Step 3 – My Company

Back in 2014, my company that I was assigned to was LogiCamms which is an Australian company provider of multidiscipline of engineering, project delivery and asset performance services to multiple industries. This term my company is Cathay International Holdings Ltd which is based in Hong Kong. This is my first time to learn more about an international company, so what I am interested to find out is what this company is all about, what their main purpose of existence are and especially how they operate. And to find this information I need to do a bit of research and their website is a good starting point.

From looking at their website, Cathay International Holding Limited is a main market investment holding company and an operator and investor in the growing healthcare sector in the People’s Republic of China (PRC). The principal activities of the company and its subsidiaries are engaging in healthcare business and hotel operations. I was quick to find out that the company operates in five segments: Lansen segment, Haizi segment, Natural Dailyhealth segment, Botai segment and Hotel operations segment. And I thought my last company was complicated, this assignment is definitely going to be a long one so please bear with me.

According to Financial Times (2017), the Lansen segment is focused on the manufacture, marketing and sale of specialty western pharmaceuticals, plant extracts and healthcare products and generic pharmaceuticals in the People’s Republic of China (PRC). The Haizi segment is engaged in manufacture, marketing and sale of inositol and its by-product, di-calcium phosphate. The Natural Dailyhealth segment is engaged in the production and sales of plant extracts for use as key active ingredients in healthcare products. The Botai segment is engaged in collagen products. The Hotel operations segment is a hotel located in the Luohu district of Shenzhen in the PRC.

To be honest, I have very little knowledge about pharmaceutical or hotel businesses, however it seems that the Group is doing exceptionally well despite its slow growth. The Company’s common shares are premium listed on London Stock Exchange, the Group employs more than 2000 people across China, including 30 specialist corporate and business development staff based in Hong Kong and Shenzhen offices.

Portfolio of Cathay’s business includes:

Pharmaceutical
Lansen	Lansen, listed on the main board of the Hong Kong Exchange, is a leading pharmaceutical company in China which focuses on the rheumatic specialty prescription western pharmaceuticals for the treatment of autoimmune rheumatic diseases and dermatology indications. Lansen group is engaged in the manufacture, distribution and development of rheumatic drugs, with a leading position in the disease-modifying anti-rheumatic drugs ("DMARDs") market in the PRC. Lansen is also engaged in the production and sales of plant extracts and healthcare products.
Cosmecutical
Botai	Botai is engaged in collagen products and has received the first ever domestic production license in China for collagen injectable filler from SFDA in China. Modification and expansion of production facilities expected to complete in 2015.
Healthcare
Haizi	Haizi is engaged in the manufacture, marketing and sales of inositol and its by-product, di-calcium phosphate and has capacity to produce 2,500 tonnes of inositol per annum, second largest in the PRC.
Natural Dailyhealth	Natural Dailyhealth is engaged in the production and sales of plant extracts, such as bilberry, gingko extract and ginseng extract, for use as key active ingredients in healthcare products.
Hotel
Hotel	The Crowne Plaza Hotel & Suites Landmark Shenzhen This is a leading luxury business hotel, managed by InterContinental Hotels Group, and located in the Luohu district of Shenzhen in the PRC.

Proceeding with my research, I have discovered that the Group’s share price has been quite steady this year, falling ever so slightly. Currently, the company is sitting on 8 GBX or $0.14, in 2014 the share price reaches its peak of 40.5 GBX or $0.71 and once again dropped to $0.14 in 2016 and gradually increases. Comparing with the 5 years period, the share prices has yet to drop below $0.14 which is a good indicator that the company has a good strategy in order to stay afloat.

Now, let’s get into the financial report and see what other information I can find. In the latest annual report, The Group, meaning consolidate subsidiaries, reported a decrease of 2.1% in its revenue from 2015. Although Lansen’s specialty pharmaceuticals business and Natural Dailyhealth’s plant extract business both recorded sales growth, the Group’s recorded revenue in 2016 was USD118.4 million. The result of a decrease in revenue was due to the continued lower inositol market price which has had a negative effect on Haizi’s sales performance.

However, the Group’s gross profit during the year has increase by 15.2% from that of 2015, recorded as USD57.3 million. The overall gross profit margin went up to 48.4%, 2015 to 41.1%, this is mainly due to the higher proportion of sales of high margin product at Lansen. Another thing that was reported is that in 2016, the Group’s net loss was USD10.2 million, which was less than the net loss of USD12.6 million in 2015. The loss attributable to owners of the parent for the year decreased from USD13.6 million in 2015 to USD11.8 million, this suggests that the company has an effective strategic plan.

 The annual report provides the above graph that shows the Company’s Total Shareholder Return (TSR) performance compared to the TSR of the FTSE UK Pharmaceutical & Biotechnology Sector Index over the past five years. TSR is defined as the percentage change over the period in market price assuming the re-investment of income and funding of liabilities of the theoretical holding.

The Consolidated Statement of Comprehensive Income (Income Statement)

The Income Statement recorded the total comprehensive income for the year of 2016 at USD 25 million, compares to 2015 income is at USD 8 million. The Loss for the year of 2016 is USD 10 million which is less than 2015 of USD 12million. The two sections that seems to be the main part of income statement is what I don’t understand. The reclassification adjustments relating to disposal of a subsidiary and the items that will not be reclassified to profit or loss. This part for me is rather confusing to read, mainly because the language used is not what I’m familiar with. 

The Consolidated Statement of Profit or Loss

The Group recorded the revenue of USD118 million in 2016, while in 2015 the revenue was recorded at USD 120 million. This was due to the general economic slowdown and policy reforms. One thing that I notice from this statement is the Loss from flood that reported USD -4 million in 2015. There was no further information under that category, upon further research I have found that in September 2015 Cathay wrote-off CNY26.7 million (AUD 5.29 million) worth of inventories held by two subsidiaries, following flood damage caused by a rainstorm in Ningbo. This articles details the results of Lansen received the insurance claim of total USD 2.6 million. It is interesting to see how they calculate the loss from flooding and how the company manage when unexpected events occur.

The Consolidated Statement of Financial Position (Balance Sheet)

The balance sheet records the total values of assets is USD 444m in 2015 and had decreased to USD 438m in 2016. There is also a decrease in the total of non-current assets from USD317m in 2015 to USD304m in 2016. This is due to the property, plant and equipment and intangible assets. However, the current asset displays an increase from 2015 of USD126m to USD133m in 2016. The increased is due largely to trade and other receivables, pledged bank deposits and cash and cash equivalent. The equity attributable to owners has decreased slightly from the last period. The equity has decreased by USD -28m. The total liabilities have increases by USD 21.7m, this is mainly due to the current liabilities which falls under the borrowings of USD137m in 2016 compares to USD106m in 2015.

At this stage, there is a lot of questions that comes to mind, for example what does the capital and reserves means and how important it is when it comes to analysing the company. Other questions I have is why are there two prepaid land lease payment under non-current and current assets.

I have found it quite difficult to understand each account, so I must read more into the footnotes to get a further clarification. So, if you have no idea what is what, then I would recommend reading the footnotes for more details. For instance, I was able to find out that inventories consist of raw materials, work-in-progress, finished goods and hotel inventories. I was also wondering what the available-for-sale financial assets means, and the footnotes have provided the details of Intelligent Sensor System Limited (ISS) which is the headquartered in the UK and has development centre at Kent University. ISS sells fibre optic sensor systems and monitoring services principally to the energy, mining and medical industries. This is really interesting to see that the Group has other investment which has not been listed as part of the main earnings.

There is plenty of information provided by Cathay’s websites on its latest news and their current action plans such as:

The latest news article of Lansen's second share reduction plan of Starry announced that Lansen has notified Starry (Zheijang Starry Phrmaceutical Co., Ltd) of the Second Share Reduction Plan or simply disposition of shares. The number of Starry Shares to be disposed are not more than 5,500,000 Starry Shares, representing not more than 4.583% in Starry. The Group’s decision to disposed of 5% of Starry Shares might be due to the fact of slow economic growth and the annual reports suggests that the Group share of profit from Starry was decreased by USD 1m.

Another article is also quite interesting as it entails the Litigation initiated by Neptunus Medicine Company Limited (the Claimant) against Ningbo Liwah Pharmaceutical Company Limited (Ningbo Liwah), a wholly owned subsidiary of Lansen. This particular announcement is rather interesting to see which opens a new perspective into the reality of business that you might not be able to see in the financial statement. In the real world of business, it is not just making sales and cash flows, there is also another aspect to consider and be very careful of such as legal conflicts which could lead to further loss such as this case.

There isn’t many information or news articles that I can find other than announcement provided on the company websites. However, there was plenty of information in the financial reports and on its websites regarding major challenges that the Group is facing and the outlook of 2017.

The main concerns for CTI is the slowing economy and international political uncertainties of the China market. The Group’s key business segment in 2016 continued to Lansen’s pharmaceutical business. According to the financial report, the implementation of lower drug tender prices, two rounds of price negotiations, centralised procurement and other policies have resulted in lower drug prices and narrower profit margins. However, the Group have also reported that the company is beginning to see the benefits of our diversification strategy from pharmaceutical to include healthcare and cosmeceutical products, which mitigate the business risks and improve profitability. As far as I can see, Natural Dailyhealth’s healthcare business is gaining momentum as well as the relatively new cosmeceutical business at Botai is showing good promise.  Other challenges the company is currently facing is the problem of slow growth in sales that effects Lansen’s sales of its specialty drugs due to downward pressure on pricing. The Group has proposed the strategy to control costs, expand its sales channels and bring new products to market.

How do I feel about this company? Well, to be honest I actually like enjoy learning more about it. Currently the business is facing some tough challenges which shows the reality of the firm and how the economy effects the firm. I’m not too confident on analysing the annual report but I will try my best and learn as much as I can from other students as well. Comparing to my last company of LogiCamms, Cathay Group is more complicated to analyse than LogiCamms. The main differences are that LogiCamms is the provider of multidiscipline of engineering, project delivery and asset performance services to multiple industries and Cathay is an investment company with many subsidiary in pharmaceutical industries.