Opens the New Cycle of Vitamins and Dietary Supplements

——2023 Letter to the shareholders from the Chairman of Byhealth

Dear Byhealth shareholders:

The three pandemic years passed.

The post-pandemic era has arrived.

Begins a new cycle of the VDS industry. 

Back in 2003, the outbreak of SARS and the rise of health awareness across the country accelerated the process of a comprehensive introduction of VDS in China. Since then, we have seen a rapid growth of VDS. Byhealth was fortunate to participate in the market as a pioneer and a leader.

Twenty years later, a surge of public health awareness in the post-pandemic era has secured VDS a long-term growth opportunity in the new cycle. 

In 2022, Byhealth achieved a sales revenue of 7.861 billion yuan, a year-on-year increase of 5.79% , and net profit attributable to the stakeholders stood at 1.386 billion yuan, a year-on-year decrease of 20.99%, both of which were significantly below the budget finalized at the beginning of the year. Such an outcome is clearly unacceptable.

OlBP data showed that in 2022, the total retail sales value of China's VDS industry reached 200.1 billion yuan, with a growth rate of around 4.9%. Byhealth dominated the largest market share of 10.3%, while the second and third largest market shares stood at 6.4% and 4.9%, respectively.

In 2022, the consumption of VDS per capita in China was US$22, an increase of 5%, which was slightly higher than the global average and was about 1/5 of that of the US.

Meanwhile, we noticed less VDS sales channel fluctuation in the Chinese market. The on-line sales channel was expected to account for 46%, direct sales channel 26%, pharmacy 20%, grocery 2%, and 7% for the other channels. In 2022, the market share of the online and pharmacy channels were basically stable compared to the previous year, while the direct sales channel continued to decline.

According to Zhongkang CMH retail market data, 2022 VDS in China’s pharmacy channel declined by 1.7%, compared to a positive 3.2% growth of Byhealth.

If we could look back from the future, we would have seen abundant opportunities for the growth of VDS with more categories and brands emerging in the post-pandemic era. Now the question is, how many opportunities is Byhealth gearing up to seize?

Here comes the logical mapping of Byhealth:

To start with, we have set the direction. We are confident with the growth opportunities of VDS in the new cycle, therefore we have drafted the strategies of Byhealth, cultivating multiple brands, improving hero products, looking for perfection of all products in all categories and advancing sales on all channels. Byhealth is committed to becoming an expert, dedicated to continuously improving its expertise by insisting on developing in this direction.

Furthermore, we will continue with the structure adjustments. In 2022, we have completed the adjustment of all-channel sales and operational structure. In 2023, we will construct new market structure and shared services platforms.

Additionally, Byhealth will continue to attract talents. Since the end of 2022, we have accelerated the second wave of talent attraction program after Byhealth was listed on the ChiNext.

And finally, we should control risks. We will adopt strict or even conservative financial measures to correct discrepancy and hold it under control. No matter how grand our target is, or how passionate we are, we still need the invisible hand of the market to keep us on the track and reach out to our targeted results successfully. 

Here are the core strategies of Byhealth:

1. Transformation to a leading science and technology enterprise under the strategy of applying cutting-edge scientific research to develop innovative nutritional products and solutions

In 2022, the company published, jointly with the partners, the world's first large-scale study on NAD+ & aging in China’s population. Meanwhile, we have reported findings of the clinical results of how Fruitflow could improve blood flow in Chinese people. It took us seven years to develop independently the strain LPB27 and obtained two Chinese invention patents. We have also devoted efforts on the innovation of glycosaminoglycan (GAGs) new collagen protein.

At the same time, the company has established the "Byhealth Precision Nutrition Research Centre" with the Hangzhou Institute for Advanced Study, University of Chinese Academy of Sciences; and the "Scientific Nutrition Research and Transformation Centre" in partnership with the Shanghai Institute of Nutrition and Health of the Chinese Academy of Sciences, to enhance the competitiveness of scientific research in the high-grade, high-precision and advanced fields.

2. Reinforce a solid and lasting brand

For fast-moving consumer goods, marketing is important but marketing strategy can shift from time to time. We focus on consumers and brand for a much longer period of time, they are the essential cornerstones.

The most valuable assets of FMCG companies are not internal, but rather external. They reside in the minds of end consumers and are manifested in every point of contact with users, encompassing their full range of perceptions and experiences that must be continuously safeguarded to prevent their erosion inside out.

To boost sales, short-term marketing strategy is straightforward and efficient. However it’s difficult to boost confidence and build loyalty from consumers. What we want is to be chosen by consumers, to earn their recognition, and to establish a long-standing bond.

We are happy to see customers visiting us, but we are far happier to see customers visiting us every day.

Decision-making is all about prioritizing, there is always something that you’d let go. One cannot have his cake and eat it too. 

Byhealth has a twofold target for the core market in the new VDS cycle, a significant increase in both the brand insistency rate amongst consumers and in all-channel market share.

3. Byhealth will be prepared for the protracted battles of the Red Sea, the Blue Sea and the Sea of Stars. 

1) An inevitable battle for the Red Sea of essential nutrients.

The Red Sea refers to the current existing market. Each competitor is fighting for a market share. Even a small growth in the sizable Red Sea is a big progress. Competition in the Chinese existing market is fierce, and Byhealth must be prepared to compete assertively to increase our market share.

2) A formidable battle for the Blue Sea of hero products.

The Blue Sea is the untouched market, an increment that we are aiming for. To be specific, our focus is on the proactive expansion of the market share for hero products. We will implement the established strategies unswervingly, focusing on developing additional market share with new-functionality products, and a comprehensive introduction of hero products in broad categories.

The Blue Sea Is only temporary. It is attractive to competitors considering its unmatched scope, abundant opportunities and excessive returns. Eventually, the Blue Sea will become the Red Sea. Our target is to differentiate ourselves and create a unique market position before a crowd of competitors flocking into the market. 

As a leader in the industry, while we obtain excess returns, we also bear the highest responsibility. Whether active or passive, we must continue to start again and open up blue sea one after another.

3) Exploring the Sea of Stars of the VDS market 

Undoubtedly, the VDS market in China is a Sea of Stars with innumerable opportunities. It’s because China’s population aging is accelerating, life expectancy is increasing, and Chinese people’s demand for quality life is growing.

According to the China’s Population Forecast Report 2023 published by Yuwa Population Research last month, 14.9% of China’s population in 2022 was 65 years old and above. China is becoming an aged society. It’s expected that this percentage will increase to over 20% in China by 2032 unless substantive and effective measures are adopted. It means China will nearly be classified as a super-aged society. By 2050, China’s population aged 65 and above will reach 382 million, or roughly 24% of the world’s senior population. It means one in every three Chinese people will be 65 years old or above. On the other hand, according to the National Bureau of Statistics, life expectancy is rising gradually on an annual basis, to 81.5 years for men and 86.5 years for women in 2050. In 2100, the figures will come up to 89.5 years for men and 94 years for women.

Our success in the VDS industry relies on strong technological capabilities that can effectively address the challenges and opportunities arising from aging population.

Where is the Sea of Stars for VDS? And where should Byhealth be looking at to find the Sea of Stars?

I believe the secret answer lies with the three “moon target” of Byhealth. “Shoot for the moon. Even if you miss, you’ll land on a cloud”. The first “moon targe” is the national invention patent of ingredients and formula for a differentiated advantage of Byhealth amongst peer products. The second “moon targe” is to research and develop new functionality products, hero products with concentrated functionalities for an additional unique value of improved health for consumers and added value for the industry. The third “moon target” is the prospective research on anti-aging and precision nutrition, making our contributions to the global VDS industry with scientific and technological innovation.

Looking up, you will see the stars and moon; but a bumpy and rocky road when looking down. 

Our efforts today are steppingstones for Byhealth in the years to come.

I consider the milestone of 10 billion of sales revenue reflecting of a critical hurdle for us as a FMCG producer. Success in the past might have also accumulated problems for today. Achievements that we made yesterday could also become our burdens, hindering us from marching towards tomorrow.

People may not notice any problems when they look into the future at present, but problems will become very visible when looking at the present with the lens of the future.

"焺(Sheng)" is the theme of the company’s 8th极(Ji)Extreme Challenge held at the end of last year. Literally, it indicates drum casting, a method to smelt metal. Facing the crucial challenge of further steps up the billions revenue, we are to become fearless, clothe in flame and rekindle the spark of the future.

We will go through whatever cycle we are destined to go through. 

We will become stronger after travelling the cycle and surviving the crisis. They will make us resilient. 

Quality and value chain are essential to FMCG as blood vessels are essential to human bodies. There is no compromising. 

The brand of the FMCG will disintegrate at the receding of vision, beliefs and passion. 

We should also be alert of "growth recession" when focusing on growth during the new VDS cycle. 

When I say growth recession, it refers to a situation either the growth is slower than the industry and peer products; or the growth is only in income, but not in profits. In another word, growth is only seen with "quantitative" indicators, while other “quality” indicators are declining including the gross profit margin, operating profit ratio, cash flow as well as productivity.

2023 presents the best time!

When you fix the radio frequency to 90 megahertz, you'll never be able to hear the voices coming from 100 megahertz.

As a quote, "Survive the darkness when light goes off and fly at dawn."

2023 is the first year of the post-pandemic era as well as the first year of the new VDS cycle. Five or even more years later, when we look back, 2023 might present the best opportunity for a new blueprint.

In 2023, be a new self. 

In 2023, I wish you healthy and safe. May the Year 2023 be a year of prosperity and peace, for the world, for our country. 

Liang Yunchao

Chairman of Byhealth

17^th March, 2023