A new continent can never be discovered with an old map

——Chairman’s Message to Shareholders

2020.03.12

Dear shareholders of By-Health,

The first Spring Festival of 2020s was weighed down so massively by the sudden outbreak of the coronavirus (COVID-19). We feel regret for the lives lost, for the unimaginable price paid by Wuhan to stop the spread of the epidemic, and for the unimaginable sacrifices made by frontline health workers who had been tireless and unceasing in their fight against the outbreak. We pay our respects to those brave and unhesitating rescuers who rushed to the epicenter of the virus.

If we say the year 2018 was the turning point, the year 2019 would be called a “difficult” year, and the year 2020 would be a year of “suffering”. Chinese enterprises are facing enormous difficulties and challenges. For some of them, this will be even the “life-or-death” year.

In 2019, the Vitamin & Dietary Supplements (“VDS” for short) industry in China also experienced the throes of intensive policies issued over the years. Relevant state departments jointly launched a crackdown on the industry chaos and illegal behaviors in the healthcare industry and continued to reform and regulate the drug retail industry, which brought unprecedented pressures and challenges for the entire industry.

We are more soberly aware that these short-term throes will lead to the long-term healthy development of the VDS industry. Without health as the number “1”, we will eventually return back to nothing no matter how many “0” we add to the development later.

An enterprise in connection with food is placed upon the point of sword. Since the day of its emergence, China’s VDS industry has been developing amid controversies over and negative effects of “health food”, struggling to survive and grow with resilience.

We firstly proposed the concept of VDS in the prospectus issued by By-Health in 2010. In China, VDS is not yet a statutory name and covers health food, dietary supplements, functional foods, foods for special dietary uses, sports nutrition, some special medical foods, etc. They are called Vitamin & Dietary Supplements (“VDS” for short) in the United States, Food Supplements in Europe. But in China, most people still call them “health food”. VDS started to develop late in China. The Chinese people have not yet had the awareness and habit to use VDS. The popularity and per capita consumption of VDS are far lower than that of developed countries.

VDS can be briefly summarized in three sentences: (a) its ingredients include vitamins, minerals, animal and plant extracts, etc.; (b) its functions are to balance nutrition intake and regulate body functions of specific populations; (c) its position is neither a substitute for diet nor a substitute for medication. When consumers’ expectation for VDS returns to “supplements” from “only functions” and when they stop doubting the regulating effect of VDS on health status and expecting VDS to be a substitute for medication, the spring of VDS will come. China still has a long way to go in national health education, and the education on VDS.

Let’s take a look at China’s regulatory system for VDS, which can be called the most stringent regulatory system in the world. It conducts all-round and full-chain supervisions over product safety, efficacy and quality reliability. This covers the most stringent review and approval, registration and market access systems, the most stringent standards and GMP, the most supervisions and sampling inspections at the national, provincial and prefectural levels, and the most stringent market administration such as advertising approval. The regulators have done a lot of works, but there has been a poor overall response from all walks of life. Starting from granting the first approval number for health food in 1996 to the “100-day campaign” in 2019, there have always been controversies and negative news. The regulatory authorities have never ceased the strict governance and periodic rectifications. However, risks and hidden dangers still exist and the price gets higher and higher. In the process of standardizing the drug retail industry, the “one-size-fits-all approach” was implemented in some localities, which have affected the independent operation of designated pharmacies and the market environment to a certain degree.

According to the Research on the Development Strategy of China’s Food Industry during the 13th Five-year Plan period, realizing every 300 million yuan of output value, the healthcare industry would contribute 40 million yuan to the tax revenue and reduce the public medical expenses by 500 million yuan. During the 12th Five-year Plan period, nutritional and health food manufacturing industry contributed nearly 1% of the GDP. China Dietary Supplement Industry Development Report 2019 pointed out that, in 2018, China’s health food market exceeded 460 billion yuan with an industry growth rate of 10%-15%.

An analysis based on Euromonitor’s 2017 data stated: VDS has six times growth potential in China, and the key driving forces include the per capita income above USD 8,000 which is just the stage of rapid development of health consumption; the lower level of penetration, stickiness and per capita consumption of VDS in China compared with that in the United States and Japan; the rapidly aging population, which will account for a quarter of the total population by 2030; the increasingly growing health awareness of Chinese citizens.

In China, there is no lack of market. What’s lacking is the trust of consumers while integrity and transparency are the best ways to build consumer confidence. By-Health proposed the “three-step” global ingredient procurement strategy in 2004, and constructed its transparent factory in 2012. We are proud to have established this global leading VDS manufacturing base in China. We are not proud of the hardware but the entire quality control philosophy and system. The transparent factory is open to all people from across the world, including professionals, for visits, exchanges and supervisions, which has set a benchmark for the world’s VDS industry. On July 31, 2018, the eight concepts for quality control based on our rule of “Integrity Over Intelligence” was further summed up as the ballast for corporate survival and development. The Nutrition Exploratorium opened in July 2019 will become an important base for consumer health education. After a dozen of years of efforts, By-Health has gradually built three core DNAs, namely global nutrition, transparent factory, and world-class quality supplements that treat consumers as family and friends. We will do subtraction in marketing and addition in product.

Entering 2020, the impact of the macroeconomic environment and industry policies combined with the COVID-19 outbreak will exceed expectations in terms of severity and duration. The direct impact on the VDS industry will still be there.

As the industry leader, what should we do?

Firstly, only by extending the timeline could we see the general trend more clearly. In the short term, it’s full of volatility, uncertainly, and problems. In the long term, it’s more important and clearer to see the trend strategically. “Healthy China 2030” as a national strategy proposed the concepts of “big sanitation, big health”, and the requirement for focusing on disease prevention and bringing supervision forward. In July 2019, the State Council issued the plan for implementation of “Healthy China Action (2019-2030)”, raising “Healthy China” to the national strategic height, shifting the focus from disease treatment to health promotion in positioning and shifting from passive disease treatment to active disease prevention in strategy, which will bring great development opportunities for the VDS industry.

Secondly, By-Health needs to change from “pressure-fed growth” to leading the entire VDS industry towards restorative growth. By-Health boasts two extremely strong advantages: six times VDS growth potential and industry leading position. As a leading player, By-Health needs to make breakthroughs first and lead China’s VDS industry towards long-term and healthy development.

By-Health designated “activation” as the word for 2020.

First, it’s to activate consumers.

Second, it’s to re-activate the VDS business in China. The growth rate of VDS retail sales of Chinese pharmacies dropped from 5.4% in 2017 to 2.3% in 2018, and even to 0.8% in 2019. In 2019, By-Health realized a VDS growth rate of 19.9% in domestic offline channels, much higher than the industry average level. However, we need to be soberly aware that such “pressure-fed growth” will not sustain the momentum of development. As a Chinese saying goes, “When the nest is upset, no egg is left intact.” In this case, By-Health must change from such “pressure-fed growth” to leading the entire VDS industry towards restorative growth.

Third, it’s to re-activate the Life-Space business. By-Health has been pursuing a very stable and even conservative financial policy. And I have warned myself and my team for years that it’s easy to conclude an M&A but difficult to swallow and even more difficult to digest it. After getting listed, By-Health has been looking for strategic cooperation and M&A opportunities in global VDS markets. In recent years, we’ve basically seen the main target enterprises in global markets and given up multiple opportunities for M&A. Unexpectedly, our first overseas M&A led to a huge impairment of goodwill in a short period of time and directly brought the company’s first loss after going public.

We learned from the bitter experience and followed three logics in acquiring LSG, namely cross-border e-commerce, internationalization and probiotic market segment. Now, we still uphold these three logics in M&A. “Antibody would not form without going through a crisis.” We set off again at the lowest point.

Fourth, it’s to activate the brand power. More investment in brand asset is more investment in the future.

In 2020, the company will have some innovations and changes in management:

First, it’s the change to applying the 4 2 1 core market strategy with the focus on multiple varieties so as to change the current situation of sales of varieties as “ice and fire”;

Second, it’s the change to rebuild a core sales model suitable for multiple hero products and launch the 1,000-dealer fission plan;

Third, it’s to implement “By-Health 12 Rules for Talent Structure Upgrade”, including work shift across the board, full enabling of the high-potential young talent, the successor plan, mandatory performance grading distribution for each job level, and internal promotion propriety, etc.

Fourth, it’s the trial implementation of a dynamic budget control mechanism that applies to all key categories of costs based on the status quo of revenue-cost ratioses.

In 2020, By-Health will also stay focus on the three strategic projects representing the group, namely “user asset operation”, “e-commerce digitalization” and “super supply chain”, and try to make breakthroughs again from lessons.

This is an ever-changing era as we are seeing new technology application, and changing retail environment, changing channels and scenarioses, changing policies and supervisions, and changing users under consumption classification. The raging epidemic will have a profound impact on individuals’ behaviors and the VDS industry, and even lead to substitutions.

This is an era in which risks and opportunities co-exist. Economy downturn is accompanied by opportunities, and M&A is accompanied by risks. Making innovations and changes is the most essential capacity of By-Health. For us, deviating from the ear is risky and adapting to the era is an opportunity. Being complacent and conservative will lead to a crisis, but actively making changes will bring us opportunities. We must realize that the factors that brought tremendous pressures and challenges to the VSD industry and By-Health in 2019 are not yet eliminated, and will affect the VSD industry for a long period of time.

A new continent can never be discovered with an old map. When the industry changes discontinuously, there would be a great cognitive challenge. Such cognitive challenge determines where we should go and how we look at the ultimate industry objectives. We should make new judgements based on the old map and explore new growth opportunities with new cognitions. We would not have the future by clinging to what we know before.

“In turbulent times, turmoil itself is not terrible. What’s terrible is to follow the logic of the past.”

In the new 2020s, we should make changes quickly to adapt to the ever-changing times.

In 2020, we will rise from the ashes.

The COVID-19 is still spreading across the world. We must prepare for the worst and strive for the best. At this critical juncture, By-Health must assume the responsibility as a corporate citizen. Following the 10-million-yuan donation for setting up “a special relief fund to fight against the COVID-2019”, By-Health also donated a total of 149,000 pieces of Vitamin C, protein powder, probiotics and non-contact infrared thermometers in two batches.

Life always comes first, and every life is equally worthy of respect.

“No winter lasts forever; no spring skips its turn.”

By-Health Chairman of the Board: LIANG Yunchao

March 12,2020