Business Review

Distribution of Gene Testing Services

The Group continued to diversify within the region and expand the market share of its gene testing services business. Its subsidiary, China United Gene Health Limited (“United Gene Health”), entered into five franchise agreements (collectively the “Franchise Agreements” or individually the “Franchise Agreement”) with five independent distributors, namely Fashion Fame Limited, Grace Noble Limited, Rising Rates International Limited, Noble Hat Limited and Sky Cultures Limited (collectively the “Distributors” or individually the “Distributor”) for the period of five years on 14 July 2009. Under the Franchise Agreements, United Gene Health (i) appointed each Distributor as its distributor for the gene testing services in the PRC; and (ii) advanced a non-interest bearing loan to the five distributors named above for HK$6,000,000, HK$8,000,000, HK$8,000,000, HK$10,000,000 and HK$12,000,000 respectively (the “Loan”, collectively the “Loans”), for the sole purpose of soliciting business and organizing marketing activities as permitted by United Gene Health. An undertaking has been issued to United Gene Health by Fashion Fame Limited, Grace Noble Limited, Rising Rates International Limited, Noble Hat Limited and Sky Cultures Limited that the annual sales attributable to the distribution of gene testing services in the PRC generated by them shall not be less than HK$24,000,000, HK$32,000,000, HK$32,000,000, HK$40,000,000 and HK$48,000,000 respectively (the “Specified Amounts”, each as a “Specified Amount”). In the event that the sales generated by the relevant Distributor in any one year is equal to or in excess of the relevant Specified Amount, United Gene Health agrees to waive the repayment of 20% of the relevant Loan; otherwise, the relevant Distributor shall have to repay 20% of the relevant Loan to United Gene Health within three business days after the review made by United Gene Health, pursuant to the relevant Franchise Agreements. In the event that the sales generated by the relevant Distributor falls below the relevant Specified Amount for two consecutive years, United Gene Health will have the right to terminate the relevant Franchise Agreement and to require the repayment of the relevant Loan outstanding within three business days after it giving the notice of termination to the relevant Distributor.

During the Interim Period, turnover of distribution of gene testing services was approximately HK$96.7million (approximately HK$20.4 million in the prior period). This substantial increase of approximately 374.02% was mainly due to the enlarged distribution coverage in the PRC since May 2009 which contributed approximately HK$90.3 million to the turnover during the Interim Period. However, the gross profit margin decreased from approximately 16.80% in the prior period to approximately 12.25% in the Interim Period due to the introduction of more favourable incentives to the distributors in the PRC.

山東特利爾醫藥有限公司Co-operative Joint Venture (the “CJV”) for sales of pharmaceutical products

On 18 September 2009, CJV mutually agreed with Laolaishou Biotech Company Limited (濟南老來壽生物科技有限公司) (“Laolaishou”) that, for commercial reasons, to enter into the termination agreement for the exclusive distribution agreement for the products of Laolaishou in the PRC, with immediate effect. The termination of this agreement will not have any material financial impact on the Group’s operations or financial position.

During the Interim Period, sales of pharmaceutical products of the CJV was approximately HK$197.5 million as compared to approximately HK$165 million in the prior period, representing an increase of approximately 19.70%, whilst the gross profit margin remained at approximately 1.65% in the Interim Period.

Prospects

Distribution of Gene Testing Services

The management believes that the distribution of gene testing services has a strong potential due to increasing awareness of health care by individuals and their families, and the increasing national income in the PRC. With the exclusive distribution rights in Hong Kong and non-exclusive distribution rights in the PRC for the gene testing services, together with the Franchise Agreements which set substantial sales target for each of the forthcoming five years, the Group will be able to (i) retain the existing distributors and attract other potential distributors of gene testing services; (ii) secure more competitive pricing to capture a larger market share; and (iii) add more business partners in different regions of the PRC , thus achieve increasing profitability in the forthcoming years.

Provision of Health Care Management Services

On 23 June 2009, the Group established an indirect wholly-owned subsidiary, 聯合基因(上海)健康管理服務有限公司 (for identification purpose, United Gene HealthCare Limited, Shanghai), ( “United Gene HealthCare”) in Shanghai as a limited liability company with a registered capital of HK$20 million, of which HK$4 million has been injected as at 31 December 2009 and would be applied towards the start-up and development costs for the business of the health care center. The scope of business of United Gene HealthCare includes health care management service, health care consultancy, health care apparatus wholesale, commission agency, and provision of ancillary services.

On 20 November 2009, United Gene HealthCare established in Guangzhou the first health care centre to provide gene testing and health care services, health check services, rehabilitation services, psychology consultancy and therapy services, infirmary and nutrition services, health fitness and exercise services, traditional Chinese medical services and other ancillary services. For the period ended 31 December 2009, United Gene HealthCare not yet generated any income because it was still in the development and coordination stage of setting up the provision of health care management services.

On 15 February 2010, United Gene HealthCare entered into a joint venture agreement with an independent third party to jointly establish 上海途舒館健康管理服務有限公司 in Shanghai (“SH HealthCare Joint Venture”), which is a limited liability company with a registered capital of RMB22.5 million. United Gene HealthCare has committed to contribute a total of RMB4.5 million representing 20% interest in the SH HealthCare Joint Venture. The scope of proposed business of SH HealthCare Joint Venture includes health care management service, health care consultancy, health care apparatus wholesale and provision of ancillary services.


The CJV

In October 2009, one member of the top management of the CJV fell seriously ill and had to be admitted to hospital where he is still being treated. Since then the Group has been looking for a suitable replacement. Turnover of the CJV has been affected and it has dropped significantly.

In view of the subdued financial performance and management succession problem, the Group has been discussing with the joint venture partner to try to restructure the business of the CJV. The Board is of the view that the current situation of the CJV would not have any material financial impact on the Group or its financial results.

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