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Financial Statements And Related Announcement For the 9 months ended 30 September 2018

Statement of Comprehensive Income for the nine months ended 30 September 2018:

Balance Sheet

Review of Performance

Overview

For the nine months ended 30 September 2018, the Group recorded a 3.8% increase in Revenue for the same period last year. The increase is primarily due to the commencement of Revenue generated from the sale of the Group’s skin care line in China through the Franchise segment, and the improvement of the Group’s Direct Selling segment in Indonesia and Hong Kong.

As Franchise revenue is recognized at a higher price point compared to Export price, commencement of the recognition of revenue generated from the sale of the Group’s skin care line in China through the Franchise segment in 3Q2018 boosted Group Revenue by 96.8% to $92.1 million. Cost of sales remained relatively stable at $14.8 million in 3Q2018 compared to $15.4 million in 3Q2017. Despite the significantly higher revenue in 3Q2018, revenue for the nine months ended 30 September 2018 improved only 3.8% vis-à-vis the same period last year mainly due to the minimal revenue generated under the Export segment in 1H2018 as a result of the Group’s transition to Franchise segment from the Export segment.

Higher Franchise Revenue in 3Q2018 also improved the Group’s Gross Profit Margin to 83.9% in 3Q2018 and 79.7% for the nine months ended 30 September 2018. For 3Q2018 and the nine months ended 30 September 2018, Net Profit Margin increased to 32.5% and 29.4% respectively, mainly due to the following factors:

  • Other Operating Income, increased by 681.8% to $9.1 million in 3Q2018 mainly due to a one-time trademark royalty fee received from our China agent in 3Q2018 prior to the termination of the agency arrangement. For the nine months ended 30 September 2018, Other Operating Income increased by 220.8% to $17.4 million mainly due to the above trademark royalty fee received as well as service fees relating to market development services, trainings and IT services;
  • Interest Income increased by 88.4% in 3Q2018 and 72.9% for the nine months ended 30 September 2018 primarily due to higher fixed deposits placed with financial institutions and higher interest income earned from other financial assets;
  • Under the Franchise segment, expenses for approved marketing activities and customers support, training and logistics services provided by the franchisees, were incurred. As a result, Distribution Costs, from this quarter onwards will mainly comprise commissions and convention expenses under the Direct Selling segment, and the abovementioned sales related expenses in the Franchise segment. For 3Q2018, Distribution Costs increased by 338.4% from $7.5 million in 3Q2017 to $32.7 million and increased by 64.4% to $52.9 million for the nine months ended 30 September 2018 mainly as a result of the sales related expenses incurred in the Franchise segment;
  • The Group incurred Adminstrative Expenses of $16.5 million in 3Q2018 and $31.9 million for the nine months ended 30 September 2018, mainly due to increase in professional fees and management and staff costs as well as one-time withholding tax expenses in relation to the above trademark royalty fee. In addition, higher expenses from the fully operational Changsha branch office contributed to the increase of Administrative Expenses in 3Q2018;
  • For 3Q2018, the Group recorded Net Other Losses of $1.5 million mainly attributable to the foreign exchange losses due to weakened Indonesia Rupiah and Chinese Yuan against Singapore Dollar during the quarter, offsetting write back of accruals of certain subsidiaries. For the nine months ended 30 September 2018, the Group recorded Net Other Losses of $0.8 million due to foreign exchange losses of $2.0 million offsetting write back of accruals; and
  • In 3Q2018 and for the nine months ended 30 September 2018, the Group incurred higher Income Tax Expenses of $6.0 million and $9.2 million respectively. For the nine months ended 30 September 2018, tax expenses was 35.1% lower as compared to the same period last year due to tax effect of Group consolidation adjustment on unrealised profits on inventories held by our subsidiaries as at 30 September 2018 and a higher provision for Group tax expenses for the nine months ended 30 September 2017.

As a result, Group’s Profit Attributable to Owners of the Parent Company increased from $33.9 millon to $44.8 million for the nine months ended 30 September 2018.

Revenue by Business Segments

For Quarter: 3Q2018 Vs 3Q2017

For Nine-Months Ended: 3Q2018 Vs 3Q2017

Vis-à-vis the same quarter last year, the Group’s Direct Selling Revenue increased from $20.4 million to $30.4 million, making up 33.0% of the Group’s total Revenue in 3Q2018. This represents an increase of 48.8% due to growth in Group’s key markets of Taiwan, Indonesia and Hong Kong. For the nine months ended 2018, Direct Selling Revenue increased by 7.1% mainly due to the growth from Revenue in Indonesia as well as improvement from Taiwan in 3Q2018.

In line with the last announcement, from 3Q2018 onwards, Export segment represents solely Revenue from the Group’s exports to Myanmar. Export segment for 3Q2018 declined to $0.15 million from $25.3 million in 3Q2017.

The Group first introduced the Franchise segment in 2Q2018, which refers to Revenue generated from sales to our franchisees in China. In 3Q2018, due to the growing awareness and demand for our skin care line in China, sales under Franchise segment contributed $60.5 million or 65.7% of the Group’s total Revenue in 3Q2018. As at 30 September 2018, our China subsidiary had entered into agreements with 28 franchisees, which are spread over ten provinces and one municipality in mainland China.

Manufacturing/Wholesale revenue decreased 4.2% in 3Q2018 and 9.6% for the nine months ended 30 September 2018.

As at 30 September 2018, the Group had 98,423 members for our Direct Selling business. This translate to a 0.5% increase when compared to 30 June 2018.

Revenue by Geographical Locations

For Quarter: 3Q2018 Vs 3Q2017

For Nine-Months Ended: 3Q2018 Vs 3Q2017

Singapore

For the nine months ended 30 September 2018, Revenue from Singapore remained stable at $5.7 million. In 3Q2018, Revenue from Singapore declined by 3.5 % to $2.1 million. For the remaining period of the year, management will continue to invest in online brand building campaigns using social influencers and satisfied customers, to stimulate demand for our products.

China

Revenue from China increased from $26.2 million in 3Q2017 to $61.5 million in 3Q2018 mainly due to the commencement of Franchise segment in the last week of June 2018 and underlying growth in demand for our skin care line. For the sale of an identical product, Revenue recognized under the Franchise segment is higher due to the fact that our products sell at a higher price under the Franchise segment as compared to the price sold under the Export segment.

For the nine months ended 30 September 2018, despite minimal Export Revenue from China in 1H2018 due to the transition away from the Export segment, Revenue from China increased by 0.5% to $74.5 million when compared to the same period last year.

Taiwan

Despite the 22.4% Revenue decline in 1H2018 compared to 1H2017, management’s effort managed to narrow Revenue decline to 5.9% for the nine months ended 30 September 2018 compared to the same period in FY2017. Activities in the quarter such as the “Best World Ambassador” in July, and the 9/9 New Generation Campaign drew a good response which led to a 40.3% increase in Revenue in 3Q2018, vis-à-vis the same period in FY2017.

Indonesia

Revenue from Indonesia increased by 239.0% in 3Q2018 and 191.7% for the nine months ended 30 September 2018 mainly due to the successful growth in our members and continuing increased demand for our weight management line and skincare line. Management also expects to launch a mobile apps in 4Q2018 to improve the buying experience of members, especially given that the age profile of Indonesia members is younger than most of the markets that the Group operates in.

Others

Revenue from Other Markets increased by 31.4% for 3Q2018 due to the increase in sales from Hong Kong, Malaysia and Philippines offsetting declines from the markets of Thailand, Vietnam and Korea. For the nine months ended 30 September 2018, Revenue increased by 25.8% as compared to the same period last year mainly due to the increase in sales from Hong Kong offsetting declines in Malaysia, Thailand, Vietnam, Korea and Philippines.

Financial Position and Cash Flow

Non-current assets of the Group decreased from $23.8 million as at 31 December 2017 to $23.1 million as at 30 September 2018, mainly due to depreciation of Property, Plant and Equipment and amortisation of Intangible Assets offsetting increase in construction in progress for our Tuas facility.

Inventories increased from $28.2 million as at 31 December 2017 to $37.3 million as at 30 September 2018 due to the building up of inventories in China in anticipation for higher yearend demand.

Trade and Other Receivables decreased from $47.1 million as at 31 December 2017 to $8.6 million as at 30 September 2018 due to payments received from our China agent.

Other Assets increased from $4.3 million as at 31 December 2017 to $16.1 million as at 30 September 2018 mainly due to the larger orders of inventories with increasing deposits paid to suppliers as well as prepayments made for professional fees.

Trade and Other Payables increased from $45.9 million as at 31 December 2017 to $61.3 million as at 30 September 2018 due to higher trade payables to suppliers as well as accruals of sales related expenses to our franchisees offsetting lower accruals of management and staff costs.

Total Other Financial Liabilities decreased from $7.4 million as at 31 December 2017 to $2.7 million as at 30 September 2018 due to repayment of bank borrowings during 3Q2018.

Other Liabilities were maintained at $1.0 million as at 30 September 2018 vis-à-vis 31 December 2017.

Income Tax Payable increased from $10.8 million as at 31 December 2017 to $13.1 million as at 30 September 2018 due to additional tax provisions from our profitable subsidiaries for the period.

For the nine months ended 30 September 2018, the Group generated $79.6 million net cash flow from operating activities mainly due to Profit Before Tax of $53.7 million as well as payments received from our China agent of $35.0 million. Net cash flow used in financing activities of $26.7 million was mainly due to dividend payments of $20.9 million and $4.7 million repayment of borrowings during the period.

As at 30 September 2018, the Group maintained a healthy balance sheet and working capital position with approximately $134.2 million in cash and cash equivalents.

Commentary

3Q2018 marks a new milestone for the Group as we register our first quarter of Franchise sales in China.

Leveraging on China’s consumers’ demand for DR’s Secret skin care line, coupled with contribution from the Group’s operations in Taiwan, Indonesia, Hong Kong and Singapore, in line with previous announcements and barring any unforeseen circumstances, management is cautiously optimistic that the Group will be able to achieve higher bottom line for FY2018 compared to FY2017, despite achieving only $14.9 million in Profit Attributable to Owners of the Parent Company during the transition phase in 1H2018.

For the next reporting period of 4Q2018 and for the next 12 months, some factors that may affect the Group’s performance are as follows:

  • As part of the Group’s long term growth strategy, management has been actively exploring M&A and corporate development opportunities which are relevant to the Group’s business. As a result of such activities, we expect higher professional fees and other related expenses in 2H2018 relative to 1H2018;
  • Gross Profit Margin will normalise between 75% and 80% with the completed transition away from the Export segment which generates a lower Gross Profit Margin;
  • With the migration of the Group’s Export segment to the Franchise segment, we do not expect any more contributions in Other Operating Income from our previous China agent in the quarters ahead;
  • Moving forward, barring any unforeseen circumstances, we expect the normalization of our Distribution Costs to be between 35% and 40% of Revenue;
  • Higher Administrative Expenses due to an increase in management and staff in HQ and certain subsidiaries, and expenses related to the construction of the Group’s Tuas manufacturing facilities;
  • Management is cautiously optimistic that business performance in FY2018 for Taiwan will be comparable to that of FY2017, primarily driven by the upcoming annual anniversary celebrations and product launch in 4Q2018; and
  • Currencies fluctuations against the Singapore Dollar in key markets which the Group operates 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 timelines 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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