In line with Section 10 of the Group’s 1Q2018 Results Announcement, the Group’s transition to the new Franchise Segment in China extended into 2Q2018, resulting in lower Export Segment revenue as compared to 2Q2017. Group revenue for the reporting period ended 30 June 2018 declined 39.6% vis-à-vis the same period last year primarily due to the aforesaid transition which delays revenue recognition to 2H2018.
Quarter-on-quarter, the Group’s gross profit margin improved to 76.2%, which is comparable to the margins typically achieved by the Group before the Export Segment in China, which has a lower gross profit margin, became a major revenue contributor to the Group. Net Profit Margin also improved to 26.1% in 2Q2018, mainly due to the following factors:
As a result, Group’s Profit Attributable to Owners of the Parent Company for 1H2018 is $14.9 million, down 31.3% from $21.7 million compared to the same period last year.
The Group generated $47.0 million or 77.8% of its total revenue from Direct Selling in 1H2018. Compared to 1H2017, this represents a decline of 9.3% due to revenue decline of the Group’s key market of Taiwan, offsetting improvements from Singapore, Indonesia and Hong Kong.
In line with last quarter’s announcement, the Group completed its transition phase in China from the Export Segment to the Franchise Segment in 2Q2018. However, as a result of strong demand in China in 2Q2018, the Group had to export certain SKUs which were in critically low supply to its agent in China. As a result, $4.5 million of Export Revenue was recorded.
In a press release issued by the Group on 3 July 2018, it was mentioned that the Franchise Segment will formally replace the Export Segment from 2H2018 onwards. In the last weeks of June 2018, the Franchise Segment recorded prelude revenues of $0.8 million as the Group’s China subsidiary, Best World (China) Pharmaceutical (BWCP), commenced sales of certain SKUs to several franchisees. From 3Q2018 onwards, the Franchise Segment is expected to become a significant revenue contributor to the Group, while the Export Segment will represent solely the Group’s exports to Myanmar.
Management does not expect to record further China derived revenue in the Export Segment moving forward.
Prior to the Group’s transition into the Franchise Segment in China, the total number of members disclosed in the quarterly results announcement comprised (1) members under the Direct Selling Segment, and (2) consumer members under the Export Segment in China. Going forward, the disclosure on the Franchise Segment will focus on the number of franchisees only as management is of the view that the number of franchisees is a more accurate indicator of the Franchise Segment’s distribution capabilities in China.
As at 30 June 2018, there are 27 franchisees that our China subsidiary had entered into agreement with. These franchisees’ operations cover 10 provinces and one municipality including that of Zhejiang, Sichuan, Guangdong, Henan, Heilongjiang etc.
In line with the above changes, the Group will disclose only the total members of our Direct Selling Segment (i.e. excluding China consumer members).
As at 30 June 2018, the Group had 97,892 members for its Direct Selling business
In 1H2018, the Manufacturing/Wholesale segment contributed 3.1% to the Group’s total revenue.
Despite a slight decline of Revenue from Singapore for 2Q2018 of 3% vis-à-vis the same period last year, Revenue from Singapore for 1H2018 grew marginally from $3.6 million to $3.7 million, mainly from the campaign in developing new distributors earlier in 1Q2018. Management will continue to nurture younger distributors to garner better positive results. For the period of 1H2018, 22.7% of Singapore’s revenue was achieved through our online store/apps.
New products are stated to be launched in 2H2018. In line with our online brand awareness campaign, the Group will be launching its DR’s Secret Online store in September with a key focus to attract new and younger users through key opinion leaders.
As mentioned previously, due to the transition towards the new Franchise business segment resulting in delayed revenue recognition, revenue from China decreased from $26.6 million in 2Q2017 to $6.2 million in 2Q2018.
Notwithstanding the foregoing, demand for our products continues to grow in China. The aggregate SKUs sold to our franchisees in 1H2018 is significantly higher than the SKUs sold by our agent to the DR’s Secret Experience Centers in 1H2017, consistent across all of our core products.
Since the beginning of FY2018, the Group’s management in Taiwan took steps to limit price promotion activities of core products to curb online discounting, which had resulted in a decline of revenue from Taiwan of 22.4% for 1H2018 compared with the same period last year.
In 2Q2018, the decline narrowed to 12.0% vis-à-vis the same period last year as in contrast to the 35.3% experienced in 1Q2018, mainly due to Mother’s Day promotional activities held in April and a new product launch.
As of 1H2018, 33.8% of Taiwan’s revenue was achieved online through our online store/apps. New products shall also be launched in 2H2018.
The Group’s revenue from the Indonesia market improved by 161.8% in 1H2018 mainly due to successful marketing efforts to appeal to a group of younger distributors and increased demand for our skin care line. In addition, demand for our weight management line continued to improve. The Group’s management will continue efforts to train and nurture these younger distributors.
We anticipate that the BWL iPhone/Android apps for Indonesia will be launched in October 2018.
Revenue from Other Markets increased by 23.1% in 1H2018 as compared to the same period last year mainly due to the increase in sales from Hong Kong, Thailand, Malaysia and Vietnam, offsetting decline from the markets of Korea and Philippines.
Non-current assets of the Group decreased from $23.8 million as at 31 December 2017 to $22.4 million as at 30 June 2018, mainly due to depreciation of Property, Plant and Equipment, and amortisation of Intangible Assets.
Inventories increased from $28.2 million as at 31 December 2017 to $34.3 million as at 30 June 2018 due to commencement of our Group subsidiary, BWCP which had started to build up inventories in preparation for sales to franchisees.
Trade and Other Receivables decreased from $47.1 million as at 31 December 2017 to $15.1 million as at 30 June 2018 due to payments received from China agent and lower export sales during 1H2018.
Other Assets increased from $4.3 million as at 31 December 2017 to $9.6 million as at 30 June 2018 mainly due to the increasing orders of inventories with greater deposits paid to suppliers.
Trade and Other Payables decreased from $45.9 million as at 31 December 2017 to $37.7 million as at 30 June 2018 due to lower accruals of management and staff costs, and freelance commissions offsetting the increase of trade payables to suppliers during 1H2018.
Total Other Financial Liabilities decreased from $7.4 million as at 31 December 2017 to $3.4 million as at 30 June 2018 due to repayment of bank borrowings during 1H2018.
Other Liabilities were maintained at $1.0 million as at 30 June 2018 vis-à-vis 31 December 2017.
Income Tax Payable decreased from $10.8 million as at 31 December 2017 to $8.7 million as at 30 June 2018 due to settlements of tax payables during 1H2018.
As at 30 June 2018, the Group generated net cash flow from operating activities of $26.8 million mainly due to payments received from our China agent. Net cash flow used in financing activities of $19.5 million was mainly due to dividends payment and repayment of bank borrowings in 1H2018.
As at 30 June 2018, the Group maintained a healthy balance sheet and working capital position with approximately $90.1 million in cash and cash equivalents.
The completion of 1H2018 marks a new milestone for the Group’s China operations with the commencement of the Franchise Segment which replaces the Export Segment from 2H2018 onwards.
With market demand for the Group’s products in China being stronger than before and with contribution from the Group’s operations in Taiwan, Indonesia, Hong Kong and Singapore, barring any unforeseen circumstances, the management is still cautiously optimistic that the Group will be able to register bottom line growth for FY2018, despite having recorded lower revenue during the transition phase in 1H2018.
For the next reporting period of 3Q2018 and for the next 12 months, some factors that may affect the Group’s performance are as follows:
Other ongoing factors that may affect the Group’s performance include timelines for product license registration and renewal in key markets, natural disasters, unanticipated changes in market regulations and product registration regulations of key markets we operate in and disruptions from market competition.