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Financial Statements And Related Announcement For the 9 months ended 30 September 2017

Statement of Comprehensive Income for the nine months ended 30 September 2017:

Balance Sheet

Review of Performance

Overview

For the nine months ended 30 September 2017, Group revenue for 3Q2017 declined by 10.3% as compared to the same period last year, due to decreased revenue contribution from Taiwan and on the back of sustained export growth to China. Profit Attributable to Owners of the Parent Company for the quarter improved 36.4% from $8.9 million in 3Q2016 to $12.2 million in 3Q2017.

Key points to note for the Group’s performance for this reporting period include:

  • As the Export segment makes up more than half of the Group’s revenue for 3Q2017, Gross profit margin declined to 67.2% when compared to the same period last year due to the Export segment’s lower gross profit margin compared to the Direct Selling Segment;
  • Other Operating Income increased by 12.0% mainly due to higher service fees received from the Group’s overseas Export Agent in 3Q2017;
  • In line with the decrease in revenue contribution from Taiwan, Distribution Costs, which comprise of freelance commissions and other sales related expenses, declined by 45.6% from $13.7 million in 3Q2016 to $7.5 million in 3Q2017. The Export Segment does not incur any commissions for the Group;
  • Administrative Expenses for 3Q2017 decreased by 24.2% as a result lower professional fees incurred during the quarter. For the nine months ended 30 September 2017, Administrative Expenses decreased only by 5.5% due to lower professional fees offsetting higher incentives accrued to management and staff, depreciation for our Tuas facility as well as the newly established Taipei RC in 1H2017;
  • Finance Costs increased by 218.8% in 3Q2017 mainly due to bank borrowings related to our Tuas facility drawn down since 3Q2016;
  • For 3Q2017, the Group recorded Net Other Gains of $0.2 million mainly attributable to reversal of allowance for impairment on trade receivables offsetting unrealised exchange losses due to translation of cash and cash equivalents held in US dollars during the quarter. Net Other Losses of $1.8 million for the nine months ended 30 September 2017 mainly due to higher Foreign Exchange Losses recorded in the Group; and
  • The Group incurred Income Tax Expenses of $14.1 million due to certain subsidiaries in the Group being profitable for the nine months ended 30 September 2017.

Revenue by Business Segments

Vis-à-vis the same quarter last year, Direct Selling revenue declined by 37.0%, making up 43.7% of the Group’s total revenue for 3Q2017. This decline is primarily due to the decline in revenue from the Group’s key market of Taiwan.

China consumer market continued to display a growing appetite and demand for the Group’s skincare brand, DR’s Secret. Revenue for Export Segment in 3Q2017 increased to 54.0% of the Group’s total revenue as compared to 35.8% for the same period last year.

For 3Q2017, Manufacturing/Wholesale segment maintained a revenue of $1.1 million. For the nine months ended 30 September 2017, contribution from this segment increased by 3.4% to $3.2 million, which is mainly attributable to the expansion of the internal sales team since end of FY2016 as well as more marketing activities and participation in trade exhibitions during the first half of FY2017.

As at 30 September 2017, total membership for the Group’s Direct Selling business increased 2.3% to 479,366 members, when compared to 30 June 2017. Active distributors, which refers to members who have received commission over the last 12 months stands at 8.2% of total membership.

Revenue by Geographical Locations

Singapore

Revenue from Singapore for 3Q2017 increased 23.3% to $2.1 million due to more marketing activities such as weekly events organised by distributors to promote the Group’s range of brand offerings. Management’s strategies to nurture younger distributors continue to garner positive results and management is cautiously optimistic that this momentum will continue.

China

For the nine months ended 30 September 2017, revenue from China grew 76.5% to $74.2 million from $42.0 million vis-à-vis the same period last year. This is mainly attributable to increased Export orders from our agent on the back of growing demand for DR’s Secret skincare line in the existing cities that are represented by DR’s Secret Experience Centres.

As the Group’s China management team makes the necessary preparations to expand the coverage of our direct selling license to include key cities in various provinces where DR’s Secret had established brand presence, we expect more Experience Centres to be set up by independent distributors over the course of the remaining months of FY2017.

Barring any unforeseen circumstances, management is confident that contribution from China will continue to improve for the final quarter of FY2017.

Taiwan

Up to the period ended 30 September 2017, although Taiwan revenue has declined 31.6% from $82.9 million to $56.7 million, it remained as the Group’s biggest revenue contributor in the Direct Selling Segment, accounting for 38.6% of the Group’s total revenue.

Since the beginning of FY2017, Taiwan management has implemented strategies to focus on improving sales per member as opposed to increase new members. However, the strategies were unable to yield results within the timeframe we had anticipated. Other factors like stiffer market competition and online discounting also aggravated the situation. As a result, revenue in 3Q2017 declined by 46.1%.

Despite the challenges which Taiwan encountered during the nine months period, Management is confident that Taiwan will be able to contribute positively to the Group’s profitability for FY2017.

Indonesia

Revenue from Indonesia decreased 7.3% to $3.6 million for the nine months ended 30 September 2017 due to the recent switch of strategy from weight management line to skin care range.

In 3Q2017, the strategy began to gain traction, as a result, revenue increased by 15.9% from $1.2 million in 3Q2016 to $1.4 million in 3Q2017.

In addition, the Group has witnessed gradual increase in a new group of distributors which also contributed to the increase of revenue in 3Q2017.

Others

Revenue from Other Markets increased by 10.0% in the current quarter as compared to the same period last year primarily due to the increase in revenue from Hong Kong, Vietnam, Korea and Malaysia, offsetting decline from Philippines and Thailand.

Financial Position and Cash Flow

Non-current assets of the Group decreased from $26.8 million as at 31 December 2016 to $25.9 million as at 30 September 2017, mainly due to depreciation of Property, Plant and Equipment as well as amortisation of Intangible Assets.

Inventory decreased from $43.0 million as at 31 December 2016 to $40.0 million as at 30 September 2017 as the Group has improved its stock shortages issues faced previously and has sufficient buffer to sustain growth moving forward.

In line with higher revenue generated from the Export Segment, Trade and Other Receivables increased from $23.4 million as at 31 December 2016 to $44.9 million as at 30 September 2017.

Other Assets decreased from $12.1 million as at 31 December 2016 to $10.5 million as at 30 September 2017 mainly due to lower deposits paid to suppliers in line with the decreased orders made to suppliers as the Group currently maintains a sufficient level of inventory. In addition, the decline in Other Assets was due to our Indonesian subsidiary offsetting the overpaid Value Added Tax against existing outstanding tax payable as earlier disclosed during 1Q2017.

Other Financial Assets increased from $2.0 million as at 31 December 2016 to $4.6 million as at 30 September 2017 mainly due to increased investment in quoted securities.

Trade and Other Payables decreased by $1.7 million to $42.2 million as at 30 September 2017 mainly due to decrease in accruals of commissions offsetting increase in trade payables during the period.

Total Other Financial Liabilities increased from $7.4 million as at 31 December 2016 to $8.1 million as at 30 September 2017 due to net increase in bank borrowings during the period.

Other Liabilities were maintained at $1.0 million as at 30 September 2017 vis-à-vis 31 December 2016.

Income Tax Payable decreased from $16.5 million as at 31 December 2016 to $12.8 million as at 30 September 2017 due to settlement of tax payables during the period, offsetting additional tax provisions by the Company.

As at 30 September 2017, the Group generated net cash flow from operating activities of $10.6 million in 3Q2017. Net cash flows used in financing activities in 3Q2017 of $9.8 million was mainly due to dividends paid during the quarter.

As at 30 September 2017, the Group maintained a strong balance sheet and working capital position, with approximately $48.8 million of cash and cash equivalents.

Commentary

With sustained growth expected for the Group’s Export Segment, barring unforeseen circumstances, Management is cautiously optimistic of the Group’s profitability for the next reporting period and for FY2017 and that the decline in Taiwan will be sufficiently buffered by growth of the Group’s Export Segment.

Factors that may affect the Group’s performance in the next reporting period and for the next 12 months are as follows:

  • To set the Group’s growth path moving forward, Management constantly explores M&A opportunities. In the course of assessing these opportunities, regardless of success or not, professional fees and other related expenses may be incurred;
  • Compared to the last financial year, Management expects higher Administrative expenses due to increase in Management and staff to cater our growing business, and depreciation expenses related to the Group’s Tuas manufacturing facility and our Changsha RC which was officially opened in October;
  • To ensure that Tuas facilities’ manufacturing capacity is sufficient to meet the Group’s future needs, major alteration and addition works (A&A works) has to be undertaken to the current building. Professional fees and depreciation as well as other related expenses may be incurred moving forward;
  • As previously announced, conversion of the Export business to Direct Selling shall be implemented in phases.

    Upon conversion of the Export Business to Direct Selling, some or all of the following items, amongst others may be affected:
    1. Increase in Revenue and Gross Profit as a result of revenue recognition at a price higher than export price;
    2. Decline in Other Operating Income due to lower service fees that the Group will be receiving from the Group’s Export Agent; and
    3. Increase in Distribution Expenses mainly attributable to commissions paid to distributors.

    The Group’s effort to expand the geographical coverage of our direct selling license beyond Hangzhou to include other cities is proceeding as planned. The expansion application has already commenced and shall include key cities of at least 7 provinces to be approved by the end of FY2018; and
  • Currency fluctuation against the SGD may positively or negatively impact the Group’s performance. Management will undertake measures to mitigate any currency risks the Group is exposed to.

Other ongoing factors that affect the Group’s include, timeline required for product registration in various markets, natural disasters, local direct selling regulations, product registration regulations and market competition.

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