2024 Letter to the Shareholders from the Chairman of Byhealth

Dear Byhealth shareholders:

In 2023, Byhealth has achieved a sales revenue of 9.407 billion yuan, a year-on-year increase of 19.66 %, and net profit attributable to the shareholders of 1.746 billion yuan, a year-on-year increase of 26.01%. Regarding this figure, excluding the temporary high-growth factors affecting the entire industry, objectively speaking, there is no reason for us to feel self-satisfaction.

Euromonitor data shows that the total retail scale of China's VDS industry was 225.3 billion yuan in 2023, with a growth rate of approximately 11.6%. Byhealth's market share was 10.4%, slightly increasing and maintaining its top position. The market shares of the second and third rankings were 7% and 5.4% respectively.

In 2023, the consumption per capita of vitamins and dietary supplements in China reached US$23.3, an increase of 11.5%, slightly higher than the global average level, accounting for about 22% of the consumption in the United States.

This year, the structural changes in the channels of VDS in China intensified once again, with online channels expected to account for 56%, direct sales channels 20.8%, pharmacies 16.4%, grocery 1.4%, and other channels 5.4%. The market share of direct sales channels continued to decline.

According to Zhongkang CMH retail market data, the overall growth rate of dietary and nutritional supplements in China’s pharmacies was -5.4% in 2023. The market share of Byhealth saw a slight increase, holding its leading position.

The year 2023 marked the beginning of a new cycle for the dietary supplements (VDS) industry. In the post-pandemic era, public health awareness surged, and in January 2023, there was an explosive demand for categories such as Immune Support, leading to a rapid increase in the VDS industry penetration within a short period of time.

In the first and second quarters of 2023, the growth rate of dietary supplements in the e-commerce channel exceeded 46%, before declining to 12.5% in Quarter Four. Nonetheless, the industry still achieved a growth rate of 30.7% for the entire year, with e-commerce channel sales exceeding 100 billion RMB throughout the year.

The emerging large number of new consumers, technological advancements, consumption stratification, the window period of platform transitions, well-developed supply chains, and the influence of capital has laid the groundwork for advancing into the final competitions, with all conditions in place. 

The opening of the new cycle for VDS is surging forward with great momentum.

Arrogance is more dangerous than sluggishness.

Underneath the raging storm of the new cycle, there are hidden strong undercurrents. 

After more than 20 years surviving in the cracks and growing with resilience, China's VDS industry, as a new-born industry with an identity as innovators in "traditional health products" is now in a new situation and a new period. It has been a hard-won journey, but destruction can be in a breath. 

In the VDS industry, safety is utmost important. Product reputation relies on word-of-mouth, especially products eat into mouth.  We should ensure that people take our products with confidence. Every step we take is like walking on a sword edge or walking on thin ice with great care, always maintain a sense of awe, without any slack. We must always approach with caution, mindful of our values and conscience, measuring our actions with the empathy that we'd extend to family and friends.

How does Byhealth win lasting trust from consumers?

With the core value of "Integrity is more important than intelligence"; serving "Family and Friends" as the essential DNA of the brand; the ability to create incremental value for consumers health.

Maintain the original intention, by remaining steadfast facing constant changes.

Consumers don't just listen to what we say but watch what we do.

Consumers don't just look at what we do at a moment, but they see what we do consistently.

I decline to chase for growth at the cost of compromising the core values, the soul of this company.

It is certain that we and I don’t want to see a "soulless" brand and enterprise that is reduced to a mere string of sales revenue numbers.

The truth behind the surging waves is more worthy of exploration than the appearance of a roaring storm. We will unveil the logic and truth underneath from the "facts" of discontinuity and structural changes. 

Sticking to the original intention, products are the ultimate code for the brand. "Scientific nutrition" is the fast lane of the VDS industry.

Marketing just amplifies good products.

In 2023, we launched a supreme products upgrade program, implementing "scientific nutrition" in terms of raw materials, content, formula, process, and function. Fulfilling the empathy and commitment to "family and friends," we aim to provide more valuable product innovations for consumers health.

On August 28, 2023, the State Administration for Market Regulation issued the "Implementation Rules for the evalsuation of New Functions and Product Technologies of Health Foods (Trial)." Byhealth quickly submitted a registration application for a new health food function that helps maintain normal platelet aggregation function. This application is based on clinical verification and related mechanism research on the impact of blood flow health on the Chinese population, with research results published in the Journal of Functional Foods and Frontiers in Nutrition.

We continue to strengthen the research in new functions (such as reducing homocysteine, reducing advanced glycation end products AGEs), new raw materials, intestinal health, cardiovascular health, and anti-aging among other areas. Byhealth has published eighteen SCI articles in 2023.

If the fundamental logic and essence of the retail industry is the supply chain, then the underlying logic of the VDS industry is product innovation. 

We will focus on establishing the long-term core competitiveness of the enterprise, bearing in mind the primary growth logic of the industry. Based on this, we will adapt to constant changes by remaining steadfast, shifting from a passive to a proactive approach, rather than being forced to follow trends or blindly go with the flow.

Abandoning product innovation means giving up on the future.

In the first half of the internet consumption era, B-end commercial interests had to give way to C-end consumers interests. In the second half of the internet consumption era, the balance begins to tilt. For an industry with escalating consumption, it shouldn't be a zero-sum game when it involves brands, distributors, retailers, and consumers. Consumers are the ultimate target, we will collectively create new value for the C-end.  When it comes to a time that consumption being categorized to different levels, is it a blue sea, a red sea, a business warfare as a blood sea or an escape game out of the sea of bitterness? Prosperity on one side should not come at the cost of decline on the other, nor should it harm consumers interests.

We may lack the power to compete with algorithms, but we must be vigilant against the possibility of misleading or biased data analysis. Data may has God's eye, but it may become the evil's tongue stealthily. As a consumer product, the brand (measured by the designated purchase rate, repurchase rate, and net recommendation rate after recognized by consumers) is the greatest moat. Data shows that in the past year, the value of the world's top 100 brands has shrunk by nearly 20%. We must persevere, only with the brand can we transcend the cycle.

We cannot be complacent with tactical victories, we cannot replace strategic thinking with tactical thinking, and shouldn't sacrifice the future for the present.

Looking at a longer-term future, is the trend in retail more like the "centralization" of platform attributes or the "fragmentation" of social attributes?

In the era of information explosion, we seem to know everything, yet we are unsure of what is just a fact and what is the truth.

When competition shifts from the incremental consumers to the existing market scale, and with the changing trends in population structure, what deep-seated reversals might occur in the business logic of the consumption market that we cannot see now or are not even aware of?

"Paradigm Shift" and "cycle" are two different things.

Strategic choices are more important than tactical efforts.

Many excellent Chinese consumer goods companies have already positioned themselves in the context of brand globalization and the international market. They are actively exploring new cycles in their industries, taking the advantage of the rapid growth and strong capacity of China’s internet and supply chain.

" Flourish or flash is just a moment away. "

You can't reach a new land replying on an old map.

Although the VDS industry has entered a new cycle, there is no less need for introspection in the VDS industry than in other industries.

The strategies of Byhealth are cultivating multiple brands, improving hero products, looking for perfection of all products in all categories and advancing sales on all channels. 

The single-brand strategy undoubtedly concentrates resources in the short or even medium term, leading to higher operational efficiency and investment returns.

When both the industry and the company are youthful and vigorous, we will actively front-load future risks to today, enduring the difficult and tortuous path of multiple brands, and constructing the global multi-brand matrix that Byhealth looks forward to in the future.

Market share is one of the most important KPIs in the new cycle.

This indicator represents industry status and potential momentum. If it falls, it means the new cycle leaves you behind.

Any explanation is feeble and self-deceptive, all reasons become excuses.

The goal of "unmanned operation" is to create a long-term plan for the unique transparent factory of Byhealth, which will span the entire new cycle of VDS. The foundation and premise of "unmanned operation" are the ongoing processes and results of intelligent automation and digitalization, including Byhealth's innovative continuous production model in the healthcare industry, which undergoes a qualitative change from quantitative change. Focused on a more measurable and higher goal, the "unmanned operation" strategic objective will grow into a new core competitiveness for Byhealth in the medium and long run, which is unique in the global VDS industry.

To achieve Byhealth's ambitious goals of exploring the Sea of Stars, we recruited nearly 30 mid-to-senior-level talents from the consumer goods industry in 2023. Our criteria were threefold: 1. Alignment with the company's values; 2. Innovation (awareness and vision); 3. Passion.

We believe that by finding the right people, we have found the path reaching our ambitious goals.

Furthermore, at the end of September 2023, we initiated a new management structure that is more professional and open-minded, paving the way for the future of Byhealth.

On October 28, 2023, during the company's anniversary celebration, more than 100 employees participated in the 9th “极” Extreme Challenge of Byhealth. The theme of the 9th “极” Extreme Challenge was "昪", which means "bright and joyful".

The keyword for 2024 is "fulfill."

The transformation and adjustments over the past two years need to be examined and fulfilled in terms of business performance.

The strong technology transformation strategy must be realized through "scientific nutrition" centred on consumers health and more professional product innovation. This will create a long-term core and unique competitiveness, supporting the establishment of the brand's professional mindset. This transformation relies on one product innovation after another to fulfill the essential DNA of the brand.

The transformation of a strong brand must be fulfilled in the unity of products and brand.

At the same time, we must resolutely eliminate individuals and events that deviate significantly from the core values of the company, where "integrity is more important than intelligence."

The problems are still there, right in front of us. Instead of dwelling on them, we should focus on solving them.

The strategy is like a blocked lake, which needs to be cleared and fulfilled through resolute execution.

Excuses are just excuses!

Just like a pawn that moves step by step towards the same goal, we will make gradual progress day by day for brilliant achievements in the new VDS cycle.

In 2024, we will overcome obstacles through fulfillment!

In 2024, I wish you healthy and safe. May the Year 2024 be a year of prosperity and peace for the world, for our country. 

Liang Yunchao 

Chairman of Byhealth 

18th March 2024