Shandong Xinhua Pharmaceutical : Continuing Connected Transactions In Relation To Shandong Lukang Agreement and China Shandong Agreement

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, 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 announcement.

This announcement appears for information purposes only and does not constitute an invitation or offer to acquire purchase or subscribe for any securities of the Company.

山東新華製藥股份有限公司

Shandong Xinhua Pharmaceutical Company Limited

(a joint stock company incorporated in the People's Republic of China with limited liability)

(Stock Code: 00719)

Continuing Connected Transactions In Relation To

(i)Shandong Lukang Agreement and (ii) China Shandong AgreementSHANDONG LUKANG AGREEMENT

On 30 March 2021, the Company and Shandong Lukang Pharmaceutical Co., Ltd. (山東魯抗醫藥 股份有限公司) ("Shandong Lukang") entered into a supply of goods and service agreement (the "Shandong Lukang Agreement") in relation to the purchase of preparation products and bulk drugs, and the sale of pharmaceutical intermediaries and bulk drugs and provision of engineering design services for the period commencing from 1 January 2021 to 31 December 2021.

CHINA SHANGDONG AGREEMENT

On 30 March 2021, the Company and China Shandong Group Limited ( 華魯集團有限公司) ("China Shandong") entered into a sales of goods agreement (the "China Shandong Agreement", together with the Shandong Lukang Agreement, the "Agreements") in relation to the sales of chemical raw materials and products for the period commencing from 1 January 2021 to 31 December 2021.

LISTING RULES IMPLICATIONS

As at the date of this announcement, Hualu Holdings Co. Ltd. ("HHC") is a controlling shareholder of the Company (as defined in the Listing Rules) and is directly and indirectly interested in approximately 36.63% of the entire issued share capital of the Company. Both Shandong Lukang and China Shandong are subsidiaries of HHC and are therefore connected persons of the Company. Accordingly, the Agreements and the transactions contemplated thereunder constitute continuing connected transactions of the Company under Chapter 14A of the Listing Rules.

Given that all of the percentage ratios (as defined under Rule 14.07 of the Listing Rules) other than the profits ratio under the Agreements exceed 0.1% but are less than 5% on an annual basis, the continuing connected transactions contemplated thereunder are subject to the reporting, announcement and annual review requirements under Chapter 14A of the Listing Rules and areexempt from the circular (including independent financial advice) and independent shareholders' approval requirements.

THE SHANDONG LUKANG AGREEMENT

The principal terms of the Shandong Lukang Agreement are set out below:

Date

30 March 2021

Parties

• 1. The Company; and

• 2. Shandong Lukang

Term

From 1 January 2021 to 31 December 2021 (both dates inclusive), subject to early termination by either party giving the other party at least three (3) months' prior written notice.

Subject Matter

Shandong Lukang and/or its subsidiaries will supply preparation products and bulk drugs to the Company and/or its subsidiaries.

The Company and/or its subsidiaries will supply pharmaceutical intermediaries and bulk drugs as well as provide engineering design services to Shandong Lukang and/or its subsidiaries.

Pricing

The basis for determining the service fee has been made with reference to the prevailing market price and the terms entered into with Shandong Lukang will be no less favorable to the Company than those entered into by the Company with independent third parties.

PROPOSED ANNUAL CAP

The proposed annual cap for the continuing connected transaction under the Shandong Lukang Agreement is as follow:-

Unit: 0,000

Parties	Subject matter of the connected transaction	Proposed annual cap amount for the year 2021 (RMB)
Purchase of products from Shandong Lukang	Purchase of preparation products and bulk drugs	1,400
Sale of products and provision of services to Shandong Lukang	Sale of pharmaceutical intermediaries and bulk drugs and provision of engineering design services	1,400

Total

2,800

Basis for the Proposed Annual Cap

The proposed annual cap under the Shandong Lukang Agreement was arrived at after taking into account (i) the historical amounts for the transactions between the Company and/or its subsidiaries and Shandong Lukang and/or its subsidiaries for the supply of preparation products, bulk drugs, pharmaceutical intermediaries and provision of engineering design services; (ii) the prevailing market price for preparation products, bulk drugs, pharmaceutical intermediaries and provision of engineering design services; (iii) estimated demand of the products supplied by Shandong Lukang and/or its subsidiaries from the Company and/or its subsidiaries; (iv) estimated demand of the products supplied and services provided by the Company and/or its subsidiaries from Shandong Lukang and/or its subsidiaries; and (v) the anticipated business volume of the Company's products and services.

The Company will satisfy the consideration of the transaction contemplated under the Shandong Lukang Agreement from its internal resources.

THE CHINA SHANDONG AGREEMENT

The principal terms of the China Shandong Agreement are set out below:

Date

30 March 2021

Parties

• 1. The Company; and

• 2. China Shandong

Term

From 1 January 2021 to 31 December 2021 (both dates inclusive), subject to early termination by either party giving the other party at least three (3) months' prior written notice.

Subject Matter

The Company and/or its subsidiaries will supply chemical raw materials and products to China Shandong.

Pricing

The basis for determining the service fee has been made with reference to the prevailing market price and the terms entered into with China Shandong will be no less favorable to the Company than those entered into by the Company with independent third parties.

PROPOSED ANNUAL CAP

The proposed annual cap for the continuing connected transaction under the China Shandong Agreement is as follow:-

Unit: 0,000

Parties	Subject matter of the connected transaction	Proposed annual cap amount for the year 2021 (USD)
Sale of chemical raw materials and products to China Shandong	Sale of chemical raw materials and products	1,500
Total	1,500

Basis for the Proposed Annual Cap

The proposed annual cap under the China Shandong Agreement was arrived at after taking into account (i) the prevailing market price for chemical raw materials and products; (ii) estimated demand of the products supplied by the Company and/or its subsidiaries from China Shandong; and (iii) the anticipated business volume of the Company's products.

ACTUAL TRANSACTION AMOUNTS

During the period from 1 January 2021 to 29 March 2021, the actual amounts of the Company's transactions with Shandong Lukang (unaudited) were as follows:-

Parties and subject matter	Transaction Amount (RMB)
Purchase of products from Shandong Lukang	1,053,700
Sale of products and provision of services to Shandong Lukang	2,253,800
Total	3,307,500

No transactions took place between the Company and China Shandong during the period from 1 January 2021 to 29 March 2021.

The abovementioned actual transaction amounts have not exceeded the threshold under Rule 14A.76(1) of the Listing Rules.

PRICING POLICY

Products provided by Shandong Lukang

The prices and terms for each batch of purchase transactions from Shandong Lukang to the Company contemplated under the Shandong Lukang Agreement will be determined in the ordinary course of business of both parties on normal commercial terms and negotiated on arm's length basis between the parties thereto. In particular, the prices and terms will be determined:

(i) by taking reference to the prevailing market price of the same or substantially similar products announced by at least two independent third parties in the same period which offer the same or substantially similar products in the same or nearby areas through inquiries via websites; and 4

(ii) by ensuring that in any event the price offered by Shandong Lukang will be no less favourable to the Company than those offered by independent third party suppliers to the Company in comparable transactions of the same period.

Products provided to Shandong Lukang and China Shandong

The prices and terms for each batch of purchase transactions from the Company to Shandong Lukang and China Shandong contemplated under the respective Agreements will be determined in the ordinary course of business of both parties on normal commercial terms and negotiated on arm's length basis between the parties thereto. In particular, the prices and terms will be determined:

• (i) by reference to the actual costs incurred plus a reasonable profit margin (with reference to the general range of profit in the industry). The Company will refer to the historical average price for the relevant products such as bulk drugs, pharmaceutical intermediaries or chemical raw materials and products (to the extent available) and/or profit margins of comparable products and services disclosed by at least two other listed companies to determine whether the profit margin charged is in line with the industry. The Company will also consider the demand and supply in the market and the urgency of the orders from Shandong Lukang and China Shandong respectively at the relevant time in determining the final transaction price. Some companies publish profit margins of their principal goods and services on the Shanghai Stock Exchange, the Shenzhen Stock Exchange or domestic bond markets (including but not limited to the inter-bank market of the People's Republic of China operated by the National Association of Financial Market Institutional Investors), from which the Company is able to draw references. As information are categorised by the industry and the region in the PRC, the Company will select and refer to profit margins of comparable products and services in the same or nearby areas or in the PRC (to the extent available) to determine whether the profit margin charged is in line with the industry; and

• (ii) by ensuring that in any event the price offered by the Company will be no less favourable to the Company than those offered by the Company to independent third parties in comparable transactions of the same period.

Services provided to Shandong Lukang

The determination of the service fees chargeable to Shandong Lukang will be determined in the ordinary course of business of both parties on normal commercial terms and negotiated on arm's length basis between the parties thereto. In particular, the following factors will be taken into consideration in determining the relevant prices and terms:

• (i) the urgency of the proposed provision of services;

• (ii) the estimated man-hours and/or man-days of the human resources required to provide the relevant services;

• (iii) the size and complexity of the proposed provision of services; and

• (iv) the fees charged for historical transactions of similar nature.

INTERNAL CONTROLS

To ensure that the continuing connected transactions contemplated under the Agreements will be conducted on normal commercial terms and not prejudicial to the interests of the Company and its minority shareholders, the Company has adopted the following internal control procedures:

• (i) The management of the Company will hold meetings to discuss and consider the terms and conditions and the pricing mechanism of each transaction contemplated under the Agreements before entering into such transactions to ensure that they are on normal commercial terms;

• (ii) The finance department of the Company is responsible for reviewing the relevant transactions on a monthly basis and submitting the relevant information to the Board for review, including but not limited to historical and actual transaction amounts, to ensure that the relevant transactions are conducted in accordance with the Agreements and that the annual cap is not exceeded and the pricing mechanism is effectively implemented; and

• (iii) The independent non-executive Directors and the auditors of the Company will conduct annual review on the continuing connected transactions contemplated under the Agreements to confirm that the pricing policy and annual cap remain fair and reasonable, and provide confirmation of the same annually in the annual report of the Company in accordance with the Listing Rules.

REASONS FOR AND BENEFITS OF THE CONTINUING CONNECTED TRANSACTIONS

By entering into the Shandong Lukang Agreement, the Company and/or its subsidiaries will be able to expand their sales channels by supplying pharmaceutical intermediaries and bulk drugs as well as provision of engineering design services to Shandong Lukang and/or its subsidiaries. On the other hand, the Company and/or its subsidiaries will be able to carry out more structural distribution of pharmaceutical products to medical institutions in the Luzhong region and hence meeting the production needs of the Company by receiving supply of preparation products and bulk drugs from Shandong Lukang.

By entering into the China Shandong Agreement, the Company is able to expand the scale of offshore product sales, further develop the offshore market as China Shandong engages in the business of import and export of relevant products, and obtain stable income from the sales of products.

The board of Directors of the Company (the "Board") and the independent non-executive Directors (excluding Mr. Zhang Daiming, Mr. Xu Lie and Mr. Cong Kechun, who are considered to have a material interest in the Agreements due to their respective directorships or capacities as a member of the management of a subsidiary of HHC and were therefore required to abstain from voting on the relevant Board resolutions in relation to the Agreements) have considered and reviewed the terms and provisions of the Agreements and are of the view that both agreements have been entered into on an arm's length basis and in the ordinary and usual course of business, and that the transactions contemplated thereunder and the relevant annual caps are on normal commercial terms, fair and reasonable and in the interests of the Company and its shareholders as a whole.

RELATIONSHIP BETWEEN THE CONNECTED PARTIES

HHC is a controlling shareholder of the Company and is directly and indirectly interested in approximately 36.63% of the entire issued share capital of the Company. Shandong Lukang and China Shandong are subsidiaries of HHC, and are therefore connected persons of the Company. Accordingly, the Agreements constitutes continuing connected transactions of the Company under Chapter 14A of the Listing Rules.

LISTING RULES IMPLICATIONS

As all the applicable percentage ratios (as defined in the Listing Rules) for the proposed annual cap of the transactions contemplated under the Agreements are more than 0.1% and less than 5% on an annual basis, the transactions are subject to the reporting, announcement and annual review requirements but are exempt from the circular (including independent financial advice) and independent shareholders' approval requirements under Chapter 14A of the Listing Rules.

INFORMATION OF THE PARTIES AND CONNECTED PERSONS

The Company is a joint stock limited company incorporated in the PRC with its H shares and A shares listed on the Stock Exchange and Shenzhen Stock Exchange respectively. The Company is principally engaged in the development, manufacture and sale of bulk pharmaceuticals, preparations and chemical products. The ultimate beneficial owner of the Company is the State-owned Assets Supervision and Administration Commission of the State Council of Shandong province.

HHC is a state-owned enterprise principally engaged in investment holding of various companies listed or not listed on the stock exchanges of the mainland China and Hong Kong.

Shandong Lukang is a company incorporated in the PRC with limited liability and its principal businesses include, among others, manufacturing, processing and sales of chemical raw materials and preparations products for pharmaceutical production, auxiliary materials and intermediates, veterinary drugs, pharmaceutical packaging products and feed additives.

China Shandong is a company incorporated in Hong Kong with limited liability and its principal businesses include project investment and import and export trade.

By Order of the Board

Shandong Xinhua Pharmaceutical Company Limited

Zhang Daiming

Chairman

30 March 2021, Zibo, the PRC

As at the date of this announcement, the Board comprises:

Executive Directors:	Independent Non-executive Directors:
Mr. Zhang Daiming (Chairman)	Mr. Pan Guangcheng
Mr. Du Deping	Mr. Zhu Jianwei
Mr. He Tongqing	Mr. Lo Wah Wai
Non-executive Directors:
Mr. Cong Kechun
Mr. Xu Lie
7