Tongjitang Chinese Medicines Company (TCM)

Accounts Receivable

Our total accounts receivable increased by RMB100.5 million to RMB272.6 million (US$37.4 million) as of December 31, 2007 from RMB172.1 million as of December 31, 2006. This increase occurred during a period in which our net revenue amounted to RMB596.0 million (US$81.7 million). This increase in our accounts receivable resulted primarily from a rapid increase in our net revenues in 2007. In 2006 and 2007, as our net revenues grew rapidly, we strengthened our ability to collect our accounts receivable. During this period, we hired new personnel and allocated more of our existing personnel to collect accounts receivable, with the objective of collecting all accounts receivable according to contract terms. We also assessed credit risk profiles of our large distributors more closely before extending further credit to them. We have a settlement department in charge of monitoring our account receivable position with our distributors. The settlement department reconciles account receivable balance between our books and distributors’ records on a monthly basis. For any overdue account receivable, the settlement department will request an immediate settlement with that distributor, stop delivering additional products to that distributor and commence collection procedures.

At the balance sheet date of each month, we prepare an account receivable aging analysis measured by dates of sales and the subsequent settlement amount. For those accounts receivable net of the subsequent settlement that exceeded 180 days starting from the date of the sales, we will consider making a specific provision on a basis of the individual distributor by reference to the totality of that distributor’s past track record with us, its reputation and financial condition. The circumstances causing us to determine an account receivable to be likely unrecoverable include, but are not limited to, bankruptcy, liquidation, death of the key management and severe deterioration of the financial condition of our distributors. Once we determine that an account receivable from an individual distributor is unlikely to be recovered, we will write off that account receivable.

As we have historically experienced a very low level of bad debts, we have not made any general provision for our accounts receivable. Our bad debt expense, as a percentage of our net revenues, was 0.53%, zero and 0.50% for 2005, 2006 and 2007, respectively. We believe these percentages are not material.

73

Table of Contents

We grant credit terms of up to 180 days to our distributors. Our account receivable turnover days in 2007 was 136, as compared to 118 in 2006. As of December 31, 2006 and 2007, our accounts receivable balance over 180 days was RMB16.0 million and RMB61.3 million (US$8.4 million), respectively.