the completion of the [REDACTED]) are held by [REDACTED].
Pursuant to the applicable PRC laws, all our existing Shareholders (including the Pre-[REDACTED] Investors) are not permitted to dispose of any of the Shares held by them in our Company within the 12 months following the [REDACTED].
Sole Sponsor’s confirmation
The Sole Sponsor is of the view that the Pre-[REDACTED] Investment is in compliance with Guidance Letters HKEx-GL29-12 issued by the Stock Exchange in January 2012 and updated in March 2017, Guidance Letter HKEx-GL43-12 issued by the Stock Exchange in October 2012, updated in July 2013 and March 2017 and the Guidance Letter HKEx-GL44-12 issued by the Stock Exchange in October 2012 and updated in March 2017.
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PRIOR QUOTATION ON AND DELISTING FROM THE NEEQ
On January 26, 2016, our Company received the letter from NEEQ, granting an approval for the quotation and trading by way of negotiated transfer of the Shares of our Company on NEEQ. The Shares of our Company became quoted on the NEEQ under the stock name “派尔 特” (stock code: 835879) on April 14, 2016. For reasons set out in “—Reasons for Seeking the Listing on the Stock Exchange” below and after taking into account factors including development of the industry in which we operate, development of our own businesses, our long-term operation and growth strategies and path planning in the capital market, the then capital market environment and our Company’s operating and management needs, and the objective of maximizing our Company’s and our Shareholders’ interests, our Company made an application to have the Shares voluntarily ceased to be quoted on the NEEQ (the “Delisting”) on August 9, 2019, and effective from November 5, 2019, our Company was delisted from the NEEQ. The Delisting was approved by the then Shareholders holding 59,510,000 Shares at a general meeting of our Company held on August 26, 2019, representing 95.37% of the Shares the holders of which were entitled to vote on this matter. Shareholders holding 2,890,000 Shares voted against the resolution to delist our Company from NEEQ, which represented 4.63% of the Shares the holders of which were entitled to vote. No privatization offer was made in connection with the Delisting.
The dissenting Shareholders included Zibo Taige (which held 1,450,000 Shares), Fuhai Bohui (which held 720,000 Shares) and Ningbo Xinquan (which held 720,000 Shares), representing 2.32%, 1.15% and 1.15%, respectively, of the Shares the holders of which were entitled to vote at the aforesaid general meeting (the “Dissenting Shareholders”). As a protection measure provided to the Dissenting Shareholders derived from a regulatory requirement as a result of the Delisting, we granted a repurchase right to the Dissenting Shareholders, upon which they may request our Company, or such third party as designated by our Company, to repurchase the Shares held by them within 10 calendar days from September 30, 2020 if our Company failed to file an application for listing with CSRC or the SSE on or before such date. The detailed terms of share repurchase shall be subject to further negotiations between the parties, and it was agreed that the repurchase price per Share shall in no event be lower than the acquisition cost per Share paid by such Dissenting Shareholders.
Since our Company did not file an application for listing with CSRC or the SSE before September 30, 2020, Zibo Taige and Fuhai Bohui had notified our Company that they intended to request our Company to repurchase their Shares. Subsequently, we entered into an agreement with each of Zibo Taige and Fuhai Bohui on June 4, 2021 and May 20, 2021, respectively, pursuant to which (i) each of Zibo Taige and Fuhai Bohui is entitled to exercise their respective repurchase right only if the [REDACTED] does not take place on or before July 31, 2022; and (ii) the right to request share repurchase shall be automatically terminated upon [REDACTED]. Accordingly, the right to request share repurchase of each of Zibo Taige and Fuhai Bohui, which was derived from a regulatory requirement as a result of the Delisting, will not be exercisable and will be terminated upon completion of the [REDACTED]. Furthermore, since Ningbo Xinquan had not requested our Company, or such third party as designated by our Company, to repurchase its Shares within the stipulated notice period, its right to request for the repurchase of its Shares lapsed automatically.
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Our Directors confirm that our Company had been in compliance with applicable PRC securities laws and regulations as well as rules and regulations of the NEEQ in all material respects, and to the best knowledge of our Directors after having made all reasonable enquiries, there is no other matter that should be brought to the attention of the Stock Exchange and the potenital investors in relation to (i) our compliance record on the NEEQ during the period when the shares of our Company were quoted on the NEEQ and (ii) the Delisting (the “Confirmation”). The Sole Sponsor, having considered (a) the Confirmations from our Company and each of our Directors who were directors of our Company during its listing on the NEEQ and (b) the view of our PRC Legal Advisors that during the listing on the NEEQ, our Company and its then directors had not been subject to disciplinary action or administrative penalty by the NEEQ, the CSRC or its local agency for any violation of laws and regulations based on the public search results, concurs with the Confirmation.
PREVIOUS LISTING PLANS
Previous ChiNext Market Listing Plans
In 2017, we considered to apply for listing on the ChiNext Market which our Directors believed would allow us to raise further funds for our business expansion, bring us more financing opportunities to optimize our capital structure, and enhance our brand awareness.
On May 24, 2017, we engaged China International Capital Corporation Limited (中國國 際金融股份有限公司)(“CICC”) in respect of the provision of pre-listing application tutoring for the proposed listing on the ChiNext Market (“2017 ChiNext Market Listing Plan”). During the course of the pre-listing application tutoring for the 2017 ChiNext Mar Listing Plan, CICC assisted our Company in improving corporate governance policies and internal management policies. In view of the changes in policies of the relevant authorities and the then market circumstances, taking into account our business strategy, we voluntarily ceased the 2017 ChiNext Market Listing Plan without filing any formal listing application with CSRC or the SZSE. Accordingly, the pre-listing application tutoring with CICC was terminated based on mutual communication and agreement between parties in May 2018.
On December 16, 2019, we engaged Sinolink Securities Co., Ltd. (國金證券股份有限公 司)(“Sinolink“) in relation to the provision of pre-listing application tutoring for the proposed listing on the ChiNext Market (the “2019 ChiNext Market Listing Plan”). During the course of the pre-listing application tutoring for the 2019 ChiNext Market Listing Plan, Sinolink conducted certain due diligence work, including collecting corporate information, interviewing the management, and inspecting inventory of our Company. Due to the outbreak of COVID-19, we temporarily suspended the 2019 ChiNext Market Listing Plan during the pandemic. In March 2020, taking into account of the impact on our business due to the COVID-19 pandemic, we voluntarily ceased the 2019 ChiNext Market Listing Plan without filing any formal listing application with CSRC or the SZSE. Accordingly, the pre-listing application tutoring with Sinolink was terminated based on mutual communication and agreement between parties.
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Previous STAR Market Listing Plan
In 2020, we considered to apply for listing on the STAR Market which our Directors believed would allow us to raise further funds for our business expansion, bring us more financing opportunities to optimize our capital structure, and enhance our brand awareness. On November 30, 2020, we engaged BOC International (China) Co., Ltd. (中銀國際證券股份有限 公司)(“BOCI”) for the provision of pre-listing application tutoring for the proposed listing on the STAR Market (the “2020 STAR Market Listing Plan”). During the course of the pre-listing application tutoring for the 2020 STAR Market Listing Plan, we cooperated with BOCI on its independent due diligence work, including participating in interviews, providing information and materials and attending trainings as required and conducted by BOCI.
Nevertheless, due to the prolonged and uncertain listing timetable in light of the significant increase in the number of STAR Market listing applicants and the overall vetting process for a listing on the STAR Market, and in order to gain recognition from international financial markets, we voluntarily ceased the 2020 STAR Market Listing Plan without filing any formal listing application with CSRC or the SSE. Instead, for reasons set out in “—Reasons for Seeking the [REDACTED] on the Stock Exchange” below, we started the preparation of the [REDACTED] on the Stock Exchange. Accordingly, the pre-[REDACTED] application tutoring with BOCI was terminated based on mutual communication and agreement between parties in May 2021.
Our Directors confirm that, to their best knowledge, (i) they were not aware of any matters or adverse findings by previous sponsors or any matters that might materially and adversely affect our suitability for the 2017 ChiNext Market Listing Plan, the 2019 ChiNext Market Listing Plan and the 2020 STAR Market Listing Plan (the “Previous Listing Plans”); and (ii) there are no other matters that need to be brought to the attention of the Stock Exchange and the potential investors with respect to the Previous Listing Plans.
Based on the above and the Sole Sponsor’s due diligence work, the Sole Sponsor is of the view that nothing in relation to the Previous Listing Plans has come to its attention that may materially adversely affect our Company’s suitability for the [REDACTED] and that should be brought to the Stock Exchange’s attention.
REASONS FOR SEEKING THE [REDACTED] ON THE STOCK EXCHANGE
Our Directors believe that the [REDACTED] will be in the interests of our Group’s business development strategies and beneficial to us and our Shareholders as a whole for the following reasons:
(i) the Stock Exchange, as a leading player of the international financial markets, serves as the ideal [REDACTED] venue for us by virtue of its strong business ties with Chinese investors and business partners. As a company principally engaged in design, development, manufacturing and marketing surgical devices, it is important for us to have a viable source of capital to finance our business growth. The Stock Exchange could offer us a direct access to the international capital markets, enhance our fund-raising capabilities and channels and broaden our Shareholders base;
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(ii) [REDACTED] on the Stock Exchange would in turn help us attract and motivate the talents that we need to support our rapid growth, retain key management personnel for our business and enhance our operating efficiency on an ongoing basis; and
(iii) [REDACTED] on the Stock Exchange will further raise our business profile, gain international recognition, enhance our brand awareness and competitiveness and thus, enhance our ability to attract new customers, business partners and strategic investors as well as to benefit our global business expansion.
– 178 – CORPORATE STRUCTURE IMMEDIATELY BEFORE THE [REDACTED] DOCUMENT. THIS OF COVER MUST THE INFORMATION ON THE “WARNING” THAT HEADED AND CHANGE SECTION TO THE SUBJECT WITH AND CONJUNCTION INCOMPLETE IN FORM, READ DRAFT BE IN IS DOCUMENT THIS The following diagram illustrates our shareholding structure immediately prior to the [REDACTED]:
Other SBCVC CBC IV Woodlawn Beijing Zibo Ningbo Shanghai Lianyungang Shanghai Fuhai Ningbo Beijing (1) (1) Kaiderui(3) Jinruifu(2) independent Ms. Liu Mr. Qu Fund(2) Investment(2) Investments(2) Binghong(2) Taige(2) Chunyuan(7) Hongcheng(2)(7) Yongcheng(2)(7) Yongtong(2)(7) Bohui(2) Xinquan(2) Zhongling(2) Shareholders(4)
27.80% 13.62% 11.15% 10.00% 5.77%4.81% 2.88% 2.32% 2.31% 2.31% 2.31%0.58% 1.15% 1.15% 0.77% 0.38% 10.68% ITR N OPRT STRUCTURE CORPORATE AND HISTORY
Our Company (PRC)
100.00% 100.00% 100.00%100.00% 100.00% 70.00% 51.00%
Kunshan Panther Panther Panther Panther Panther Vincente Qingsen Suzhou US India Hong Kong Mexico(5) Medical(6) 7 – 179 –
Notes:
(1) Mr. Qu and Ms. Liu are spouses, both being our Controlling Shareholders. (2) For details of the background of our Pre-[REDACTED] Investors, see “—Pre-[REDACTED] Investments—Information Relating to our Pre-[REDACTED] Investors” in this section. (3) The general partner of Kaiderui is Ms. Han Ning, Mr. Qu niece. Limited partners of Kaiderui include our existing and former employees. For details of Kaiderui, see “—Our Corporate Development—Our Company—Adoption of Share Incentive Scheme” in this section.
(4) Other independent Shareholders include six individual Shareholders, namely Mr. Sun Lenong (孫樂農), Mr. Rong Liang (榮亮), Ms. Hua Fei (華飛), Mr. Fan Huakai (范華凱), Ms. Cao Xiaoru (曹曉茹), Mr. Liu Gang (劉剛), all being Independent Third Parties, none of whom hold more than 5% of the total number of Shares. (5) As of the Latest Practicable Date, Panther Mexico was owned as to 70% by our Company and 30% by Pedro Loarca Caldero´n, an Independent Third Party. (6) As of the Latest Practicable Date, Vincente Medical was owned as to 51% by our Company, 18.99% by Mr. Zhang Xincheng, 15.93% by Mr. Pang Jian, 9.19% by Mr. Xie Yi and 4.90% by Winside, all being Independent Third Parties (save for their shareholdings in Vincente Medical). (7) Lianyungang Yongcheng, our Pre-[REDACTED] Investor, is managed by Yonghua Capital through Yonghai Investment (its investment fund), which in turn is ultimately controlled by Ms. Chen Jinxia. Shanghai Yongtong, our Pre-[REDACTED] Investor, is managed by Yonghua Capital through Yongtai Investment (its investment fund), which in turn is ultimately controlled by Ms. Chen Jinxia. Shanghai Hongcheng, our Pre-[REDACTED] Investor, is managed by Shanghai Nano, which in turn is owned as to 75% by Ms. Chen Jinxia. CORPORATE STRUCTURE AFTER THE [REDACTED] DOCUMENT. THIS OF COVER MUST THE INFORMATION ON THE “WARNING” THAT HEADED AND CHANGE SECTION TO THE SUBJECT WITH AND CONJUNCTION INCOMPLETE IN FORM, READ DRAFT BE IN IS DOCUMENT THIS The following diagram illustrates our shareholding structure immediately following the completion of the [REDACTED] (assuming the [REDACTED] is not exercised):
Other SBCVC CBC IV Woodlawn Beijing Zibo Ningbo Shanghai Lianyungang Shanghai Fuhai Ningbo Beijing Public (1) (1) Kaiderui(3) Jinruifu(2) independent Ms. Liu Mr. Qu Fund(2) Investment(2) Investments(2) Binghong(2) Taige(2) Chunyuan(2) Hongcheng(2)(7) Yongcheng(2)(7) Yongtong(2)(7) Bohui(2) Xinquan(2) Zhongling(2) Shareholders Shareholders(4) ITR N OPRT STRUCTURE CORPORATE AND HISTORY [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED] [REDACTED][[REDACTED] [REDACTED] REDACTED] [REDACTED] [REDACTED] [REDACTED]
Our Company (PRC)
100.00% 100.00% 100.00%100.00% 100.00% 70.00% 51.00%
Kunshan Panther Panther Panther Panther Panther Vincente Qingsen Suzhou US India Hong Kong Mexico(5) Medical(6) 8 – 180 –
Notes:
(1) Mr. Qu and Ms. Liu are spouses, both being our Controlling Shareholders.
(2) For details of the background of our Pre-[REDACTED] Investors, see “—Pre-[REDACTED] Investments—Information Relating to our Pre-[REDACTED] Investors” in this section. (3) The general partner of Kaiderui is Ms. Han Ning, Mr. Qu’s niece. Limited partners of Kaiderui include our existing and former employees. For details of Kaiderui, see “—Our Corporate Development—Our Company—Adoption of the Share Incentive Scheme” in this section.
(4) Other independent Shareholders include six individual Shareholders, namely Mr. Sun Lenong (孫樂農), Mr. Rong Liang (榮亮), Ms. Hua Fei (華飛), Mr. Fan Huakai (范華凱), Ms. Cao Xiaoru (曹曉茹), Mr. Liu Gang (劉剛), all being Independent Third Parties, none of whom hold more than 5% of the total number of Shares. (5) As of the Latest Practicable Date, Panther Mexico was owned as to 70% by our Company and 30% by Pedro Loarca Caldero´n, an Independent Third Party. (6) As of the Latest Practicable Date, Vincente Medical was owned as to 51% by our Company, 18.99% by Mr. Zhang Xincheng, 15.93% by Mr. Pang Jian, 9.19% by Mr. Xie Yi and 4.90% by Winside, all being Independent Third Parties (save for their shareholdings in Vincente Medical). (7) Lianyungang Yongcheng, our Pre-[REDACTED] Investor, is managed by Yonghua Capital through Yonghai Investment (its investment fund), which in turn is ultimately controlled by Ms. Chen Jinxia. Shanghai Yongtong, our Pre-[REDACTED] Investor, is managed by Yonghua Capital through Yongtai Investment (its investment fund), which in turn is ultimately controlled by Ms. Chen Jinxia. Shanghai Hongcheng, our Pre-[REDACTED] Investor, is managed by Shanghai Nano, which in turn is owned as to 75% by Ms. Chen Jinxia. THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. BUSINESS
OUR MISSION
Our mission is to reduce the pain of patients through our MISIA products by helping achieve higher success rates of surgeries, less surgical trauma and faster post-surgery recovery, at lower cost.
OVERVIEW
We are a leading provider of intelligent minimally invasive surgical solutions in the PRC. We design, develop, manufacture and market surgical devices, with a focus on surgical staplers, and provide customized surgical training services. According to F&S, we rank first among domestic surgical stapler manufacturers in the PRC in terms of sales volume (including export) in 2020, representing 14.3% of total sales volume by domestic surgical stapler manufacturers. Our products were sold to more than 60 countries and regions around the world in 2020, such as Brazil, Spain, Turkey, Italy and Canada. According to F&S, we ranked first among Chinese surgical stapler brands in terms of export sales volume for five consecutive years from 2016 to 2020.
After nearly two decades of development, we have built a comprehensive product portfolio, comprising (i) surgical staplers, including endoscopic staplers, smart staplers and open staplers, applicable to multiple surgical specialties, ranging from gastrointestinal, gynecologic and thoracic surgeries to sleeve gastrectomy surgeries for weight control, and (ii) other instruments and accessories for minimally invasive and open surgeries, such as ultrasonic scalpels and disposable fixation devices for hernia repair. We also market and distribute sutures, hernia meshes and blood vessel titanium clips manufactured by third parties as part of our integrated product offerings to our customers, and manufacture and sell certain products to OEM customers. As of the Latest Practicable Date, we had over 300 models of products on offer. As of the same date, 3 and 61 of our products had been certified as Class III and Class II medical devices in China, respectively, and our key products had received FDA approvals for 7 products, CE Marks for 21 products and MDSAP recognitions for 11 products. We have also developed a robust new product pipeline, including a laparoscopic surgical robot, which we expect to launch in 2024, if approved. As of the Latest Practicable Date, we had 19 product candidates, including 6 potential Class III medical devices and 13 potential Class II medical devices. As of the same date, we had two products that had received CE Marks and were in product registration process in China. With our comprehensive product portfolio, we aim to provide an “all-in-one” surgical toolkit that can make MIS safer, simpler, faster and more affordable.
R&D capability represents one of the most important engines driving our growth. We master a number of industry-leading core technologies, which together form a MISIA technology platform. Based on these technologies, we have developed various advanced and cost-effective products. As of the Latest Practicable Date, we had 243 patents in China (including 93 invention patents), 2 in Europe, 5 in the US and 1 in Japan. As of the same date, we had 54 patent applications pending approval. Our “Key Technologies and Applications of Minimally Invasive Abdominal Surgery Robots and Instruments (腹腔微創手術機器人與器械 關鍵技術及應用)” project was awarded the National Technology Invention Second Prize (國家 技術發明獎二等獎) and our “Establishment, Clinical Research and Application of China’s Comprehensive Minimally Invasive Lung Cancer Treatment System (中國肺癌微創綜合診療體 系的建立、臨床基礎研究和應用推廣)” project was awarded the National Scientific Progress Second Prize (國家科學技術進步獎二等獎).
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Over the years, we have established an extensive sales network in China that covers all provinces, laying a solid foundation for the promotion of our products. In addition to a stable in-house sales team, we have an extensive distributor network, composed of over 400 distributors as of December 31, 2020. In 2020, we sold our products to more than 1,200 hospitals nationwide, of which more than 400 were Grade IIIA hospitals. According to F&S, we had the largest sales network among domestic surgical stapler manufacturers in terms of the number of hospitals covered as of December 31, 2020. In overseas markets, we have built up a sales network composed of over 70 distributors to promote both our own brands and OEM products, and have sold our products to over 60 countries and regions. The proportion of our revenue contributed by overseas sales continued to grow from 22.7% in 2018 to 29.0% in 2019, and further to 40.0% in 2020.
According to F&S, China’s MIS market is expected to grow significantly. As a result, the PRC MISIA market is also expected to grow rapidly, at a CAGR of 17.1% from 2020 to 2025, far higher than the global average of 7.5%. Endoscopic and smart staplers represent the largest part of the MISIA market and are projected to account for 30.2% of the PRC MISIA market in terms of revenue in 2025. Further, domestically manufactured endoscopic and smart staplers are expected to account for 43.0% of the endoscopic and smart stapler market in the PRC by 2025, representing a significant increase as compared with 2020. Leveraging our leading position in the PRC MISIA market, we believe that we are well positioned to seize the momentum of accelerating domestic substitution and capture a larger share in the fast-growing market.
In 2018, 2019 and 2020, our revenue was RMB228.9 million, RMB302.5 million and RMB308.5 million, respectively, and our net profit was RMB31.6 million, RMB41.8 million and RMB34.4 million, respectively. A substantial majority of our revenue during the Track Record Period was derived from our surgical staplers, which amounted to RMB203.9 million, RMB276.9 million and RMB260.8 million in 2018, 2019 and 2020, respectively, accounting for 89.1%, 91.6% and 84.5% of our total revenue, respectively.
COMPETITIVE STRENGTHS
Leading Provider of Intelligent MIS Solutions in China Serving a Large and Fast-growing Market
We are a leading provider of intelligent MIS solutions in China. We design, develop and manufacture surgical devices, and provide customized surgical training services. After more than a decade of development, we have built a comprehensive product portfolio, centered on surgical staplers and encompassing disposable fixation devices for hernia repair, trocars, polymer clips and other surgical instruments. According to F&S, we rank first among domestic surgical stapler manufacturers in the PRC in terms of sales volume (including export) in 2020, representing 14.3% of total sales volume by domestic surgical stapler manufacturers. Our products are sold to more than 60 countries and regions around the world, including Brazil, Spain, Turkey, Italy and Canada. According to F&S, we ranked first among Chinese surgical stapler brands in terms of export sales volume for five consecutive years from 2016 to 2020.
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As we continuously enrich our product portfolio, optimize product functions, improve product quality and expand end-user base, our products have been increasingly recognized by customers, and our “Panther” brand has gained growing reputation since we launched it in 2002. According to F&S, we were the first in China to launch endoscopic staplers with 360 degree rotation and self-locking misfiring prevention features, and linear staplers with knife. Our smart staplers are equipped with three cutting-edge technologies, namely, chip recognition, tissue detection and smart firing. We believe such products and technologies have further enhanced our brand image as a forerunner in the industry.
According to F&S, China’s MIS market is expected to grow significantly in the future due to the growing volume of surgeries and the increasing penetration rate of MIS. In 2020, the penetration rate of MIS in the PRC was only 12.8%, significantly lower than that of 50.7% in the US. Therefore, the PRC MISIA market is expected to grow significantly in the future, at a CAGR of 17.1% from 2020 to 2025, far higher than the global average of 7.5%. Endoscopic and smart staplers represent the largest part of the PRC MISIA market and are projected to account for 30.2% of the market in terms of revenue in 2025, according to F&S. Further, as MISIA continue to undergo technological upgrades, there will be great market demand for “smart” MISIA, such as smart staplers. Compared to traditional surgical devices and procedures, smart MISIA are easy to use, while improving the precision, reliability, consistency, flexibility and reproducibility of clinical outcomes. With our existing portfolio of smart staplers, we have made a strategic presence in the smart MISIA market and are well positioned to capture emerging market opportunities. In addition, according to F&S, domestically manufactured MISIA are expected to account for a much larger share of the PRC MISIA market. Made in China 2025, a national strategic plan issued by the State Council, includes high-performance medical devices as one of the ten key sectors for development. Domestic endoscopic and smart staplers are more and more competitive due to their high quality and affordable prices, and are expected to account for 43.0% of the endoscopic and smart stapler market in the PRC in terms of sales revenue in 2025, representing a significant increase as compared with 24.5% in 2020.
Leveraging our leading position in the PRC MISIA market, we believe that we are well positioned to seize the momentum of accelerating domestic substitution and capture a larger share in the fast-growing market. Moreover, benefiting from China’s complete industry chain for our key products, we believe that our share of the global MISIA market will also continue to grow.
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Continuously Enriched and Iterated Product Portfolio Providing Comprehensive Solutions for MIS
Rich Product Portfolio
We have a rich product portfolio. We develop, manufacture and market various MISIA, comprising (i) surgical staplers, applicable to multiple surgical specialties, ranging from gastrointestinal, gynecologic and thoracic surgeries to sleeve gastrectomy surgeries for weight control, and (ii) other instruments and accessories for minimally invasive and open surgeries, such as disposable fixation devices for hernia repair. We also market and distribute sutures, hernia meshes and blood vessel titanium clips manufactured by third parties as part of our integrated product offerings to our customers. As of the Latest Practicable Date, we had over 300 models of products on offer, including over 100 models of surgical staplers under three major categories, namely, endoscopic staplers, smart staplers and open staplers. With our comprehensive product portfolio, we aim to provide surgeons with an “all-in-one” MIS toolkit.
Our surgical instruments and accessories work well together with various types of surgery. Adopting our “all-in-one” surgical toolkit means that the surgeon need not worry about compatibility of different devices inside the surgery room or time consumed in accommodating promotional efforts from multiple brand manufacturers outside the surgery room. The following chart illustrates the application of our different products in surgical procedures:
Surgery Establish Tissue End of begins; access dissection Tissue Specimen Wound surgery; Reconstruction Anesthesia and and resection retrieval closure Patient of patient vision isolation wakes up
Veress needle
Trocar
Endoscopic System
Hand instruments
Ultrasonic scalpels
Polymer clips
Titanium clips
Surgical Specimen Surgical staplers pouch staplers
Sutures
Hernia meshes* only used in hernia surgeries
Disposable fixation devices for hernia surgeries only used in hernia surgeries
self-manufactured products products produced by third-parties *A portion of Hernia meshes are produced by third-parties
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We develop products with an aim to provide a total solution for smart MIS, based on our in-depth understanding of the industry and our keen insight in the industry trend. On the one hand, our products help make MIS safer and more efficient; on the other hand, a total solution can help improve the operation and surgical efficiency of hospitals and enhance our brand awareness and customer loyalty. Moreover, a comprehensive product portfolio enables us to perceive clinical needs faster and more precisely, and continuously upgrade our products to meet evolving customer demand.
Continuous Iteration of Key Products and Product Candidates
Smart Stapler
Our latest smart stapler under development, the third-generation electric-powered endoscopic stapler, can be operated single-handedly, featuring electrically driven functions such as firing/return, closure/open of jaws and bending/360-degree rotation. Our smart staplers are easy to use, reducing reliance on surgical suturing skills while ensuring precision and improving reliability of stapling effects. This product is expected to be used for anastomosis of stomach, lung and digestive tract surgeries. It has received the CE Mark and is in clinical trials in China. Compared with existing products on the market, our smart stapler has the following advantages:
• fully powered functions to provide better safety, efficiency and convenience in the surgery, including 360-degree smooth rotation before cutting and suturing, firing and return, closure and open of jaws,
• completely disposable, which reduces cross-infection risk,
• more adaptable staple cartridge and lower cost,
• discernible color indication, chip-enabled recognition, real-time tissue thickness detection and smart firing control, which can improve suture performance and reduce the risk of injury caused by mis-operation, and
• simple replacement of cartridges and shorter clinical learning curve.
Ultrasonic Scalpel
Ultrasonic scalpels are widely used for cutting, coagulation, grasping and dissection of soft tissues in one step in both minimally invasive and traditional open surgeries. Our ultrasonic scalpel is undergoing its second iteration. Our first-generation ultrasonic scalpel has received the CE Mark. Our second-generation ultrasonic scalpel is expected to be used for general, thoracic, gynecological, pediatric and plastic surgeries. It features
• a smart and fast self-check system to save preoperative preparation time,
• ultrasonic handle and cutter head with a larger amplitude, generating higher energy to facilitate smooth incision during the surgery and a safe hemostasis process,
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• optional max/min performance cutter head adaption meeting the needs of different procedures,
• a reusable activation handle connected with the transducer, which can reduce maintenance cost, and
• intelligent tissue resection management technology reducing thermal damage to the tissues.
According to F&S, the penetration rate of ultrasonic scalpels in the US reached 27.0% in 2020, while the domestic market only saw a penetration rate of 1.1%, indicating a huge growth potential. We believe our technological innovation and continuous upgrade will enable us to capture a larger market share in the growing PRC ultrasonic scalpel market.
Laparoscopic Surgical Robot
Laparoscopic surgical robots are typically used in minimally invasive procedures. Robot-assisted laparoscopic surgery overcomes most of the limitations of conventional endoscopic procedures and brings many advantages, such as precision, flexibility, reproducibility and stability, and can be less affected by human physiological factors, which are of great importance to solve the problems faced by traditional MIS.
Our surgical robot, currently under development, is expected to apply to cardiothoracic, general, genitourinary and gynecologic surgeries. It is expected to reduce reliance on surgeons’ technical skills and practical experience, improve precision, simplify operation procedures and shorten operation time. It features
• intuitive control technology, with which unattended robotic arms can suspend in any position during the surgery without any unwanted movements, thereby reducing surgical risks,
• intraoperative adjustment mechanism, which can save operative time and make the robot easy to handle,
• immersive 3D imaging, which brings lower latency and larger depth of field, allowing flexible operation with a more precise view,
• integration of CT and ECG images, which can be compared to surgical field images in real time during the operation, providing surgeons with a reliable reference.
According to F&S, as of the Latest Practicable Date, no domestically developed laparoscopic surgical robot products had been commercialized, and our laparoscopic surgical robot was one of a few in the development stage. We believe our early-mover advantages and the innovative features of our laparoscopic surgical robot will position us well to compete in this burgeoning market.
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As of the Latest Practicable Date, we had 19 product candidates at various stages of development, including 6 potential Class III medical devices and 13 potential Class II medical devices. As of the same date, we had two products that had received CE Marks and were in product registration process in China. We believe that our smart staplers, ultrasonic scalpels and surgical robots will significantly complement our product portfolio to provide surgeons with a total intelligent MIS solution.
Forward-looking R&D Strategy, Cutting-edge Technologies and Strong Commercialization Capabilities
Industry-leading Technology Platform
We have various industry-leading core technologies, which together form a MISIA technology platform. Based on these technologies, we have developed a number of advanced and cost-effective products.
• Surgical stapler technologies: We have mastered a set of surgical stapler technologies applicable to minimally invasive procedures of tissue resection, suture and hemostasis core, such as self-locking misfiring prevention features, til-top anvil, color indication, press-stabilized gradual cutting, prompt tone, smart firing control based on recognition of tissue thickness, recognition of firing length, anti-forgery quality assurance, pre-use self-check, smooth articulation system and tissue atraumatic extra griping and less slippage. Based on these technologies, we have successfully developed and commercialized various types of surgical staplers, including smart staplers and endoscopic staplers, and continuously upgrade our products to maintain our leading position in the market.
• Surgical robot technologies: Our surgical robot technologies include specialist customization technology and intuitive control technology, as well as general robot technologies such as fine motion control, visual imaging system and remote operation control. We benchmark against world leading technologies to improve the functionality and performance of our products, and continue to develop advanced laparoscopic surgical robot products and other surgical robot products which will be applied to a wider range of surgeries.
We are a National High-Tech Enterprise. As of the Latest Practicable Date, we had 243 patents in China (including 93 invention patents), 2 in Europe, 5 in the US and 1 in Japan. As of the same date, we had 54 patent applications pending approval. Our “Key Technologies and Applications of Minimally Invasive Abdominal Surgery Robots and Instruments (腹腔微創手 術機器人與器械關鍵技術及應用)” project was awarded the National Technology Invention Second Prize (國家技術發明獎二等獎) and our “Establishment, Clinical Research and Application of China’s Comprehensive Minimally Invasive Lung Cancer Treatment System (中 國肺癌微創綜合診療體系的建立、臨床基礎研究和應用推廣)” project was awarded the National Scientific Progress Second Prize (國家科學技術進步獎二等獎). Our “Design, Technology and Application of Endoscopic Minimally Invasive Devices (腔鏡微創器械設計技
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術與應用)” and “Key Technology of Minimally Invasive Surgical Robot System and its Application (微創手術機器人系統關鍵技術與應用)” projects were awarded the First Prize and Special Prize, respectively, of Technology Invention Award in Tianjin.
Forward-looking R&D Strategy and Continuously Enhanced R&D Capabilities
We were founded by a team of medical experts and entrepreneurs, and have always prioritized the development of MISIA that both meet clinical needs and have market potential. We have accumulated extensive experience in the design, development and manufacturing of MISIA, in particular high-value MISIA, such as high-end surgical staplers and surgical robots. We develop MISIA through both our in-house R&D team and in collaboration with leading research institutions and renowned hospitals. As of December 31, 2020, we had 37 in-house R&D personnel, representing 10.3% of our total headcount, among which the core members had over ten years of experience in the R&D of surgical devices. We have established collaborative relationship with many academic and research institutions, hospitals, medical associations, domestic and international surgical specialists and clinicians.
Our R&D is substantially driven by clinical feedback, which enables us to develop products that truly address unmet clinical need. For example, we developed endoscopic staplers with a 360-degree rotating head, self-locking misfiring prevention features and discernible color indicator to meet the demand for surgical staplers that are both convenient and safe. Having seen the market potential, we have also made strategic planning and started our R&D for surgical robots. We strive to build up a platform to continuously incubate MISIA products that meet evolving surgical needs, and commercialize such products leveraging our extensive sales network.
Strong Commercialization Capabilities
We commercialize our R&D results through the collaboration of various internal departments. In the early R&D planning stage, our R&D team closely communicates with our in-house sales team and external surgeons to explore and understand customer needs, formulate a preliminary product concept, evaluate market potential and assess the feasibility of patent application; our management team evaluates the path and feasibility of product registration in each target country, providing references to finetune our technical solutions and pave the way for commercialization. In the product development process, our simplified management structure facilitates efficient information exchange among our design, process, quality, registration, procurement, manufacturing, sales and other relevant personnel, thereby achieving our goals faster.
We have a strong manufacturing team and systematic manufacturing planning, which allows us to progress from clinical trials to commercialization in a rapid and cost-effective manner. In the product development process, our R&D team assesses the required manufacturing environment, equipment and personnel in advance, formulates codes of practice, designs tooling and fixtures, and trains and evaluates relevant personnel. We are equipped with more than 20 advanced automatic binding machines and a variety of tooling and
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Extensive Sales Network and Outstanding Academic Promotion Capabilities
Sales Network
With nearly two decades of experience in the MISIA industry, we have established an extensive sales network in China that covers all provinces, laying a solid foundation for the promotion of our products. We have a stable in-house sales team, and most of our regional managers have been with us for over 10 years. We also have an extensive distributor network in China, composed of over 400 distributors as of December 31, 2020. In 2020, we sold our products to more than 1,200 hospitals nationwide, of which more than 400 were Grade IIIA hospitals. According to F&S, we had the largest sales network among domestic surgical stapler manufacturers in terms of the number of hospitals covered as of December 31, 2020.
In overseas markets, we have formed a sales network composed of over 70 distributors to promote both our own brands and OEM products as of December 31, 2020. In 2020, we sold our products in over 60 countries and regions, such as Brazil, Spain, Turkey, Italy and Canada. After entering a country, we build a localized sales team to communicate with and provide on-call services to hospitals and surgeons, such as operating room shadowing. We have set up offshore subsidiaries and warehouses to fulfill international orders. During the Track Record Period, the proportion of our revenue contributed by overseas sales grew continuously, from 22.7% in 2018 to 29.0% in 2019, and further to 40.0% in 2020.
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Academic Promotion
We have actively participated in major domestic and international academic conferences and symposiums and established extensive relationships with domestic and international surgical experts and clinicians, which has enhanced our brand awareness and recognition. Most of the academic conferences we participate in are the largest and most influential conferences in their fields, such as the annual meetings of the International Federation for the Surgery of Obesity and Metabolic Disorders (IFSO) and its branches in different continents, the American Association for Thoracic Surgery (AATS), the European Society of Thoracic Surgeons (ESTS), the European Society of Coloproctology (ESCP) and the Endoscopic and Laparoscopic Surgeons of Asia (ELSA), as well as the World Congress of Surgery (WCS) of the International Society of Surgery. These academic activities have helped surgeons better understand our products, effectively enhanced our brand awareness and promoted the sales of our products. Meanwhile, through these academic conferences, we can gain a better understanding of clinical needs, stay abreast of the latest trend in the industry and upgrade our products.
In order to provide high-value technical support to global customers, we have established the Panther Surgical Academy. Our Panther Surgical Academy provides value-added academic services to surgeons from all over the world through various forms of training, including surgical training courses and immersive surgery observation. We have established a number of regional training centers at collaborating hospitals in the PRC, Europe, South America, Middle East and South Asia, among others. Our training programs cover the MIS procedures of a range of surgical specialties such as weight loss and metabolic, gastrointestinal and thoracic surgeries. During the Track Record Period, we provided training to more than 1,000 surgeons every year. To capture market opportunities brought by the Belt and Road Initiative, we facilitated international exchanges and communications, with the aim of improving the surgical capabilities of surgeons in Belt and Road countries and assisting Chinese experts and hospitals to expand their international presence. As of the Latest Practicable Date, we had organized more than 20 training sessions for over 200 surgeons in cooperation with 10 domestically and internationally recognized hospitals, on the topics of lung cancer, esophageal cancer, colorectal cancer, gastric cancer, weight loss and metabolic treatment. In particular, the “Duke-Asia Masters of Metabolic and Bariatric Surgery (杜克-亞洲減重代謝外科國際大師培訓班)” we organized in cooperation with the Duke University Hospital and the “International Master Class of Thoracic Surgery (北京大學人民醫院國際胸腔鏡大師班)” we organized in cooperation with the Peking University People’s Hospital have become internationally recognized academic activities. Moreover, we provide technical support to end-user hospitals and distributors through our sales personnel in the forms of departmental meetings, animal experiments, tutoring by senior surgeons, topical salons, study groups, operating room shadowing and product trials.
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Seasoned Management Team, Comprehensive Talent Development Scheme and Strong Shareholder Support
We have an experienced and stable management team. Our co-founder, Chairman and executive Director, Mr. Qu Chao, an attending physician, has over eight years of clinical experience and over 30 years of experience in the field of medical devices. Benefiting from his extensive experience, Mr. Qu has a deep understanding of surgical instruments, quality control and end-user needs. Ms. Liu Qing, our co-founder, general manager and executive Director, has 26 years of experience in marketing and corporate management. Ms. Liu is also in charge of our R&D activities. Mr. Li Yanduo, our chief financial officer and secretary to the Board, was previously employed by Deloitte Touche Tohmatsu and has extensive experience in private equity and finance. Most of our management staff have mechanical, medical and marketing experience in large-scale, comprehensive medical device enterprises in China and abroad. Many management members are former surgeons, who can bring us a step closer to the demand of hospital customers, so that we can timely formulate and adjust our development strategy and R&D direction according to industry trend and market demand. We believe that the experience, professionalism and excellent execution capability of our management team will lead our continuous development.
We cultivate and attract talent in collaboration with universities and research institutions, and hire experienced talent, in particular mid-level and senior technical personnel, from top international medical device companies who can bring us cutting-edge concepts of R&D, sales and management. We have a standardized training system and make comprehensive plans for employee training, such as pre-job training and on-the-job training. We also conduct regular training for our R&D personnel. Moreover, we have crafted a sound internal competition mechanism to improve the competence of our employees, integrating performance evaluation, remuneration and career advancement, to establish a fair and long-term incentive mechanism and retain core talent. In particular, we have a competitive remuneration system and incentive mechanism for our R&D personnel to motivate them and ensure the sustainability of R&D innovation. Many of our employees join and grow with us, committed to the prospects of our Company, which underpins our sustainable development.
Our shareholders include reputable investors, such as SBCVC and CBC Group. Apart from financial support, we can also leverage their extensive experience and resources in the healthcare industry to find acquisition targets and adjust our growth strategies.
BUSINESS STRATEGIES
Continue to Expand Our Market Share and Solidify Our Industry Position
We plan to keep abreast of the technology development of surgical instruments and solidify our leading position in the PRC MISIA market. We also plan to further broaden our sales channels, integrate high-end product resources from third parties to enhance our ability to provide a total solution, so as to further increase our market share in the PRC MISIA market and enhance our competitiveness in overseas markets.
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Domestically, as we further diversify our product portfolio, we plan to continue providing customized products to our customers in the form of packaged solutions, reducing the administrative burden of hospitals on procurement procedures and thereby attracting hospital customers with a larger and diverse demand for surgical instruments. For existing customers, we plan to solidify our cooperation with distributors through training on our products by our sales staff, and promote our high-end surgical instruments such as smart staplers and endoscopic staplers. Meanwhile, we plan to enhance our marketing capabilities by increasing our sales force and actively develop new customers on a regional basis. We plan to increase our sales by recruiting more local sales personnel in the southwestern, central and western regions of China, and providing more medical training, intraoperative technical support and product introduction for distributors and hospitals in lower-tier cities. Further, we plan to cooperate with well-known domestic experts to organize surgery skill training sessions and live surgery sessions to help the surgical teams in local hospitals improve their surgical capabilities. During such process, we expect our customized services to effectively result in customer demand for our products, thus increasing our market share in China. Overseas, we intend to increase our sales by expanding our overseas sales team, hiring more local sales staff who understand the relevant markets better and penetrating into new markets. We plan to set up or invest in local companies in strategically important countries to support our sales in such markets.
Further Enrich Product Pipeline, Accelerate the Commercialization of Product Candidates and Pursue Acquisition Opportunities
R&D capability represents one of the most important engines driving our growth. We plan to accelerate the clinical research and commercialization of our product candidates, and continuously enhance our capability to provide packaged surgical solutions.
We plan to continue collecting surgery experts’ needs and requirements on surgical instruments, and develop innovative products that meet clinical demand. In the meantime, we will continue to accelerate the R&D and commercialization process of key product candidates, such as ultrasonic scalpel, trocar and laparoscopic surgical robot. We also plan to distribute more types of products manufactured by third parties, such as thoracoscopic and laparoscopic devices, to complement our surgical toolkit.
We plan to actively pursue collaborative R&D opportunities with universities and research institutions. We also plan to enhance our R&D capability and diversify our product portfolio through acquisitions of MISIA companies. The target shall generally meet the following criteria: (i) a relatively large revenue, and a net profit of RMB5.0 million to RMB10.0 million in the most recent fiscal year; (ii) ownership, right of use or long-term lease interest in its plant and the underlying land; (iii) having obtained patents and NMPA certification for key products, and better with international certifications such as CE and FDA; (iv) mature R&D, manufacturing and sales teams in suitable sizes; (v) complementary to our existing business, such as new products or significant upgrade of our existing products; and (vi) relatively advanced technology in the industry, which enhances our technological capabilities. According to F&S, there are a sufficient number of targets on the market that meet our criteria.
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Expand Manufacturing Capacity and Enhance Intelligent Manufacturing Capability
We plan to expand our manufacturing capacity to accommodate the potential increase in demand that may result from centralized volume procurement, which in turn could help control our manufacturing cost, improve our management efficiency and enhance our competitiveness. We plan to achieve 24/7 manufacturing by installing more automated equipment for manufacturing, assembly and packaging, and expand our manufacturing team to support the increased manufacturing capacity, so as to meet the growing demand for the next five to ten years.
We plan to purchase advanced manufacturing equipment, improve the level of intelligent manufacturing and optimize the manufacturing process of high-end surgical stapler products to meet the requirements of domestic and international markets. In the first stage (2022-2023), we plan to design special molds, clamps, fixtures and checking fixtures to achieve manual-free assembly process; in the second stage (2023-2024), we plan to make extensive use of optical inspection and other automatic inspection equipment to reduce human visual and manual inspection; in the third stage (2025-2027), we plan to realize completely unmanned and automated manufacturing. Through the intelligent manufacturing, we expect to enhance manufacturing cost control, improve management efficiency, increase manufacturing capacity and improve market competitiveness.
We plan to manufacture some of the core components for high-end surgical staplers in-house, which will help reduce our reliance on external component suppliers, strengthen our bargaining power and reduce our cost.
Further Enhance Our Brand Awareness
We plan to continue enhancing the recognition of our Panther brand in the industry. Focusing on the standardization of surgical treatment for thoracic tumors, gastrointestinal tumors and obesity and metabolic diseases, we plan to cooperate with KOLs in China and abroad to further improve our training system and expand our training scale. We plan to organize and promote international communications and exchanges among surgeons in Belt and Road countries, in order to provide surgeons with a variety of value-added services that can improve their surgical capabilities and expand their industry influence, which will also enhance our own brand awareness, strengthen their confidence in our products and cultivate brand loyalty. We plan to continue participating in important domestic and international academic conferences to showcase our latest products and services, and make use of various new media platforms to maintain long-lasting influence on and interaction with our target customer groups by means of livestreaming, information push and community activities. We also plan to support surgical research projects in important markets by introducing new surgical technologies, through which we can on the one hand obtain clinical evidence to prove the safety, stability and reliability of our products, promote our products and establish our brand image as an industry leader with academic expertise and rigorous quality control while on the other hand assisting experts in promoting extensive application of new surgical technologies.
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In view of the implementation of the Healthy China strategy, the improvement of the diagnosis and treatment capabilities of medical institutions in lower-tier cities and the goal to achieve treatment of critical diseases within counties, it is expected that the volume of surgeries in hospitals in prefecture-level cities will grow at a higher pace than the national average. We plan to collaborate with experts to conduct “master class” training programs to link up experts with hospitals in prefecture-level cities through our Panther Surgical Academy to improve their diagnosis and treatment capabilities and surgical skills. We also plan to continue training international hospitals and surgeons through Panther Surgical Academy. We believe such training can enhance the recognition of our brand by domestic and international hospitals and increase customer loyalty, which will in turn promote the sales and use of our products.
Attract and Retain Outstanding Talent
We plan to attract high-caliber talent specialized in R&D, manufacturing and sales with our competitive remuneration package and training system. We plan to hire more midlevel and senior technical personnel to strengthen our R&D team and optimize our team structure. We will continue to improve our systems of performance assessment, remuneration and career advancement to establish a fair and sustainable incentive mechanism. In particular, we plan to improve the remuneration system and equity incentive mechanism for our R&D personnel, to motivate our R&D personnel, ensure the sustainability of R&D activities and retain quality talent. We also plan to continue cultivating and attracting talent in collaboration with universities and research institutions to support our long-term development.
OUR BUSINESS MODEL
During the Track Record Period, we generated a vast majority of our revenue from sales of our self-manufactured products, such as surgical staplers, disposable fixation devices for hernia repair and other surgical instruments and accessories. In addition, we also derived a small portion of revenue from distribution of products manufactured by third parties, including sutures, hernia meshes and blood vessel titanium clips. The following table sets forth a breakdown of our revenue by source of products for the years indicated:
For the year ended December 31, 2018 2019 2020 (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Self-manufactured products 205,991 90.0 279,277 92.3 291,691 94.5 Products manufactured by third parties 22,878 10.0 23,192 7.7 16,831 5.5
Total 228,869 100.0 302,469 100.0 308,522 100.0
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OUR PRODUCT PORTFOLIO
We are a leading provider of intelligent MIS solutions in China, focusing on the design, development, manufacturing and marketing of an extensive range of surgical devices. Our surgical devices comprise (i) surgical staplers, including endoscopic staplers, smart staplers and open staplers, and (ii) other instruments and accessories for minimally invasive and open surgeries, such as disposable fixation devices for hernia repair. We also market and distribute sutures, hernia meshes and blood vessel titanium clips manufactured by third parties as part of our integrated product offerings to our customers. As of the Latest Practicable Date, we had registered 61 Class II medical devices and 3 Class III medical devices in China. As of the same date, we had received FDA approvals for 7 products in the United States, CE Marks for 21 products in and MDSAP recognitions for 11 products. We have also developed a robust product pipeline to achieve a more extensive product offering, including a laparoscopic surgical robot product in China in 2024. In addition, we have obtained CE Marks for and commercialized our first generation smart stapler and first generation ultrasonic scalpel in Europe. We plan to launch the same products in China in 2021 and 2022, respectively. See “—Smart Staplers” and “—Ultrasonic Scalpels” in this section. In addition, leveraging our production capacity and expertise in manufacturing medical devices, we completed the registration of Class II medical devices for our medical isolation masks and gowns in April 2020 and started to manufacture masks and medical isolation gowns in response to market opportunities arising from the COVID-19 pandemic.
A substantial majority of our revenue during the Track Record Period was derived from surgical staplers. The following table sets forth a breakdown of our revenue by product type for the years indicated:
For the year ended December 31, 2018 2019 2020 (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Surgical staplers 203,917 89.1 276,911 91.6 260,817 84.5 Endoscopic staplers 138,355 60.5 194,166 64.2 200,464 65.0 Smart staplers – – – – 178 0.1 Open staplers 65,562 28.6 82,745 27.4 60,175 19.4 Masks and medical isolation gowns – – – – 27,331 8.9 Sutures 11,931 5.2 12,841 4.2 10,083 3.3 Hernia repair products 5,238 2.3 5,451 1.8 3,564 1.2 Disposable fixation devices 721 0.3 526 0.2 939 0.3 Hernia meshes 4,517 2.0 4,925 1.6 2,625 0.9 Other surgical instruments and accessories(1) 7,783 3.4 7,266 2.4 6,727 2.2
Total 228,869 100.0 302,469 100.0 308,522 100.0
(1) Primarily include disposable trocars, disposable blood vessel titanium forceps and disposable polymer clips.
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In 2020, we exported our products to over 60 countries and regions, primarily through overseas distributors. Our sales outside Greater China accounted for 22.7%, 29.0% and 40.0% of our total revenue in 2018, 2019 and 2020, respectively. The following table sets forth a breakdown of our revenue by geographic region for the years indicated:
For the year ended December 31, 2018 2019 2020 (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Greater China 176,910 77.3 214,899 71.0 185,025 60.0 Europe(1) 23,691 10.4 43,179 14.3 64,286 20.8 South America(2) 13,224 5.8 14,144 4.7 30,053 9.7 Other regions in Asia(3) 13,002 5.7 26,065 8.6 20,939 6.8 North America(4) 1,301 0.6 3,044 1.0 4,470 1.4 Africa(5) 741 0.2 1,138 0.4 3,749 1.3
Total 228,869 100.0 302,469 100.0 308,522 100.0
(1) During the Track Record Period, we derived revenue from 24 countries in this region, such as Turkey and Spain.
(2) During the Track Record Period, we derived revenue from seven countries in this region, such as Brazil and Ecuador.
(3) During the Track Record Period, we derived revenue from 22 countries in this region, such as Iran and Saudi Arabia.
(4) During the Track Record Period, we derived revenue from ten countries in this region, such as Canada and Panama.
(5) During the Track Record Period, we derived revenue from six countries in this region, such as South Africa and Egypt.
Surgical Staplers
We offer a wide range of surgical staplers to accommodate different patient and surgeon preferences and operation needs in multiple surgical specialties, ranging from gastrointestinal, gynecologic and thoracic surgeries to sleeve gastrectomy surgeries for weight reduction. As of the Latest Practicable Date, we had seven major series of surgical stapler products, including one type of disposable endoscopic stapler, one type of smart stapler and five types of open staplers. All of them are Class II medical devices. Our comprehensive surgical stapler portfolio is highly regarded by our customers and users for reliability, consistency and efficiency and is designed to meet both procedural and economic needs.
We offer various specifications for each of our major product types, and we sell many of our products in sets with different product configurations. Our surgical stapler products contributed 89.1%, 91.6% and 84.5% of our total revenue in 2018, 2019 and 2020, respectively.
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Endoscopic Staplers
Endoscopic staplers have been our traditional strength for which we have over a decade of operation experience. An endoscopic stapler is mainly used for removing part of an organ (resection), cutting through organs and tissues (transection) or creating connections between structures (anastomoses) in laparoscopic, thoracoscopic and many other types of MIS. MIS has many advantages over traditional open surgery, such as less surgical trauma, faster post-surgery recovery, cleaner incision scars and lower costs. According to F&S, China’s MIS market is expected to experience tremendous growth in the future, and the endoscopic cutting stapler is an important device used in MIS. A disposable surgical stapler can be used for only one single operation to reduce cross-infection risk. We offer disposable endoscopic cutting staplers in a wide range of types and specifications to meet the needs of various surgeries, including hepatobiliary, gastrointestinal, genealogical, pediatric and thoracic surgeries.
An endoscopic stapler consists of two parts: (i) an anastomosis function part and (ii) a handle transmission part. The anastomosis function part mainly comprises a staple cartridge, a staple seat, a staple cartridge seat, a cutting knife and a titanium nail driving mechanism. The handle transmission part mainly comprises an activation handle, a positioning handle and a transmission mechanism. The following picture illustrates the structure and components of our disposable endoscopic cutting stapler:
The universal and ergonomic non-slipping handle is available in three shaft lengths for surgeons to manipulate freely and is compatible with two types of reloading units, both straight and articulating. Our disposable endoscopic cutting staplers are also powered with different staple heights, which enables surgeons to select the appropriate staple height to best accommodate various tissue thicknesses. Wide distal jaw aperture facilitates easy manipulation and placement of tissue. Staple gap control allows for consistent staple formation as the cutting knife proceeds through the transected tissue. Our disposable endoscopic cutting stapler incorporates two triple-staggered rows of staples and simultaneously cuts and divides the tissue between the two rows as an efficient procedural approach to reduce patient pain. Our disposable endoscopic cutting staplers are Class II medical devices registered in the PRC in 2009. All of our wide range of component configurations are compatible with the universal handle, allowing surgeons to select different components for different patient conditions and different type of tissue.
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The following table sets forth details of our disposable endoscopic cutting stapler:
Medical Device Type Major Application Classification Features and Benefits Example
Disposable Laparoscopic, Class II • Smooth articulation system: 360° endoscopic thoracoscopic and smooth rotation enables flexible cutting stapler various other operation at different angles, types of MIS elevating surgeon’s operation experience and accuracy; • Tissue atraumatic extra griping and less slippage: Jaws equipped with anti-skid structures, securing tissue in the jaws and prevent tissue from sliding during the anastomosis. Progressive clamping technology utilizing anvil and cartridge with non- traumatic sides for better clamping and less squeezing of tissue; • Enhanced anvil delivering better compression and manipulation of tissue; and
Smart Staplers
Leveraging our expertise in manual endoscopic staplers, we developed smart staplers, which are powered endoscopic staplers with advanced features and easy to use while ensuring precision and improving reliability of stapling effects. Our smart stapler features chip-enabled recognition, tissue detection and smart firing. Evidence shows that firing more slowly in thicker tissue helps ensure a higher percentage of properly “B”-shaped staples. When our smart stapler is fired, it automatically applies the appropriate firing speed for the tissue, allowing thicker tissue to compress to the correct height for the staples to improve stability, consistency and efficiency of staple line formation. Our smart staplers incorporate real-time feedback, effectively improving surgeons’ control of surgical staplers and stapler-tissue interactions to minimize variation in usage, standardize performance across users and optimize the clinical outcomes.
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As of the Latest Practicable Date, we had three generations of smart staplers. Our first generation smart stapler has obtained CE Mark as Class IIa medical device in 2020 and is at clinical trial stage in China. We currently expect we will submit the registration application to the NMPA in the third quarter of 2021 and expect to receive registration approval in China in the fourth quarter of 2021. We are also in process of registration in Brazil, Mexico, South Korea and Peru and plan to apply for FDA registration. As of the Latest Practicable Date, our second and third generations of smart staplers are in the design and development stage.
In 2018, 2019 and 2020, the R&D expenditures incurred for our smart staplers was RMB1.3 million, RMB0.3 million and RMB2.1 million, accounting for 9.4%, 1.7% and 12.2% of our total R&D expenditures, respectively, during the same period.
Product Structure and Key Features
The following picture illustrates the structure and components of our smart stapler:
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The following table sets forth details of our smart staplers:
Expected Medical Device Launch Date Candidate Name Classification Major Application Features and/or Key Upgrades Current Status in China
Smart stapler I NMPA: Class II Laparoscopic, • Chip-enabled recognition: chip NMPA: Clinical 2021 (plan to obtain) thoracoscopic incorporated in the reloads for trial CE Mark: and various precise firing and better clinical Europe: Class IIa other MIS outcomes; launched (obtained) • Tissue detection: detecting tissue thickness and informing surgeons to support surgical decision- making; and • Smart firing: automatically adjusting firing speed according to real-time feedback and enabling surgeons to deliver accurate performance in variable tissue; automatically stopping firing and activating backout mechanism when abnormal condition is detected to reduce the risks of misfiring and malformation and improve staple line security
Smart stapler II NMPA: Class II Laparoscopic, • Key upgrades: Pre-use self-check: Product design 2022 (plan to obtain) thoracoscopic Fully powered turning before and CE Mark: and various cutting and suturing to provide development Class IIa other MIS more safety, efficiency and (plan to obtain) convenience in the surgery, in addition to powered firing and return, as well as powered closure and open of jaws
Smart stapler III NMPA: Class II Laparoscopic, • Key upgrades: Smooth Product design 2023 (plan to obtain) thoracoscopic articulation system: 360-degree and CE Mark: and various powered smooth rotation before development Class IIa other MIS cutting and suturing tissues to (plan to obtain) further ensure flexibility and stability of the surgical stapler during firing with more consistent compression of surgical stapler onto tissue
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Clinical Trials in China
For the clinical trial of our first generation smart stapler in China, we enrolled 108 patients. We commenced the trial in November 2020 and expect to complete it in July 2021.
This is a prospective, multi-center, block-randomized, parallel-controlled and non- inferiority clinical trial, aiming to assess the safety and efficacy of our smart staplers in endoscopic surgery through comparison with a commercialized smart stapler manufactured by another developer (“Approved Smart Stapler”).
108 patients were enrolled in three sites and randomized into the study group (using our smart stapler) and the control group (using Approved Smart Stapler) at a ratio of 1:1. The primary efficacy endpoint of the trial was no statistically significant difference in anastomosis success rate between the study group and the control group. An anastomosis would be deemed successful when (i) a complete anastomosis line was formed; (ii) no anastomotic fistula nor bleeding occurs after stapling and (iii) no bubble outflow during the tubal insufflation test. Secondary efficacy endpoint was postoperative anastomotic healing rate. The safety profile would be assessed by occurrences of wound opening due to breaking staple and postoperative complications. As of the Latest Practicable Date, we had completed an around three- to ten-day follow-up study on the patients enrolled in the clinical trial for digestive tract operations, three- to five-day follow-up study for lung operations, or one- to three-day follow-up study for other endoscopic operations to assess the safety and efficacy of our smart stapler. We are currently in the process of conducting data analysis and preparing the clinical trial report.
Market Opportunities and Competition in China
According to F&S, in China there were only a few commercialized domestically developed smart staplers and our smart staplers was one of a few smart staplers under or beyond clinical trial stage in China as of the Latest Practicable Date. Most of endoscopic staplers only provide basic functions whereas smart staplers generally include upgrade functions, such as chip recognition, tissue detection and smart firing technologies. We believe our smart staplers will be competitive in the market. See “Industry Overview—Our Product Portfolio—Smart Staplers.”
WE CANNOT GUARANTEE YOU THAT WE CAN SUCCESSFULLY DEVELOP AND MARKET OUR SMART STAPLERS IN CHINA IN A TIMELY MANNER, IF AT ALL.
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Open Staplers
An open stapler is used in open surgery which typically is invasive and involves creating a large incision in the skin through which tissues and organs are cut. We have developed a portfolio of specialty stapling solutions with our open staplers to provide the right tool that meets each specific challenge. All of our open staplers are Class II medical devices registered in the PRC in 2006 or 2009. The following table sets forth details of major types of our open staplers:
Type Major Application Features and Benefits Example
Disposable circular Creation of end-to-end, • Ergonomic curved intraluminal shaft and stapler end-to-side and side- textured firing handle facilitating to-side anastomosis surgeons’ comfort and control; in general and • Self-locking misfiring prevention thoracic surgeries, features: Dual safety lockout mechanism such as digestive preventing from accidental misfiring; tract reconstructive • Til-top anvil: Unique 90-degree folding surgery anvil for easy and safe removal through anastomosis, minimizing potential tissue trauma; and • Tissue atraumatic extra griping and less slippage: Cartridge and anvil self-lock design preventing slipping out of the tissue and eliminating the problem when the anvil returns back during the firing action
Disposable linear Resection, transection • Self-locking misfiring prevention cutter stapler of tissues and organs features: Multiple safety devices such as and creation of (i) blade protector designed to cover anastomosis in blade properly before and after reloading gastrointestinal, unit fired and protect surgeons in gynecologic, operation, (ii) cartridge safety lockout pediatric and feature designed to prevent use of a fired thoracic surgeries reloading unit, and (iii) floating reloading unit design above the edge of the fork before closing the surgical stapler fully, preventing misfiring; and
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Type Major Application Features and Benefits Example
Disposable circular Surgical treatment of • Self-locking misfiring prevention stapler for hemorrhoidal features: Patented built-in automatic hemorrhoidal diseases and rectal safety device, preventing misfiring prolapse mucosal prolapses without proper closure; and • Color indication: Green firing indicator window offering visual and audible indication for commencing firing.
Disposable linear Thoracic, general, • Ergonomic, single handed firing lever stapler hepatobiliary, fitting different operational habits and urological and needs and providing optimal user control; gynecological • Self-locking misfiring prevention surgeries for features: built-in automatic safety device, resection, transection preventing misfiring without proper and creation of closure; and anastomosis of tissue • Color indication: offering visual and audible indication for firing status, minimizing the risk of mis-operation and improving operation stability.
Disposable linear Distal rectal excision in • Self-locking misfiring prevention stapler with knife low rectal resection features: built-in automatic safety device, surgery preventing misfiring without proper closure; • Color indication: offering visual and audible indication for firing status, minimizing the risk of mis-operation and improving operation stability; and • Tissue atraumatic extra griping and less slippage: Progressive clamping technology utilizing anvil and cartridge with non-traumatic sides for better clamping and less squeezing of tissue.
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Ultrasonic Scalpels
An ultrasonic scalpel comprises an electrosurgical hardware (主機) to support disposable ultrasonic dissectors, a transducer built in the handle, a scalpel and a footswitch. Ultrasonic scalpels are widely used for cutting, coagulation, grasping and dissection of soft tissues in one step in both minimally invasive and traditional open surgeries to save surgery time.
As of the Latest Practicable Date, we had two generations of ultrasonic scalpels: the first-generation ultrasonic scalpel had been registered as Class IIb medical device in Europe in 2020 and were at clinical trial stage in China, and we were designing our the second-generation ultrasonic scalpel, which will make further improvements to our first-generation ultrasonic scalpel. We currently expect we will submit the registration application for the first-generation ultrasonic scalpel to the NMPA in 2022 and expect to receive registration approval of the first-generation ultrasonic scalpel in China by the end of 2022. We also plan to register the first-generation ultrasonic scalpel primarily in other countries and regions, such as Brazil, India, Canada and Turkey.
In 2018, 2019 and 2020, the R&D expenditures incurred for our ultrasonic scalpels was nil, RMB2.5 million and RMB2.7 million, accounting for nil, 13.9% and 15.7% of our total R&D expenditures, respectively, during the same period.
Product Structure and Key Features
The following picture illustrates the structure and components of our ultrasonic scalpels:
1. Scalpel 2. Transducer 3. Hardware 4. Foot switch
The following table sets forth details of our ultrasonic scalpels:
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Expected Medical Device Launch Date Candidate Name Classification Major Application Features and/or Key Upgrades Current Status in China
Ultrasonic scalpel I NMPA: Class III General, thoracic, • Pre-use self-check: Smart and fast China: selecting 2022 (plan to obtain) gynecological, self-check, saving surgery time; patients for CE: Class IIb pediatric and • Cost-efficient designs such as clinical trial (obtained) plastic surgeries reusable activation handle which Europe: can be disconnected from launched transducer Ultrasonic scalpel II NMPA: Class III General, thoracic, Key upgrades: Product design 2023 (plan to obtain) gynecological, • Tissue atraumatic extra griping and CE: Class IIb pediatric and and less slippage: Enhanced jaw development (plan to obtain) plastic surgeries design to prevent tissue slippage and improve surgeon’s control over tissues during the surgery; • Efficient ultrasonic drive circuit and control algorithm;
Clinical Trials in China
For the clinical trial of our first generation ultrasonic scalpel, we intend to enroll 108 patients and as of the Latest Practicable Date were in the process of patient selection. We expect to commence the clinical trial in December 2021 and complete it in July 2022.
This will be a prospective, multi-center, block-randomized, parallel controlled and non-inferiority clinical trial in China, aiming to assess the safety and efficacy of such ultrasonic scalpels. We plan to conduct the clinical trial in endoscopic surgery through comparison with a commercialized ultrasonic scalpel manufactured by another developer (“Approved Ultrasonic Scalpel”).
Set forth below are the patient inclusion criteria for the clinical trial for our ultrasonic scalpels in China: (i) the age of the patient is between 18 to 75 years old; (ii) the patient will undergo surgical hemostasis of blood vessels; and (iii) the patient is willing to participate in our clinical research and has signed an informed consent form.
108 patients would be enrolled in three sites and randomized into the study group (using our ultrasonic scalpel I) and the control group (using Approved Ultrasonic Scalpel) at a ratio of 1:1. The primary efficacy endpoint of the trial was no statistically significant difference in hemostatic success rate between the study group and the control group. A hemostatis would be deemed successful when (i) the cutting speed is relatively fast; (ii) the incision is smooth without any ambustion and (iii) blood vessel seals within a relatively short period of time without rupture. Secondary efficacy endpoint was postoperative hemostatic healing rate. The safety profile would be assessed by the rate of ambustion at non-surgical site and the
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As of the Latest Practicable Date, we were selecting patients for the clinical trial. Whether or not to proceed with such clinical trial and how to conduct such clinical trial remain subject to change depending on our assessment of the market condition, the market demand for such product and and our R&D progress of such product.
Market Opportunities and Competition in China
Most of the ultrasonic scalpels in the market are able to seal Յ3mm blood vessels, whereas our second-generation ultrasonic scalpels also include upgrade functions, such as the designed capability of sealing vessels with diameter Յ5mm. We believe our ultrasonic scalpels will be competitive in the market.
According to F&S, China ultrasonic scalpel market is continuously expanding, while domestic companies accounted for approximately 10% of the China ultrasonic scalpel market by sales revenue in 2020. See “Industry Overview—Our Product Portfolio—Ultrasonic Scalpels.”
WE CANNOT GUARANTEE YOU THAT WE CAN SUCCESSFULLY DEVELOP AND MARKET OUR ULTRASONIC SCALPELS IN CHINA IN A TIMELY MANNER, IF AT ALL.
Masks and Medical Isolation Gowns
In response to market opportunities arising from the COVID-19 pandemic, capitalizing on our existing manufacturing capabilities and experienced production team, we have developed and manufactured a variety of protective products for individuals and medical professionals, mainly including disposable medical and surgical masks, FFP2 folding cup-shaped masks, FFP3 folding cup-shaped masks, surgical gowns and medical isolation gowns in 2020. We completed registration of Class II medical devices in PRC and Class I medical devices in Europe for our medical isolation masks and gowns in April 2020, which have been exported to Europe, the United States, Spain, Canada, Italy and Ireland.
Sutures
We market and distribute sutures manufactured by a third-party medical device manufacturer under its CE Mark. Sutures are widely used for ligation, stitching, structural reconstruction and incision closure of soft tissues in cardiovascular, general, genealogical and orthopedic surgeries. We offer absorbable sutures and non-absorbable cardiovascular sutures. The sutures we distribute are Class II or III medical devices registered by the third-party medical device manufacturer in the PRC. We typically enter into a one-year distribution agreement with the third-party medical device manufacturer, under which we are granted the exclusive right to distribute relevant suture products in China and the manufacturer itself is exclusively responsible for all damages resulting from any product defects.
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Hernia Repair Products
We offer hernia meshes and disposable fixation devices for hernia repair. We primarily market and distribute hernia meshes manufactured by a third-party medical device manufacturer as part of our integrated product offerings to our customers. Hernia mesh is a medical device that supports damaged or weakened tissue or abdominal wall around hernias as the tissue heals and is most commonly used in the surgical repair and treatment of inguinal hernias and abdominal wall hernias. The hernia meshes we distribute are Class III medical devices registered by the third-party medical device manufacturer in the PRC. We typically enter into distribution agreement of a term of one year with the third-party medical device manufacturer, under which we are granted the exclusive right to distribute relevant hernia mesh products in China and the manufacturer itself is exclusively responsible for all damaging consequences resulting from product defects.
During the Track Record Period, we also manufactured and sold an insignificant amount of self-developed hernia meshes in the PRC.
We also design, develop, manufacture and sell disposable fixation devices with titanium tacks for secure laparoscopic hernia repair which are used to hold hernia meshes and ensure tissue alignment during laparoscopic hernia repair surgeries and other related surgical fields. We received Class IIb CE Mark for our disposable fixation devices with titanium tacks for hernia repair in 2018.
Other Surgical Instruments and Accessories
We also sell other types of surgical instruments and accessories, primarily including (i) self-developed disposable trocars, which are designed for extended use in the operating room, especially for minimally invasive laparoscopic surgeries. Our trocars contain two seals: an outer removable self-adjusting seal for instruments exchange and an internal seal for small specimen retrieval and laparoscopic suturing. Its optical bladeless tip offers direct visualization of tissue layers and eliminates blind entry. It separates, rather than cuts, along tissue fibers pushing tissue and vessels away; (ii) disposable blood vessel titanium clips produced by third parties; and (iii) self-developed disposable polymer clips. Disposable trocars are Class II medical devices registered in PRC in 2017. Disposable polymer clips are Class III medical devices registered in PRC in 2020. Our disposable blood vessel titanium clips are III medical devices registered by the third-party medical device manufacturer in the PRC in 2005.
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The following table sets forth the sales volume and average selling price of our major products for the years indicated:
For the year ended December 31, 2018 2019 2020 Average Average Average Selling Selling Selling Quantity(1) Price(2) Quantity(1) Price(2) Quantity(1) Price(2) (units in (units in (units in ’000) (RMB) ’000) (RMB) ’000) (RMB)
Endoscopic staplers 284 487 344 448 459 437 Smart staplers ––––0.2954 Open staplers Disposable circular staplers 38 603 61 568 41 562 Disposable linear cutter staplers 79 305 103 280 86 258 Disposable circular staplers for hemorrhoidal prolapse 18 502 22 508 16 479 Disposable linear staplers 29 301 25 311 26 264 Disposable linear staplers with knife 1 561 2 615 1 598
(1) For endoscopic staplers and smart staplers, each unit represents one surgical stapler without reload unit or one reload unit alone. For disposable circular staplers and disposable circular staplers for hemorrhoidal prolapse, each unit represents one surgical stapler equipped with one reload unit. For disposable linear cutter staplers, disposable linear staplers and disposable linear staplers with knife, each unit represents one surgical stapler equipped with one reload unit or one reload unit alone.
(2) Price before tax for each unit.
In general, our average selling prices decreased from 2018 to 2019 as our revenue from sales overseas increased significantly and we maintained lower selling prices in overseas market. However, as we launched some new specifications of disposable linear stapler, disposable linear stapler with knife and disposable circular stapler for hemorrhoidal prolapse in 2019, we were able to sell such new specifications at higher prices. Our average selling prices decreased from 2019 to 2020 primarily because (i) our revenue from sales overseas continue to increase; and (ii) the domestic market demand decreased during the COVID-19 pandemic. See “—Sales, Marketing and Distribution—Pricing” in this section.
Product Candidates
We focus on R&D of surgical staplers, ultrasonic scalpels and other surgical instruments and accessories to improve our current products and expand our product portfolio to satisfy surgeons’ clinical surgical needs. As of the Latest Practicable Date, we had 19 product candidates under development in China (including our first generation smart stapler and first generation ultrasonic scalpel). The development process primarily comprises product registration testing, clinical trial (if required), registration application filing and approval. In addition, we have obtained relevant CE Marks for and commercialized our first generation
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Medical Expected Candidate Device Current Launch Date Name Classification Application Features and Benefits Status
Surgical staplers and other surgical instruments and accessories 2022 Powered circular Class II End-to-end and • Self-locking misfiring Product design stapler side-to-side prevention features: and anastomoses built-in automatic safety development throughout the device, preventing alimentary tract misfiring without proper closure; • Til-top anvil: Unique 90- degree folding anvil for easy and safe removal through anastomosis, minimizing potential tissue trauma; and • Tissue atraumatic extra griping and less slippage: enhanced jaw design to prevent tissue slippage and improve surgeon’s control over tissues during the surgery.
2022 Fascial closure Class II Stapling of tissues • Easy operation; Product design device in laparoscopic • Reducing risks of and surgeries complications; development • Stapling from inside, reducing the anastomosis margin.
2022 Surgical Class II Treatments for • Capable of one-hand Product ligatures hemorrhoids and operation; registration rectal polyp • Simultaneous ligation and tightening in one step; • Visible amount of tissue suctioned.
2022 Single-port Class II Creating a channel • Transforming would-be Product trocar into abdominal open surgeries to MIS; registration cavity • Varying specifications suitable for customers with varying situations.
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Medical Expected Candidate Device Current Launch Date Name Classification Application Features and Benefits Status
2022 Multi-port trocar Class II Creating a channel • Easy operation and Product design into abdominal assembly; and cavity • Adjustable to suit different development thickness of tissues; • Avoid contamination when taking out diseased tissues.
Surgical Robot 2024 Robot-assisted NMPA: Class Robot-assisted • Intuitive control: enable Product design laparoscopic III excision and unattended robotic arms to and surgical creation of suspend in any position development instruments anastomosis in during the surgery without cardiothoracic, any unwanted movements, general, thereby reducing surgical urological and risks; gynecologic • Compatible with most of surgeries, among our MIS instruments and others accessories and can be applied in various types of surgeries; • Shorter operative time; • 3D imaging, four robotic arms and seven degrees of freedom, allowing flexible operation with better view; • Tremor filtration: reducing shaking when performing procedures to achieve staler outcomes; • Compatible with 5G technology.
Laparoscopic Surgical Robot
Surgical robots are typically used in MIS with high precision requirements for better reproducibility and operational stability. Laparoscopic surgical robot is a major type of surgical robot, typically relating to minimally invasive laparoscopic procedure which is precisely performed by doctors assisted by a computer console, a robotic arm system, and a high-definition camera system. Robot-assisted laparoscopic surgery overcomes most of the limitations of conventional endoscopic procedures with many advantages, such as high operation accuracy, flexibility, reproducibility, and can be less unaffected by human physiological factors such as fatigue and mood, which are of great importance to solve the problems faced by traditional MIS, improving the quality of surgery, shortening the operation time, and effectively expanding the surgical capability of physicians.
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According to F&S, surgical robot market is still at a relatively early stage with significant growth potential. As of the Latest Practicable Date, there were only two companies that had laparoscopic surgical robot products approved by the FDA, while other systems were still under FDA approval process. In addition, surgical robot markets in developing countries are still under-penetrated but have high potential for future growth. In China, due to the aging population, the increase in the number of cancer patients, strong supports from governments and the ease of access to qualified medical institutions, robot-assisted laparoscopic surgeries grew rapidly from 18.0 thousand to 47.4 thousand procedures at a CAGR of 27.4% from 2016 to 2020, and is expected to grow further exponentially, reaching 481.1 thousand in 2025 at a CAGR of 59.0% from 2020 to 2025; China’s laparoscopic surgical robots market has grown from RMB681 million in 2016 to RMB2,197 million in 2020, with a CAGR of 34.0%, and will remain continuously growing at a high rate, reaching RMB13,133 million by 2025, according to F&S.
According to F&S, in China, there are not yet any commercialized domestically developed laparoscopic surgical robot products and our laparoscopic surgical robot is one of a few in the development stage. We believe our early-mover advantages and the innovative features of our laparoscopic surgical robot will position us well to compete in this burgeoning market. See “Industry Overview—The Surgical Robot Market.”
Our design provides precious and clear image in narrow and confined surgical spaces through high-resolution 3D visual technologies, allow flexible position and location, utilize computer algorithm to analyze information and provide instant feedback to robotic arms, as well as deliver high operation accuracy while making only small wound and having limited radiation during operation. Our laparoscopic surgical robot product candidate is expected to reduce reliance on surgeons’ technical skills and practical experiences, improve precision, simplify operation procedures and shorten operation time. We currently are conducting trial production of surgical robots prototype and expect to commence animal studies on our laparoscopic surgical robot product candidate in the fourth quarter of 2021, commence clinical trials in early 2022, complete such clinical trial and submit the registration application the NMPA in 2023 and complete the registration in China in 2024. We also plan to apply for the CE Mark for our surgical robot product.
During the Track Record Period, we conducted R&D of our laparoscopic surgical robots through Vincente Medical, currently a subsidiary of our Group upon acquisition of additional 33% of shares of Vincente Medical in May 2021. See “History and Corporate Structure—Acquisitions and Disposal During Track Record Period—Acquisitions During Track Record Period—Vincente Medical.”
WE CANNOT GUARANTEE YOU THAT WE CAN SUCCESSFULLY DEVELOP AND MARKET OUR PRODUCT CANDIDATES IN CHINA OR OVERSEAS IN A TIMELY MANNER, IF AT ALL.
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RESEARCH AND DEVELOPMENT
R&D efforts are critical to our continued business growth. Our market-driven and customer-centric R&D efforts focus on developing new products and production technologies to respond to the evolving needs of surgeons and patients in the PRC and overseas. We also actively work on upgrading existing products by further improving product performance and quality. We conduct our R&D activities through our internal R&D team, as well as in collaboration with external research partners from time to time on specific research topics. Our R&D expenditure was RMB13.8 million, RMB18.0 million and RMB17.2 million, accounting for 6.0%, 6.0% and 5.6% of our total revenue in 2018, 2019 and 2020, respectively.
In-house R&D
R&D Team
We have built a core R&D team with extensive expertise in areas such as mechanical and electronic engineering. Our R&D team is divided into five R&D groups, namely, technology development, design realization, quality assurance, intellectual property and project management. We believe this working mechanism enables our different R&D groups to collaborate closely with each other and contribute to each major step of product development based on their expertise.
Our R&D team is led by Ms. Liu, who has been in charge of our R&D activities since 2011 and has been leading the R&D of our product candidates. As of the Latest Practicable Date, our R&D team had approximately 37 team members. A majority of our R&D team members have over ten years of experience in the medical device or mechanical engineering industries. The following is an introduction of core members of our R&D team:
• Ms. Liu is an executive Director and the general manager of our Company. Ms. Liu leads the the management of R&D of our product candidates and has participated in the R&D of all of our surgical stapler products. Ms. Liu received her diploma in financial management from Qingdao University in 1991 and an executive master’s degree of business administration from Peking University in 2017. She is a certified assistant accountant and has obtained China Professional Manager Extraordinary Professional Qualification (Special Level).
• Ms. Xuelan Yang is the deputy general manager and vice president of our R&D department. Ms. Yang leads the R&D of our products and has participated in the R&D of our major surgical stapler products. Ms. Yang graduated from Henan University of Science and Technology in 2002 with a bachelor’s degree in mechanical design and manufacturing. She was named as an inventor in 11 patents.
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• Mr. Libo Liu is an executive Director of our Company. Mr. Liu leads the R&D of our surgical stapler products and has participated in the R&D of our smart stapler. Mr. Liu graduated from China Agricultural University in 2005 with a bachelor’s degree in mechanical design, manufacturing and automation. He was named as an inventor in 9 patents. He is a qualified internal auditor of ISO13485.
• Mr. Xin Lu is the associate director of design of our Company. Mr. Lu leads the R&D of our endoscopic products and has participated in the R&D of our endoscopic staplers and several of our endoscopic component series. Mr. Lu graduated from Tianjin University in 2008 with a bachelor’s degree in electronic science and technology. He has 15 years’ experience in mechanical design. He was named as an inventor in 19 patents. He is a senior radio commissioning personnel.
In addition to the technical core competencies, we place emphasis on staff training in intellectual property, project management and medical device regulations and standards. We are committed to recruiting new talent to join our R&D team. We also seek to hire R&D personnel with experience in the relevant fields. We attract new R&D talent by offering career development opportunities and trainings designed to enhance their skills and technical knowledge.
In addition, we have developed a significant portfolio of intellectual property rights in relation to our technologies and products. In 2018, 2019 and 2020, our R&D expenses were RMB13.8 million, RMB18.0 million and RMB17.2 million, respectively. We expect that our expenditure in R&D will increase in line with the increased level of R&D activities of our product candidates in the future.
Product Design and Preclinical Development
Product Design
Our product development process is market-oriented and technology-focused. We often seek input from surgeons, patients, hospitals and academic institutions on the design and potential uses of new products and solicit feedback from them for our existing products. Through close communication with other market practitioners including hospitals and professionals in the industry in China and overseas from time to time to gather first-hand market information about our products and consumer needs, we are able to proactively develop and launch quality and innovative products closely following clinical practice trends.
We have established and strictly followed an internal protocol to carry out our in-house product design and development. The design and development of our product candidates typically involve four phases, namely, design planning, designing, design verification and design realization, before registration application and mass production. We commence manufacturing only after the process goes beyond the design realization stage.
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• Design planning. Our marketing department, China business department, and overseas business department closely follow up with hospitals and professionals in the industry to identify potential R&D opportunities and gain a better understanding of clinical needs and to better position our R&D efforts. We then propose improvement and development directions based on our industry analysis. Once our R&D staff confirm the technical feasibility, our legal, finance, production and operation departments will conduct systemic analysis of intellectual property, costs and feasibility, production resource allocation and market demand, respectively.
• Designing. Our R&D department manufactures computer-aided design models, drawings, specifications and other design files based on specific product requirements. This step generally takes at least two to three years for Class II and Class III medical devices.
• Design verification. The design verification stage includes design verification and design confirmation. We verify the design files to ensure the prototype’s properties and functionality. To confirm the design, our quality control department conducts several verification tests under simulated or actual operating conditions, covering safety, efficacy, function, operability and reliability of the product candidates. We also complete the design of product packaging and labeling and preparation of the user instructions in the design confirmation process.
• Design realization. We then conduct trial production of prototype to verify production process, assess feasibility and capability of commercial-scale production and identify potential quality, clinical or production issues that may arise during commercial-scale production. Prototype and manufacturing process designs are revisited and modified as necessary to resolve the remaining issues and achieve an optimal design. Our product registration team conducts product registration testing for the product candidate. Only product candidates that can pass our design realization procedure can proceed with commercial-scale production. This step generally takes two to six months.
R&D Results
In order to enhance our product quality and to achieve better clinical results, we modify our products based on the latest clinical feedback. Some of our product improvements are shown as below. See “—Intellectual Property” in this section.
• Self-locking misfiring prevention features. The safety device automatically unlocks only when the product detects the appropriate triggering position. The safety device automatically locks when the product is not at the appropriate triggering position. This technique avoid mis-triggering due to surgeon’s false judgment of triggering position.
• Til-top anvil. The til-top anvil is a unique 90-degree folding anvil that enables easy and safe removal through anastomosis and minimizes potential tissue trauma.
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• Color indication. A color-coded indicator on the product shows the status of the anastomosis process, minimizing the risk of mis-operation and achieving more stable outcome.
• Press-stabilized gradual cutting. By pressing down the tissue while performing gradual cutting, such technique prevents tissue from sliding, results in more complete cut and minimizing the risks of broken blade.
• Prompt tone. When the product is approaching the firing position and when the firing completes, prompt tones alert surgeons of the firing status, improving the product safety and reliability.
• Illumination to increase visibility. Equipping products with the illumination device at the operation end of the products and transparent and hollow components, such technique provides surgeons with plain view of the operation site.
• Automation pressure recognition and feedback. Products equipped with this technique detects the pressure in real-time and alerts surgeons when the pressure approaches preset parameters. It supports surgical decision-making and minimizes risks of maloperation.
• Smart firing control based on recognition of tissue thickness. Products equipped with technique detects tissue thickness and compares with preset parameters. If the tissue thickness is incompatible with the specification of the products used, the triggering or stapling process automatically stops. Such technique supports surgical decision-making without requiring proficient surgical skills and experience.
• Recognition of firing length. Each specification of surgical stapler components are embedded with preset parameters. When the surgical stapler is assembled with a component, it recognizes the preset firing length and automatically stops after reaching such length. Such technique improves operation reliability.
• Anti-forgery quality assurance. Each components are embedded with Company’s unique security code and can only be assembled with surgical stapler that recognizes such security code. It prevents mix-matching products and components, ensuring operation safety.
• Pre-use self-check. The product self-checks its status every time a new battery is inserted in the product. In addition, the product reinitializes and self-checks its status before every use. Such technique improves product reliability and operation safety.
• Smooth articulation system. The smooth articulation system allows surgeons to operate at more suitable angles, achieving more comfortable operation experience and more accurate results.
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• Tissue atraumatic extra griping and less slippage. To prevent tissue from sliding, which may pull the staples and affects stapling outcome, the surgical stapler jaws are equipped with nontraumatic anti-skid structures for better clamping and less squeezing of tissue. Such technique improves operation safety and effectiveness.
Collaboration with Third Parties
We engage in joint R&D activities with KOLs, physicians, hospitals and academic institutions. For example, in May 2019, we entered into a framework collaborative development agreement with a renowned university to develop surgical instruments designed specifically for thoracoscopic surgical instruments, endoscopic staplers and open staplers. Under such agreement, we are responsible for the mechanical design and manufacturing of a series of surgical instruments developed and improved by the university. We may jointly apply and implement national scientific research projects and industry-academic-research projects. In addition, we committed to support the university to improve its training programs and provide internship and research opportunities to its students. According to the framework agreement, each party is required to keep confidential any information, documents, materials or data relating to such collaborative R&D activities. In 2017, we opened a training center in a hospital in Shanghai dedicated to the rapidly developing surgical field. We also have held international master classes in close cooperation with experts from an American university which involve live surgery, animal lab, presentations and lively discussions.
Clinical Trials
We have a clinical department responsible for the day-to-day management of the clinical trials of our product candidates. Our clinical department is responsible for the clinical trial design, preparation of the necessary documents, selection of qualified clinical trial sites and the monitoring of clinical trials to ensure that clinical trials comply with the clinical trial protocol.
We normally select at least two trial sites for each clinical trial. We require such clinical trial sites to be medical device clinical trial sites filed with NMPA. We evaluate the number of patients, the research experiences of the hospitals and the number of clinical trials carried out at the relevant departments of the hospitals to ensure that sufficient resources at trial sites will be allocated to our clinical trials. We only select reputable and experienced surgeons for our clinical trials. We keep communication with surgeons participating the clinical trials to better understand the clinical performance of our products and to address the issues arising from the clinical trials promptly. We believe their views and advice from clinical perspective are not only valuable for our product registration, but also benefit us in the design of upgraded products.
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In line with industry practice, during the Track Record Period, we engaged SMOs to manage, conduct and support our clinical trials. SMOs are mainly responsible for assisting researchers to complete certain supporting duties in relation to the ongoing clinical trials, including collecting source data and scheduling patient’s follow-up evaluations, among others. With SMOs’ assistance, we select qualified hospitals to carry out clinical trials. During the clinical trial, the SMO assists our clinical department by implementing the approved clinical trial protocol prepared by us and monitoring the use of our product candidates during the trial procedures. SMOs assist us to organize relevant clinical data and prepare the formal reports of the clinical trial. We also engaged one clinical statistic center for data collection and data analysis for certain clinical trials.
We select our SMOs based on various factors, including service quality, capability, reputation, cost-effectiveness and research experience. We normally enter into master service agreements with our SMOs with a detailed scope of work for each study or trial, establishing specific and detailed metrics on working methods, procedures, standards and timelines to further ensure the quality of the outcomes. We will timely communicate and follow up with such SMOs to ensure quality clinical trials can be conducted as scheduled. We monitor the SMOs to ensure they perform their duties with a standard in line with our protocols and industry benchmark to safeguard the integrity of the data collected from the trials and studies. All the clinical trial results are stored on an online electronic data capture system, which is only accessed by our responsible employees and the employee of the SMO that is in charge of the clinical trial.
General key terms of our service agreement with SMOs are summarized below.
• Services. SMOs provide us with services related to clinical trials in certain phases as specified in the agreement or work order.
• Term. SMOs are required to complete the work on a project basis.
• Payments. We are required to make payments to the SMOs by installments according to milestones of respective services during the clinical trials.
• Intellectual property rights. Intellectual property arising from the clinical trials conducted by the SMOs are exclusively owned by us.
• Confidentiality. The SMOs are required to keep confidential any information, documents, materials or data relating to our products and clinical trials.
• Dispute resolution. In the event of any disputes related to the enforcement of any agreement during the clinical trial, both parties shall negotiate amicably. If an agreement cannot be reached, the parties have the right to sue.
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To evaluate the functions, safety and practicality of our products and product candidates in a cost-effective way with controllable risk exposures, we typically engage SMOs to conduct preclinical animal studies before our products reaching clinical trial stage. Before commencing animal studies, we first formulate a detailed animal study protocol which specifies the goals and requirements for animal studies. We then send the protocol to the testing institution to evaluate the feasibility and potential costs. After the protocol is agreed upon, we prepare the product and the relevant surgery protocol. The testing institution is responsible for the preparation and monitoring of animals during and after performing animal surgeries. We believe we are well-positioned to identify potential risks and improve our products through animal studies.
Our clinical trial stage generally can take up to two years. Before we commercialize new products, we prepare formal applications to be submitted to the NMPA to seek approval for the commercialization of our products. This step generally takes around two years for Class II medical devices and around three years for Class III medical devices from submission of application materials. For Class I medical devices, the whole product development from demand identification to regulatory approval generally takes us approximately three months. The CE Mark can be obtained through a clinical evaluation and therefore our application for CE Mark registration was typically supported by the clinical data from our clinical trials in China.
MANUFACTURING
Production Planning
We plan our production volume based on a rolling projections of sales based on purchase orders from distributors and our inventory level, and plan our production of our products sold to OEM customers based on their purchase orders and the purchase plans or forecasts that some of our major OEM customers provide.
Manufacturing Facilities and Production Capacity
As of the Latest Practicable Date, we had two production, assembly and packaging facilities in Beijing. Our manufacturing facilities occupy over 1,500 sq.m. of land. In addition, we have one comprehensive production and assembly facility in Suzhou, Jiangsu province which is expected to begin production of accessories in the fourth quarter of 2021. Such facility occupies over 5,000 sq.m. Our manufacturing facilities primarily consist of production lines with cleanliness level of class 100,000, cleanrooms and microbiological laboratories with cleanliness level of class 10,000, general cleanrooms and laboratories and sterilization plants. As of the Latest Practicable Date, we had a production team of around 135 employees with approximately eight to nine years of experience on average.
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Our production plants are equipped with machinery and equipment used in our production process owned by us, including CCD automatic optical inspection machines, laser labeling machines, ultrasonic welding machines, knitting machines, packaging machines, heat sealing machines, melting machines, and other relevant automatic equipment and machines for cutting, testing and assembly. We procure manufacturing machinery and equipment from time to time based on our production needs. We also endeavor to keep ourselves abreast of technological advances in our production facilities and regular monitor and upgrade production technology, equipment and processes. In 2018, 2019 and 2020, our capital expenditure for manufacturing machinery and equipment amounted to RMB15.7 million, RMB23.4 million and RMB35.2 million, respectively. To our Directors’ best knowledge, the life span of our manufacturing machinery and equipment ranges from three to ten years, and as of the Latest Practicable Date, our major machinery and equipment had been in operation for approximately two to three years. We perform routine and preventative maintenance on our manufacturing machinery and equipment to ensure their proper functioning. During the Track Record Period and up to the Latest Practicable Date, we had not experienced any material interruption to our production process due to machine or equipment failure.
The following table sets forth the maximum annual production capacity, actual production volume, and utilization rate of our manufacturing facilities by major products for the years indicated:
For the year ended December 31, 2018 2019 2020 Production Production Utilization Production Production Utilization Production Production Utilization Capacity(1) Volume Rate(2) Capacity(1) Volume Rate(2) Capacity(1) Volume Rate(2) (’000) (’000) (%) (’000) (’000) (%) (’000) (’000) (%)
Surgical staplers Endoscopic staplers Disposable endoscopic linear cutter staplers 306.7 319.0 104.0 483.8 468.4 96.8 630.5 494.8 78.5 Open staplers Disposable circular staplers 53.2 47.6 89.5 68.5 63.4 92.6 56.4 44.1 78.2 Disposable linear cutter staplers 88.7 86.5 97.5 118.4 117.6 99.3 115.2 90.3 78.4 Disposable circular stapler for hemorrhoidal prolapse 22.2 20.5 92.3 25.2 23.2 92.1 23.5 17.7 75.3 Disposable linear stapler 30.4 31.0 101.9 33.3 24.5 73.7 37.6 29.7 79.0 Disposable stapler with knife 1.3 1.1 84.6 1.7 1.8 105.9 1.7 1.2 70.6 Hernia repair products 5.0 0.4 7.6 5.0 4.8 95.2 5.0 2.4 47.7 Masks and medical isolation gowns – – – – – – 29,800.0 13,435.9 45.2 Other surgical instruments and accessories 2.4 2.3 95.8 15.0 11.9 79.3 300.0 280.7 93.6
(1) The table above is for illustration purposes only. Production capacity refers to the theoretical maximum units of products that our manufacturing facilities can manufacture in a period. Since we used these machineries and equipment to manufacture our products, the calculation of maximum annual production capacity has also taken into account the proportionate working hours attributable to each product.
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For endoscopic staplers, we operated 18 machines in 2018; 28 machines in 2019; and 37 machines in 2020. We assume our employees operate such machines for eight hours each working day and for 300 working days each year. As a result, the maximum hours that we can operate our machines in 2018, 2019 and 2020 were approximately 43,200 hours, 67,200 hours and 88,800 hours, respectively. In 2018, 2019 and 2020, each ultrasonic welding machine can manufacture approximately 7 units of disposable endoscopic cutting stapler per hour.
For open staplers, we operated 12 machines in 2018; 15 machines in 2019; and 14 machines in 2020. We assume our employees operate such machines for eight hours each working day and for 300 working days each year. As a result, the maximum hours that we can operate our machines in 2018, 2019 and 2020 were approximately 28,800 hours, 36,000 hours and 33,600 hours, respectively. In 2018, 2019 and 2020, each ultrasonic welding machine can manufacture approximately 7, 7, 7, 7 and 5 units of disposable circular stapler, disposable linear cutter stapler, disposable circular stapler for hemorrhoidal prolapse, disposable linear stapler and disposable linear stapler with knife per hour, respectively. In addition, in 2018, 2019 and 2020, the estimated proportion of maximum operating hours of our machines allocated to disposable circular stapler was 28%, 28% and 24%, to disposable linear cutter stapler 44%, 47% and 49%, to disposable circular stapler for hemorrhoidal prolapse was 11%, 10% and 10%, to disposable linear stapler was 16%, 14% and 16% and to disposable linear stapler with knife was 1%, 1% and 1%, respectively. Our production capacity of open staplers decreased from 2019 to 2020 primarily because certain machines retired in 2020.
(2) Utilization rate of our production facilities for each product refers to the percentage of the production volume to maximum annual production capacity during the same period. Utilization rate may exceed 100% as we incurred overtime production during the Track Record Period. The general increase in the utilization rates of major types of our disposable products from 2018 to 2019 reflected the increased market demand for our products and our allocation of production capacity to different products based on the market demand. The utilization rates of major types of our disposable products decreased from 2019 and 2020 as we substantially reduced our manufacturing activities temporarily during the COVID-19 pandemic and experienced decreased demands as hospitals in China limited the numbers of elective surgeries.
Production Process
We manufacture a variety of products which have different production processes. The following diagram illustrates the general and major production process for our products.
Raw materials Cleaning and Project passing the drying assembly inspection
Performance Sterilization Initial package inspection
Sending to Inspection Outer package finished product warehouse
Note 1: represents the inspection process; represents the production process; The process within the dashed frame are under cleanliness of 100,000 class. Note 2: Inspection of raw materials and the sterilization process were partly outsourced to third parties.
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The following is a brief description of the key steps in our manufacturing process of our major products:
• Washing and drying. Before we assemble, we clean all raw materials and product parts to remove pollutants and bacteria to satisfy subsequent production steps in clean rooms.
• Assembly. We assemble product components and parts. We have increasingly automated the assembly step for our products.
• Performance inspection. We conduct inspection according to the product specification, if any flaw is detected, the semi-finished product would be returned to the previous step or be scrapped, as appropriate.
• Initial packaging. We finish the initial packaging in compliance with sterile integrity before the products are transferred to the warehouse.
• Sterilization. We sterilize the products with ethylene oxide to make the products free from viable microorganisms.
• Final inspection. We conduct a final inspections before the outer packaging. If any flaw is detected, the products would be placed to the previous step or scrapped, as appropriate.
• Outer packaging. We package our products in compliance with sterile integrity and regulatory standards.
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SALES, MARKETING AND DISTRIBUTION
Sales Model
We have an extensive sales network. Our products, including products manufactured by ourselves and third parties, are primarily sold to domestic and overseas distributors, while a small portion are sold to hospitals in China directly or overseas OEM customers. The following chart illustrates the structure of our sales model:
Our Group
Direct sales Sales to distributors Distributors (domestic and overseas) OEM model
Sub-distributors(1)
Customers Hospitals and other customers (overseas)
Contractual relationships with us Contractual relationships between third parties
(1) We primarily operate a single-layer distribution system.
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Through our sales network, our products were ultimately sold to over 1,200 hospitals nationwide in 2020, including over 400 Grade IIIA hospitals, covering all provinces in China and over 60 countries and regions overseas. The following table sets forth our revenue by geographic market and sales channel for the years indicated:
For the year ended December 31, 2018 2019 2020 (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Domestic Distributors 176,910 77.3 214,597 70.9 185,025 60.0 Hospitals – – 302 0.1 – – Sub-total 176,910 77.3 214,899 71.0 185,025 60.0
Overseas(1) Distributors 38,274 16.7 69,985 23.1 112,512 36.5 OEM customers 13,685 6.0 17,585 5.9 10,985 3.5 Sub-total 51,959 22.7 87,570 29.0 123,497 40.0
Total 228,869 100.0 302,469 100.0 308,522 100.0
(1) During the Track Record Period, our overseas sales were primarily made to Brazil, Spain and Turkey.
Sales to Distributors
We primarily sell our products through an extensive network of distributors, which is in line with industry practice, according to F&S. We have established a network of 495 distributors as of December 31, 2020, covering all provinces in China and over 60 countries and regions overseas. As of December 31, 2018, 2019 and 2020, we had 413, 489 and 495 distributors, respectively, which contributed to 94.0%, 94.1% and 96.4% of our total revenue in 2018, 2019 and 2020, respectively. During the Track Record Period, to the best of our Directors’ knowledge, except Panther Brazil, Panther Canada, Beijing Hongchengjijia Technology Co., Ltd. (北京宏承吉佳科技有限公司) and Qingdao Kaiyujia Material Co., Ltd. (青島凱譽佳物資有限公司), all of our distributors were Independent Third Parties, and none was controlled by our current or former employees. Beijing Hongchengjijia Technology Co., Ltd. and Qingdao Kaiyujia Materials Co., Ltd. ceased to be related persons in 2018 and 2019, respectively.
We generally operate a single-layer distribution system, where most of our distributors on-sell our products directly to end customers such as hospitals through their own sales and distribution networks. We believe that such a distribution model enables us to leverage the distributors’ customer bases, as well as registration and expertise in local markets, while controlling our costs. We further believe that our single-layer distribution system, compared to a multi-layer distribution system, allows us to more efficiently manage and control our network of distributors and have greater visibility over market demand.
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The map below sets forth the coverage of our distributors as of the Latest Practicable Date (for illustration purpose only):
worldwide distributors no presence
South North Asia Europe America America Africa
Armenia Malaysia Austria Latvia Argentina Canada Algeria Bangladesh Myanmar Bulgaria Lithuania Bolivia Costa Rica Egypt China Nepal Belgium Netherlands Brazil Cuba Libya Hong Kong Pakistan Croatia Norway Chile Dominican Morocco India Philippines Cyprus Portugal Colombia Republic South Africa Indonesia Saudi Arabia Czech Republic Romania Ecuador El Salvador Tunisia Iran Singapore Denmark Russia Peru Guatemala Israel South Korea Finland Slovak Jamaica Jordan Sri Lanka France Spain Mexico Kazakhstan Syria Greece Sweden Panama Kuwait Thailand Hungary Switzerland Puerto Rico Kyrgyzstan United Arab Emirates Ireland Turkey Lebanon Vietnam Italy Ukraine
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The following table sets forth the change in numbers of our distributors that purchased our products as of the dates and for the years indicated:
As of/for the year ended December 31, 2018 2019 2020
Domestic Beginning of the year 372 413 489 Increase in domestic distributors(1) 165 212 151 Decrease in domestic distributors(2) 124 136 145
End of the year 413 489 495
Overseas Beginning of the year 48 50 66 Increase in overseas distributors(1) 22830 Decrease in overseas distributors(2) –1216
End of the year 50 66 80
(1) The increase in the number of distributors represents those distributors that made purchases from us in the year indicated but did not purchase from us in the year immediately preceding the year indicated.
(2) The decrease in the number of distributors represents those distributors that made purchases from us in the year immediately preceding the year indicated but did not purchase from us in the year indicated.
Fluctuations in the number of distributors during the Track Record Period were largely related to their sales performance. During the Track Record Period, we actively terminated business relationships with certain distributors who failed to deliver satisfactory performance in procuring sufficient customers or demand for our products in an effort to increase our overall sales and achieve a wider hospital coverage.
During the Track Record Period, a majority of our revenue was attributed to a stable group of major distributors. We seek to establish long-term relationships with these distributors, as they are more likely to devote all or most of their time and resources to selling our products. In addition, all of our domestic distributors are required to obtain licenses or record-filing proof, such as the Business Operation License of Medical Devices (醫療器械經 營許可證), to sell Class II and Class III medical device products to hospitals and other end customers in the PRC, which requires them to satisfy certain conditions to engage in the operation of a medical device business, such as maintaining suitable business premises and storage conditions, as well as a quality control department or personnel. In 2018, 2019 and 2020, revenue from sales to companies which were our distributors in all three years of the Track Record Period accounted for 76.9%, 77.0% and 55.2% of our total revenue, respectively.
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Such percentage decreased from 2019 to 2020 as we engaged new distributors for distribution of our masks and medical isolation gowns in 2020. The number of our overseas distributors increased from 48 to 80 during the Track Record Period, as we expanded our overseas sales network.
Selection of Distributors
We typically select distributors based on factors including their background, qualifications and licenses, reputation, credit worthiness, record of regulatory compliance, sales experience, knowledge of medical devices, marketing capabilities, overall operational capabilities and capacity to fulfill contractual obligations, among other factors. We approach distributors in trade fairs held during medical and other professional conferences in certain regions. Potential candidates can also apply to join our distribution network directly.
Our distributors in the PRC and overseas are typically distributors of medical devices, which are required to hold a valid medical device operation license or filing certificate for sales of certain types of medical devices according to the relevant laws and regulations. See “—Sales, Marketing and Distribution—Sales to Distributors—Management and Control of Distributors” in this section. Before authorizing distributors to commence distribution of our products, we also prepare the necessary information and documentation for the products and offer them training to understand our products and policies.
Management and Control of Distributors
We proactively manage our network of distributors by limiting their distribution scope, providing training opportunities and conducting regular evaluation. We primarily rely on distribution agreements, policies and measures we have in place to manage and control our distributors. We provide marketing and technical support to our distributors by organizing promotional meetings in hospital, animal studies, surgical teaching led by senior doctors, panels discussing surgical techniques and intraoperative accidents, surgery observations and product trials. In addition, we designate professional sales staff to provide technical support to hospital customers in the distributor’s designated geographic region. We conduct regular evaluation to review the distributors’ sales performance, particularly whether they meet the target sales amount, and their authorized hospitals’ feedback. Depending on our evaluation of their performance, we may grant rebates to our distributors or adjust their designated geographic regions in accordance with the distribution agreements and our internal policies. We may also terminate our relationship with any distributor which is suspected for conducting activities that do not comply with the applicable laws and regulations.
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Prevention of Cannibalization
Our distributors are only authorized to sell to their designated hospitals in the designated geographic regions, and cannot sell, directly or indirectly, to end customers outside their designated geographic regions. Our distributors typically file with us the invoices for sales to hospitals and therefore we typically have a record of the hospitals to which our products are sold by the relevant distributors. We manage the risk of potential cannibalization among our distributors based on such record and do not appoint more than one distributor for the same type of product for a hospital in the PRC. For overseas sales, we typically only have one distributor for each country or region, which generally needs to apply for product registration locally and therefore cannot sell our products to other countries. For some countries, where we have more than one distributor, such distributors cover different product types, different regions or different hospitals, and therefore, we consider that there is no cannibalization among such distributors in the same countries.
Inventory Management and Control
Our distributors generally maintain a two-month inventory as specified in our distribution agreements, which is in line with industry practice according to F&S. During the Track Record Period, our distributors generally place one order to three orders per month and we will normally ship our products within two to fourteen days upon we receive the payment in relation to the order in full. In addition, by implementing the following policies and measures, we believe we are able to ensure that our sales to distributors reflect genuine market demand for our products and prevent channel-stuffing of our products:
• Buy-out model. According to our internal policies, we maintain a buyer-seller relationship with all of our distributors, where they will bear all losses and liabilities arising from any channel stuffing. We believe that this will incentivize our distributors to place orders based on actual demand, and to operate more efficiently.
• Payment method. We require all of our distributors to make full payment to us before we make shipment, except for certain distributors to whom we granted a credit term of around one month to six months, in light of its historical procurement amount and hospital coverage. We believe that this will require our distributors to effectively manage their cash flow and ensure that orders are made based on actual demand. During the Track Record Period, we only granted credit terms to a limited number of distributors on a case-by-case basis based on our assessment.
• Strict product return and exchange policy. We maintain a buyer-seller relationship with our distributors, and recognize revenue from sales to our distributors when control of goods is transferred to them. We do not allow distributors to return any unsold goods unless there are quality defects or upon termination of the distribution arrangements, which we believe is in line with industry practice. Upon termination of distribution arrangements, distributors can either return unsold goods or sell such goods to other distributors. For each year during the Track Record Period, our returned goods upon termination of distribution arrangement accounted for less than 0.9% of our total revenue. We do not allow distributors to exchange any unsold goods unless upon our end customer’s requests. In such case, we allow exchanges of unexpired and non-promotional products as long as the total annual exchange amount does not exceed 3% of the total annual order amount. During the Track
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Record Period, our products returned were primarily due to changes in certain distributors’ purchase orders because of product pipeline update, public bidding process, or surgery transition, such as transition from open surgery to laparoscopic surgery. During the Track Record Period, our returned goods were primarily due to termination of distribution arrangements.
• Close monitoring. We collect information about our distributors’ sales performance periodically. Leveraging our long-term business relationships with our distributors, we believe we have a good understanding of their sales network, the demand and needs of hospitals they cover and their procurement practices.
• Distributor independence. During the Track Record Period, to the best of our Directors’ knowledge, except for Panther Brazil, Panther Canada, Beijing Hongchengjijia Technology Co., Ltd. (“Hongchengjijia”) and Qingdao Kaiyujia Material Co., Ltd. (“Kaiyujia”), all of our distributors were Independent Third Parties, and none was controlled by our current or former employees. In 2018, 2019 and 2020, our revenue generated from sales to Hongchengjijia and Kaiyujia were RMB0.4 million, RMB0.4 million and nil, accounting for 0.2%, 0.1% and nil of our total revenue, respectively. During the Track Record Period, we did not provide any material advance or financial assistance to our independent third-party distributors.
• Limited number of sub-distributors. As a general matter, our distributors are disincentivized from engaging sub-distributors as it would lower their margins. However, from time to time, some of our distributors may engage sub-distributors, primarily because these sub-distributors have access to certain hospitals that our distributors do not cover. Historically, we did not require distributors to seek our approval to engage sub-distributors, and we did not have contractual relationships with sub-distributors.
• Distribution agreement. In order to strengthen our control and management of our distributors and to align our distributor management measures with what our Directors understand to be the industry norm in the medical device industry of entering into written agreements with distributors, we have adopted the policy to enter into written distributorship agreements with our distributors to govern our relationship with them. Our standard distributorship agreement includes general terms such as product specification, logistic arrangement, payment arrangement, geographic exclusivity, return and exchange policy; provisions requiring our distributors (i) to avoid any cannibalization conduct and (ii) to strictly comply with all applicable laws and regulations, including anti-corruption laws and regulations; and provision that we will have the right to terminate their appointment as our distributors and hold them liable for any loss we suffer as a result of them failing to meet the above requirements.
Management of Sub-distributors
While most of our distributors in the PRC and overseas sell our products directly to the hospitals, during the Track Record Period, some of our distributors engage sub-distributors from time to time, which then sell our products to hospitals. In such cases, we do not enter into any contract with these sub-distributors, and we only sell to our distributors.
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Agreement with Domestic Distributors
During the Track Record Period, we required all distributors to enter into framework distribution agreements or purchase orders for each transaction with distributors. We regularly review our distributors’ sales performance such as sales revenue, coverage of designated geographic region and hospital penetration, and adjust their designated geographic and product type coverage as well as our marketing efforts accordingly. See “—Sales, Marketing and Distribution—Sales to Distributors—Management and Control of Distributors” in this section. Our distributors are required to comply with applicable laws and regulations in relation to centralized volume procurement as well as anti-bribery and that our distributors should bear all losses and liabilities arising from any channel stuffing. Major terms of our new standard domestic distribution agreements include:
• Term and contract extension. Our distribution agreements generally have a term of one year. Distributors can negotiate to extend the term prior to the expiration of the agreement.
• Geographic restrictions and exclusivity. We grant our distributors exclusive rights to sell our designated products within designated geographic areas. Our distributors are required to abide by geographic restrictions stipulated in the distribution agreement. In general, we do not engage multiple distributors in the same geographic region.
• Annual sales targets. We set annual sales targets for most of our distributors, the majority of which range from RMB0.5 million to RMB5.0 million. Distributors are required to provide sales reports to us on a monthly basis.
• Non-competition. Within the designated geographic region, distributors are not allowed to distribute products that are identical, similar or in competition with our products.
• Regulatory compliance. Distributors are responsible for conducting sales in compliance with relevant laws and regulations.
• Payment and credit term. We typically require distributors to make full payment of our products no later than product delivery, except for certain distributors to whom we granted a credit term of around one month to six months, depending on its historical procurement amount and hospital coverage.
• Prices. We sell our products to distributors at standard prices determined by us, which we may adjust based on market conditions.
• Buy-out. Our distributors will bear all profits, losses and liabilities arising from the distribution.
• Inventory. We generally require our distributors to maintain a two-month inventory.
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• Delivery. Distributors are responsible for establishing local warehouses and provide punctual delivery to hospitals to ensure smooth logistics and to enable hospitals to maintain stable safety stocks.
• Reporting of complaints. Distributors are responsible for promptly reporting to us any complaints about product quality or clinical accidents which may be related to our products, and returning the relevant products (whether used or not) to us. Our distributors will take full responsibility if they fail to return the products appropriately.
• Sales reports. Distributors are required to report their sales performance with stamped invoices on a monthly basis.
• Product return and exchange. We do not allow distributors to return any unsold goods unless upon termination of the distribution agreement or there are quality defects, which we believe is in line with industry practice. We do not allow distributors to exchange any unsold goods unless upon our end customer’s requests. In such case, we allow exchanges of unexpired and non-promotional products as long as the total annual exchange amount does not exceed 3% of the total annual order amount.
• Termination. We are entitled to terminate a distribution agreement under certain circumstances, including upon a 24-hour written notice by either party.
Agreement with Overseas Distributors
We also sell products under our own brand overseas through distributors. Similar to domestic distributors, our overseas distributors are required to comply with all of our policies and requirements. We enter into framework distribution agreements with most of overseas distributors which set forth the geographic restrictions and designated product types. During the Track Record Period, we did not enter into distribution agreements with certain overseas distributors. In 2018, 2019 and 2020, 12, 23 and 27 of our overseas distributors, respectively, did not enter into distribution agreements with us. These distributors were generally (i) new distributors which had only started to purchase a small quantity of products from us on a trial basis before we decide whether to formally appoint them as our distributors; or (ii) distributors distributed or sold only a small range or quantity of component-type products. Our revenue generated from these distributors amounted to RMB5.8 million, RMB7.1 million and RMB14.8 million in 2018, 2019 and 2020, respectively, accounting for 2.5%, 2.3% and 4.8% of our total revenue for the same periods, respectively. Among these distributors, no distributor contributed over 1.5% of our total revenue in any year during the Track Record Period. We generally manage distributors that do not enter into distribution agreements with us under the same distributor management measures and policies. We have full discretion to discontinue selling products to them if we notice any misconduct or unauthorized sales by such distributors, or take legal action if necessary.
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Domestic Sales to Hospitals
Starting from 2019, we also conducted direct sales to hospitals. In 2019, our direct sales to hospitals amounted to RMB0.3 million. Our direct sales to hospitals were made at retail prices. As the retail prices are higher than the prices at which we sell to distributors, the gross margins for direct sales to hospitals are typically higher than those for sales to distributors. However, we may incur higher selling expenses for direct sales to hospitals. In line with the market practice, hospitals generally do not enter into framework or long-term sales agreements with us. Instead, they place orders with us on an as-needed basis. We are responsible for arranging delivery of products to our hospital customers and any loss or damage in transit.
Overseas Sales to OEM Customers
We also manufacture and sell medical devices mainly including surgical staplers to five OEM customers in 2020, which are all overseas customers located in Europe, Asia and South America. In contrast to our distribution sales where we sell products under our own brand, the products sold to OEM customers are labeled with OEM customers’ own brands and trademarks. Under this sales model, our overseas customers place orders with us, and we design and manufacture the products based on their specifications. Our OEM customers generally provide specifications on the production equipment and processes, the production and quality control procedures and standards, as well as detailed technical product specifications. In 2018, 2019 and 2020, our revenue from sales to OEM customers amounted to RMB13.7 million, RMB17.6 million and RMB11.0 million, respectively, representing 6.0%, 5.9% and 3.5% of our total revenue for the same year, respectively.
We generally have to undergo a qualification process to become an approved supplier for our OEM customers, including site visits, audit and inspection of our production facilities and review of our licenses and certifications. After the successful completion of the qualification process, the OEM customers will engage us as their approved supplier, and we will provide the price quotation for the relevant production projects. Upon confirmation of the terms of the production project, we will commence our project planning processes, which typically include prototyping, documentation preparation for compliance with the applicable regulatory and industry standards and product validation before we begin the production process.
The terms of the OEM arrangements vary depending on the requirements of the customers and the relevant products, but typically include the following:
• Term. The term generally ranges from three to five years or without specified duration;
• Price. Unit prices are typically specified in the agreement;
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• Minimum order quantity. Minimum order amount and initial order amount are generally specified. We are entitled to reject any purchase order less than the minimum order amount;
• Delivery. Customers are generally responsible for shipping costs and loss for all shipments. Acceptance by customers may be subject to an inspection period, during which period customers may reject and return the products to us if any defect or noncompliance with their specifications is found;
• Credit term. We typically requires full prepayment for our customers or allow some customers to make payments in stages according to contract progress on a case-by-case basis;
• Regulatory filing. Customers are generally responsible for regulatory filings at their jurisdictions;
• Confidentiality. We typically agree to protect the intellectual property rights of the customers and not to disclose any confidential or proprietary information to third-party. Meanwhile, customers may not file local patents or obtain registered trademarks without our written consent; and
• Termination. Typically may be terminated (a) by either party with a notice period; or (b) by one party upon the breach of agreement by the other.
We manufacture surgical stapler products both for our OEM customers and under our own brand. The overlapping products do not contain any patented or proprietary technology or special design or customization features that our OEM customers specify. Revenue from products under our own brand which overlap with our OEM products was RMB11.0 million in 2020, representing 3.5% of our total revenue. Products we manufacture for our OEM customers and products under our own brand undergo similar production processes and quality control procedures (unless the relevant OEM customers specify otherwise), with all of our OEM products being sold to overseas OEM customers during the Track Record Period and products under our own brand being sold both in the PRC and overseas; and products under our own brand generally target a higher price segment than the similar OEM products manufactured for overseas OEM customers. Considering that sales of OEM of our products, as a percentage of our total revenue, has been decreasing during the Track Record Period and only accounted for 6.0%, 5.9% and 3.5% of our revenue in 2018, 2019 and 2020, respectively, we believe that the overlap between OEM products and products under our own brand will not have a material impact on our business or results of operations.
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Marketing
We have a well-trained sales and marketing team which is familiar with our products and specific and detailed requirements of customers and also possess the relevant technical expertise. We engage in extensive academic promotion activities with surgeon KOLs, hospitals and medical associations to promote our brand and establish a stable end-user base, especially with Grade IIIA hospitals with MIS capabilities. Our academic promotion and marketing activities include holding surgical trainings, master classes, promotional meetings in hospital and panels discussing surgical techniques and intraoperative accidents, organizing surgery observations and product trials, and holding or attending medical conferences and industry exhibitions such as “International Master Class of Thoracic Surgery (北京大學人民醫院國際胸 腔鏡大師班)” by Peking University People’s Hospital, “Duke-Asia International Masters of Metabolic and Bariatrics Surgery (杜克-亞洲減重外科國際大師班)” and “Minimally Invasive Bariatric Surgery Workshop (微創減重外科培訓班)” to promote our products, gather market intelligence and meet with our existing or potential customers to have a better understanding of their needs.
We require distributors to comply with our policies with respect to using our brand name when conducting sales and marketing activities. Our sales and marketing department monitors and manages our distributors to ensure their compliance with our brand protection policy. If we discover any non-compliance, we have the right to seek legal recourse and be indemnified by distributors for any losses we incur because of such noncompliance. See “Risk Factors—Risks Relating to Intellectual Property Rights—If our trademarks, trade names and other proprietary rights are not adequately protected, we may not be able to build name recognition in our markets of interest and our business may be adversely affected.”
To promote our products and brand overseas, we attend international medical conferences from time to time to directly introduce our products to overseas customers and collect product feedback. For example, we participated in the 2019 annual conference of International Federation for the Surgery of Obesity and Metabolic Disorders, the 2019 annual conference of European Society of Thoracic Surgeons and the 2019 annual conference of The Endoscopic and Laparoscopic Surgeons of Asia. We have also established the Panther Surgical Academy that provides value-added academic services to surgeons from all over the world through various forms of training.
We also believe that our co-operation with well-known research and academic institutions enhances our brand awareness, and these partners also serve as marketing channels for products we jointly develop with them. Our other promotion channels include printed brochures, product catalogs and our corporate website.
Pricing
In China, a majority of our sales made to public hospitals are under the centralized volume procurement regimes established within their respective regions. We are responsible for participating in such public tender processes to secure the right to sell our products to the
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We take into account a number of factors in determining our prices, such as the successful bidding price for sales to the relevant public hospitals, the market positioning and target customers of the specific products, the prevailing market price of similarly positioned products, different product specifications, and our costs and expenses, especially our investments in R&D and costs incurred for patent applications. We would consider adjusting the standard price for our products according to the market conditions and competition. In certain regions where we do not have a large market share, such as Shandong province, we adopt competitive pricing strategy for products that have been on the market for a relatively long time, so as to obtain a larger market share. For new products, we adopt a higher price compared to other domestic competitors, based on our products’ superior performance and our patent. We may provide volume discounts to distributors and adjust our prices on a case-by-case basis based on different retail prices across regions.
We determine the selling price of suture hernia meshes and blood vessel titanium clips we distribute as an agent for third parties based on the purchase price we pay, related taxes and expenses and our overall profit margin.
For our overseas sales, we negotiate with our distributors/customers on an arm’s length basis based on the specific market condition of each overseas market, the prevailing market price of similarly positioned products, different product specifications, our costs and expenses, especially our investments in R&D and our overall profit margin.
We believe that we have implemented an effective pricing strategy, and we believe our products are preferred by domestic end customers because of our cost-effective operations and the added value of highly refined patented products, as well as distributors due to our strong brand reputation and effective promotion and marketing strategy. Our prices are competitive due to our cost-effectiveness while maintaining the same performance level. See “Financial Information—Key Factors Affecting Our Results of Operations—Product Pricing.”
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After-sale Service, Product Return and Warranty
After our products are sold and implanted, we also conduct certain follow-up services, including distributor training and technical support such as training in the basic technologies of our products, participating in presentations to potential end-customers, product maintenance and performance follow-up with surgeons. We also assist our distributors in preparing documents for contracts awarded by hospitals through competitive bidding and tenders.
We consider customer feedback a valuable tool for improving our service. We conduct follow-up discussions with the surgeons who used our products to better understand the key advantages and weaknesses of our products, which we believe provide us the opportunity not only to improve our product design in the future, but also to strengthen product loyalty and lay the foundation for further cooperation. The information we collected from after-sale product performance follow-up also form a strong basis for our future R&D and academic promotion activities.
Furthermore, we also provide channels for complaints regarding our products and have established a set of procedures for handling customer complaints. During the Track Record Period and up to the Latest Practicable Date, we have not received any material product complaint that had any material effect on our business or results of operations.
We generally do not provide any warranty on our products, except for endoscopic instruments such as 2D and 3D laparoscopy, which are typically covered by a warranty period of one year for product defects or upon termination of distribution agreements. We generally do not allow product return or refund for our products except for product defects. During the Track Record Period and up to the Latest Practicable Date, we had not experienced any material product return or recalled any product due to quality issues.
EFFECT OF THE COVID-19 PANDEMIC
An outbreak of respiratory illness caused by a novel coronavirus, namely, COVID-19, was reported in December 2019 and continued to expand globally. The outbreak of the COVID-19 pandemic is likely to have an adverse impact on the livelihood of people around the world and on the global economy. Our business and results of operations for the year ending December 31, 2021 was affected by the COVID-19 pandemic. See “Risk Factors—Risks Relating to Our Operations—Our business, results of operations and financial position could be adversely affected by the outbreak of COVID-19.”
In response to the COVID-19 pandemic, we have adopted enhanced hygiene and precautionary measures, including (i) closely following the latest regulatory measures on combatting the COVID-19 pandemic in terms of checking the health status of our employees, and timely reporting potential issues to the relevant authorities; (ii) disinfecting production facilities, warehouses and offices; and (iii) encouraging our R&D and product registration teams to work from home. By providing online trainings to employees and communicating with customers through video conferencing, we were able to maintain work efficiency and customer satisfaction.
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In addition, capitalizing on our existing solid manufacturing capabilities and experienced production team, we have developed and manufactured a variety of protective products such as masks and medical isolation gowns in response to market opportunities arising from the COVID-19 pandemic. See “—Our Product Portfolio—Masks and Medical Isolation Gowns” in this section.
As of April 30, 2021, we had capital resources of RMB119.1 million, consisting of cash and cash equivalents of RMB72.1 million and time deposits of RMB47.0 million. In the very unlikely event that we are forced to reduce or suspend a substantial part of our business operations, we estimate that our capital resources on hand and the 10% of the net [REDACTED] at the low end of the [REDACTED] range to be used for working capital and general corporate purposes, and based on the following assumptions, will allow our Group to remain financially viable from April 30, 2021 for over two years. Key assumptions for the above estimates include: (i) we will not generate any income due to the suspension of business; (ii) we incur expenses to maintain its operations at a minimum level, primarily including estimated monthly fixed costs (including staff costs, rental costs and other miscellaneous charges) and other minimal operating and administrative expenses; (iii) all of our outstanding trade receivables will be recovered; (iv) our payables and borrowings will continue to be settled when they become due; (v) no additional external financing will be provided during the forecast period; (vi) except for dividend already declared, no further dividend will be declared and paid; (vii) the expansion plan will be suspended; and (viii) there will be no material changes in the near future that would significantly affect the above-mentioned key assumptions. The above-mentioned extreme situation may or may not occur. The above- mentioned analysis is for illustrative purpose only and our Directors currently assess that the likelihood of such situation is remote. The actual impact from the outbreak of COVID-19 will depend on its subsequent development; therefore, there is a possibility that such impact to our Group may be out of our Director’s control and beyond our estimation and assessment.
CUSTOMERS
During the Track Record Period, our customers generally included (i) domestic and overseas distributors; (ii) public hospitals; and (iii) overseas OEM customers. The following table sets forth details of our five largest customers for the years indicated:
Duration of Business Relationship Transaction % of Total as of the Latest Type of Rank Customer Country Amount Revenue Practicable Date Credit Term Customer (RMB’000) (Years)
2020 1 Customer A Spain 16,015 5.2 9 30 days Distributor 2 Panther Brazil(1) Brazil 15,944 5.2 4 6 months Distributor 3 Customer B Turkey 13,441 4.4 4 Pay in advance Distributor 4 Customer C China 11,293 3.7 1 Pay in advance Distributor 5 Customer D Iran 10,768 3.4 7 Pay in advance Distributor
Total 67,461 21.9
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Duration of Business Relationship Transaction % of Total as of the Latest Type of Rank Customer Country Amount Revenue Practicable Date Credit Term Customer (RMB’000) (Years)
2019 1 Customer D Iran 19,767 6.5 8 Pay in advance Distributor 2 Customer E United 15,451 5.1 9 Pay in advance OEM Kingdom or 90 days customer 3 Customer F China 14,403 4.8 6 Pay in advance Distributor 4 Customer G China 10,438 3.5 7 Pay in advance Distributor 5 Customer H China 10,419 3.4 3 Pay in advance Distributor
Total 70,478 23.3
2018 1 Customer E United 9,777 4.3 9 Pay in advance OEM Kingdom or 90 days customer 2 Customer F China 9,496 4.1 6 Pay in advance Distributor 3 Customer H China 9,203 4.0 3 Pay in advance Distributor 4 Customer I Brazil 8,995 3.9 4 6 months Distributor 5 Customer D Iran 6,837 3.1 8 Pay in advance Distributor
Total 44,308 19.4
(1) an associate of our Company
We sold medical devices to all of our five largest customers during the Track Record Period. We did not experience any significant delay of payments due from our five largest customers in each year during the Track Record Period. None of our five largest customers was one of our suppliers during the Track Record Period or vice versa.
Revenue from sales to the largest customer in 2018, 2019 and 2020 were RMB9.8 million, RMB19.8 million and RMB16.0 million, representing 4.3%, 6.5% and 5.2% of our total revenue, respectively. Except Panther Brazil, all of our five largest customers during the Track Record Period were Independent Third Parties. As of the Latest Practicable Date, none of our Directors, their close associates or any Shareholders which, to the knowledge of our Directors, owned more than 5% of the issued share capital of our Company as of the Latest Practicable Date, had any interest in any of our five largest customers during the Track Record Period.
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RAW MATERIALS AND SUPPLIERS
Our Raw Materials
The principal raw materials we purchased during the Track Record Period mainly include (i) medical-grade stainless steel, anvils, titanium tacks, polycarbonate particles, packaging materials and cartridges which are used for manufacturing our self-developed products; and (ii) raw materials for our masks and medical isolation gowns in 2020 such as melt blown fabric, nonwoven fabric and electrostatic cotton. During the Track Record Period, we purchased all of our raw materials in China, except for titanium wires, which we imported from the United States. In 2018, 2019 and 2020, we incurred raw material costs of RMB48.3 million, RMB68.1 million and RMB82.4 million, respectively, representing 60.5%, 66.0% and 71.5% of our cost of sales, respectively.
Our procurement department is responsible for making procurement plans, placing orders with suppliers and managing suppliers. We generally keep a three-month safety stock, except for titanium wires which we typically have a one-year stock, to better control our procurement cost and inventory level. We classify all raw materials into three categories, namely, key materials, general materials and auxiliary materials. Key materials are directly used in products and directly affect the quality of our final product. General materials are materials directly used in products other than key materials. Auxiliary materials are materials not directly used in products. For key materials and general materials, we make procurement plans every month and require inspection by our quality control department upon delivery. For auxiliary materials, we make procurement plans every six months and require relevant departments to inspect according to the procurement demands. Our R&D department and quality control department are also involved in the procurement process and participate in raw material quality control.
Our Suppliers
We have maintained relatively stable relationships with our major raw material suppliers. We purchase our raw materials only from approved suppliers which meet our evaluation criteria and typically have alternative suppliers available for such materials. We generally enter into supply agreements with our raw material suppliers on a case-by-case basis. According to these supply agreements, we and our raw material suppliers generally determine the price on an annual basis with reference to the type and market price of raw materials. Our major raw material suppliers typically offer us a credit term of around 45 working days after inspection.
Our procurement department is responsible for selecting and evaluating suppliers for each type of raw materials. Our procurement department conducts market research to identify potential raw material suppliers that are capable to fulfill our quality requirements. After ensuring that these potential suppliers have the necessary licenses and permits, our procurement personnel will evaluate the capabilities of potential suppliers and quality, price and cost performance of the materials. Other than the necessary licenses and permits, we also consider a raw material supplier’s production capacity and technological capabilities when selecting suppliers.
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We conduct quarterly performance evaluation and annual comprehensive performance evaluation for our suppliers. Our quarterly performance evaluation is based on suppliers’ service, delivery, development and quality and costs of materials. Our comprehensive performance evaluation is based on suppliers’ R&D capability, on-site service quality and general performance. We classify our raw material suppliers into four levels according to the evaluation results. In particular, level I suppliers will enjoy beneficial policies including priority in new products development. Suppliers are classified as level II if they meet the basic requirements of our supply system. We require level III suppliers to resolve certain defects and we may restrict or stop its supplying if necessary. For level IV suppliers, we reduce or stop its supplying and start to remove them from our suppliers list.
During the Track Record Period, we also purchased sutures, hernia meshes and blood vessel titanium clips from third-party suppliers to market and distribute as part of our integrated product offerings to our customers. We typically enter into one-year distribution agreements with the supplier, under which we are granted the exclusive right to distribute relevant products in China and the manufacturer itself is exclusively responsible for all damages resulting from any product defects. See “—Our Business Model” in this section.
Although we generally do not enter into long-term supply agreement with our suppliers, we have long-term and stable relationship with our major suppliers and have not experienced any material disputes with suppliers, difficulties in the procurement of raw materials or interruptions in our operations due to a shortage or delay of raw materials during the Track Record Period and we have not been subject to material price increases by our suppliers during the Track Record Period. We do not anticipate difficulty procuring raw materials necessary for our production. See “Risk Factors—Risks Relating to Other Parties—We have relied on and expect to continue to rely on third parties to supply raw materials for manufacture of our products and R&D, and our business could be harmed if we are unable to obtain such raw materials in sufficient quantities or at acceptable quality or prices.”
The following table sets forth details of our five largest suppliers for the years indicated:
Purchase % of Total Goods/ Rank Suppliers Amount Purchase Services Procured (RMB’000)
2020 1 Supplier A 10,059 7.0 Raw materials and moulds 2 Supplier B 9,817 6.8 Raw materials 3 Supplier C 9,073 6.3 Raw materials and moulds 4 Supplier D 9,037 6.3 Sutures 5 Supplier E 8,456 5.8 Raw materials and moulds
Total 46,442 32.2
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Purchase % of Total Goods/ Rank Suppliers Amount Purchase Services Procured (RMB’000)
2019 1 Supplier B 11,158 10.0 Raw materials 2 Supplier D 10,077 9.1 Sutures 3 Supplier C 7,168 6.4 Raw materials and moulds 4 Supplier E 5,761 5.2 Raw materials and moulds 5 Supplier F 5,211 4.7 Raw materials and moulds
Total 39,375 35.4
2018 1 Supplier G 11,757 13.8 Raw materials 2 Supplier D 7,571 8.9 Sutures 3 Supplier C 6,129 7.2 Raw materials and moulds 4 Supplier E 6,046 7.1 Raw materials and moulds 5 Supplier F 4,733 5.5 Raw materials
Total 36,236 42.5
None of our five largest suppliers was our customers during the Track Record Period. As of the Latest Practicable Date, none of our Directors, their close associates or any Shareholders which, to the knowledge of our Directors, owned more than 5% of the issued share capital of our Company as of the Latest Practicable Date, had any interest in any of our five largest suppliers during the Track Record Period.
INVENTORY MANAGEMENT
Our inventory mainly includes raw materials, packaging, low-value consumables, work-in-progress and finished products. As of December 31, 2018, 2019 and 2020, we had inventories of RMB55.8 million, RMB64.3 million and RMB83.0 million, respectively. We have established an inventory management system that monitors each stage of our warehousing process. We regularly evaluate our inventory level of our raw materials. We generally maintain a three-month supply of raw materials which varies according to the demand of our customers, sales and production plans after taking into account, among other things, lead time of raw material procurement and production lead time of our major products. We keep a higher inventory level for titanium wires, which are imported from the United States, to minimize the risks and costs associated with the importing process. Raw materials are separately stored in
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In addition to regular review through our IT system, we also carry out physical stock counts and stock inspections internally, generally on a monthly basis, to monitor inventory movements of each type of product and raw material, and adjustments are made to the procurement or production plan as necessary to maintain a reasonable inventory level for each type of product and raw material, and to ensure on-time delivery of our finished products to our OEM customers and distributors. During the Track Record Period, we did not experience any material shortage of inventory.
QUALITY MANAGEMENT
Quality control and quality assurance are crucial for us, and we place a strong emphasis on adopting quality control and assurance systems that meet the international and industry standards for medical devices. We endeavor to ensure the quality of our operations through a comprehensive quality management system, which was formulated in accordance with the GMP standard as required by the NMPA and ISO13485 standard, covering substantially every aspect of our operations including product design, industry chain, manufacturing, and sales, among others. In 2020, we received the ISO13485 certificate and CE Mark issued by TÜV Rheinland LGA Products GmbH for our quality control program. The CE certificates are granted to applicants who have satisfied, among other factors, the applicable quality control standards laid down in the European Directive 93/42/EEC. These certifications are generally valid for a period of five years and have to be renewed subject to continuing compliance with the relevant requirements and some of the certificate issuing bodies conduct annual site visits and audit of our production facility to confirm our compliance with the relevant requirements. These show that our products and production processes are able to meet the regulatory standards internationally, and enable us to market and sell our products to overseas customers.
We have set up a quality control system in accordance with relevant laws and regulations in China and overseas markets where we have business operations. Our quality assurance measures cover all aspects of our production processes and operations, including design installation and maintenance of production facilities, procurement of raw materials and packaging materials, monitoring and quality checks of raw materials, semi-finished products and finished products and verification of documentation to comply with product registration certification standards and requirements. We select our suppliers based on a strict set of criteria and we regularly conduct supplier audits which include documentation inspection and/or on-site inspection on such qualified suppliers to make sure our requirements are being consistently met. We conduct inspection on raw materials, including work-in-progress in accordance with our quality management standards. We have established a comprehensive set of quality control and quality assurance procedures to monitor our manufacturing process to ensure it to comply with relevant regulatory requirements and our internal quality requirements. We require responsible personnel for each manufacturing step to keep records on
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INTELLECTUAL PROPERTY
As a medical device company focusing on innovative solutions for minimally invasive and open surgeries, intellectual property rights are crucial to our business and we are committed to the development and protection of our intellectual properties.
As of the Latest Practicable Date, we owned 243 patents in China, including 93 invention patents, 121 utility models and 29 industrial designs. As of the same date, we also had 54 pending patent applications in China, including 36 invention patents and 18 utility models. To facilitate our strategy to enter overseas market, we also owned two patents in Europe, five patents in the United States and one patent in Japan. All of the patents that we owned or applied for are related to self-developed technologies by our in-house R&D team. As of the same time, we also owned 14 trademarks and 17 domain names registered in China and 4 trademarks overseas. See “Appendix VI—B. Further Information about Our Business—2. Intellectual Property Rights of Our Group.”
The table below lists the material patents owned by our Group for our core technologies as of the Latest Practicable Date:
Type of Registration Number/ Related Application Authorization Name of Patent Patent Application Number Product(s) Date(1) Date Jurisdiction Authority
Disposable surgical stapler Invention 200710107833.8 Circular stapler May 18, 2007 July 29, 2009 China CNIPA comprising safety patent apparatus (具有自動保險 裝置的一次性吻合器)
Driving and locking Invention 201210374549.8 Linear stapler September 29, July 1, 2015 China CNIPA apparatus and cutting patent with knife 2012 stapler using the same (一種驅動及鎖緊裝置以 及應用該裝置的切割縫合 器)
Endoscopic linear cutting Invention 201310196052.6 Endoscopic May 24, 2013 March 25, 2015 China CNIPA stapler and its security patent linear cutter apparatus (腔鏡下直線切 stapler 割縫合器及其保險裝置)
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Type of Registration Number/ Related Application Authorization Name of Patent Patent Application Number Product(s) Date(1) Date Jurisdiction Authority
Linear cutting and Invention 201210310307.2 Linear cutter August 28, December 3, China CNIPA stitching instrument patent stapler 2012 2014 adopting novel transmission mechanism (一種帶有夾板鎖緊機構 的直線切割縫合器)
Tiltable and repositionable Invention 201010120231.8 Circular stapler March 8, 2010 October 10, China CNIPA anvil assembly for patent 2012 surgical stapler and surgical stapler comprising the same (可 側倒和復位的抵釘座組件 及採用該抵釘座組件的吻 合器)
Indicator apparatus for Invention 201310393065.2 Linear stapler August 30, August 31, China CNIPA cutting stapler and patent with knife 2013 2016 cutting stapler with the same (帶刀縫合器的指示 裝置及具有該指示裝置的 帶刀縫合器)
Indicator, surgical stapler Invention 201210445368.X Linear stapler November 9, November 25, China CNIPA and surgical instruments patent 2012 2015 with the same (一種指示 器、採用該指示器的縫合 器和外科手術器械)
Surgical stapler and its Invention 201210181151.2 Circular June 4, 2012 November 5, China CNIPA status indicator (一種吻 patent stapler for 2014 合器及其狀態指示裝置) hemorrhoidal prolapse
Stapler with knife (一種帶 Invention 201210023636.9 Linear stapler February 3, February 5, China CNIPA 刀縫合器) patent with knife 2012 2014
Reload unit for linear Invention 201110415659.X Linear cutter December 14, May 29, 2013 China CNIPA cutting stapler and patent stapler 2011 surgical stapler using the same (一種直線切割吻合 器釘倉組件及應用該組件 的吻合器)
Surgical stapler with Invention 201410336537.5 Circular stapler July 16, 2014 October 20, China CNIPA prompt tone (一種具有示 patent 2017 聲功能的吻合器)
Circular purse string clamp Invention 201310521365.4 Purse-string October 30, November 23, China CNIPA and its indicator patent forceps 2013 2016 apparatus (荷包鉗及其提 示裝置)
Anal dilator (一種縫紥器) Utility 201420191574.7 Anal dilator April 18, 2014 March 25, 2015 China CNIPA model
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Type of Registration Number/ Related Application Authorization Name of Patent Patent Application Number Product(s) Date(1) Date Jurisdiction Authority
Surgical stapler cutting Utility 201820757618.6 Endoscopic May 21, 2018 October 25, China CNIPA knife (一種吻合器切割 model linear cutter 2019 刀) stapler
An auxiliary device for Invention 201410510192.0 Endoscopic September 29, April 3, 2018 China CNIPA surgical stapler, surgical patent linear cutter 2014 stapler and surgical stapler instrument using the same (用於吻合器的輔助 裝置、應用該輔助裝置的 吻合器和外科手術器械)
Titanium nail capable of Invention 201410382354.7 Staple August 6, 2014 August 14, China CNIPA loading drug and drug- patent 2020 loaded titanium nail and preparing method of the same (一種醫用吻合釘及 其製備方法)
Compressing adjusting Utility 201822099389.6 Circular stapler December 13, September 20, China CNIPA reload unit and surgical model 2018 2019 stapler (壓榨調節組件及 吻合器)
Electronic stapler with Utility 201821834429.0 Smart stapler November 8, November 26, China CNIPA cartridge information model 2018 2019 recognition (一種可識別 釘匣信息的電動吻合器)
Surgical stapler (吻合器) Utility 201921951417.0 Smart stapler November 13, September 15, China CNIPA model 2019 2020
The staple cartridge Utility 201621301504.8 Endoscopic November 30, December 8, China CNIPA rotation control model linear cutter 2016 2017 apparatus of the stapler endoscopic stapler (腔鏡 吻合器的釘倉旋轉控制裝 置)
Surgical stapler component Utility 201721670681.8 Endoscopic December 5, July 19, 2018 China CNIPA (一種吻合器組件) model linear cutter 2017 stapler
Innovative anvil and Utility 201220550011.3 Circular stapler October 25, May 29, 2013 China CNIPA surgical stapler using the model 2012 same (一種新型抵釘座以 及應用該抵釘座的吻合 器)
Surgical staple (一種用於 Utility 201820181058.4 Staple February 2, June 28, 2019 China CNIPA 吻合器的縫釘) model 2018
(1) The validity period is 20 years and ten years from the application date as stated on such certificates for invention patents and utility model, respectively.
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We have a dedicated internal team to manage and safeguard our intellectual property rights. The team is responsible for patent and trademark applications and maintenance of granted patents and trademarks, management of files and records related to our intellectual properties. The team also supervises transfer, license and other matters related to our patents and trademarks, and regularly monitors if there is any intellectual property infringement, litigations, claims or disputes in relation to us. We have also entered into confidentiality agreements and non-competition agreements with our senior management and certain key members of our R&D team. Our standard employment contract, which we used to employ each of our employees, contains a confidentiality clause, under which employees are required to keep our technology know-how, intellectual property rights, trade secrets and other related information confidential if such information was obtained during work or through any other resources and has not been disclosed to the public by us. In addition, we include a confidentiality clause in our agreements with our research partners and other third parties who may have access to our proprietary information.
With the implementation of the foregoing intellectual property protection measures, during the Track Record Period and up to the Latest Practicable Date, we were not involved in any proceedings in respect of, and we had not received notice of any claims of infringement of, any intellectual property rights, in which we may be a claimant or a respondent, nor were we aware of any breach of the aforementioned confidentiality or non-compete obligations by the counterparties. Based on the above, our Directors believe that we were not involved in any pending, or to their knowledge, potential or threatened intellectual property infringement, litigations or claims during the Track Record Period and up to the Latest Practicable Date.
AWARDS AND RECOGNITION
The following table sets out a summary of the major awards and recognitions we have received:
Year Award/Recognition Awarded Entity/Project Awarding Institution(s)
2020 National Technology Minimally Invasive National Office for Invention Award Laparascopic Surgical Science and Tianjin Second Award Robot Technology Awards (國 (國家技術發明獎天津 家科學技術獎勵工作辦 市二等獎) 公室)
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Year Award/Recognition Awarded Entity/Project Awarding Institution(s)
2020 Beijing New Technology Disposable Circular Beijing Municipal and New Products Stapler, Disposable Science & Technology (Services) Certificate Linear Stapler, Commission (北京市科 (北京市新技術新產品 Disposable Circular 學技術委員會), Beijing (服務)證書) Stapler for Municipal Commission Hemorrhoidal Prolapse, of Development and Disposable Endoscopic Reform (北京市發展和 Linear Cutter Stapler, 改革委員會), Beijing Components for Municipal Commission Disposable Endoscopic of Economy and Linear Cutter Stapler Information Technology (北京市經濟和信息化委 員會), Beijing Municipal Commission of Housing and Urban Rural Development (北 京市住房和城鄉建設委 員會), Beijing Quality and Technology Supervision Bureau (北 京市質量技術監督局) and Administrative Commission of Zhongguancun Science Park
2019 Tianjin Technology Minimally Invasive Tianjin Municipal Invention Award Surgery Robot System People’s Government Grand Prize (天津市 (天津市人民政府) 技術發明獎特等獎)
2019 China Pharmaceutical Our Company China Pharmaceutical Company of Industry Chamber of Compliance and Commerce (中華全國工 Integrity (中國醫藥守 商業聯合會醫藥業商會) 法誠信企業)
2019 Top 50 Medical Device Our Company China Pharmaceutical Sales in China (中國 Industry Chamber of 醫療器械銷售50強) Commerce
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Year Award/Recognition Awarded Entity/Project Awarding Institution(s)
2017 100 Most Influential Our Company Zhongguancun Enterprise Credible Enterprises Credit Promotion (百家最具影響力信用 Association (中關村企 企業) 業信用促進會)
2016 Beijing New Technology Disposable Linear Beijing Municipal and New Products Cutting Stapler, Science & Technology (Services) Certificate Disposable Circular Commission, Beijing (北京市新技術新產品 Stapler for Municipal Commission (服務)證書) Hemorrhoidal Prolapse, of Development and Disposable Endoscopic Reform, Beijing Linear Cutter Stapler, Municipal Commission Disposable Purse-string of Economy and Stapler Information Technology Beijing Municipal Commission of Housing and Urban Rural Development, Beijing Quality and Technology Supervision Bureau and Administrative Commission of Zhongguancun Science Park
2014 Tianjin Technology Endoscopic Instruments Tianjin Municipal Invention Award First for Minimally Invasive People’s Government Prize (天津市技術發 Surgery 明獎一等獎)
2014 Beijing Patent Model Our Company Beijing Municipal Company (北京市專利 Intellectual Property 示範單位) Office (北京市知識產 權局)
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Year Award/Recognition Awarded Entity/Project Awarding Institution(s)
2013 Zhongguancun National Circular Stapler Beijing Municipal Independent Science & Technology Innovation Showcase Commission, Beijing Zone New Technology Municipal Commission and New Products of Development and (Services) Certificate Reform, Beijing (中關村國家自主創新 Municipal Commission 示範區新技術新產品 of Economy and (服務)證書) Information Technology, Beijing Municipal Commission of Housing and Urban Rural Development and Administrative Commission of Zhongguancun Science Park
2012 National Scientific China Minimally Invasive State Council of the Progress Second Prize Comprehensive Lung People’s Republic of (國家科學進步二等獎) Cancer Treatment China (中華人民共和國 System 國務院)
2012 Medical Device Quality Our Company Leading Group of Beijing Management Model Drug Safety Project (北 Enterprise (醫療器械 京市藥品安全百千萬工 質量管理示範企業) 程建設領導小組)
COMPETITION
We operate in a rapidly changing market, resulting from technological advances and scientific discoveries. According to F&S, we ranked first among domestic surgical stapler manufacturers in the PRC in terms of sales volume in 2020, representing 14.3% of total sales volume by domestic surgical stapler manufacturers. We were the largest domestic player in terms of export sales volume from 2016 to 2020. We also had the largest hospital coverage in China in 2020 among domestic surgical stapler manufacturers. While we believe our rich product portfolio, forward-looking R&D strategy and sales network provide us with competitive advantages, we face potential competition with major international and domestic MISIA manufacturers. We compete primarily based on the clinical performance of our products and product candidates, our ability to commercialize products, R&D capabilities and brand recognition. See “—Our Product Portfolio” in this section and “Industry Overview.”
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EMPLOYEES
As of December 31, 2020, we had 352 employees in China and nine sales and marketing employees in India. The table below sets forth our employees in China by function as of December 31, 2020.
Number of % of total Function employees employees
Management and Administrative 48 13.6 Production 139 39.5 Sales, Marketing and Customer Relationship 103 29.3 Technology and R&D 51 14.5 Finance 11 3.1
Total 352 100.0
We recruit our employees through recruitment websites, recruiters, internal referrals and job fairs. For all of our employees, we provide on-board training and periodic training to enhance their professional skills. Our training programs cover broad topics including medical device related regulations, production safety knowledge, and procedures and protocols relating to quality control.
In compliance with the relevant PRC laws and regulations, we entered into employment contracts with our employees to cover matters such as wages, benefits and grounds for termination. We enter into standard confidentiality agreements with all of our employees. We enter into non-compete agreements with employees of the departments that we consider crucial to our business, such as R&D, quality control and clinical trial registration. Such non-compete agreements prohibit the employees from competing with us, directly or indirectly, during his or her employment. Before an employee leaves our Company, we assess whether he or she has access to our confidential information and if necessary require the employee to enter into a non-compete agreement for up to two years after the termination of his or her employment.
The remuneration package of our employees includes salary and bonus, which are generally based on their qualifications, industry experience, position and performance. We consider the remuneration package of our employees to be competitive among our domestic competitors. During the Track Record Period, we failed to fully make social insurance and housing provident fund contributions for some of our employees according to the relevant PRC laws and regulations. We estimate that the total outstanding amount of social insurance and housing provident fund contributions during the Track Record Period that may be required by the relevant authorities to repay is approximately RMB9.9 million.
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Such incidents occurred primarily because (i) the lack of understanding by the responsible personnel of the requirements under the relevant PRC laws and regulations; and (ii) there were differences in implementation or interpretations of the relevant PRC laws and regulations by local government authorities.
According to the relevant PRC laws and regulations, we may be ordered to pay the social insurance and housing provident fund contributions in arrears and be subject to an overdue payment on delinquent payment of social insurance contributions calculated at a daily rate of from 0.05% onwards. As of the Latest Practicable Date, we had not received any notification from the relevant PRC authorities requiring us to pay shortfalls with respect to social insurance and housing provident funds. During the Track Record Period and up to the Latest Practicable Date, we had not been subject to any administrative penalties, nor were we aware of any material employee complaints or involved in any material labor disputes with our employees with respect to social insurance and housing provident funds. In addition, we will make full contributions or to pay the shortfall within a prescribed time period if demanded by the relevant PRC authorities or by our employees. Based on the foregoing, our PRC Legal Advisors are of the view that the likelihood that we would be subject to material administrative penalties by relevant authorities is low, provided that, once required by the relevant social insurance or housing provident fund authorities, we will pay the shortfall and the related late payment fees within the time limit prescribed by the relevant authorities. We have made full provisions of RMB3.2 million, RMB4.0 million and RMB2.7 million for the social insurance and housing provident fund contribution shortfall in 2018, 2019 and 2020, respectively. As such, our Directors consider that such non-compliance incident would not have a material operational or financial impact on us.
We have implemented a policy on managing social insurance and housing provident fund contribution for employees, providing specific guidance to human resource personnel on the handling of social insurance and housing provident funds contributions during employee turnover. Our internal policy requires human resource personnel to make contribution to social insurance and housing provident funds for all employees as required by relevant regulatory authorities. The policy also requires an annual check in relation to the compliance with the relevant laws and regulations. We also have provided trainings on social insurance and housing provident fund contributions to all human resource personnel.
After reviewing the above internal control measures, our Directors are of the view that the above measures are adequate and will effectively ensure a proper internal control system to prevent future similar non-compliance incidents.
Our employees do not negotiate their terms of employment through any labor union or by way of collective bargaining agreements. During the Track Record Period and as of the Latest Practicable Date, we did not experience any material labor disputes or strikes that may have a material and adverse effect on our business, financial condition or results of operations.
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INSURANCE
We maintain insurance policies that are required under PRC laws and regulations as well as based on our assessment of our operational needs and industry practice. In line with industry practice in China, we maintain different types of insurance policies, such as product liability insurance for our manufacturing facilities and life science comprehensive liability insurance for our products sold both in China and overseas, including our products sold outside China to OEM customers. Our Directors consider that our existing insurance coverage is sufficient for our present operations and in line with the practice followed by other manufacturers in our industry that are based in China with similar international sales coverage. See “Risk Factors—Risks Relating to Our Operations—Our insurance coverage may not completely cover the risks relating to our business and operations.”
PROPERTIES
Our corporate headquarters are located in Beijing. All of our manufacturing facilities as of the Latest Practicable Date were located in the PRC. See “—Manufacturing—Manufacturing Facilities and Production Capacity” in this section.
According to section 6(2) of the Companies (Exemption of Companies and Prospectuses from Compliance with Provisions) Notice, this document is exempted from compliance with the requirements of section 342(1)(b) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance in relation to paragraph 34(2) of the Third Schedule to the Companies (Winding Up and Miscellaneous Provisions) Ordinance for the reason that, as of December 31, 2020, we had no single property of our non-property activities with a carrying amount of 15% or more of our total assets.
Owned Property
As of the Latest Practicable Date, we owned a building in Suzhou, Jiangsu province, with a total GFA of 21,694 sq.m. Such property is used for non-property activities as defined under Rule 5.01(2) of the Listing Rules. Our building is primarily used as production facility. We had obtained title, land use right and building ownership certificates for such property. Our PRC Legal Advisors are of the view that we have valid legal title to the property and the land use rights for the land occupied by the building, and that we are entitled to legally occupy, use, benefit from, transfer, lease, pledge or otherwise dispose of such property.
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Leased Property
As of the Latest Practicable Date, we leased one land parcel and nine premises in Beijing and Suzhou, Jiangsu province, with an aggregate GFA of 13,142 sq.m.
As of the Latest Practicable Date, the lessors of the land parcel and of seven of the leased premises, which are mainly used as ancillary facilities, had not obtained the real property title certificates due to relevant regulations of collective land ownership. Considering that (i) the local authorities have confirmed the land parcel owner’s legal title and confirmed that there is no illegal use or construction on the land parcel; (ii) as of the Latest Practicable Date, we had not received any penalty, objection, inquiry or investigation from the local authorities with respect to such properties; (iii) our leased premises are used for offices, manufacturing of masks, packaging and warehouse only and our revenue from sales of masks only accounted for a small portion of our total revenue in 2020; (iv) we do not plan to use one of the leased premises and is relocating from such property and (v) there are abundant unoccupied properties available for lease at similar costs and we believe we would be able to relocate our facilities to a different site relatively easily if we are required by local authorities, our PRC Legal Advisors are of the view that such title defects will not have a material adverse impact on our continuous operation and the [REDACTED]. Based on the foregoing, our Directors are of the view that such title defect will not have a material adverse effect on our business, financial condition and results of operations.
As of the Latest Practicable Date, we had not completed lease registration with the relevant regulatory authorities for seven of the eight leases primarily due to the above- mentioned title defects and the lack of the cooperation from the relevant landlords to complete such registration. Our PRC Legal Advisors are of the view that the non-registration of lease agreements will not affect the validity of such lease agreements, but the relevant local housing administrative authorities can require us to complete registrations within a specified timeframe and we may be subject to a fine between RMB1,000 and RMB10,000 per lease for any delay in making these registrations. Therefore, we have the right to use such properties in accordance with the lease agreement but we may be subject to the risks of fines if the lease registration is not completed as required by the relevant local housing administrative authorities. As of the Latest Practicable Date, we were not subject to any penalties arising from the non-registration of the lease agreements. In the event that we are required by relevant competent authorities to rectify the non-registration of these lease agreements, and we are unable to do so due to lack of cooperation from the landlords, we intend to terminate the non-compliant leases, find alternative locations nearby and relocate from such leased properties. Given the abundant unoccupied properties available for lease, we believe that it would not be difficult for us to identify and relocate to alternative premises and relocation would not result in any material disruptions to our business. Taking into account that the maximum penalties we may be subject to and the additional relocation costs we may incur, our Directors believe that these unregistered lease agreements would not have a material operational or financial impact on us.
SOCIAL, HEALTH, WORK SAFETY AND ENVIRONMENTAL MATTERS
In respect of social responsibilities, we have entered into employment contracts with our employees in accordance with the applicable PRC laws and regulations. We hire employees based on their merits and it is our corporate policy to offer equal opportunities to our employees regardless of gender, age, race, religion or any other social or personal characteristics. We strive to provide a safe working environment for our employees. We have implemented work safety guidelines setting out safety practices, accident prevention and
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In light of the COVID-19 pandemic, we have implemented various protection policies for our employees to work remotely and onsite with protective masks and sanitization supplies to ensure their well-being. Our enhanced hygiene and precautionary measures include, among others, (i) closely following the latest regulatory measures on combatting the COVID-19 pandemic in terms of checking the health status of our employees and timely reporting inspection results to the relevant authorities; (ii) disinfecting facilities, building corridors, elevators and other public areas in workspace; (iii) encouraging employees to work from home; (iv) providing online trainings to physicians, nurses and our own employees such as sales and marketing personnel; and (v) offering services to and closely follow up with customers online to enhance efficiency and customer satisfaction.
Although we do not operate in a highly-polluted industry, our manufacturing processes generate noise, waste water and solid waste. We have adopted specific environmental protection policies to make our operations more energy efficient and environmentally friendly and to ensure effective compliance with applicable PRC environmental laws and regulations. To lower our environmental impact, we have endeavored to utilize certain environment- friendly equipments in our production process. We also engage professional third-party environmental protection companies for recycle of waste packaging materials on an as-needed basis.
During the Track Record Period and up to the Latest Practicable Date, we had not been subject to any material claim or penalty in relation to health, work safety, social and environmental protection, had complied with the relevant environmental and occupational health and safety laws and regulations in all material aspects and did not have any incidents or complaints which had a material and adverse effect on our business, financial condition or results of operations during the period.
LICENSES, PERMITS AND APPROVALS
We operate in a heavily regulated industry. As a result, we are required to obtain various licenses, permits and certifications for our operations. See “Regulatory Overview—Overview of PRC Regulations.”
We are required to obtain registration certificates for Class II and Class III medical devices from and complete record-filings for Class I medical devices with relevant regulatory authorities to commercialize our medical device products. According to applicable PRC laws and regulations, the Class I record-filings will remain effective provided that we continue to comply with the record-filing obligations for subsequent amendments to filed materials, and the registration certificates for Class II and Class III medical devices are valid for five years and subject to renewal. As of the Latest Practicable Date, we had completed required record-filings for 19 Class I medical devices, and obtained 61 Beijing MPA registration certificates for Class II medical devices and 3 NMPA registration certificates for Class III medical devices. As of the same date, 21 of our Class II medical device registration certificates will expire in 2022 and all of our other Class II medical device registration certificates will expire in or after 2023.
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To commercialize our medical device products overseas, we are also required to obtain registration certificates from relevant regulatory authorities. As of the Latest Practicable Date, we had obtained registration certificate from Conformite Europeenne (HD 2185282-1) and ISO13485 certificate (SX 2185282-1) for our products. As of the same date, we had obtained over 100 registration certificates and record-filing proof to sell in over 60 countries and regions overseas, including Canada, the United States, Australia, India, Indonesia and Mexico.
In addition, we are required to maintain a number of licenses, permits, approvals and record-filing proof for our production and operations, including the Permit for the Medical Device Production (醫療器械生產許可證), the Record-filling Proof for Production of Class I Medical Devices (第一類醫療器械生產備案憑證), the Business Operation License of Medical Devices (醫療器械經營許可證) and the Record-filling Proof for Operation of Class II Medical Devices (第二類醫療器械經營備案憑證), Qualification for Drug Information Service over the Internet (互聯網藥品信息服務資格證書), Registration Certificate of the Customs of the People’s Republic of China for the Declaration Enterprises (中華人民共和國海關報關單位註冊 登記證書), Proof for Record-filing and Registration of Foreign Trade Business Operators (對 外貿易經營者備案登記表) and Proof for Record-filing of Entry-exit Inspection and Quarantine Enterprise (出入境檢驗檢疫企業備案表).
The following table sets forth the key licenses, permits and certificates related to our major products as of the Latest Practicable Date:
License/Permit/ Issuing License/Permit/Certificate Certificate No. Validity Period Authority
Domestic Medical Device Production Jing Shi Yao Jian Xie Sheng until April 22, Beijing MPA License (《醫療器械生產許 Chan Xu No. 20040138 2023 可證》) for Class II and III (京食藥監械生產許 Medical Devices 20040138號)
Record-filling Proof for Jing Chang Shi Yao Jian Xie N/A Beijing Production of Class I Sheng Chan Bei No. Changping Medical Devices (《第一類 20160005 (京昌食藥監械生 MPA 醫療器械生產備案憑證》) 產備20160005號)
Business Operation License of Jing Chang Shi Yao Jian Xie until February 11, Beijing Medical Devices (《醫療器 Jing Ying Xu No. 2025 Changping 械經營許可證》) 20150020 (京昌食藥監械經 MPA 營許20150020號)
Record-filling Proof for Jing Chao Shi Yao Jian Xie N/A Beijing Operation of Class II Jing Yin Bei No. 20140060 Changping Medical Devices (《第二類 (京朝食藥監械經營備 MPA 醫療器械經營備案憑證》) 20140060號)
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License/Permit/ Issuing License/Permit/Certificate Certificate No. Validity Period Authority
Registration Certificate for Jing Xie Zhu Zhun May 26, 2017 to Beijing MPA Medical Device (《醫療器 20172080621 (京械註准 May 25, 2022 械註冊證》) (Disposable 20172080621) endoscopic cutting stapler (一次性使用腔鏡下切割吻合 器))
Registration Certificate for Jing Xie Zhu Zhun January 6, 2020 to Beijing MPA Medical Device (《醫療器 20152020238 (京械註准 January 5, 2025 械註冊證》) (Disposable 20152020238) circular stapler (一次性使用 管型吻合器))
Registration Certificate for Jing Xie Zhu Zhun January 6, 2020 to Beijing MPA Medical Device (《醫療器 20152020189 (京械註准 January 5, 2025 械註冊證》) (Disposable 20152020189) linear cutter stapler (一次性 使用直線型切割吻合器))
Registration Certificate for Jing Xie Zhu Zhun July 24, 2017 to Beijing MPA Medical Device (《醫療器 20172090789 (京械註准 July 23, 2022 械註冊證》) (Disposable 20172090789) circular stapler for hemorrhoidal prolapse (一次性使用肛腸吻合器))
Registration Certificate for Jing Xie Zhu Zhun January 6, 2020 to Beijing MPA Medical Device (《醫療器 20152020239 (京械註准 January 5, 2025 械註冊證》) (Disposable 20152020239) linear stapler (一次性使用直 線型縫合器))
Registration Certificate for Jing Xie Zhu Zhun May 26, 2017 to Beijing MPA Medical Device (《醫療器 20172080620 (京械註准 May 25, 2022 械註冊證》) (Disposable 20172080620) linear stapler with knife and accessories (一次性使用線型 切割吻合器及組件))
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License/Permit/ Issuing License/Permit/Certificate Certificate No. Validity Period Authority
International CE Certificate for product HD 2185282-1 January 12, 2021 TÜV Rheinland categories: surgical staplers, to May 26, 2024 LGA staples, trocars, dilators Products with light source, endo GmbH stapler introducers, accessory kits for anorectal surgery, disposable surgical trocar with cannula, disposable suction irrigation sets, disposable lap bags, disposable veress needles, implantable ligating clips, disposable hand assist tunnels and fixation device with titanium tacks, endoscopic motorized cutting staplers for single- use, ultrasonic surgical system generators, soft- tissue ultrasonic surgical system holder/tips for single-use, sterile skin staple removers, sterile surgical face masks, sterile medical face masks, sterile surgical gowns and sterile medical isolation gowns
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License/Permit/ Issuing License/Permit/Certificate Certificate No. Validity Period Authority
ISO13485: 2016 Certificate SX 2185282-1 November 13, TÜV Rheinland for design, development, 2020 to LGA production and distribution November 13, Products of: surgical staples, staples, 2023 GmbH trocars, dilator with light source, thoracic and general surgical instruments, endo stapler introducers, accessory kits for anorectal surgery, sterile skin staple removers, disposable surgical trocar with cannula, disposable suction irrigation sets, disposable lap bags, disposable hand assist tunnels, clip removers, fixation device with titanium tacks, endoscopic motorized cutting staplers for single-use, ultrasonic surgical system generators, soft-tissue ultrasonic surgical system holders/tips for single-use, sterile and non-sterile surgical face masks, sterile and non- sterile medical face masks, sterile and non-sterile surgical gowns and sterile and non-sterile medical isolation gowns
Trocar 95722 renewable annually Canadian Medical Devices Bureau of the Therapeutic Products Directorate
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License/Permit/ Issuing License/Permit/Certificate Certificate No. Validity Period Authority
Circular stapler 98132 renewable annually Canadian Medical Devices Bureau of the Therapeutic Products Directorate
Linear stapler 98134 renewable annually Canadian Medical Devices Bureau of the Therapeutic Products Directorate
Linear cutter stapler 98135 renewable annually Canadian Medical Devices Bureau of the Therapeutic Products Directorate
Endo linear cutter stapler 98401 renewable annually Canadian Medical Devices Bureau of the Therapeutic Products Directorate
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License/Permit/ Issuing License/Permit/Certificate Certificate No. Validity Period Authority
Surgical staplers K103470 renewable annually FDA
Endo linear cutter stapler K142577 renewable annually FDA
Cutter stapler K152618 renewable annually FDA
Circular stapler 80940400001 January 18, 2016 Brazil Agência to January 18, Nacional de 2026 Vigilância Sanitária
Linear cutter stapler 80940400002 August 8, 2016 to Brazil Agência August 8, 2026 Nacional de Vigilância Sanitária
Endo linear stapler 80940400003 February 13, 2017 Brazil Agência to February 13, Nacional de 2027 Vigilância Sanitária
Trocar 80940400004 Long term Brazil Agência Nacional de Vigilância Sanitária
Trocar 80940400006 Long term Brazil Agência Nacional de Vigilância Sanitária
PPH 80940400006 April 8, 2019 to Brazil Agência April 8, 2029 Nacional de Vigilância Sanitária Circular stapler, hemorrhoidal “IMP/MD/2019/000105 March 20, 2019 to Indian Central stapler, linear cutter stapler, MD/PostAppr/2019/2118” March 20, Licensing linear stapler, endo linear 2022/May 26, Authority cutter stapler, cutter stapler 2020 to May 26, 2023
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Our PRC Legal Advisors have confirmed that we have obtained all necessary licenses, permits, approvals, certificates from, or made all necessary filings to, relevant competent regulatory authorities for our business operations in China in all material respects as of the Latest Practicable Date. As of the Latest Practicable Date, we had obtained all requisite licenses, approvals and certificates to sell our products in all of the relevant overseas jurisdictions to which we exported our products. We plan to renew all the material licenses and permits upon their expiration. We did not experience any material difficulties in obtaining, making or renewing such licenses, permits, approvals, certificates and filings during the Track Record Period.
COMPLIANCE AND LEGAL PROCEEDINGS
Legal Proceedings
We have been involved in legal proceedings or disputes in the ordinary course of business, including disputes related to our share incentive scheme. Our Directors have confirmed that, as of the Latest Practicable Date, we were not involved in any litigation, arbitration or administrative proceedings, claims or disputes which had a material adverse effect on our financial condition or results of operations. As of the Latest Practicable Date, we were involved in certain litigation, details of which are set out below.
Litigation Relating to Share Incentive Scheme
In January 2019, a former employee of ours (the “Employee”) filed a claim with the People’s Court of Changping District Court (昌平區人民法院) (the “Changping Court”) against our Company, Kaiderui and the general partner of Kaiderui (the “GP”) requesting our Company, Kaiderui and the GP to repurchase the Employee’s granted shares in Kaiderui (the “Granted Shares”) under our share incentive scheme at a price of RMB3.9 million pursuant to a 2014 share incentive grant agreement, a 2016 share incentive grant agreement and a partnership assets transfer agreement. The Changping Court held a hearing and ruled that the GP shall repurchase the Granted Shares at a price of RMB2.5 million. The Employee and the GP both appealed. Beijing No. 1 Intermediate People’s Court (北京市第一中級人民法院) held a hearing and remanded the case to the Changping Court for retrial to consider further evidence of the calculation basis of the repurchase price. The latest hearing was held on June 17, 2021. As of the Latest Practicable Date, the lawsuit remained pending.
After consultation with the litigation counsel engaged by us, our Directors are of the view that (i) it is likely that the GP is obligated to repurchase the Granted Shares based on the partnership assets transfer agreement; (ii) it is likely that our Company is not obligated to repurchase the Granted Shares as the Changping Court will likely affirm the ruling that the GP is obligated to repurchase the Granted Shares; (iii) it is likely that our Company is obligated to pay the repurchase price of the Granted Shares only if the Changping Court considers Employee to have indirect equity interest in our Company; and (iv) the possibility that we are liable for the repurchase is less than 50%. In light of the foregoing, our Directors believe that this lawsuit will not have a material adverse effect on our business, financial condition and results of operations.
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Compliance with Laws and Regulations
During the Track Record Period and as of the Latest Practicable Date, there were no litigation or arbitration proceedings or administrative proceedings pending or threatened against us or any of our Directors which would have a material adverse effect on our business, financial position or results of operations.
Business Activities with Customers in relation to Countries subject to International Sanctions
During the past five years (the OFAC statute of limitations period), we sold a small amount of non-United States origin surgical devices to customers/distributors in Cuba, Iran and Syria, which are Comprehensively Sanctioned Countries. During the Track Record Period, our revenue generated from sales to Cuba, Iran and Syria were RMB7.2 million, RMB20.8 million and RMB10.9 million, representing 3.1%, 6.9% and 3.5% of our total revenue in 2018, 2019 and 2020, respectively. During the same period, we generally required full payment before delivery for our distributors with respect to our sales to customers in Iran and Syria, while we allowed payment after delivery with respect to our sales to customers in Cuba. Our trade receivables from our distributors in Cuba, Iran and Syria were RMB0.3 million, RMB1.2 million and RMB1.0 million, representing 1.9%, 4.9% and 2.6% of our total trade receivables as of December 31, 2018, 2019 and 2020, respectively. Among our activities with Cuba, Iran and Syria, only sales to Syria involved USD payments. See “Risk Factors—Risks Relating to Extensive Government Regulations—We could be adversely affected as a result of any sales we made to certain countries that are, or become subject to, sanctions administered by the United States, EU, the United Kingdom, UN, Australia and other relevant sanctions authorities.” Our Directors confirm that we do not have present intention to undertake new business involving the Comprehensively Sanctioned Countries. Upon completing our existing contractual obligations in relation to Comprehensively Sanctioned Countries and prior to the earlier of November 31, 2021 or the [REDACTED], we will cease all sales involving the Comprehensively Sanctioned Countries. Further, we will not knowingly or intentionally conduct any future business with persons, entities or organizations designated on the SDN List, or any business in any Comprehensively Sanctioned Countries and we will not use the [REDACTED] from the [REDACTED] to finance or facilitate, directly or indirectly, activities or business with, or for the benefit of, Comprehensively Sanctioned Countries or Sanctioned Target. In addition, we have given certain undertakings to the Stock Exchange regarding sanctions-related matters.
During the Track Record Period, we had sold our non-United States origin surgical devices to customers/distributors in the Relevant Regions. The revenue generated from such transactions related to the Relevant Regions was RMB10.1 million, RMB31.6 million and RMB31.6 million, representing 4.4%, 10.4% and 10.2% of our total revenue for the years ended December 31, 2018, 2019 and 2020, respectively. As advised by our International Sanctions Legal Advisors, the United States primary sanctions are applicable to activities involving a United States nexus such as funds transfers in the United States currency that clear through the United States financial system or are processed by the United States payment processors. During the past five years, our Group received an aggregate amount of US$0.1 million in U.S. dollar-denominated transactions in relation to sales of non-United States origin surgical devices Syria which is a Comprehensively Sanctioned Country. To our knowledge, our customers/distributors involved in these transactions were not Sanctioned Persons. As advised by our International Sanctions Legal Advisors, such U.S. dollar denominated transactions in relation to Syria were authorized by OFAC general license at 31 CFR 542.525, which authorizes the United States banks to process USD payments as services that are ordinarily incident to the exportation or reexportation to Syria, including to the Government of Syria, of non-United States-origin medicine and medical devices that would be designated as EAR99
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Based on our current understanding and advised by our International Sanctions Legal Advisors, we are not subject to sanctions risk that could have a material adverse effect on our business from our past sales of products in Syria due to OFAC general license noted above, the minimal value compared with our total revenue during the Track Record Period and the nature of the sales. Our Directors confirm that, as of the Latest Practicable Date, we had not been notified that any International Sanctions penalties would be imposed on us for our historic sales to the Comprehensively Sanctioned Countries. Our Directors confirm that we do not have present intention to undertake new business involving the Comprehensively Sanctioned Countries. Upon completing our existing contractual obligations in relation to Comprehensively Sanctioned Countries and prior to the earlier of November 31, 2021 or [REDACTED], we will cease all sales involving the Comprehensively Sanctioned Countries. In addition, we have adopted enhanced internal control and risk management measures to enable us to monitor and evaluate our business to address economic sanction risks.
The United States also has enacted secondary sanctions targeting non-United States persons who have engaged in certain sanctionable activities related to Comprehensively Sanctioned Countries or Sanctioned Persons, including related to Syria. As advised by our International Sanctions Legal Advisors, as (i) the U.S. dollar denominated transactions in relation to Syria were authorized by OFAC general license at 31 CFR 542.525; (ii) during the Track Record Period, to our knowledge, the customers/distributors in our sales to Relevant Regions have not been SDNs; and (iii) the nature of our sales should not trigger the United States secondary sanctions targeting certain industries or products, the risk for our business dealings to implicate secondary United States sanctions is remote.
As further advised by our International Sanctions Legal Advisors, (i) our business dealings in Cuba, Iran and Syria do not appear to be unlawful under the restrictive measures of International Sanctions; and (ii) we did not engage in other Primary Sanctioned Activity or any Secondary Sanctionable Activity during the Track Record Period, and thus would not result in material sanctions risks.
We have undertaken to the Stock Exchange that, after [REDACTED], (i) we will not use the [REDACTED] from the [REDACTED] to finance or facilitate, directly or indirectly, activities or business with, or for the benefit of, Comprehensively Sanctioned Countries or Sanctioned Targets; (ii) we will not enter into any transaction that would cause our Group, the Stock Exchange, HKSCC, HKSCC Nominees or our Shareholders to violate or become a Sanctioned Target; and (iii) we will make timely disclosures on the Stock Exchange’s website and on our own website if we should believe that any of our business transactions would put our Group or our Shareholders at risk of being sanctioned and in our annual reports or interim reports our efforts on monitoring our business exposure to sanctions risks and our business intentions relating to International Sanctions.
Considering that (i) our revenue from sales to Comprehensively Sanctioned Countries accounted for 3.1%, 6.9% and 3.5% of our total revenue in 2018, 2019 and 2020, respectively; (ii) we have reduced our business activities in such countries and our revenue from sales to Comprehensively Sanctioned Countries decreased significantly from 2019 to 2020; and (iii) we plan to continue expanding our business in other countries, our Directors are of the view that termination of business in such countries will not have a material adverse impact on our business, financial condition and results of operations.
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Given the scope of the [REDACTED] and the expected [REDACTED] as set out in this Document, our International Sanctions Legal Advisors are of the view that the involvement by parties in the [REDACTED] will not implicate any applicable International Sanctions on such parties, including our Company and our subsidiaries, the respective directors and employees of our Company and our subsidiaries, our Company’s or our subsidiaries’ investors, shareholders as well as the Stock Exchange and its related group companies.
We have adopted enhanced internal control and risk management measures to enable us to continously monitor and evaluate our business and to take measure to protect the interest of our Group and our shareholders from economic sanctions risk. The following measures have been implemented as of the Latest Practicable Date:
• to further enhance our existing internal risk management functions, our Legal Department is responsible for monitoring our exposure to sanctions risks and our implementation of the related internal control procedures. Our Legal Department will hold at least two meetings each year to monitor our exposure to sanctions risks;
• we will evaluate the sanctions risks prior to determining whether we should embark on any business opportunities in Comprehensively Sanctioned Countries and with Sanctioned Target. According to our internal control procedures, our Legal Department needs to review and approve all relevant business transaction documentation from customers or potential customers from Comprehensively Sanctioned Countries and with Sanctioned Target. If any potential sanctions risk or suspicious transaction is identified, we may seek advice from reputable external international legal counsel with necessary expertise and experience in sanctions- related matters;
• we will set up before [REDACTED] and maintain a separate bank account, which is designated for the sole purpose of the deposit and deployment of the [REDACTED] from the [REDACTED] or any other funds raised through the Stock Exchange; our Directors will continuously monitor the [REDACTED] from the [REDACTED], as well as any other funds raised through the Stock Exchange, to ensure that such funds will not be used to finance or facilitate, directly or indirectly, activities or business with, or for the benefit of, Comprehensively Sanctioned Countries and with Sanctioned Target where this would be in breach of International Sanctions;
• our legal department will monitor our exposure to sanction risks and our implementation of the related internal control procedures, and periodically review our internal control policies and procedures with respect to sanctions matters. As and when our legal department considers necessary, we will retain external international legal counsel with necessary expertise and experience in sanctions matters for recommendations and advice; and
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• if necessary, we will arrange external international legal counsel to provide training programs relating to the sanctions to our Directors, our senior management and other relevant personnel to assist them in evaluating the potential sanctions risks in our daily operations, in particular, to perform screening procedures where appropriate in respect of counterparties to our Group’s business to ensure none of them are Sanctioned Persons. Our external international legal counsel will provide current list of countries subject to International Sanctions and Sanctioned Persons to our Directors, senior management and other relevant personnel, who will in turn disseminate such information internally.
Our International Sanctions Legal Advisors have reviewed and evaluated these internal control measures and are of the view that these measures are adequate and effective for our Group, based on our products and risk assessment, to comply with applicable international sanction laws and our undertakings to the Stock Exchange.
Our internal control consultant has also reviewed and evaluated these internal control measures, and provided recommendations to enhance the effectiveness and adequacy of our internal control system to mitigate the sanctions risk. Our internal control consultant has performed follow-up review on our internal control systems with regard to those actions taken by our Company and reported the follow-up review findings in June 2021. In addition, our internal control consultant has provided trainings to our Executive Directors, senior management and other relevant personnel regarding risks and compliance with respect to International Sanctions. Having discussed and consulted with International Sanctions Legal Advisors and internal control consultant, and taken the above advice of International Sanctions Legal Advisors and internal control consultant into account, our Directors are of the view that our enhanced measures as of the Latest Practicable Date are adequate and effective for the our Group to comply with our undertakings to the Stock Exchange and to identify and monitor any material risks relating to International Sanctions. Having regard to the above and subject to the full implementation and enforcement of such measures, the Sole Sponsor is of the view that these measures will provide a reasonably adequate and effective internal control framework to assist the Company in identifying and monitoring any material risks relating to International Sanctions.
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RISK MANAGEMENT AND INTERNAL CONTROL
We are exposed to various risks during our operations and have established risk management systems with relevant policies and procedures that we believe are appropriate for our business operations. Our policies and procedures relate to the R&D, manufacture and commercialization of our products. To monitor the ongoing implementation of our risk management policies and corporate governance measures after [REDACTED], we have adopted or will continue to adopt, among other things, the following risk management measures:
• establish an audit committee to review and oversee our financial reporting process and internal control system and review financial statements of the Company. Our audit committee consists of three members, namely, Mr. Chan Ka Kit, who serves as chairman of the committee, Ms. Zhang Ran and Mr. Gong Yuzhen. See “Directors, Supervisors and Senior Management”;
• adopt various policies to ensure compliance with the Listing Rules, including but not limited to aspects related to risk management, connected transactions and information disclosure;
• attend the training session by our Directors and senior management in respect of the relevant requirements of the Listing Rules and duties of directors of companies listed in Hong Kong; and
• provide regular anti-corruption and anti-bribery compliance training for our Directors and senior management in order to enhance their knowledge and compliance of applicable laws and regulations.
We embed a culture of compliance in the daily work routine of our employees through regular compliance trainings, and set various expectations for our employees’ work performances in terms of compliance.
We have engaged an internal control consultant to identify deficiencies and improvement opportunities of our internal controls associated with our major business processes. Certain internal control matters were identified and we have adopted corresponding internal control measures to improve on these matters. We have discussed with the internal control consultant and adopted the recommendations made by the internal control consultant.
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OVERVIEW
Immediately following the [REDACTED] (without taking into account any Shares which may be issued upon the exercise of the [REDACTED]), our Controlling Shareholders as a group, namely, Mr. Qu and his spouse, Ms. Liu, will be beneficially interested in an aggregate of [REDACTED]% of the issued share capital of our Company.
Mr. Qu and Ms. Liu, our Controlling Shareholders, are both our executive Directors. For further background of Mr. Qu and Ms. Liu, see “Directors, Supervisors and Senior Management”.
DELINEATION OF BUSINESS
Each of our Directors and our Controlling Shareholders have confirmed that, as of the Latest Practicable Date, none of them or any of their respective close associates had interests in any business, other than our business, which competes, or is likely to complete, either directly or indirectly, with our business which would require disclosure under Rule 8.10 of the Listing Rules.
INDEPENDENCE FROM OUR CONTROLLING SHAREHOLDERS AND THEIR CLOSE ASSOCIATES
Having considered the following factors, we believe that we are capable of carrying on our business independently from our Controlling Shareholders and their respective close associates (other than our Group) after the [REDACTED].
Management Independence
Our Board comprises three executive Directors, one non-executive Director and three independent non-executive Directors.
Each of our Directors is aware of his/her fiduciary duties as a Director, which require, among other things, that he/she acts for the benefit and in the best interests of our Company and does not allow any conflict between his/her duties as a Director and his/her personal interests. In the event that there is a potential conflict of interest arising out of any transaction to be entered into between our Group and any of our Directors or their respective close associates, the interested Director(s) shall abstain from voting at the relevant board meetings of our Company in respect of such transactions and shall not be counted in the quorum. In addition, we have an independent senior management team to carry out the business operation of our Group independently from our Controlling Shareholders.
Based on the reasons above, our Directors are of the view that our Group is capable of managing our business independently from our Controlling Shareholders and their respective close associates following the completion of the [REDACTED].
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Operational Independence
We carry out and make our own operational decisions on our own business operations independent from our Controlling Shareholders and their respective close associates and will continue to do so after the [REDACTED].
Licenses and permits required for operation
We hold and enjoy the benefit of all relevant licenses and permits material to the operation of our business.
Access to customers/suppliers/business partners
We have a large and diversified base of customers that are unrelated to our Controlling Shareholders and/or their respective close associates. During the Track Record Period, our customers generally included (i) domestic and overseas distributors; (ii) public hospitals; and (iii) overseas OEM customers, which are independent from our Controlling Shareholders. We have independent access to the suppliers and other business partners as well.
Operational facilities
As of the Latest Practicable Date, our Company operated and maintained our own production facilities and owned our own equipment necessary to our business operations which are independent from our Controlling Shareholders and their respective close associates.
Employees
As of the Latest Practicable Date, all of our full-time employees were recruited independently and primarily through recruitment websites, recruiting firms and internal referrals.
Continuing connected transactions
“Connected Transactions” sets out the continuing connected transactions between our Group and our Controlling Shareholders’ associate which will continue after the completion of the [REDACTED]. Such transaction is determined after arm’s length negotiations and on normal commercial terms.
As such, we expect that we will be able to maintain the aggregate amounts of the continuing connected transactions with our Controlling Shareholders’ associate at a reasonable percentage with respect to our total revenues after [REDACTED]. Accordingly, such continuing connected transactions are not expected to affect our operational independence as a whole.
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Financial Independence
No loans or guarantees provided by, or granted to, our Controlling Shareholders or their close associates will be outstanding as of the [REDACTED].
In addition, we have our internal auditing department for the overall internal control and financial department which set forth our own accounting systems and independent treasury function for cash receipts and payment and independent access to third-party financing before [REDACTED]. Accordingly, we believe we are able to maintain financial independence from our Controlling Shareholders and their respective associates.
CORPORATE GOVERNANCE MEASURES
Each of our Controlling Shareholders has confirmed that he/she fully comprehends his/her obligations to act in our Shareholders’ best interests as a whole and is fully aware of the compliance of Rule 8.10 of the Listing Rules.
Our Directors believe that there are adequate corporate governance measures in place to manage existing and potential conflicts of interest. In order to further avoid potential conflicts of interest, we have implemented the following measures:
(a) as part of our preparation for the [REDACTED], we have amended our Articles of Association to comply with the Listing Rules. In particular, our Articles of Association provided that a Director shall neither vote on any resolution approving any contract or arrangement or any other proposal in which such Director or any of his/her associates have a material interest nor exercise voting rights on behalf of other Directors or be counted in the quorum present at the meeting;
(b) we are committed that our Board should include a balanced composition of executive Directors, non-executive Director and independent non-executive Directors. We have appointed independent non-executive Directors and we believe our independent non-executive Directors possess sufficient experience and they are free from any business or other relationship which could interfere in any material manner with the exercise of their independent judgment and will be able to provide an impartial and external opinion to protect the interests of our public Shareholders. Details of our independent non-executive Directors are set out in “Directors, Supervisors and Senior Management—Board of Directors—Independent non-executive Directors”;
(c) in the event that our independent non-executive Directors are requested to review any conflicts of interests circumstances between our Group and our Controlling Shareholders, our Controlling Shareholders and/or our Company shall provide our independent non-executive Directors with all necessary information and our
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Company shall disclose the decisions of our independent non-executive Directors (including why business opportunities referred to it by our Controlling Shareholders were not taken up) either in its annual report or by way of announcements;
(d) we have appointed Haitong International Capital Limited as our compliance advisor, which will provide advice and guidance to us in respect of compliance with the applicable laws and the Listing Rules including various requirements relating to Directors’ duties and corporate governance; and
(e) our Company has established internal control mechanisms to identify conflict of interest and connected transactions. A Director with material interests shall make full disclosure in respect of matters that may have conflict or potentially conflict with any of our interest. Meanwhile, upon [REDACTED], if our Company enters into connected transactions with our Controlling Shareholders or their associates, our Company will comply with the Listing Rules. In addition, as required by the Listing Rules, our independent non-executive Directors shall review any connected transactions annually and confirm in our annual report that such transactions have been entered into in our ordinary and usual course of business, are either on normal commercial terms or on terms no less favorable to us than those available to or from Independent Third Parties and on terms that are fair and reasonable and in the interests of our Shareholders as a whole.
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We have entered into a framework agreement with a party who will, upon completion of the [REDACTED], become our connected person, and the transactions disclosed in this section will constitute continuing connected transactions of our Company under Chapter 14A of the Listing Rules upon [REDACTED].
(A) CONTINUING CONNECTED TRANSACTIONS SUBJECT TO THE REPORTING, ANNUAL REVIEW AND ANNOUNCEMENT REQUIREMENTS BUT EXEMPT FROM THE INDEPENDENT SHAREHOLDERS’ APPROVAL REQUIREMENT
Property Lease Framework Agreement
On [●], our Company (for ourselves and on behalf of our subsidiaries) entered into a property lease framework agreement with Quzhi Vision Media Culture (Beijing) Co., Ltd. (曲 直視線傳媒文化(北京)有限公司)(“Quzhi Vision Media”) (the “Property Lease Framework Agreement”), pursuant to which Quzhi Vision Media agreed to lease certain premises and provide property management services, including but not limited to management and maintenance of the communal buildings and the public usage facilities, provision of security, cleaning and gardening services, management of car parking lots and other services, for the leased properties to us. The Property Lease Framework Agreement has a term commencing from the [REDACTED] to December 31, 2023 and is renewable for a term of three years upon mutual consents and subject to the requirements under the Listing Rules and other applicable laws and regulations.
As the Property Lease Framework Agreement is a framework agreement, it is envisaged that from time to time and as required, individual agreements will be entered into between the members of our Group and Quzhi Vision Media in connection with the lease of properties and the provision of related property management services. Each individual agreement will be agreed upon on normal commercial terms after arm’s length negotiations between the parties thereto and set out the specific terms and conditions according to the principle terms provided in the Property Lease Framework Agreement.
During the Track Record Period, we leased certain premises located at Panther International Center, No. 8 Shangcheng Road, Hongfu Pioneer Park, Changping District, Beijing, PRC with an aggregate GFA of 2,994.8 sq.m. from Quzhi Vision Media which were mainly for office and manufacturing uses and also as the headquarters of our Group and part of our R&D laboratories. For each of the years ended December 31, 2018, 2019 and 2020, the total amount paid by our Group in connection with the lease of properties and the related property management services amounted to RMB1.95 million, RMB2.09 million and RMB2.52 million, respectively.
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We will continue to lease the premises and procure property management services for the properties from Quzhi Vision Media after the [REDACTED]. As of the Latest Practicable Date, the aggregated GFA we leased from Quzhi Vision Media was increased to 5,212.5 sq.m. due to (i) the lease of additional office space and warehouses by our Group from Quzhi Vision Media in line with the expansion of our business scale; and (ii) the inclusion of office area leased by Vincente Medical from Quzhi Vision Media after its consolidation into the financial results of our Group in May 2021. In light of the increase in aggregated GFA we leased from Quzhi Vision Media as of the Latest Practicable Date as compared to that during the Track Record Period, our Directors estimate that the maximum transaction amount payable by our Group under the Property Lease Framework Agreement for each of the three years ending December 31, 2023 will not exceed RMB5.12 million, RMB5.99 million and RMB6.12 million, respectively. The maximum transaction amounts to be paid under the Property Lease Framework Agreement include (a) the rental for the lease of the premises, which shall be determined after arm’s length negotiations with reference to factors including the rental payable by our Group and the annual increment thereof pursuant to the property leasing arrangements currently in existence and the prevailing market rates of the properties in the same locality with similar scale and quality; and (b) the fees in relation to the property management and other related services for the leased properties, which shall be determined based on the size of the leased properties, the scope of services, the market prices for utility expenses and the prices charged by Quzhi Vision Media for providing comparable services to Independent Third Parties.
Asia-Pacific Consulting and Appraisal Limited, an independent property valuer, has reviewed the terms of the Property Lease Framework Agreement and the existing lease agreements between the members of our Group and Quzhi Vision Media, and confirmed that the agreed rentals are fair and reasonable and in line with the market rate by reference to the prevailing market prices for similar properties in similar location and usage.
Quzhi Vision Media is a company wholly owned by Ms. Qu Zhi (曲直), the daughter of Mr. Qu and Ms. Liu, our Controlling Shareholders. Accordingly, each of Ms. Qu Zhi and Quzhi Vision Media is a connected person of our Company for the purpose of the Listing Rules. The transactions under the Property Lease Framework Agreement will therefore constitute continuing connected transactions for our Company under Chapter 14A of the Listing Rules upon [REDACTED].
As each of the applicable percentage ratios (other than the profit ratio) under the Listing Rules in respect of the annual caps for the Property Lease Framework Agreement is expected to be more than 0.1% but less than 5% on an annual basis, the transactions under the Property Lease Framework Agreement constitute continuing connected transactions for our Company which are subject to the reporting, annual review and announcement requirements but exempt from the independent shareholders’ approval requirement under Chapter 14A of the Listing Rules.
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(B) APPLICATION FOR WAIVER
The transactions described in “—(A) Continuing Connected Transactions subject to the Reporting, Annual Review and Announcement Requirements but exempt from the Independent Shareholders’ Approval Requirement” in this section constitute our continuing connected transactions under the Listing Rules, which are exempt from the independent shareholders’ approval requirements but subjects to the reporting, annual review and announcement requirements of the Listing Rules.
Pursuant to Rule 14A.105 of the Listing Rules, we have applied for, and the Stock Exchange [has granted] us, a waiver exempting our Company from strict compliance with the announcement requirement under Chapter 14A of the Listing Rules in respect of the continuing connected transactions as disclosed in “—(A) Continuing Connected Transactions subject to the Reporting, Annual Review and Announcement Requirements but exempt from the Independent Shareholders’ Approval Requirement” in this section, subject to the condition that the aggregate amounts of the continuing connected transactions for each financial year shall not exceed the relevant amounts set forth in the respective annual caps (as stated above). Apart from the above waiver sought on the strict compliance of the announcement requirement, we will comply with the relevant requirements under Chapter 14A of the Listing Rules.
If any terms of the transactions contemplated under the agreement mentioned above are altered or if our Company enters into any new agreement with any connected person in the future, we will fully comply with the relevant requirements under Chapter 14A of the Listing Rules unless we apply for and obtain a separate waiver from the Stock Exchange.
(C) DIRECTORS’ VIEWS
Our Directors (including our independent non-executive Directors) consider that the continuing connected transactions described in “—(A) Continuing Connected Transactions subject to the Reporting, Annual Review and Announcement Requirements but exempt from the Independent Shareholders’ Approval Requirement” in this section has been and will be carried out (i) in the ordinary and usual course of our business; (ii) on normal commercial terms or better; and (iii) in accordance with the respective terms that is fair and reasonable and in the interests of our Company and our Shareholders as a whole.
Our Directors (including our independent non-executive Directors) are also of the view that the annual caps of the continuing connected transactions in “—(A) Continuing Connected Transactions subject to the Reporting, Annual Review and Announcement Requirements but exempt from the Independent Shareholders’ Approval Requirement” in this section are fair and reasonable and in the interests of our Shareholders as a whole.
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(D) SOLE SPONSOR’S VIEW
The Sole Sponsor is of the view (i) that the continuing connected transactions described in “—(A) Continuing Connected Transactions subject to the Reporting, Annual Review and Announcement Requirements but exempt from the Independent Shareholders’ Approval Requirement” in this section has been and will be entered into in the ordinary and usual course of our business, on normal commercial terms or better, that is fair and reasonable and in the interests of our Company and our Shareholders as a whole; and (ii) that the proposed annual caps (where applicable) of such continuing connected transactions are fair and reasonable and in the interests of our Company and our Shareholders as a whole.
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BOARD OF DIRECTORS
Our Board which is responsible for the management and conduct of our business consists of seven Directors including three executive Directors, one non-executive Director and three independent non-executive Directors.
Time of Date of Relationship joining our Position(s) in appointment Key with other Name Age Group our Company as Director responsibilities Director(s)
Executive Directors
Mr. Qu Chao 62 February Chairman of February 23, Responsible for Spouse of (曲超) 2008 our Board 2010 formulation Ms. Liu and and provision executive of guidance Director and development strategies for the overall development of our Group
Ms. Liu Qing 54 September Executive December 20, Responsible for Spouse of (劉青) 2002 Director and 2005 overall Mr. Qu general strategic manager decisions, business planning and major operational decisions of our Group
Mr. Liu Libo 37 July 2017 Executive August 2, Responsible for N/A (劉立波) Director 2018 research and development of our Group
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Time of Date of Relationship joining our Position(s) in appointment Key with other Name Age Group our Company as Director responsibilities Director(s)
Non-executive Director
Mr. Jiang 43 January Non-executive January 18, Responsible for N/A Min (江敏) 2021 Director 2021 participating in the decision- making of important matters of our Group
Independent non-executive Directors
Mr. Chan 46 May 2021 Independent May 9, 2021 Responsible for N/A Ka Kit non- supervising (陳家傑) executive and providing Director independent advice on the operation and management of our Group
Ms. Zhang 43 January Independent January 18, Responsible for N/A Ran 2021 non- 2021 supervising (張然) executive and providing Director independent advice on the operation and management of our Group
Mr. Gong 51 January Independent January 18, Responsible for N/A Yuzhen 2021 non- 2021 supervising (宮玉振) executive and providing Director independent advice on the operation and management of our Group
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Executive Directors
Mr. Qu Chao (曲超), aged 62, is one of the founders of our Group. He was appointed as a Director in February 2010 and was re-designated as an executive Director on June 3, 2021. He is primarily responsible for the formulation and provision of guidance and development strategies for the overall development of our Group. Since joining our Group in February 2008, Mr. Qu successively served as the manager of our research and development department and the general manager of our Group. He was appointed as a Director in February 2010 and has been the chairman of our Board since April 2010. Mr. Qu, together with his spouse, Ms. Liu, our executive Director and general manager, founded our business in September 2002 and have guided its development and growth since then.
Prior to joining our Group, from August 1982 to May 1991, Mr. Qu worked as a doctor at No. 2 National Cotton Factory Staff’s Hospital (國棉二廠職工醫院). He concurrently worked as a refresher doctor at Qingdao Textile Hospital (青紡醫院) from October 1986 to October 1988 and then, from May 1991 to May 1992, he served as a surgeon at the oncology rehabilitation unit at the hospital and dedicated in providing clinical service and medical treatment for breast-tumor related diseases. He served as the general manager at Qingdao High-Tech Industrial Park Madison Trading Co., Ltd. (青島高科技工業園麥迪森貿易有限公司) from May 1992 to March 2001 and as the president at Beijing Maidixin Medical Apparatus & Instrument Co., Ltd. (北京麥迪鑫醫療設備有限公司) (a company principally engaged in the sales of medical devices) from March 2001 to August 2007, where he was primarily responsible for the company’s overall management and operation.
Mr. Qu received his diploma in medicine from Qingdao Textile Hospital Gongren Medical University (青紡醫院工人醫科大學) in the PRC in August 1982 and a master’s degree of business administration from Peking University (北京大學) in the PRC in July 2016. Mr. Qu was certified as an attending physician (主治醫師) by the Bureau of Human Resources of Qingdao (青島市人事局) in the PRC in May 1993.
Mr. Qu was a director of the following company which was established in the PRC and was dissolved, when he was a director:
Date of Method of Reason for Name of company Nature of business dissolution dissolution dissolution
Changzhou Jindikaer Mold and June 9, 2013 Dissolved (註銷) Cessation of Machinery Co., Ltd. mechanical parts business (常州金迪卡爾機械有 manufacturing 限公司)1
Note:
1 The company’s business license was revoked on December 28, 2012 and dissolved by way of a members’ voluntary winding up on June 9, 2013.
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Mr. Qu was a supervisor of the following companies, which were all established in the PRC, which had their business licenses revoked during his tenure:
Nature of Date of Outcome/Current Name of company business revocation Reason for revocation position
Qingdao Ruichi Medical September 15, Failure to conduct annual The company ceased Medical Equipment devices 2004 inspection as required business prior to Co., Ltd. (青島瑞馳 sales under the relevant PRC revocation of business 醫療器械有限公司) laws and regulations. license. It currently has no operation but not yet dissolved.
Qingdao Kaidi Medical October 29, Failure to conduct annual The company ceased Medical devices 2007 inspection as required business prior to Technology Co., sales under the relevant PRC revocation of business Ltd. (青島凱迪醫療 laws and regulations. license. It currently 科技有限公司) has no operation but not yet dissolved.
Mr. Qu has confirmed that (i) he was not responsible for company secretarial matters as such as conducting annual inspection of the above mentioned companies, which was assigned to certain specified staff in the respective company; and (ii) there was no dishonest or fraudulent act on his part in respect of the license revocation of the above mentioned companies. Mr. Qu further confirmed that up to the Latest Practicable Date, he has not received any (i) claims or legal proceedings made or commenced against him by any creditors of the above mentioned companies or any third parties; (ii) notice or sanction by any relevant government authorities against him imposing any penalty or order for rectification or alleging that he is personally liable for the above mentioned non-compliances; or (iii) notice of disqualification by relevant authorities requiring him to cease to act as director of any PRC companies. Save as disclosed herein, Mr. Qu confirms that, there is no other information that should be disclosed for himself pursuant to the requirements under Rule 13.51(2) of the Listing Rules.
Ms. Liu Qing (劉青), aged 54, is one of the founders of our Group. She was appointed as a Director on December 20, 2005 and was re-designated as an executive Director on June 3, 2021. She is primarily responsible for overall strategic decisions, business planning and major operational decisions of our Group. Since our Group’s inception in September 2002, Ms. Liu successively served as our vice president of operations, deputy general manager and secretary of our Board and has been serving as our general manager since November 2019.
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Prior to founding our Group, from January 1995 to May 2001, Ms. Liu served as the regional manager of Shandong and financial director at Qingdao High-Tech Industrial Park Madison Trading Co., Ltd. (青島高科技工業園麥迪森貿易有限公司), where she was primarily responsible for formulating and implementing sales and after-sales strategies in Shandong, overall management of financial affairs and establishing financial and accounting system. From May 2001 to September 2002, she served as the financial director at Beijing Maidixin Medical Apparatus & Instrument Co., Ltd. (北京麥迪鑫醫療設備有限公司), a company principally engaged in the sales of medical equipment, where she was primarily responsible for overall management of financial affairs and the establishment of the financial and accounting system.
Ms. Liu received her diploma in financial management from Qingdao University (青島大 學) in the PRC in July 1991 and a master’s degree of business administration from Peking University (北京大學) in the PRC in June 2017. She completed the curriculum of the Internationalization of Business Management held by Tsinghua University (清華大學)inthe PRC in January 2010 and the curriculum of the Leading Under Uncertainty Program held by Hult Ashridge Executive Education in United Kingdom in October 2016. Ms. Liu was certified as an assistant accountant (助理會計師) by the Ministry of Finance of the PRC (中華人民共和 國財政部) in November 1993 and obtained the China Professional Manager Qualification Certificate (Special Level) (中國職業經理人資格證書(特級)) by the China Human Resource Development Seminar (中國人力資源開發研究會) in the PRC in January 2011.
Ms. Liu is the spouse of Mr. Qu, an executive Director and the chairman of our Board.
Mr. Liu Libo (劉立波), aged 37, was appointed as a Director on August 2, 2018 and was re-designated as an executive Director on June 3, 2021. He is primarily responsible for research and development of our Group. Mr. Liu joined our Group in July 2017 and has been serving as the senior research and development director since then.
Prior to joining our Group, Mr. Liu successively worked at Reach Surgical (Beijing) Co., Ltd. (瑞奇外科器械(北京)有限公司), Reach Surgical (China) Co., Ltd (瑞奇外科器械(中国)有 限公司) (currently known as Reach Surgical, Ing. (天津瑞奇外科器械股份有限公司)) and Yingjia Medical Instrument Manufacturing (Shanghai) Co., Ltd. (盈甲醫療器械製造(上海)有 限公司) as the research and development director until July 2017, all above companies focused on researching and manufacturing minimally invasive surgical devices.
Mr. Liu received his bachelor of engineering in mechanical design, manufacturing and automation from China Agricultural University (中國農業大學) in the PRC in July 2005.
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Non-executive Director
Mr. Jiang Min (江敏), aged 43, was appointed as a Director on January 18, 2021 and was re-designated as a non-executive Director on June 3, 2021. He is primarily responsible for providing guidance and advice on the corporate and business strategies of our Group. Mr. Jiang was nominated as a Director by SBCVC Fund III Company Limited, one of our Shareholders.
From August 2003 to Feburary 2011, Mr. Jiang worked at Shanghai Youth Post (上海青年報社). He subsequently served as a vice president at WeDoctor Holdings Limited (微 醫集團), a company principally engaged in digital medical and Internet medical business, until February 2017. Mr. Jiang is currently the executive affairs representative of Zhuhai Hengqin Softbank Xinchuang Equity Investment Management Enterprise(Limited Partnership) (珠海橫 琴軟銀欣創股權投資管理企業(有限合夥) (a fund management entity of SB China Capital (SBCVC) (SBCVC軟銀中國資本)) and is responsible for the investment planning and investment management in the medical and health industries.
Mr. Jiang received his master of arts in journalism and communication from Nanchang University (南昌大學) in the PRC in July 2003.
Independent Non-executive Directors
Mr. Chan Ka Kit (陳家傑), aged 46, was appointed as our independent Director on May 9, 2021 and was re-designated as an independent non-executive Director on June 3, 2021. He is primarily responsible for supervising and providing independent advice on the operation and management of our Group.
Mr. Chan has over 23 years of experience in handling various projects with companies in Hong Kong and the PRC, including accounting and taxation as well as setting up and modifying internal control system of group companies. He joined Deloitte Touche Tohmatsu in September 1997 as an auditor and then joined Shek Mun Group Company Limited (石門集團 有限公司), a company principally engaged in investment management, in February 2005 as the financial director and company secretary, where he was primarily responsible for taxation, accounting, acquisition and financial management related matters. Mr. Chan was the chief financial officer and company secretary at Sparkle Roll Group Limited (Stock code: 970) from January 2008 to August 2010, the chief financial officer at North Asia Resources Holdings Limited (now known as Green Leader Holdings Group Limited) (Stock code: 61) from August 2010 to March 2011 and the chief financial officer and company secretary of Lijun International Pharmaceutical (Holding) Co., Limited (now known as SSY Group Limited) (Stock code: 2005) from May 2013 to April 2015, all of whose shares are listed on the Main Board of the Stock Exchange. Mr. Chan was the independent non-executive director of Roma Group Limited (Stock code: 8072) from September 2011 to March 2016, the shares of which are listed on the GEM of the Stock Exchange. He currently serves as the director of the board at Smartact (Hong Kong) Limited (智謀(香港)有限公司), the principal activities of which are handling the taxation matters, companies daily operations, financial management and internal
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Mr. Chan received his bachelor of Arts in accountancy from the City University of Hong Kong in Hong Kong in November 1997. He became a Certified Public Accountant as certified by the Hong Kong Institute of Certified Public Accountants in October 2005 and was admitted as a member of the Taxation Institute of Hong Kong in February 2015.
Ms. Zhang Ran (張然), aged 43, was appointed as our independent Director on January 18, 2021 and was re-designated as an independent non-executive Director on June 3, 2021. She is primarily responsible for supervising and providing independent advice on the operation and management of our Group.
Ms. Zhang has over 15 years of experience in finance and accounting. From August 2006 to October 2019, she worked at the Guanghua School of Management of Peking University (北京大學光華管理學院) and successively served as a teacher and an associate professor in accounting. She joined Renmin Business School (中國人民大學商學院) in October 2019 and currently is a professor and doctoral supervisor.
Ms. Zhang also served and has been serving as an independent director in the following listed companies:
Period of Name of Place of listing Principal service company and stock code business Responsibilities
From September BYD Company Shenzhen Stock Manufacturing Supervising and 2014 to Limited (比亞 Exchange: automobiles providing September 迪股份有限 002594; and battery- independent 2020 公司) Stock powered advice on the Exchange: 1211 vehicles operation and management
From June 2017 Beijing Sanfo Shenzhen Stock Manufacturing Supervising and to February Outdoor Exchange: and distributing providing 2021 Products Co., 002780 outdoor independent Ltd. (北京三夫 products and advice on the 戶外用品股份有 equipment operation and 限公司) management
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Period of Name of Place of listing Principal service company and stock code business Responsibilities
From July 2018 Ronglian Group Shenzhen Stock Providing cloud Supervising and to October Ltd. (榮聯科技 Exchange: computing and providing 2018 集團股份有限 002642 data operation independent 公司) and advice on the maintenance operation and services and management solutions
Since July 2016 Novogene Co., Shanghai Stock Providing genome Supervising and Ltd. (北京諾禾 Exchange: services and providing 致源科技股份有 688315 solutions independent 限公司) advice on the operation and management
Since November Sino Geophysical Shenzhen Stock Development and Supervising and 2018 Co., Ltd. (潛能 Exchange: investment of providing 恒信能源技術股 300191 mining independent 份有限公司) technology advice on the operation and management
Ms. Zhang received her bachelor’s degree in accountancy in July 1999 and a master’s degree in management in April 2002 from Northern Jiaotong University (北方交通大學) (currently known as Beijing Jiaotong University (北京交通大學)) in the PRC. She received her doctoral degree in philosophy from University of Colorado in the United States in August 2006. She completed the curriculum of the Training Courses for Senior Managers of Listed Companies (上市公司高級管理人員培訓班) held by Shenzhen Stock Exchange in July 2014. She was awarded the Special Excellent Award of National Natural Science Foundation of China (國家自然基金結題特優獎) by the National Natural Science Fund in February 2014, the Financial Teaching Excellence Award (金融教學優秀獎) by the Guanghua School of Management of Peking University in May 2017, the Outstanding Head Teacher of Peking University (北京大學優秀班主任) by Peking University in July 2017 and the First-Graded Award of the 13th Human Sociology Research by Peking University (北京大學) in June 2017.
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Mr. Gong Yuzhen (宮玉振), aged 51, was appointed as our independent Director on January 18, 2021 and was re-designated as an independent non-executive Director on June 3, 2021. He is primarily responsible for supervising and providing independent advice on the operation and management of our Group.
From June 1994 to July 2004, Mr. Gong successively served as an assistant researcher and deputy researcher at the Strategy Research Department of the Chinese Academy of Military Sciences (中國人民解放軍軍事科學院戰略研究部) and engaged in military strategy research. Since March 2004, he has successively served as an associate professor then a professor at Peking University (北京大學). He has been an independent director at Yingda Taihe Property Insurance Co., Ltd. (英大泰和財產保險股份有限公司), a company principally engaged in the provision of insurance services, since May 2016 and Bozhon Precision Industry Technology Co., Ltd. (博眾精工科技股份有限公司) (stock code: 688097), a company listed on the Science and Technology Innovation Board and principally engaged in manufacturing industrial equipment and production devices, since September 2017, where he is primarily responsible for supervising and providing independent advice on the operation and management of both companies.
Mr. Gong received his bachelor’s degree in history from Qufu Normal University (曲阜 師範大學) in the PRC in June 1991 and a master’s degree in history from Beijing Normal University (北京師範大學) in the PRC in July 1994. He received his doctoral degree in military science from Military Science College (軍事科學院) in the PRC in July 2000.
SUPERVISORS
In accordance with the PRC Company Law, all joint stock companies are required to establish a supervisory committee, responsible for supervising the board of directors and senior management on fulfilling their respective duties and financial performance of the corporation. The Supervisory Committee consists of three members, being one employee representative Supervisor and two Shareholder representative Supervisors.
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The detailed information of our Supervisors are listed below:
Date of Time of joining Existing position appointment Key Name Age our Group in our Company as Supervisors responsibilities
Mr. Wang 43 November 2009 Employee July 28, 2015 Responsible for Jianzhong representative presiding the (王建中) Supervisor work of the Supervisory Committee, supervising the Board and the senior management of our Company
Mr. Guo 45 March 2010 Shareholder January 18, Responsible for Jingxiang representative 2021 supervising the (郭敬祥) Supervisor Board and the senior management of our Company
Ms. Ge 35 March 2011 Shareholder January 18, Responsible for Ruina representative 2021 supervising the (葛蕊娜) Supervisor Board and the senior management of our Company
Mr. Wang Jianzhong (王建中), aged 43, was appointed as our Supervisor on July 28, 2015 and as the president of the Supervisory Committee on January 23, 2021. He is primarily responsible for presiding the work of the Supervisory Committee, supervising the Board and the senior management of our Company.
Mr. Wang joined our Group in November 2009 as our process inspection manager at the manufacturing and operation department, where he was primarily responsible for monitoring the quality of the manufacturing process until September 2014. From March 2015 to June 2018, he successively served as our product manager at the marketing department and our quality manager at the quality department. Since June 2018, he has been our medical engineering manager at the marketing department and primarily responsible for technique transfer mechanism, clinical product communication and product promotion.
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Prior to joining our Group, from October 1996 to June 2006, Mr. Wang served as a team leader of the manufacturing department at Beijing Matsushita Color CRT Co., Ltd. (北京京東 方松彩創新有限公司) (formerly known as Beijing Matsushita Color CRT Co., Ltd. (北京松下 彩色顯像管有限公司)), a company principally engaged in manufacturing and sales of cathode-ray tube.
Mr. Wang received his diploma in industrial business management from Beijing Information Technology College (北京信息職業技術學院) in the PRC in July 2002 and diploma in business management from Capital University of Economics and Business (北京首 都經濟貿易大學) in the PRC in January 2009. He was certified as an assistant engineer (助理 工程師) by the Beijing Junior Professional and Technical Post Review Committee (北京市初 級專業技術職務評審委員會) in the PRC in October 2002.
Mr. Guo Jingxiang (郭敬祥), aged 45, was appointed as our Supervisor on January 18, 2021. He is primarily responsible for supervising the Board and the senior management of our Company.
Mr. Guo joined our Group in March 2010 and successively served as our front-line worker and director of manufacturing department, where he was primarily responsible for team management and implementing manufacturing plan until September 2020. Since September 2020, he has been our assistant plant manager and manufacturing manager and primarily responsible for assisting the plant manager to manage the daily operation of the factory and implementing manufacturing plan.
Prior to joining our Group, Mr. Guo served as a team leader of the manufacturing department at Beijing Matsushita Color CRT Co., Ltd. (北京京東方松彩創新有限公司) (formerly known as Beijing Matsushita Color CRT Co., Ltd. (北京松下彩色顯像管有限公司)), a company principally engaged in manufacturing and sales of cathode-ray tube, until September 2009.
Mr. Guo received his diploma in domestic appliance maintenance from College of Huimin (惠民縣成人中專) in the PRC in July 1994. He obtained the Certificate of Quality Controller of Medical Devices (醫療器械品質管制體系內審員合格證書) issued by Beijing Hua Guang Certification of Medical Devices Co., Ltd. (北京國醫械華光認證有限公司) in the PRC in May 2017.
Ms. Ge Ruina (葛蕊娜), aged 35, was appointed as our Supervisor on January 18, 2021. Ms. Ge is primarily responsible for supervising the Board and the senior management of our Company.
Ms. Ge joined our Group in March 2011 and successively served as our operation assistant, manager of procurement department and manager of quality control department, where she was primarily responsible for data compilation, procurement management, product quality supervision and formulation of quality control work plans until June 2020. Since June 2020, she has been our director of the president’s office and primarily responsible for managing the affairs of the president’s office and team management.
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Prior to joining our Group, from May 2008 to February 2011, Ms. Ge worked at the administration department of Beijing Fanglian Zhonghe Technology Co., Ltd. (北京方聯眾合 技術有限公司), a company principally engaged in the production and sales of optical fiber communication, data communication and computer communication equipment.
Ms. Ge received her diploma in commercial secretary from Beijing Senior Secretary College (北京高等秘書學院) in the PRC in June 2008. She obtained a higher education graduation certificate from Beijing Jiaotong University (北京交通大學) in the PRC in December 2019. She obtained the Secretary Professional Qualification Certificate (Level 3) (秘 書職業證書(三級)) issued by Ministry of Labor and Social Security of the People’s Republic of China (中華人民共和國勞動和社會保障部) in March 2007 and the Certificate of Quality Controller of Medical Devices (醫療器械品質管制體系內審員合格證書) issued by Beijing Hua Guang Certification of Medical Devices Co., Ltd. (北京國醫械華光認證有限公司)inMay 2017. She completed the curriculum of public relations and received a certificate in December 2007 issued by the Public Relations Education Professional Committee of the Commission of China Tertiary Education (中國高等教育學會公共關係教育專業委員會).
Save as disclosed in “—Board of Directors” and “—Supervisors” in this section, each of our Directors and Supervisors had not held any other directorships in listed companies during the three years immediately prior to the Latest Practicable Date and there is no other information in respect of our Directors or Supervisors to be disclosed pursuant to Rule 13.51(2) of the Listing Rules and there is no other matter that needs to be brought to the attention of our Shareholders.
SENIOR MANAGEMENT
Our general manager and other members of the senior management team of our Group, together with our executive Directors, namely, Mr. Qu, Ms. Liu and Mr. Liu Libo, are responsible for the day-to-day operations and management of the business of our Group. See “—Executive Directors” in this section for the biographical details of Mr. Qu Chao, Ms. Liu and Mr. Liu Libo. Members of the senior management team of our Group also include the following:
Date of appointment Time of joining Existing position as senior Key Name Age our Group in our Company management responsibilities
Mr. Li 34 April 2016 Secretary of our April 2016 and Responsible for Yanduo Board and May 2020, our Group’s (李硯鐸) financial respectively finance and director investments and board secretary related affairs
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Date of appointment Time of joining Existing position as senior Key Name Age our Group in our Company management responsibilities
Ms. Yang 43 July 2017 Vice president of June 2020 Responsible for Xuelan our research 2017 and formulating (楊雪蘭) and January development development 2021, strategy, department and respectively management of deputy general research and manager development team and product development
Mr. Chu 43 August 2014 Vice president of August 2014 Responsible for Gang our marketing and January formulating (儲剛) department and 2021, marketing deputy general respectively strategies and manager brand management of our Group
Mr. Huang 44 June 2017 Vice president of June 2017 and Responsible for Bo (黃波) our China January the sales, business 2021, business department and respectively cooperation and deputy general market manager development in China
Mr. Li Yanduo (李硯鐸), aged 34, was appointed as the secretary of our Board on April 26, 2016 when he joined our Group and as our financial director on May 15, 2020. He is primarily responsible for our Group’s finance and investments and board secretary related affairs.
Prior to joining our Group, Mr. Li worked at Deloitte Touche Tohmatsu Certified Public Accountants (Special General Partnership) Tianjin Branch (德勤華永會計師事務所(特殊普通 合夥)天津分所) and successively served as an auditor and senior auditor from October 2009 to May 2014. From June 2014 to March 2015, he served as the manager of the business department at Beijing Lianchu Investment Company Limited (北京聯儲投資有限公司) and then as a senior investment manager at Wotianwo Asset Management Co., Ltd. (沃田沃(北京)
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資產管理有限公司), both of which are principally engaged in assets management. He subsequently served as the financial director at Beijing Tuman Technology Company Limited (北京土曼科技有限公司), a company principally engaged in production and sales of electronic products, until March 2016.
Mr. Li received a bachelor of management in international accountancy from Tianjin University of Finance & Economics (天津財經大學) in the PRC in June 2009. He became a Certified Public Accountant (註冊會計師) as certified by Commission of Tianjin Registered Accountant (天津市註冊會計師協會) in July 2015. He received the Qualification Certificate of Board Secretary (董事會秘書資格證書) issued by the Shenzhen Stock Exchange in September 2016 and by the NEEQ and the SSE in May 2017, respectively. In November 2017, he was recognized as “2017 NEEQ Gold Medal Board Secretary TOP 1000 (2017年新三板金牌董秘 TOP1000)” by the Understand The NEEQ (讀懂新三板), a financial media focuses on the NEEQ information.
Ms. Yang Xuelan (楊雪蘭), aged 43, was appointed as the director of our research and development department on July 26, 2017 when she joined our Group and as our deputy general manager on January 23, 2021. She is primarily responsible for formulating development strategy and management of research and development team and product development.
Prior to joining our Group and after receiving her bachelor degree, Ms. Yang worked at Goodbaby Group Co., Ltd. (好孩子集團有限公司), a company principally engaged in the production and sales of maternal and infant products, until June 2006. From March 2007 and April 2015, she served as a project manager at Reach Surgical Instruments (Beijing) Co., Ltd. (瑞奇外科器械(北京)有限公司), a company principally engaged in manufacturing and sales of surgical medical devices. She subsequently served as the technical director at Yingjia Medical Equipment Manufacturing (Tianjin) Co., Ltd. (盈甲醫療器械製造(天津)有限公司), a company principally engaged in the development, manufacturing and sales of minimally invasive medical devices.
Ms. Yang received her bachelor of science in mechanical design and manufacturing from Henan University of Science and Technology (河南科技大學) in the PRC in July 2002.
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Mr. Chu Gang (儲剛) (formerly known as Chu Donghui (儲東輝)), aged 43, was appointed as our marketing manager on August 18, 2014 when he joined our Group and as our deputy general manager on January 23, 2021. He is primarily responsible for formulating marketing strategies and brand management of our Group.
Prior to joining our Group, Mr. Chu successively worked at various sino-foreign joint ventures, including Johnson & Johnson (China) Medical Equipment Co., Ltd. (強生(中國)醫療 器材有限公司) and Covidien Healthcare International Trading (Shanghai) Co., Ltd. (柯惠醫療 器材國際貿易(上海)有限公司) (formerly known as Tyco Healthcare International Trading (Shanghai) Co., Ltd. (泰科醫療器材國際貿易(上海)有限公司)), both companies principally engaged in development, manufacturing and sales of medical devices, with his last position was the procedure marketing manager at Covidien Healthcare International Trading (Shanghai) Co., Ltd. until July 2014.
Mr. Chu received his bachelor’s degree in medicine from Peking University (北京大學) in the PRC in July 2001.
Mr. Huang Bo (黃波), aged 44, was appointed as the vice president of our China business department on June 1, 2017 when he joined our Group and as our deputy general manager on January 23, 2021. He is primarily responsible for the sales, business cooperation and market development in China.
Prior to joining our Group, Mr. Huang worked in various sino-foreign joint ventures, including Bayer Healthcare Co., Ltd. (拜耳醫藥保健有限公司), a pharmaceutical company, and Johnson & Johnson (Shanghai) Medical Equipment Co., Ltd. (強生(上海)醫療器材有限公司), a company principally engaged in medical device production, research and development and sales companies.
Mr. Huang received his bachelor’s degree in medicine from Peking University (北京大學) in the PRC in July 2001.
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COMPANY SECRETARY
Ms. Fung Po Ting (馮寶婷), was appointed as our company secretary on May 23, 2021.
Ms. Fung currently serves as an assistant manager of Vistra Corporate Services (HK) Limited. She has over 11 years of experience in providing company secretarial and compliance services to listed companies and private companies.
Ms. Fung received her bachelor’s degree of business administration in corporate administration in June 2016 and a master’s degree of corporate governance in August 2020 from the Open University of Hong Kong in Hong Kong. Ms. Fung is a member of the Hong Kong Institute of Chartered Secretaries and an associate member of the Chartered Governance Institute in the United Kingdom.
BOARD COMMITTEES
Our Board has established the audit committee, the remuneration committee and the nomination committee and delegated various responsibilities to these committees, which assist our Board in discharging its duties and overseeing particular aspects of our Group’s activities.
Audit Committee
We have established an audit committee with written terms of reference in compliance with Rule 3.21 of the Listing Rules and paragraph C.3 of the Corporate Governance Code (“CG Code”) as set out in Appendix 14 to the Listing Rules. The primary duties of the audit committee are to (i) review and supervise our financial reporting process and internal control system of our Group, risk management and internal audit; (ii) provide advice and comments to our Board; and (iii) perform other duties and responsibilities as may be assigned by our Board.
The audit committee consists of three members, namely, Mr. Chan Ka Kit, Ms. Zhang Ran and Mr. Gong Yuzhen. The chairman of the audit committee is Mr. Chan Ka Kit, who possesses the appropriate professional qualifications as required under Rule 3.10(2) of the Listing Rules.
Remuneration Committee
We have established a remuneration committee with written terms of reference in compliance with Rule 3.25 of the Listing Rules and paragraph B.1 of the CG Code as set out in Appendix 14 of the Listing Rules. The primary duties of the remuneration committee are to (i) establish, review and provide advices to our Board on our policy and structure concerning remuneration of our Directors and senior management and on the establishment of a formal and transparent procedure for developing policies concerning such remuneration; (ii) determine the terms of the specific remuneration package of each executive Director and senior management; and (iii) review and approve performance-based remuneration by reference to corporate goals and objectives resolved by our Directors from time-to-time.
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The remuneration committee consists of three members, namely, Ms. Zhang Ran, Ms. Liu and Mr. Gong Yuzhen. The chairlady of the remuneration committee is Ms. Zhang Ran.
Nomination Committee
We have established a nomination committee with written terms of reference in compliance with paragraph A.5 of the CG Code as set out in Appendix 14 of the Listing Rules. The primary duties of the nomination committee are to (i) review the structure, size and composition of our Board on a regular basis and make recommendations to the Board regarding any proposed changes to the composition of our Board; (ii) identify, select or make recommendations to our Board on the selection of individuals nominated for directorship, and ensure the diversity of our Board members; (iii) assess the independence of our independent non-executive Directors; and (iv) make recommendations to our Board on relevant matters relating to the appointment, reappointment and removal of our Directors and succession planning for our Directors.
The nomination committee consists of three members, namely, Mr. Qu, Ms. Zhang Ran and Mr. Gong Yuzhen. The chairman of the nomination committee is Mr. Qu.
BOARD DIVERSITY POLICY
Our Board has adopted a board diversity policy which sets out the approach to achieve diversity on our Board. Our Company recognizes and embraces the benefits of having a diverse Board and sees increasing diversity at Board level as an essential element in supporting the attainment of our Company’s strategic objectives and sustainable development. Our Company seeks to achieve Board diversity through the consideration of a number of factors, including but not limited to talents, skills, gender, age, ethnicity, experience, independence, knowledge and length of service.
Our Directors have a balanced mix of knowledge and skills, including overall strategic decisions, business planning, clinical medicine, finance, accounting, taxation, sales and market development and corporate governance. They obtained degrees in various majors including clinical medicine, business administration, financial management, mechanical design and manufacturing, journalism and communication, accountancy, economics, quantitative economics, history and military science. We have three independent non-executive Directors with different industry backgrounds, representing more than a third of the members of our Board. Furthermore, our Board has a wide range of age, ranging from 37 years to 62 years old. Taking into account our existing business model and specific needs as well as the different background of our Directors, the composition of our Board satisfies our board diversity policy.
With regards to gender diversity on the Board, we recognize the particular importance of gender diversity. Our Board currently comprises seven Directors, including two female Directors. We have taken and will continue to take steps to promote and enhance gender diversity at all levels of our Company, including but without limitation at our Board and senior management levels. Our board diversity policy provides that our Board shall take opportunities
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Our nomination committee is responsible for ensuring the diversity of our Board members. After [REDACTED], our nomination committee will review our board diversity policy and its implementation from time to time to monitor its continued effectiveness and we will disclose the implementation of our board diversity policy, including any measurable objectives set for implementing the board diversity policy and the progress on achieving these objectives, in our corporate governance report on an annual basis.
COMPENSATION OF DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Our Directors and Supervisors receive compensation from our Company in the form of salaries, housing allowance and contributions to a retirement benefit scheme.
The remuneration (including fees, salaries, allowances and benefits in kind, bonuses, retirement scheme contributions and share-based payments) paid to our Directors and Supervisors in aggregate for each of the years ended December 31, 2018, 2019 and 2020 were RMB11.5 million, RMB21.0 million and RMB6.9 million, respectively.
The remuneration (including fees, salaries, allowances and benefits in kind, bonuses, retirement scheme contributions and share-based payments) paid to our Group’s five highest paid individuals included 3, 4 and 4 Directors and Supervisors for each of the years ended December 31, 2018, 2019 and 2020, respectively. The remuneration payable to the remaining 2, 1 and 1 individuals during the Track Record Period were RMB2.4 million, RMB1.7 million and RMB1.5 million, respectively.
During the Track Record Period, no remuneration was paid by us to, or receivable by, our Directors, Supervisors or the five highest paid individuals as an inducement to join or upon joining our Company as a compensation for loss of office in respect of the years ended December 31, 2018, 2019 and 2020.
None of our Directors and Supervisors had waived or agreed to waive any remuneration during the Track Record Period. Under the current arrangements, our Directors and Supervisors are entitled to receive compensation (including fees, salaries, housing allowance and contributions to a retirement benefit scheme) from our Company for the year ending December 31, 2021 under arrangement in force as of the date of this document which is RMB10.1 million in aggregate.
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Our Board will review and determine the remuneration and compensation packages of our Directors, Supervisors and senior management and will, following the [REDACTED], receive recommendation from our remuneration committee which will take into account salaries paid by comparable companies, time commitment and responsibilities of our Directors and Supervisors and performance of our Group.
Save as disclosed above, no other payments had been made, or are payable, by any member of our Group to our Directors and Supervisors during the Track Record Period. For additional information on our Directors and Supervisors’ remuneration during the Track Record Period as well as information on the highest paid individuals, please refer to Notes 8 and 9 in the Accountant’s Report set out in Appendix I to this document.
COMPLIANCE ADVISOR
Our Company has appointed Haitong International Capital Limited as our compliance advisor pursuant to Rule 3A.19 of the Listing Rules. The material terms of the compliance advisor’s agreement entered into between our Company and the compliance advisor are as follows:
(a) the compliance advisor shall provide our Company with services including guidance and advice as to compliance with the requirement of the Listing Rules and other applicable laws, rules, codes and guidelines, and accompany our Company to any meetings with the Stock Exchange;
(b) our Company may terminate the appointment of the compliance advisor by giving a no less than 30 days’ prior written notice to the compliance advisor. Our Company will exercise such right in compliance with Rule 3A.26 of the Listing Rules. The compliance advisor will have the right to terminate its appointment as compliance advisor under certain specific circumstances and upon notification of the reason of its resignation to the Stock Exchange; and
(c) during the period of appointment, our Company must consult with, and if necessary, seek advice from the compliance advisor on a timely basis in the following circumstances:
i. before the publication of any regulatory announcement, circular or financial report;
ii. where a transaction, which might be a notifiable or connected transaction, is contemplated, including share issues and share repurchases;
iii. where we propose to use the [REDACTED]ofthe[REDACTED] in a manner different from that detailed in this document or where our business activities, developments or results materially deviate from any forecast, estimate, or other information in this document; and
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iv. where the Stock Exchange makes an inquiry of our Company regarding unusual movements in the price or trading volume of our Shares.
The term of the appointment shall commence on the [REDACTED] and end on the date on which we distribute our annual report in respect of our financial results for the first full financial year commencing after the [REDACTED].
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As of the Latest Practicable Date, the share capital of our Company was RMB62,400,000, divided into 62,400,000 Shares, with a nominal value of RMB1.00 each.
Immediately after the Completion of the [REDACTED] and [REDACTED] (assuming that the [REDACTED] is not exercised), the share capital of our Company will be as follows:
Percentage of Number of total issued Shares Description of Shares share capital
[REDACTED] Domestic Shares [REDACTED]% [REDACTED][REDACTED][REDACTED]% [REDACTED][REDACTED][REDACTED]% [REDACTED] Total 100%
Note: See “History and Corporate Structure—Pre-[REDACTED] Investments—Public Float and Lock-up” for details of the identities of the shareholders whose Shares will be converted into H Shares upon [REDACTED].
Immediately after the [REDACTED] and [REDACTED] (assuming that the [REDACTED] is fully exercised), the share capital of our Company will be as follows.
Percentage of Number of total issued Shares Description of Shares share capital [REDACTED] Domestic Shares [REDACTED]% [REDACTED][REDACTED][REDACTED]% [REDACTED][REDACTED][REDACTED]% [REDACTED] Total 100%
Note: See “History and Corporate Structure—Pre-[REDACTED] Investments—Public Float and Lock-up” for details of the identities of the shareholders whose Shares will be converted into H Shares upon [REDACTED].
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CLASS OF SHARES
Upon the completion of [REDACTED] and [REDACTED], the Shares will be divided into two classes: Domestic Shares and H Shares. The two classes of Shares are both ordinary shares in the share capital of our Company.
H Shares may only be [REDACTED] for and [REDACTED] in Hong Kong dollars. Domestic Shares may only be subscribed for and traded in RMB. Apart from certain qualified domestic institutional investors in the PRC, the qualified PRC investors under the Shanghai- Hong Kong Stock Connect, the Shenzhen-Hong Kong Stock Connect or other persons who are entitled to hold our H Shares pursuant to relevant PRC laws and regulations or upon approvals of any competent authorities, H Shares generally cannot be subscribed for by or traded between legal or natural persons of the PRC. Domestic Shares, on the other hand, can be subscribed for by and traded between legal or natural persons of the PRC, qualified foreign institutional investors. We must pay all dividends in respect of H Shares in Hong Kong dollars, all dividends in respect of Domestic Shares in RMB.
Domestic Shares and H Shares are regarded as different classes of Shares. The differences between the two classes of Shares, provisions on class rights, dispatch of notices and financial reports to Shareholders, dispute resolution, registration of Shares on different registers of Shareholders, the procedure of transfer of Shares and appointment of dividend receiving agents as contained in the Articles of Association and summarized and summarized in Appendix V to this document.
Except as described above, our Domestic Shares and H Shares will rank equally with each other in all respects and, in particular, will rank equally for all dividends or distributions declared, paid or made after the date of this document (save for the dividends payment in RMB for Domestic Shares, in foreign currency except for RMB for Domestic Shares and in Hong Kong dollars for H Shares). However, the transfer of Domestic Shares is subject to such restrictions as PRC laws may impose from time to time. Save for the [REDACTED], we do not propose to carry out any public or private issue or to place securities simultaneously with the [REDACTED] or within the next six months from the [REDACTED]. We have not approved any share issue plan other than the [REDACTED].
CONVERSION OF OUR DOMESTIC SHARES INTO H SHARES
If any of the Domestic Shares are to be converted, [REDACTED] and [REDACTED]as H Shares on the Stock Exchange, such conversion, [REDACTED] and [REDACTED] will need the approval of the relevant PRC regulatory authorities, including the CSRC, and the approval of the Stock Exchange.
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[REDACTED]
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[REDACTED]
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[REDACTED]
TRANSFER OF SHARES ISSUED PRIOR TO [REDACTED]
The PRC Company Law provides that in relation to the [REDACTED] of a company, the shares issued prior to the [REDACTED] shall not be transferred within a period of one year from the date on which the publicly offered shares are [REDACTED] on any stock exchange. Accordingly, Shares issued by our Company prior to the [REDACTED] (including a total of [REDACTED] H Shares to be converted from Domestic Shares held by the [REDACTED]) are restricted from trading within one year from the [REDACTED].
Our Company will work with the Domestic Securities Company to be engaged by our Company to restrict the trading of the H Shares converted from Domestic Shares technically within one year after the [REDACTED]. In the unlikely event that any [REDACTED] trades their H Shares during such restriction period, as advised by our PRC Legal Advisors, there will be no administrative penalty on our Company under the PRC laws and regulations but there is risk that the underlying agreement for the transfer of such H Shares may be declared void pursuant to the Civil Code of the People’s Republic of China (《中華人民共和國民法典》).
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INCREASE IN SHARE CAPITAL
As advised by our PRC Legal Advisors, King & Wood Mallesons, pursuant to the Articles of Association and subject to the requirements of relevant PRC laws and regulations, our Company, upon the [REDACTED] of our H Shares, is eligible to enlarge its share capital by issuing either new H Shares or new Domestic Shares on condition that such proposed issuance shall be approved by a special resolution of Shareholders in general meeting and by holders of Shares of that class of Shareholders whose interest is affected in a separate meeting conducted in accordance with the provisions of the Articles of Association and that such issuance complies with the Listing Rules and other relevant laws and regulations of Hong Kong. To adopt a special resolution of Shareholders in general meeting, more than the two thirds votes represented by the Shareholders (including proxies) present at the general meeting must be exercised in favor of the resolution. Resolutions of a class of Shareholders shall be passed by votes representing more than two thirds of Shareholders with voting rights attending the class Shareholders’ meeting.
REGISTRATION OF SHARES NOT LISTED ON THE OVERSEAS STOCK EXCHANGE
According to the Notice of Centralized Registration and Deposit of Non-overseas Listed Shares of Companies Listed on an Overseas Stock Exchange (《關於境外上市公司非境外上市 股份集中登記存管有關事宜的通知》) issued by the CSRC, the Company is required to register the Domestic Shares with China Securities Depository and Clearing Corporation Limited (中 國證券登記結算有限責任公司) within 15 business days upon the [REDACTED] and provide a written report to the CSRC regarding the centralized registration and deposit of the Domestic Shares as well as the [REDACTED] and [REDACTED] of the H Shares.
CIRCUMSTANCES UNDER WHICH GENERAL MEETING AND CLASS MEETING ARE REQUIRED
For details of circumstances under which our Shareholders’ general meeting and class Shareholders’ meeting are required, see “Appendix V—Summary of the Articles of Association—Shareholders and Shareholders’ General Meetings.”
SHAREHOLDERS’ APPROVAL FOR THE [REDACTED]
Approval from holders of the Shares is required for our Company to issue H Shares and seek the [REDACTED] of H Shares on the Stock Exchange. Our Company has obtained such approval at the Shareholders’ general meeting held on June 3, 2021.
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So far as is known to our Directors, as of the Latest Practicable Date and immediately prior to and following the completion of the [REDACTED] and [REDACTED] (assuming the [REDACTED] is not exercised), the following persons had and will have interests or short positions (as applicable) in our Shares or underlying Shares which would fall to be disclosed to us under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who is, directly or indirectly, interested in 10% or more of the issued voting shares of our Company:
Shares held as of the Shares held immediately following Latest Practicable Date and immediately prior the completion of the [REDACTED] and to the [REDACTED] and [REDACTED](1) [REDACTED](1) Percentage of Percentage of the total Percentage of the total Class of issued share Class of the relevant issued share Name of Shareholder Nature of interest Shares Number capital Shares Number class of Shares capital
Mr. Qu Beneficial owner Domestic 8,496,000 (L) 13.62% [REDACTED][REDACTED][REDACTED][REDACTED] Shares [REDACTED][REDACTED][REDACTED][REDACTED] Interest of spouse(2) Domestic 17,346,000 (L) 27.80% [REDACTED][REDACTED][REDACTED][REDACTED] Shares [REDACTED][REDACTED][REDACTED][REDACTED] Ms. Liu Beneficial owner Domestic 17,346,000 (L) 27.80% [REDACTED][REDACTED][REDACTED][REDACTED] Shares [REDACTED][REDACTED][REDACTED][REDACTED] Interest of spouse(2) Domestic 8,496,000 (L) 13.62% [REDACTED][REDACTED][REDACTED][REDACTED] Shares [REDACTED][REDACTED][REDACTED][REDACTED] SBCVC Fund(3) Beneficial owner Domestic 6,958,000 (L) 11.15% [REDACTED][REDACTED][REDACTED][REDACTED] Shares SBCVC Fund III, Pte. Interest in controlled Domestic 6,958,000 (L) 11.15% [REDACTED][REDACTED][REDACTED][REDACTED] Ltd.(3) corporation Shares SBCVC Fund III, L.P.(3) Interest in controlled Domestic 6,958,000 (L) 11.15% [REDACTED][REDACTED][REDACTED][REDACTED] corporation Shares SBCVC Management III, Interest in controlled Domestic 6,958,000 (L) 11.15% [REDACTED][REDACTED][REDACTED][REDACTED] LP(3) corporation Shares SBCVC Limited(3) Interest in controlled Domestic 6,958,000 (L) 11.15% [REDACTED][REDACTED][REDACTED][REDACTED] corporation Shares
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Shares held as of the Shares held immediately following Latest Practicable Date and immediately prior the completion of the [REDACTED] and to the [REDACTED] and [REDACTED](1) [REDACTED](1) Percentage of Percentage of the total Percentage of the total Class of issued share Class of the relevant issued share Name of Shareholder Nature of interest Shares Number capital Shares Number class of Shares capital
Star Pioneer Investment Interest in controlled Domestic 6,958,000 (L) 11.15% [REDACTED][REDACTED][REDACTED][REDACTED] Holdings Limited(3) corporation Shares Lin Ye Song(3) Interest in controlled Domestic 6,958,000 (L) 11.15% [REDACTED][REDACTED][REDACTED][REDACTED] corporation Shares CBC IV Investment Five Beneficial owner Domestic 6,240,000 (L) 10.00% [REDACTED][REDACTED][REDACTED][REDACTED] Limited(4) Shares C-Bridge IV Investment Interest in controlled Domestic 6,240,000 (L) 10.00% [REDACTED][REDACTED][REDACTED][REDACTED] Five Limited(4) corporation Shares C-Bridge Healthcare Interest in controlled Domestic 6,240,000 (L) 10.00% [REDACTED][REDACTED][REDACTED][REDACTED] Fund IV, L.P. (4) corporation Shares C-Bridge Healthcare Interest in controlled Domestic 6,240,000 (L) 10.00% [REDACTED][REDACTED][REDACTED][REDACTED] Fund GP IV, L.P.(4) corporation Shares C-Bridge Capital GP IV, Interest in controlled Domestic 6,240,000 (L) 10.00% [REDACTED][REDACTED][REDACTED][REDACTED] Ltd.(4) corporation Shares Nova Aqua Limited(4) Interest in controlled Domestic 6,240,000 (L) 10.00% [REDACTED][REDACTED][REDACTED][REDACTED] corporation Shares Fu Wei(4) Beneficiary of a trust Domestic 6,240,000 (L) 10.00% [REDACTED][REDACTED][REDACTED][REDACTED] Founder of a trust Shares Woodlawn Investments(5) Beneficial owner Domestic 3,600,000 (L) 5.77% [REDACTED][REDACTED][REDACTED][REDACTED] Shares Woodlawn Investments Interest in controlled Domestic 3,600,000 (L) 5.77% [REDACTED][REDACTED][REDACTED][REDACTED] Limited(5) corporation Shares 45 Yi Capital Holdings Interest in controlled Domestic 3,600,000 (L) 5.77% [REDACTED][REDACTED][REDACTED][REDACTED] Co., Ltd.(5) corporation Shares Thalia Capital Holdings Interest in controlled Domestic 3,600,000 (L) 5.77% [REDACTED][REDACTED][REDACTED][REDACTED] Co., Ltd.(5) corporation Shares Tsz Ho Tony Lau(5) Interest in controlled Domestic 3,600,000 (L) 5.77% [REDACTED][REDACTED][REDACTED][REDACTED] corporation Shares Pan Yuefeng(5) Interest in controlled Domestic 3,600,000 (L) 5.77% [REDACTED][REDACTED][REDACTED][REDACTED] corporation Shares Sun Lenong (孫樂農) Beneficial owner Domestic 2,353,000(L) 3.77% [REDACTED][REDACTED][REDACTED][REDACTED] Shares [REDACTED][REDACTED][REDACTED][REDACTED] Rong Liang (榮亮) Beneficial owner Domestic 1,961,000(L) 3.14% [REDACTED][REDACTED][REDACTED][REDACTED] Shares [REDACTED][REDACTED][REDACTED][REDACTED]
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Notes:
(1) The letter “L” denotes the person’s long position in our Shares.
(2) Ms. Liu is the spouse of Mr. Qu. By virtue of the SFO, Mr. Qu and Ms. Liu are deemed to be interested in the Shares in which each other is interested.
(3) Each of SBCVC Fund III, Pte. Ltd. (as the sole shareholder of SBCVC Fund), SBCVC Fund III, L.P. (as the sole shareholder of SBCVC Fund III, Pte. Ltd.), SBCVC Management III, LP (as the general partner of SBCVC Fund III, L.P.), SBCVC Limited (as the general partner of SBCVC Management III, LP), Star Pioneer Investment Holdings Limited (holding approximately 90.1% equity interest in SBCVC Limited) and Lin Ye Song (as the sole shareholder of Star Pioneer Investment Holdings Limited) is deemed to be interested in the Shares in which SBCVC Fund is interested by virtue of the SFO.
(4) Each of C-Bridge IV Investment Five Limited (as the sole shareholder of CBC IV Investment Five Limited), C-Bridge Healthcare Fund IV, L.P. (as the sole shareholder of C-Bridge IV Investment Five Limited), C-Bridge Healthcare Fund GP IV, L.P. (as the general partner of C-Bridge Healthcare Fund IV, L.P.), C-Bridge Capital GP IV, Ltd. (as the general partner of C-Bridge Healthcare Fund GP IV, L.P.), Nova Aqua Limited (holding approximately 83.55% equity interest in C-Bridge Capital GP IV, Ltd.) and Fu Wei (as the settlor and beneficiary of the Fu Family Trust which holds the entire interest in Nova Aqua Limited) is deemed to be interested in the Shares in which CBC IV Investment Five Limited is interested by virtue of the SFO.
(5) Each of Woodlawn Investments Limited (as the sole shareholder of Woodlawn Investments HK Limited), 45 Yi Capital Holdings Co., Ltd. (holding 50% equity interest in Woodlawn Investments Limited), Thalia Capital Holdings Co., Ltd. (holding 50% equity interest in Woodlawn Investments Limited), Tsz Ho Tony Lau (as the sole shareholder of 45 Yi Capital Holdings Co., Ltd.) and Pan Yuefeng (as the sole shareholder of Thalia Capital Holdings Co., Ltd.) is deemed to be interested in the Shares in which Woodlawn Investments HK Limited is interested by virtue of the SFO.
Save as disclosed above, our Directors are not aware of any person will, immediately following the completion of the [REDACTED] and [REDACTED] (assuming the [REDACTED] is not exercised), have interests or short positions in any Shares or underlying Shares, which would fall to be disclosed to us under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who is, directly or indirectly interested in 10% or more of the issued voting shares of our Company. Our Directors are not aware of any arrangement which may at a subsequent date result in a change of control of our Company.
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You should read the following discussion and analysis in conjunction with our consolidated financial statements included in Accountants’ Report set out in Appendix I to this document, together with the accompanying notes. Our consolidated financial information has been prepared in accordance with IFRSs, which may differ in material aspects from generally accepted accounting principles in other jurisdictions. You should read the entire Accountants’ Report and not merely rely on the information contained in this section.
The following discussion and analysis contain forward-looking statements that reflect the current views with respect to future events and financial performance. These statements are based on assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we believe are appropriate under the circumstances. However, whether the actual outcome and developments will meet our expectations and predictions depends on a number of risks and uncertainties over which we do not have control. See “Forward-looking Statements” and “Risk Factors.”
OVERVIEW
We are a leading provider of intelligent minimally invasive surgical solutions in the PRC. We design, develop, manufacture and market surgical devices, with a focus on surgical staplers, and provide customized surgical training services. According to F&S, we rank first among domestic surgical stapler manufacturers in the PRC in terms of sales volume (including export) in 2020, representing 14.3% of total sales volume by domestic surgical stapler manufacturers. Our products were sold to more than 60 countries and regions around the world in 2020, such as Brazil, Spain, Turkey, Italy and Canada. According to F&S, we ranked first among Chinese surgical stapler brands in terms of export sales volume for five consecutive years from 2016 to 2020.
After nearly two decades of development, we have built a comprehensive product portfolio, comprising (i) surgical staplers, including endoscopic staplers, smart staplers and open staplers, applicable to multiple surgical specialties, ranging from gastrointestinal, gynecologic and thoracic surgeries to sleeve gastrectomy surgeries for weight control, and (ii) other instruments and accessories for minimally invasive and open surgeries, such as ultrasonic scalpels and disposable fixation devices for hernia repair. We also market and distribute sutures, hernia meshes and blood vessel titanium clips manufactured by third parties as part of our integrated product offerings to our customers, and manufacture and sell certain products to OEM customers.
In 2018, 2019 and 2020, our revenue was RMB228.9 million, RMB302.5 million and RMB308.5 million, respectively, and our net profit was RMB31.6 million, RMB41.8 million and RMB34.4 million, respectively. A substantial majority of our revenue during the Track Record Period was derived from our surgical staplers, which amounted to RMB203.9 million, RMB276.9 million and RMB260.8 million in 2018, 2019 and 2020, respectively, accounting for 89.1%, 91.6% and 84.5% of our total revenue, respectively.
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KEY FACTORS AFFECTING OUR RESULTS OF OPERATIONS
We believe that the key factors affecting our results of operations and financial condition include the following.
Development of China’s Medical Device Industry and Surgical Stapler Market
We operate in the medical device industry. Our revenue depends on the market demand for medical devices, in particular in China, which in turn depends on the development of China’s medical device industry. According to F&S, the size of China’s medical device market is continuously increasing. However, the growth of China’s medical device industry may be negatively affected by a number of factors, including adverse macroeconomic conditions and delays in the implementation of favorable governmental policies. A slowdown of China’s medical device industry will negatively impact our results of operations and financial condition.
Since sales of surgical staplers accounted for a majority of our revenue, our results of operations depend on the market demand for surgical staplers in China. The size of the surgical stapler market has also been persistently increasing. The size of the open stapler market in China grew from RMB981 million in 2016 to RMB1,526 million in 2020, representing a CAGR of 11.7%. The size of the endoscopic stapler market in China grew from RMB2,584 million in 2016 to RMB4,379 million in 2020, representing a CAGR of 14.1%. The size of the smart stapler market in China grew from RMB322 million in 2016 to RMB988 million in 2020, representing a CAGR of 32.4% and accounting for 14.3% of total market size of surgical stapler market in China in 2020. It has been estimated that the size of the smart stapler market in China will reach RMB5,410 million in 2025, representing 35.6% of the total market size.
In addition to the overall growth of China’s medical device industry and surgical stapler market, we have also benefited from and expect to continue to benefit from favorable industry trends such as the increasing usage of disposable products, growing acceptance of domestic products and market consolidation. See “Industry Overview.” As a leading provider of smart MIS solutions in China, we believe we are well positioned to grow in the large and fast-growing medical device industry and surgical stapler market and expect our results of operations to improve further in the future.
Regulatory Environment in China
The medical device market in China is highly regulated. The implementation and enforcement of government policies and regulations in China generally have a significant impact on the supply, design, manufacture, price and sale of medical devices in China, which also increase the cost of compliance with such policies and regulations for medical device companies in China. Specifically, medical devices must be filed or registered with the NMPA or its local branches at the prefectural city level before they can be manufactured or commercialized in China and such filing or registration must be renewed periodically. Any change in laws, regulations or policies in relation to such filing or registration could affect our
– 304 – THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. FINANCIAL INFORMATION ability and plans to launch new products and renew registration for existing products. See “Regulatory Overview—Overview of PRC Regulations.” In recent years, our revenue and profitability have benefited from policies in China that support the development and innovation of medical devices, especially domestically developed and manufactured medical devices, such as “Made in China (2025) (中國製造2025),” “Healthy China 2030 (健康中国2030),” “13th Five-Year National Science and Technology Innovation Planning “(十三五”國家科技發展及科 技創新規劃)” and “13th Five-Year Special Plan for Medical Device Technology Innovations “(十三五”醫療器械科技創新專項規劃).”
The regulatory framework for the medical device industry in China is constantly evolving, and we expect that it will continue to evolve, which may affect our financial condition and results of operations. For example, one of such changes relates to the public tender processes pursuant to which we need to participate in regional centralized volume procurement regime to sell our products to public hospitals and other not-for-profit medical institutions within particular regions. As of the Latest Practicable Date, among our major products, only open staplers were subject to centralized volume procurement by governments in certain provinces. The centralized procurement regime is still at trial stage and there are uncertainties about the impact of such regime on our business.
New Product Development and Commercialization
During the Track Record Period, we primarily offered a comprehensive product portfolio covering major minimally invasive and open surgical procedures. We also actively develop new products and upgrade existing products to support a more extensive range of surgical procedures, which we believe will diversify our revenue source and enable us to maintain sustainable growth. In 2021 and 2022, we plan to complete product registrations of our smart stapler and ultrasonic scalpel in China, respectively. In addition, from 2021 to 2025, we plan to upgrade and expand our product line of smart stapler. We also have several product candidates currently in product design and development stage, which we plan to launch in or after 2022, such as upgraded smart stapler and accessories, upgraded ultrasonic scalpel and laparoscopic surgical robots. We believe these candidates represent long-term growth opportunities of the MISIA market. See “Business—Our Product Portfolio—Product Candidates.”
We have accumulated extensive experience in commercializing products in the past, from clinical trial to registration and approval. We plan to leverage our established sales network to commercialize our product candidates, primarily focusing on promoting these products in Grade IIIA hospitals where we have a broad network of KOLs and physicians and extensive distributor coverage, and then gradually increasing penetration in lower-tier hospitals.
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Successful Expansion of Manufacturing Capacity and Sales Network
Our manufacturing capacity affects our results of operations. We have gradually expanded our production facilities over time to satisfy growing demand for our products. The expansion of manufacturing capacity mainly involves (i) construction of facilities, (ii) receipt of the necessary permits and certifications for operations, (iii) employee recruitment and training for operating manufacturing facility and (iv) procurement of machine and equipment.
We generate a majority of our revenue from sales to our domestic distributors. In 2018, 2019 and 2020, revenue generated from sales to domestic distributors was RMB176.9 million, RMB214.6 million and RMB185.0 million, respectively, representing 77.3%, 70.9% and 60.0% of our total revenue, respectively. Our ability to effectively manage our sales network and to expand hospital coverage of our domestic sales network is critical to our business performance.
We generated revenue of RMB38.3 million, RMB70.0 million and RMB112.5 million from sales to overseas distributors, which accounted for 16.7%, 23.1% and 36.5% of our total revenue, in 2018, 2019 and 2020, respectively. During the Track Record Period, our overseas sales were made to over 60 countries and regions. We plan to expand our sales and increase our brand recognition in global market and strategically register certain new products in Europe, the United States, Canada, Brazil and India. If we are unable to successfully expand our international presence to increase sales, our results of operations may be adversely affected.
Cost Control and Operation Efficiency
During the Track Record Period, our cost of sales mainly consisted of raw material, labor and manufacturing costs. During this period, our cost of sales increased steadily as our business expanded. Our selling expenses mainly consist of marketing and advertising fees, transportation and travel fees in relation to our sales and marketing activities and staff costs for our sales and marketing personnel. Our selling expenses increased from 2018 to 2019 due to our increased sales and marketing efforts, and decreased from 2019 to 2020 primarily as we reduced our sales and marketing activities during the COVID-19 pandemic. Our administrative expenses primarily consist of staff cots for our administrative staff and office, travel and miscellaneous expenses in relation to our daily administration. Our administrative expenses steadily increased during the Track Record Period as we expanded our business. Our ability to efficiently control our operating expenses, mainly including costs of sales, selling expenses and administrative expenses, will impact our profitability. See “—Results of Operations” in this section.
We expect our cost structure to evolve as our business expands and as we develop and launch new products in the future. In particular, we expect to incur additional costs relating to selling and distribution, raw material procurement, manufacturing and R&D, among other things. Going forward, we will continue to further improve operation efficiency and our profit margin.
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Product Pricing
For our products sold to distributors, our product prices are affected by the public tender and centralized volume procurement regime, which may put downward pressure on our selling prices. For our products sold to OEM customers, our product prices are based on negotiation with relevant customers. Decreases in the selling prices of our products may adversely affect our revenue and gross profit margin. We seek to enhance our pricing bargaining power by investing in product development, design capabilities and new product initiatives that respond to customer needs. However, we may not be able to maintain the average selling prices of our products under pricing pressure. In addition, fluctuations in the prices of raw materials could affect our cost structure, product pricing and thereby our profits. To the extent our cost reductions do not sufficiently offset price reductions, our profit margin could decline.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our consolidated financial information requires management to make significant estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and their accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amounts of the assets or liabilities affected in the future. We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and our best assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates and expectations. See note 2 “Significant Accounting Policies” and note 3 “Accounting Judgment and Estimates” to the Accountants’ Report set out in Appendix I of this document.
Revenue Recognition
We recognize revenue when control over a product is transferred to the buyer at the amount of promised consideration to which the Group is expected to be entitled, excluding those amounts collected on behalf of third parties. Revenue excludes value added tax or other sales taxes and is after deduction of any trade discounts.
For sales of goods, revenue is recognized when the customer takes possession of and accepts the products. If the products are a partial fulfillment of a contract covering other goods and/or services, then the amount of revenue recognized is an appropriate proportion of the total transaction price under the contract, allocated between all the goods and services promised under the contract on a relative stand-alone selling price basis.
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Loss Allowance of Inventories
The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognized as a reduction in the amount of inventories and recognized as an expense in the period in which the reversal occurs.
Expected Credit Loss for Trade Receivables
The credit losses for trade and other receivables are based on assumptions about risk of expected credit loss rates. Our judgment in making these assumptions and selecting the inputs to the expected credit loss calculation are based on our past history, existing market conditions as well as forward looking estimates at the end of each reporting period.
Property, Plant and Equipment
The following items of property, plant and equipment are stated at cost less accumulated depreciation and impairment losses:
• right-of-use assets arising from leases over leasehold properties where the Group is not the registered owner of the property interest; and
• items of plant and equipment, including right-of-use assets arising from leases of underlying plant and equipment.
The cost of self-constructed items of property, plant and equipment includes the cost of materials, direct labor, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and an appropriate proportion of production overheads and borrowing costs.
Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognized in profit or loss on the date of retirement or disposal.
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Depreciation is calculated to write off the cost of property, plant and equipment, less their estimated residual value, if any, using the straight-line method over their estimated useful lives as follows:
• Plant and buildings 30 years • Machinery and equipment 3 – 10 years • Vehicles, furniture and other 3 – 5 years • Leasehold improvement 3 – 10 years • Right-of-use assets Over the term of lease
Where parts of an item of property, plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually. No depreciation is provided in respect of construction in progress until it is completed and ready for its intended use.
Application of IFRS 16
Effective for annual periods beginning on or after January 1, 2018, IFRS 16 “Leases” replaced the previous standard IFRS 17 “Leases” and related interpretations. We have consistently applied IFRS 16 to our consolidated financial statements throughout the Track Record Period and the effects to our Group are as follows:
• IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to recognize assets and liabilities for most leases. At the commencement date of a lease, a lessee will recognize a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Upon adoption of IFRS 16, we recognize lease liabilities and right-of-use assets in relation to leases which were classified as operating leases under the principles of IFRS 17, except for short-term leases. As of December 31, 2018, 2019 and 2020, we recognized lease liabilities of RMB21.0 million, RMB17.3 million and RMB13.3 million, respectively, and the associated right-of-use assets of RMB19.9 million, RMB15.1 million and RMB11.1 million, respectively. Further, we reclassified prepaid land lease payments of RMB5.1 million, RMB5.0 million and RMB4.9 million to right-of-use assets, respectively.
Taking into account the impact disclosed above, we consider that the adoption of IFRS 16 did not have significant impact on our financial position and performance during the Track Record Period.
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DESCRIPTION OF CERTAIN CONSOLIDATED STATEMENT OF PROFIT OR LOSS ITEMS
The following table sets forth a summary of our consolidated statement of profit or loss for the years indicated. Our historical results presented below are not necessarily indicative of the results that may be expected for any future period:
For the year ended December 31, 2018 2019 2020 %of %of %of Amount revenue Amount revenue Amount revenue (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Revenue 228,869 100.0 302,469 100.0 308,522 100.0 Cost of sales (79,833) (34.9) (103,132) (34.1) (115,164) (37.3)
Gross profit 149,036 65.1 199,337 65.9 193,358 62.7 Other gains/(losses), net 3,826 1.7 2,800 0.9 (5,420) (1.8) Selling expenses (54,655) (23.9) (83,072) (27.5) (71,026) (23.0) Administrative expenses (44,460) (19.4) (49,938) (16.5) (55,499) (18.0) R&D expenses (13,761) (6.0) (18,011) (6.0) (17,199) (5.6) Finance costs (1,021) (0.4) (921) (0.3) (1,341) (0.4) Share of profits/(losses) of a joint venture 365 0.2 (281) (0.1) – – Share of losses of associates – – – – (707) (0.2)
Profit before taxation 39,330 17.2 49,914 16.5 42,166 13.7 Income tax expense (7,707) (3.4) (8,155) (2.7) (7,808) (2.5)
Profit for the year 31,623 13.8 41,759 13.8 34,358 11.1
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Revenue
By Source of Products
During the Track Record Period, we generated a vast majority of our revenue from sales of our self-manufactured products, such as surgical staplers, masks and medical isolation gowns, disposable fixation devices for hernia repair and other surgical instruments and accessories. In addition, we also derived a small portion of revenue from distribution of products manufactured by third parties, including sutures, hernia meshes and blood vessel titanium clips. The following table sets forth a breakdown of our revenue by source of products for the years indicated:
For the year ended December 31, 2018 2019 2020 (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Self-manufactured products 205,991 90.0 279,277 92.3 291,691 94.5 Products manufactured by third parties 22,878 10.0 23,192 7.7 16,831 5.5
Total 228,869 100.0 302,469 100.0 308,522 100.0
By Product Type
We generated revenue from sales of surgical staplers, masks and medical isolation gowns, sutures, hernia repair products and other surgical instruments and accessories during the Track Record Period. The above products all have different models, specifications and configurations in each product type. The following table sets forth the breakdown of our revenue by product type for the years indicated:
For the year ended December 31, 2018 2019 2020 (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Surgical staplers Endoscopic staplers 138,355 60.5 194,163 64.2 200,464 65.0 Smart staplers – – – – 178 0.1 Open staplers 65,562 28.6 82,748 27.4 60,175 19.4
Sub-total 203,917 89.1 276,911 91.6 260,817 84.5 Masks and medical isolation gowns – – – – 27,331 8.9 Sutures 11,931 5.2 12,841 4.2 10,083 3.3 Hernia repair products Disposable fixation devices 721 0.3 526 0.2 939 0.3 Hernia meshes 4,517 2.0 4,925 1.6 2,625 0.9
Sub-total 5,238 2.3 5,451 1.8 3,564 1.2
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For the year ended December 31, 2018 2019 2020 (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Other surgical instruments and accessories(1) 7,783 3.4 7,266 2.4 6,727 2.1
Total 228,869 100.0 302,469 100.0 308,522 100.0
(1) Primarily include disposable trocars, disposable blood vessel titanium forceps and disposable polymer clips.
Surgical Staplers
Our major product types had a relatively wide price range due to the different product specifications and sets with different product configurations we offered. The following table sets forth the sales volume and average selling price of our surgical staplers for the years indicated:
For the year ended December 31, 2018 2019 2020 Average Average Average Selling Selling Selling Quantity(1) Price(2) Quantity(1) Price(2) Quantity(1) Price(2) (units in (units in (units in ’000) (RMB) ’000) (RMB) ’000) (RMB)
Endoscopic staplers 284 487 344 448 459 437 Smart staplers ––––0.2954 Open staplers Disposable circular staplers 38 603 61 568 41 562 Disposable linear cutter staplers 79 305 103 280 86 258 Disposable circular staplers for hemorrhoidal prolapse 18 502 22 508 16 479 Disposable linear staplers 29 301 25 311 26 264 Disposable linear staplers with knife 1 561 2 615 1 598
(1) For endoscopic staplers and smart staplers, each unit represents one surgical stapler without reload unit or one reload unit alone. For disposable circular staplers and disposable circular staplers for hemorrhoidal prolapse, each unit represents one surgical stapler equipped with one reload unit. For disposable linear cutter staplers, disposable linear staplers and disposable linear staplers with knife, each unit represents one surgical stapler equipped with one reload unit or one reload unit alone.
(2) Price before tax for each unit.
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During the Track Record Period, a significant majority of our revenue was from sales of surgical staplers. As a percentage of total revenue, revenue from sales of surgical staplers increased from 89.1% in 2018 to 91.6% in 2019, and then decreased to 84.5% in 2020. Revenue from sales of surgical staplers decreased from RMB276.9 million in 2019 to RMB260.8 million in 2020, primarily (i) due to the decreased average selling price of our surgical staplers as a result of our effort to mitigate the decreased market demand during the COVID-19 pandemic and (ii) because we strategically allocated more resources to produce masks and medical isolation gowns in response to market opportunities arising from the COVID-19 outbreak in 2020. However, we expect surgical staplers to continue to be our largest revenue contributor in the foreseeable future.
Among our surgical staplers, sales of endoscopic staplers accounted for over 60% of our total revenue during each year of the Track Record Period, which grew at a CAGR of 20.4% during this period, mainly driven by increased sales volume. Our revenue from open staplers increased by 26.2% from 2018 to 2019 primarily due to increased sales volume. The increase in sales volume of these products was primarily due to increased sales to our major distributors driven by increased market demand for such products. Our revenue from open staplers decreased by 27.3% from 2019 to 2020 primarily (i) as we strategically shifted our focus to endoscopic staplers which typically have more advanced features as compared to open staplers to better address customer demand and (ii) we sold masks and medical isolation gowns in 2020 in response to market opportunities arising from the COVID-19 outbreak. In addition, we commercialized and sold a small amount of smart staplers in Europe in 2020. We expect to launch the same product in China by the end of 2021 and expect to generate more revenue from sales of smart staplers in the future.
Masks and Medical Isolation Gowns
In response market opportunities arising from to the COVID-19 outbreak, capitalizing on our solid manufacturing capabilities and experienced production team, we manufactured and sold masks and medical isolation gowns in 2020 in China and to over ten countries overseas. Our revenue from masks and medical isolation gowns amounted to RMB27.3 million in 2020.
Sutures
Revenue from sutures increased by 7.6% from 2018 to 2019 primarily due to increased sales volume and decreased by 21.5% from 2019 to 2020 primarily due to the decrease in the number of elective surgeries during the COVID-19 pandemic.
Hernia Repair Products
We sold and generated revenue from hernia meshes and, to a lesser extent, disposable fixation devices for hernia repair during the Track Record Period. Revenue from hernia repair products remained relatively stable at RMB5.2 million and RMB5.5 million in 2018 and 2019, respectively, and decreased to RMB3.6 million in 2020. Such decrease was primarily due to the decrease in the number of elective surgeries during the COVID-19 pandemic. During the Track Record Period, sales of hernia meshes accounted for a majority of our sales from hernia repair products. During the same period, we also manufactured disposable fixation devices.
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Other Surgical Instruments and Accessories
Disposable blood vessel titanium clips were the largest contributor to our revenue from other surgical instruments and accessories during the Track Record Period, while we also sold other surgical instruments and accessories, such as disposable polymer clips and disposable trocars. Revenue from other surgical instruments and accessories was RMB7.8 million, RMB7.3 million and RMB6.7 million in 2018, 2019 and 2020, respectively.
By Geographic Region
We derived a major portion of our revenue from sales in Greater China during the Track Record Period. The following table sets forth the breakdown of our revenue by geographic area for the years indicated:
For the year ended December 31, 2018 2019 2020 (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Greater China 176,910 77.3 214,899 71.0 185,025 60.0 Europe(1) 23,691 10.4 43,179 14.3 64,286 20.8 South America(2) 13,224 5.8 14,144 4.7 30,053 9.7 Other regions in Asia(3) 13,002 5.7 26,065 8.6 20,939 6.8 North America(4) 1,301 0.6 3,044 1.0 4,470 1.4 Africa(5) 741 0.2 1,138 0.4 3,749 1.3
Total 228,869 100.0 302,469 100.0 308,522 100.0
(1) During the Track Record Period, we derived revenue from 24 countries in this region, such as Turkey and Spain.
(2) During the Track Record Period, we derived revenue from seven countries in this region, such as Brazil and Ecuador.
(3) During the Track Record Period, we derived revenue from 22 countries in this region, such as Iran and Saudi Arabia.
(4) During the Track Record Period, we derived revenue from ten countries in this region, such as Canada and Panama.
(5) During the Track Record Period, we derived revenue from six countries in this region, such as South Africa and Egypt.
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As a percentage of total revenue, our revenue from sales in Greater China decreased from 77.3% in 2018 to 71.0% in 2019. The decrease was mainly due to our business expansion in other countries, such as Iran and Turkey. Our revenue from sales in Iran increased significantly from RMB6.8 million in 2018 to RMB19.8 million in 2019 primarily due to an increase in revenue from sales of endoscopic staplers as we obtained regulatory approval for new specification of reload unit of endoscopic stapler in Iran in 2019. Our revenue from sales in Turkey increased significantly from RMB0.7 million in 2018 to RMB6.9 million in 2019 primarily as a result of (i) our continuous marketing effort, and (ii) an increasing demand for low-cost weight-loss surgeries and endoscopic staplers used in such surgeries in the Turkish market. As a percentage of total revenue, our revenue from sales in Greater China further decreased to 60.0% in 2020, which was primarily due to increases in our revenue from sales in Spain and Brazil driven by our sales of masks and medical isolation gowns in such regions in 2020. Our revenue from Spain and Brazil increased significantly by 744.0% and 143.6% from RMB2.4 million and RMB11.5 million in 2019 to RMB20.3 million and RMB28.1 million in 2020, respectively.
By Sales Channel
During the Track Record Period, we primarily sold our products to domestic and overseas distributors. To a lesser extent, we also sold our products to overseas OEM customers, as well as to hospitals in China directly. The following table sets forth the breakdown of our revenue by geographic market and sales channel for the years indicated:
For the year ended December 31, 2018 2019 2020 (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Domestic Distributors 176,910 77.3 214,597 70.9 185,025 60.0 Hospitals – – 302 0.1 – –
Sub-total 176,910 77.3 214,899 71.0 185,025 60.0 Overseas Distributors 38,274 16.7 69,985 23.1 112,512 36.5 OEM customers 13,685 6.0 17,585 5.8 10,985 3.5
Sub-total 51,959 22.7 87,570 29.0 123,497 40.0
Total 228,869 100.0 302,469 100.0 308,522 100.0
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During the Track Record Period, the percentage of our revenue from sales to domestic distributors decreased from 77.3% in 2018 to 70.9% in 2019 and to 60.0% in 2020, while the percentage of revenue from sales to overseas distributors increased from 16.7% in 2018 to 23.1% in 2019, and further to 36.5% in 2020. Such changes were mainly attributable to our ongoing international expansion and the impact of the COVID-19 pandemic on our domestic sales. Our overseas sales was impacted by the COVID-19 pandemic to a lesser extent because hospitals overseas adopted relatively relaxed containment measures after the COVID-19 outbreak.
Cost of Sales
Our cost of sales mainly consists of raw material, labor and manufacturing costs. The following table sets forth the breakdown of our cost of sales by nature for the years indicated:
For the year ended December 31, 2018 2019 2020 (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Raw material cost(1) 48,298 60.5 68,099 66.0 82,384 71.5 Labor costs 14,808 18.5 17,366 16.8 16,116 14.0 Manufacturing costs(2) 4,948 6.2 5,613 5.5 7,806 6.8 Costs of products manufactured by third parties(3) 11,779 14.8 12,054 11.7 8,858 7.7
Total 79,833 100.0 103,132 100.0 115,164 100.0
(1) Primarily include costs of anvils, blades and cartridges.
(2) Primarily include utility costs, overhead expenses and depreciation of our manufacturing equipment.
(3) Primarily include costs of sutures, hernia meshes and blood vessel titanium clips.
Our raw material cost increased from 2019 to 2020, mainly because (i) we procured more raw materials at the end of 2020 in anticipation of increase in demand for our products in 2021; and (ii) we commenced manufacture and sale of masks and medical isolation gowns in 2020, which have lower gross profit margin. Our labor costs decreased from 2019 to 2020, mainly reflecting the decrease in overtime compensation due to reduction of our manufacturing activities during the COVID-19 pandemic and a reduction on social premium expenses pursuant to preferential government policy during the COVID-19 pandemic. In line with the decreased revenue from sales of products manufactured by third parties in 2020, our costs of products manufactured by third parties decreased from 2019 to 2020, mainly due to the impact of the COVID-19 pandemic.
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The following table sets forth the breakdown of our cost of sales by product type for the years indicated:
For the year ended December 31, 2018 2019 2020 (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Surgical staplers Endoscopic staplers 45,046 56.4 64,543 62.6 67,848 58.9 Smart staplers ––––11– Open staplers 21,788 27.3 25,622 24.8 19,813 17.2
Sub-total 66,834 83.7 90,165 87.4 87,672 76.1 Masks and medical isolation gowns ––––17,493 15.2 Sutures 5,898 7.4 6,368 6.2 4,602 4.0 Hernia repair products Disposable fixation devices 210 0.3 161 0.2 307 0.3 Hernia meshes 1,787 2.2 1,778 1.7 1,126 1.0
Sub-total 1,997 2.5 1,939 1.9 1,433 1.3 Other surgical instruments and accessories 5,104 6.4 4,660 4.5 3,964 3.4
Total 79,833 100.0 103,132 100.0 115,164 100.0
The changes in cost of sales for our products generally corresponded to the changes in sales of relevant products. As a percentage of our total cost of sales, cost of sales for endoscopic staplers decreased despite of increased percentage of revenue from sales of the same products from 2019 to 2020, primarily because we commenced manufacture and sale of masks and medical isolation gowns in 2020 and such products have relatively high costs and low gross profit margins as compared to our other products. In line with the decreases in the percentage of revenue from open staplers, sutures, hernia products and other surgical instruments and accessories, the percentage of cost of sales for such products decreased correspondingly during the same periods.
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Gross Profit and Gross Profit Margin
By Business Model
The following table sets out our gross profit and gross profit margin by source of products for the years indicated:
For the year ended December 31, 2018 2019 2020 Gross Gross Gross Gross profit Gross profit Gross profit profit margin profit margin profit margin (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Self-manufactured products 137,937 67.0 188,199 67.4 185,385 63.6 Products manufactured by third parties 11,099 48.5 11,138 48.0 7,973 47.4
Total/Overall 149,036 65.1 199,337 65.9 193,358 62.7
The gross profit margins for our self-manufactured products were higher than those of products manufactured by third parties during the Track Record Period as we have more control over the manufacturing process and therefore the cost of sales of our self-manufactured products. The gross profit margins for our self-manufactured products decreased from 67.4% in 2019 to 63.6% in 2020, primarily because (i) we commenced manufacture and sale of masks and medical isolation gowns in 2020, which generally have a lower gross profit margin as compared to other self-manufactured products; and (ii) the overall average selling price of our products decreased from 2019 to 2020 mainly due to decreased demand during the COVID-19 pandemic.
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By Product Type
The following table sets forth the breakdown of gross profit and gross profit margin by product type for the years indicated:
For the year ended December 31, 2018 2019 2020 Gross Gross Gross Gross profit Gross profit Gross profit profit margin profit margin profit margin (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Surgical staplers Endoscopic staplers 93,309 67.4 129,620 66.8 132,616 66.2 Smart staplers ––––16793.8(1) Open staplers 43,774 66.8 57,126 69.0 40,362 67.1
Sub-total/overall 137,083 67.2 186,746 67.4 173,145 66.4 Masks and medical isolation gowns ––––9,838 36.0 Sutures 6,033 50.6 6,473 50.4 5,481 54.4 Hernia repair products Disposable fixation devices 511 70.9 365 69.4 632 67.3 Hernia meshes 2,730 60.4 3,147 63.9 1,499 57.1
Sub-total/overall 3,241 61.9 3,512 64.4 2,131 59.8 Other surgical instruments and accessories 2,679 34.4 2,606 35.9 2,763 41.1
Total gross profit/overall gross profit margin 149,036 65.1 199,337 65.9 193,358 62.7
(1) Our smart staplers had not entered into mass production stage in 2020. The gross profit margin in 2020 was not indicative and has decreased in the five months ended May 31, 2021. As such, it is reasonably expected to have a lower gross profit margin for our smart staplers as compared to that in 2020.
Our overall gross profit margin fluctuated during the Track Record Period as the composition of our products sold during each year varies. Our gross profit increased from RMB149.0 million in 2018 to RMB199.3 million in 2019 primarily due to an increase in the sales volume of our endoscopic staplers while we were able to maintain relatively stable ex-factory prices for products with same specifications. Our gross profit slightly decreased to RMB193.4 million in 2020 primarily attributable to a decrease in our revenue from sales of surgical staplers, which accounted for over 80% of our total revenue in 2020.
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Our gross profit margin increased from 65.1% in 2018 to 65.9% in 2019, primarily because endoscopic staplers, which generally have a higher profit margin as compared to other products, accounted for a larger share of our total sales in 2019. Our gross profit margin of open staplers increased from 66.8% in 2018 to 69.0% in 2019 albeit a decrease in average selling price of such products, primarily because of our improved production efficiency as we increased production capacity of such products in 2019. Our gross profit margin decreased to 62.7% in 2020 primarily because (i) we started to sell masks and medical isolation gowns in 2020, which generally have a lower gross profit margin as compared to other products; and (ii) the gross profit margin of surgical staplers decreased from 2019 to 2020 due to the decreased average selling price of surgical staplers as a result of our effort to mitigate decreased demand during the COVID-19 pandemic.
The gross profit margin of surgical staplers decreased from 67.4% in 2019 to 66.4% in 2020 primarily due to decreased average selling prices. We had a relatively high gross profit margin for sutures of 54.4% in 2020 primarily because the French absorbable sutures, which generally have a higher profit margin as compared to other types of sutures, accounted for a larger share of our total sales from sutures during the same period. In addition, we had a relatively high gross profit margin of hernia repair products of 64.4% in 2019 primarily because the Italian hernia meshes, which generally have a higher profit margin as compared to other types of hernia repair products, accounted for a larger share of our total sales from hernia repair products during the same period. Our gross profit margin of other surgical instruments and accessories was relatively high in 2020, primarily because disposable trocars, which have a higher profit margin as compared to other products in this category, accounted for a larger share of our total sales from this category during the same period.
Other Gains/(Losses), Net
Our other net gains or losses primarily consist of (i) interest income from bank deposits; (ii) changes in fair value of financial assets at FVTPL; (iii) government grants, primarily representing subsidies received from local governments for the purposes of compensation for expenses arising from R&D activities, reward for excellent talent and subsidies for capital expenditure incurred on certain projects, some of which are one-off and some are recurring; (iv) net foreign exchange gains; and (v) net loss on disposal of property, plant and equipment. The following table sets forth the breakdown of our other net gains or losses for the years indicated:
For the year ended December 31, 2018 2019 2020 (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Interest Income 1,075 28.1 1,210 43.2 693 (12.8) Changes in fair value of financial assets at FVTPL ––––393(7.3) Government grants 222 5.8 332 11.9 370 (6.8) Net foreign exchange gains 2,308 60.3 1,159 41.4 (6,914) 127.6 Net loss on disposal of property, plant and equipment – – (204) (7.3) (35) 0.6 Others(1) 221 5.8 303 10.8 73 (1.3)
Total 3,826 100.0 2,800 100.0 (5,420) (100.0)
(1) Mainly included return of individual tax handling fees.
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Selling Expenses
Our selling expenses primarily consist of (i) staff costs for our sales and marketing personnel; (ii) marketing and advertising fees we incurred to maintain and expand our sales network; and (iii) transportation and travel fees in relation to our sales and marketing activities. The following table sets forth the breakdown of our selling expenses for the years indicated:
For the year ended December 31, 2018 2019 2020 (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Staff costs 26,628 48.7 38,787 46.7 40,761 57.4 Marketing and advertising fees 12,927 23.6 26,031 31.3 19,448 27.4 Transportation and travel fees 13,426 24.6 17,070 20.6 9,402 13.2 Other(1) 1,674 3.1 1,184 1.4 1,415 2.0
Total 54,655 100.0 83,072 100.0 71,026 100.0
(1) Mainly included public tender fees, courier fees, relevant office expenses and promotion expenses for giveaways.
As a percentage of revenue, selling expenses increased from 23.9% in 2018 to 27.5% in 2019 and decreased to 23.0% in 2020. The increase in selling expenses from 2018 to 2019 primarily reflected our increased sales and marketing efforts as we expanded our business. The decrease in selling expenses from 2019 to 2020 was primarily because we reduced our sales and marketing activities due to strict containment measures subsequent to the COVID-19 outbreak.
Administrative Expenses
Our administrative expenses primarily consist of (i) staff costs for our administrative and related staff; (ii) professional services fees, primarily representing fees paid to professional parties, including legal consultants, auditors and valuers, notarization fees and registration fees; (iii) depreciation and amortization; (iv) office, travel and miscellaneous expenses in relation to our daily administration; (v) tax expenses, primarily including VAT surcharges; (vi) inventory impairment; and (vii) impairment of trade receivables. Our administrative expenses increased from RMB44.5 million in 2018 to RMB49.9 million in 2019, primarily due to an increase of RMB3.6 million in our office, travel and miscellaneous expenses, which was in line with our business expansion. Our administrative expenses increased to RMB55.5 million in 2020 because of an increase of RMB5.9 million in professional services fees, specifically due
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For the year ended December 31, 2018 2019 2020 (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Staff costs 23,927 53.8 22,598 45.3 22,997 41.4 Professional service fees 5,897 13.3 5,326 10.7 11,237 20.2 Office, travel and miscellaneous expenses 6,007 13.5 9,565 19.2 7,398 13.3 Depreciation and amortization 4,096 9.2 4,522 9.1 4,195 7.6 Tax expenses 2,711 6.1 3,165 6.3 2,866 5.2 Inventory impairment 367 0.8 16 –(2) 1,882 3.4 Impairment on trade receivables 27 0.1 33 0.1 211 0.4 Other(1) 1,428 3.2 4,713 9.3 4,713 8.5
Total 44,460 100.0 49,938 100.0 55,499 100.0
(1) Mainly included miscellaneous expenses which we incurred for our administrative activities from time to time, such as rental expenses, conference expenses and bank handling fees.
(2) Less than 0.05%.
In 2018, 2019, and 2020, our administrative expenses represented 19.4%, 16.5%, and 18.0% of our revenue, respectively.
R&D Expenses
All of the expenditures of our R&D activities during the Track Record Period were recognized as expenses. In 2018, 2019 and 2020, our R&D expenses were RMB13.8 million, RMB18.0 million and RMB17.2 million, respectively, representing 6.0%, 6.0% and 5.6% of our revenue, respectively. Our R&D expenses primarily consist of (i) staff costs in relation to our R&D team; (ii) product and patent registration expenses; (iii) costs of raw materials used in our R&D projects; and (iv) depreciation. The following table sets forth the breakdown of our R&D expenses for the years indicated:
For the year ended December 31, 2018 2019 2020 (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Staff costs 9,046 65.7 11,691 64.9 11,822 68.7 Product and patent registration 955 6.9 1,120 6.2 1,480 8.6
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For the year ended December 31, 2018 2019 2020 (RMB’000) (%) (RMB’000) (%) (RMB’000) (%)
Raw material costs 1,324 9.6 3,272 18.2 1,411 8.2 Depreciation 860 6.3 963 5.3 1,051 6.1 Others(1) 1,576 11.5 965 5.4 1,435 8.4
Total 13,761 100.0 18,011 100.0 17,199 100.0
(1) Mainly included miscellaneous expenses which we incurred in relation to our R&D activities from time to time, such as delegated technology development fees, rental expenses, courier fees and travel expenses.
Finance Costs
Our finance costs represented interest expenses on lease liabilities and bank loans. We had finance costs of RMB1.0 million, RMB0.9 million and RMB1.3 million in 2018, 2019 and 2020, respectively. See “—Indebtedness” in this section.
Share of Gains/(Losses) of a Joint Venture
We invested in Panther Brazil in August 2018 which was a joint venture before June 2020 and our associate as of the Latest Practicable Date, in which we held 51%. We recognized share of gains of a joint venture of RMB0.4 million in 2018 and share of losses of a joint venture of RMB0.3 million and nil in 2019 and 2020, respectively. See “History and Corporate Structure—Acquisitions and Disposal During Track Record Period—Acquisitions During Track Record Period.”
Share of Losses of Associates
We invested in Panther Canada in March 2020 and Panther Brazil became our associate in June 2020, in which we held 33.3% as of the Latest Practicable Date. We had share of losses of associates of RMB0.7 million in 2020. See “History and Corporate Structure—Acquisitions and Disposal During Track Record Period—Acquisitions During Track Record Period.”
Income Tax Expenses
In 2010, we qualified as a High and New Technology Enterprise (高新技術企業) and last renewed the status in 2019 for a period of three years to 2022. We expect to renew the status again in 2022. As a High and New Technology Enterprise, we enjoy an EIT rate of 15% which is lower than the standard EIT rate of 25% in China.
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Our income tax expenses amounted to RMB7.7 million, RMB8.2 million and RMB7.8 million in 2018, 2019 and 2020, respectively. Our effective income tax rates were 19.6%, 16.3% and 18.5% in 2018, 2019 and 2020, respectively.
For the year ended December 31, 2018 2019 2020 (RMB’000)
PRC Tax Current Tax 7,566 8,812 8,033 Deferred Tax 141 (657) (225)
Total 7,707 8,155 7,808
RESULTS OF OPERATIONS
2020 Compared to 2019
Revenue
Our revenue increased slightly from RMB302.5 million in 2019 to RMB308.5 million in 2020, reflecting our increased revenue of RMB27.3 million from sales of masks and medical isolation gowns in response to market opportunities arising from the COVID-19 outbreak, partially offset by a decrease of RMB22.6 million in revenue from sales of our open staplers.
Revenue generated from the sales of our surgical staplers decreased by 5.8% from RMB276.9 million in 2019 to RMB260.8 million in 2020, primarily due to a decrease in revenue from sales of open staplers in 2020. The decrease in sales of our open staplers were primarily due to (i) a shift in our focus from open staplers to endoscopic and smart staplers; and (ii) a decrease in number of elective surgeries performed resulted from relevant restrictive measures imposed by local hospitals during the COVID-19 pandemic. However, revenue from sales of our endoscopic staplers increased slightly from RMB194.2 million in 2019 to RMB200.5 million in 2020. The increase in sales of endoscopic staplers were primarily driven by an increase in sales volume, which was primarily attributable to our continuous growth of overseas sales in Saudi Arabia as we obtained regulatory approval for new specification of reload unit of endoscopic stapler in Saudi Arabia in December 2019.
Revenue generated from the sales of our sutures, hernia repair products and other surgical instruments and accessories decreased by 20.3% from RMB25.6 million in 2019 to RMB20.4 million in 2020, primarily because we devoted part of our production capacity into manufacturing masks and medical isolation gowns in response to market opportunities arising from the COVID-19 outbreak. We recognized revenue of RMB27.3 million from sales of masks and medical isolation gowns in 2020.
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Cost of Sales
Our cost of sales increased by 11.7% from RMB103.1 million in 2019 to RMB115.2 million in 2020, primarily due to an increase of RMB14.3 million in raw material costs and an increase of RMB2.2 million in our manufacturing costs, which were primarily because we manufactured and sold masks and medical isolation gown in 2020. Our labor costs decreased slightly by RMB1.3 million as we incurred less overtime compensation due to reduced manufacturing activities during the COVID-19 pandemic and a reduction on social premium expenses pursuant to preferential government policy during the COVID-19 pandemic.
Gross Profit and Gross Profit Margin
Our gross profit decreased slightly from RMB199.3 million in 2019 to RMB193.4 million in 2020, primarily reflecting a decrease of RMB13.6 million in gross profit from sales of our surgical staplers due to decreased average selling prices of such products and decreased number of elective surgeries performed during the COVID-19 pandemic, partially offset by an increase in gross profit from sales of masks and medical isolation gowns as well as our endoscopic staplers. Our gross profit margin decreased from 65.9% in 2019 to 62.7% in 2020 primarily because (i) we started to sell masks and medical isolation gowns in 2020, which generally have a lower profit margin as compared to our surgical staplers; and (ii) the gross profit margin of surgical staplers decreased from 67.4% in 2020 to 66.4% in 2019 mainly due to the decreased average selling price of surgical staplers as a result of our effort to mitigate decreased demand during the COVID-19 pandemic.
Other Gains/(Losses), Net
We recognized other net gains of RMB2.8 million in 2019 and other net losses of RMB5.4 million in 2020. Our other net gains in 2019 mainly resulted from a foreign exchange gain of RMB1.2 million in 2019. Our other net losses in 2020 was mainly attributable to a foreign exchange loss of RMB6.9 million which resulted from the increase in our U.S. dollar assets and the fluctuation in the respective exchange rate.
Selling Expenses
Our selling expenses decreased by 14.5% from RMB83.1 million in 2019 to RMB71.0 million in 2020, primarily due to a decrease of RMB6.6 million in marketing and advertising fees, which primarily reflected our reduced sales and marketing activities due to strict containment measures during the COVID-19 pandemic.
Administrative Expenses
Our administrative expenses increased by 11.1% from RMB49.9 million in 2019 to RMB55.5 million in 2020, primarily due to an increase of RMB5.9 million in professional services fees, which were primarily attributable to fees paid to professional parties for our A-share listing application in 2020 and the increased product consulting fees for product registrations overseas. Such increase was partially offset by a decrease in staff costs and office, travel and other miscellaneous expenses, because of the temporary reduction in our travel and business activities during the COVID-19 pandemic.
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R&D Expenses
Our R&D expenses were RMB18.0 million and RMB17.2 million in 2019 and 2020, respectively. The costs of raw materials used in our R&D decreased by RMB1.9 million as we reduced our R&D activities during the COVID-19 pandemic.
Finance Costs
Our finance costs were RMB0.9 million and RMB1.3 million in 2019 and 2020, respectively.
Share of Gains/(Losses) of a Joint Venture
We recognized share of losses of a joint venture of RMB0.3 million and nil in 2019 and 2020, respectively, relating to our investment in Panther Brazil.
Share of Losses of Associates
We recognized share of loss of associates of RMB0.7 million in 2020, representing our share of losses of Panther Canada after we invested in such associate in March 2020 and our share of losses of Panther Brazil after such entity became our associate in June 2020.
Income Tax Expense
Our income tax expense decreased slightly from RMB8.2 million in 2019 to RMB7.8 million in 2020, primarily due to a decrease in profit before tax. Our effective income tax rate increased from 16.3% in 2019 to 18.5% in 2020, primarily attributable to an increase of RMB0.2 million in the deferred tax assets recognized primarily due to an increase in unrealized profit arising from our joint venture and associates.
Profit for the Year
For the foregoing reasons, our profit for the year decreased by 17.7% from RMB41.8 million in 2019 to RMB34.4 million in 2020.
2019 Compared to 2018
Revenue
Our revenue increased by 32.2% from RMB228.9 million in 2018 to RMB302.5 million in 2019, reflecting an increase of RMB73.0 million in revenue generated from the sales of our surgical staplers.
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Revenue generated from the sales of our surgical staplers increased by 35.8% from RMB203.9 million in 2018 to RMB276.9 million in 2019. Among our surgical staplers, sales of our endoscopic staplers increased by 40.3% from RMB138.4 million in 2018 to RMB194.2 million in 2019. The increase was primarily driven by an increase in sales volume, which was primarily attributable to (i) increasing demand due to overall growth of global MISIA market and favorable industry trends which benefit us, such as the growing acceptance of domestic products over imported products; (ii) our efforts to expand our sales network by increasing the share of wallet from Grade IIIA hospitals and penetration in lower-tier hospitals; and (iii) an increase in sales of endoscopic staplers to overseas regions such as Brazil and Turkey, as a result of our dedicated marketing effort.
Revenue generated from the sales of our sutures, hernia products and other surgical instruments and accessories slightly increased from RMB25.0 million in 2018 to RMB25.6 million in 2019. Such increase was in line with the increase in sales volume as we expanded our sales network.
Cost of Sales
Our cost of sales increased by 29.2% from RMB79.8 million in 2018 to RMB103.1 million in 2019, primarily due to (i) an increase of RMB19.8 million in raw material costs, which were in line with our increased production and sales, and (ii) an increase of RMB2.6 million in labor costs primarily because we increased the headcount of our manufacturing team to support our growing operations.
Gross Profit and Gross Profit Margin
Our gross profit increased by 33.8% from RMB149.0 million in 2018 to RMB199.3 million in 2019, primarily reflecting an increase in gross profit from endoscopic staplers, which generally have a higher profit margin as compared to other products and accounted for a larger share of our total sales in 2019. Our gross profit margin increased from 65.1% in 2018 to 65.9% in 2019 primarily because endoscopic staplers, which generally have a higher profit margin compared to our other products, accounted for a larger share of our total sales.
Other Net Gains/(Losses)
We recognized other net gains of RMB3.8 million and RMB2.8 million in 2018 and 2019, respectively.
Selling Expenses
Our selling expenses increased by 51.9% from RMB54.7 million in 2018 to RMB83.1 million in 2019, primarily due to an increase of RMB13.1 million in marketing and advertising fees and an increase of RMB12.2 million in staff costs, which primarily reflected our increased sales and marketing efforts, including recruiting additional marketing personnel, as we expanded our business.
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Administrative Expenses
Our administrative expenses increased by 12.1% from RMB44.5 million in 2018 to RMB49.9 million in 2019, primarily due to an increase of RMB3.6 million in office, travel and miscellaneous expenses, generally in line with our business expansion.
R&D Expenses
Our R&D expenses increased by 30.4% from RMB13.8 million in 2018 to RMB18.0 million in 2019, primarily due to an increase of RMB2.7 million in staff costs as we increased headcount of R&D staff, generally in line with our enhanced R&D efforts to commercialize new products, and an increase of RMB2.0 million in raw material costs as we procured more raw materials for our R&D projects. Our R&D expenses as a percentage of revenue remained stable at 6.0% in 2018 and 2019.
Finance Costs
Our finance costs remained relatively stable at RMB1.0 million and RMB0.9 million in 2018 and in 2019, respectively.
Share of Profits/(Losses) of a Joint Venture
We recognized share of profits of a joint venture of RMB0.4 million in 2018, and share of losses of a joint venture of RMB0.3 million in 2019.
Income Tax Expense
Our income tax expense increased by 6.5% from RMB7.7 million in 2018 to RMB8.2 million in 2019, primarily due to an increase in profit before tax. Our effective income tax rate decreased from 19.6% in 2018 to 16.3% in 2019, primarily due to a deferred tax of RMB0.7 million charged to our profit or loss statement in 2019 primarily attributable to inventory write-downs and allowance of trade and bill receivables.
Profit for the Year
For the foregoing reasons, our profit for the year increased by 31.6% from RMB31.7 million in 2018 to RMB41.7 million in 2019.
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DESCRIPTION OF CERTAIN CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ITEMS
As of December 31, 2018 2019 2020 (RMB’000)
Non-current assets Property, plant and equipment 49,609 58,813 82,955 Intangible assets 679 339 270 Interest in a joint venture 2,338 2,057 3,785 Interest in an associate – – 1,497 Financial assets at fair value through profit or loss – 8,000 20,993 Deferred tax assets 1,858 2,515 2,740
Total non-current assets 54,484 71,724 112,240
Current assets Inventories 55,767 64,333 83,003 Trade and bill receivables 21,561 31,073 39,646 Prepayments and other receivables 5,114 11,821 11,612 Cash and cash equivalents 142,761 151,236 135,336
Total current assets 225,203 258,463 269,597
Current liabilities Interest-bearing borrowings – – (800) Trade and other payables (43,601) (75,088) (87,348) Contract liabilities (12,439) (9,930) (8,236) Lease liabilities (4,691) (5,420) (5,555) Tax payables (1,644) (1,694) (2,487)
Total current liabilities (62,375) (92,132) (104,426)
Net current assets 162,828 166,331 165,171
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As of December 31, 2018 2019 2020 (RMB’000)
Non-current liabilities Interest-bearing borrowings – (9,968) (19,479) Lease liabilities (16,354) (11,830) (7,731) Deferred income – (2,730) (2,677)
Total non-current liabilities (16,354) (24,528) (29,887)
Net assets 200,958 213,527 247,524
Property, Plant and Equipment
Our property, plant and equipment mainly consist of machinery and equipment, vehicles, right-of-use assets, furniture and other fixtures, leasehold improvement and construction in progress during the Track Record Period. Our property, plant and equipment increased by 18.6% from RMB49.6 million as of December 31, 2018 to RMB58.8 million as of December 31, 2019, and further by 41.0% to RMB83.0 million as of December 31, 2020. Such increases were primarily in relation to construction of manufacturing facilities and procurement of equipment and machinery, especially relating to our new manufacturing site in Suzhou which is expected to begin operation in the fourth quarter of 2021.
Financial Assets at Fair Value through Profit or Loss (“FVTPL”)
Our financial assets at FVTPL represent our investment in Vincente Medical in 2019 and 2020 and investment in Cadyson Medical in 2020 as part of our business development strategy. See “History and Corporate Structure—Acquisitions and Disposal During Track Record Period—Acquisitions During Track Record Period.”
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Inventories
Our inventories mainly consist of raw materials, work-in-progress and finished goods. Under our inventory control policy, we regularly monitor and analyze our historical procurement, production and sales statistics and adjust our inventories to meet customer demand in a timely manner. The following table sets forth the details of our inventories as of the dates indicated and inventory turnover days for the years indicated:
As of/for the year ended December 31, 2018 2019 2020 (RMB’000, except days)
Raw materials 17,460 26,252 36,102 Work-in-progress 7,286 6,609 9,700 Finished goods 38,148 38,615 46,227
Less: write-down of inventories (7,127) (7,143) (9,026)
Total 55,767 64,333 83,003
Inventory turnover days (days)(1) 255 213 233
(1) The inventories turnover days are calculated by dividing the arithmetic mean of the opening and ending balance of inventories in that period by cost of sales for the corresponding period and then multiplying by 365 days.
Our inventories increased from RMB55.8 million as of December 31, 2018 to RMB64.3 million as of December 31, 2019 and further to RMB83.0 million as of December 31, 2020. Our inventory turnover days were 255 days, 213 days and 233 days in 2018, 2019 and 2020, respectively. Our inventory turnover days were relatively long during the Track Record Period primarily because we were unable to sell certain equipment we purchased in 2016. We purchased such equipment in anticipation to distribute to hospitals. However, the tender process for distribution of such equipment to hospital generally takes over one year, while we also faced competition from many other distributors of the same manufacturer. In addition, we have a higher inventory turnover days for products manufactured by other parties, including sutures, meshes and blood vessel titanium clips. Excluding all products manufactured by other parties, our inventory turnover days for self-manufactured products were 194 days, 167 days and 188 days in 2018, 2019 and 2020, respectively. Our inventory turnover days for self-manufactured products decreased from 2018 to 2019 as we maintained a higher inventory level at end of 2018 as we anticipated an increase in demand in 2019. Our inventory turnover days for self-manufactured products increased from 2019 to 2020 as the market demand in 2020 was lower due to the unexpected COVID-19 pandemic.
As of April 30, 2021, RMB51.1 million, or 60.0% of our total inventories as of December 31, 2020, had been subsequently consumed for production or transformed to finished goods or products sold.
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Trade and Bill Receivables
Our trade and bill receivables represent outstanding amounts due from our distributors as well as other customers. During the Track Record Period, we typically require our distributors to make full payment prior to product shipments, except for certain distributors to whom we granted a credit term of one month to six months from the date of billing. We seek to maintain strict control over the outstanding receivables to minimize credit risk. See “Business—Sales, Marketing and Distribution—Sales to Distributors—Management and Control of Distributors.” The following table sets forth the details of our trade and bill receivables as of the dates indicated and trade receivables turnover days for the years indicated:
As of/for the year ended December 31, 2018 2019 2020 (RMB’000, except days)
Trade receivables 17,661 23,843 38,341 – Related parties 238 5,949 12,162 – Third parties 17,423 17,894 26,179 Less: loss allowance (1,709) (1,742) (1,954)
Net trade receivables 15,952 22,101 36,387 Bill receivables 5,609 8,972 3,259
Total 21,561 31,073 39,646
Trade receivable turnover days (days)(1) 27 32 42
(1) Calculated by dividing the arithmetic mean of the opening and ending balance of trade receivables in that period by revenue for the corresponding period and then multiplying by 365 days.
As of December 31, 2018, 2019 and 2020, we had trade and bill receivables of RMB21.6 million, RMB31.1 million and RMB39.6 million, respectively. The increase of our trade and bill receivables was primarily due to the growth of our business and revenue in 2019 and the increased trade receivables due from distributors in certain countries in 2020, particularly Brazil and Turkey. Our trade receivable turnover day increased from 27 days in 2018 to 32 days in 2019, primarily due to an increase in our trade receivables from our related parties. Our trade receivable turnover day further increased to 42 days in 2020, primarily because we experienced delays in recovering trade receivables during the COVID-19 pandemic.
We have implemented a credit assessment system to evaluate the creditworthiness and financial condition of our customers, taking into account their historical settlement record, business relationship with us and credit assessment. Our senior management regularly review the balances of our trade receivable and overdue amount, and we follow up with customers with over due trade receivables. We perform an impairment analysis as of the end of each financial year using a provision matrix to measure expected credit losses and assess our credit
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The following table sets forth an aging analysis, based on the invoice date, of our trade receivables, net of loss allowance, as of the dates and for the years indicated:
As of December 31, 2018 2019 2020 (RMB’000)
Within one year 15,950 22,006 34,956 One to two years 1 95 1,346 Two to three years 1 – 85
Total 15,952 22,101 36,387
As of April 30, 2021, RMB15.8 million, or 41.2% of our trade and bill receivables as of December 31, 2020, had been subsequently settled.
Prepayments and Other Receivables
Our prepayments and other receivables primarily consist of (i) prepayments for purchase of inventories and services made to suppliers of raw materials, equipment and services; (ii) other receivables which mainly consist of deposits and prepaid expenses; and (iii) deductible value-added tax. The following table sets forth the details of our prepayments and other receivables as of the dates indicated:
As of December 31, 2018 2019 2020 (RMB’000)
Prepayments for purchase of inventories and services 1,772 2,878 3,380 Other receivables 2,104 2,701 3,548 Deductible value-added tax 158 1,956 2,299 Others(1) 1,080 4,286 2,385
Total 5,114 11,821 11,612
(1) Mainly included receivables from disposal of equipments, prepayment for purchase of equipment and reserves for employees.
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Our prepayments and other receivables increased significantly from 2018 to 2019 mainly in relation to (i) our prepayments for raw materials in 2019 in anticipation of higher product demand; (ii) our increased deductible value-added tax due to equipment purchase and other construction costs incurred during the construction of our production facility in Suzhou; and (iii) receivables from disposal of equipment in 2019 as we disposed of certain idle equipment. Our prepayments and other receivables slightly decreased from 2019 to 2020 in relation to recovering receivables from disposal of equipment.
Trade and Other Payables
Our trade and other payables primarily represent (i) payments due to our suppliers of raw materials and equipment; and (ii) other payables, which mainly represent payroll payables, other tax payables such as VAT payables, payments due to construction service providers and dividend payable. The following table sets forth the details of our other payables and accruals as of the dates indicated:
As of December 31, 2018 2019 2020 (RMB’000)
Trade Payable 23,011 41,600 54,610 Other Payables Payroll payables 10,635 21,013 24,730 Other payables 9,326 10,457 6,198 Others(1) 629 2,018 1,810
Total 43,601 75,088 87,348
(1) Mainly included payables for legal fees, professional fees and courier fees.
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The following table sets forth an aging analysis of trade payables based on the invoice dates as of the dates indicated and trade payable turnover days for the years indicated:
As of/for the year ended December 31, 2018 2019 2020 (RMB’000, except days)
Within one year 22,953 41,535 54,537 One to two years – 8 8 Two to three years 4 – 8 Over three years 54 57 57
Total 23,011 41,600 54,610
Trade payable turnover days (days)(1) 95 114 152
(1) Calculated by dividing the arithmetic mean of the opening and ending balance of trade payables in that period by cost of sales for the corresponding period and then multiplying by 365 days.
Our trade payables increased by 80.8% from RMB23.0 million as of December 31, 2018 to RMB41.6 million as of December 31, 2019 and further increased by 31.3% to RMB54.6 million as of December 31, 2020, primarily attributable to our procurement of raw materials continuously increased during the Track Record Period. Accordingly, our trade payable turnover days increased from 95 days in 2018 to 114 days in 2019 and further increased to 152 days in 2020. Our major raw material suppliers typically offer us a credit term of 45 working days after inspection during the Track Record Period. Our trade payable turnover days were longer than the credit term provided by our suppliers because we checked in all inventory upon receipt and prior to inspection of such inventory.
As of April 30, 2021, RMB47.6 million, or 87.2% of our trade payables as of December 31, 2020, had been subsequently settled.
Our other payables increased by 62.6% from RMB20.6 million as of December 31, 2018 to RMB33.5 million as of December 31, 2019, primarily due to an increase in payroll payables as we increased headcount to support our business expansion and employee salary and benefit package to retain talent. Our other payables remained relatively stable at RMB33.5 million as of December 31, 2019 and RMB32.7 million as of December 31, 2020.
LIQUIDITY AND CAPITAL RESOURCES
Our primary uses of cash during the Track Record Period were to fund R&D of our products, purchase of equipment, purchase of raw materials, employee compensation, as well as other working capital needs. Historically, we have financed our operations and other capital requirements primarily through cash generated from our operations.
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Our anticipated cash needs primarily include costs associated with business operations. We expect to fund our future working capital and other cash requirements with cash generated from our operations, the net [REDACTED] from [REDACTED] and, when necessary, bank and other borrowings. As of April 30, 2021, the latest practicable date for determining our indebtedness, we had capital resources of RMB119.1 million, consisting of cash and cash equivalents of RMB72.1 million and pledged deposits of RMB47.0 million. Taking into account our internal resources, our cash flow from operations and the estimated net [REDACTED] from the [REDACTED], our Directors confirm that the working capital available to us is sufficient for our requirements at present for at least the next 12 months from the date of this document.
Net Current Assets
The following table sets forth a summary of our current assets and liabilities as of the dates indicated:
As of As of December 31, April 30, 2018 2019 2020 2021 (RMB’000) (Unaudited)
Current assets Inventories 55,767 64,333 83,003 95,144 Trade and bill receivables 21,561 31,073 39,646 36,129 Prepayments and other receivables 5,114 11,821 11,612 20,289 Cash at bank and on hand 142,761 151,236 135,336 119,053
Total current assets 225,203 258,463 269,597 270,615
Current liabilities Interest-bearing borrowings – – 800 800 Trade and other payables 43,601 75,088 87,348 70,430 Contract liabilities 12,439 9,930 8,236 4,805 Lease liabilities 4,691 5,420 5,555 4,135 Tax payable 1,644 1,694 2,487 1,265
Total current liabilities 62,375 92,132 104,426 81,435
Net current assets 162,828 166,331 165,171 189,180
Our net current assets increased from RMB165.2 million as of December 31, 2020 to RMB189.2 million as of April 30, 2021, primarily due to (i) an increase of RMB12.1 million in inventories, (ii) an increase of RMB8.7 million in prepayments and other receivables, and (iii) a decrease of RMB16.9 million in trade and other payables, partially offset by a decrease of RMB16.3 million in cash at bank and on hand.
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Our net current assets decreased from RMB166.3 million as of December 31, 2019 to RMB165.2 million as of December 31, 2020, primarily due to (i) a decrease of RMB15.9 million in cash at bank and on hand as we invested in the manufacture equipment purchase and the construction of our production facility in Suzhou; and (ii) an increase of RMB12.3 million in trade and other payables, partially offset by (i) an increase of RMB18.7 million in inventories; and (ii) an increase of RMB8.6 million in trade and bill receivables in line with our business expansion.
Our net current assets increased from RMB162.8 million as of December 31, 2018 to RMB166.3 million as of December 31, 2019, primarily due to (i) an increase of RMB9.5 million in trade and bill receivables in line with our business expansion; (ii) an increase of RMB8.6 million in inventories; and (iii) an increase of RMB8.5 million in cash at bank and on hand, partially offset by an increase of RMB31.5 million in trade and other payables.
Cash Flows
The following table sets forth a summary of our consolidated cash flow statements for the years indicated:
For the year ended December 31, 2018 2019 2020 (RMB’000)
Operating cash flows before movement in working capital 49,064 60,849 57,662 Changes in working capital (2,181) 10,988 (14,122) Income tax paid (7,387) (8,762) (7,240)
Net cash flows from operating activities 39,496 63,075 36,300 Net cash flows used in investing activities (21,570) (9,827) (45,181) Net cash flows from/(used in) financing activities (11,936) (25,475) 3,664
Net increase/(decrease) in cash and cash equivalents 5,990 27,773 (5,217) Cash and cash equivalents at beginning of year 88,671 96,861 125,326 Effect of foreign exchange rate changes, net 2,200 692 (6,154)
Cash and cash equivalents as of the end of year 96,861 125,326 113,955
Operating Activities
In 2020, we had net cash flows from operating activities of RMB36.3 million, primarily attributable to our profit before taxation of RMB42.2 million, as adjusted for non-cash and non-operating items, which primarily include (i) depreciation of property, plant and equipment of RMB11.5 million; and (ii) net foreign exchange loss of RMB3.0 million. The amount was
– 337 – THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. FINANCIAL INFORMATION further adjusted by negative changes in working capital and income tax paid of RMB7.2 million. The negative changes in working capital primarily included (i) an increase in inventories of RMB18.7 million to support our increased production and sales; and (ii) an increase in trade and other receivables of RMB10.9 million primarily due to our business expansion, partially offset by an increase in trade and other payables of RMB17.2 million primarily because we procured more raw materials for increased product manufacturing and sales.
In 2019, we had net cash from operating activities of RMB63.1 million, primarily attributable to our profit before taxation of RMB50.0 million, as adjusted for non-cash and non-operating items, which primarily include depreciation of property, plant and equipment of RMB9.8 million. The amount was further adjusted by positive changes in working capital and income tax paid of RMB8.8 million. The positive changes in working capital were mainly attributable to an increase in trade and other payables of RMB34.0 million primarily because we procured more raw materials for increased product manufacturing and sales, partially offset by (i) an increase in trade and other receivables of RMB11.9 million primarily due to our business expansion; and (ii) an increase in inventories of RMB8.6 million to support our increased production and sales.
In 2018, we had net cash from operating activities of RMB39.5 million, primarily attributable to our profit before taxation of RMB39.3 million, as adjusted for non-cash and non-operating items, which primarily include (i) depreciation of property, plant and equipment of RMB9.1 million; and (ii) equity-settled share-based payment expenses of RMB2.7 million. The amount was further adjusted by negative changes in working capital and income tax paid of RMB7.4 million. The negative changes in working capital were mainly attributable to (i) an increase in trade and other receivables of RMB6.9 million primarily due to our business expansion; and (ii) an increase in inventories of RMB5.3 million to support our increased production and sales, partially offset by an increase in trade and other payables of RMB8.4 million primarily because we procured more raw materials for increased product manufacturing and sales.
Investing Activities
In 2020, our net cash used in investing activities was RMB45.2 million, primarily attributable to (i) purchase of property, plant and equipment of RMB35.2 million; and (ii) payment for acquisition of financial assets at FVTPL of RMB12.6 million.
In 2019, our net cash used in investing activities was RMB9.8 million, primarily attributable to (i) purchase of property, plant and equipment of RMB23.4 million; and (ii) payment for acquisition of financial assets at FVTPL of RMB8.0 million.
In 2018, our net cash used in investing activities was RMB21.6 million, primarily attributable to (i) purchase of property, plant and equipment of RMB15.7 million; and (ii) withdrawal of deposits at banks of RMB5.9 million.
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Financing Activities
In 2020, our net cash generated in financing activities was RMB3.7 million, primarily attributable to proceeds from interest-bearing borrowings of RMB10.3 million, partially offset by payment of capital element of lease rentals of RMB5.3 million.
In 2019, our net cash used from financing activities was RMB25.5 million, primarily attributable to dividends paid of RMB30.6 million.
In 2018, our net cash used from financing activities was RMB11.9 million, respectively, primarily attributable of dividends paid of RMB7.5 million and payment of capital element of lease rentals of RMB3.4 million.
INDEBTEDNESS
As of December 31, 2018, 2019 and 2020 and April 30, 2021, our interest-bearing borrowings was nil, RMB10.0 million, RMB20.3 million and RMB20.0 million, respectively, representing loans from a reputable PRC commercial bank, which was primarily used to fund our business operation. Such long-term borrowings have a term of eight years and the interest rates of such borrowings range from 5.68% to 5.88%. As of December 31, 2018, 2019 and 2020 and April 30, 2021, we recorded lease liabilities of RMB21.0 million, RMB17.3 million, RMB13.3 million and RMB11.1 million, respectively, primarily in relation to the properties we leased for our office premises, manufacturing and inventory storage. As of the Latest Practicable Date, we had unutilized credit facilities granted by a bank in China of RMB24.0 million.
Since April 30, 2021, the latest practical date for the purpose of this indebtedness statement, and up to the date of this document, there had been no material adverse change to our indebtedness.
CAPITAL EXPENDITURE
Our capital expenditure during the Track Record Period primarily related to (i) purchases of property, plant and equipment, relating to our construction of manufacturing facilities, as well as purchases of machinery and equipment and properties; and (ii) purchases of moulds and tools. During the Track Record Period, we financed our capital expenditures primarily through cash flow from operations. Our addition of properties was relatively high in 2020 primarily because we were in the process of building one new manufacturing facilities in Suzhou, which were completed in the first half of 2021. Our addition of machinery and equipment was relatively high in 2020 primarily because we purchased equipment and machinery for our manufacturing facilities. See note 11 “Property, Plants and Equipment” to the Accountants’ Report in Appendix I to this document. In 2018, 2019 and 2020, our capital expenditure was RMB15.7 million, RMB23.4 million and RMB35.2 million, respectively.
We expect our capital expenditure for 2021 and 2022 to remain at similar levels, subject to any future changes in our business plan, market conditions, and the economic and regulatory environment. We plan to finance such expenditure primarily through cash flow from operating activities and the net [REDACTED] from the [REDACTED].
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CONTINGENT LIABILITIES
On January 8, 2019, a former employee of ours (“Employee”) filed a claim with the People’s Court of Changping District Court (昌平區人民法院) (the “Changping Court”) against our Company, Kaiderui and the general partner of Kaiderui (the “GP”) requesting our Company, Kaiderui and the GP to repurchase the Employee’s granted shares in Kaiderui (the “Granted Shares”) under our share incentive scheme at a price of RMB3.9 million.
The Changping Court held a hearing and ruled that the GP shall repurchase the Granted Shares at a price of RMB2.5 million. The Employee and the GP both appealed after the hearing. Beijing No. 1 Intermediate People’s Court (北京市第一中級人民法院) held a hearing and remanded the case to Changping Court for retrial to consider further evidence of the calculation basis of the repurchase price. The latest hearing was held on June 17, 2021. As of the Latest Practicable Date, the lawsuit remained pending and the impact on our results of operation remained uncertain.
After consultation with the litigation counsel engaged by us, our Directors are of the view that the possibility that we are liable for the repurchase is less than 50%. In line with our accounting policies, we have not made any provision.
CAPITAL COMMITMENTS
Our capital commitments as of the end of each year during the Track Record Period primarily related to contracts we entered into for the purchase of property, plant and equipment. As of December 31, 2018, 2019 and 2020, we had capital commitments of nil, RMB19.0 million and RMB3.5 million, respectively.
RELATED PARTY TRANSACTIONS
During the Track Record Period, our transactions with related parties primarily include (i) payment of remuneration to key management personnel and (ii) the following transactions with the our Group, Beijing Hongchengjijia Technology Co., Ltd. (北京宏承吉佳科技有限公司) (“Hongchengjijia”), Qingdao Kaiyujia Material Co., Ltd. (青島凱譽佳物資有限公司) (“Kaiyujia”) and Quzhi Vision Media Culture (Beijing) Co., Ltd. (曲直視線傳媒文化(北京)有 限公司) (“Quzhi Vision”). Beijing Hongchengjijia Technology Co., Ltd. and Qingdao Kaiyujia Materials Co., Ltd. ceased to be related persons in 2018 and 2019, respectively. The following table sets forth our transactions with related parties for the years indicated:
For the year ended December 31, 2018 2019 2020 (RMB’000) (RMB’000) (RMB’000)
Sales of products 733 6,307 16,519 Leasing certain premises and receiving property management services 1,950 2,091 2,520 Receiving consulting services 757 1,136 1,195 Purchase of software 272 – –
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During the Track Record Period, we sold products to Panther Brazil, Panther Canada, Hongchengjijia and Kaiyujia, all of whom were our distributors. To expand our distribution network overseas, we received sales and marketing consulting services from Panther Brazil and Panther Canada, during the same period. We leased six premises for offices, production facilities and warehouses from Quzhi Vision during the same period. In 2018, we purchased customer relationship management software from Hongchengjijia.
Our Directors believe that our related party transactions during the Track Record Period, as described in note 32 to the Accountants’ Report attached as Appendix I to this document, were conducted on an arm’s length basis and entered into in the ordinary course of business, and would not distort our track record results or make our historical results not reflective of our future performance. See “Connected Transactions.”
KEY FINANCIAL RATIOS
The following table sets forth our key financial ratios as of the dates or for the years indicated:
As of/for the year ended December 31, 2018 2019 2020
Gross profit margin(1) 65.1% 65.9% 62.7% Net profit margin(2) 13.8% 13.8% 11.1% Return on average equity(3) 16.6% 20.1% 14.9% Return on average asset(4) 12.5% 13.7% 9.7% Current ratio (times) (5) 3.6 2.8 2.6 Quick ratio (times) (6) 2.7 2.1 1.8
(1) Equals gross profit for the year divided by revenue for that year and multiplied by 100%.
(2) Equals profit for the year divided by revenue for that year and multiplied by 100%.
(3) Equals profit for the year divided by average balance of total equity as of the beginning and the end of that year and multiplied by 100%.
(4) Equals profit for the year divided by average balance of total assets at the beginning and the end of that year and multiplied by 100%.
(5) Current ratio represents current assets divided by current liabilities as of the same date.
(6) Quick ratio represents current assets less inventories and divided by current liabilities as of the same date.
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Gross Profit Margin and Net Profit Margin
In 2018, 2019 and 2020, our gross profit margin was 65.1%, 65.9% and 62.7% and our net profit margin was 13.8%, 13.8% and 11.1%, respectively. See “—Results of Operations” in this section.
Return on Average Equity
Our return on average equity increased from 16.6% in 2018 to 20.1% in 2019, primarily due to the growth of our profit for the year from 2018 to 2019.
Our return on average equity decreased from 20.1% in 2019 to 14.9% in 2020, primarily because our profit for the year decreased during the COVID-19 pandemic.
Return on Average Assets
Our return on average assets decreased from 12.5% in 2018 to 13.7% in 2019 and to 9.7% in 2020, primarily because the balance of our total assets increased from December 31, 2018 to December 31, 2019 and further to December 31, 2020 mainly due to the increase in property, plant and equipment as we expanded our production capacity.
Current Ratio and Quick Ratio
Our current ratio decreased from 3.6 times as of December 31, 2018 to 2.8 times as of December 31, 2019, and our quick ratio decreased from 2.7 times as of December 31, 2018 to 2.1 times as of December 31, 2019, because our current assets increased significantly, primarily due to (i) an increase in our cash at bank and on hand of RMB8.4 million; (ii) an increase in our inventories of RMB8.6 million and (iii) an increase in our trade and bill receivables of RMB9.5 million, while our current liabilities increased by RMB34.4 million from December 31, 2018 to December 31, 2019, primarily due to an increase in trade and other payables.
Our current ratio decreased from 2.8 times as of December 31, 2019 to 2.6 times as of December 31, 2020, and our quick ratio decreased from 2.1 times as of December 31, 2019 to 1.8 times as of December 31, 2020, primarily because our current assets increased by RMB11.1 million, primarily due to an increase in inventories of RMB18.7 million, while our current liabilities increased by RMB12.3 million.
OFF-BALANCE SHEET COMMITMENTS AND ARRANGEMENTS
As of the Latest Practicable Date, we did not have any material off-balance sheet arrangements.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to a variety of market risks, including credit risk, liquidity risk, interest rate risk and currency risk, as set out below. We manage and monitor these exposures to ensure appropriate measures are implemented on a timely and effective manner. See note 29 “Financial Risk Management and Fair Values of Financial Instruments” to the Accountants’ Report in Appendix I to this document.
Credit Risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to our Group. Our credit risk is primarily attributable to cash at bank, financial assets measured at FVTPL and trade and other receivables. Our exposure to credit risk arising from cash and cash equivalents and financial assets measured at FVTPL are limited because the counterparties are banks and financial institutions with a high credit standing assigned by the our management, to which we consider to have low credit risk.
In respect of trade receivables due from related parties, credit risk, and deposits and proadvances to employees included in other receivables, we have assessed that the expected credit loss rate for these receivables is immaterial under 12-month expected losses method based on historical settlement records.
In respect of trade receivables due from third parties, we measure loss allowances at an amount equal to lifetime ECLs based on historical settlement records. We have large number of customers and there was no concentration of credit risk. In addition, we have monitoring procedures to ensure that follow-up action is taken to recover overdue debts. We consider that a default event occurs when there is significant decrease in services fee collection rate and estimates the expected credit loss rate for the years ended December 31, 2018, 2019 and 2020. Normally, we do not obtain collateral from customers.
See note 29 “Financial Risk Management and Fair Values of Financial Instruments—(a) Credit Risk” to the Accountants’ Report in Appendix I to this document.
Liquidity Risk
Individual operating entities within the Group are responsible for their own cash management, including the short-term investment of cash surpluses and the raising of loans to cover expected cash demands, subject to approval by the board when the borrowings exceed certain predetermined levels of authority. Our policy is to regularly monitor its liquidity requirements, to ensure that it maintains sufficient reserves of cash to meet its liquidity requirements in the short and longer term. See note 29 “Financial Risk Management and Fair Values of Financial Instruments—(b) Liquidity Risk” to the Accountants’ Report in Appendix I to this document.
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Interest Rate Risk
Our interest rate risk arises primarily from interest-bearing borrowings. See note 29 “Financial Risk Management and Fair Values of Financial Instruments—(c) Interest Rate Risk” to the Accountants’ Report in Appendix I to this document.
Currency Risk
We are exposed to currency risk primarily through sales and purchases which give rise to cash, receivables and payables balances that are denominated in a foreign currency, i.e. a currency other than the functional currency of the operations to which the transactions relate. The currencies giving rise to this risk are primarily United States dollars (US$), Euro and Indian rupee (Rs).
See note 29 “Financial Risk Management and Fair Values of Financial Instruments—(d) Currency Risk” to the Accountants’ Report in Appendix I to this document.
DIVIDENDS
We declared and paid dividends of RMB7.5 million, RMB30.6 million and nil in 2018, 2019 and 2020, respectively. We do not have a specific dividend policy or a predetermined dividend payout ratio. The decision to pay dividends in the future will be made by our Shareholders in general meetings and will be based on our profits, cash flows, financial condition, capital requirements and other conditions that our Board deems relevant. The payment of dividends may be limited by other legal restrictions and agreements that we may enter into in the future.
DISTRIBUTABLE RESERVES
As of December 31, 2020, our Group had retained profits of RMB116.6 million under IFRSs, which are available for distribution to our equity Shareholders.
[REDACTED] EXPENSES
[REDACTED] expenses to be borne by us are estimated to be approximately HK$[REDACTED] (including [REDACTED] commission and other expenses), assuming an [REDACTED] of HK$[REDACTED] per H Share, which is the mid-point of the indicative [REDACTED] range stated in this document. Approximately HK$[REDACTED] is expected to be charged to our consolidated statements of profit or loss and other comprehensive income, and approximately HK$[REDACTED] is expected to be accounted for as a deduction from equity upon [REDACTED]. We did not incur any [REDACTED] expenses in 2020. The [REDACTED] expenses above are the latest practicable estimate for reference only, and the actual amount may differ from this estimate. Our Directors do not expect such [REDACTED] expenses to have a material adverse impact on our results of operations for the year ending December 31, 2021.
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UNAUDITED PRO FORMA STATEMENT OF ADJUSTED NET TANGIBLE ASSETS
The unaudited pro forma statement of adjusted net tangible assets of our Group prepared in accordance with Rule 4.29 of the Listing Rules is to illustrate the effect of the [REDACTED] on the net tangible assets of our Group attributable to owners of our Company as of December 31, 2020 as if the [REDACTED] had taken place on that date.
The unaudited pro forma statement of adjusted net tangible assets of our Group has been prepared for illustrative purposes only and, because of its hypothetical nature, it may not provide a true picture of the net tangible assets attributable to owners of our Company had the [REDACTED] been completed as of December 31, 2020 or at any future date. No adjustment has been made to reflect any trading results or open transactions of our Group entered into subsequent to December 31, 2020. See the Unaudited Pro Forma Financial Information in Appendix II to this document.
NO MATERIAL ADVERSE CHANGE
From February to June 2020, the COVID-19 outbreak had a material impact on our results of operations because we suspended our sales and marketing activities and substantially decreased our production activities after the end of Chinese New Year holidays in 2020 and many hospitals in China had lower demand for our products, as many MIS were rescheduled to avoid cross-infections and hospital resources were redirected to support COVID-19 treatment during this period. See “Summary—Recent Development and No Material Adverse Change.”
We cannot foresee when the COVID-19 outbreak will become completely under control or whether COVID-19 will have a material and adverse impact on our business going forward. See “Risk Factors—Risks Relating to Our Operations— Our business, results of operations and financial position could be adversely affected by the outbreak of COVID-19.” We are constantly monitoring the COVID-19 situation as well as various regulatory and administrative measures adopted by local governments to prevent and control the epidemic. We will continue to evaluate the impact of this outbreak on us and adjust our precautionary measures according to the latest developments of the outbreak.
Our Directors confirm that, save as disclosed above and save for the dividends of an aggregate amount of RMB6.2 million declared on June 25, 2021 (which will be paid to the then Shareholders within two months after the declaration), as far as they are aware, there had been no material adverse change in our financial, trading position or prospects since December 31, 2020, being the latest date of our consolidated financial statements as set out in “Appendix I—Accountants’ Report” of this document, up to the date of this document.
DISCLOSURE REQUIRED UNDER THE LISTING RULES
Our Directors have confirmed that, as of the Latest Practicable Date, they were not aware of any circumstance that would give rise to a disclosure requirement under Rules 13.13 to 13.19 of the Listing Rules.
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FUTURE PLANS AND PROSPECTS
See “Business—Business Strategies” for a detailed description of our future plans.
[REDACTED]
We estimate that we will receive net proceeds from the [REDACTED] of approximately RMB[REDACTED], after deducting [REDACTED] commissions, fees and estimated expenses payable by us in connection with the [REDACTED], assuming that the [REDACTED] is not exercised and assuming an [REDACTED] of HK$[REDACTED] per H Share, being the mid-point of the indicative [REDACTED] range stated in this document. If the [REDACTED] is set at HK$[REDACTED] per H Share, being the high end of the indicative [REDACTED] range, the net [REDACTED] from the [REDACTED] will increase by approximately RMB[REDACTED]. If the [REDACTED] is set at HK$[REDACTED] per H Share, being the low end of the indicative [REDACTED] range, the net [REDACTED] from the [REDACTED] will decrease by approximately RMB[REDACTED].
We currently intend to apply these net [REDACTED] for the following purposes:
• approximately [REDACTED]%, or RMB[REDACTED], will be used to expand the production capacity of our surgical staplers and strengthen our manufacturing capabilities of our production facilities in Suzhou, including:
ؠ approximately [REDACTED]%, or RMB[REDACTED], to be used for purchasing additional machinery and equipment, such as fully automated stapling machines and molding and auxiliary equipment, within the next three years;
ؠ approximately [REDACTED]%, or RMB[REDACTED], to be used for recruiting and training an additional 100 to 200 production workers within the next five years. The allocation of new production workers is subject to adjustment between our production lines for different types of surgical staplers in line with market demand;
ؠ approximately [REDACTED]%, or RMB[REDACTED], to be used to optimize our production automation and process level, including (i) approximately [REDACTED]%, or RMB[REDACTED] to be used for recruiting and training an additional 25-30 R&D personnel within the next five years; and (ii) approximately [REDACTED]%, or RMB[REDACTED]tobe used for developing automated manufacturing equipment for our surgical robots products and accessories;
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ؠ approximately [REDACTED]%, or RMB[REDACTED], to be used to obtain requisite permits, licenses and approvals for our production facilities in Suzhou;
ؠ approximately [REDACTED]%, or RMB[REDACTED], to be used for trial productions in our production facilities in Suzhou. The allocation of trial production funds is subject to adjustment between our production lines for different types of surgical staplers in line with market demand; and
The following table sets forth the timeline of our expected use of proceeds for expansion and upgrade of our production facilities in Suzhou:
From the completion of [REDACTED] For the six months ending to June 30, December June 30, December June 30, December 2022 31, 2022 2023 31, 2023 2024 31, 2024 Total (RMB millions)
Expansion and upgrade of Suzhou production facility [REDACTED] [REDACTED][REDACTED][REDACTED][REDACTED][REDACTED] [REDACTED]
• approximately [REDACTED]%, or RMB[REDACTED], will be used to fund our R&D activities, including:
ؠ approximately [REDACTED]%, or approximately RMB[REDACTED], will be used for the ongoing R&D activities, clinical trial and product registration of upgraded disposable endoscopic stapler, disposable circular stapler, disposable linear stapler with knife and smart stapler for the next four years;
ؠ approximately [REDACTED]%, or approximately RMB[REDACTED], will be used for the ongoing R&D activities of consumables supporting surgeries using surgical staplers, including fascial closure device and single- and multi-port trocars for the next five years. Since we derive most of our revenue from sales of surgical staplers, we believe R&D of such supporting consumables will enrich our product portfolio, enable us to offer a total MIS solution and provide better operation experience to surgeons; and
ؠ approximately [REDACTED]%, or approximately RMB[REDACTED], will be invested in Vincente Medical for the ongoing R&D activities, clinical trial, animal study and product registration of laparoscopic surgical robots; Vincente Medical is primarily engaged in the development, manufacture and sales of laparoscopic surgical robots and supporting consumables. According to F&S,
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the demand for surgical robots has been increasing since the commercialization of the world’s first surgical robot. We believe the R&D activities of laparoscopic surgical robots will contribute to our future growth.
• approximately [REDACTED]%, or RMB[REDACTED], will be invested in our sales and marketing activities, including:
ؠ approximately [REDACTED]%, or RMB[REDACTED], to be used in our domestic sales and marketing activities, including (i) approximately [REDACTED]%, or RMB[REDACTED], to be used for establishing a sales and marketing center at our headquarters within the next three years, and approximately 10 to 20 regional sales offices in strategically selected first- or second-tier cities within the next three years; (ii) approximately [REDACTED]%, or RMB[REDACTED] for expansion of our sales team, by recruiting around 40 additional domestic sales personnel; and (iii) approximately [REDACTED]%, or RMB[REDACTED], to be used for conducting more academic promotion activities in order to expand our market share and further strengthen our market position in the PRC; and
ؠ approximately [REDACTED]%, or RMB[REDACTED], will be used to increase our overseas sales, including (i) approximately [REDACTED], or RMB[REDACTED], to be used for expansion of our overseas sales team, including recruiting around 35 additional overseas sales personnel in developing our overseas network of distributors; and (ii) approximately [REDACTED]%, or RMB[REDACTED], to be used in attending international medical conferences and industry exhibitions and inviting overseas surgical experts to attend domestic medical conferences to promote our brand and products.
• approximately [REDACTED]%, or RMB[REDACTED], will be used to fund potential strategic investment and acquisitions that could complement and expand our product portfolio and technologies, and in turn further drive our business growth. See “Business—Business Strategies—Further Enrich Product Pipeline, Accelerate the Commercialization of Product Candidates and Pursue Acquisition Opportunities.” As of the Latest Practicable Date, we had not identified any specific acquisition targets, formed any specific acquisition plans or entered into any agreements with potential targets;
• approximately [REDACTED]%, or RMB[REDACTED], will be used to improve our IT system, including (i) approximately [REDACTED]%, or RMB[REDACTED], to be used in purchase and customization of customer, document, project, sales and intellectual property management systems; and (ii) approximately [REDACTED]% or RMB[REDACTED], to be used in purchase of approximately 20 sets of hardware equipment and recruiting and training approximately two IT personnel to support the operation of our new IT system; and
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• approximately [REDACTED]%, or RMB[REDACTED], will be used for our working capital and general corporate purposes.
If the [REDACTED] is exercised in full, we estimate that the additional net [REDACTED] from the offering of these additional Shares will be approximately RMB[REDACTED], after deducting the [REDACTED] commissions and other estimated expenses payable by us in connection with the [REDACTED], assuming an [REDACTED]of HK$[REDACTED] per Share, being the mid-point of the indicative [REDACTED] range.
The above allocation of the net [REDACTED] from the [REDACTED] will be adjusted on a pro rata basis in the event that the [REDACTED] is fixed at a higher or lower level compared to the mid-point of the indicative [REDACTED] range stated in this document.
To the extent that the net [REDACTED] from the [REDACTED] are not immediately applied to the above purposes and to the extent permitted by applicable law and regulations, we intend to deposit the net [REDACTED] into short-term demand deposits and/or money market instruments.
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INDEPENDENCE OF THE SPONSOR
The Sole Sponsor satisfy the independence criteria applicable to sponsors set out in Rule 3A.07 of the Listing Rules.
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The following is the text of a report set out on pagesI–1toI–66,received from the Company’s reporting accountants, KPMG, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this document.
ACCOUNTANTS’ REPORT ON HISTORICAL FINANCIAL INFORMATION TO THE DIRECTORS OF 北京派爾特醫療科技股份有限公司 B.J.ZH.F.PANTHER MEDICAL EQUIPMENT CO., LTD.* AND HAITONG INTERNATIONAL CAPITAL LIMITED
Introduction
We report on the historical financial information of B.J.ZH.F.Panther Medical Equipment Co., Ltd. (“北京派爾特醫療科技股份有限公司”, the “Company”) and its subsidiaries (together, the “Group”) set out on pagesI–4toI–66,which comprises the consolidated statements of financial position of the Group and the statements of financial position of the Company as at 31 December 2018, 2019 and 2020, and the consolidated statements of profit or loss, the consolidated statements of profit or loss and other comprehensive income, the consolidated statements of changes in equity and the consolidated cash flow statements, for each of the years ended 31 December 2018, 2019 and 2020 (the “Track Record Period”), and a summary of significant accounting policies and other explanatory information (together, the “Historical Financial Information”). The Historical Financial Information set out on pagesI–4toI–66 forms an integral part of this report, which has been prepared for inclusion in the document of the Company dated [REDACTED] (the “Document”) in connection with the [REDACTED] of shares of the Company on the Main Board of The Stock Exchange of Hong Kong Limited.
Directors’ responsibility for Historical Financial Information
The directors of the Company are responsible for the preparation of the Historical Financial Information that gives a true and fair view in accordance with the basis of preparation and presentation set out in Note 1 to the Historical Financial Information, and for such internal control as the directors of the Company determine is necessary to enable the preparation of the Historical Financial Information that is free from material misstatement, whether due to fraud or error.
* For identification purpose only
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Reporting accountants’ responsibility
Our responsibility is to express an opinion on the Historical Financial Information and to report our opinion to you. We conducted our work in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 200 “Accountants’ Reports on Historical Financial Information in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”). This standard requires that we comply with ethical standards and plan and perform our work to obtain reasonable assurance about whether the Historical Financial Information is free from material misstatement.
Our work involved performing procedures to obtain evidence about the amounts and disclosures in the Historical Financial Information. The procedures selected depend on the reporting accountants’ judgement, including the assessment of risks of material misstatement of the Historical Financial Information, whether due to fraud or error. In making those risk assessments, the reporting accountants consider internal control relevant to the entity’s preparation of the Historical Financial Information that gives a true and fair view in accordance with the basis of preparation and presentation set out in Note 1 to the Historical Financial Information in order to design procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Our work also included evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the Historical Financial Information.
We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Opinion
In our opinion, the Historical Financial Information gives, for the purpose of the accountants’ report, a true and fair view of the Company’s and the Group’s financial position as at 31 December 2018, 2019 and 2020, and of the Group’s financial performance and cash flows for the Track Record Period in accordance with the basis of preparation and presentation set out in Note 1 to the Historical Financial Information.
Report on matters under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and the Companies (Winding Up and Miscellaneous Provisions) Ordinance
Adjustments
In preparing the Historical Financial Information, no adjustments to the Underlying Financial Statements as defined on pageI–4have been made.
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Dividends
We refer to Note 28(c) to the Historical Financial Information which contains information about the dividends paid by the Company in respect of the Track Record Period.
Certified Public Accountants 8th Floor, Prince’s Building 10 Chater Road Central, Hong Kong
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HISTORICAL FINANCIAL INFORMATION
Set out below is the Historical Financial Information which forms an integral part of this accountants’ report.
The consolidated financial statements of the Group for the Track Record Period, on which the Historical Financial Information is based, have been prepared in accordance with the accounting policies which conform with International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board (the “IASB”) and were audited by KPMG Huazhen LLP in accordance with Hong Kong Standards on Auditing issued by the HKICPA (“Underlying Financial Statements”).
The Historical Financial Information is presented in Renminbi (“RMB”) and all values are rounded to the nearest thousand (RMB’000) except when otherwise indicated.
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Consolidated statements of profit or loss (Expressed in Renminbi (“RMB”))
Year ended 31 December Note 2018 2019 2020 RMB’000 RMB’000 RMB’000
Revenue 4 228,869 302,469 308,522 Cost of sales (79,833) (103,132) (115,164)
Gross profit 149,036 199,337 193,358
Other gains/(losses), net 5 3,826 2,800 (5,420) Selling expenses (54,655) (83,072) (71,026) Administrative expenses (44,460) (49,938) (55,499) Research and development expenses (13,761) (18,011) (17,199)
Profit from operations 39,986 51,116 44,214
Finance costs 6(a) (1,021) (921) (1,341) Share of profits/(losses) of a joint venture 365 (281) – Share of losses of associates – – (707)
Profit before taxation 6 39,330 49,914 42,166
Income tax 7(a) (7,707) (8,155) (7,808)
Profit for the year 31,623 41,759 34,358
Earnings per share Basic and diluted (RMB) 10 0.51 0.67 0.55
The accompanying notes form part of the Historical Financial Information.
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Consolidated statement of profit or loss and other comprehensive income (Expressed in Renminbi (“RMB”))
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Profit for the year 31,623 41,759 34,358
Other comprehensive income for the year (after tax and reclassification adjustments): Item that may not be reclassified subsequently to profit or loss: Exchange differences on translation of: – financial statements of overseas subsidiaries 54 (62) (361)
Other comprehensive income for the year 54 (62) (361) ------
Total comprehensive income for the year 31,677 41,697 33,997
The accompanying notes form part of the Historical Financial Information.
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Consolidated statements of financial position (Expressed in RMB)
At 31 December Note 2018 2019 2020 RMB’000 RMB’000 RMB’000 Non-current assets Property, plant and equipment 11 49,609 58,813 82,955 Intangible assets 12 679 339 270 Interest in a joint venture 14 2,338 2,057 – Interest in associates 15 – – 5,282 Financial assets at fair value through profit or loss (“FVTPL”) 16 – 8,000 20,993 Deferred tax assets 26(b) 1,858 2,515 2,740
54,484 71,724 112,240 ------Current assets Inventories 17 55,767 64,333 83,003 Trade and bill receivables 18 21,561 31,073 39,646 Prepayments and other receivables 19 5,114 11,821 11,612 Cash at bank and on hand 20 142,761 151,236 135,336
225,203 258,463 269,597 ------Current liabilities Interest-bearing borrowings 24 – – 800 Trade and other payables 21 43,601 75,088 87,348 Contract liabilities 22 12,439 9,930 8,236 Lease liabilities 23 4,691 5,420 5,555 Current taxation 26(a) 1,644 1,694 2,487
62,375 92,132 104,426 ------Net current assets 162,828 166,331 165,171 ------Total assets less current liabilities 217,312 238,055 277,411 ------Non-current liabilities Interest-bearing borrowings 24 – 9,968 19,479 Lease liabilities 23 16,354 11,830 7,731 Deferred income 27 – 2,730 2,677
16,354 24,528 29,887 ------NET ASSETS 200,958 213,527 247,524
CAPITAL AND RESERVES Share capital 28 62,400 62,400 62,400 Reserves 28 138,558 151,127 185,124
TOTAL EQUITY 200,958 213,527 247,524
The accompanying notes form part of the Historical Financial Information.
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Statement of financial position of the Company (Expressed in RMB)
At 31 December Note 2018 2019 2020 RMB’000 RMB’000 RMB’000 Non-current assets Property, plant and equipment 11 38,193 30,930 34,332 Intangible assets 12 659 324 261 Interest in a joint venture 1,973 1,973 – Interest in associates – – 5,906 Interest in subsidiaries 13 7,720 25,520 28,020 Financial assets at FVTPL 16 – 8,000 20,993 Deferred tax assets 26(b) 1,858 2,415 2,678
50,403 69,162 92,190 ------Current assets Inventories 17 53,849 62,200 82,013 Trade and bill receivables 18 21,540 31,226 40,225 Prepayments and other receivables 19 3,984 6,584 10,845 Cash at bank and on hand 20 139,697 138,698 130,094
219,070 238,708 263,177 ------Current liabilities Trade and other payables 21 40,954 71,448 81,623 Contract liabilities 22 12,359 9,554 7,982 Lease liabilities 23 3,321 3,936 4,681 Current taxation 26(a) 1,644 1,694 2,487
58,278 86,632 96,773 ------Net current assets 160,792 152,076 166,404 ------Total assets less current liabilities 211,195 221,238 258,594 ------Non-current liabilities Lease liabilities 23 14,144 10,996 7,731
14,144 10,996 7,731 ------NET ASSETS 197,051 210,242 250,863
CAPITAL AND RESERVES
Share capital 28 62,400 62,400 62,400 Reserves 28 134,651 147,842 188,463
TOTAL EQUITY 197,051 210,242 250,863
The accompanying notes form part of the Historical Financial Information.
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Consolidated statements of changes in equity (Expressed in RMB)
Attributable to equity shareholders of the Company Share Capital Statutory Exchange Retained Total Note capital reserve reserve reserve earnings Equity RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Note 28(b)) (Note 28(d)) (Note 28(d)) (Note 28(d)) Balance at 1 January 2018 62,400 55,454 9,327 – 46,932 174,113 Changes in equity for 2018: Profit for the year ––––31,623 31,623 Other comprehensive income – – – 54 – 54
Total comprehensive income for the year – – – 54 31,623 31,677 ------Dividends declared and paid in respect of the previous year 28(c) ––––(7,488) (7,488) Appropriation to statutory reserve – – 2,567 – (2,567) – Equity settled share-based payments 25 – 2,656–––2,656
Balance at 31 December 2018 and 1 January 2019 62,400 58,110 11,894 54 68,500 200,958 Changes in equity for 2019: Profit for the year ––––41,759 41,759 Other comprehensive income – – – (62) – (62)
Total comprehensive income for the year – – – (62) 41,759 41,697 ------Dividends declared and paid in respect of the previous year 28(c) ––––(30,576) (30,576) Appropriation to statutory reserve – – 4,232 – (4,232) – Equity settled share-based payments 25 – 1,448–––1,448
Balance at 31 December 2019 and 1 January 2020 62,400 59,558 16,126 (8) 75,451 213,527 Changes in equity for 2020: Profit for the year ––––34,358 34,358 Other comprehensive income – – – (361) – (361)
Total comprehensive income for the year – – – (361) 34,358 33,997 ------Appropriation to statutory reserve – – 4,079 – (4,079) –
Balance at 31 December 2020 62,400 59,558 20,205 (369) 105,730 247,524
The accompanying notes form part of the Historical Financial Information.
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Consolidated cash flow statements (Expressed in RMB)
Year ended 31 December Note 2018 2019 2020 RMB’000 RMB’000 RMB’000 Operating activities Profit before taxation 39,330 49,914 42,166 Adjustments for: Depreciation of property, plant and equipment 6(c) 9,083 9,826 11,455 Amortisation of intangible assets 6(c) 71 341 70 Interest income 5 (1,075) (1,210) (693) Interest expense 6(a) 1,021 921 1,341 Net loss on disposal of property, plant and equipment 5 – 204 35 Change in fair value of financial assets at FVTPL 29(e) – – (393) Amortisation of government grant – – (53) Share of losses of a joint venture (365) 281 – Share of losses of associates – – 707 Equity-settled share-based payment expenses 25 2,656 1,448 – Net foreign exchange (gain)/loss (1,657) (876) 3,027 Changes in working capital: – Increase in inventories (5,344) (8,566) (18,670) – Increase in trade and other receivables (6,907) (11,911) (10,930) – Increase/(decrease) in contract liabilities 1,653 (2,508) (1,693) – Increase in trade and other payables 8,417 33,973 17,171
Cash generated from operations 46,883 71,837 43,540 Income taxes paid 26(a) (7,387) (8,762) (7,240)
Net cash generated from operating activities 39,496 63,075 36,300 ------Investing activities Proceeds from disposal of property, plant and equipment – 414 1,356 Interest received 1,075 1,210 693 Purchase of property, plant and equipment (15,720) (23,441) (35,227) Capital contribution to a joint venture (1,025) – – Acquisition of associates – – (3,932) Payment for acquisition of financial assets at FVTPL – (8,000) (12,600) (Withdraw)/placement of deposits at banks (5,900) 19,990 4,529
Net cash used in investing activities (21,570) (9,827) (45,181) ------Financing activities Proceeds from interest-bearing borrowings 20(b) – 9,968 10,311 Interest paid – – (575) Dividends paid 28(c) (7,488) (30,576) – Capital element of lease rentals paid 20(b) (3,427) (3,946) (5,306) Interest element of lease rentals paid 20(b) (1,021) (921) (766)
Net cash (used in)/generated from financing activities (11,936) (25,475) 3,664 ------Net increase/(decrease) in cash and cash equivalent 5,990 27,773 (5,217) Cash and cash equivalents at 1 January 88,671 96,861 125,326 Effect of foreign exchange rate changes 2,200 692 (6,154)
Cash and cash equivalents at 31 December 20(a) 96,861 125,326 113,955
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NOTES TO THE HISTORICAL FINANCIAL INFORMATION
1 BASIS OF PREPARATION AND PRESENTATION OF HISTORICAL FINANCIAL INFORMATION
B.J.ZH.F.Panther Medical Equipment Co., Ltd. 北京派爾特醫療科技股份有限公司 (the “Company”) was incorporated in the People’s Republic of China (the “PRC”) as a joint stock limited liability company under the PRC.
The Company and its subsidiaries (together, “the Group”) are principally engaged in design, develop, manufacture and market surgical devices, with a focus on surgical staplers. The information of the Group’s principal subsidiaries is set out in Note 13. The Company has prepared statutory financial statements in accordance with the requirements of China Accounting Standards (“CAS”) issued by the Ministry of Finance (“MOF”) of the People’s Republic of China.
The Historical Financial Information has been prepared in accordance with all applicable International Financial Reporting Standards (“IFRSs”) which collective term includes all applicable individual International Financial Reporting Standards, International Accounting Standards (“IASs”) and Interpretations issued by the International Accounting Standards Board (the “IASB”). Further details of the significant accounting policies adopted are set out in Note 2.
The IASB has issued a number of new and revised IFRSs. For the purpose of preparing this Historical Financial Information, the Group has applied all applicable new and revised IFRSs, including IFRS 16 Leases, consistently throughout the Track Record Period. The Group has not adopted any other new standards or interpretations that are not yet effective for the accounting period beginning on 1 January 2020. The new and revised accounting standards and interpretations issued but not yet effective for the accounting period beginning on 1 January 2020 are set out in Note 34.
The Historical Financial Information also complies with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“Hong Kong Stock Exchange”).
The accounting policies set out below have been applied consistently to all periods presented in the Historical Financial Information.
The functional currency of the Company is Renminbi (“RMB”), which is the same as the presentation currency of the Historical Financial Information.
2 SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of measurement
The measurement basis used in the preparation of the Historical Financial Information is the historical cost basis except that the following assets are stated at their fair value as explained in the accounting policies set out below:
– other Investments in debt and equity securities (see Note 2(g)).
(b) Use of estimates and judgements
The preparation of the Historical Financial Information in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
The accompanying notes form part of the Historical Financial Information.
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Judgements made by management in the application of IFRSs that have significant effect on the Historical Financial Information and major sources of estimation uncertainty are discussed in Note 3.
(c) Business combination
The Group accounts for business combinations using the acquisition method when control is transferred to the Group (see Note 2(c)). The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment (see Note 2(k)(ii)). Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities.
The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss.
Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, other contingent consideration is remeasured at fair value at each reporting date and subsequent changes in the fair value of the contingent consideration are recognised in profit or loss.
If share-based payment awards (replacement awards) are required to be exchanged for awards held by the acquiree’s employees (acquiree’s awards), then all or portion of the amount of the acquirer’s replacement awards is included in measuring the consideration transferred in the business combination. This determination is based on the market-based measure of the replacement awards compared with the market-based measure of the acquiree’s awards and the extent to which the replacement awards relate to pre-combination service.
(d) Subsidiaries and non-controlling interests
Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. When assessing whether the Group has power, only substantive rights (held by the Group and other parties) are considered.
An investment in a subsidiary is consolidated into the Historical Financial Information from the date that control commences until the date that control ceases. Intra-group balances, transactions and cash flows and any unrealised profits arising from intra-group transactions are eliminated in full in preparing the Historical Financial Information. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment.
Non-controlling interests represent the equity in a subsidiary not attributable directly or indirectly to the Company, and in respect of which the Group has not agreed any additional terms with the holders of those interests which would result in the Group as a whole having a contractual obligation in respect of those interests that meets the definition of a financial liability. For each business combination, the Group can elect to measure any non-controlling interests either at fair value or at the non-controlling interests’ proportionate share of the subsidiary’s net identifiable assets.
Non-controlling interests are presented in the consolidated statement of financial position within equity, separately from equity attributable to the equity shareholders of the Company. Non-controlling interests in the results of the Group are presented on the face of the consolidated statement of profit or loss and consolidated statement of profit or loss and other comprehensive income as an allocation of the total profit or loss and total comprehensive income for the period between non-controlling interests and the equity shareholders of the Company. Loans from holders of non-controlling interests and other contractual obligations towards these holders are presented as financial liabilities in the consolidated statement of financial position in accordance with Notes 2(p) or (q) depending on the nature of the liability.
Changes in the Group’s interests in a subsidiary that do not result in a loss of control are accounted for as equity transactions, whereby adjustments are made to the amounts of controlling and non-controlling interests within consolidated equity to reflect the change in relative interests, but no adjustments are made to goodwill and no gain or loss is recognised.
When the Group loses control of a subsidiary, it is accounted for as a disposal of the entire interest in that subsidiary, with a resulting gain or loss being recognised in profit or loss. Any interest retained in that former subsidiary at the date when control is lost is recognised at fair value and this amount is regarded as the fair value on initial recognition of a financial asset (see Note 2(g)) or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture (see Note 2(e)).
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In the Company’s statement of financial position, an investment in a subsidiary is stated at cost less impairment losses (see Note 2(k)(ii)), unless the investment is classified as held for sale (or included in a disposal group that is classified as held for sale).
(e) Associates and joint ventures
An associate is an entity in which the Group or Company has significant influence, but not control or joint control, over its management, including participation in the financial and operating policy decisions.
A joint venture is an arrangement whereby the Group and other parties contractually agree to share control of the arrangement, and have rights to the net assets of the arrangement.
An investment in an associate or a joint venture is accounted for in the Historical Financial Information under the equity method, unless it is classified as held for sale (or included in a disposal group that is classified as held for sale). Under the equity method, the investment is initially recorded at cost, adjusted for any excess of the Group’s share of the acquisition-date fair values of the investee’s identifiable net assets over the cost of the investment (if any). The cost of the investment includes purchase price, other costs directly attributable to the acquisition of the investment, and any direct investment into the associate or joint venture that forms part of the Group’s equity investment. Thereafter, the investment is adjusted for the post acquisition change in the Group’s share of the investee’s net assets and any impairment loss relating to the investment (see Note 2(k)(ii)). Any acquisition-date excess over cost, the Group’s share of the post-acquisition, post-tax results of the investees and any impairment losses for the period are recognised in the consolidated statement of profit or loss, whereas the Group’s share of the post-acquisition post-tax items of the investees’ other comprehensive income is recognised in the consolidated statement of profit or loss and other comprehensive income.
When the Group’s share of losses exceeds its interest in the associate or the joint venture, the Group’s interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the investee. For this purpose, the Group’s interest is the carrying amount of the investment under the equity method, together with any other long-term interests that in substance form part of the Group’s net investment in the associate or the joint venture (after applying the ECL model to such other long-term interests where applicable).
Unrealised profits and losses resulting from transactions between the Group and its associate or the joint venture are eliminated to the extent of the Group’s interest in the investee, except where unrealised losses provide evidence of an impairment of the asset transferred, in which case they are recognised immediately in profit or loss.
If an investment in an associate or the joint venture becomes an investment in a joint venture or vice versa, the retained interest is not remeasured. Instead, the investment continues to be accounted for under the equity method.
In all other cases, when the Group ceases to have significant influence over an associate or the joint venture or, it is accounted for as a disposal of the entire interest in that investee, with a resulting gain or loss being recognised in profit or loss. Any interest retained in that former investee at the date when significant influence is lost is recognised at fair value and this amount is regarded as the fair value on initial recognition of a financial asset (see Note 2(g)).
In the Company’s statement of financial position, investments in joint ventures and associates are stated at cost less impairment losses (see Note 2(k)(ii)), unless classified as held for sale (or included in a disposal group that is classified as held for sale).
(f) Goodwill
Goodwill represents the excess of
(i) the aggregate of the fair value of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the Group’s previously held equity interest in the acquiree; over
(ii) the net fair value of the acquiree’s identifiable assets and liabilities measured as at the acquisition date.
When (ii) is greater than (i), then this excess is recognised immediately in profit or loss as a gain on a bargain purchase.
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Goodwill is stated at cost less accumulated impairment losses. Goodwill arising on a business combination is allocated to each cash-generating unit, or groups of cash generating units, that is expected to benefit from the synergies of the combination and is tested annually for impairment (see Note 2(k)(ii)).
On disposal of a cash generating unit during the year, any attributable amount of purchased goodwill is included in the calculation of the profit or loss on disposal.
(g) Other Investments in debt and equity securities
The Group’s policies for investments in debt and equity securities, other than investments in subsidiaries, associates and joint ventures, are set out below.
Investments in debt and equity securities are recognised/derecognised on the date the Group commits to purchase/sell the investment. The investments are initially stated at fair value plus directly attributable transaction costs, except for those investments measured at fair value through profit or loss (“FVTPL”) for which transaction costs are recognised directly in profit or loss. For an explanation of how the Group determines fair value of financial instruments, see Note 29(e). These investments are subsequently accounted for as follows, depending on their classification.
(i) Investments other than equity investments
Non-equity investments held by the Group are classified into one of the following measurement categories:
– amortised cost, if the investment is held for the collection of contractual cash flows which represent solely payments of principal and interest. Interest income from the investment is calculated using the effective interest method (see Note 2(u)(ii)).
– fair value through other comprehensive income (“FVOCI”) – recycling, if the contractual cash flows of the investment comprise solely payments of principal and interest and the investment is held within a business model whose objective is achieved by both the collection of contractual cash flows and sale. Changes in fair value are recognised in other comprehensive income, except for the recognition in profit or loss of expected credit losses, interest income (calculated using the effective interest method) and foreign exchange gains and losses. When the investment is derecognised, the amount accumulated in other comprehensive income is recycled from equity to profit or loss.
– FVTPL if the investment does not meet the criteria for being measured at amortised cost or FVOCI (recycling). Changes in the fair value of the investment (including interest) are recognised in profit or loss.
(ii) Equity investments
An investment in equity securities is classified as FVTPL unless the equity investment is not held for trading purposes and on initial recognition of the investment the Group makes an irrevocable election to designate the investment at FVOCI (non-recycling) such that subsequent changes in fair value are recognised in other comprehensive income. Such elections are made on an instrument-by-instrument basis, but may only be made if the investment meets the definition of equity from the issuer’s perspective. Where such an election is made, the amount accumulated in other comprehensive income remains in the fair value reserve (non-recycling) until the investment is disposed of. At the time of disposal, the amount accumulated in the fair value reserve (non-recycling) is transferred to retained earnings. It is not recycled through profit or loss. Dividends from an investment in equity securities, irrespective of whether classified as at FVTPL or FVOCI, are recognised in profit or loss as other net gain.
(h) Property, plant and equipment
The following items of property, plant and equipment are stated at cost less accumulated depreciation and impairment losses (see Note 2(k)).
– right-of-use assets arising from leases over leasehold properties where the Group is not the registered owner of the property interest; and
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– items of plant and equipment, including right-of-use assets arising from leases of underlying plant and equipment (see Note 2(j)).
The cost of self-constructed items of property, plant and equipment includes the cost of materials, direct labour, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and an appropriate proportion of production overheads and borrowing costs (see Note 2(v)).
Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognised in profit or loss on the date of retirement or disposal.
Depreciation is calculated to write off the cost of property, plant and equipment, less their estimated residual value, if any, using the straight-line method over their estimated useful lives as follows:
– Plant and buildings 30 years – Machinery and equipment 3-10 years – Vehicles, furniture and others 3-5 years – Leasehold improvement 3-10 years – Right-of-use assets Over the term of lease
Where parts of an item of property, plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually. No depreciation is provided in respect of construction in progress until it is completed and ready for its intended use.
(i) Intangible assets (other than goodwill)
Expenditure on research activities is recognised as an expense in the period in which it is incurred. Expenditure on development activities is capitalised if the product or process is technically and commercially feasible and the Group has sufficient resources and the intention to complete development. The expenditure capitalised includes the costs of materials, direct labour, and an appropriate proportion of overheads and borrowing costs, where applicable. Capitalised development costs are stated at cost less accumulated amortisation and impairment losses (see Note 2(k)(ii)). Other development expenditure is recognised as an expense in the period in which it is incurred.
Intangible assets that are acquired by the Group are stated at cost less accumulated amortisation (where the estimated useful life is finite) and impairment losses (see Note 2(k)). Expenditure on internally generated goodwill and brands is recognised as an expense in the period in which it is incurred.
Amortisation of intangible assets with finite useful lives is charged to profit or loss on a straight-line basis over the assets’ estimated useful lives. The useful lives of intangible assets are determined based on factors such as the attrition rate, technological obsolescence, and expiry of related legal rights. The following intangible assets with finite useful lives are amortised from the date they are available for use and their estimated useful lives are as follows:
– Software 4-5 years – Patent 5 years
Both the period and method of amortisation are reviewed annually.
(j) Leased assets
At inception of a contract, the Group assesses whether the contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control is conveyed where the customer has both the right to direct the use of the identified asset and to obtain substantially all of the economic benefits from that use.
As a lessee
Where the contract contains lease component(s) and non-lease component(s), the Group has elected not to separate non-lease components and accounts for each lease component and any associated non-lease components as a single lease component for all leases.
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At the lease commencement date, the Group recognises a right-of-use asset and a lease liability, except for short-term leases that have a lease term of 12 months or less and leases of low-value assets. When the Group enters into a lease in respect of a low-value asset, the Group decides whether to capitalise the lease on a lease-by-lease basis. The lease payments associated with those leases which are not capitalised are recognised as an expense on a systematic basis over the lease term.
Where the lease is capitalised, the lease liability is initially recognised at the present value of the lease payments payable over the lease term, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, using a relevant incremental borrowing rate. After initial recognition, the lease liability is measured at amortised cost and interest expense is calculated using the effective interest method. Variable lease payments that do not depend on an index or rate are not included in the measurement of the lease liability and hence are charged to profit or loss in the accounting period in which they are incurred.
The right-of-use asset recognised when a lease is capitalised is initially measured at cost, which comprises the initial amount of the lease liability plus any lease payments made at or before the commencement date, and any initial direct costs incurred. Where applicable, the cost of the right-of-use assets also includes an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, discounted to their present value, less any lease incentives received. The right-of-use asset is subsequently stated at cost less accumulated depreciation and impairment losses (see Notes 2(h) and 2(k)(ii)).
The lease liability is remeasured when there is a change in future lease payments arising from a change in an index or rate, or there is a change in the Group’s estimate of the amount expected to be payable under a residual value guarantee, or there is a change arising from the reassessment of whether the Group will be reasonably certain to exercise a purchase, extension or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.
The lease liability is also remeasured when there is a change in the scope of a lease or the consideration for a lease that is not originally provided in the lease contract (“lease modification”) that is not accounted for as a separate lease. In this case the lease liability is remeasured based on the revised lease payments and lease term using a revised discount rate at the effective date of the modification. The only exceptions are any rent concessions which arose as a direct consequence of the COVID-19 pandemic and which satisfied the conditions set out in paragraph 46B of IFRS 16 Leases. In such cases, the group took advantage of the practical expedient set out in paragraph 46A of IFRS 16 and recognised the change in consideration as if it were not a lease modification.
The Group presents right-of-use assets in “property, plant and equipment” and presents lease liabilities separately in the consolidated statement of financial position.
(k) Credit losses and impairment of assets
(i) Credit losses from financial instruments
The Group recognises a loss allowance for expected credit losses (ECLs) on the following items:
– financial assets measured at amortised cost (including cash and cash equivalents, trade and bill receivables, and other receivables)
Other financial assets measured at fair value, including equity and debt securities measured at FVTPL and equity investments designated at FVOCI (non-recycling), are not subject to the ECL assessment.
Measurement of ECLs
ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all expected cash shortfalls (i.e. the difference between the cash flows due to the Group in accordance with the contract and the cash flows that the Group expects to receive).
The expected cash shortfalls of fixed-rate financial assets, trade and other receivables and contract assets are discounted using the effective interest rate determined at initial recognition or an approximation thereof where the effect of discounting is material.
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The maximum period considered when estimating ECLs is the maximum contractual period over which the Group is exposed to credit risk.
In measuring ECLs, the Group takes into account reasonable and supportable information that is available without undue cost or effort. This includes information about past events, current conditions and forecasts of future economic conditions.
ECLs are measured on either of the following bases:
– 12-month ECLs: these are losses that are expected to result from possible default events within the 12 months after the reporting date; and
– lifetime ECLs: these are losses that are expected to result from all possible default events over the expected lives of the items to which the ECL model applies.
Loss allowances for trade receivables and contract assets are always measured at an amount equal to lifetime ECLs. ECLs on these financial assets are estimated using a provision matrix based on the Group’s historical credit loss experience, adjusted for factors that are specific to the debtors and an assessment of both the current and forecast general economic conditions at the reporting date.
For all other financial instruments, the Group recognises a loss allowance equal to 12-month ECLs unless there has been a significant increase in credit risk of the financial instrument since initial recognition, in which case the loss allowance is measured at an amount equal to lifetime ECLs.
Significant increases in credit risk
In assessing whether the credit risk of a financial instrument has increased significantly since initial recognition, the Group compares the risk of default occurring on the financial instrument assessed at the reporting date with that assessed at the date of initial recognition. In making this reassessment, the Group considers that a default event occurs when (i) the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realising security (if any is held) The Group considers both quantitative and qualitative information that is reasonable and supportable, including historical experience and forward-looking information that is available without undue cost or effort.
In particular, the following information is taken into account when assessing whether credit risk has increased significantly since initial recognition:
– failure to make payments of principal or interest on their contractually due dates;
– an actual or expected significant deterioration in a financial instrument’s external or internal credit rating (if available);
– an actual or expected significant deterioration in the operating results of the debtor; and
– existing or forecast changes in the technological, market, economic or legal environment that have a significant adverse effect on the debtor’s ability to meet its obligation to the Group.
Depending on the nature of the financial instruments, the assessment of a significant increase in credit risk is performed on either an individual basis or a collective basis. When the assessment is performed on a collective basis, the financial instruments are grouped based on shared credit risk characteristics, such as past due status and credit risk ratings.
ECLs are remeasured at each reporting date to reflect changes in the financial instrument’s credit risk since initial recognition. Any change in the ECL amount is recognised as an impairment gain or loss in profit or loss. The Group recognises an impairment gain or loss for all financial instruments with a corresponding adjustment to their carrying amount through a loss allowance account.
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Basis of calculation of interest income
Interest income recognised in accordance with Note 2(u)(ii) is calculated based on the gross carrying amount of the financial asset unless the financial asset is credit-impaired, in which case interest income is calculated based on the amortised cost (i.e. the gross carrying amount less loss allowance) of the financial asset.
At each reporting date, the Group assesses whether a financial asset is credit-impaired. A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred.
Evidence that a financial asset is credit-impaired includes the following observable events:
– significant financial difficulties of the debtor;
– a breach of contract, such as a default or past due event;
– it becoming probable that the borrower will enter into bankruptcy or other financial reorganisation; or
– significant changes in the technological, market, economic or legal environment that have an adverse effect on the debtor.
Write-off policy
The gross carrying amount of a financial asset or contract asset is written off (either partially or in full) to the extent that there is no realistic prospect of recovery. This is generally the case when the Group determines that the debtor does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off.
Subsequent recoveries of an asset that was previously written off are recognised as a reversal of impairment in profit or loss in the period in which the recovery occurs.
(ii) Impairment of other non-current assets
Internal and external sources of information are reviewed at the end of each reporting period to identify indications that the following assets may be impaired or an impairment loss previously recognised no longer exists or may have decreased:
– property, plant and equipment, including right-of-use assets;
– intangible assets; and
– investments in subsidiaries, joint venture and associate in the Company’s statement of financial position.
If any such indication exists, the asset’s recoverable amount is estimated.
– Calculation of recoverable amount
The recoverable amount of an asset is the greater of its fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).
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– Recognition of impairment losses
An impairment loss is recognised in profit or loss if the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs of disposal (if measurable) or value in use (if determinable).
– Reversals of impairment losses
An impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount.
A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior periods. Reversals of impairment losses are credited to profit or loss in the period in which the reversals are recognised.
(l) Inventories
Inventories are assets which are held for sale in the ordinary course of business, in the process of production for such sale or in the form of materials or supplies to be consumed in the production process or in the rendering of services.
Inventories are carried at the lower of cost and net realisable value as follows:
– Cost is calculated using the first-in, first-out method and comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
– Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised.
The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.
(m) Contract liabilities
A contract liability is recognised when the customer pays non-refundable consideration before the Group recognises the related revenue (see Note 2(u)). A contract liability would also be recognised if the Group has an unconditional right to receive non-refundable consideration before the Group recognises the related revenue. In such cases, a corresponding receivable would also be recognised (see Note 2(n)).
For a single contract with the customer, either a net contract asset or a net contract liability is presented. For multiple contracts, contract assets and contract liabilities of unrelated contracts are not presented on a net basis.
When the contract includes a significant financing component, the contract balance includes interest accrued under the effective interest method (see Note 2(u)).
(n) Trade and other receivables
A receivable is recognised when the Group has an unconditional right to receive consideration. A right to receive consideration is unconditional if only the passage of time is required before payment of that consideration is due. If revenue has been recognised before the Group has an unconditional right to receive consideration, the amount is presented as a contract asset.
Receivables are stated at amortised cost using the effective interest method less allowance for credit losses (see Note 2(k)).
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(o) Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition. Cash and cash equivalents are assessed for expected credit losses (ECL) in accordance with the policy set out in Note 2(k).
(p) Trade and other payables
Trade and other payables are initially recognised at fair value and are subsequently stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost.
(q) Interest-bearing borrowings
Interest-bearing borrowings are measured initially at fair value less transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost using the effective interest method. Interest expense is recognised in accordance with the Group’s accounting policy for borrowing costs (see Note 2(v)).
(r) Employee benefits
(i) Short-term employee benefits and contributions to defined contribution retirement plans
Salaries, annual bonuses, paid annual leave, contributions to defined contribution retirement plans and the cost of non-monetary benefits are accrued in the period in which the associated services are rendered by employees. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.
(ii) Share-based payments
The fair value of the selected current employee services received in exchange for the grant of the restricted shares is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the granted shares measured as of the grant date less the proceeds received from the employees, and recorded in the capital reserve until each unlocking date and record it under reserves attributable to equity shareholders of the Company. The proceeds received from the employees is firstly recorded as other payables.
During the vesting period, the number of equity instruments that is expected to vest is reviewed. Any resulting adjustment to the cumulative fair value recognised in prior periods is charged/credited to the profit or loss for the period of the review, unless the original employee expenses qualify for recognition as an asset, with a corresponding adjustment to the capital reserve. On vesting date, the amount recognised as an expense is adjusted to reflect the actual number of equity instruments that vest (with a corresponding adjustment to the capital reserve) except where forfeiture is only due to not achieving vesting conditions that relate to the market price of the Company’s shares. The equity amount is recognised in the capital reserve until either the option is exercised or the restricted shares are released (when it is included in the amount recognised in share capital for the shares issued) or the option or restricted share expires (when it is released directly to retained earnings).
(s) Income tax
Income tax for the period comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognised in profit or loss except to the extent that they relate to business combinations and items recognised in other comprehensive income or directly in equity, in which case the relevant amounts of tax are recognised in other comprehensive income or directly in equity, respectively.
Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the end of the reporting period, and any adjustment to tax payable in respect of previous period.
Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.
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Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilised, are recognised. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilised.
The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences arising from the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable differences, the Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.
The amount of deferred tax recognised is measured based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the end of the reporting period. Deferred tax assets and liabilities are not discounted.
The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilised. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available.
Additional income taxes that arise from the distribution of dividends are recognised when the liability to pay the related dividends is recognised.
Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities, if the Company of the Group has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:
– in the case of current tax assets and liabilities, the Company of the Group intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or
– in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:
– the same taxable entity; or
– different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously.
(t) Provisions and contingent liabilities
Provisions are recognised when the Group has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.
Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.
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(u) Revenue and other income
Income is classified by the Group as revenue when it arises from the sale of goods in the ordinary course of the Group’s business.
Revenue is recognised when control over a product is transferred to the customer at the amount of promised consideration to which the Group is expected to be entitled, excluding those amounts collected on behalf of third parties. Revenue excludes value added tax or other sales taxes and is after deduction of any trade discounts.
Further details of the Group’s revenue and other income recognition policies are as follows:
(i) Sales of goods
Revenue is recognised when the customer takes possession of and accepts the products. If the products are a partial fulfilment of a contract covering other goods and/or services, then the amount of revenue recognised is an appropriate proportion of the total transaction price under the contract, allocated between all the goods and services promised under the contract on a relative stand-alone selling price basis.
(ii) Interest income
Interest income is recognised as it accrues under the effective interest method. For financial assets measured at amortised cost that are not credit-impaired, the effective interest rate is applied to the gross carrying amount of the asset. For credit-impaired financial assets, the effective interest rate is applied to the amortised cost (i.e. gross carrying amount net of loss allowance) of the asset (see Note 2(k)).
(iii) Government grants
Government grants are recognised in the statement of financial position initially when there is reasonable assurance that they will be received and that the Group will comply with the conditions attaching to them. Grants that compensate the Group for expenses incurred are recognised as income in profit or loss on a systematic basis in the same periods in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are recognised initially as deferred income and subsequently recognised in profit or loss over the useful life of the asset.
(v) Borrowing costs
Borrowing costs that are directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of that asset. Other borrowing costs are expensed in the period in which they are incurred.
The capitalisation of borrowing costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalisation of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or complete.
(w) Translation of foreign currencies
Foreign currency transactions during the period are translated at the foreign exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at the end of the reporting period. Exchange gains and losses are recognised in profit or loss.
Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the foreign exchange rates ruling at the transaction dates. The transaction date is the date on which the Company initially recognises such non-monetary assets or liabilities.
The results of foreign operations are translated into RMB at the exchange rates approximating the foreign exchange rates ruling at the dates of the transactions. Statement of financial position items are translated into RMB at the closing foreign exchange rates at the end of the reporting period. The resulting exchange differences are recognised in other comprehensive income and accumulated separately in equity in the exchange reserve.
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(x) Related parties
(a) A person, or a close member of that person’s family, is related to the Group if that person:
(i) has control or joint control over the Group;
(ii) has significant influence over the Group; or
(iii) is a member of the key management personnel of the Group or the Group’s parent.
(b) An entity is related to the Group if any of the following conditions applies:
(i) The entity and the Group are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).
(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).
(iii) Both entities are joint ventures of the same third party.
(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
(v) The entity is a post-employment benefit plan for the benefit of employees of either the Group or an entity related to the Group.
(vi) The entity is controlled or jointly controlled by a person identified in (a).
(vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).
(viii) The entity, or any member of a group of which it is a part, provides key management personnel services to the Group or to the Group’s parent.
Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity.
(y) Segment reporting
Operating segments, and the amounts of each segment item reported in the Historical Financial Information, are identified from the financial information provided regularly to the Group’s most senior executive management for the purposes of allocating resources to, and assessing the performance of, the Group’s various lines of business and geographical locations.
Individually material operating segments are not aggregated for financial reporting purposes unless the segments have similar economic characteristics and are similar in respect of the nature of products and services, the nature of production processes, the type or class of customers, the methods used to distribute the products or provide the services, and the nature of the regulatory environment. Operating segments which are not individually material may be aggregated if they share a majority of these criteria.
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3 ACCOUNTING JUDGEMENT AND ESTIMATES
Note 25 and Note 29(e) contains information about the assumptions and their risk factors relating to fair value of restricted shares granted under share incentive scheme and fair value of financial instruments. Other key source of estimation uncertainty is as follows:
(a) Expected credit losses for receivables
The credit losses for trade and other receivables are based on assumptions about risk of expected credit loss rates. The Group uses judgement in making these assumptions and selecting the inputs to the expected credit loss calculation, based on the Group’s past history, existing market conditions as well as forward looking estimates at the end of each reporting period. For details of the key assumptions and inputs used, see Note 29(a). Changes in these assumptions and estimates could materially affect the result of the assessment and it may be necessary to make additional loss allowances in future period.
(b) Depreciation
Property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual values, if any. The Group reviews the estimated useful lives and residual values, if any, of the property, plant and equipment regularly in order to determine the amount of depreciation expense to be recorded during any reporting period. The determination of the useful lives and residual values, if any, are based on historical experience with similar assets after taking into account the anticipated changes on how such assets are to be deployed in the future. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.
(c) Deferred tax assets
Deferred tax assets are recognised for unused tax losses and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which the deferred tax assets can be utilised. In determining the amount of deferred tax assets to be recognised, significant judgement is required relating to the timing and level of future taxable profits, after taking into account future tax planning strategies. The amount of deferred tax assets recognised at future dates are adjusted if there are significant changes from these estimates.
4 REVENUE AND SEGMENT REPORTING
The principal activities of the Group design, develop, manufacture and market surgical devices, with a focus on surgical staplers.
(a) Disaggregation of revenue
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Revenue from contracts with customers within the scope of IFRS 15 recognised at point in time – Surgical staplers 203,917 276,911 260,817 – Other surgical instruments and related products 24,952 25,558 47,705
228,869 302,469 308,522
During the Track Record Period, no revenue amounting to 10% or more of the Group’s total revenue was derived from sales to a single customer.
The Group takes advantage of the practical expedient in paragraph 121 of IFRS15 and does not disclose the remaining performance obligation as all of the Group’s sale contracts have an original expected duration of less than one year.
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The Group does not adjust the promised amount of consideration for the effect of a significant financing component as the period between the Group transfers a promised goods to a customer and when the customer pays for that goods will be within one year.
The Group takes advantage of the practical expedient in paragraph 94 of IFRS 15 and recognise the incremental costs of obtaining a contract as an expense if the amortisation of the asset is less than one year.
Details of concentration of credit risk from the Group’s customers are set out is Note 29(a).
(b) Geographic information
The following table set out information about the geographical location of the Group’s revenue from external customers. The geographical information about the revenue prepared by external customers’ respective country/region of domicile is as follows:
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
The PRC (including Hong Kong) 176,910 214,899 185,025 Overseas 51,959 87,570 123,497
228,869 302,469 308,522
The geographical location of the specified non-current assets is based on the physical location of the asset, in the case of property, plant and equipment, and the location of the operation to which they are allocated, in the case of intangible assets.
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
The PRC (including Hong Kong) 50,288 59,138 83,217 Overseas – 14 8
50,288 59,152 83,225
(c) Segment reporting
IFRS 8, Operating Segments, requires identification and disclosure of operating segment information based on internal financial reports that are regularly reviewed by the Group’s chief operating decision maker for the purpose of resources allocation and performance assessment. On this basis, the Group has determined that it only has one operating segment which is sales of surgical staplers and other medical instruments and related products during the Track Record Period.
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5 OTHER GAINS/(LOSSES), NET
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Government grants (including amortisation of deferred income, see Note 27) 222 332 370 Interest income 1,075 1,210 693 Net foreign exchange gain/(loss) 2,308 1,159 (6,914) Net loss on disposal of property, plant and equipment – (204) (35) Change in fair value of financial assets at FVTPL – – 393 Others 221 303 73
3,826 2,800 (5,420)
6 PROFIT BEFORE TAXATION
Profit before taxation is arrived at after charging:
(a) Finance costs
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Interest on interest-bearing borrowings (Note 20(b)) – – 575 Interest on lease liabilities (Note 20(b)) 1,021 921 766
1,021 921 1,341
(b) Staff costs
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Salaries, wages and other benefits 64,431 82,940 95,552 Contributions to defined contribution retirement plan 7,172 10,137 4,497 Equity-settled share-based payment expenses (Note 25) 2,656 1,448 –
74,259 94,525 100,049
The employees of the Company and the subsidiaries of the Group established in the PRC participate in a defined contribution retirement benefit scheme managed by the local government authority, whereby these companies are required to contribute to the scheme at certain rates of the employees’ basic salaries. Employees of these companies are entitled to retirement benefits, calculated based on a percentage of the average salaries level in the PRC (other than Hong Kong), from the above mentioned retirement scheme at their normal retirement age. In 2020, to reduce the impact of the COVID-19 pandemic on enterprises, governments in certain regions in the PRC had gradually reduced or exempted the social insurance contributions.
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The Group has no further material obligation for payment of other retirement benefits beyond the above contributions.
(c) Other items
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Amortisation and depreciation – property, plant and equipment 9,083 9,826 11,455 – intangible assets 71 341 70
Provision of expected credit losses – trade and other receivables 27 33 212
Auditors’ remuneration – statutory audit services 623 847 425
Cost of inventories* 80,200 103,148 117,047
* Cost of inventories includes RMB18,223,000, RMB21,273,000 and RMB20,228,000 for the year ended 31 December 2018, 2019 and 2020 relating to staff costs, depreciation and amortisation which amount is also in the respective total amount disclosed separately above or in Note 6(b) for each types of expenses.
7 INCOME TAX IN THE CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
(a) Taxation in the consolidated statements of profit or loss and other comprehensive income represents:
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Current tax – PRC Corporate Income Tax Provision for the year 7,566 8,812 8,033
Deferred tax Origination and reversal of temporary differences (Note 26(b)) 141 (657) (225)
7,707 8,155 7,808
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(b) Reconciliation between tax expense and accounting profit at applicable tax rates:
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Profit before taxation 39,330 49,914 42,166
Notional tax on profit before taxation, calculated at the rates applicable (Note (i)) 9,833 12,479 10,542 Tax effect of different tax rates of subsidiaries operating in other jurisdictions and tax concessions (Notes (ii) and (iii)) (3,265) (6,973) (5,681) Tax effect of non-deductible expenses 2,563 4,074 4,013 Tax effect of unused tax losses and temporary differences not recognised 314 622 1,109 Tax impact of share of (profits)/losses of associates and joint venture (91) 70 177 Tax effect of additional tax deduction on research and development expenses (Note (iv)) (1,647) (2,117) (2,352)
7,707 8,155 7,808
Notes:
(i) The Company and its subsidiaries established in the PRC and are subject to PRC Corporate Income Tax rate of 25% during the Track Record Period.
(ii) The PRC Corporate Income Tax Law allows enterprises to apply for certificate of “High and New Technology Enterprise” (“HNTE”), which entitles the qualified companies to a preferential income tax rate of 15%, subject to fulfilment of the recognition criteria.
The Company is qualified as a HNTE. Accordingly, the Company are entitled to the preferential tax rate of 15% for the years ended 31 December 2018, 2019 and 2020. The Company obtained its renewed certificate of HNTE on 15 October 2019 and is subject to income tax at 15% till 14 October 2022.
(iii) Taxation for the overseas subsidiaries is charged at the appropriate current rates of taxation ruling in the relevant countries.
(iv) According to the relevant tax rules in the PRC, qualified research and development expenses are allowed for additional tax deduction based on 50% or 75% of such expenses.
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8 DIRECTORS’ AND SUPERVISORS’ EMOLUMENTS
Details of the emoluments of the directors and supervisors of the Company during the Track Record Period are as followings:
Year ended 31 December 2018 Directors’ Salaries, and allowances Retirement Share-based Supervisors’ and benefits Discretionary scheme payments fee in kind bonus contributions Sub-total (Note 25) Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Executive directors Mr. Qu Chao – 1,320 1,020 19 2,359 – 2,395 Ms. Liu Qing – 1,200 2,082 37 3,319 – 3,319 Mr. Shang Tao (resigned on 1st August 2018) – 486 22 – 508 – 508 Mr. Liu Libo (appointed on 2nd August 2018) – 971 – 55 1,026 1,210 2,236
Non-executive directors Mr. Hua Ping ––––––– Mr. Ding Kui –––––––
Supervisors Mr. Wang Jianzhong – 339 1 51 391 – 391 Ms. Zhou Qian (resigned on 23 January 2018) – 15 – 4 19 – 19 Mr. Zhao Yu (resigned on 1 August 2018) – 112 4 16 132 – 132 Ms. Chi Yun – 348 11 30 389 – 389 Ms. Yang Xuelan – 909 – 51 960 1,210 2,170
– 5,700 3,140 263 9,103 2,420 11,523
Year ended 31 December 2019 Directors’ Salaries, and allowances Retirement Share-based Supervisors’ and benefits Discretionary scheme payments fee in kind bonus contributions Sub-total (Note 25) Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Executive directors Mr. Qu Chao – 1,593 4,163 – 5,756 – 5,756 Ms. Liu Qing – 1,430 8,500 33 9,963 – 9,963 Mr. Liu Libo – 1,386 – 49 1,435 706 2,141
Non-executive directors Mr. Hua Ping ––––––– Mr. Ding Kui –––––––
Supervisors Mr. Wang Jianzhong – 393 4 45 442 – 442 Ms. Chi Yun – 513 45 27 585 – 585 Ms. Yang Xuelan – 1,321 – 52 1,373 706 2,079
– 6,636 12,712 206 19,554 1,412 20,966
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Year ended 31 December 2020 Directors’ Salaries, and allowances Retirement Share-based Supervisors’ and benefits Discretionary scheme payments fee in kind bonus contributions Sub-total (Note 25) Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Executive directors Mr. Qu Chao – 1,567 – – 1,567 – 1,567 Ms. Liu Qing – 1,407 – 5 1,412 – 1,412 Mr. Liu Libo – 1,496 – 8 1,504 – 1,504
Non-executive directors* Mr. Hua Ping ––––––– Mr. Ding Kui –––––––
Supervisors Mr. Wang Jianzhong – 388 – 7 395 – 395 Ms. Chi Yun (resigned on 25 December 2020) – 549 – 4 553 – 553 Ms. Yang Xuelan (resigned on 25 December 2020) – 1,479 – 8 1,487 – 1,487
– 6,886 – 32 6,918 – 6,918
* The non-executive directors, Mr. Hua Ping and Mr. Ding Kui resigned in January 2021.
During the Track Record Period, no emoluments were paid by the Group to the directors as an inducement to join or upon joining the Group or as compensation for loss of office. There was no arrangement under which a director has waived or agreed to waive remuneration during the Track Record Period.
9 INDIVIDUALS WITH HIGHEST EMOLUMENTS
Of the five individuals with the highest emoluments, 3, 4 and 4 are directors or supervisors for the years ended 31 December 2018, 2019 and 2020, respectively, whose emoluments are disclosed in Note 8. The aggregate of the emoluments in respect of the remaining individuals during the Track Record Period are as followings:
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Salaries and other emoluments 2,343 1,660 1,439 Discretionary bonuses 22 – – Retirement scheme contributions 57 53 41
2,422 1,713 1,480
The emoluments of the remaining 2, 1 and 1 individuals for each of the years ended 31 December 2018, 2019 and 2020, respectively, who are amongst the five highest paid individuals of the Group are within the following bands:
Year ended 31 December 2018 2019 2020 Number of Number of Number of individuals individuals individuals
HK$1,000,001 to HK$1,500,000 2 – – HK$1,500,001 to HK$2,000,000 – 1 1
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10 EARNINGS PER SHARE
The calculation of the basic earnings per share during the Track Record Period is based on the profit attributable to equity shareholders of the Company of RMB31,623,000, RMB41,759,000 and RMB34,358,000 for the years ended 31 December 2018, 2019 and 2020, respectively, and the weighted average number of ordinary shares of 62,400,000 during the Track Record Period.
The Company did not have any potential dilutive shares throughout the Track Record Period. Accordingly, diluted earnings per share is the same as basic earnings per share.
11 PROPERTY, PLANTS AND EQUIPMENT
(a) Reconciliation of carrying amount
The Group
Machinery Vehicles, Plant and Right-of- and furniture Leasehold Construction buildings use assets equipment and others improvement in progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Cost: At 1 January 2018 – 23,051 27,357 5,103 4,938 2,873 63,322 Additions – 6,625 2,669 344 – 5,755 15,393 Transfer in/(out) – – 2,481 – – (2,481) –
At 31 December 2018 – 29,676 32,507 5,447 4,938 6,147 78,715 Additions – 151 1,135 688 – 20,291 22,265 Transfer in/(out) – – 2,812 – – (2,812) – Disposals – – (3,569) (989) – – (4,558)
At 31 December 2019 – 29,827 32,885 5,146 4,938 23,626 96,422 Additions – 1,342 6,991 305 1,143 25,855 35,636 Transfer in/(out) 37,261 – 4,424 472 – (42,157) – Disposals – – – (784) – – (784)
At 31 December 2020 37,261 31,169 44,300 5,139 6,081 7,324 131,274 ------
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Machinery Vehicles, Plant and Right-of- and furniture Leasehold Construction buildings use assets equipment and others improvement in progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Accumulated depreciation: At 1 January 2018 – – (16,709) (3,314) – – (20,023) Charge for the year – (4,706) (3,017) (547) (813) – (9,083)
At 31 December 2018 – (4,706) (19,726) (3,861) (813) – (29,106) Charge for the year – (4,993) (3,516) (457) (860) – (9,826) Written back on disposals – – 384 939 – – 1,323
At 31 December 2019 – (9,699) (22,858) (3,379) (1,673) – (37,609) Charge for the year (685) (5,514) (3,677) (630) (949) – (11,455) Written back on disposals – – – 745 – – 745
At 31 December 2020 (685) (15,213) (26,535) (3,264) (2,622) – (48,319) ------
Carrying mount: At 31 December 2020 36,576 15,956 17,765 1,875 3,459 7,324 82,955
At 31 December 2019 – 20,128 10,027 1,767 3,265 23,626 58,813
At 31 December 2018 – 24,970 12,781 1,586 4,125 6,147 49,609
Certain of the Group’s property, plant and equipment were pledged to secure certain bank borrowings (Note 24).
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The Company
Machinery Vehicles, Right-of- and furniture Leasehold Construction use assets equipment and others improvement in progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Cost: At 1 January 2018 18,347 27,357 5,083 4,383 2,873 58,043 Additions 1,420 1,402 232 – 4,634 7,688 Transfer in/(out) – 2,481 – – (2,481) –
At 31 December 2018 19,767 31,240 5,315 4,383 5,026 65,731 Additions 151 1,134 670 – 1,293 3,248 Transfer in/(out) – 2,812 – – (2,812) – Disposals – (2,636) (988) – – (3,624)
At 31 December 2019 19,918 32,550 4,997 4,383 3,507 65,355 Additions 1,342 6,991 296 1,143 2,765 12,537 Transfer in/(out) – 4,424 – – (4,424) – Disposals – – (784) – – (784)
At 31 December 2020 21,260 43,965 4,509 5,526 1,848 77,108 ------
Accumulated depreciation: At 1 January 2018 – (16,709) (3,313) – – (20,022) Charge for the year (3,289) (2,997) (538) (692) – (7,516) Written back on disposals – – ––––
At 31 December 2018 (3,289) (19,706) (3,851) (692) – (27,538) Charge for the year (3,576) (3,489) (419) (692) – (8,176) Written back on disposals – 350 939 – – 1,289
At 31 December 2019 (6,865) (22,845) (3,331) (1,384) – (34,425) Charge for the year (4,097) (3,668) (550) (781) – (9,096) Written back on disposals – – 745 – – 745
At 31 December 2020 (10,962) (26,513) (3,136) (2,165) – (42,776) ------
Carrying mount: At 31 December 2020 10,298 17,452 1,373 3,361 1,848 34,332
At 31 December 2019 13,053 9,705 1,666 2,999 3,507 30,930
At 31 December 2018 16,478 11,534 1,464 3,691 5,026 38,193
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(b) Right-of-use assets
The analysis of the net book value of right-of-use assets by class of underlying asset is as follows:
The Group
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Property leased for own use, carried at depreciation cost: – Plants 11,481 9,622 7,834 – Office buildings 8,388 5,510 3,230 – Land use rights 5,101 4,996 4,892
24,970 20,128 15,956
The Company
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Property leased for own use, carried at depreciation cost: – Plants 11,481 9,622 7,834 – Office buildings 4,997 3,431 2,464
16,478 13,053 10,298
The analysis of expense items in relation to leases recognised in profit or loss is as follows:
The Group
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Depreciation charge of right-of-use assets by class of underlying assets: – Plants 1,624 1,861 1,969 – Office buildings 2,978 3,028 3,441 – Land use rights 104 104 104
4,706 4,993 5,514
Interest on lease liabilities (Note 6(a)) 1,021 921 766
Further details on lease liabilities are set out in Notes 20(b) and 23, respectively.
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12 INTANGIBLE ASSETS
The Group
Software Patent Total RMB’000 RMB’000 RMB’000
Cost: At 1 January 2018 544 100 644 Additions 286 – 286
At 31 December 2018 830 100 930 Additions 1 – 1 Disposals (272) – (272)
At 31 December 2019 and 2020 559 100 659 ------
Accumulated amortisation: At 1 January 2018 (128) (52) (180) Charge for the year (61) (10) (71)
At 31 December 2018 (189) (62) (251) Charge for the year (331) (10) (341) Written back on disposals 272 – 272
At 31 December 2019 (248) (72) (320) Charge for the year (59) (10) (70)
At 31 December 2020 (307) (82) (389) ------
Net book value: At 31 December 2020 252 18 270
At 31 December 2019 311 28 339
At 31 December 2018 641 38 679
The amortisation of intangible assets is included in cost of sales, administrative expenses and research and development expenses in the consolidated statement of profit or loss and other comprehensive income.
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The Company
Software Patent Total RMB’000 RMB’000 RMB’000
Cost: At 1 January 2018 530 100 630 Additions 272 – 272
At 31 December 2018 802 100 902 Disposals (272) – (272)
At 31 December 2019 and 2020 530 100 630 ------
Accumulated amortisation: At 1 January 2018 (128) (52) (180) Charge for the year (53) (10) (63)
At 31 December 2018 (181) (62) (243) Charge for the year (325) (10) (335) Written back on disposals 272 – 272
At 31 December 2019 (234) (72) (306) Charge for the year (53) (10) (63)
At 31 December 2020 (287) (82) (369) ------
Net book value: At 31 December 2020 243 18 261
At 31 December 2019 296 28 324
At 31 December 2018 621 38 659
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13 INVESTMENT IN SUBSIDIARIES
Particulars of subsidiaries are as follows:
Group’s effective interest Place of incorporation/ As of Principal establishment Particulars date activities At 31 December and kind of Date of of registered/ of this and place of Company name legal entity incorporation paid-up capital 2018 2019 2020 report operations
Panther (Suzhou) The PRC, 28 November RMB100,000,000 100% 100% 100% 100% Technical Medical Technology limited 2017 research and Co., Ltd. (“Panther liability development, Suzhou”) 派爾特(蘇 company production 州)醫療科技有限公司 and sales of (Notes (i) and (ii)) medical devices and components/ the PRC Kunshan Qingsen jiemei The PRC, 9 September RMB10,000,000 100% 100% 100% 100% Production of Machine limited 2016 components Manufacturing liability of stapler Co., Ltd. 昆山青森潔 company products/ 美機械製造有限公司 the PRC (Notes (i) and (ii)) B.J.ZH.F. PANTHER India, limited 28 August USD550,000 100% 100% 100% 100% Selling surgical MEDICAL liability 2018 instruments/ EQUIPMENT INDIA company India PRIVATE LIMITED (Notes (iii)) Panther Medtech Inc The USA, 2 November USD1,000,000 100% 100% 100% 100% Selling surgical (Notes (ii)) limited 2017 instruments/ liability the USA company
Notes:
(i) The official names of these entities are in Chinese. The English translation is included for identification purpose only.
(ii) No statutory financial statements have been prepared for these companies.
(iii) The statutory financial statements of the subsidiary for the year ended 31 December 2020 have been audited by AARK & Co. LLP. No statutory financial statements have been prepared for the subsidiary for the years ended 31 December 2018 and 2019.
All companies comprising the Group have adopted 31 December as their financial year end date.
14 INTEREST IN A JOINT VENTURE
The following table lists out the particulars of the Group’s joint venture, which is an unlisted entity:
Place of incorporation/ Group’s effective interest establishment Particulars At 31 December and kind of Date of of registered/ Principal Company name legal entity incorporation paid-up capital 2018 2019 2020 activities
Panther Healthcare Brasil Brazil, limited 28 May 2012 Brazilian Real 33% 33% N/A* Sales of Distribuidora De Produtos liability 1,866,584 medical Médicos Ltda (“Panther company instruments Brazil”) related products
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* The directors of the Company consider Panther Brazil as a joint venture as the Group has joint control, over its management, including participation in the financial and operating policy decisions during the years ended 31 December 2018 and 2019.
On 3 June 2020, the Group injected capital of USD248,000 to Panther Brazil, upon which the Group’s holding in the total equity interest of Panther Brazil increased from 33% to 51%. As the Group could make decisions together with any one of the other two shareholders (each holds 24.5% of the equity interest of Panther Brazil) and the contractual terms do not specify which combination of parties is required to make unanimous decisions about the relevant activities, the directors of the Company consider Panther Brazil as an associate upon the capital injection in June 2020.
The investment in Panther Brazil enables the Group to have the exposure to this market through the local sales team.
Summarised financial information of Panther Brazil, adjusted for any differences in accounting policies, and reconciliation to the carrying amount in the consolidated financial statements, as disclosed below:
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Gross amounts Current assets 7,633 10,821 N/A Non-current assets 18 21 N/A Current liabilities 636 4,670 N/A Non-current liabilities – – N/A
Net assets 7,015 6,172 N/A
Included in the above assets and liabilities Cash and cash equivalents 605 1,024 N/A
Reconciled to the Group’s interests in the joint venture Gross amounts of the joint venture’s net assets 7,015 6,172 N/A Group’s effective interest 33% 33% N/A Group’s share of the joint venture’s net assets 2,338 2,057 N/A Carrying amount in the consolidated financial statements 2,338 2,057 N/A
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Gross amounts Revenue 10,370 16,316 6,818 Profit/(loss) for the year 1,105 (843) – Other comprehensive income 19 (11) – Total comprehensive income 1,124 (854) –
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15 INTEREST IN ASSOCIATES
The following table lists out the particulars of the Group’s associates, which are unlisted entities:
Place of incorporation/ Group’s effective interest establishment Particulars At 31 December and kind of Date of of registered/ Principal Company name legal entity incorporation paid-up capital 2018 2019 2020 activities
Panther Medical Canada Inc. Canada, limited 10 July 2018 USD305,000 N/A N/A 33% Sales of (“Panther Canada”) liability medical (Note (i)) company instruments related products Panther Brazil” (Note (ii)) Brazil, limited 28 May 2012 Brazilian Real N/A N/A 51% Sales of liability 1,866,584 medical company instruments related products
(i) Panther Canada
On 30 March 2020, the Company acquired 33% equity interest of Panther Canada from the original shareholders of Panther Canada with the consideration USD305,000. Panther Canada commenced operation in July 2018 and is mainly engaged in trading of surgical instrument products and related supporting services. The investment in Panther Canada enables the Group to have the exposure to Canadian market through the local sales team.
Summarised financial information of Panther Canada, adjusted for any differences in accounting policies, and reconciliation to the carrying amount in the consolidated financial statements, as disclosed below:
At 31 December 2020 RMB’000
Gross amounts Current assets 9,741 Current liabilities 4,070 Non-current liabilities 1,180
Net assets 4,491
Included in the above assets and liabilities Cash and cash equivalents 22
Reconciled to the Group’s interests in the associate Gross amounts of the associate’s net assets 4,491 Group’s effective interest 33% Group’s share of the associate’s net assets 1,497 Carrying amount in the consolidated financial statements 1,497
Years ended 31 December 2020 RMB’000
Gross amounts Revenue 2,325 Loss for the year (2,009) Other comprehensive income 13 Total comprehensive income (1,996)
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(ii) Panther Brazil
Summarised financial information of Panther Brazil (Note 14), adjusted for any differences in accounting policies, and reconciliation to the carrying amount in the consolidated financial statements, as disclosed below:
At 31 December 2020 RMB’000
Gross amounts Current assets 15,066 Non-current assets 11 Current liabilities 7,655 Non-current liabilities –
Net assets 7,422
Included in the above assets and liabilities Cash and cash equivalents 2,477 Reconciled to the Group’s interests in the associate Gross amounts of the associate’s net assets 7,422 Group’s effective interest 51% Group’s share of the associate’s net assets 3,785 Carrying amount in the consolidated financial statements 3,785
Year ended 31 December 2020 RMB’000
Gross amounts Revenue 16,353 Loss for the year (73) Other comprehensive income (31) Total comprehensive income (104)
16 FINANCIAL ASSETS MEASURED AT FVTPL
The Group and the Company
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Unlisted investments in private companies: – Suzhou Vincente Medical Robot Co., Ltd. (“蘇州威森特醫療機器人有限公司”, “Vincente Medical”) (Note (i) and (iii)) – 8,000 8,228 – Cadyson (Suzhou) Medical Technology Co., Ltd. (“凱迪森(蘇州)醫療科技有限公司”, “Cadyson Medical”) (Note (ii) and (iii)) – – 12,765
– 8,000 20,993
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Notes:
(i) In 2019, the Company subscribed 18% equity interest in Vincente Medical at a consideration of RMB8,000,000.
Vincente Medical is a limited liability company incorporated in the PRC which engages in the development, production and sales of medical robots and supporting consumables.
In May 2021, the Company acquired further 33% of shares of Vincente Medical, upon which, the Company obtained control right of the entity. See Note 33 for details.
(ii) In January 2020, the Company subscribed 18% equity interest in Cadyson Medical at a consideration of RMB12,600,000.
Cadyson Medical is a limited liability company incorporated in the PRC which engages in the development, production and sales of ultrasonic blades and supporting consumables.
(iii) The official names of these entities are in Chinese. The English translation is included for identification purpose only.
17 INVENTORIES
(a) Inventories in the statement of financial position comprise:
The Group
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Raw materials 17,460 26,252 36,102 Work in progress 7,286 6,609 9,700 Finished goods 38,148 38,615 46,227
62,894 71,476 92,029 Less: write-down of inventories (7,127) (7,143) (9,026)
55,767 64,333 83,003
The Company
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Raw materials 17,342 25,252 36,102 Work in progress 7,286 6,609 9,700 Finished goods 36,348 37,482 45,237
60,976 69,343 91,039 Less: write-down of inventories (7,127) (7,143) (9,026)
53,849 62,200 82,013
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(b) The analysis of the amount of inventories recognised as an expense and included in profit or loss is as follows:
The Group
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Carrying amount of inventories sold 79,833 103,132 115,164 Write-down of inventories 367 16 1,883
80,200 103,148 117,047
18 TRADE AND BILLS RECEIVABLES
The Group
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Trade receivables due from – Related parties 238 5,949 12,162 – Third parties 17,423 17,894 26,179
17,661 23,843 38,341 Less: Loss allowance (1,709) (1,742) (1,954)
15,952 22,101 36,387 ------
Bills receivables 5,609 8,972 3,259 ------
21,561 31,073 39,646
The Company
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Trade receivables due from – Subsidiaries 318 413 906 – Other related parties 238 5,949 12,162 – Third parties 17,084 17,634 25,852
17,640 23,996 38,920 Less: Loss allowance (1,709) (1,742) (1,954)
15,931 22,254 36,966 ------
Bills receivables 5,609 8,972 3,259 ------
21,540 31,226 40,225
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(a) Ageing analysis
As of the end of each reporting period, the ageing analysis of trade receivable based on the date of revenue recognition and net of allowance for impairment of trade receivables is as follows:
The Group
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Within 1 year 15,950 22,006 34,956 1 to 2 years 1 95 1,346 2 to 3 years 1 – 85
15,952 22,101 36,387
The Company
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Within 1 year 15,929 22,159 35,535 1 to 2 years 1 95 1,346 2 to 3 years 1 – 85
15,931 22,254 36,966
Trade receivables are due within one month to six months from the date of billing. Further details on the Group’s credit policy and credit risk arising from trade receivables are set out in Note 29(a).
19 PREPAYMENTS AND OTHER RECEIVABLES
The Group
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Prepayments and other receivables due from – Related parties – – 208 – Third parties 5,114 11,821 11,404
5,114 11,821 11,612
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At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Prepayments and other receivables – Prepayments for purchase of inventories and services 1,772 2,878 3,380 – Deposits 1,118 1,267 1,826 – Prepaid expenses 986 1,434 1,722 – Value added tax recoverable 158 1,956 2,299 – Others 1,080 4,286 2,385
5,114 11,821 11,612
The Company
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Prepayments and other receivables due from – A subsidiary – – 3,500 – Other related parties – – 208 – Third parties 3,984 6,584 7,137
3,984 6,584 10,845
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Prepayments and other receivables – Prepayments for purchase of inventories and services 1,548 2,092 2,830 – Deposits 582 559 544 – Prepaid expenses 986 1,434 1,722 – Amounts due from a subsidiary – – 3,500 – Others 868 2,499 2,249
3,984 6,584 10,845
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20 CASH AT BANK AND ON HAND AND OTHER CASH FLOW INFORMATION
(a) Cash and cash equivalents comprise:
The Group
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Cash on hand 25 22 23 Cash at bank 142,736 151,214 135,313 Cash at bank and on hand included in the consolidated statements of financial position 142,761 151,236 135,336 Less: Bank deposits with initial maturity of over three months 45,900 25,910 21,381
Cash and cash equivalents included in the consolidated cash flow statements 96,861 125,326 113,955
The Company
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Cash on hand 25 22 23 Cash at bank 139,672 138,676 130,071
Cash at bank and on hand included in the consolidated statements of financial position 139,697 138,698 130,094 Less: Bank deposits with initial maturity of over three months 45,900 25,910 21,381
Cash and cash equivalents 93,797 112,788 108,713
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(b) Reconciliation of liabilities arising from financing activities
The tables below detail changes in the Group’s liabilities from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are liabilities for which cash flows were, or future cash flows will be, classified in the Group’s consolidated statements of cash flows as cash flows from financing activities.
Interest- bearing Lease borrowings liabilities (Note 24) (Note 23) Total RMB’000 RMB’000 RMB’000
At 1 January 2018 – 23,052 23,052 ------
Changes from financing cash flows: Capital element of lease rentals paid – (3,427) (3,427) Interest element of lease rentals paid – (1,021) (1.021)
Total changes from financing cash flows – (4,448) (4,448) ------
Increase in lease liabilities from entering into new leases during the year – 1,420 1,420 Interest expenses – 1,021 1,021 ------
At 31 December 2018 and 1 January 2019 – 21,045 21,045 ------
Changes from financing cash flows: Proceeds from long-term borrowing 9,968 – 9,968 Capital element of lease rentals paid – (3,946) (3,946) Interest element of lease rentals paid – (921) (921)
Total changes from financing cash flows 9,968 (4,867) 5,101 ------
Increase in lease liabilities from entering into new leases during the year – 151 151 Interest expenses – 921 921 ------
At 31 December 2019 and 1 January 2020 9,968 17,250 27,218 ------
Changes from financing cash flows: Proceeds from long-term borrowing 10,311 – 10,311 Interest paid (575) – (575) Capital element of lease rentals paid – (5,306) (5,306) Interest element of lease rentals paid – (766) (766)
Total changes from financing cash flows 9,736 (6,072) 3,664 ------
Increase in lease liabilities from entering into new leases during the year – 1,342 1,342 Interest expenses 575 766 1,341 ------
At 31 December 2020 20,279 13,286 33,565
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(c) Total cash outflow for leases
Amounts included in the cash flow statement for leases comprise the following:
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Within investing cash flows 5,205 – – Within financing cash flows 4,448 4,867 6,072
9,653 4,867 6,072
These amounts relate to the following:
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Addition of land use right 5,205 – – Lease rentals paid 4,448 4,867 6,072
9,653 4,867 6,072
21 TRADE AND OTHER PAYABLES
(a) Trade payables
The Group
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Trade payables 23,011 41,600 54,610
The Company
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Trade payables – Subsidiaries 318 160 – – Third parties 22,567 41,516 49,809
22,885 41,676 49,809
Trade payables are due within 45 days from the date of billing for certain suppliers. All the trade payables are expected to be settled within one year.
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As of the end of each reporting periods, the ageing analysis of trade payables, based on the invoice date, is as follows:
The Group
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Within 1 year 22,953 41,535 54,537 1 to 2 years – 8 8 2 to 3 years 4 – 8 Over 3 years 54 57 57
23,011 41,600 54,610
The Company
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Within 1 year 22,827 41,611 49,736 1 to 2 years – 8 8 2 to 3 years 4 – 8 Over 3 years 54 57 57
22,885 41,676 49,809
(b) Other payables
The Group
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Other payables – Payable for staff related costs 10,635 21,013 24,730 – Payables for acquisition of property, plant and equipment 4,211 5,741 3,578 – Payables for other taxes 2,495 3,619 1,617 – Deposits received 2,317 794 700 – Dividends payable 303 303 303 – Others 629 2,018 1,810
20,590 33,488 32,738
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The Company
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Other payables – Payable for staff related costs 10,484 20,352 24,169 – Payables for acquisition of property, plant and equipment 3,984 3,398 3,532 – Payables for other taxes 2,470 3,597 1,479 – Deposits received 229 114 80 – Dividends payable 303 303 303 – Amounts due to a subsidiary – – 600 – Others 599 2,008 1,651
18,069 29,772 31,814
As at 31 December 2018, 2019 and 2020, all of the other payables are expected to be settled within one year or are repayable on demand.
22 CONTRACT LIABILITIES
The Group
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Billings in advance of performance 10,857 8,496 6,793 Sales rebates 1,582 1,434 1,443
12,439 9,930 8,236
The Company
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Billings in advance of performance 10,777 8,120 6,539 Sales rebates 1,582 1,434 1,443
12,359 9,554 7,982
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Normally the Group and the Company receives advanced payments before the sales of goods to customers. Contract liabilities represent the Group’s and the Company’s obligations to transfer goods to customers for which the Group or the Company have received advanced payments received from such customers.
Sales rebates represents rebates granted to the customers the right to redeem the rebates through purchase of the Group’s products at a discount in the future. The sales rebates granted give the customer the right to purchase the Group’s products at a discount in the future. The amount of this contract liability is based on the standalone selling price of goods delivered and undelivered, and takes into account the amount of rebates granted to customers that have not been redeemed and the expected forfeiture rate.
Revenue with the amount of RMB2,726,000, RMB9,585,000 and RMB7,016,000 recognised that was included in the balance of contract liabilities at the beginning of the year in the years of 2018, 2019 and 2020, respectively.
23 LEASE LIABILITIES
The following table shows the remaining contractual maturities of the Group’s and the Company’s lease liabilities at 31 December 2018, 2019 and 2020.
The Group
31 December 2018 31 December 2019 31 December 2020 Present Present Present value of the Total value of the Total value of the Total minimum minimum minimum minimum minimum minimum lease lease lease lease lease lease payments payments payments payments payments payments RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Within 1 year 4,691 4,814 5,420 5,561 5,555 5,689 ------
After 1 year but within 2 years 5,096 5,482 4,832 5,189 2,669 2,871 After 2 year but within 5 years 8,757 10,218 6,617 7,836 5,062 5,874 After 5 years 2,501 3,267 381 486 – –
16,354 18,967 11,830 13,511 7,731 8,745 ------
21,045 23,781 17,250 19,072 13,286 14,434
Less: total future interest expenses (2,736) (1,822) (1,148)
Present value of lease liabilities 21,045 17,250 13,286
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The Company
31 December 2018 31 December 2019 31 December 2020 Present Present Present value of the Total value of the Total value of the Total minimum minimum minimum minimum minimum minimum lease lease lease lease lease lease payments payments payments payments payments payments RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Within 1 year 3,321 3,407 3,936 4,038 4,681 4,801 ------
After 1 year but within 2 years 3,681 3,959 3,998 4,301 2,669 2,871 After 2 year but within 5 years 7,962 9,330 6,617 7,836 5,062 5,874 After 5 years 2,501 3,267 381 486 – –
14,144 16,556 10,996 12,623 7,731 8,745 ------
17,465 19,963 14,932 16,661 12,412 13,546
Less: total future interest expenses (2,499) (1,729) (1,134)
Present value of lease liabilities 17,464 14,932 12,412
24 INTEREST-BEARING BORROWINGS
The Group’s bank borrowings are secured and repayable as follows:
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Within 1 year – – 800 ------
After 1 year but within 2 years – 800 4,800 After 2 years but within 5 years – 9,168 14,679
– 9,968 19,479 ------
– 9,968 20,279
At 31 December 2020, the Group’s bank loans are secured by property, plant and equipment with an aggregate carrying value of RMB44,000,000.
At 31 December 2019, the Group’s bank loans are secured by bank deposits with an aggregate carrying value of RMB9,567,000.
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25 EQUITY SETTLED SHARE-BASED TRANSACTIONS
On 9 September 2011, a share incentive scheme (“Share Incentive Plan”) has been established. On 18 February 2016, 31 March 2016 and 26 July 2017, restricted shares of 180,000 shares, 180,000 shares and 242,400 shares were granted to several eligible directors/employees of the Group respectively. The eligible directors/employees participated in the Share Incentive Plan are entitled options to subscribe the Company’s shares at RMB0.88 each.
The fair value of services received in return for shares granted was measured by reference to the fair value of share granted which was measured based on the share price of the Company on the granted date with reference to the prevailing market transaction price.
(a) The terms and conditions of each grant during the Track Record Period are as follows:
Number of Contractual instruments Vesting Conditions life of shares
Restricted shares granted: – on 18 February 2016 180,000 Service period 1-3 years conditions apply (Note (i))
– on 21 March 2016 180,000 Service period 1-3 years conditions apply (Note (i))
– on 26 July 2017 242,400 Service period 1-2 years conditions apply (Note (ii))
602,400
(i) The restricted shares will vest over a three-year period, with 33.33%, 33.33% and 33.33% of total number of shares vesting on the first trading day after the first, second and third anniversary date from the date of the registration of grant, respectively, upon meeting the achievement of vesting conditions with reference to the service period of the directors and the employees.
(ii) The restricted shares will vest over a two-year period, with 50% and 50% of total number of shares vesting on the first trading day after the first and second anniversary date from the date of the registration of grant, respectively, upon meeting the achievement of vesting conditions with reference to the service period of the directors and the employees.
(b) During years ended 31 December 2018, 2019 and 2020, the Group has recognised share-based payment expenses of RMB2,656,000, RMB1,448,000, nil, respectively.
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26 INCOME TAX IN THE CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(a) Current taxation in the consolidated statements of financial position represents:
The Group and the Company
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
PRC Corporate Income Tax At 1 January 1,465 1,644 1,694 Charged to profit or loss (Note 7) 7,566 8,812 8,033 Payments during the year (7,387) (8,762) (7,240)
At 31 December 1,644 1,694 2,487
(b) Deferred tax assets recognised:
Movement of each component of deferred tax assets
The components of deferred tax assets recognised in the consolidated statements of financial position and the movements during the Track Record Period are as follows:
The Group
Unrealised profit arising from intra- Credit loss group Accrued Deferred tax arising from: allowance transactions expenses Total RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2018 1,473 – 526 1,999 Credited/(charged) to profit or loss 55 – (196) (141)
At 31 December 2018 and 1 January 2019 1,528 – 330 1,858 Credited to profit or loss 43 203 411 657
At 31 December 2019 and 1 January 2020 1,571 203 741 2,515 Credited/(charged) to profit or loss 644 34 (453) 225
At 31 December 2020 2,215 237 288 2,740
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The Company
Unrealised profit arising from intra- Credit loss group Accrued Deferred tax arising from: allowance transactions expenses Total RMB’000 RMB’000 RMB’000 RMB’000
At 1 January 2018 1,473 – 526 1,999 Credited/(charged) to profit or loss 55 – (196) (141)
At 31 December 2018 and 1 January 2019 1,528 – 330 1,858 Credited to profit or loss 43 103 411 557
At 31 December 2019 and 1 January 2020 1,571 103 741 2,415 Credited/(charged) to profit or loss 644 72 (453) 263
At 31 December 2020 2,215 175 288 2,678
(c) Deferred tax assets not recognised
In accordance with the accounting policy set out in Note 2(s), the Group has not recognised deferred tax assets in respect of cumulative tax losses of RMB3,360,000, RMB5,847,000, and RMB10,283,000 as at 31 December 2018, 2019 and 2020, respectively, as it is not probable that future taxable profits against which the losses can be utilised will be available in the relevant tax jurisdiction/entity.
Pursuant to the relevant laws and regulations in the PRC, the unrecognised tax losses at the end of the reporting period will expire in the following years:
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Year of 2021 538 538 538 Year of 2022 1,566 1,566 1,566 Year of 2023 1,256 1,256 1,256 Year of 2024 – 2,487 2,487 After 2024 – – 4,436
3,360 5,847 10,283
27 DEFERRED INCOME
The Group
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
At 1 January – – 2,730 Additions – 2,730 – Credited to profit or loss – – (53)
At 31 December – 2,730 2,677
Deferred income of the Group mainly represents government grants received in relation to the acquisition of property, plant and equipment, which would be recognised in “Other gains/(losses), net” over the expected useful lives of the relevant assets.
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28 CAPITAL, RESERVES, DIVIDENDS AND NON-CONTROLLING INTERESTS
(a) Movements in components of equity
Details of the changes in the Company’s individual component of equity during the Track Record Period are set out below:
Share Capital Statutory Retained Note capital reserve reserve earnings Total equity RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Note 28(b)) (Note 28(d)) (Note 28(d))
Balance at 1 January 2018 62,400 55,454 9,327 49,034 176,215
Changes in equity for 2018: Profit and total comprehensive income for the year – – – 25,668 25,668 Dividends declared 28(c) – – – (7,488) (7,488) Appropriation to statutory reserve – – 2,567 (2,567) – Equity settled share-based payments – 2,656 – – 2,656
Balance at 31 December 2018 and 1 January 2019 62,400 58,110 11,894 64,647 197,051
Changes in equity for 2019: Profit and total comprehensive income for the year – – – 42,319 42,319 Dividends declared 28(c) – – – (30,576) (30,576) Appropriation to statutory reserve – – 4,232 (4,232) – Equity settled share-based payments – 1,448 – – 1,448
Balance at 31 December 2019 62,400 59,558 16,126 72,158 210,242
Share Capital Statutory Retained capital reserve reserves earnings Total equity RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Note 28(b)) (Note 28(d)) (Note 28(d))
Balance at 1 January 2020 62,400 59,558 16,126 72,158 210,242
Changes in equity for year ended 31 December 2020: Profit and total comprehensive income for the year –– – 40,621 40,621 Appropriation to statutory reserve – – 4,079 (4,079) –
Balance at 31 December 2020 62,400 29,558 20,205 108,700 250,863
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(b) Share capital
The Company was incorporated in the PRC as a joint stock limited liability company under the PRC, with an authorised share capital of RMB62,400,000, divided into 62,400,000 shares with par value of RMB1 each during the years ended 31 December 2018, 2019 and 2020.
(c) Dividends
Dividends declared and paid to the equity shareholders of the Company during the Track Record Period are as follows:
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Final dividend in respect of the previous year, declared and paid during the year 7,488 30,576 –
Dividend per ordinary share (RMB) 0.12 0.49 –
(d) Nature and purpose of reserves
(i) Capital reserve
For the purpose of the Historical Financial Information, capital reserve balance represents:
– the aggregate amount of proceeds in excess of the par value upon shares issuance received by the Company at the respective dates; and
– the portion of the grant date fair value of unvested restricted shares granted to the employees of the Group that has been recognised in accordance with the accounting policy adopted for share-based payments in Note 2(r)(ii).
(ii) Statutory surplus reserve
Pursuant to the Company’s Articles of Association, the Company is required to transfer 10% of net profit (after offsetting prior year losses) at determined in accordance with the accounting rules and regulations of the PRC to the statutory reserve until such reserve reaches 50% of the registered capital of the Company. The statutory reserve can be utilised, upon approval by the relevant authorities, to offset accumulated losses or to increase capital of the Company and is non-distributable other than in liquidation.
(iii) Exchange reserve
The exchange reserve comprises foreign exchange differences arising from the translation of the financial statements of foreign operations into RMB. The reserve is dealt with in accordance with the accounting policy set out in Note 2(w).
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(e) Capital management
The Group’s primary objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders, by pricing products and services commensurately with the level of risk and by securing access to finance at a reasonable cost. The Group’s overall strategy remains unchanged throughout the Track Record Period.
The Group actively and regularly reviews and manages its capital structure to maintain a balance between the higher shareholder returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position, and makes adjustments to the capital structure in light of changes in economic conditions.
The Group monitors its capital based on the total equity reported in the statement of changes in equity.
Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements.
29 FINANCIAL RISK MANAGEMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS
Exposure to credit, liquidity and interest rate risks arises in the normal course of the Group’s business.
The Group’s exposure to these risks and the financial risk management policies and practices used by the Group to manage these risks are described below.
(a) Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to the Group and the Company. The Group’s and the Company’s credit risk is primarily attributable to trade and other receivables. The Group’s and the Company’s exposure to credit risk arising from cash and cash equivalents is limited because the counterparties are banks and financial institutions with a minimum credit rating assigned by the management of the Group and the Company, for which the Group and the Company considers to have low credit risk.
Trade receivables
The Group’s and the Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer rather than the industry in which the customers operate and therefore significant concentrations of credit risk primarily arise when the Group and the Company have significant exposure to individual customers. At 31 December 2018, 2019 and 2020, 35%, 27% and 33% of the total trade receivables, respectively, were due from the Group’s largest debtor, and 83%, 69% and 80% of the total trade receivables, respectively, were due from the Group’s five largest debtors. At 31 December 2018, 2019 and 2020, 35%, 27% and 33% of the total trade receivables, respectively, were due from the Company’s largest debtor, and 83%, 68% and 78% of the total trade receivables, respectively, were due from the Company’s five largest debtors.
Individual credit evaluations are performed on all customers requiring credit over a certain amount. These evaluations focus on the customer’s past history of making payments when due and current ability to pay, and take into account information specific to the customer as well as pertaining to the economic environment in which the customer operates. Trade receivables are due from the date of billing. Normally, the Group and the Company does not obtain collateral from customers.
The Group and the Company measures loss allowances for trade receivables at an amount equal to lifetime ECLs, which is calculated using a provision matrix. As the Group’s and the Company’s historical credit loss experience indicate significantly different loss patterns for different customer segments, the loss allowance based on past due status is distinguished between the Group’s and the Company’s different customer bases.
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The following tables provide information about the Group’s exposure to credit risk and ECLs for trade receivables as at 31 December 2018, 2019 and 2020.
At 31 December 2018 Gross Expected carrying Loss loss rate amount allowance % RMB’000 RMB’000
Within 1 year 0.19% 15,981 31 1-2 years 10.32% 1 * 2-3 years 14.77% 1 * Over 3 years 100% 1,678 1,678
17,661 1,709
At 31 December 2019 Gross Expected carrying Loss loss rate amount allowance % RMB’000 RMB’000
Within 1 year 0.24% 22,059 53 1-2 years 10.53% 106 11 2-3 years 15.89% – – Over 3 years 100% 1,678 1,678
23,843 1,742
At 31 December 2020 Gross Expected carrying Loss loss rate amount allowance % RMB’000 RMB’000
Within 1 year 0.27% 35,051 95 1-2 years 10.86% 1,510 164 2-3 years 16.67% 102 17 Over 3 years 100% 1,678 1,678
38,341 1,954
Expected loss rates are based on actual loss experience over the past two years. These rates are adjusted to reflect differences between economic conditions during the period over which the historic data has been collected, current conditions and the Group’s view of economic conditions over the expected lives of the receivables.
* The balance represents an amount less than RMB1,000.
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Movement in the loss allowance account in respect of trade receivables during the year is as follows:
The Group
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Balance at 1 January 1,682 1,709 1,742 Impairment loss recognisedduring the year 27 33 212
Balance at 31 December 1,709 1,742 1,954
(b) Liquidity risk
The following tables show the remaining contractual maturities at the end of 31 December 2018, 2019 and 2020 of the Group’s non-derivative financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on rates current at the end of the reporting period) and the earliest date the Group can be required to pay.
At 31 December 2018 Contractual undiscounted cash outflow Within More than More than 1 year 1 year but 2 years but or on less than less than More than Carrying demand 2 years 5 years 5 years Total amount RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Trade and other payables 43,601 – – – 43,601 43,601 Lease liabilities 4,814 5,482 10,218 3,267 23,781 21,045
48,415 5,482 10,218 3,267 67,382 64,646
At 31 December 2019 Contractual undiscounted cash outflow Within More than More than 1 year 1 year but 2 years but or on less than less than More than Carrying demand 2 years 5 years 5 years Total amount RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Interest-bearing borrowings 575 1,359 10,493 515 12,942 9,968 Trade and other payables 75,088 – – – 75,088 75,088 Lease liabilities 5,561 5,189 7,836 486 19,072 17,250
81,224 6,548 18,329 1,001 107,102 102,306
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At 31 December 2020 Contractual undiscounted cash outflow Within More than More than 1 year 1 year but 2 years but or on less than less than More than Carrying demand 2 years 5 years 5 years Total amount RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Interest-bearing borrowings 1,950 5,858 16,963 487 25,258 20,279 Trade and other payables 87,348 – – – 87,348 87,348 Lease liabilities 5,689 2,871 5,874 – 14,434 13,286
94,987 8,729 22,837 487 127,040 120,913
(c) Interest rate risk
The Group’s interest rate risk arises primarily from interest-bearing borrowings.
(i) Interest rate risk profile
The following table details the interest rate profile of the Group’s borrowings at the end of each reporting period.
At 31 December 2018 At 31 December 2019 At 31 December 2020 Effective Effective Effective interest interest interest rate Amounts rate Amounts rate Amounts % RMB’000 % RMB’000 % RMB’000
Fixed rate borrowings: – Lease liabilities 4.75% 21,045 4.75% 17,250 4.75% 13,286
Variable rate borrowings: – Interest-bearing borrowings – – 5.88% 9,968 5.88% 20,279
Total borrowings 21,045 27,218 33,565
Fixed rate borrowings as a percentage of total net borrowings 100% 63% 40%
(ii) Sensitivity analysis
At 31 December 2018, 2019 and 2020, it is estimated that a general increase/decrease of 100 basis points in interest rates, with all other variables held constant, would have increased/decrease the Group’s profit after tax and decreased/increased the Group’s retained earnings by approximately Nil, RMB85,000 and RMB17,000 respectively.
The sensitivity analysis above indicates the instantaneous change in the Group’s profit after tax and retained earnings that would arise assuming that the change in interest rates had occurred at the end of the each reporting period. The impact is estimated as an annualised impact on interest exposure of such a change in interest rates. The sensitivity analysis is performed on the same basis during the Track Record Period.
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(d) Currency risk
The Group is exposed to currency risk primarily through sales, purchases which give rise to cash, receivables and payables balances that are denominated in a foreign currency, i.e. a currency other than the functional currency of the operations to which the transactions relate. The currencies giving rise to this risk are primarily United States dollars (US$), Euro and Indian rupee (Rs).
(i) Exposure to currency risk
The following table details the Group’s exposure at the end of the reporting period to currency risk arising from recognised assets or liabilities denominated in a currency other than the functional currency of the entity to which they relate. For presentation purposes, the amounts of the exposure are shown in RMB, translated using the spot rate at the end of the reporting period. Differences resulting from the translation of the financial statements of foreign operations into the Group’s presentation currency are excluded.
At 31 December 2018 At 31 December 2019 At 31 December 2020 US$ Euro US$ Euro RS US$ Euro RS RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Cash at bank and on hand 44,667 670 47,659 3,952 1,257 84,882 4,058 274 Trade receivables 11,452 – 16,815 975 – 29,876 1,001 – Trade payables – (897) – (1,111) – – (809) –
Gross exposure arising from recognised assets and liabilities 56,119 (227) 64,474 3,816 1,257 114,758 4,250 274
(ii) Sensitivity analysis
The following table indicates the instantaneous change in the Group’s profit after tax (and retained earnings) that would arise if foreign exchange rates to which the Group has significant exposure at the end of the reporting year had changed at that date, assuming all other risk variables remained constant.
Increase/ Effect on profit after tax (decrease) Year ended 31 December in foreign exchange rates 2018 2019 2020 RMB’000 RMB’000 RMB’000
US$ 5% 2,357 2,712 4,853 (5%) (2,357) (2,712) (4,853)
EUR 5% (10) 162 181 (5%) 10 (162) (181)
RS 5% – 47 10 (5%) – (47) (10)
Results of the analysis as presented in the above table represent an aggregation of the instantaneous effects on each of the Group entities’ profit after tax and equity measured in the respective functional currencies, translated into RMB at the exchange rate ruling at the end of the reporting year for presentation purposes.
The sensitivity analysis assumes that the change in foreign exchange rates had been applied to re-measure those financial instruments held by the Group which expose the Group to foreign currency risk at the end of the reporting year. The analysis excludes differences that would result from the translation of the financial statements of foreign operations into the Group’s presentation currency, which depends on the foreign currencies the Group is exposed to, may or may not have an effect on the Group’s net assets. The analysis is performed on the same basis during the Track Record year.
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(e) Fair value measurement
(i) Financial assets measured at fair value
Fair value hierarchy
The following table presents the fair value of the Group’s financial instruments measured at the end of the reporting period on a recurring basis, categorised into the three-level fair value hierarchy as defined in IFRS 13, Fair value measurement. The level into which a fair value measurement is classified is determined with reference to the observability and significance of the inputs used in the valuation technique as follows:
• Level 1 valuations: Fair value measured using only Level 1 inputs i.e. unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.
• Level 2 valuations: Fair value measured using Level 2 inputs i.e. observable inputs which fail to meet Level 1, and not using significant unobservable inputs. Unobservable inputs are inputs for which market data are not available.
• Level 3 valuations: Fair value measured using significant unobservable inputs.
Fair value Fair value Fair value as at as at as at 31 December 31 December 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Financial assets measured at FVTPL (Note 16) Level 2 – 8,000 – Level 3 – – 20,993
Valuation techniques and inputs used in Level 2 fair value measurements
The fair value of the Vincente Medical investment measured at FVTPL as at 31 December 2019 is based on the consideration of the subscription. The fair value of the equity investment as at 31 December 2019 would not be materially different from the consideration, as the subscription took place on 19 October 2019 (see Note 16).
Information about Level 3 fair value measurements
Unobservable Valuation techniques input Range
– Vincente Medical Discounted Cash Flow Discount rate 14.88% – Cadyson Medical Discounted Cash Flow Discount rate 14.68%
The fair value of the Vincente Medical investment measured at FVTPL as at 31 December 2020 is based on the discounted cash flow model. As at 31 December 2020, it is estimated that with all other variables held constant, a decrease/increase in discount rate by 1% would have increased/decreased the profit after tax (and increased/decreased retained earnings) by RMB191,000 and RMB187,000 respectively.
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The fair value of the Cadyson Medical investment measured at FVTPL as at 31 December 2020 is based on the discounted cash flow model. As at 31 December 2020, it is estimated that with all other variables held constant, a decrease/increase in discount rate by 1% would have increased/decreased the profit after tax (and increased/decreased retained earnings) by RMB225,000 and RMB220,000 respectively.
The movements during the year/period in the balance of Level 3 fair value measurements are as follows:
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Unlisted equity investments: At 1 January – – – Transferred into Level 3 – – 8,000 Payment for purchases – – 12,600 Change in fair value recognised in profit or loss – – 393
At 31 December – – 20,993
(ii) Fair value of financial assets and liabilities carried at other than fair value
The carrying amounts of the Group’s financial instruments carried at amortised cost were not materially different from their fair values as at 31 December 2018, 2019 and 2020.
30 CONTINGENT LIABILITIES
On 8 January 2019, a former employee (the “Employee”) filed a lawsuit to the Company, Beijing Kaiderui Investment Management Center (Limited Partnership) (北京凱德瑞投資管理中心(有限合夥)) (“Kaiderui”) and the general partner of Kariderui (the “GP”), claiming the Company, Kaiderui and the GP to repurchase the Employee’s granted shares under Share Incentive Plan with the consideration of RMB3.87 million. According to the results of the first instance by the court, the GP was responsible to repurchase the incentive shares from the employee with the consideration of RMB2.45 million. The Employee and the GP both appealed and the latest rehearing was held on 17 June 2021, upon which the interested parties conducted adduction and examination of evidence without inquiring and debating. The second hearing will be held on 12 July 2021.
Based on the advice from the Company’s legal counsel, the possibility that the Company undertake the liability in relation to such lawsuit is lower than 50%. As at the date of this report, given the above-mentioned lawsuit is yet to be concluded, the outcome and potential financial impact, if any cannot be estimated reasonably, and therefore no provision has therefore been made in respect of this claim,.
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31 COMMITMENTS
Capital commitments outstanding at respective reporting period end dates not provided for in the Historical Financial Information were as follows:
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Purchase of property, plant and equipment: Contracted for – 19,019 3,463
32 MATERIAL RELATED PARTY TRANSACTIONS
(a) Name and relationship with related parties
During the Track Record Period, transactions with the following parties are considered as related party transactions:
Name of related party Relationship with the Group
Panther Brazil Joint venture (became an associate after June 2020) of the Company Panther Canada Associate of the Company Beijing Hongchengjijia Technology Co., Ltd.* Company controlled by a close family member of (“Beijing Hongchengjijia”) two shareholders in the year of 2018 北京宏承吉佳科技有限公司 Quzhi Vision Media Culture (Beijing) Co., Ltd.* Company controlled by a close family member of (“Quzhi Vision Media”) two shareholders 曲直視線傳媒文化(北京)有限公司 Qingdao Kaiyujia Material Co., Ltd.* Company controlled by a close family member of (“Qingdao Kaiyujia”) a shareholder in the year of 2018 and 2019 青島凱譽佳物資有限公司
* The English names of these companies are for reference only and have not been registered.
(b) Significant related party transactions
During years ended 31 December 2018, 2019 and 2020, the Group entered into the following transactions with its related parties.
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Sales of products to – Panther Brazil 302 5,906 15,944 – Panther Canada – – 575 – Beijing Hongchengjijia 121 – – – Qingdao Kaiyujia 310 401 –
Leasing certain premises and receiving property management services from – Quzhi Media 1,950 2,091 2,520
Receiving consulting services from – Panther Brazil 757 1,136 887 – Panther Canada – – 308
Purchase of software from – Beijing Hongchengjijia 272 – –
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(c) Balances with related parties
At 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Trade related Trade and bill receivables – Panther Brazil 98 5,949 12,124 – Panther Canada – – 38 – Beijing Hongchengjijia 140 – –
Prepayments and other receivables – Quzhi Media – – 208
(d) Key management personnel remuneration
Remuneration for key management personnel of the Group, including amounts paid to the Company’s directors as disclosed in Note 8 and certain of the highest paid employees as disclosed in Note 9, is as follows:
Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000
Short-term employee benefits 12,037 23,923 10,574 Retirement scheme contributions 433 371 90 Share-based payments 2,656 1,448 –
15,126 25,742 10,664
Total remuneration is included in “staff costs” (see Note 6(b)).
33 NON-ADJUSTING EVENTS AFTER THE REPORTING PERIOD
Pursuant to an investment agreement entered between the Group and other shareholders of Vincente Medical in April 2021, the Company increased its interests in Vincente Medical, from 18% to 51% on 31 May 2021. The Company injected cash of RMB12 million to Vincente Medical in June 2021 and is obligated to inject a further RMB55 million in six instalments based on the progress of the research & development projects of Vincente Medical.
The Company is still in the process of assessing the fair value of identifiable assets and liabilities of Vincente Medical at the completion date and hence the disclosure of amounts to be recognised in each line item in the consolidated statement of financial position impracticable in this report.
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34 POSSIBLE IMPACT OF AMENDMENTS, NEW STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE FOR THE TRACK RECORD PERIOD
Up to the date of this report, the IASB has issued a number of amendments, and a new standard, IFRS 17, Insurance contracts, which are not yet effective for the year ended 31 December 2020 and which have not been adopted in the Historical Financial Information. These developments include the following which may be relevant to the Group.
Effective for accounting periods beginning on or after
Amendment to IFRS 16, Covid-19-Related Rent Concessions 1 June 2020 Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16, Interest Rate Benchmark Reform – Phase 2 1 January 2021 Amendments to IFRS 3, Reference to the Conceptual Framework 1 January 2022 Amendments to IAS 16, Property, Plant and Equipment: Proceeds before Intended Use 1 January 2022 Amendments to IAS 37, Onerous Contracts – Cost of Fulfilling a Contract 1 January 2022 Annual Improvements to IFRSs 2018-2020 Cycle 1 January 2022 Amendments to IAS 1, Classification of Liabilities as Current or Non-current 1 January 2023 Amendments to IFRS 17 Insurance contracts 1 January 2023 Amendments to IAS 1 and IFRS Practice Statement 2, Disclosure of Accounting Policies 1 January 2023 Amendments to IAS 8, Definition of Accounting Estimates 1 January 2023 Amendments to IFRS 4, Extension of the temporary exemption from applying IFRS 9 1 January 2023 Amendments to IFRS 10 and IAS 28, Sale or contribution of assets between an investor and its associate or joint venture To be determined
The Group is in the process of making an assessment of what the impact of these developments is expected to be in the period of initial application. So far it has concluded that the adoption of them is unlikely to have a significant impact on the consolidated financial statements.
SUBSEQUENT FINANCIAL STATEMENTS
No audited financial statements have been prepared by the Company and its subsidiaries comprising the Group in respect of any period subsequent to 31 December 2020.
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UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following information does not form part of the Accountants’ Report received from the Company’s reporting accountants, KPMG, Certified Public Accountants, Hong Kong, as set out in Appendix I to this document, and is included herein for illustrative purposes only. The unaudited pro forma financial information should be read in conjunction with the section headed “Financial information” in this document and the historical financial information included in the Accountants’ Report set out in Appendix I to this document.
A. UNAUDITED PRO FORMA ADJUSTED NET TANGIBLE ASSETS
The following unaudited pro forma statement of adjusted net tangible assets of our Group is prepared in accordance with Rule 4.29 of the Listing Rules and is set out below to illustrate the effect of the [REDACTED] on the consolidated net tangible assets of the Group attributable to the equity shareholders of the Company as at 31 December 2020 as if the [REDACTED] had taken place on 31 December 2020.
The unaudited pro forma statement of adjusted net tangible assets has been prepared for illustrative purposes only and because of its hypothetical nature, it may not give a true picture of the financial position of the Group had the [REDACTED] been completed as at 31 December 2020 or at any future date.
Consolidated net tangible Unaudited assets pro forma attributable adjusted net to equity tangible shareholders assets of the attributable Unaudited pro forma Company Estimated to equity adjusted net tangible assets as at [REDACTED] shareholders attributable to equity 31 December from the of the shareholders of the 2020(1) [REDACTED](2) Company Company per Share RMB’000 RMB’000 RMB’000 RMB(3) HK$(4)
Based on an [REDACTED] of HK$[REDACTED] per Share 247,254 [REDACTED][REDACTED][REDACTED][REDACTED] Based on an [REDACTED] of HK$[REDACTED] per Share 247,254 [REDACTED][REDACTED][REDACTED][REDACTED]
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Notes:
(1) The consolidated net tangible assets attributable to the equity shareholders of the Company as at 31 December 2020 is arrived at after deducting intangible assets of RMB270,000 from the consolidated total equity attributable to equity shareholders of the Company as at 31 December 2020 of RMB247,524,000, which is extracted from the Accountants’ Report set out in Appendix I to this document.
(2) The estimated [REDACTED] from the [REDACTED] are based on the expected issuance of [REDACTED] shares and the indicative [REDACTED] of HK$[REDACTED] per Share (being the minimum [REDACTED]) and HK$[REDACTED] per Share (being the maximum [REDACTED]), after deduction of the [REDACTED] fees and other related expenses payable by the Group, and does not take into account any shares which may be issued upon the exercise of the [REDACTED].
The estimated [REDACTED]ofthe[REDACTED] have been converted to Renminbi at the PBOC rate of HK$1 to RMB0.84 prevailing on 31 December 2020. No representation is made that Hong Kong dollars amount have been, could have been or may be converted to Renminbi, or vice versa, at that rate or at any other rate.
(3) The unaudited pro forma adjusted net tangible assets attributable to equity shareholders of the Company per Share is arrived at by dividing the unaudited pro forma adjusted net tangible assets attributable to equity shareholders of the Company by [REDACTED] Shares, being the number of shares expected to be in issue immediately following the completion of the [REDACTED], and does not take into account any shares which may be issued upon the exercise of the [REDACTED].
(4) The unaudited pro forma adjusted net tangible assets attributable to equity shareholders of the Company per Share amounts in RMB are converted to Hong Kong dollar with the PBOC rate of RMB1.00 to HK$1.19 prevailing on 31 December 2020. No representation is made that Renminbi amount have been, could have been or may be converted to Hong Kong dollars, or vice versa, at that rate or at any other rate.
(5) No adjustment has been made to reflect any trading result or other transactions of the Group entered into subsequent to 31 December 2020, including but not limited to the dividend of RMB6,200,000 declared on June 25, 2021. Had such dividend been declared and paid on December 31, 2020, our unaudited pro forma adjusted net tangible assets attributable to equity shareholders of the Company as of December 31, 2020 would have been decreased by approximately RMB6,200,000, and our unaudited pro forma adjusted net tangible assets attributable to equity shareholders of the Company per Share would have been decreased by approximately RMB[REDACTED].
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[REDACTED]
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[REDACTED]
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[REDACTED]
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[REDACTED]
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TAXATION ON HOLDERS OF SECURITIES
The following is a summary of certain PRC taxation consequences of the ownership of H Shares by an investor who purchases such H Shares in connection with the [REDACTED] and holds the H Shares as capital assets. This summary does not purport to address all material taxation consequences of the ownership of H Shares, and does not take into account the specific circumstances of any particular investor, some of which may be subject to special rules. This summary is based on the tax laws of the PRC as in effect on the date as of the date of this document, all of which are subject to change (or changes in interpretation) and may have retroactive effect.
This section of this document does not address any aspects of PRC taxation other than income tax, capital gains tax, stamp duty and estate duty. Prospective investors are urged to consult their respective tax advisors regarding the PRC and other taxation consequences arising from the ownership and disposal of H Shares.
PRC
Dividend tax
Individual Investors
According to the Individual Income Tax Law of the People’s Republic of China (中華人 民共和國個人所得稅法) (“IIT Law”) which was adopted and implemented by the National People’s Congress on September 10, 1980, and latest amended on August 31, 2019, and the Regulations for the Implementation of the Individual Income Tax Law of the People’s Republic of China (中華人民共和國個人所得稅法實施條例) which was promulgated by the State Council on January 28, 1994, and latest amended on December 18, 2018, a 20% withholding tax shall be deducted from the dividend paid by Chinese company to individual investors.
According to the Circular on Some Policy Questions Concerning Individual Income Tax (Cai Shui Zi [1994] No. 020) (關於個人所得稅若干政策問題的通知) issued on May 13, 1994 by the MOF and the SAT, The incomes gained by individual foreigners from dividends and bonuses of enterprise with foreign investment are exempt from individual income tax for the time being.
According to the Circular on the Individual Income Tax Collection and Administration after the Guo Shui Fa [1993] No. 045 Document is Abolished (Guo Shui Han [2011] No. 348) (關於國稅發[1993]045號文件廢止後有關個人所得稅徵管問題的通知) issued on June 28, 2011 by the SAT, as for the income from dividends and bonuses obtained by foreign resident individual shareholders from the shares issued in Hong Kong by domestic non-foreign invested enterprises, the individual income tax shall be withheld by withholding agents according to the item of “income from interest, dividends and bonuses”. Where a domestic non-foreign invested enterprise issues shares in Hong Kong, its foreign resident individual shareholders can enjoy relevant tax incentives in accordance with tax treaties signed between their countries of
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According to the Arrangement between the Mainland and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and the Prevention of Fiscal Evasion (內地和香港特別行政區關於對所得避免雙重徵稅和防止偷漏稅的安排), which was signed on August 21, 2006, the Chinese Government may levy taxes on the dividends paid by a Chinese company to Hong Kong residents (including natural persons and legal entities) in an amount not exceeding 10% of the total dividends payable by the Chinese company. If a Hong Kong resident directly holds 25% or more of the equity interest in a Chinese company, then such tax shall not exceed 5% of the total dividends payable by the Chinese company if the Hong Kong resident is the beneficial owner of the equity and certain other conditions are met.
Enterprise Investors
According to the Enterprise Income Tax Law of the People’s Republic of China (中華人 民共和國企業所得稅法) (“EIT Law”) which was adopted by the National People’s Congress on March 16, 2007, implemented on January 1, 2008, and latest amended on December 29, 2018, and Regulation on the Implementation of the Enterprise Income Tax Law of the People’s Republic of China (中華人民共和國企業所得稅法實施條例) which was promulgated by the State Council on December 6, 2007, implemented on January 1, 2008, and latest amended on April 23, 2019, a nonresident enterprise is generally subject to a 10% corporate income tax on PRC-sourced income (including dividends received from a PRC resident enterprise), if it does not have an establishment or premise in the PRC or has an establishment or premise in the PRC but its PRC-sourced income has no real connection with such establishment or premise. The aforesaid income tax payable for nonresident enterprises are deducted at source, where the payer of the income are required to withhold the income tax from the amount to be paid to the nonresident enterprise when such payment is made or due.
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According to the Circular of the State Administration of Taxation on the Withholding and Remitting of Enterprise Income Tax on the Dividend Distributed by Chinese Resident Enterprise to Overseas H-Share Non-resident Enterprise (Guo Shui Han [2008] No. 897) (關於中國居民企業向境外H股非居民企業股東派發股利代扣代繳企業所得稅有關問題的通知) issued by the SAT and taking effect on November 6, 2008, Where a Chinese resident enterprise pays dividends for the year of 2008 or any year thereafter to its H-share holders which are overseas non-resident enterprises, it shall withhold the enterprise income tax thereon at the uniform rate of 10%. After receiving the dividends, a non-resident enterprise shareholder may, by itself or through an authorized agent or withholding agent, submit an application to the competent tax authority for enjoying any treatment under a relevant tax agreement (arrangement), and provide proof that it is an actual beneficial owner satisfying the requirements of the tax agreement (arrangement). If the application is justified upon verification, the competent tax authority shall refund the difference between the tax paid and the tax payable calculated at the tax rate under the tax agreement (arrangement).
According to the Arrangement between the Mainland and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and the Prevention of Fiscal Evasion (內地和香港特別行政區關於對所得避免雙重徵稅和防止偷漏稅的安排), the Chinese Government may levy taxes on the dividends paid by a Chinese company to Hong Kong residents (including natural persons and legal entities) in an amount not exceeding 10% of the total dividends payable by the Chinese company. If a Hong Kong resident directly holds 25% or more of the equity interest in a Chinese company, then such tax shall not exceed 5% of the total dividends payable by the Chinese company if the Hong Kong resident is the beneficial owner of the equity and certain other conditions are met.
Taxation treaty
Non-resident investors residing in jurisdictions which have entered into treaties or adjustments for the avoidance of double taxation with the PRC are entitled to a reduction of the Chinese enterprise income tax imposed on the dividends received from PRC companies. The PRC currently has entered into Avoidance of Double Taxation Treaties or Arrangements with a number of countries and regions including Hong Kong Special Administrative Region, Macau Special Administrative Region, Australia, Canada, France, Germany, Japan, Malaysia, the Netherlands, Singapore, the United Kingdom and the United States.
Capital Gains Tax
Individual Investors
According to the IIT Law, gains realized on the sale of equity interests in PRC resident enterprises are subject to the income tax at a rate of 20%.
Pursuant to the Circular on Declaring that Individual Income Tax Continues to be Exempted over Income of Individuals from the Transfer of Shares (Cai Shui Zi [1998] No. 61) (關於個人轉讓股票所得繼續暫免徵收個人所得稅的通知) jointly issued by the MOF and the SAT on March 30, 1998, from January 1, 1997, income of individuals from transfer of the
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However, According to the Circular on Related Issues on Levying Individual Income Tax over the Income Received by Individuals from the Transfer of Listed Shares Subject to Sales Limitation (Cai Shui [2009] No. 167) (關於個人轉讓上市公司限售股所得徵收個人所得稅有關 問題的通知) jointly issued by the MOF, the SAT and CSRC on December 31, 2009, and taking effect on January 1, 2010, individuals’ income from the transfer of listed shares obtained from the public offering of listed companies and transfer market on the Shanghai Stock Exchange and the Shenzhen Stock Exchange shall continue to be exempted from individual income tax, except for the relevant shares which are subject to sales restriction as defined in the Supplementary Notice on Issues Concerning the Levy of Individual Income Tax on Individuals’ Income from the Transfer of Restricted Stocks of Listed Companies (Cai Shui [2010] No. 70) (關於個人轉讓上市公司限售股所得徵收個人所得稅有關問題的補充通知) jointly issued and implemented by such departments on November 10, 2010.
As of the Latest Practicable Date, no provisions have expressly provided that individual income tax shall be levied from non-Chinese resident individuals on the transfer of shares in PRC resident enterprises listed on overseas stock exchanges, and no such income tax was levied by PRC tax authorities in practice.
Enterprise Investors
In accordance with the EIT Law and its implementation provisions, a non-resident enterprise is generally subject to a 10% corporate income tax on PRC-sourced income, including gains derived from the disposal of equity interests in a PRC resident enterprise, if it does not have an establishment or place in the PRC or has an establishment or premises in the PRC but the PRC-sourced income is not connected with such establishment or premise. Such income tax for non-resident enterprises are deducted at source, where the payer of the income are required to withhold the income tax from the amount to be paid to the non-resident enterprise when such payment is made or due. The withholding tax may be reduced pursuant to applicable treaties or agreements on avoidance of double taxation.
Stamp Duty
Pursuant to the Provisional Regulations of the PRC on Stamp Duty (中華人民共和國印花 稅暫行條例), which was issued by the State Council on August 6, 1988 and latest amended on January 8, 2011, and the Implementation Provisions of Provisional Regulations of the PRC on Stamp Duty (中華人民共和國印花稅暫行條例施行細則), which was promulgated by the MOF on September 29, 1988 and implemented on October 1, 1988, PRC stamp duty only applies to specific taxable document executed or received within the PRC, having legally binding force in the PRC and protected under the PRC laws, thus the requirements of the stamp duty imposed on the transfer of shares of PRC listed companies shall not apply to the acquisition and disposal of H Shares by non-PRC investors outside of the PRC.
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Estate duty
As of the date of this document, no estate duty has been levied in the PRC under the PRC laws.
Taxation Policy of Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect
On 31 October 2014 and November 5, 2016, the MOF, the SAT and the CSRC jointly issued the Notice on Taxation Policies concerning the Pilot Program of an Interconnection Mechanism for Transaction in the Shanghai and Hong Kong Stock Markets (Cai Shui [2014] No. 81) (關於滬港股票市場交易互聯互通機制試點有關稅收政策的通知) and the Notice on the Relevant Taxation Policies for the Pilot Program of the Interconnection Mechanism for Transactions in the Shenzhen and Hong Kong Stock Markets (Cai Shui [2016] No. 127) (關於 深港股票市場交易互聯互通機制試點有關稅收政策的通知). According to such Notices, Mainland enterprise investors’ income from dividends, bonuses and price differences of investment in stocks listed on the HKEx through the Shanghai-Hong Kong Stock Connect or Shenzhen-Hong Kong Stock Connect shall be included into the total income and shall be subject to the enterprise income tax. Income of mainland resident enterprises obtained from dividends and bonuses by holding H shares for over twelve months consecutively shall be exempted from enterprise income tax according to the law. Enterprises of H shares shall not withhold income tax of dividends and bonuses for mainland enterprise investors. The taxes payable shall be declared and paid by enterprises on their own.
For dividends and bonuses obtained by individual mainland investors from investment in H shares listed on the HKEx through the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect, enterprises of H shares shall submit applications to China Securities Depository and Clearing Corporation Limited (“CSDC”) so as to get the register of individual mainland investors and withhold the individual income tax at the tax rate of 20%. For taxes withheld abroad, individual investors may apply to competent taxation authorities of the CSDC for tax credit upon the strength of valid tax withholding vouchers. For dividends and bonuses obtained by mainland securities investment funds from investment in stocks listed on the HKEx through the Shanghai-Hong Kong Stock Interconnection, individual income tax shall be calculated and levied in accordance with the above provisions.
On December 4, 2019, the MOF, the SAT and the CSRC jointly issued the Announcement on the Continued Implementation of the Individual Income Tax Policies on the Interconnection Mechanisms for Transactions in the Shanghai and Hong Kong Stock Markets and for Transactions in the Shenzhen and Hong Kong Stock Markets (Announcement 93, 2019 of the MOF) (關於繼續執行滬港、深港股票市場交易互聯互通機制和內地與香港基金互認有關個人 所得稅政策的公告), which stipulates that from December 5, 2019 to December 31, 2022, the transfer price difference income that a mainland Chinese individual investor obtains by investing in stocks listed on the Stock Exchange of Hong Kong Limited through the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect and by trading in Hong Kong fund shares through mutual recognition of funds will continue to be temporarily exempt from individual income tax.
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Main PRC Taxes of the Company
Income tax
According to the EIT Law, a resident enterprise shall pay EIT on its income originating from both inside and outside PRC at an EIT rate of 25%. The enterprise income tax on important high- and new-tech enterprises that are necessary to be supported by the state shall be levied at the reduced tax rate of 15%. The Company (excluding the subsidiaries of the Company) is a high- and new-tech enterprise, and it shall pay enterprise income tax at the rate of 15%.
VAT
According to the Provisional Regulations of the PRC on Value-Added Tax (中華人民共和 國增值稅暫行條例), which was promulgated by the State Council on December 13, 1993 and latest amended on November 19, 2017 (the “Regulations on VAT”), and the Detailed Rules for the Implementation of the Provisional Regulations of the PRC on Value-added Tax (中華人民 共和國增值稅暫行條例實施細則), which was promulgated by the MOF and the SAT on December 18, 2008 and latest amended on October 28, 2011, all the taxpayers engaged in sales of goods or provision of processing, repair and maintenance labor or import of goods in China shall be subject to value-added tax. Unless specified by the Regulations on VAT, for the sales or import of goods by general taxpayers, the VAT rate shall be 17%; for provision of processing, repair and maintenance labor by taxpayers, the VAT rate shall be 17%; for export of goods by taxpayers, the VAT rate shall be nil, unless otherwise provided.
According to the Circular of the Ministry of Finance and the State Taxation Administration on Adjusting Value-added Tax Rates (Cai Shui [2018] No. 32) (財政部、國家 稅務總局關於調整增值稅稅率的通知), which was issued by the MOF and the SAT on April 4, 2018 and implemented on May 1, 2018, where a tax payer engages in a taxable sales activity for the value-added tax purpose or imports goods, the previous applicable reduced 17% and 11% tax rates are adjusted to be 16% and 10%, respectively.
According to the Announcement of the Ministry of Finance, the State Taxation Administration and the General Administration of Customs on Deepening Policies in relation to Value-added Tax Reform (財政部、稅務總局、海關總署關於深化增值稅改革有關政策的公 告) which was promulgated on March 20, 2019 and implemented on April 1, 2019, the VAT rates are reduced to 13% and 9%, respectively.
FOREIGN EXCHANGE
The lawful currency of the PRC is the Renminbi, which is currently subject to foreign exchange control and is not freely convertible into foreign exchange. The SAFE, under the authority of PBOC, is responsible for administration of all matters relating to foreign exchange, including the enforcement of foreign exchange control regulations.
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The Regulations on Foreign Exchange Control of the PRC (中華人民共和國外匯管理條 例) (the “Foreign Exchange Control Regulations”), which was issued by the State Council on January 29, 1996 and implemented on April 1, 1996 classifies all international payments and transfers into current items and capital items. Most of the current items are not subject to the approval of foreign exchange administration agencies, while capital items are subject to such approval. Pursuant to the Foreign Exchange Control Regulations amended on January 14, 1997 and August 1, 2008, the PRC will not impose restriction on international current payments and transfers.
According to the Regulations for the Administration of Settlement, Sale and Payment of Foreign Exchange (結匯、售匯及付匯管理規定) (the “Settlement Regulations”), which was promulgated by the PBOC on June 20, 1996 and implemented on July 1, 1996, it removes other restrictions on convertibility of foreign exchange under current items, while imposing existing restrictions on foreign exchange transactions under capital account items.
According to the Announcement on Improving the Reform of the Renminbi Exchange Rate Formation Mechanism (the PBOC Announcement [2005] No. 16) (關於完善人民幣匯率形成機 制改革的公告), which was issued by the PBOC and implemented on July 21, 2005, the PRC has started to implement a managed floating exchange rate system in which the exchange rate would be determined based on market supply and demand and adjusted with reference to a basket of currencies since July 21, 2005. Therefore, the Renminbi exchange rate was no longer pegged to the U.S. dollar. PBOC would publish the closing price of the exchange rate of the Renminbi against trading currencies such as the U.S. dollar in the interbank foreign exchange market after the closing of the market on each working day, as the central parity of the currency against Renminbi transactions on the following working day.
On August 5, 2008, the State Council promulgated the revised Foreign Exchange Control Regulations, which have made substantial changes to the foreign exchange supervision system of the PRC. First, it has adopted an approach of balancing the inflow and outflow of foreign exchange. Foreign exchange income received overseas can be repatriated or deposited overseas, and foreign exchange and foreign exchange settlement funds under the capital account are required to be used only for purposes as approved by the competent authorities and foreign exchange administrative authorities; second, it has improved the RMB exchange rate formation mechanism based on market supply and demand; third, in the event that international revenues and expenditure occur or may occur a material misbalance, or the national economy encounters or may encounter a severe crisis, the State may adopt necessary safeguard and control measures on international revenues and expenditure; fourth, it has enhanced the supervision and administration of foreign exchange transactions and grant extensive authorities to the SAFE to enhance its supervisory and administrative powers.
PRC enterprises (including foreign investment enterprises) which need foreign exchange for current item transactions may, without the approval of the foreign exchange administrative authorities, effect payment through foreign exchange accounts opened at the designated foreign exchange bank, on the strength of valid transaction receipts and proof. Foreign investment enterprises which need foreign exchange for the distribution of profits to their shareholders and
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PRC enterprises which, in accordance with regulations, are required to pay dividends to their shareholders in foreign exchange (such as our Company) may, on the strength of resolutions of the board of directors or the shareholders’ meeting on the distribution of profits, effect payment from foreign exchange accounts at the designated foreign exchange bank, or effect exchange and payment at the designated foreign exchange bank.
According to the Decisions on Matters including Canceling and Adjusting a Batch of Administrative Approval Items (Guo Fa [2014] No. 50) (國務院關於取消和調整一批行政審批 項目等事項的決定) which was promulgated by the State Council on October 23, 2014, it decided to cancel the approval requirement of the SAFE and its branches for the remittance and settlement of the proceeds raised from the overseas listing of the foreign shares into RMB domestic accounts.
According to the Notice of the State Administration of Foreign Exchange on Issues Concerning the Foreign Exchange Administration of Overseas Listing (Hui Fa [2014] No. 54) (國家外匯管理局關於境外上市外匯管理有關問題的通知) issued by the SAFE and implemented on December 26, 2014, a domestic company shall, within 15 business days from the date of the end of its overseas listing issuance, register the overseas listing with the local branch office of State Administration of Foreign Exchange at the place of its establishment; the proceeds from an overseas listing of a domestic company may be remitted to the domestic account or deposited in an overseas account, but the use of the proceeds shall be consistent with the content of the document and other disclosure documents.
According to the Notice of the State Administration of Foreign Exchange on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment (Hui Fa [2015] No. 13) (國家外匯管理局關於進一步簡化和改進直接投資外匯管理 政策的通知), which was issued by the SAFE on February 13, 2015 and came into effect on June 1, 2015, it has canceled two of the administrative examination and approval items, being the confirmation of foreign exchange registration under domestic direct investment and the confirmation of foreign exchange registration under overseas direct investment, instead, banks shall directly examine and handle foreign exchange registration under domestic direct investment and foreign exchange registration under overseas direct investment, and the SAFE and its branch offices shall indirectly regulate the foreign exchange registration of direct investment through banks.
According to the Notice of the State Administration of Foreign Exchange of the PRC on Revolutionizing and Regulating Capital Account Settlement Management Policies (Hui Fa [2016] No. 16) (國家外匯管理局關於改革和規範資本項目結匯管理政策的通知) which was promulgated by the SAFE and implemented on June 9, 2016, foreign currency earnings in capital account that relevant policies of willingness exchange settlement have been clearly implemented on (including the recalling of raised capital by overseas listing) may undertake foreign exchange settlement in the banks according to actual business needs of the domestic institutions. The tentative percentage of foreign exchange settlement for foreign currency earnings in capital account of domestic institutions is 100%, subject to adjust of the SAFE in due time in accordance with international revenue and expenditure situations.
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CIRCULAR 37
The Circular on Issues Concerning the Administration of Foreign Exchange in Offshore Investments and Financing and Return Investments by Domestic Residents through Special Purpose Vehicles (Hui Fa [2014] No. 37) (關於境內居民通過特殊目的公司境外投融資及返程 投資外匯管理有關問題的通知) (“Circular 37”) was promulgated and implemented by the SAFE on July 4, 2014. According to Circular 37, domestic residents, individuals and entities shall apply to the SAFE for registration of foreign exchange for offshore investment before making contributions to special purpose vehicles with domestic and overseas legal assets or equities. In addition, any domestic resident who is a shareholder of an overseas special purpose vehicle shall complete the registration formality of foreign exchange alteration for offshore investment with the SAFE in a timely manner in the event of any change of significant matters of such overseas special purpose vehicle such as capital increase/decrease, equity transfer or swap, merge and spin-off. The subsequent foreign exchange business (including remittance of profits and dividend) of a domestic resident who fails to comply with the registration requirements as set out in Circular 37 may be restricted. Domestic residents that have made contributions to special purpose vehicles with domestic and overseas legal assets or equities without the required registration of foreign exchange for offshore investment prior to the implementation of Circular 37 shall issue a letter of explanation to the SAFE containing specific reasons. The SAFE shall make a post-registration following the principles of legality and rationality, and impose administrative penalties in case of suspected violation of foreign exchange control regulations.
According to the Circular on Further Simplifying and Improving Policies for the Foreign Exchange Administration Applicable to Direct Investment (Hui Fa [2015] No. 13) (關於進一 步簡化和改進直接投資外匯管理政策的通知), banks that have obtained financial institution identification codes from foreign exchange authorities and have connected to the Capital Account Information System with the local foreign exchange authorities may directly handle the registration under Circular 37 and the foreign exchange authorities shall indirectly regulate the foreign exchange registration of direct investment through banks.
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This Appendix sets forth summaries of certain aspects of PRC laws and regulations which are relevant to our Company’s operations and business. Laws and regulations relating to taxation in the PRC are discussed separately in “Appendix III—Taxation and Foreign Exchange.” For discussion of laws and regulations which are relevant to the Company’s business, see “Regulatory Overview.”
PRC LEGAL SYSTEM
The PRC legal system is based on the PRC Constitution (中華人民共和國憲法) (the “Constitution”) and is made up of written laws, administrative regulations, local regulations, autonomous regulations, separate regulations, rules and regulations of State Council departments, rules and regulations of local governments, laws of special administrative regions and international treaties of which the PRC government is the signatory and other regulatory documents. Court judgments do not constitute legally binding precedents, although they are used for the purposes of judicial reference and guidance.
According to the Constitution and the Legislation Law of the PRC (中華人民共和國立法 法), the National People’s Congress and its Standing Committee are empowered to exercise the legislative power of the State. The National People’s Congress shall develop and amend the basic laws on criminal matters, civil matters, and state authorities and others matters. The Standing Committee of the National People’s Congress shall develop and amend laws other than those developed by the National People’s Congress; and when the National People’s Congress is not in session, partially supplement and amend laws developed by the National People’s Congress, provided that the basic principles in such laws are not violated.
The State Council is the highest organ of state administration and has the power to formulate administrative regulations based on the Constitution and laws.
The people’s congress and its standing committee of a province, autonomous region, or municipality directly under the Central Government may, according to the specific circumstances and actual needs of the administrative region, develop local regulations, provided that such regulations do not contravene the Constitution, laws, and administrative regulations.
The people’s congress and its standing committee of a districted city may, according to the city’s specific circumstances and actual needs, develop local regulations on urban and rural development and administration, environmental protection, and historical culture protection, among others, provided that they do not contravene the Constitution, laws, administrative regulations, and the local regulations of the province or autonomous region where the city is located, unless a law provides otherwise for the development of local regulations by a districted city.
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The people’s congress of an ethnic autonomous area shall have the power to develop autonomous regulations and separate regulations based on the political, economic, and cultural characteristics of the local ethnicities.
The ministries and commissions of the State Council, the People’s Bank of China, the State Audit Administration, and other divisions with administrative functions directly under the State Council may, in accordance with the laws and the administrative regulations, decisions, and orders of the State Council, develop rules within their respective power. The matters prescribed in State Council departmental rules shall be matters for the enforcement of laws or the administrative regulations, decisions, and orders of the State Council. The people’s government of a province, an autonomous region, a municipality directly under the Central Government, a districted city, or an autonomous prefecture may develop rules in accordance with laws, administrative regulations, and the local regulations of the province, autonomous region, or municipality.
Pursuant to the Resolution of the Standing Committee of the NPC Providing an Improved Interpretation of the Law (全國人民代表大會常務委員會關於加強法律解釋工作的決議) passed on June 10, 1981, In cases where the limits of articles of laws and decrees need to be further defined or additional stipulations need to be made, the Standing Committee of the National People’s Congress shall provide interpretations or make stipulations by means of decrees. Interpretation of questions involving the specific application of laws and decrees in court trials shall be provided by the Supreme People’s Court. Interpretation of questions involving the specific application of laws and decrees in the procuratorial work of the procuratorates shall be provided by the Supreme People’s Procuratorate. Interpretation of questions involving the specific application of laws and decrees in areas unrelated to judicial and procuratorial work shall be provided by the State Council and the competent departments. In cases where the limits of locally enacted rules and regulations need to be further defined or additional stipulations need to be made, the standing committees of the people’s congresses of the provinces, autonomous regions, and municipalities directly under the Central Government which have formulated these rules and regulations shall provide the interpretations or make the stipulations. Interpretation of questions involving the specific application of local rules and regulations shall be provided by the competent departments under the people’s governments of the provinces, autonomous regions, and municipalities directly under the Central Government.
PRC JUDICIAL SYSTEM
Under the Constitution, the Law of Organization of the People’s Court of the PRC (中華 人民共和國人民法院組織法) and the Law of Organization of the People’s Procuratorate of the PRC (中華人民共和國人民檢察院組織法), the people’s courts of the PRC are divided into the Supreme People’s Court, the local people’s courts at all levels and special people’s courts. The local people’s courts at all levels are divided into three levels, namely, the basic people’s courts, the intermediate people’s courts and the higher people’s courts. The basic people’s courts may set up certain people’s tribunals based on the status of the region, population and cases. The Supreme People’s Court shall be the highest judicial organ of the state. The Supreme
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People’s Court shall supervise the administration of justice by the local people’s courts at all levels and by the special people’s courts. The people’s courts at a higher level shall supervise the judicial work of the people’s courts at lower levels. The people’s procuratorates of the PRC are divided into the Supreme People’s Procuratorate, the local people’s procuratorates at all levels, Military Procuratorates and other special people’s procuratorates. The Supreme People’s Procuratorate shall be the highest procuratorial organ. The Supreme People’s Procuratorate shall direct the work of the local people’s procuratorates at all levels and of the special people’s procuratorates; the people’s procuratorates at higher levels shall direct the work of those at lower levels.
The people’s courts employ a two-tier appellate system, i.e., judgments or rulings of the second instance at the people’s courts are final. A party may appeal against the judgment or ruling of the first instance of a local people’s courts. The people’s procuratorate may present a protest to the people’s courts at the next higher level in accordance with the procedures stipulated by the laws. In the absence of any appeal by the parties and any protest by the people’s procuratorate within the stipulated period, the judgments or rulings of the people’s courts are final. Judgments or rulings of the second instance of the intermediate people’s courts, the higher people’s courts and the Supreme People’s Court and those of the first instance of the Supreme People’s Court are final. However, if the Supreme People’s Court or the people’s courts at the next higher level finds any definite errors in a legally effective final judgment or ruling of the people’s court at a lower level, or if the chief judge of a people’s court at any level finds any definite errors in a legally effective final judgment or ruling of such court, the case can be retried according to judicial supervision procedures.
The Civil Procedure Law of the PRC (中華人民共和國民事訴訟法) (the “PRC Civil Procedure Law”) prescribes the conditions for instituting a civil action, the jurisdiction of the people’s court, the procedures for conducting a civil action, and the procedures for enforcement of a civil judgment or ruling. All parties to a civil action conducted within the PRC must abide by the PRC Civil Procedure Law. A civil case is generally heard by the court located in the defendant’s place of domicile, and Parties to a contract may, by a written agreement, choose the people’s court at the place of domicile of the defendant, at the place where the contract is performed or signed, at the place of domicile of the plaintiff, at the place where the subject matter is located or at any other place actually connected to the dispute to have jurisdiction over the dispute, but the provisions of this Law regarding hierarchical jurisdiction and exclusive jurisdiction shall not be violated.
A foreign individual, a person without nationality, a foreign enterprise or a foreign organization is given the same litigation rights and obligations as a citizen, a legal person or other organizations of the PRC when initiating actions or defending against litigations at a people’s court. Should a foreign court limit the litigation rights of PRC citizens or enterprises, the PRC court may apply the same limitations to the citizens or enterprises of such foreign country. A foreign individual, a person without nationality, a foreign enterprise or a foreign organization must engage a PRC lawyer in case he or it needs to engage a lawyer for the purpose of initiating actions or defending against litigations at a people’s court. In accordance
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All parties to a civil action shall perform the legally effective judgments and rulings. If any party to a civil action refuses to abide by a judgment or ruling made by a people’s court or an award made by an arbitration tribunal in the PRC, the other party may apply to the people’s court for the enforcement of the same within two years subject to application for postponed enforcement or revocation. If a party fails to satisfy within the stipulated period a judgment which the court has granted an enforcement approval, the court may, upon the application of the other party, mandatorily enforce the judgment against such party.
Where a party requests for enforcement of an effective judgment or ruling made by a people’s court, but the opposite party or his property is not within the territory of the People’s Republic of China, the party may directly apply to the foreign court with jurisdiction for recognition and enforcement of the judgment or ruling, or the people’s court may, in accordance with the provisions of international treaties to which the PRC is a signatory or in which the PRC is a participant or according to the principle of reciprocity, request for recognition and enforcement by the foreign court. Similarly, for an effective judgment or ruling made by a foreign court that requires recognition and enforcement by a people’s court of the PRC, a party may directly apply to an intermediate people’s court of the PRC with jurisdiction for recognition and enforcement of the judgment or ruling, or the foreign court may, in accordance with the provisions of international treaties to which its country and the PRC are signatories or in which its country is a participant or according to the principle of reciprocity, request for recognition and enforcement by the people’s court. If the judgment or ruling violates the basic principles of the laws of the PRC or the sovereignty, security or public interest of the PRC, the people’s court shall not grant recognition and enforcement.
THE COMPANY LAW, SPECIAL REGULATIONS AND MANDATORY PROVISIONS OF PRC
The Company Law of the People’s Republic of China (中華人民共和國公司法) (the “PRC Company Law”) was adopted by the Standing Committee of the Eighth NPC at its Fifth Session on December 29, 1993 and came into effect on July 1, 1994. It was successively amended on December 25, 1999, August 28, 2004, October 27, 2005, December 28, 2013 and October 26, 2018. The newly revised PRC Company Law has been implemented since October 26, 2018.
The Special Regulations of the State Council on the Overseas Offering and Listing of Shares by Joint Stock Limited Companies (國務院關於股份有限公司境外募集股份及上市的特 別規定) (the “Special Regulations”) were promulgated by the State Council on August 4, 1994. The Special Regulations include provisions in respect of the overseas share offering and listing of joint stock limited companies.
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The Mandatory Provisions for the articles of association of Companies to be Listed Overseas (到境外上市公司章程必備條款) (the “Mandatory Provisions”) were jointly issued by the former Securities Commission of the State Council and the former State Economic Restructuring Commission on September 29, 1994, prescribing provisions which must be incorporated into the articles of association of joint stock limited companies to be listed overseas. Accordingly, the Mandatory Provisions have been incorporated in the Articles of Association (which are summarized in “Appendix V—Summary of the Articles of Association”). The term “company” as mentioned in the Appendix refers to a joint stock limited company established under the PRC Company Law with H-shares to be issued.
Main provisions in PRC Company Law, Special Regulations and Mandatory Provisions are summarized as follows:
General
A joint-stock limited company refers to a corporate legal person incorporated in China under the PRC Company Law with independent legal person properties and entitlements to such legal person properties. The liability of the company for its own debts is limited to the total amount of all assets it owns and the liability of its shareholders for the company is limited to the extent of the shares they subscribe for.
Incorporation
A company may be established by promotion or subscription. A company shall have a minimum of two but no more than 200 people as its promoters, over half of which must be residents within the PRC. Companies established by promotion are companies of which the registered capital is the total share capital subscribed for by all the promoters registered with the company’s registration authorities. No share offering shall be made before the shares subscribed for by promoters are fully paid up. For companies established by share offering, the registered capital is the total paid-up share capital as registered with the company’s registration authorities. If laws, administrative regulations and State Council decisions provide otherwise on paid-in registered capital and the minimum registered capital, a company should follow such provisions.
For companies incorporated by way of promotion, the promoters shall subscribe in writing for the shares required to be subscribed for by them and pay up their capital contributions under the articles of association. Procedures relating to the transfer of titles to non-monetary assets shall be duly completed if such assets are to be contributed as capital. Promoters who fail to pay up their capital contributions in accordance with the foregoing provisions shall assume default liabilities in accordance with the covenants set out in the promoters’ agreements. After the promoters have confirmed the capital contribution under the articles of association, a board of directors and a supervisory board shall be elected and the board of directors shall apply for registration of establishment by filing the articles of association with the company registration authorities, and other documents as required by the law or administrative regulations.
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Where companies are incorporated by subscription, not less than 35% of their total number of shares must be subscribed for by the promoters, unless otherwise provided by laws or administrative regulations. A promoter who offers shares to the public must publish a document and prepare a subscription letter. Such offer shall be underwritten by security companies established under PRC law, and underwriting agreements shall be entered into. Such promoter shall also enter into agreements with banks in relation to the receipt of subscription monies. After the subscription monies for the share issue have been paid in full, a capital verification institution established under PRC laws must be engaged to conduct a capital verification and furnish a certificate thereof. The promoters shall preside over and convene an inauguration meeting within 30 days from the date of the full payment of subscription money. The inauguration meeting shall be formed by the promoters and subscribers. Where the shares issued remain undersubscribed by the deadline stipulated in the document, or where the promoter fails to convene an inauguration meeting within 30 days of the subscription monies for the shares issued being fully paid up, the subscribers may demand that the promoters refund the subscription monies so paid together with the interest at bank rates of a deposit for the same period. Within 30 days after the conclusion of the inauguration meeting, the board of directors shall apply to the company registration authority for registration of the establishment of the company.
A company’s promoters shall be liable for: (1) the debts and expenses incurred in the establishment process jointly and severally if the company cannot be incorporated; (2) the subscription monies paid by the subscribers together with interest at bank rates of deposit for the same period jointly and severally if the company cannot be incorporated; and (3) the compensation of any damages suffered by the company in the course of its establishment as a result of the promoters’ fault.
Share Capital
The promoters of a company can make capital contributions in cash or in kind, that can be valued in currency and transferable according to law such as intellectual property rights or land use rights based on their appraised value, except for the property that is not allowed to be used as capital contributions, as is provided for by laws or administrative regulations. Non-current property used for capital contributions shall be evaluated and verified, and shall not be overvalued or undervalued.
The issuance of shares shall be conducted in a fair and equitable manner. Each share of the same class must carry equal rights. Shares issued at the same time and within the same class must be issued on the same conditions and at the same price. The same price per share shall be paid by any share subscriber (whether an entity or an individual). The share offering price may be equal to or greater than the nominal value of the share, but may not be less than the nominal value.
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A company must obtain the approval of CSRC to offer its shares to the overseas public. The Special Regulations and the Mandatory Provisions provide that the shares issued to foreign investors and listed overseas by a company shall be in registered form, denominated in Renminbi and subscribed for in foreign currencies. Shares issued to foreign investors (including the investors from the territories of Hong Kong, Macau and Taiwan) and listed in Hong Kong are classified as H Shares, and those shares issued to investors within the PRC, other than these regions mentioned above, are known as domestic shares. Under the Special Regulations, upon approval of CSRC, a company may agree, in the underwriting agreement in respect of an issue of H Shares, to retain not more than 15% of the aggregate number of such overseas listed foreign shares proposed to be issued in addition to the number of underwritten shares. The issuance of retained shares is deemed to be a part of this offering.
Under the PRC Company Law, a company issuing registered share certificates shall maintain a shareholder registry which sets forth the following matters: (1) the name and domicile of each shareholder; (2) the number of shares held by each shareholder; (3) the serial numbers of shares held by each shareholder; and (4) the date on which each shareholder acquired the shares.
Increase in Share Capital
Where a company is issuing new shares, resolutions shall be passed at general meeting in respect of the class and amount of the new shares, the issue price of the new shares, the commencement and end dates for the issue of the new shares and the class and amount of the new shares proposed to be issued to existing shareholders.
When a company launches a public issue of new shares to the public upon the approval by CSRC, a new share offering document and financial accounting report must be announced and a subscription letter must be prepared. After the new shares issued by the company has been paid up, the change must be registered with the company registration authority and a public announcement must be made accordingly. Where an increase in registered capital of a company is made by means of an issue of new shares, the subscription of new shares by shareholders shall be made in accordance with the relevant provisions on the payment of subscription monies for the establishment of a company.
Reduction of Share Capital
A company may reduce its registered capital in accordance with the following procedures prescribed by the PRC Company Law:
(i) the company shall prepare a balance sheet and an inventory of the assets;
(ii) the reduction of registered capital must be approved by shareholders in general meeting;
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(iii) the company shall inform its creditors of the reduction in registered capital within 10 days and publish an announcement of the reduction in the newspaper within 30 days after the resolution approving the reduction has been passed;
(iv) the creditors shall, within 30 days from the date they receive the written notice, or within 45 days from the date the announcement is made in the case of those who have not received such written notice, have the right to claim full repayment of their debts or provision of a corresponding guarantee from the company; and
(v) the company must apply to the company registration authority for registration of the reduction in registered capital.
Repurchase of Shares
A company may not purchase its own shares other than for the purpose of:
(i) reducing the registered capital of the company;
(ii) merging with another company holding shares of this company;
(iii) using for employee stock ownership plan or equity incentives;
(iv) purchasing the company’s own shares upon request of its shareholders who vote against the resolution regarding the merger or division of the company in a general meeting;
(v) utilizing the shares for conversion of listed corporate bonds which are convertible into shares; or
(vi) where it is necessary for the listed company to safeguard the value of the company and the interests of its shareholders. the acquisition by a company of its own shares in circumstances as set out in items (iii), (v) and (vi) above may be approved by way of a resolution at a board meeting with two-third or more of the directors present in accordance with the provisions of the company’s articles of association or the authorization of the shareholders’ general meeting.
Following the acquisition by a company of its own shares in accordance with these requirements, such shares shall be canceled within 10 days from the date of the acquisition under the circumstance in item (i); such shares shall be transferred or canceled within six months under the circumstances in items (ii) or (iv); the total shares held by the Company shall not exceed 10% of the total shares issued by the Company and such shares shall be transferred or canceled within three years under the circumstances in items (iii), (v) or (vi).
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A listed company shall perform its information disclosure obligations in accordance with the provisions of the Securities Law of People’s Republic of China when acquiring its own shares. The acquisition by a listed company of its own shares in circumstances as set out in items (iii), (v) and (vi) of this article shall be conducted through open centralized trading.
The Company shall not accept the shares of the Company as the subject of pledge.
Transfer of Shares
Shares held by shareholders may be transferred legally.
Pursuant to the PRC Company Law, shares held by promoters may not be transferred within one year of the establishment of the company. Shares of the company issued prior to the public issue of shares may not be transferred within one year of the date of the company’s listing on a stock exchange. Directors, supervisors and the senior management of a company shall declare to the company their shareholdings in it and changes in such shareholdings. During their terms of office, they may transfer no more than 25% of the total number of shares they hold in the company every year. They shall not transfer the shares they hold within one year from the date of the company’s listing on a stock exchange, nor within six months after they leave their positions in the company. The articles of association may set out other restrictive provisions in respect of the transfer of shares in the company held by its directors, supervisors and the senior management.
Shareholders
Under the PRC Company Law and the Mandatory Provisions, the rights of a shareholder include:
(i) to transfer his or her shares legally;
(ii) to attend in person or appoint a proxy to attend shareholders’ general meetings, and to exercise the voting rights;
(iii) to inspect the company’s articles of association, shareholders’ registers, records of debentures, minutes of shareholders’ general meetings, board resolutions, supervisors resolutions, financial and accounting reports and put forward proposals or raise questions about the business operations of the company;
(iv) to receive dividends in respect of the number of shares held;
(v) to participate in distribution of residual properties of the company in proportion to their shareholdings upon the liquidation of the company; and
(vi) any other shareholders’ rights specified in laws, administrative regulations, other normative documents and the articles of association.
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The obligations of a shareholder include the obligation to abide by the company’s articles of association, to pay the subscription monies in respect of the shares subscribed for, to be liable for the company’s debts and liabilities to the extent of the amount of subscription monies agreed to be paid in respect of the shares taken up by him/her, not to abuse shareholders’ right to damage the interests of the company or other shareholders of the company; not to abuse the independent status of the company as a legal person and the limited liability to damage the interests of the creditors of the company and any other shareholders’ obligation specified in the company’s articles of association.
Shareholders’ General Meetings
The shareholders’ general meeting is the organ of authority of the company, which exercises the following principal powers:
(i) to decide on the company’s operational policies and investment plans;
(ii) to elect or replace the directors, supervisors who are not representatives of the employees and decide on matters relating to the remuneration of directors and supervisors;
(iii) to consider and approve reports of the board of directors;
(iv) to consider and approve reports of the supervisory committee;
(v) to consider and approve the company’s proposed annual financial budget and financial accounts;
(vi) to consider and approve the company’s proposals for profit distribution and for recovery of losses;
(vii) to decide on any increase or reduction in the company’s registered capital;
(viii) to decide on the issue of bonds by the company;
(ix) to decide on issues such as merger, division, dissolution, liquidation or change of the form of the company and other matters;
(x) to amend the articles of association of the company; and
(xi) other powers specified in the articles of association of the company.
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A shareholders’ general meeting is required to be held once every year within six months after the end of the previous accounting year. An extraordinary shareholders’ general meeting is required to be held within two months after the occurrence of any of the following circumstances:
(i) the number of directors is less than the number provided for in the PRC Company Law or less than two-thirds of the number specified in the company’s articles of association;
(ii) the losses of the company which are not made up reach one-third of the company’s total paid up share capital;
(iii) shareholders individually or in aggregate holding 10% or more of the company’s shares request to convene an extraordinary general meeting;
(iv) when deemed necessary by the board of directors;
(v) when the supervisory committee proposes convening it; or
(vi) other matters required by the company’s articles of association.
Shareholders’ general meetings shall be convened by the board of directors, and presided over by the chairman of the board of directors. In the event that the chairman is incapable of performing or not performing his duties, the meeting shall be presided over by the vice chairman. In the event that the vice chairman is incapable of performing or not performing his duties, a director nominated by more than half of directors shall preside over the meeting. Where the board of directors is incapable of performing or not performing its duties of convening the shareholders’ general meeting, the supervisory committee shall convene and preside over such meeting in a timely manner. In case the supervisory committee fails to convene and preside over such meeting, shareholders alone or in aggregate holding more than 10% of the total shares of the company for ninety days consecutively may unilaterally convene and preside over such meeting.
In accordance with the PRC Company Law, a notice of the general meeting stating the date and venue of the meeting and the matters to be considered at the meeting shall be given to all shareholders 20 days prior to the meeting. A notice of extraordinary general meeting shall be given to all shareholders 15 days prior to the meeting. For the issuance of bearer share certificates, the time and venue of and matters to be considered at the meeting shall be announced 30 days prior to the meeting. A single shareholder who holds, or several shareholders who jointly hold, more than three percent of the shares of the company may submit an interim proposal in writing to the board of directors within 10 days before the general meeting. The board of directors shall notify other shareholders within two days upon receipt of the proposal, and submit the interim proposal to the general meeting for deliberation. The contents of the interim proposal shall fall within the scope of powers of the general
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There is no specific provision in the PRC Company Law regarding the number of shareholders constituting a quorum in a shareholders’ meeting.
Board of Directors
A company shall have a board of directors, which shall consist of 5 to 19 members and there can be staff representatives of the company who shall be democratically elected by the company’s staff at a staff representative assembly, general staff meeting or otherwise. The term of a director shall be stipulated in the articles of association, provided that no term of office shall last for more than three years. A director may serve consecutive terms if re-elected. A director shall continue to perform his/her duties as a director in accordance with the laws, administrative regulations and the articles of association until a duly reelected director takes office, if re-election is not conducted in a timely manner upon the expiry of his/her term of office or if the resignation of director results in the number of directors being less than the quorum.
Under the PRC Company Law, the board of directors shall be responsible for the shareholders’ meeting and exercises the following powers:
(i) to convene the shareholders’ general meeting and report on its work to the shareholders;
(ii) to implement the resolution of the shareholders’ general meeting;
(iii) to decide on the company’s business plans and investment plans;
(iv) to formulate the company’s proposed annual financial budget and final accounts;
(v) to formulate the company’s proposals for profit distribution and for recovery of losses;
(vi) to formulate proposals for the increase or reduction of the company’s registered capital and the issue of corporate bonds;
(vii) to prepare plans for the merger, division, dissolution or change of the form of the company;
(viii) to decide on the company’s internal management structure;
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(ix) to appoint or dismiss the company’s general manager, and based on the president’s recommendation, to appoint or dismiss deputy general manager and financial officers of the company and to decide on their remuneration;
(x) to formulate the company’s basic management system; and
(xi) any other power given under the articles of association of the company.
Meetings of the board of directors shall be convened at least twice a year. Notice of meeting shall be given to all directors and supervisors at least ten days before the meeting. Interim board meetings may be proposed to be convened by shareholders representing more than 10% of the voting rights, more than one-third of the directors or the supervisory board. The chairman shall convene the meeting within 10 days of receiving such proposal, and preside over the meeting. The board of directors may otherwise determine the means and the period of notice for convening an interim board meeting.
Meetings of the board of directors shall be held only if more than half of the directors are present. Resolutions of the board of directors require the approval of more than half of all directors. Each director shall have one vote for a resolution to be approved by the board. Directors shall attend board meetings in person. If a director is unable to attend a board meeting, he may appoint another director to attend the meeting on his behalf by a written power of attorney specifying the scope of the authorization.
The board of directors shall keep minutes of resolutions passed at board meetings. The minutes shall be signed by the directors present at the meeting. The directors shall be responsible for the resolutions of the board of directors. If a resolution of the board of directors violates the laws, administrative regulations or the company’s articles of association as a result of which the company sustains serious losses, the directors participating in the resolution are liable to compensate the company. However, if it can be proven that a director expressly objected to the resolution when the resolution was voted on, and that such objections were recorded in the minutes of the meeting, such director may be relieved of that liability.
Under the PRC Company Law, the following persons may not serve as a director of a company:
(i) persons without civil capacity or with restricted civil capacity;
(ii) persons who have committed the offense of corruption, bribery, taking of property, misappropriation of property or destruction of the social economic order, and have been sentenced to criminal punishment, where less than five years have elapsed since the date of completion of the sentence; or persons who have been deprived of their political rights due to criminal offense, where less than five years have elapsed since the date of the completion of implementation;
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(iii) persons who are former directors, factory managers or managers of a company or enterprise which has become bankrupt and been liquidated due to mismanagement and who are personally liable for the bankruptcy of such company or enterprise, where less than three years have elapsed since the date of the completion of the bankruptcy and liquidation of the company or enterprise;
(iv) persons who were legal representatives of a company or enterprise which had its business license revoked or business operation shut down due to violation of the law and who are personally liable, where less than three years have elapsed since the date of the revocation of the business license; or
(v) persons who have a relatively large amount of debt due and outstanding.
Where a company elects or appoints a director to which any of the above circumstances applies, such election or appointment shall be null and void. A director to which any of the above circumstances applies during his/her term of office shall be released of his/her duties by the company.
In addition, the Mandatory Provisions further provide other circumstances under which a person is disqualified from acting as a director of a company, including: (1) the person is under investigation by the judicial authorities after a claim has been brought for violating the criminal law, pending conclusion of the case; (2) the person is not eligible for enterprise leadership under the laws and administrative regulations; (3) the person is not a natural person; and (4) no more than five years have lapsed since the person was found guilty of violating relevant securities regulations and involved in fraud or dishonesty as adjudged by relevant regulatory authorities.
Under the PRC Company Law, the board of directors shall appoint a chairman and may appoint a vice chairman. The chairman and the vice chairman shall be elected with approval of more than half of all the directors. The chairman shall convene and preside over board meetings and review the implementation of board resolutions. The vice chairman shall assist the chairman to perform his/her duties.
Supervisors
A company shall have a supervisory board composed of not less than three members. The supervisory board shall consist of representatives of the shareholders and an appropriate proportion of representatives of the company’s staff, among which the proportion of representatives of the company’s staff shall not be less than one-third, and the actual proportion shall be determined in the articles of association. Representatives of the company’s staff at the supervisory board shall be democratically elected by the company’s staff at the staff representative assembly, general staff meeting or otherwise.
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The supervisory board shall appoint a chairman and may appoint a vice chairman. The chairman and the vice chairman of the supervisory board shall be elected by more than half of all the supervisors. Directors and senior management members shall not act concurrently as supervisors.
According to the Reply of the Overseas Listing Department of CSRC and the Production System Department of the State Commission for Restructuring the Economic System on Opinions Concerning the Supplement and Amendment to Articles of Association by Companies to Be Listed in Hong Kong (中國證監會海外上市部、國家體改委生產體制司關於到香港上市 公司對公司章程作補充修改的意見的函), the chairman of the supervisory board shall be selected by more than two-thirds of all the supervisors.
The chairman of the supervisory board shall convene and preside over supervisory board meetings. Where the chairman of the supervisory board is incapable of performing, or is not performing his/her duties, the vice chairman of the supervisory board shall convene and preside over supervisory board meetings. Where the vice chairman of the supervisory board is incapable of performing, or is not performing his/her duties, a supervisor elected by more than half of the supervisors shall convene and preside over supervisory board meetings.
Each term of office of a supervisor is three years and he/she may serve consecutive terms if re-elected. A supervisor shall continue to perform his/her duties as a supervisor in accordance with the laws, administrative regulations and the articles of association until a duly re-elected supervisor takes office, if re-election is not conducted in a timely manner upon the expiry of his/her term of office or if the resignation of supervisor results in the number of supervisors being less than the quorum.
The supervisory committee exercises the following powers:
(i) to examine the company’s financial affairs;
(ii) to supervise the directors and senior management in their performance of their duties and to propose the removal of any director or senior management who violates the laws, regulations, articles of association or shareholders’ resolution;
(iii) to require any director or senior management whose act is detrimental to the company’s interests to rectify such act;
(iv) to propose the convening of extraordinary shareholders’ general meetings and, in the event that the board of directors fails to perform the duties of convening and presiding shareholders’ meetings to convene and preside over shareholders’ meetings;
(v) to propose any bills to shareholders’ general meetings;
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(vi) to bring actions against directors and senior management personnel pursuant to the relevant provisions of the PRC Company Law; and
(vii) other powers specified in the company’s articles of association.
Supervisors may be present at board meetings and make inquiries or proposals in respect of the resolutions of the board. The supervisory board may investigate any irregularities identified in the operation of the company and, when necessary, may engage an accounting firm to assist its work at the cost of the company.
Managers and other Senior Officers
Under the relevant requirements of the PRC Company Law, a company shall have a manager who shall be appointed or removed by the board of directors. Meanwhile, under the relevant requirements of the Mandatory Provisions, the manager, who reports to the board of directors, may exercise his/her powers:
(i) taking charge of the management of the production and business operations of the company, organizing the implementation of the resolutions of the board of directors;
(ii) organizing the implementation of the company’s annual business and investment plans;
(iii) drafting plans for the establishment of the company’s internal management structure;
(iv) drafting the basic administration system of the company;
(v) formulating the company’s internal rules;
(vi) proposing to hire or dismiss the company’s vice manager(s) and the person in charge of finance;
(vii) deciding on the hiring or dismissal of the persons-in-charge other than those who shall be decided by the board of directors; and
(viii) other powers conferred by the board of directors or the company’s articles of association.
The manager shall be present at meetings of the board of directors. However, the manager shall have no voting rights at meetings of the board of directors unless he/she concurrently serves as a director.
According to the PRC Company Law, senior management refers to manager, deputy manager, financial officer, secretary to the board of a listed company and other personnel as stipulated in the articles of association.
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Duties of Directors, Supervisors and Senior Officers
A director, supervisor and senior officer of a company are required under the PRC Company Law to comply with the relevant laws, regulations and the company’s articles of association, carry out their duties honestly and protect the interests of the company. They are also prohibited from abusing their powers to accept bribes or other unlawful income and from misappropriating the company’s properties.
Meanwhile, Directors and senior management are prohibited from:
(i) misappropriation of company funds;
(ii) deposit of company funds into accounts under their own name or the name of other individuals;
(iii) loaning company funds to others or providing guarantees in favor of others supported by the company properties in violation of the articles of association or without prior approval of the shareholders’ general meeting or board of directors;
(iv) entering into contracts or deals with the company in violation of the articles of association or without prior approval of the shareholders’ general meeting or board of directors;
(v) using their position to procure business opportunities for themselves or others that should have otherwise been available to the company or operating for their own benefit or managing on behalf of others businesses similar to that of the company without prior approval of the shareholders’ general meeting;
(vi) accepting for their own benefit commissions from other parties dealing with the company;
(vii) unauthorized divulgence of confidential information of the company; or
(viii) other acts in violation of their duty of loyalty to the company.
Income generated by directors or senior management in violation of aforementioned shall be returned to the company.
A director, supervisor and senior officer who contravenes any law, regulation or the company’s articles of association in the performance of his duties which results in any loss to the company shall be personally liable to the company.
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Where the attendance of a director, supervisor, or senior officer is requested by the shareholders’ general meeting, such director, supervisor, or other senior officer shall attend the meeting as requested and answer enquiries of shareholders. Directors and senior officers shall furnish with all truthfulness facts and information to the supervisory committee without obstructing the discharge of duties by the supervisory committee.
The Special Regulations and the Mandatory Provisions provide that a director, supervisor and senior officer of a company owe fiduciary duties to the company and are required to perform their duties faithfully and to protect the interests of the company and not to make use of their positions in the company for their own benefit.
Finance and Accounting
A company shall establish its financial and accounting systems according to laws, administrative regulations and the provisions of the responsible financial department of the State Council and at the end of each financial year, prepare a financial report which shall be audited and verified as provided by law. A company shall deposit its financial statements at the company for inspection by the shareholders at least 20 days before the convening of the annual general meeting of shareholders. A company incorporated by public subscription must publish its financial statements.
When distributing each year’s after-tax profits, the company shall set aside 10% of its after-tax profits for the company’s statutory common reserve, except where the reserve has reached 50% of the company’s registered capital. When the company’s statutory common reserve is not sufficient to make up for the company’s losses of the previous years, current year profits shall be used to make up for the losses before allocations are set aside for the statutory surplus reserve. After a company has made an allocation to its statutory common reserve from its after-tax profits, subject to a resolution of the shareholders’ general meeting, the company may make an allocation to a discretionary common reserve. After the company has made up for its losses and make allocations to its statutory common reserve, the remaining profits could be available for distribution to shareholder in proportion to the number of shares held by the shareholders except as otherwise provided in the articles of association of such company limited by shares.
Profits distributed to shareholders by a resolution of a shareholders’ general meeting or the board of directors before losses have been made good and allocations have been made to the statutory common reserve fund in violation of the requirements described above must be returned to the company. The company shall not be entitled to any distribution of profits in respect of its own shares held by it.
The premium of a joint stock limited company from the issuance of stocks at a price above the par value of the stocks, and other incomes listed in the capital reserve under provisions of the treasury department of the State Council shall be listed as the company’s capital reserve. The company’s common reserves shall be used for making up losses, expanding the production and business scale or increasing the registered capital of the company, but the
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The company shall have no other accounting books except the statutory accounting books. The company’s assets shall not be deposited in any accounts opened in the name of an individual.
Appointment and Retirement of Auditors
Pursuant to the PRC Company Law, the engagement or dismissal of an accounting firm responsible for the company’s auditing shall be determined by a shareholders’ general meeting or the board of directors in accordance with the articles of association. The accounting firm should be allowed to make representations when the general meeting or the board of directors conducts a vote on the dismissal of the accounting firm. The company should provide true and complete accounting evidence, accounting books, financial and accounting reports and other accounting information to the engaged accounting firm without any refusal or withholding or falsification of data.
The Special Regulations require a company to engage an independent qualified accounting firm to audit the company’s annual accounts reports and to review and check other financial reports of the company. The accounting firm’s term of office shall commence from the end of the shareholders’ annual general meeting to the end of the next shareholders’ annual general meeting.
Distribution of Profits
According to the PRC Company Law, a company shall not distribute profits before losses are covered and the statutory common reserve fund is provided. Additionally, the Special Regulations require that any dividend and other distribution to shareholders of H Shares shall be declared and calculated in RMB and paid in foreign currency. Under the Mandatory Provisions, a company shall make foreign currency payments to shareholders through receiving agents.
Amendments to Articles of Association
Pursuant to PRC Company Law, the resolution of a shareholders’ general meeting regarding any amendment to a company’s articles of association requires affirmative votes by more than two-thirds of the votes held by shareholders attending the meeting. Pursuant to the Mandatory Provisions, the company may amend its articles of association according to the laws, administrative regulations and the articles of association. The amendment to articles of association involving content of the Mandatory Provisions will only be effective upon approval of the department in charge of company examination authorized by the State Council and approval of the securities regulatory department under by the State Council, while the amendment to articles of association involving matters of company registration must be registered with the relevant authority in accordance with laws.
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Dissolution and Liquidation
Under the PRC Company Law, a company shall be dissolved in any of the following events:
(i) the term of its operations set down in its articles of association has expired or events of dissolution specified in its articles of association have occurred;
(ii) the shareholders in general meeting have resolved to dissolve the company;
(iii) the company is dissolved by reason of its merger or demerger;
(iv) the company is subject to the revocation of business license, a closure order or elimination in accordance with laws; or
(v) in the event that the company encounters substantial difficulties in its operation and management and its continuance shall cause a significant loss, in the interest of shareholders, and where this cannot be resolved through other means, shareholders who hold more than 10% of the total shareholders’ voting rights of the company may present a petition to the people’s court for the dissolution of the company.
In the event of paragraph (i) above, the company may carry on its existence by amending its articles of association. The amendments to the articles of association in accordance with the provisions described above shall require the approval of more than two-thirds of voting rights of shareholders attending a shareholders’ general meeting.
Where the company is dissolved under the circumstances set forth in paragraph (i), (ii), (iv) or (v) above, it should establish a liquidation committee within 15 days of the date on which the dissolution matter occurs. The liquidation committee shall be composed of directors or any other person determined by a shareholders’ general meeting. If a liquidation committee is not established within the stipulated period, the company’s creditors can apply to the people’s court for setting up a liquidation committee with designated relevant personnel to conduct the liquidation. The people’s court should accept such application and form a liquidation committee to conduct liquidation in a timely manner.
The liquidation committee shall exercise the following powers during the liquidation period:
(i) to sort out the company’s assets and to prepare a balance sheet and an inventory of the assets;
(ii) to notify creditors or issue public notices;
(iii) to deal with and settle any outstanding business of relevant company;
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(iv) to pay any overdue tax together with any tax arising during the liquidation process;
(v) to settle the company’s claims and liabilities;
(vi) to handle the remaining assets of the company after its debts have been paid off; and
(vii) to represent the company in civil lawsuits.
The liquidation committee shall notify the company’s creditors within 10 days of its establishment, and publish an announcement in newspapers within 60 days. A creditor shall lodge his claim with the liquidation committee within 30 days of receipt of the notification or within 45 days of the date of the announcement if he has not received any notification. A creditor shall report all matters relevant to his claimed creditor’s rights and furnish relevant evidence. The liquidation committee shall register such creditor’s rights. The liquidation committee shall not make any settlement to creditors during the period of the claim.
Upon disposal of the company’s property and preparation of the required balance sheet and inventory of assets, the liquidation committee shall draw up a liquidation plan and submit this plan to a shareholders’ general meeting or a people’s court for endorsement. The remaining part of the company’s assets, after payment of liquidation expenses, employee wages, social insurance expenses and statutory compensation, outstanding taxes and the company’s debts, shall be distributed to shareholders in proportion to shares held by them. The company shall continue to exist during the liquidation period, although it cannot conduct operating activities that are not related to the liquidation. The company’s property shall not be distributed to shareholders before repayments are made in accordance with the requirements described above.
Upon liquidation of the company’s property and preparation of the required balance sheet and inventory of assets, if the liquidation committee becomes aware that the company does not have sufficient assets to meet its liabilities, it must apply to a people’s court for a declaration of bankruptcy in accordance with the laws. Following such declaration by the people’s court, the liquidation committee shall hand over the administration of the liquidation to the people’s court.
Upon completion of the liquidation, the liquidation committee shall prepare a liquidation report and submit it to the shareholders’ general meeting or the people’s court for verification, and to the company registration authority for the cancellation of company registration, and an announcement of its termination shall be published. Members of the liquidation committee shall be faithful in the discharge of their duties and shall perform their liquidation duties in compliance with laws. Members of the liquidation committee shall be prohibited from abusing their authority in accepting bribes or other unlawful income and from misappropriating the company’s properties. Members of the liquidation committee who have caused the company or its creditors to suffer from any loss due to intentional fault or gross negligence, should be liable for making compensations to the company or its creditors. In addition, liquidation of a company declared bankrupt according to laws shall be processed in accordance with the laws on corporate bankruptcy.
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Loss of Share Certificates
A shareholder may apply, in accordance with the relevant provisions set out in the PRC Civil Procedure Law, to a people’s court in the event that share certificates in registered form are either stolen or lost, for a declaration that such certificates will no longer be valid. After such a declaration has been obtained, the shareholder may apply to the company for the issue of replacement certificates.
The Mandatory Provisions provide for a separate procedure regarding loss of H share certificates, details of which are set out in the articles of association.
Merger and Demerger
Under the PRC Company Law, as for a corporate merger, both parties to the merger shall conclude an agreement with each other and formulate balance sheets and checklists of properties. The companies involved shall, within ten days as of making the decision of merger, notify the creditors, and shall make a public announcement in a newspaper within thirty days. The creditors may, within thirty days as of the receipt of the notice or within forty five days as of the issuance of the public announcement if it fails to receive a notice, require the company to clear off its debts or to provide corresponding guarantees. In the case of a merger, the credits and debts of the companies involved shall be succeeded by the company that survives the merger or by the newly established company.
As for the division of a company, the properties thereof shall be divided accordingly. The post-split companies shall bear several and joint liabilities for the debts of the company before its split unless it is otherwise prescribed in a written agreement reached by the company and the creditors before the split regarding the debt pay-off.
Where, in the process of company merger or split, any of the registered items is changed, the companies shall go through modification registration with the company registration authority. Where a company is dissolved, it shall be deregistered according to law. If a new company is established, it shall go through the procedures for company establishment according to law.
SECURITIES LAW AND REGULATIONS
The PRC has promulgated a series of regulations that relate to the issue and trading of the Shares and disclosure of information. In October 1992, the State Council established the Securities Committee and CSRC. The Securities Committee is responsible for coordinating the drafting of securities regulations, formulating securities-related policies, planning the development of securities markets, directing, coordinating and supervising all securities related institutions in the PRC and administering CSRC. CSRC is the regulatory arm of the Securities Committee and is responsible for the drafting of regulatory provisions governing securities markets, supervising securities companies, regulating public offerings of securities by PRC companies in the PRC or overseas, regulating the trading of securities, compiling securities- related statistics and undertaking relevant research and analysis. In 1998, the State Council dissolved the Securities Committee of the State Council and assigned its function to the CSRC.
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The PRC Securities Law (中華人民共和國證券法) (the “Securities Law”) took effect on July 1, 1999 and was revised as of August 28, 2004, October 27, 2005, June 29, 2013, August 31, 2014 and December 28, 2019, respectively. The latest Securities Law was implemented on March 1, 2020. It was the first national securities law in the PRC, and is divided into 14 chapters and 226 articles comprehensively regulating activities in the PRC securities market, including the issue and trading of securities, takeovers by listed companies and the duties and responsibilities of the securities exchanges, securities companies, securities clearing institutions and securities regulatory authorities. Article 224 of the PRC Securities Law provides that domestic enterprises shall satisfy the relevant requirements of the State Council when it issues shares or lists shares outside the PRC directly or indirectly. Currently, the issue and trading of foreign issued securities (including shares) are principally governed by the regulations and rules promulgated by the State Council and CSRC.
Overseas Listing
The shares of a company shall only be listed overseas after obtaining approval from the securities regulatory authority of the State Council and the listing must be arranged in accordance with procedures specified by the State Council.
According to the Special Regulations, a company’s plan to issue overseas listed foreign invested shares and domestic invested shares which has been approved by the securities regulatory authority of the State Council may be implemented by the board of directors of a company by way of separate issues, within fifteen months after approval is obtained from the CSRC.
Suspension and Termination of Listing
Under the Securities Law, where a security listed and traded on a stock exchange falls under any of the delisting circumstances prescribed by the stock exchange, the stock exchange shall delist the security according to its business rules. Where a stock exchange decides to delist a security on the stock exchange, it shall announce the delisting in a timely manner, and file a report with the securities regulatory agency of the State Council for recordation.
ARBITRATION AND ENFORCEMENT OF ARBITRAL AWARDS
The Arbitration Law of the PRC (中華人民共和國仲裁法) (the “Arbitration Law”) was passed by the Standing Committee of the National People’s Congress on August 31, 1994 and the latest version was amended on August 27, 2009 with immediate effect. It is applicable to contract disputes and other property disputes between natural persons, legal persons and other organizations where the parties have entered into a written agreement to refer the matter to arbitration before an arbitration committee constituted in accordance with the Arbitration Law. Under the Arbitration Law, an arbitration committee may, before the promulgation by the PRC
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Arbitration Association of arbitration regulations, formulate provisional arbitration rules in accordance with the Arbitration Law and the PRC Civil Procedure Law. Where the parties have by agreement provided arbitration as the method for dispute resolution, the people’s court will refuse to handle the case.
The Arbitration Law of the PRC (中華人民共和國仲裁法) (the “PRC Arbitration Law”) was enacted by the Standing Committee of the National People’s Congress on August 31, 1994, which became effective on September 1, 1995 and was amended on September 1, 2017. It is applicable to disputes concerning contracts and other property where the parties have agreed in writing to submit the relevant disputes to an arbitration commission constituted in accordance with the PRC Arbitration Law. The PRC Arbitration Law provides that an arbitration committee may, before the promulgation of arbitration regulations by the PRC Arbitration Association, formulate interim arbitration provisions in accordance with the PRC Arbitration Law and the PRC Civil Procedure Law. Where the involved parties have agreed to settle disputes by means of arbitration, a people’s court will refuse to handle a legal proceeding initiated by one of the parties at such people’s court, unless the arbitration agreement is null and void.
The Hong Kong Listing Rules and the Mandatory Provisions require an arbitration clause to be included in the Articles of Association and, in the case of the Hong Kong Listing Rules, also in contracts with each of the Directors and Supervisors, to the effect that whenever any disputes or claims arise between holders of the H Shares and the company; holders of the H shares and holders of the domestic holder; or holders of the H Shares and the Directors, Supervisors or officers, in respect of any disputes or claims in relation to our affairs or as a result of any rights or obligations arising under the Articles of Association, the PRC Company Law or other relevant laws and administrative regulations, such disputes or claims shall be referred to arbitration.
A claimant may elect for arbitration to be carried out at either the China International Economic and Trade Arbitration Commission (“CIETAC”) or the Hong Kong International Arbitration Centre (“HKIAC”). Disputes in respect of the definition of shareholder and disputes in relation to the company’s shareholder registry need not be resolved by arbitration. If the party seeking arbitration elects to arbitrate the dispute or claim at the HKIAC, then either party may apply to have such arbitration conducted in Shenzhen in accordance with the securities arbitration rules of the HKIAC.
Under the PRC Arbitration Law and the PRC Civil Procedure Law, a system of a single and final award shall be practiced for arbitration. If a party applies for arbitration to an arbitration commission or institutes an action in a people’s court regarding the same dispute after an arbitration award has been made, the arbitration commission or the people’s court shall not accept the case. If one party fails to comply with the arbitral award, the other party to the award may apply to a people’s court for its enforcement. However, the people’s court may refuse to enforce an arbitral award made by an arbitration commission if there is any
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If a party applies for enforcement of a legally effective arbitration award made by a foreign-related arbitration commission and if the party against whom the enforcement is sought or such party’s property is not within the territory of the PRC, he shall directly apply to a competent foreign court for recognition and enforcement of the award. Likewise, an arbitral award made by a foreign arbitral body may be recognized and enforced by a PRC court in accordance with the principle of reciprocity or any international treaties concluded or acceded to by the PRC.
The PRC acceded to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (承認及執行外國仲裁裁決公約) (the “New York Convention”) adopted on June 10, 1958 pursuant to a resolution of the Standing Committee of the National People’s Congress passed on December 2, 1986. The New York Convention provides that all arbitral awards made in a state which is a party to the New York Convention shall be recognized and enforced by other parties to the New York Convention, subject to their right to refuse enforcement under certain circumstances, including where the enforcement of the arbitral award is against the public policy of the State to which the application for enforcement is made. It was declared by the Standing Committee of the National People’s Congress simultaneously with the accession of the PRC that (i) the PRC will only recognize and enforce foreign arbitral awards on the principle of reciprocity and (ii) the PRC will only apply the New York Convention in disputes considered under PRC laws to arise from contractual and non- contractual mercantile legal relations.
In June 1999, an arrangement was made between Hong Kong and the Supreme People’s Court of the PRC for the mutual enforcement of arbitral awards. This new arrangement was approved by the Supreme People’s Court of the PRC and the Hong Kong Legislative Council, and became effective on February 1, 2000. The arrangement is made in accordance with the spirit of the New York Convention. Under the arrangement, awards made by PRC arbitration bodies pursuant to the Arbitration Law can be enforced in Hong Kong. Hong Kong arbitral awards pursuant to the Arbitration Ordinance of Hong Kong are also enforceable in the PRC. If the Mainland court finds that the enforcement of awards made by the Hong Kong arbitral bodies in the Mainland will be against public interests of the Mainland, the awards may not be enforced.
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SUMMARY OF MATERIAL DIFFERENCES BETWEEN HONG KONG AND PRC COMPANY LAW
The Hong Kong laws applicable to a company incorporated in Hong Kong are the Companies Ordinance and the Companies (Winding Up and Miscellaneous Provisions) Ordinance and are supplemented by common law and the rules of equity that are applicable to Hong Kong.
As a joint stock limited company established in the PRC that is seeking a listing of shares on the Hong Kong Stock Exchange, the Company is governed by the PRC Company Law and all other rules and regulations promulgated pursuant to the PRC Company Law.
Set out below is a summary of certain material differences between Hong Kong company law applicable to a company incorporated in Hong Kong and the PRC Company Law applicable to a joint stock limited company incorporated under the PRC Company Law. This summary is, however, not intended to be an exhaustive comparison.
Corporate Existence
Under Hong Kong company law, a company with share capital, shall be incorporated by the Registrar of Companies in Hong Kong and the company will acquire an independent corporate existence upon its incorporation. A company may be incorporated as a public company or a private company. Pursuant to the Companies Ordinance, the articles of association of a private company incorporated in Hong Kong shall contain provisions that restrict a member’s right to transfer shares. A public company’s articles of association do not contain such provisions.
Under the PRC Company Law, a joint stock company may be incorporated by promotion or subscription. The amended PRC Company Law which came into effect on October 26, 2018 has no provision on the minimum registered capital of joint stock companies, except that laws, administrative regulations and State Council decisions have separate provisions on paid-in registered capital and the minimum registered capital of joint stock, in which case the company should follow such provisions.
Share Capital
Under Hong Kong law, the directors of a Hong Kong company may, with the prior approval of the shareholders if required, issue new shares of the company. The PRC Company Law provides that any increase in our registered capital must be approved by our shareholders’ general meeting. There are no such minimum capital requirements on a Hong Kong company under Hong Kong law.
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Under the PRC securities laws and regulations, a company which is approved by the relevant securities regulatory authority to list its shares on a stock exchange must have a total share capital of not less than RMB30 million. There is no such restriction on companies incorporated in Hong Kong under Hong Kong law.
Under the PRC Company Law, the shares may be subscribed for in the form of money or non-monetary assets (other than assets not entitled to be used as capital contributions under relevant laws and administrative regulations). For non-monetary assets to be used as capital contributions, appraisals and transfer procedures of property rights must be carried out to ensure no over-valuation or under-valuation of the assets. There is no such restriction on a Hong Kong company under Hong Kong law.
Restrictions on Shareholding and Transfer of Shares
Under PRC law, domestic shares, which are denominated and subscribed for in Renminbi, may only be subscribed for and traded by the government or government authorized departments, PRC legal persons, natural persons, qualified foreign institutional investors, or eligible foreign strategic investors. Overseas listed shares, which are denominated in Renminbi and subscribed for in a foreign currency other than Renminbi, may only be subscribed for, and traded by investors from Hong Kong, Macau or Taiwan or any country and territory outside the PRC, or qualified domestic institutional investors. However, qualified institutional investors and individual investors may trade Southbound Hong Kong trading Link and Northbound Shanghai trading Link (or the Northbound Shenzhen trading Link) shares via participating in Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect.
Under the PRC Company Law, a promoter of a joint stock company is not allowed to transfer the shares it holds for a period of one year after the date of establishment of the company. Shares in issue prior to the public offering cannot be transferred within one year from the listing date of the shares on a stock exchange. Shares in a joint stock company held by its directors, supervisors and senior management transferred each year during their term of office shall not exceed 25% of the total shares they held in the company, and the shares they held in the company cannot be transferred within one year from the listing date of the shares, and also cannot be transferred within half a year after such person has left office. The articles of association may set other restrictive requirements on the transfer of the company’s shares held by its directors, supervisors and senior management. There are no such restrictions on shareholdings and transfers of shares under Hong Kong law apart from six-month lockup on the company’s issue of shares and the 12-month lockup on controlling shareholders’ disposal of shares.
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Financial Assistance for Acquisition of Shares
The PRC Company Law does not prohibit or restrict a joint stock company or its subsidiaries from providing financial assistance for the purpose of an acquisition of its own or its holding company’s shares. However, the Mandatory Provisions contain special restrictions provisions on a company and its subsidiaries on providing aforesaid financial assistance similar to those under the Hong Kong company law.
Variation of Class Rights
The PRC Company Law has no special provision relating to variation of class rights. However, the PRC Company Law states that the State Council can promulgate separate regulations relating to other kinds of shares. The Mandatory Provisions contain elaborate provisions relating to the circumstances which are deemed to be variations of class rights and the approval procedure required to be followed in respect thereof. These provisions have been incorporated in the Articles of Association.
Under the Companies Ordinance, no rights attached to any class of shares can be varied except:
(i) If there are provisions in the articles of association relating to the variation of those rights, then in accordance with those provisions;
(ii) If there are no relevant provisions in the articles of associations, then (1) with the consent in writing of holders representing at least three fourths of the total voting rights of holders of the shares in the class in question, or (2) with the approval of a special resolution of the holders of the relevant class at a separate meeting.
Directors, Senior Management and Supervisors
The PRC Company Law, unlike Hong Kong company law, does not contain any requirements relating to the declaration of directors’ interests in material contracts, restrictions on companies providing certain benefits to directors and guarantees in respect of directors’ liability and prohibitions against compensation for loss of office without shareholders’ approval. The Mandatory Provisions, however, contain certain restrictions on interested contracts and specify the circumstances under which a director may receive compensation for loss of office.
Supervisory Board
Under the PRC Company Law, a joint stock company’s directors and members of the senior management are subject to the supervision of supervisory board. There is no mandatory requirement for the establishment of supervisory board for a company incorporated in Hong Kong. The Mandatory Provisions provide that each supervisor owes a duty, in the exercise of his powers, to act in good faith and honestly in what he considers to be in the best interests of the company and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
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Derivative Action by Minority Shareholders
According to Hong Kong law, as permitted by court, shareholders may initiate a derivative action on behalf of the company against directors who have any misconduct to the company if the directors control a majority of votes at a general meeting, thereby effectively preventing a company from suing the directors in breach of their duties in its own name.
The PRC Company Law provides shareholders of a joint stock company with the right so that in the event where the directors and senior management violate their obligations and cause damages to a company, the shareholders individually or jointly holding more than 1% of the shares in the company for more than 180 consecutive days may request in writing the supervisory board to initiate proceedings in the people’s court. In the event that the supervisory board violates their obligations and cause damages to company, the above said shareholders may send written request to the board of directors to initiate proceedings in the people’s court. Upon receipt of aforesaid written request from the shareholders, if the supervisory board or the board of directors refuses to initiate such proceedings, or has not initiated proceedings within 30 days from the date of receipt of the request, or if under urgent situations, failure of initiating immediate proceeding may cause irremediable damages to the company, the above said shareholders shall, for the benefit of the company’s interests, have the right to initiate proceedings directly to the people’s court in their own name.
The Mandatory Provisions also provide further remedies against the directors, supervisors and senior management who breach their duties to the company. In addition, as a condition to the listing of shares on the Hong Kong Stock Exchange, each director and supervisor of a joint stock company is required to give an undertaking in favor of the company acting as agent for the shareholders. This allows minority shareholders to take action against directors and supervisors of the company in default.
Protection of Minorities
Under Hong Kong law, a shareholder who complains that the business of a company incorporated in Hong Kong are conducted in a manner unfairly prejudicial to his interests may petition to the Court to make an appropriate order to give relief to the unfairly prejudicial conduct. Alternatively, pursuant to the Companies (Winding Up and Miscellaneous Provisions) Ordinance, a shareholder may seek to wind up the company on the just and equitable ground. In addition, on the application of a specified number of members, the Financial Secretary may appoint inspectors who are given extensive statutory powers to investigate the affairs of a company incorporated or registered in Hong Kong.
According to the PRC Company Law, in the event that the company encounters substantial difficulties in its operation and management and its continuance shall cause a significant loss to the interest of its shareholders, and where this cannot be resolved through other means, the shareholders who hold more than 10% of the total shareholders’ voting rights of the company may present a petition to the People’s Court for the dissolution of the company.
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The Mandatory Provisions, however, contains provisions that a controlling shareholder may not exercise its voting rights in a prejudicial manner to the interests of the entire or part of shareholders of a company to relieve a director or supervisor of his duty to act honestly in the best interests of the company or to approve the expropriation by a director or supervisor of the company’s assets or the individual rights of other shareholders.
Notice of Shareholders’ General Meetings
Under the PRC Company Law, notice of a shareholders’ annual general meeting and an extraordinary shareholders meeting must be given to shareholders at least 20 days and 15 days before the meeting, respectively.
For a company incorporated in Hong Kong, the minimum period of notice is 21 days in the case of an annual general meeting (or such longer period as required under the articles of association of the Company). Further, where a meeting involves consideration of a resolution requiring special notice, the company must also give its shareholders notice of the resolution at least 14 days before the meeting.
Quorum for Shareholders’ General Meetings
Under the Companies Ordinance, the quorum for a general meeting must be at least two members present in person or by proxy unless the articles of association of the company otherwise provided. For companies with only one shareholder, the quorum must be that one shareholder present in person or by proxy. The PRC Company Law does not specify the quorum for a shareholders’ general meeting.
Voting
Under the Companies Ordinance, an ordinary resolution is passed by a simple majority of (a) on a show of hands, the total number of the Shareholders who vote in person, or by proxy; and (b) on a poll, the total voting rights of all the Shareholders who vote in person, or by proxy, at a general meeting, and a special resolution is passed by not less than three-fourths of (a) on a show of hands, the total number of the shareholders who vote in person, or by proxy; and (b) on a poll, the total voting rights of all the shareholders who vote in person, or by proxy, at a general meeting.
Under the PRC Company Law, the passing of any resolution requires more than one-half of the affirmative votes held by our shareholders present at a shareholders’ meeting except in cases such as proposed amendments to our articles of association, increase or decrease of registered capital, merger, division, dissolution or transformation, which require two-thirds of the affirmative votes cast by shareholders present at a shareholders’ general meeting.
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Financial Disclosure
Under the PRC Company Law, a joint stock company is required to make its financial report available at the company for inspection by shareholders its financial report 20 days before its shareholders’ annual general meeting. In addition, a joint stock limited company of which the shares are publicly issued must publish its financial report. The Companies Ordinance requires a company incorporated in Hong Kong to send to every shareholder a copy of its financial statements, auditors’ report and directors’ report, which are to be presented before the company’s annual general meeting, not less than 21 days before such meeting. A joint stock company is required under the PRC law to prepare its financial statements in accordance with the PRC GAAP. In addition, pursuant to the Mandatory Provisions, a company must, in addition to preparing financial statements according to the PRC GAAP, have its financial statements prepared and audited in accordance with international accounting standards or the accounting standards of the oversea place where the shares are listed and its financial statements must also contain a statement of the financial effect of the material differences (if any) from the financial statements prepared in accordance with the PRC GAAP. The lower of the after-tax profits of a specific fiscal year stated in the statements prepared based on the above-mentioned principles shall prevail in the allocation of such profits. The company shall publish its financial reports twice in each accounting year. An interim financial report shall be published within 60 days after the end of the first six months of each accounting year, while an annual financial report shall be published within 120 days after the end of each accounting year.
The Special Regulations require that there should not be any contradiction between the information disclosed within and outside the PRC and that, to the extent that there are differences in the information disclosed in accordance with the relevant PRC and overseas laws, regulations and requirements of the relevant stock exchanges, such differences should also be disclosed simultaneously.
Information on Directors and Shareholders
The PRC Company Law gives shareholders the right to inspect the company’s articles of association, minutes of the shareholders’ general meetings, share register, counterfoil of company debentures, resolutions of board meetings, resolutions of the board of supervisors and financial and accounting reports, which is similar to the shareholders’ rights of Hong Kong companies under Hong Kong law.
Receiving Agent
Under the PRC Company Law and Hong Kong law, dividends once declared are debts payable to shareholders. The limitation period for debt recovery action under Hong Kong law is six years, while under the PRC laws this limitation period is three years. The Mandatory Provisions require the relevant company to appoint a trust company registered under the Trustee Ordinance (Chapter 29 of the Laws of Hong Kong) as a receiving agent to receive on behalf of holders of shares dividends declared and all other monies owed by the company in respect of its shares.
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Corporate Reorganization
Corporate reorganization involving a company incorporated in Hong Kong may be effected in a number of ways, such as a transfer of the whole or part of the business or property of the company in the course of voluntary winding up to another company pursuant to Section 237 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance or a compromise or arrangement between the company and its creditors or between the company and its shareholders under Division 2 of Part 13 of the Companies Ordinance, which requires the sanction of the court. In addition, subject to the shareholders’ approval, an intra-group wholly-owned subsidiary company may also be amalgamated horizontally or vertically under the Companies Ordinance.
Under PRC law, merger, division, dissolution or change the form of a joint stock company has to be approved by shareholders in general meeting.
Dispute Resolution
In Hong Kong, disputes between shareholders on one hand, and a company incorporated in Hong Kong or its directors on the other hand, may be resolved through legal proceedings in the courts. The Mandatory Provisions provide that such disputes should be submitted to arbitration at either the HKIAC or the CIETAC, at the claimant’s choice.
Statutory Reserve Fund Withdrawal
Under the PRC Company Law, when a joint stock company allocating the after-tax profits of the current year, the company shall allocate (10) ten percent of its profit to the statutory common reserve fund. There are no corresponding provisions under Hong Kong law.
Remedies of the Company
Under the PRC Company Law, if a director, supervisor or senior management in carrying out his duties infringes any law, administrative regulation or the articles of association of a company, which results in damage to the company, that director, supervisor or senior management should be responsible to the company for such damages. In addition, the Listing Rules require listed companies’ articles of association to provide for remedies of the company similar to those available under Hong Kong law (including rescission of the relevant contract and recovery of profits from a director, supervisor or senior management).
Dividends
The company has the power in certain circumstances to withhold, and pay to the relevant tax authorities, any tax payable under PRC law on any dividends or other distributions payable to a shareholder. Under Hong Kong law, the limitation period for an action to recover a debt (including the recovery of dividends) is six years, whereas under PRC laws, the relevant limitation period is three years. The company must not exercise its powers to forfeit any unclaimed dividend in respect of shares until after the expiry of the applicable limitation period.
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Fiduciary Duties
In Hong Kong, directors owe fiduciary duties to the company, including the duty not to act in conflict with the company’s interests. Furthermore, the Companies Ordinance has codified the directors’ statutory duty of care.
Under the PRC Company Law, directors, supervisors and senior management should be loyal and diligent. Under the Mandatory Provisions, directors, supervisors and senior management are not permitted, without the approval of the shareholders’ general meeting, to engage in any activities which compete with or damage the interests of their company.
Closure of Register of Shareholders
The Companies Ordinance requires that the register of shareholders of a company must not be closed for the registration of transfers of shares for more than 30 days (extendable to not more than 60 days in a year by a resolution of the shareholders of the Company) in a year, whereas, as required by the PRC Company Law and the Mandatory Provisions, share transfers shall not be registered within five days before the base date set for the purpose of distribution of dividends.
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SHARES
Shares and Registered Capital
The Company shall have ordinary shares at all times. The Company may set other types of shares subject to needs, upon approval by the authorities that are authorized by the State Council.
The issuing of shares by the Company shall be conducted on the principle of fairness and justness, with each share of the same class bearing equal rights. The issuing conditions and price for each share of the same class issued at the same time shall be the same. Each share subscribed by any entity or individual shall be subscribed at the same price.
Upon approval of the securities regulatory authority of the State Council, the Company may issue shares to domestic investors and overseas investors. Upon approval by the securities regulatory authority of the State Council of the Company’s plan for issuing domestic listed domestic shares and overseas listed foreign shares, the board of directors of the Company may arrange for implementation of such plan by means of separate issues. The Company’s respective plans for issuing domestic listed domestic shares and overseas listed foreign shares in accordance with the preceding provision may be implemented respectively within fifteen (15) months upon the date of approval by the securities regulatory authority of the State Council. Where the Company issues overseas listed foreign shares and domestic investment shares within the total shares defined in the issuance plan, every such issue of shares shall be fully subscribed at one time. Where special circumstances make it impossible for full subscription at one time, the shares may be issued in several stages, subject to approval of the securities regulatory authority of the State Council.
Subject to the approval of the securities regulatory authorities of the State Council, holders of unlisted shares of the Company may transfer all or part of the shares held by them to overseas investors and have the shares listed and traded on overseas stock exchange(s). All or part of the unlisted shares are convertible into foreign invested shares, and the resulting shares may be listed and traded on overseas stock exchange(s). The listing and trading of shares so transferred or converted on an overseas stock exchange shall comply with the regulatory procedures, regulations and requirements of the overseas securities market(s). No shareholders’ general meeting(s) or shareholders’ class meeting(s) is required to be convened for voting in respect of the transfer and/or conversion and listing and trading of such shares on overseas stock exchanges. The overseas listed foreign invested shares converted from unlisted shares shall be of the same class as the existing overseas listed foreign invested shares.
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Increase and Decrease in Share Capital
Subject to approval as stipulated in this Articles of Association and in accordance with the relevant laws and regulations, the listing rules of the stock exchange on which the shares of Company are listed, the Company may increase its capital in the following ways to meet the needs of operations and business expansion:
(1) offering new shares to non-specially-designated investors for subscription;
(2) issuing new shares to existing shareholders;
(3) issuing bonus shares to existing shareholders;
(4) offering new shares to specially-designated investors;
(5) converting the capital reserve into capital;
(6) any other means permitted by laws and administrative regulations and regulatory authorities.
Once the Company’s increase of share capital by means of the issuance of new shares has been approved in accordance with the provisions of the Articles of Association, the issuance thereof shall be carried out in accordance with the procedures set out in the relevant laws and administrative regulations of the PRC and the listing rules of the stock exchange on which the shares of the Company are listed.
The Company may reduce its registered capital. The Company shall reduce its registered capital in compliance with the procedures as required by the laws and regulations, the listing rules of the stock exchange on which the shares of the Company are listed and this Articles of Association. The Company shall prepare a balance sheet and a list of assets when it reduces its registered capital.
The Company shall notify its creditors within 10 days from the date of the resolution on reduction in registered capital, publish an announcement in a newspaper within 30 days from the date of such resolution and publish it on the Company’s website and relevant stock exchange websites in accordance with the listing rules of the stock exchange on which the shares of the Company are listed. A creditor shall have the right, within 30 days upon receipt of the notice from the Company or, in the case of a creditor who does not receive such notice, within 45 days of the date of the first announcement, to require the Company to repay its debt or to provide corresponding guarantee for such debt.
The registered capital of the Company following the reduction in capital shall not fall below the minimum statutory requirement.
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Repurchase of Shares
The Company may, in accordance with the procedures of the relevant laws and regulations, the listing rules of the stock exchange on which the shares of the Company are listed and this Articles of Association and upon approval of the relevant competent authorities of the PRC, repurchase its shares under the following circumstances:
(1) canceling its shares for the purpose of reducing its registered capital;
(2) merging with another company which holds the shares of the Company;
(3) using shares for employee stock ownership plan or equity incentives;
(4) acquiring the shares of shareholders who vote against any resolution adopted at the shareholders’ general meeting on the merger or demerger of the Company and request the Company to acquire their shares;
(5) using shares for converting convertible corporate bonds issued by the Company;
(6) it is necessary for the Company to protect the corporate value and the rights and interests of shareholders; and
(7) other circumstances permitted by laws and administrative regulations, the listing rules of the stock exchange on which the shares of the Company are listed and regulatory authorities.
The Company may, upon approval of the relevant competent authorities of the PRC, repurchase its shares in one of the following ways:
(1) making a pro rata general offer of repurchase to all its shareholders;
(2) repurchasing shares through public trading on a stock exchange;
(3) repurchasing by an off-market agreement; or
(4) other ways as permitted by laws, administrative regulations, the listing rules of the stock exchange on which the shares of the Company are listed and regulatory authorities.
The Company shall obtain prior approval of the shareholders at a shareholders’ general meeting in accordance with the provisions of this Articles of Association before it repurchases its shares by means of an off-market agreement. The Company may, by obtaining prior approval of the shareholders at a shareholders’ general meeting in the same manner, discharge or vary a contract which has been entered into in the aforesaid manner, or waive its rights thereunder.
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In the event that the Company has repurchased its shares under the circumstance set out in clause (1), such shares shall be canceled within 10 days from the date of repurchase, and for circumstances set out in clauses (2) and (4), such shares shall be transferred or canceled within six months from the date of repurchase. For circumstances set out in clause (3), (5) and (6), shares so repurchased and hold by the Company shall not exceed 10% of the total issued shares of the Company and shall be transferred to employees or canceled within three year.
The Company’s registered capital shall be deducted an amount equal to the aggregate par value of those canceled shares.
Transfer of Shares
Except if laws and statutory regulations and the relevant securities regulatory authorities stipulate otherwise, shares of a company may be subject to free assignment and shall have no lien attached.
The shares issued before the Company publicly issues shares shall not be transferred within one year from the day when the stocks of the Company get listed and are traded in a stock exchange.
The directors, supervisors and senior managers of the Company shall declare to the company the shares held by them and the changes thereof. During the term of office, the shares transferred by any of them each year shall not exceed 25% of the total shares of the Company he holds. Within six months after any of the aforesaid persons is removed from his post, he shall not transfer the shares of the company he holds.
The Company shall not accept its own shares as the subject matter of a pledge.
Any paid up overseas listed foreign shares listed on the Hong Kong Stock Exchange are free to be transferred pursuant to this Articles of Association, provided that the Board may refuse to recognize any instrument of transfer without assigning any reason unless the following conditions are satisfied:
(1) HK$2.50 transfer fee (per transfer document) is paid to the Company, or a higher fee agreed by the Hong Kong Stock Exchange, for the registration of the transfer of shares and other documents relating to or affecting ownership;
(2) the instrument of transfer only relates to the overseas listed foreign shares listed in Hong Kong;
(3) the stamp duty on the instrument of transfer payable according to laws has been paid;
(4) the relevant share certificates and the evidences reasonably required by the Board showing that the transferor has the right to transfer such shares have been provided;
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(5) if the shares are to be transferred to joint holders, the number of joint holders shall not exceed four;
(6) the relevant shares shall be free from any company’s liens.
Financial Aid
The Company or its subsidiaries shall not offer any financial aid at any time by any means to purchasers or prospective purchasers of the Company’s shares. Such purchasers of the Company’s shares as mentioned above shall include those who directly or indirectly assume the obligations due to the purchase of the shares of the Company.
The Company or its subsidiaries shall not offer any financial aid at any time by any means in order to reduce or relieve the obligations of the aforesaid purchasers. This Article does not apply to the circumstances as defined below:
(1) where the Company provides the relevant financial aid in good faith for the benefit of the Company and the main purpose of the financial aid is not to purchase shares of the Company, or the financial aid is an incidental part of an overall plan of the Company;
(2) lawful distribution of the Company’s property in the form of dividends;
(3) distribution of dividends in the form of shares;
(4) reduction of registered capital, share acquisition, adjustment of shareholding structure, etc., in accordance with the Articles of Association;
(5) provision of loans by the Company within its business scope and in normal business (provided that the provision does not lead to a reduction in the net assets of the Company or that even if it constitutes a reduction, the financial aid was paid out of the Company’s distributable profits); and
(6) provision of fund by the Company for an employee shareholding scheme (provided that the provision does not lead to a reduction in the net assets of the Company or that even if it constitutes a reduction, the financial aid was paid out of the Company’s distributable profits).
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SHAREHOLDERS AND SHAREHOLDERS’ GENERAL MEETINGS
Shareholders
Shareholders of the Company shall be persons who lawfully hold the shares of the Company and whose names are registered in the register of shareholders. Shareholders shall enjoy rights and undertake obligations according to the class and number of shares held by them. Shareholders who hold the same class of shares shall enjoy equal rights and undertake equal obligations.
Shareholders holding different classes of shares in the Company shall enjoy equal rights in any distribution made in dividends or any other form.
Holders of the ordinary shares of the Company shall have the following rights:
(1) the right to receive dividends and other forms of benefit distributions in proportion to their shareholdings;
(2) the right to request, call, preside over, attend or appoint a shareholder’s agent to attend the general meeting of shareholders and exercise the voting right in accordance with the laws;
(3) the right to supervise and manage the Company’s business operations, put forward proposals and raise inquiries;
(4) the right to transfer, grant or pledge the shares held in accordance with laws, administrative regulations and provisions of this Articles of Association;
(5) the right to access relevant information in accordance with laws and the provisions of the Articles of Association, including:
1. a copy of the Articles of Association upon payment of the costs thereof;
2. the right to inspect and copy, subject to payment of a reasonable charge:
(1) the register of all shareholders;
(2) the personal particulars of the Directors, Supervisors and senior management of the Company, including:
(a) the present and former name and alias;
(b) the principal address (place of residence);
(c) the nationality;
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(d) the full-time job and all other part-time jobs and duties;
(e) the identification documents and the numbers thereof.
(3) the status of the share capital of the Company;
(4) the reports stating the aggregate par value, quantity, maximum and minimum prices paid in respect of each class of shares repurchased by the Company since the end of the last accounting year and the aggregate amount incurred by the Company for this purpose;
(5) the copy of corporate bonds;
(6) the minutes of shareholders’ general meetings;
(7) the resolutions made at the meetings of the Board;
(8) the resolutions made at the meetings of the Supervisory Committee; and
(9) financial accounting report.
(6) in the event of the termination or liquidation of the Company, the right to participate in the distribution of the remaining property of the Company according to the number of shares held;
(7) the right to request the Company to acquire the shares held by shareholders who vote against any resolution adopted at the shareholders’ general meeting on the merger or demerger of the Company;
(8) other rights conferred by the laws and regulations, the listing rules of the stock exchange on which the shares of the Company are listed and this Articles of Association.
If the resolution of the general meeting or the Board violates laws and administrative regulations, the shareholders have the right to request the people’s court to determine it invalid. If the procedures for convening a meeting of, or the method of voting at, a general meeting or the Board are in breach of any law, administrative regulation or this Articles of Association, or the content of a resolution is in breach of this Articles of Association, shareholders may petition to a court to rescind such resolutions within sixty days from the date on which such resolution is passed.
If a director and senior management personnel violates the laws, regulations or the provisions of this Articles of Association during the performance of his/her duties to the Company and incurs losses to the Company, the shareholders holding individually or in aggregate 1% or more of the shares of the Company for a continued period of 180 days or more
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Shareholders of ordinary shares of the Company shall undertake the following obligations:
(1) abiding by the laws, administrative regulations and this Articles of Association;
(2) making payment of the share capital according to the number of shares subscribed by them and the method of capital injection;
(3) not to withdraw its shares unless in accordance with the laws and regulations;
(4) not to abuse their rights as a shareholder in infringing the interests of the Company or other shareholders; nor to abuse the status of the Company as an independent legal entity and limited liability of shareholders to impair the creditors’ interests.
any shareholder who abuses his rights as a shareholder and causes any loss to the Company or any other shareholder shall be liable for indemnification of such loss according to law. Any shareholder who misuse the independent legal person status of the Company or his limited liability as a shareholder in evading debts and causes a serious damage to the interests of any creditor of the Company shall have a joint and several liability for the debts of the Company;
(5) other obligations imposed by laws and regulations, the listing rules of the stock exchange on which the shares of the Company are listed and this Articles of Association.
Shareholders shall not assume any responsibility for further capital contribution other than the conditions agreed to by the subscribers of the relevant shares on subscription.
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Except for the obligations as required by laws, regulations or the listing rules of the locality where shares of the Company are listed, the controlling shareholders shall not make any decisions that will impair the interests of all or some of the shareholders concerning the following aspects when they exercise their powers as shareholders by exercising their voting rights:
(1) exempting the responsibility of the director and the supervisor to act in good faith for the maximum benefit of the Company;
(2) approving the director and the supervisor to deprive the property of the Company (including but not limited to the opportunities favorable to the Company) in any form for their own benefits or for the benefits of others;
(3) approving the director and the supervisor to deprive the individual rights and interests of other shareholders (including but not limited to any distribution rights, voting rights, but excluding the restructuring the Company which is submitted to the general meeting of shareholders for approval in accordance with the Articles) for their own benefits or for the benefit of others.
General provisions of Shareholders’ General Meeting
The Shareholders’ General Meeting is the organ of authority of the Company and shall exercise its functions:
(1) to decide the Company’s operational guidelines and investment schemes;
(2) to elect and change directors and supervisors assumed by non-representatives of the employees and to determine matters relating to their remunerations;
(3) to consider and approve the reports of the Board;
(4) to consider and approve the reports of the Supervisory Committee;
(5) to consider and approve the Company’s annual financial budgets and final accounts;
(6) to consider and approve the Company’s profit distribution plan and plan for making up losses;
(7) to resolve on an increase or a reduction in the Company’s registered capital;
(8) to resolve on the issue of bonds by the Company;
(9) to resolve on matters such as merger, demerger, dissolution and liquidation of the Company and change of company form;
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(10) to amend this Articles of Association;
(11) to resolve on the appointment, dismissal or non-reappointment of the accounting firms;
(12) to consider proposals put forward by any shareholder representing 3% or more of the Company’s shares with voting rights;
(13) to consider the purchases or sales of any material assets and guarantee amount of the Company within a year in excess of 25% (including 25%) of the Company’s total assets in the latest audited consolidated financial statements; and
(14) to consider any other matters to be resolved by shareholders’ general meeting as required by the laws and regulations, the listing rules of the stock exchange on which the shares of the Company are listed and this Articles of Association.
A shareholders’ general meeting shall either be an annual general meeting or an extraordinary general meeting. A shareholders’ general meeting shall be convened by the Board. Annual general meetings shall be held once every year and within six months from the close of the preceding financial year.
An extraordinary general meeting shall be convened by the Board within two months of the occurrence of any one of the following circumstances:
(1) the number of directors is less than the number stipulated in the Company Law or two thirds of the number required in the Articles of Association;
(2) when the losses of the Company not made up for amount to one-third of the total amount of its paid-in share capital;
(3) where any shareholder individually or jointly holding 10% or more of the Company’s total issued shares carrying voting rights requests in writing the convening of an extraordinary general meeting;
(4) when considered necessary by the Board or requested by the Supervisory Committee;
(5) other circumstances stipulated by laws and regulations, the listing rules of the stock exchange on which the shares of the Company are listed or this Articles of Association.
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Convening of Shareholders’ General Meeting
The following procedures shall be followed by the shareholders when requesting for convening of extraordinary general meetings or class meetings:
(1) Two or more shareholders who individually or collectively hold 10% or more of the shares carrying the right to vote at the meeting sought to be held may sign one or more written requests of identical form and substance requesting the Board to convene an extraordinary general meeting or a class meeting and stating the subject of the meeting. After receiving the aforesaid written request, the Board shall promptly convene an interim shareholders’ meeting or category shareholders’ meeting. The shareholding referred to above shall be calculated as of the date on which the written request is made by shareholder(s).
(2) If the Board fails to issue notification convening a meeting within thirty (30) days after receiving the aforesaid written request, the shareholders who put forward the request may request the Supervisory Committee to convene and preside over the meeting in time in writing.
(3) If the Supervisory Committee does not convene and preside over the meeting within 30 days after receiving the above written request, the shareholders who individually or collectively hold more than 10% of the company’s shares for more than 90 consecutive days may convene and preside over the meeting on their own. The procedure to convene the meeting shall be as close as possible to the procedure for convening a meeting by the Board.
All reasonable expenses incurred in convening and holding the meeting by shareholders due to the failure of the Board and the Supervisory Committee to hold such meeting in response to the aforesaid request shall be borne by the Company and shall be deducted from the amounts due by the Company to the defaulting director(s) or supervisor(s).
Proposals at the Shareholders’ General Meeting
The Company convenes a general meeting, Shareholder(s) severally or jointly holding 3% or more shares carrying voting rights are entitled to submit written new proposals to the Company. Matters mentioned in proposals which are within the scope of the powers of the general meeting shall be included in the meeting agenda.
The contents of the proposals shall fall within the scope of the powers of the general meeting of shareholders, have clear topics and specific resolutions, and comply with the relevant provisions of laws and regulations and this Articles of Association.
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The Company shall issue written notice 20 business days prior to the date of the annual general meeting; the Company shall issue written notice 10 business days or 15 days (whichever is the longer) prior to the date of the extraordinary general meeting. The Company shall inform all shareholders whose names appear on the register of members the proposed matters for consideration at the meeting and the date and venue of the meeting.
An extraordinary general meeting shall not make decisions on matters not specified in the notice or supplementary notice of the shareholders’ general meeting of shareholders.
Resolutions of the Shareholders’ General Meetings
Shareholders (including proxies thereof) shall exercise their voting rights as per the voting Shares they represent. Each Share carries the right to one vote. The Company has no voting right for the Shares it holds, and such part of Shares shall be excluded from the total number of voting Shares represented by the Shareholders attending the general meeting.
Resolutions of shareholders’ general meetings shall be classified as ordinary resolutions and special resolutions. To adopt an ordinary resolution, a majority of the voting rights represented by the shareholders (including proxies) present at the meeting must be cast in favor of the resolution. To adopt a special resolution, not less than two-thirds of the voting rights represented by the shareholders (including proxies) present at the meeting must be cast in favor of the resolution.
The following matters shall be resolved by ordinary resolution at a shareholders’ general meeting:
(1) work reports of the Board and the Supervisory Committee;
(2) plans for profit distribution and for making up losses prepared by the Board;
(3) appointment or removal of directors and supervisors, and their remuneration and manner of payment thereof;
(4) the Company’s annual financial budgets and final accounts, balance sheets, income statements and other financial statements;
(5) appointment, dismissal or non-reappointment of the accounting firms;
(6) the purchases or sales of any material assets or guarantee amount of the Company within a year reaching more than 25% (including 25%) and less than 30% (including 30%) of the Company’s audited total assets in the latest audited consolidated financial statements; and
(7) matters other than those required by the laws and regulations, the listing rules of the stock exchange on which the shares of the Company are listed or this Articles of Association to be approved by special resolution.
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The following matters shall be resolved by special resolution at a shareholders’ general meeting:
(1) increase or reduction of the Company’s share capital and issue of shares of any class, warrants and other similar securities;
(2) issue of bonds of the Company;
(3) demerger, merger, dissolution and liquidation;
(4) amendment to this Articles of Association;
(5) purchases or sales of material assets of the Company or guarantee amount of the Company within a year in excess of 30% (excluding 30%) of the Company’s audited total assets in the latest audited consolidated financial statements;
(6) any other matters stipulated by the laws and regulations or this Articles of Association or determined by an ordinary resolution at a shareholders’ general meeting as having a material impact on the Company and requiring to be resolved by special resolution.
Special Procedures for Voting by Class Shareholders
Shareholders holding different classes of shares shall be referred to as class shareholders. A holder of class shares shall, in accordance with the laws, administrative regulations and the Articles of Association, enjoy rights and assume obligations.
Rights conferred to class shareholders may not be varied or abrogated unless approved by way of special resolution at a shareholders’ general meeting and by the affected class shareholders at a separate shareholders’ meeting convened in accordance with the Articles of Association.
Neither the approval of the shareholders’ general meeting nor a class shareholders’ meeting is required for a variation or abrogation of the rights of class shareholders resulting from any change in domestic or foreign laws and regulations or the listing rules of the stock exchange on which the shares of the Company are listed, or those resulting from decisions made in accordance with the laws by the domestic or foreign regulatory authorities.
The following circumstances shall be taken to be a variation or abrogation of the rights of shareholders of a particular class:
(1) to increase or decrease the number of shares of such class, or to increase or decrease the number of shares of a class having a voting right or a right to dividends or other privileges equal or superior to the shares of such class;
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(2) to effect an exchange of all or part of the shares of such class into those of another class or to effect an exchange of or grant a right of exchange of all or part of the shares of another class into those of such class;
(3) to remove or reduce the rights to acquire accrued dividends or cumulative dividends attached to the shares of such class;
(4) to reduce or remove the rights with a priority to acquire dividends or property distribution during the liquidation of the Company attached to the shares of such class;
(5) to add, remove or reduce the conversion, options, voting, transfer or pre-emptive rights or the rights to acquire securities of the Company attached to the shares of such class;
(6) to remove or reduce the rights to receive payables from the Company in a particular currency attached to the shares of such class;
(7) to create a new class of shares with voting right, right to dividends or other privileges equal or superior to those of the shares of such class;
(8) to restrict the transfer of ownership of the shares of such class or to impose additional restrictions thereon;
(9) to grant the right to subscribe for, or convert into, the shares of such or another class;
(10) to increase the rights or privileges of the shares of another class;
(11) to cause the holders of different classes of shares to bear a disproportionate burden of obligations during the restructuring scheme of the Company;
(12) to vary or abrogate any provision of this Articles of Association.
Shareholders of the affected class, whether or not entitled to vote at general meetings, shall nevertheless be entitled to vote at class meetings in respect of matters concerning subparagraphs (2) to (8), (11) and (12), but interested shareholder(s) shall not be entitled to vote at class meetings.
Resolutions proposed at a class meeting shall be passed by shareholders present at the meeting representing two-thirds or more of the share interests with voting rights.
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The special procedures for voting by class shareholders shall not apply to the following circumstances:
(1) where the Company issues, upon approval by way of a special resolution at a general meeting, either separately or concurrently once every twelve months, domestic shares and overseas listed foreign shares, to the extent that the number of the shares to be issued does not exceed twenty percent of the total number of the issued shares of their respective class;
(2) where the Company’s plan to issue domestic shares and overseas listed foreign shares upon its incorporation is completed within fifteen months from the date of approval by the supervisory authorities under the State Council;
(3) Where, upon approval by the securities regulatory authorities of the State Council, holders of unlisted shares of the Company transfer all or part of the shares held by them to overseas investors, or all or part of the unlisted shares are converted into overseas listed foreign invested shares and listed and traded on overseas stock exchange(s).
DIRECTORS AND THE BOARD
Directors
Director shall be elected at shareholders’ general meetings. A Director shall serve a term of three years, and may seek reelection upon expiry of the said term.
The Director need not be the shareholders of the Company.
If the general meeting of shareholders passes the proposal for the election of directors, the directors shall take office after the resolution of the general meeting of shareholders is formed. The term of office of a director shall start from the date on which the said director assumes office to the expiry of the current Board.
The Company shall have independent non-executive directors. Independent non- executive directors are the Directors who shall not act any other position other than being as director and shall not have relationship that may hinder his independent and objective judgment as stipulated in the listing rules of the stock exchange on which the shares of the company are listed. At least one third of the members of the Board shall be independent non-executive directors and the total number shall not be less than three, including at least one independent non-executive director who shall possess appropriate professional qualifications or appropriate accounting or related financial management expertise. At least one independent non-executive director is resident in Hong Kong.
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The Board
The Company shall have a Board comprising of 7 Directors, with no less than three independent non-executive directors. The chairman shall be elected and removed by more than half of all directors.
The Board shall be accountable to the general meeting and exercise the following functions and powers:
(1) to convene general meetings and report to general meetings;
(2) to execute resolutions of general meetings;
(3) to resolve on the Company’s business plans and investment plans;
(4) to prepare the annual financial budgets and final accounting plans of the Company;
(5) to prepare the profit distribution plan and loss makeup plan of the Company;
(6) to prepare plans for the increase or decrease of the registered capital of the Company and for the issuance of corporate bonds and other securities and listing scheme;
(7) to formulate plans for repurchase of Shares of the Company, merger, division, dissolution or transformation of the Company;
(8) to decide on the establishment of the Company’s internal management structure;
(9) to appoint or dismiss the general manager and the secretary of the Board; to decide to appoint or dismiss the Company’s deputy general manager, chief financial officer and other senior management as nominated by the general manager; to determine matters regarding to the remunerations of the above-mentioned senior management;
(10) to set up the basic management system of the Company;
(11) to formulate the proposals for any amendment to this Articles of Association;
(12) to decide on matters relating to the Company’s investments, acquisitions or disposal of assets, financing and connected transactions as required by the listing rules of the stock exchange on which the shares of the company are listed;
(13) to exercise other functions and powers as stipulated by the laws and regulations, the listing rules of the stock exchange on which the shares of the company are listed, this Articles of Association and the Shareholders’ General Meeting.
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The Board may resolve on the issues specified in the preceding paragraph by approval of more than half of the Directors save for the issues specified in (6), (7), and (11), in which approval of two thirds of the Directors is required.
The chairman shall exercise the following functions and powers:
(1) to preside over general meetings and to convene and preside over the Board meetings;
(2) to examine the implementation of the resolutions of the Board;
(3) to sign the securities issued by the Company;
(4) to sign relevant documents on behalf of the Company on the premise of not violating the provisions of this Articles of Association;
(5) in the event of an emergency of force majeure such as an extraordinary natural disaster, to exercise the special right to dispose of the Company’s affairs in accordance with the laws and the interests of the company, and report to the Board and the shareholders’ general meeting afterwards;
(6) to exercise other functions and powers conferred by the Articles of Association and the Board.
The Board shall hold at least four regular meetings every year, which shall be convened by the chairman of the Board and shall notify all directors in writing 14 days before the meeting.
In any of the following circumstances, the chairman shall convene over an interim meeting of the Board:
(1) proposed by shareholders representing more than 1/10 of the voting rights;
(2) proposed by the Chairman;
(3) jointly proposed by more than one third of the Directors;
(4) proposed by the Supervisory Committee;
(5) proposed by the general manager.
A notice shall be given at least five days before the convening of an interim meeting of the Board.
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A Board meeting shall be held only when more than half of the directors (including the entrusted representatives) are present.
Every director shall have one vote. Resolutions made by the Board, unless otherwise specified by the laws and regulations and this Articles of Association, shall be passed by more than half of all Directors.
Director shall attend Board meetings in person. If any Director cannot attend the meeting for any reason, he may authorize in writing another Director to act on his behalf. The scope of authorization shall be specified in the power of attorney.
The Board shall keep minutes of resolutions on matters discussed at the meeting. The minutes shall be signed by the Director at the meeting and by the person who recorded the minutes.
The Director shall be responsible for the resolutions of the Board. If any resolution runs counter to the laws, administrative regulations or this Articles of Association, and causes any material losses to the Company, Director who votes for the said resolution shall be liable for compensation to the Company. If any Director raises an objection to the resolution and the said objection is recorded in the minutes, the said Director may be exempt from any liability.
When a director has a significant interest in the matters proposed at a board meeting, is related to the enterprise involved, or has other circumstances prescribed by laws and regulations, he shall not exercise the right to vote on the resolution or exercise the right to vote on behalf of other directors. The relevant directors will not be included in the quorum of the relevant directors’ meeting. The board meeting can be held when more than half of the unrelated directors or their authorized representatives are present. The resolution of the board meeting must be approved by more than half of the unrelated directors. If the number of unrelated directors or their entrusted representatives attending the board meeting is less than three, the matter shall be submitted to the shareholders’ general meeting for deliberation.
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Special Committees under the Board
The Company has set up three special committees under the Board, such as the Audit Committee, the Remuneration Committee and the Nomination Committee. The composition and rules of procedure of the special committee shall be separately agreed by the Board.
Secretary to the Board
The Company shall have a secretary to the board. The secretary is a senior management of the Company.
The secretary to the Board should be a natural person who have the requisite professional knowledge and experience, and shall be appointed by the board.
The secretary to the Board shall mainly perform the following duties:
(1) to ensure that the Company has complete organization documents and records;
(2) to ensure that the Company prepares and submits the reports and documents required by the competent authorities according to law;
(3) to prepare the meetings of the Board and the shareholders’ general meetings, and to record at the meeting and to keep the documentation and records of the meeting;
(4) to ensure that the shareholders’ register of the Company is established appropriately and that the persons who have the right of access to the relevant records and documents of the Company obtain the same in due time;
(5) other responsibilities stipulated by laws and regulations, the listing rules of the stock exchange on which the shares of the Company are listed and this Articles of Association.
A director or senior management of the Company may concurrently act as the secretary to the Board. The accountant of the accounting firm appointed by the Company shall not act as secretary to the Board of the Company.
Where a director concurrently acts as the secretary to the Board of the Company and an act is required to be done by a director and the secretary to the Board of the Company separately, such person shall not act in both capacities of a director and a secretary to the Board of the Company.
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General Manager and Other Senior Management
The Company shall have one general manager, several deputy general managers and one chief financial officer, who shall be appointed or dismissed by the Board.
The general manager of the Company shall be accountable to the Board and exercise the following functions and powers:
(1) to manage the business operations of the Company, and organize execution of the Board’s resolutions;
(2) to organize to execute the Company’s annual business plans and investment plans;
(3) to prepare the plan for the internal management setup of the Company;
(4) to draft the basic management system of the Company;
(5) to formulate the Company’s specific rules;
(6) to propose to the Board to appoint or dismiss the deputy general manager and chief financial officer of the Company;
(7) to decide to appoint or dismiss executives other than those appointed or dismissed by the Board;
(8) to exercise other functions and powers conferred in this Articles of Association and by the Board.
The general manager of the Company shall attend Board meetings and, if not a Director, shall not have voting right thereat.
SUPERVISORS AND SUPERVISORY COMMITTEE
Supervisors
The members of the Supervisory Committee shall be consisted of Shareholder representatives and employee representatives, of which the proportion of the representatives of the employees of the company shall not be less than one third. Shareholder representatives shall be elected or replaced at general meeting, and employee representatives shall be elected or removed democratically by employees of the Company.
The Director and senior management of the Company shall not concurrently act as Supervisor.
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Supervisory Committee
The Company shall have a Supervisory Committee and the Supervisory Committee shall be composed of three members. A Supervisor shall serve a term of three years and be reelected for successive terms. The Supervisory Committee shall have one chairman and the Chairman of the Supervisory Committee shall be appointed or removed by the votes of more than two thirds (including two thirds) of the members of the Supervisory Committee.
The Supervisory Committee shall be accountable to all general meeting and exercise the following functions and powers:
(1) to examine financial operations of the Company;
(2) to supervise the performance of duties by the Director and senior management of the Company which are in violation of the law, administrative regulations or this Articles of Association, and propose dismissal of Director and senior management who have violated the above-mentioned provisions;
(3) to require Director and senior management to make corrections if their conduct has damaged the interests of the Company;
(4) to review the financial reports, operating reports and profit distribution schemes to be submitted by the Board to the general meetings; to engage certified public accountants and practicing auditors in the name of the Company to assist reviewing if there is any doubt;
(5) to propose the convening of extraordinary general meetings and, in case the Board does not perform the obligations to convene and preside over the general meetings as required by the Company Law, to convene and preside over the general meetings;
(6) to propose motions to the general meeting;
(7) to propose the convening of an interim meeting of the Board;
(8) to negotiate with the directors on behalf of the Company and initiate legal proceedings against Director and senior management in accordance with the Company Law;
(9) to exercise other functions and powers conferred in the laws and regulations and this Articles of Association and by the shareholders’ general meeting.
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The Supervisory Committee shall meet at least once in every six months and the chairman of Supervisory Committee shall convene the meeting. The Supervisors may propose to convene an interim meeting of the Supervisory Committee. The notice time limit for the meeting of the Supervisors shall be at least ten days before the regular meeting of the Supervisory Committee is held and at least two days before the interim meeting of the Supervisory Committee.
A supervisory committee meeting shall not be held unless it is attended by more than two thirds (including two thirds) of the members of the supervisory committee.
The Resolution of the Supervisory Committee
Each supervisor has one vote. The resolution made by the supervisory committee shall be approved by more than two thirds (including two thirds) of the members of the supervisory committee.
The Qualifications and Obligations of Directors, Supervisors and Senior Management of the Company
In any of the following circumstances, a person shall not serve as a director, supervisor, senior management of the Company:
(1) without capacity or with limited capacity for civil conduct;
(2) has been sentenced to criminal punishment due to corruption, bribery, embezzlement of property, misappropriation of property or disrupting the order of economy, and less than five years have elapsed since the punishment is fully executed; or has been deprived of political rights due to any criminal offenses and less than five years have elapsed since the punishment is fully executed;
(3) has served as a Director, factory manager or manager of a company or an enterprise that is bankrupt and liquidated as a result of unsound business management, and is personally liable for the bankruptcy of the company or enterprise, and less than three years have elapsed since the date of completion of the bankruptcy liquidation of the company or enterprise;
(4) has served as the legal representative of a company or an enterprise whose Business License was revoked and ordered to close down due to illegal activities and was personally liable for such punishment, and less than three years has elapsed since the date of revocation of the business license of the company or enterprise;
(5) has large amount of overdue debts;
(6) is under investigation by the judiciary authority for violation of the criminal law;
(7) is disqualified as corporate leader in laws and administrative regulations;
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(8) is not a natural person;
(9) was ruled by the relevant regulatory authority that he has violated the relevant securities regulations and committed any fraudulent or dishonest act, and less than five years have elapsed since such ruling was made;
(10) was involved in other circumstances as prescribed by the laws and regulations of the jurisdiction where the shares of the Company are listed.
The validity of an act of a Director, general manager and other senior management of the Company on behalf of the Company for a bona fide third person is not affected by any incompliance in the appointment, election or qualification thereof.
In fulfilling duties, the director, supervisor, and senior management shall observe the principle of honesty and shall not set themselves in a position where their own interests conflict with their obligations. The said principle includes (but not limited to) the following obligations:
(1) to sincerely act in the best interest of the Company;
(2) to exercise powers within his terms of reference without ultra vires;
(3) to exercise the discretion vested in him personally and not to allow himself to act under the control of any other party; unless permitted by laws and administrative regulations or with the informed consent of the shareholders’ general meeting, delegation of discretionary powers to others is prohibited;
(4) to treat shareholders of the same class equally and to treat shareholders of different classes fairly;
(5) unless otherwise provided in the Articles of Association or with the informed approval of the shareholders’ general meeting, not to enter into any contract, transaction or arrangement with the Company;
(6) not to use the Company’s assets for personal benefits in any manner without the informed consent of the shareholders’ general meeting;
(7) not to use his authority to accept bribes or other illegal income or embezzle the Company’s property in any manner, including (but not limited to) any opportunity favorable to the Company;
(8) not to accept commissions in connection with the Company’s transactions without the informed consent of the shareholders’ general meeting;
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(9) to comply with the Articles of Association, to perform duties faithfully, to safeguard the Company’s interests and not to seek personal gains by taking advantage of his position and authority in the Company;
(10) not to compete with the Company in any way without the informed consent of the shareholders’ general meeting;
(11) not to misappropriate the Company’s funds and not to set up accounts in his own name or in the any other names for depositing the Company’s assets; not violate the provisions of the Articles of Association, and not to lend such funds to any other persons and not to provide guarantees for the debts of shareholders of the Company or any other personal liabilities with the assets of the Company without the consent of the shareholders’ general meeting and the Board; and
(12) not to release any confidential information in relation to the Company which he has obtained during his term of office without the informed consent of the shareholders’ general meeting; not to use such information other than for the benefit of the Company, save that such information may be disclosed to the court or other competent authorities of the government if:
1. stipulated by laws;
2. required in the public interests;
3. required in the interests of the relevant directors, supervisors, general manager and other senior management.
Where a director, supervisor, or senior management of the Company is, directly or indirectly, materially interested in a concluded or contemplated contract, transaction or arrangement with the Company (other than his contract of service with the Company), he shall declare the nature and extent of his interests to the Board as soon as possible, whether or not such matter is subject to the approval or consent of the Board under normal circumstances.
The Company shall not in any manner pay taxes for or on behalf of a Director, supervisor, and senior management.
The Company shall not directly or indirectly extend a loan to or provide any guarantee in connect with the extension of a loan to a director, supervisor and senior management personnel of the Company and its shareholders or any of their respective associates.
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The following transactions are not subject to the above prohibition:
(1) The provision by the Company of a loan or a guarantee of a loan to its subsidiaries.
(2) The provision by the Company of a loan or a guarantee of a loan or any other funds to any of its Directors, supervisors and senior management personnel to meet expenditure incurred by him for the purposes of the Company or for the purpose of enabling him to perform his duties, in accordance with the service contract approved by the shareholders in Shareholders’ general meeting.
(3) the Company may make a loan to or provide a loan guarantee to any of the relevant Directors, supervisors and senior management personnel or their respective associates on normal commercial terms, provided that the ordinary course of business of the Company should include the lending of money or the provision of loan guarantees.
A loan made by the Company in breach of the preceding provisions shall be forthwith repayable by the recipient of the loan regardless of the terms of the loan.
In addition to any rights and remedies provided by the laws and administrative regulations, where a director, supervisor and senior management of the Company is in breach of his duties owed to the Company, the Company shall have a right to:
(1) demand such director, supervisor and senior management to compensate the Company for the losses sustained thereby as a result of such breach;
(2) rescind any contract or transaction which has been entered into by the Company with such director, supervisor and senior management or with a third party (where such third party knows or should have known that such director, supervisor or senior management has breached his duties owed to the Company);
(3) demand such director, supervisor and senior management to surrender profits made as a result of the breach of his duties;
(4) recover any monies received by the director, supervisor and senior management which should have been received by the Company, including (but without limitation to) commissions;
(5) demand repayment of interest earned or which may have been earned by such director, supervisor and senior management on the monies that should have been paid to the Company.
The Company shall, with the prior approval of the shareholders’ general meeting, enter into a contract in writing with a director or supervisor regarding his emoluments.
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The contracts concerning emoluments entered into between the Company and its directors or supervisors shall provide that in the event that the Company is acquired, the Company’s directors and supervisors shall, subject to the prior approval of the shareholders’ general meeting, have the right to receive compensation or other payment in respect of his loss of office or retirement.
FINANCIAL AND ACCOUNTING SYSTEM AND PROFIT DISTRIBUTION
Financial and Accounting System
The Company shall establish its financial and accounting system in accordance with the laws, administrative regulations and PRC accounting standards formulated by the competent finance authorities of the State Council.
The financial statements of the Company shall be prepared in accordance with both the PRC accounting standards and regulations and the international accounting standards, or those of the overseas place where the Company’s shares are listed. If there is any material difference between the financial statements prepared respectively in accordance with the two accounting standards, such difference shall be stated in the notes to the financial statements. In distributing its profits after tax for an accounting year, the lower of the two amounts shown in the financial statements shall be adopted.
Any interim results or financial information published or disclosed by the Company shall be prepared and presented in accordance with the PRC accounting standards and regulations, and also in accordance with either international accounting standards or those of the overseas place where the Company’s shares are listed.
The Company shall announce its financial reports twice each accounting year, such as publish its interim financial report within 60 days after the expiration of the first six months of each accounting year and dispatch its annual financial report within 120 days after the end of an accounting year.
The Company shall not maintain accounts separately other than those provided by the laws.
Distribution of Profits
In distributing the current year’s profit after tax, 10% of the profit shall be allocated to the Company’s statutory reserve fund. When the aggregate amount of the statutory reserve fund has reached 50% or more of the Company’s registered capital, further appropriations are not required.
If the statutory reserve fund of the Company is insufficient to make up the losses of the previous year, the profits of the current year shall be used to make up such losses before allocating to the statutory reserve fund in accordance with the preceding paragraph.
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After allocation of its profits after tax to its statutory reserve fund, the Company may allocate its profits after tax to its discretionary reserve fund upon a resolution of the shareholders’ general meeting.
The remaining profits after tax after the Company has made up its losses and allocated to its reserve funds may be distributed to its shareholders in proportion to their shareholdings.
If a shareholders’ general meeting has, in violation of the preceding paragraph, distributed profits to shareholders before making up losses and allocating to the statutory reserve fund, shareholders shall return to the Company the profits distributed in violation of the provisions.
The shares held by the Company shall not be entitled to any profit distribution. The capital reserve fund shall include the following amounts:
(1) the premiums received when shares are issued at a premium to their par value;
(2) any other income required to be included in the capital reserve fund by the competent finance authorities of the State Council.
The Company’s reserve funds shall be used to make up the losses or expand the production operations, or be converted to increase the share capital of the Company. However, the capital reserve fund shall not be used to make up the losses of the Company.
When the statutory reserve fund is converted into capital, the remainder of the fund shall not be less than 25% of the Company’s registered capital prior to such conversion.
The Company may distribute dividends in the form of cash or shares.
The Company shall appoint a receiving agent for the holders of overseas listed foreign shares. The receiving agent shall receive on behalf of such shareholders any dividends or other amounts payable by the Company to them in respect of the overseas listed foreign shares, and shall keep such amounts to pay the relevant shareholders.
The receiving agent appointed by the Company shall satisfy the requirements of the laws of the place where the Company’s shares are listed or the rules of the relevant stock exchange.
The receiving agent appointed by the Company for holders of overseas listed foreign shares listed in Hong Kong shall be a trust company registered under the Trustee Ordinance of Hong Kong.
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Appointment of Accounting Firms
The Company shall appoint an independent accounting firm which is qualified under the relevant regulations of the PRC to audit the Company’s annual accounts and review other financial reports of the Company.
The accounting firm appointed by the Company shall hold office for a period commencing from the conclusion of this annual general meeting until the conclusion of the next annual general meeting.
The accounting firm for conducting the annual audit appointed by the Company shall have the following rights:
(1) the right to review the books, records and vouchers of the Company at any time; and the right to require the directors, general manager or other senior management of the Company to supply relevant information and explanations;
(2) the right to require the Company to take all reasonable steps to obtain from its subsidiaries such information and explanations necessary for the accounting firm to discharge its duties; and
(3) the right to be in attendance at shareholders’ meetings and to receive all notices of, and other communications relating to, any shareholders’ meeting which any shareholder is entitled to receive, and to speak at any shareholders’ meeting on matters concerning its role as the Company’s accounting firm.
The shareholders’ general meeting may by ordinary resolution remove an accounting firm before the expiration of its term of office, irrespective of the provisions in the contract between the accounting firm and the Company. If the accounting firm has the right to claim compensation for its removal, that right shall not be affected thereby.
The remuneration of an accounting firm or the manner in which such remuneration is determined shall be decided by a shareholders’ general meeting. The remuneration of the accounting firm appointed by the Board shall be determined by the Board.
If the Company proposes to remove an accounting firm or not to renew the appointment thereof, it shall notify the accounting firm in advance, and the latter shall have the right to state its opinions at a shareholders’ general meeting. If the accounting firm resigns, it shall explain to the shareholders’ general meeting whether there has been any impropriety on the part of the Company.
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The accounting firm may resign from its office by depositing a written notice of resignation at the legal address of the Company. The notice shall become effective on the date of such deposit or on such later date as may be stated therein. The notice shall contain the following statements:
(1) a statement to the effect that there are no circumstances connected with its resignation which it considers shall be brought to the notice of the shareholders or creditors of the Company; or
(2) a statement of any such circumstances that shall be explained.
The Company shall, within fourteen days after receipt of the above-mentioned written notice, send a copy of the notice to the relevant competent authorities. If the notice contains a statement under the preceding Article, a copy of such statement shall be placed at the Company for shareholders’ inspection. The Company shall also send a copy of such statement by prepaid mail to every holder of overseas listed foreign Shares at the address registered in the register of shareholders.
If the accounting firm’s notice of resignation contains a statement of any such circumstances that shall be explained, the accounting firm may request the Board to convene an extraordinary general meeting to listen to the explanation on the resignation.
Merger and Demerger of the Company
In the case of company merger or demerger, a merger or division plan shall be drafted by the board of directors and after the plan is adopted according to the procedures stipulated in this Articles of Association, the relevant procedures for examination and approval shall then be carried out in accordance with the law. If a shareholder objects to a merger or demerger plan, that shareholder shall have the right to request the Company or those shareholders who approve the merger or demerger plan to purchase his/her shares at a fair price.
When the Company is undergoing a merger, the parties to the merger shall sign a merger agreement and a balance sheet and property inventory shall be drawn up. The Company shall notify its creditors within 10 days from the date of the resolution on a company merger, publish an announcement in a newspaper within 30 days from the date of such resolution. A creditor shall have the right, within 30 days upon receipt of the notice from the Company or, in the case of a creditor who does not receive such notice, within 45 days of the date of the first announcement, to require the Company to repay its debt or to provide corresponding guarantee for such debt.
Following a merger, a takeover company or a company newly established as the result of a merger shall assume the debts receivable and debts payable of the parties to the merger.
To demerge the Company, the properties thereof shall be divided accordingly.
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To demerge the Company, the parties to the demerger shall sign a demerger agreement and a balance sheet and property inventory shall be drawn up. The Company shall notify its creditors within 10 days from the date of the resolution on a company merger, publish an announcement in a newspaper within 30 days from the date of such resolution.
The post-demerger companies shall bear several and joint liabilities for the debts of the Company before its split unless it is otherwise prescribed in a written agreement reached by the Company and the creditors before the demerger regarding the debt pay-off.
Where, in the process of company merger or demerger, any of the registered items is changed, the companies shall go through modification registration with the company registration authority. Where the Company is dissolved, it shall be deregistered according to law. If a new company is established, it shall go through the procedures for company establishment according to law.
Dissolution and Liquidation of the Company
In any of the following circumstances, the Company shall be dissolved and liquidated according to the laws:
(1) a shareholders’ general meeting resolves to dissolve the Company;
(2) dissolution is necessary due to a merger or demerger of the Company;
(3) the business license of the Company is revoked and the Company is ordered to close down or canceled according to the laws;
(4) where the Company has experienced material difficulties in operation and management, and the continuous operation thereof would lead to substantial loss to the benefits of its shareholders which cannot be resolved by other means, shareholders holding 10% or more of the total voting rights of the Company may appeal to the people’s court for dissolution of the Company;
(5) other circumstances under which the Company shall be dissolved according to laws and regulations.
Where the Company is dissolved pursuant to paragraph (1), (3) and (4), a liquidation committee shall be formed within fifteen days after the occurrence of the cause of dissolution so as to carry out a liquidation. The liquidation committee shall be composed of the directors or any other people as determined by the shareholders’ general meeting. Where no liquidation committee is formed within the time limit, the creditors may plead the people’s court to designate relevant persons to form a liquidation committee.
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Where the Board decides to liquidate the Company for any reason other than the Company’s declaration of its own bankruptcy, the Board shall include a statement in its notice convening a shareholders’ general meeting to consider the proposal to the effect that, after making full inquiry into the affairs of the Company, the Board is of the opinion that the Company will be able to pay its debts in full within twelve months from the commencement of the liquidation.
All the functions and powers of the Board shall cease immediately upon a resolution on liquidation passed by a shareholders’ general meeting. During the liquidation period, the Company shall not commence any new business activities.
During the liquidation period, the liquidation committee shall exercise the following functions and powers:
(1) to sort out the Company’s assets and prepare a balance sheet and a list of assets respectively;
(2) to notify creditors by sending notice or by making an announcement;
(3) to dispose of and liquidate any unfinished businesses of the Company;
(4) to pay outstanding taxes;
(5) to settle claims and debts;
(6) to dispose of the remaining assets of the Company after the repayment of debts; and
(7) to represent the Company in any civil proceedings.
The liquidation committee shall notify all creditors within 10 days after its establishment and shall make newspaper announcements within 60 days. Creditors should, within 30 days from the date of receipt of notice, or (if no written notice is received in person) within 45 days from the date of the first notice, claim for their creditors’ rights to the liquidation group.
Creditors, when filing their claims, should illustrate those claim-related issues and provide supporting documentation thereon. The liquidation group should register such claims.
The liquidation committee shall not settle the debts to creditors during the creditor’s claim period.
After sorting out the Company’s assets and preparing a balance sheet and a list of assets, the liquidation committee shall formulate a liquidation plan and submit it to a shareholders’ general meeting or to the relevant competent authorities for confirmation.
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The remaining assets of the Company after settlement of payments of liquidation expenses, unpaid staff wages and social insurance expenses, outstanding taxes and the Company’s debts, shall be distributed to shareholders of the Company according to the class of shares held by them and in proportion to their respective shareholdings.
If, after sorting out the Company’s assets and preparing a balance sheet and a list of assets in connection with the liquidation of the Company due to its dissolution, the liquidation committee discovers that the Company’s assets are insufficient to repay the Company’s debts in full, it shall immediately apply to the people’s court for a declaration of bankruptcy.
After the Company is declared bankrupt by a ruling of the people’s court, the liquidation committee shall hand over all matters arising from the liquidation to the people’s court.
Upon completion of the liquidation, the liquidation committee shall prepare a liquidation report, a statement of the income and expenses during the liquidation period and financial accounts, which shall be verified by PRC certified public accountants, and then submit them to a shareholders’ general meeting or to the relevant competent authorities for confirmation.
The liquidation committee shall, within thirty days after such confirmation given by the shareholders’ general meeting or other relevant competent authorities, submit the aforesaid documents to the company registration authorities and apply for cancelation of registration of the Company, and publish an announcement relating to the termination of the Company.
Credit Power
The Articles of Association do not specifically provide for the manner in which borrowing powers may be exercised nor do they contain any specific provision in respect of the manner in which such borrowing powers may be amended, except for:
(1) provisions which authorize the Board to formulate proposals on the issue and listing of bonds or other securities issued by the Company;
(2) provisions which provide that the issuing of bonds, shares, warrants and other similar securities by the Company shall be passed by the general meeting by a special resolution.
Amendments to the Articles of Association
The Company shall amend the Articles of Association in accordance with the laws, administrative regulations, the listing rules of the stock exchange on which the shares of the Company are listed and the Articles of Association.
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Any amendment to this Articles of Association involving anything set out in the Mandatory Provisions shall become effective upon approval by the company approval department authorized by the State Council and the securities regulatory authorities of the State Council. If there is any change relating to the registered particulars of the Company, application shall be made for the changes in accordance with the laws.
Settlement of Disputes
The Company shall abide by the following principles for settlement of disputes:
(1) any disputes or claims of rights between the holders of the overseas listed foreign shares and the Company, the holders of the overseas listed foreign shares and the Company’s directors, supervisors, general manager or other senior management, or the holders of the overseas listed foreign shares and the holders of domestic shares arising from any rights or obligations under the Articles of Association, the Company Law, other relevant laws or administrative regulations or in connection with the affairs of the Company, shall be referred by the relevant parties to arbitration.
Where the aforesaid disputes or claims of rights are referred to arbitration, the entire claims or disputes must be referred to arbitration, and all persons who have a cause of action based on the same facts giving rise to the disputes or claims or whose participation is necessary for the resolution of such disputes or claims, shall, where such person is the Company or a shareholder, director, supervisor, general manager or other senior management of the Company, submit to the arbitration.
Disputes over the definition of shareholders and the register of shareholders need not be resolved by arbitration.
(2) a claimant may elect arbitration to be carried out at either the China International Economic and Trade Arbitration Commission in accordance with its rules or the Hong Kong International Arbitration Center in accordance with its Securities Arbitration Rules. Once a claimant refers a dispute or a claim to arbitration, the other party must conduct arbitration at the arbitral body elected by the claimant. If a claimant elects arbitration to be carried out at the Hong Kong International Arbitration Center, any party to the dispute or claim may apply for a hearing to take place in Shenzhen in accordance with the Securities Arbitration Rules of the Hong Kong International Arbitration Center.
(3) if any disputes or claims of rights are settled by way of arbitration in accordance with subparagraph (1) above, the PRC laws shall apply, save as otherwise provided in laws and administrative regulations.
(4) the award of an arbitral body shall be final and binding on all parties.
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A. FURTHER INFORMATION ABOUT OUR GROUP
1. Establishment of our Company
Our Company was established in the PRC on September 25, 2002 and was converted to a joint stock company with limited liability under the PRC Company Law with effect from September 24, 2015.
Our Company has established a place of business in Hong Kong at Room 1901, 19/F, Lee Garden One, 33 Hysan Avenue, Causeway Bay, Hong Kong, and was registered as a non-Hong Kong company in Hong Kong under Part 16 of the Companies Ordinance on [●]. Ms. Fung Po Ting (馮寶婷) has been appointed as our agent for the acceptance of service of process and notices on behalf of our Company in Hong Kong.
As we are established in the PRC, our corporate structure and Articles of Association are subject to the relevant laws and regulations of the PRC. A summary of the relevant provisions of our Articles of Association is set out in Appendix V to this document. A summary of certain relevant aspects of the laws and regulations of the PRC is set out in Appendix IV to this document.
2. Changes in the share capital of our Company
As of the date of our establishment, our registered capital was RMB500,000 which was fully paid up.
On February 16, 2011, our registered capital was increased from RMB500,000 to RMB30,500,000.
On September 24, 2015, our Company was converted from a limited liability company into a joint stock company with limited liability. The registered share capital of our Company was increased to RMB60,000,000 divided into 60,000,000 Shares with a nominal value of RMB1.00 each.
On June 20, 2017, the registered share capital of our Company was increased to RMB62,400,000 which divided into 62,400,000 Shares with a nominal value of RMB1.00 each.
Assuming the [REDACTED] is not exercised, upon completion of the [REDACTED] and the [REDACTED], our registered share capital will be increased to RMB[REDACTED], made up of [REDACTED] Domestic Shares and [REDACTED] H Shares fully paid up or credited as fully paid up, representing [REDACTED]% and [REDACTED]% of our share capital, respectively.
Save as aforesaid, there has been no alteration in our share capital since our establishment.
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3. Restriction of share repurchase
For details of the restrictions on the share repurchase by our Company, see “Appendix V—Summary of the Articles of Association.”
4. Resolutions of our Shareholders passed at our Company’s extraordinary general meeting held on June 3, 2021
At the extraordinary general meeting of our Company held on June 3, 2021, among other things, the following resolutions were passed by the Shareholders:
(a) the issue of our H Shares with a nominal value of RMB1.00 each, the number of which shall be up to [REDACTED] Shares, and the grant of the [REDACTED]in respect of no more than [REDACTED] of the number of H Shares to be issued pursuant to the [REDACTED] and the [REDACTED] for the [REDACTED]of such H Shares on the Stock Exchange has been approved;
(b) subject to the CSRC’s approval, upon completion of the [REDACTED], [REDACTED] Domestic Shares in aggregate held by [REDACTED] will be converted into H Shares on a [REDACTED];
(c) subject to the completion of the [REDACTED], the Articles of Association has been approved and adopted, which shall only become effective on the [REDACTED], and our Board has been authorized to amend the Articles of Association in accordance with any comments from the Stock Exchange and the relevant PRC regulatory authorities; and
(d) the chairman of the Board or his authorized individual has been authorized to handle all relevant matters relating to, among other things, the implementation of the issue of H Shares, the [REDACTED] and the [REDACTED].
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5. Change in the registered capital of subsidiaries
Our Company’s subsidiaries are referred to in the Accountants’ Report in Appendix I to this document. Save for the subsidiaries mentioned in the Accountant’s Report and “History and Corporate Structure,” our Company has no other subsidiaries.
The following changes in the share capital of our subsidiaries have taken place within the two years immediately preceding the date of this document:
Vincente Medical
On May 20, 2020, the registered capital of Vincente Medical was increased from RMB1,000,000 to RMB1,219,512.
On May 31, 2021, the registered capital of Vincente Medical was increased from RMB1,219,512 to RMB2,040,816.
Save as set out above, there has been no alteration in the share capital of any of our subsidiaries within the two years immediately preceding the date of this document.
B. FURTHER INFORMATION ABOUT OUR BUSINESS
1. Summary of material contracts
We have entered into the following contracts (not being contracts entered into in the ordinary course of business) within the two years preceding the date of this document that are or may be material:
(a) the Deed of Indemnity; and
(b) the [REDACTED].
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2. Intellectual property rights of our Group
(a) Trademarks
As of the Latest Practicable Date, our Group was the registered proprietor of the following trademarks which, in the opinion of our Directors, are material to our business:
Name of Registration Registered Place of Date of No. Trademark Number Class Proprietor Registration Registration Expiry Date
1. 11262307 28 Our Company PRC December 12, December 20, 2013 2023 2. 5418521 10 Our Company PRC May 21, 2019 May 20, 2029
3. 6886668 10 Our Company PRC May 7, 2020 May 6, 2030
4. 6886670 10 Our Company PRC October 7, 2012 October 6, 2022
5. 8033437 10 Our Company PRC September 14, September 13, 2011 2021
(b) Patent
As of the Latest Practicable Date, our Group have registered the following patents which, in the opinion of our Directors, are material to our business:
Registered Place of Date of No. Patent Type Patent Number Owner Registration Application Expiry Date
1. Disposable stapler with Invention 200710107833.8 Our Company PRC May 18, 2007 May 17, automatic safety (具有自動 2027 保險裝置的一次性吻合器) 2. Tiltable and repositionable Invention 201010112511.4 Our Company PRC February 10, February 9, stapler anvil assembly and 2010 2030 stapling device employing stapler anvil assembly (可側 倒的抵釘座元件及採用該抵 釘座元件的吻合器)
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Registered Place of Date of No. Patent Type Patent Number Owner Registration Application Expiry Date
3. Tiltable and redirected Invention 201010120231.8 Our Company PRC March 8, 2010 March 7, repositionable stapler anvil 2030 assembly and stapling device employing stapler anvil assembly (可側倒和重定的抵 釘座元件及採用該抵釘座元 件的吻合器) 4. Nail cabin assembly of linear Invention 201110415659.X Our Company PRC December 14, December cutting stapler and stapler 2011 13, 2031 applying nail cabin assembly (一種直線切割吻合器釘倉元 件及應用該元件的吻合器) 5. Stitching instrument equipped Invention 201210023636.9 Our Company PRC February 3, February 2, with blade (一種帶刀縫合器) 2012 2032 6. Stapler and its status indicating Invention 201210181151.2 Our Company PRC June 4, 2012 June 3, 2032 device (一種吻合器及其狀態 指示裝置) 7. Disposable stapler with anti- Invention 201210181231.8 Our Company PRC June 5, 2012 June 4, 2032 secondary-percussion mechanism (具有防二次擊發 機構的一次性吻合器) 8. Linear cutting stitching Invention 201210310307.2 Our Company PRC August 28, 2012 August 27, instrument with splint 2032 locking mechanism (一種帶 有夾板鎖緊機構的直線切割 縫合器) 9. Driving and locking device and Invention 201210374549.8 Our Company PRC September 29, September cutting stitching instrument 2012 28, 2032 using the device (一種驅動 及鎖緊裝置以及應用該裝置 的切割縫合器) 10. An indicator, stitching Invention 201210445368.X Our Company PRC November 9, November 8, instrument and surgical 2012 2032 instrument using the indicator (一種指示器、採用 該指示器的縫合器和外科手 術器械) 11. Universal handle of electric Invention 201310032640.6 Our Company PRC January 29, January 28, surgical binding instrument 2013 2033 (電動外科裝訂器械的通用手 柄)
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Registered Place of Date of No. Patent Type Patent Number Owner Registration Application Expiry Date
12. Endoscopic linear cutting Invention 201310196052.6 Our Company PRC May 24, 2013 May 23, stitching instrument and its 2033 safety device (腔鏡下直線切 割縫合器及其保險裝置) 13. Indicating device with blade- Invention 201310393065.2 Our Company PRC August 30, 2013 August 29, equipping stitching 2033 instrument and blade- equipping stitching instrument with the indicating device (帶刀縫合 器的指示裝置及具有該指示 裝置的帶刀縫合器) 14. Purse-string pliers and its Invention 201310521365.4 Our Company PRC October 30, October 29, prompt device (荷包鉗及其 2013 2033 提示裝置) 15. Stapler with sound display Invention 201410336537.5 Our Company PRC July 16, 2014 July 15, 2034 function (一種具有示聲功能 的吻合器) 16. Medical anastomotic nail and Invention 201410382354.7 Our Company PRC August 6, 2014 August 5, its preparation method (一種 2034 醫用吻合釘及其制備方法) 17. Auxiliary device for stapler, Invention 201410510192.0 Our Company PRC September 29, September stapler and surgical 2014 28, 2034 instrument using the auxiliary device (用於吻合器 的輔助裝置、應用該輔助裝 置的吻合器和外科手術器械) 18. Medicine-carrying titanium nail Invention 201610694731.X Our Company PRC August 19, 2016 August 18, and the preparation method 2036 of the medicine-carrying titanium nail (一種可載藥鈦 釘和載藥鈦釘及其制備方法) 19. Anal expander with light Utility model 201120289618.6 Our Company PRC August 11, 2011 August 10, source (一種帶光源擴肛器) 2021 20. New type of stapler anvil and Utility model 201220550011.3 Our Company PRC October 25, October 24, the stapler using the stapler 2012 2022 anvil (一種新型抵釘座以及 應用該抵釘座的吻合器) 21. A stitching and bandaging Utility model 201420191574.7 Our Company PRC April 18, 2014 April 17, instrument (一種縫紥器) 2024 22. Cartridge rotation control Utility model 201621301504.8 Our Company PRC November 30, November device of endoscopic stapler 2016 29, 2026 (腔鏡吻合器的釘倉旋轉控制 裝置)
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Registered Place of Date of No. Patent Type Patent Number Owner Registration Application Expiry Date
23. A type of staple for stapler Utility model 201820181058.4 Our Company PRC February 2, February 1, (一種用於吻合器的縫釘) 2018 2028 24. A component of stapler Utility model 201721670681.8 Our Company PRC December 5, December 4, (一種吻合器元件) 2017 2027 25. A type of blade for stapler Utility model 201820757618.6 Our Company PRC May 21, 2018 May 20, (一種吻合器切割刀) 2028 26. Electric stapler capable of Utility model 201821834429.0 Our Company PRC November 8, November 7, identifying staple cartridge 2018 2028 information (一種可識別釘匣 信息的電動吻合器) 27. Press-adjustable component Utility model 201822099389.6 Our Company PRC December 13, December and stapler (壓榨調節組件及 2018 12, 2028 吻合器) 28. Stapler (吻合器) Utility model 201921951417.0 Our Company PRC November 13, November 2019 12, 2029 29. Anorectal Surgical Instrument – 2494913 Our Company Europe October 25, October 25, and Anal Dilator (一種肛腸 2010 2030 手術器械及擴肛器) 30. Surgical Stapler Comprising – US9770242B2 Our Company U.S. December 4, July 5, 2034 Safety Apparatus (一種具有 2014 新型保險裝置的吻合器)
(c) Domain name
As of the Latest Practicable Date, our Group was the registered proprietor of the following domain name in the PRC which, in the opinion of our Directors, is material to our business:
No. Domain Name Owner Validity Period
1. 派爾特.中國 Our Company May 29, 2014 – May 29, 2025 2. 派爾特.中國 Our Company May 29, 2014 – May 29, 2025 3. 派爾特.中國 Our Company May 29, 2014 – May 29, 2025 4. 派爾特.中國 Our Company May 29, 2014 – May 29, 2025 5. 派爾特醫療.網絡 Our Company June 2, 2011 – August 21, 2021 6. 派爾特醫療.中國 Our Company June 2, 2011 – June 2, 2031 7. 派爾特醫療.公司 Our Company June 2, 2011 – August 21, 2030 8. panther-h.com Our Company December 23, 2015 – December 23, 2025 9. pantherhealthcare.com Our Company January 18, 2008 – January 18, 2022
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C. FURTHER INFORMATION ABOUT DIRECTORS, SUPERVISORS AND SUBSTANTIAL SHAREHOLDERS
1. Disclosure of interests
(a) Interests and short positions of the Directors, Supervisors and the chief executive of our Company in the registered capital of our Company
Immediately following the completion of the [REDACTED] and [REDACTED] (assuming that the [REDACTED] is not exercised), the interests or short positions (as applicable) of Directors, Supervisors or chief executive of our Company in the Shares, underlying Shares and debentures of our Company or its associated corporations (within the meaning of Part XV of the SFO) which will be required to be notified to our Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO) or which will be required, under Section 352 of the SFO, to be entered in the register referred to in that section, or which will be required, under the Model Code for Securities Transactions by Directors of Listed Issuers as set out in Appendix 10 to the Listing Rules, to be notified to our Company once the H Shares are [REDACTED] will be as follows:
Interest in the Shares
Percentage of Percentage of Name of Director, Shareholding in the Shareholding in the Supervisor or Chief Number of Relevant Class of Total Issued Share Executive Nature of Interest Class of Shares Shares(1) Shares (approx.) Capital (approx.)
Mr. Qu Beneficial owner [REDACTED][REDACTED][REDACTED][REDACTED] [REDACTED][REDACTED][REDACTED][REDACTED] Interest of spouse(2) [REDACTED][REDACTED][REDACTED][REDACTED] [REDACTED][REDACTED][REDACTED][REDACTED] Ms. Liu Beneficial owner [REDACTED][REDACTED][REDACTED][REDACTED] [REDACTED][REDACTED][REDACTED][REDACTED] Interest of spouse(2) [REDACTED][REDACTED][REDACTED][REDACTED] [REDACTED][REDACTED][REDACTED][REDACTED]
Note:
(1) The letter “L” denotes the person’s long position in the shares.
(2) Ms. Liu is the spouse of Mr. Qu. By virtue of the SFO, Mr. Qu and Ms. Liu are deemed to be interested in our Shares in which each other is interested.
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(b) Substantial Shareholders
(i) Interests of the substantial shareholders of our Company
Save as disclosed in “Substantial Shareholders,” our Directors are not aware of any person (other than our Director or chief executive of our Company) who will, immediately following completion of the [REDACTED] and the [REDACTED] (assuming that the [REDACTED] is not exercised), have interests or short positions in our Shares or underlying Shares which would be required to be disclosed to us and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who is, directly or indirectly, interested in 10% or more of the issued voting shares of our Company.
(ii) Interests of the substantial shareholders of other members of our Group
As of the Latest Practicable Date, so far as our Directors are aware, the following persons (other than our Directors, Supervisors or chief executive of our Company) were interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of other member of our Group:
Name of Percentage of Name of members of our Group Shareholder shareholding
Vincente Medical Zhang Xincheng 18.99% (張新成) Pang Jian 15.93% (龐建) Panther Mexico Pedro Loarca 30% Caldero´n
2. Further Information about our Directors and Supervisors
(a) Particulars of Directors’ and Supervisors’ service contracts and appointment letters
Each of our Directors and Supervisors [has entered into] a service contract or appointment letter with our Company. The principal particulars of these service contracts and appointment letters comprise (a) the term of the service; (b) subject to termination in accordance with their respective term; and (c) a dispute resolution provision. The service contracts and appointment letters may be renewed in accordance with our Articles of Association and the applicable laws, rules and regulations from time to time.
Save as disclosed above, none of our Directors or Supervisors has or is proposed to have a service contract with any member of our Group (other than contracts expiring or determinable by the relevant employer within one year without the payment of compensation (other than statutory compensation)).
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(b) Others
(i) None of our Directors, Supervisors, or any past Directors of any members of our Group has been paid any sum of money for the years ended December 31, 2018, 2019 and 2020 (i) as an inducement to join or upon joining our Company or (ii) for loss of office as a director of any member of our Group or of any other office in connection with the management of the affairs of any member of our Group.
(ii) There has been no arrangement under which a Director or Supervisor has waived or agreed to waive any remuneration or benefits in kind for the years ended December 31, 2018, 2019 and 2020.
(iii) None of our Directors or Supervisors has been or is interested in the promotion of, or in the property proposed to be acquired by, our Company, and no sum has been paid or agreed to be paid to any of them in cash or shares or otherwise by any person either to induce him/her to become, or to qualify him/her as, a Director or a Supervisor, or otherwise for services rendered by him in connection with the promotion or formation of our Company.
3. Agency fees or commissions received
Save as disclosed in this section, none of the Directors, Supervisors or any of the persons whose names are listed under “—D. Other Information—7. Qualifications of Experts” in this appendix had received any commissions, discounts, agency fee, brokerages or other special terms in connection with the issue or sale of any capital of any member of our Group within the two years immediately preceding the date of this document.
4. Directors’ and Supervisors’ remuneration
For the years ended December 31, 2018, 2019 and 2020, the aggregate amount of fees, salaries, allowances and benefits in kind, bonuses, retirement scheme contributions and share-based payments granted by us to our Directors and Supervisors were RMB11.5 million, RMB21.0 million and RMB6.9 million, respectively.
Under the current arrangements, our Directors and Supervisors are entitled to receive compensation (including fees, salaries, allowances and benefits in kind, bonuses, retirement scheme contributions and share-based payments) from our Company for the year ending December 31, 2021 under arrangement in force as of the date of this document which is RMB10.07 million in aggregate.
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5. Disclaimers
(a) Save as disclosed in “—D. Other Information—6. Promoters,” none of our Directors or Supervisors nor any of the parties listed in “—D. Other Information—7. Qualifications of Experts” in this appendix has any direct or indirect interest in the promotion of our Company, or in any assets which within the two years immediately preceding the date of this document, have been acquired or disposed of by or leased to any member of our Group, or are proposed to be acquired or disposed of by or leased to any member of our Group;
(b) Save as disclosed in “—C. Further Information about Directors, Supervisors and Substantial Shareholders—1. Disclosure of Interests” in this appendix, none of our Directors or Supervisors has any interest or short position in our shares, underlying shares or debentures of our Company or any of its associated corporation (within the meaning of the SFO) which will have to be notified to our Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO or which will be required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or which will be required to be notified to our Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers once our H Shares are [REDACTED];
(c) None of our Directors or Supervisors nor any of the parties listed in “—D. Other Information—7. Qualifications of Experts” in this appendix is materially interested in any contract or arrangement subsisting at the date of this document which is significant in relation to the business of our Group as a whole;
(d) Save for the [REDACTED], none of the parties listed in “—D. Other Information—7. Qualifications of Experts” in this appendix:
(i) is interested legally or beneficially in any of our Shares or any shares of any of our subsidiaries; or
(ii) has any right or option (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe securities in any member of our Group;
(e) So far as is known to our Directors as of the Latest Practicable Date, none of our Directors, their respective close associates or Shareholders of our Company (who is interested in more than 5% of the share capital of our Company) has any interests in any of our top five suppliers and top five customers; and
(f) None of our Directors and their close associates is interested in any business (other than the business of our Group) which competes or is likely to compete, directly or indirectly, with our business.
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D. OTHER INFORMATION
1. Estate duty
As advised by our PRC Legal Advisors, the PRC currently does not impose any estate duty.
2. Tax and other indemnities
Our Controlling Shareholder [has entered] into a deed of indemnity with and in favor of each member of our Company (being the contract referred to in paragraph (a) of “—B. Further Information about Our Business—1. Summary of Material Contracts” above) to provide indemnities on a joint and several basis in respect of, among other matters, (i) any liability for estate duty under the Estate Duty Ordinance (Chapter 111 of the Laws of Hong Kong), or legislation similar thereto in Hong Kong or any jurisdictions outside Hong Kong which may be incurred by any member of our Group on or before the [REDACTED]; and (ii) other taxation which may be suffered by any member of our Group in respect of, among other things, any income, profits or gains earned, accrued or received on or before the [REDACTED], save (a) to the extent that sufficient provision or reserve has been made for such taxation in the audited consolidated financial statements of our Group as set out in Appendix I; (b) to the extent that the liability for such taxation would not have arisen but for any act or omission of, or delay by, any member of our Group after the [REDACTED] without the prior written consent or agreement of our Controlling Shareholders, unless such act or omission is conducted or agreed upon in the ordinary course of business of our Group or under a legally binding obligation created on or before the [REDACTED]; and (c) to the extent such loss arises or is incurred only as a result of a retrospective change in law or regulations or the interpretation or practice thereof by any relevant authority coming into force after the [REDACTED].
3. Litigation
We are not aware of any material legal proceedings, claims or disputes currently existing or pending against us, and no litigation, arbitration or claim of material importance is known to our Directors to be pending or threatened against us that may have a material adverse effect on our business, financial position or results of operations.
4. Sole Sponsor
The Sole Sponsor satisfies the independence criteria applicable to sponsor set out in Rule 3A.07 of the Listing Rules.
The Sole Sponsor will receive an aggregate fee of US$800,000 for acting as the Sole Sponsor for the [REDACTED].
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5. Preliminary expenses
Our Company did not incur any preliminary expense for the purpose of the Listing Rules.
6. Promoters
The promoters of our Company are Mr. Qu, Ms. Liu, SBCVC Fund, Kaiderui, Ningbo Chunyuan, Woodlawn Investments and Beijing Binghong.
Save as disclosed in “History and Corporate Structure” and “Financial Information,” within the two years immediately preceding the date of this document, no cash, securities or other benefit has been paid, allotted or given nor are any proposed to be paid, allotted or given to any promoters in connection with the [REDACTED] and the related transactions described in this document.
7. Qualifications of experts
The following are the qualifications of the experts who have given opinion or advice which are contained in this document:
Name Qualifications
Haitong International Capital Limited Licensed corporation under the SFO to conduct Type 6 (advising on corporate finance) regulated activities (as defined under the SFO)
KPMG Certified Public Accountants and Public Interest Entity Auditor registered in accordance with the Financial Reporting Council Ordinance (Chapter 588 of the Laws of Hong Kong)
King & Wood Mallesons PRC legal advisors
Frost & Sullivan (Beijing) Inc., Industry consultant Shanghai Branch Co.
Hogan Lovells Legal advisors as to International Sanctions laws
Gabriel Quintanilha Advogados Brazilian legal advisors Law Firm
8. Consents of experts
Each of the experts named in “—D. Other Information—7. Qualifications of Experts” in this appendix has given and has not withdrawn its respective written consent to the issue of this document with the inclusion of its report and/or letter and/or opinion and/or the references to its name included in this document the form and context in which it is respectively included.
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9. Interests of experts in our Company
None of the persons named in “—D. Other Information—7. Qualifications of Experts” in this appendix is interested beneficially or otherwise in any Shares or shares of any member of our Group or has any right or option (whether legally enforceable or not) to subscribe for or nominate persons to subscribe for any shares or securities in any member of our Group.
10. Taxation of holders of H Shares
The sale, purchase and transfer of H Shares are subject to Hong Kong stamp duty. The current rate chargeable on each of the seller and purchaser is 0.1% of the consideration or, if higher, the fair value of the H Shares being sold or transferred, and will be increased to 0.13% with effect from August 1, 2021. In addition, a fixed duty of HK$5 is charged on each instrument of transfer (if required). Profits from dealings in the Shares arising in or derived from Hong Kong may also be subject to Hong Kong profits tax.
11. Binding effect
This document shall have the effect, if an application is made in pursuance of this document, of rendering all persons concerned bound by all of the provisions (other than the penal provisions) of sections 44A and 44B of the Companies (Winding Up and Miscellaneous Provisions) Ordinance insofar as applicable.
12. Miscellaneous
(a) Within the two years immediately preceding the date of this document:
(i) save as disclosed in “—A. Further Information about our Group—2. Changes in the share capital of our Company” and “—A. Further Information about our Group—5. Change in the registered capital of subsidiaries” in this appendix, no share or loan capital of our Company or any of our subsidiaries has been issued or agreed to be issued or is proposed to be fully or partly paid either for cash or a consideration other than cash;
(ii) no share or loan capital of our Company or any of our subsidiaries is under option or is agreed conditionally or unconditionally to be put under option;
(iii) save as disclosed in “[REDACTED],” no commissions, discounts, brokerages or other special terms have been granted or agreed to be granted in connection with the issue or sale of any share or loan capital of our Company or any of our subsidiaries; and
(iv) save as disclosed in “[REDACTED],” no commission has been paid or is payable for subscription, agreeing to subscribe, procuring subscription or agreeing to procure subscription of any share in our Company or any of our subsidiaries.
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(b) Our Directors confirm that:
(i) there has been no material adverse change in the financial or trading position or prospects of our Group since December 31, 2020 (being the date to which the latest audited consolidated financial statements of our Group were prepared); and
(ii) there has not been any interruption in the business of our Group which may have or has had a significant effect on the financial position of our Group in the 12 months preceding the date of this document;
(c) There are no founder, management or deferred shares nor any debentures in our Company or any of our subsidiaries;
(d) All necessary arrangements have been made to enable our H Shares to be admitted into [REDACTED] for clearing and settlement;
(e) No company within our Group is presently listed on any stock exchange or traded on any trading system;
(f) Our Company has no outstanding convertible debt securities or debentures;
(g) There is no arrangement under which future dividends are waived or agreed to be waived;
(h) None of the equity and debt securities of our Company, if any, is listed or dealt with in any other stock exchange nor is any listing or permission to deal being or proposed to be sought;
(i) There is no subsidiary in our Group which is a sino-foreign equity joint venture or which operates as or under a cooperative or contractual joint venture; and
(j) We currently is a sino-foreign investment joint stock limited company and is subject to the PRC Foreign Investment Law (《中華人民共和國外商投資法》).
13. Bilingual document
The English and Chinese language versions of this document are being published separately, in reliance upon the exemption provided by section 4 of the Companies (Exemption from Companies and Prospectuses from Compliance with Provisions) Notice (Chapter 32L of the Laws of Hong Kong).
– VI-15 – THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. APPENDIX VII DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES IN HONG KONG AND AVAILABLE FOR INSPECTION
A. DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES
The documents attached to the copy of this document delivered to the Registrar of Companies in Hong Kong for registration were:
(a) a copy of [REDACTED];
(b) the written consents referred to in “Appendix VI—Statutory and General Information—D. Other Information—8. Consents of Experts”; and
(c) a copy of each of the material contracts referred to in “Appendix VI—Statutory and General Information—B. Further Information About Our Business—1. Summary of Material Contracts.”
B. DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents will be available for inspection at the offices of Sidley Austin at 39/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong during normal business hours from 9:30 a.m. to 5:30 p.m. up to and including the date which is 14 days from the date of this document:
(a) the Articles of Association;
(b) the Accountants’ Report from KPMG, the text of which is set out in Appendix I to this document;
(c) the report from KPMG in relation to the unaudited pro forma financial information, the text of which is set out in Appendix II to this document;
(d) the audited consolidated financial statements of our Group for the years ended December 31, 2018, 2019 and 2020;
(e) the legal opinion issued by King & Wood Mallesons, our legal advisors as to the PRC law, in respect of our Group’s business operations in the PRC;
(f) the legal opinion issued by Gabriel Quintanilha Advogados Law Firm, our legal advisors as to Brazilian law, in respect of our Group’s sales and distribution in Brazil;
(g) the report issued by Frost & Sullivan (Beijing) Inc., Shanghai Branch Co.;
(h) the material contracts referred to in “Appendix VI—Statutory and General Information—B. Further Information about Our Business—1. Summary of Material Contracts”;
– VII-1 – THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT. APPENDIX VII DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES IN HONG KONG AND AVAILABLE FOR INSPECTION
(i) the service contracts and appointment letters referred to in “Appendix VI—Statutory and General Information—C. Further Information about Our Directors, Supervisors and Substantial Shareholders—2. Further Information about Our Directors and Supervisors—(a) Particulars of Directors’ and Supervisors’ Service Contracts and Appointment Letters”;
(j) the written consents referred to “Appendix VI—Statutory and General Information—D. Other Information—8. Consents of Experts”; and
(k) the PRC Company Law, the PRC Securities Law, the Mandatory Provisions and the Special Regulations together with their unofficial English translation.
– VII-2 –