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Financial Statements And Related Announcement For the 9 months ended 30 September 2019

Statement of Comprehensive Income for the nine months ended 30 September 2019:

Balance Sheet

Review of Performance

Overview

In line with previous announcement on the new accounting standards SFRS(I) 15, Revenue from Contracts with Customers and certain expenses previously recorded in distribution costs are to be recorded as reduction in revenue. For the reporting period ended 30 September 2019, the Group registered a total revenue of $266.0 million, representing an increase of 91.9% vis-à-vis the same period last year mainly due to revenue from Direct Selling Segment and our Franchise segment in China.

In line with increase of underlying demand, cost of sales increased from $14.8 million in 3Q2018 to $35.6 million in 3Q2019 and also as a result of China increasing custom duties on goods from the United States during the course of 2019, increased filling/bottling/packaging charges and freight & handling charges. This has led to a decrease in Group’s gross profit margin from 81.7% in 3Q2018 to 68.9% in 3Q2019.

The decrease of Group’s net profit margin from 36.9% in 3Q2018, to 21.7% in 3Q2019 is mainly attributable to the following factors:

  • Other operating income decreased from $9.1 million in 3Q2018 to $57,000 in 3Q2019, mainly due to the absence of a one-time royalty income in 3Q2018;
  • Interest income increased from $211,000 in 3Q2018 to $439,000 in 3Q2019 mainly due to interest from deposits placed in banks and other financial assets;
  • In line with the 41.2% increase in revenue, distribution costs increased to $31.1 million in 3Q2019, compared to $21.6 million in 3Q2018. Distribution costs for the nine months ended 30 September 2019 increased by 75.9% from $39.1 million to $68.8 million, compared to the same period last year, mainly due to increase in sales related expenses from the Franchise segment as well as higher Direct Selling commissions offsetting lower convention costs accrued for the international convention to be held in Singapore in 2020;
  • For 3Q2019, the Group maintained its administrative expenses at $16.5 million vis-àvis the same period last year. For the nine months ended 30 September 2019, the Group incurred higher administrative expenses to $46.9 million from $31.9 million for the same period last year, mainly due to increased professional fees and management and staff costs, offsetting a one-time withholding tax expenses in relation to trademark royalty fee in 3Q2018.
  • Finance costs for 3Q2019 increased to $83,000 from $24,000 in 3Q2018 mainly due to interest expense on lease liabilities arising from the adoption of of SFRS(I) 16 Leases.
  • For 3Q2019, net other gains of $121,000 was largely attributable to net foreign exchange gains of $1.8 million mainly due to stronger Indonesian Rupiah and New Taiwan Dollar against Singapore dollar, offsetting a $1.7 million net foreign exchange loss due to weakened Renminbi against Singapore Dollar. For the nine months ended 30 September 2019, the Group recorded a net other loss of $151,000, mainly due to net foreign exchange loss of $1.9 million as a result of weakened Renminbi and New Taiwan Dollar against Singapore Dollar, offsetting net foreign exchange gains of $1.2 million due to stronger Indonesian Rupiah against Singapore Dollar and $0.5 million fair value gains on other financial assets;
  • Share of losses of $75,000 in an associated company for 3Q2019 was mainly due to Celligenics, an investment the Group made back in 1Q2019; and
  • The Group incurred higher income tax expense of $6.7 million and $19.3 million respectively in 3Q2018 and for the nine months ended 30 September 2019, mainly due to certain profitable subsidiaries in the Group. For the nine months ended 30 September 2019, the Group’s effective tax rate increased to 23.8% from 17.1% for the same period last year due to higher corporate tax rates applicable to certain profitable subsidiaries.

As a result, Group’s profit attributable to owners of the parent company for 3Q2019 was 16.9% lower than 3Q2018, mainly due to the absence of a one-time other operating income in 3Q2018. For the nine months ended 30 September 2019, the Group’s profit attributable to owners of the parent company increased to $61.9 million from $44.8 million for the same period last year.

Revenue by Business Segments

For Quarter: 3Q2019 Vs 3Q2018

For Year-to-Date: 3Q2019 Vs 3Q2018

Vis-à-vis the same quarter last year, the Group’s Direct Selling revenue increased from $29.1 million in 3Q2018 to $30.8 million in 3Q2019, making up 26.9% of the Group’s total revenue. This is mainly due to growth from Group’s key markets of Singapore and Taiwan. For the nine months ended 30 September 2019, Group’s Direct Selling revenue increased by 21.8% also mainly due to growth in the key markets of Singapore and Taiwan.

As mentioned in the Group’s previous announcement, revenue from Export segment from 3Q2018 onwards is solely made up of exports to Myanmar. For the nine months ended 30 September 2019, Export segment contributes just 0.2% of the total revenue.

Manufacturing/Wholesale segment revenue only makes up 0.6% of the Group’s total revenue in 3Q2019. For the nine months ended 30 September 2019, revenue from this segment decreased 34.1% mainly due to the intense market competition and a general slowdown in the health supplements sector in China since beginning of the 2019.

Revenue from Franchise increased by 63.2% from $50.7 million in 3Q2018 to $82.8 million in 3Q2019 mainly due to growing underlying demand for the Group’s skincare line. Franchise revenue made up 65.5% of the Group’s total revenue for the nine months ended 30 September 2019.

As at 30 September 2019, we have 32 franchisees, which are distributed over eleven provinces and one municipality in mainland China.

As at 30 September 2019, the Group has 103,027 members for its direct selling business, representing a 1.4% increase when compared to 1H2019.

Revenue by Geographical Locations

For Quarter: 3Q2019 Vs 3Q2018

For Year-to-Date: 3Q2019 Vs 3Q2018

Singapore

Singapore continued its momentum in 3Q2019 with an improvement of 12.1% to $2.3 million mainly attributable to higher sales from active distributors, as well as increase in orders made through our online store/mobile apps by local customers and customers in other markets e.g. Australia. As a result, overall revenue for the nine months ended 30 September 2019 increased from $5.5 million to $7.2 million compared to the same period last year.

China

For the nine months ended 30 September 2019, revenue in China increased 172.0% vis-à-vis the same period last year mainly because revenue contribution from the Franchise segment for FY2018 commenced only in the last week of June 2018. Revenue from China in 3Q2019 increased by 61.2% to $83.4 million from $51.7 million in 3Q2018, mainly driven by underlying growth in demand for the Group’s skincare line, DR’s Secret.

Taiwan

In line with the previous announcement, revenue in Taiwan increased from $19.4 million in 3Q2018 to $22.6 million in 3Q2019 mainly due to continuous effort in optimizing online to offline (O2O) interactions between distributors and their online followers, as well as improved distributors’ incentives. In addition, there is a growth in distributors resulting from implemented marketing strategies since 2H2018. These initiatives drew good response which led to a 27.1% increase in revenue for the nine months ended 30 September 2019, vis-à-vis the same period last year.

Indonesia

Revenue from Indonesia decreased from $4.7 million in 3Q2018 to $2.3 million in 3Q2019 mainly due to rampant online discounting and the lack of marketing activities as a result of demonstrations and social tension after the April elections which continued till late October 2019. As a result, revenue in Indonesia declined by 19.7% for the nine months ended 30 September 2019 when compared to the same period last year. Management are currently working with legal professionals and also implementing measures to take steps against the unauthorized online sellers.

Others

Revenue from Other Markets increased by 21.8% in 3Q2019 when compared to 3Q2018 mainly due to the increase in sales from Hong Kong, Malaysia, Thailand, Philippines, Myanmar and Dubai, offsetting declines from the markets of Vietnam and Korea. For the nine months ended 30 September 2019, revenue increased by 35.6% when compared to the same period last year mainly due to the increase in sales from Hong Kong, Malaysia, Thailand, Philippines and Dubai, offsetting declines from the markets of Vietnam, Myanmar and Korea.

Financial Position and Cash Flow

Non-current assets of the Group increased from $23.3 million as at 31 December 2018 to $41.9 million as at 30 September 2019, mainly attributable to increase of Property, Plant and Equipment in relation to construction in progress for our Tuas facility, the increase in Right-OfUse Assets with the adoption of SFRS(I) 16 Leases, and our newly acquired investment in associate, Celligenics and an increase in deferred tax asset, offsetting decrease in other financial assets, intangible assets and other intangible assets.

Inventories increased from $31.4 million as at 31 December 2018 to $66.2 million as at 30 September 2019 mainly due to building up of inventories in our Hunan branch in China and headquarter in Singapore in anticipation for higher year-end demand.

Trade and other receivables increased from $5.2 million as at 31 December 2018 to $8.2 million as at 30 September 2019 mainly due to increase in transactions during the last few days of September from a certain subsidiary and VAT receivables.

Other assets increased from $21.7 million as at 31 December 2018 to $29.3 million as at 30 September 2019 mainly due to higher deposits made to suppliers and for the purchase of equipment for our Tuas facility.

Trade and other payables increased from $95.1 million as at 31 December 2018 to $123.9 million as at 30 September 2019 due to increase in accruals for management and staff costs, higher trade payables to our suppliers and sales related expenses from our franchise segment.

Other Financial liabilities have been reduced to nil as at 30 September 2019 due to full repayment of bank borrowings in 3Q2019.

Total lease liabilities increased to $7.7 million as at 30 September 2019 due to the adoption of SFRS(I) 16 Leases.

Other liabilities were maintained at $1.0 million as at 30 September 2019 vis-à-vis 31 December 2018.

Income Tax Payable decreased from $17.8 million as at 31 December 2018 to $15.8 million as at 30 September 2019 due to settlements of tax payables during the period offsetting the additional tax provisions made by the Group.

For the nine months ended 30 September 2019, the Group reported net cash flows from operating activities of $41.7 million mainly attributable to the Group’s net profit before tax of $81.2 million, offsetting changes in working capital as a result of increase in inventories, other assets and trade and other payables, as well as income tax payments for the period. Net cash flow used in investing activities of $9.5 million was mainly due to the acquisition of an associate, Celligenics of $5.6 million, and addition of property, plant and equipment of $5.5 million mainly relating to Tuas facility. Net cash flow of $20.0 million used in financing activities was mainly due to purchase of treasury shares, dividends paid and repayment of bank borrowings of lease liabilities for the nine months ended 30 September 2019.

As at 30 September 2019, the Group maintained $209.2 million in cash and cash equivalents.

Commentary

Barring unforeseen circumstances, factors that may affect the Group’s performance in the next reporting period and for the next 12 months are as follows:

  • The slowdown in global economic growth, trade tensions between China & US, EU & Indonesia, Brexit negotiations etc, have added uncertainties to the global economy. Such uncertainties inevitably cause consumers to be more cautious about their buying habits and hence negatively impact the Group’s performance;
  • Earlier in the year, China responded to the US-China trade disputes by raising the import duties of US made skin care products from 11% to as high as 31% and by weakening the Renminbi. Such measures will reduce the profitability of the Group’s China business;
  • The ongoing independent review of the Group’s business in China has effectively diverted a certain portion of China management’s time from focusing on market development activities;
  • The Group constantly engages the services of various professionals to, amongst other reasons, identify and assess M&A and corporate development opportunities relevant to the Group’s business, and to ensure that its operations adhere to all relevant local regulations in the different jurisdictions it operates in. On top of that, we expect higher professional fees including legal and other expenses related to the independent review and the issuance of dividend declared in FY2019;
  • Besides the need to hire more talents to cater to the Group’s expanding activities, the Group also expect higher administrative expenses in relation to the construction of our Tuas manufacturing facilities, the expansion of HQ in 4Q2019 and relocation/refurbishment of certain Regional Centres;
  • Fluctuations of currencies in key markets which the Group operates in against the Singapore Dollar, may affect the Group’s performance positively or negatively. Management actively undertakes measures to mitigate such potential risks.

Other ongoing factors that may affect the Group’s performance include, timeline for product license registration and renewal in key markets, natural disasters, unanticipated regulatory changes in key markets we operate in and disruptions from market competition.

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