Dear Byhealth’s shareholders,

2020 is a watershed, and history is divided into the pre-COVID-19 world and post-COVID-19 world. The pandemic is like an accelerator, a magnifying glass, and even a truth detector.

2020 is the closing year of Byhealth’s three-year plan for a new round of growth cycle from 2018 to 2020. In the past three years, Byhealth has experienced four hurdles: health insurance policy reform, industry rectification, international mergers and acquisitions (M&A), and the pandemic. No “antibodies” will be generated if one does not experience a crisis. Every hurdle has brought an opportunity for change for Byhealth.

In 2020, Byhealth achieved a sales revenue of 6.095 billion yuan (an increase of 96% compared to 2017 before the three-year plan) and a net profit attributable to the parent company of 1.524 billion yuan (an increase of 99% compared to 2017). In the past 10 years since 2010 when the company went public, its sales revenue and net profit attributable to the parent company have increased by more than 16 folds and 15 folds respectively.

According to Euromonitor, the total scale of China's vitamin and dietary supplement (VDS) industry in 2020 was 174.3 billion yuan with a growth rate of about 4%. Byhealth ranked first with a market share of 10.3%. The market shares for the second and the third were 6.4% and 5.8% respectively. Compared with 2019, Byhealth's leading advantages continue to increase.

Affected by the pandemic, the growth rate of VDS in Chinese pharmacies[1] was -16.9% in 2020. Byhealth's sales revenue in the domestic pharmacy channel had a growth rate of 2.6% in 2020, achieving positive growth against the adversity.

According to ShengYiCanMou data by Alibaba, the overall turnover of Tmall’s VDS category[2] in 2020 was 29.417 billion yuan, a year-on-year increase of 29.16%. The market share of Byhealth brands was 6.98%, ranking first. According to JD’s Shangzhi (Business Intelligence) data, the JD platform’s healthcare & wellness industry in 2020 had a year-on-year increase of 47.8%. With a market share of 15.5%, Byhealth ranked first. Byhealth continues to lead the industry on Alibaba and JD platforms.

Byhealth makes good use of every crisis. We learn, respond and grow quickly. What doesn’t kill you makes you stronger.

The new three-year plan for 2021-2023 has begun. We have positioned it as a new period of transformation for achieving business expansion and sustained rapid growth.

While thinking and planning the new three-year plan, we have three judgments and premises:

1. Having problems is the norm and normalized problems should not be major problems. China's VDS industry has many historical issues. The pains of industry rectification campaigns and policy adjustments and their impact on China's VDS industry will exist for a long time, and having problems will become the norm. Since having problems has become the norm, we should face, deal with, and solve them with a normal mentality. We should actively adapt to changes and trends, leading sustainable and healthy development of the industry.

1. Using two major dividends to hedge the normalized problems. One is the dividend of China's VDS industry having six-fold growth potential. The other is the dividend of our leading position in China's VDS industry. We have no reasons to complain.

1. The market demand for nutrition and health-related products in the post-pandemic era has witnessed a fast increase. The indelible pain has helped to increase people’s awareness of health & wellness.

The new three-year plan for 2021-2023 has four strategic priorities:

1. Implement the Science-based Nutrition Strategy to Create Scientific Nutritional Products

The Science-based Nutrition strategy of Byhealth will focus on new testing technologies, evalsuation methods, target group databases, functional products, knowledge graphs, and intelligent algorithms that are related to precision nutrition. Over the years, many achievements have been made, including the successful development of the world's leading personalized vitamin mini-tablet products and the first personalized vitamin production equipment connected with core algorithms after over 10 years of hard work, as well as the first indigenous developed and built automatic dried blood spot (DBS) testing center for nutrient testing in China.

In November 2017, Byhealth, the Shanghai Institute for Biological Sciences of the Chinese Academy of Sciences (CAS), the Netherlands Organization for Applied Scientific Research (TNO), and BASF of Germany jointly established the Precision Nutrition Research & Commercialization Industry Alliance. In October 2019, Byhealth established the Nutrition & Anti-Aging Research Center with the Shanghai Institute of Nutrition and Health, CAS.

The journey of innovation is long, but we have to keep going until we succeed.

We will upgrade the R&D strategy of indigenous core technologies and patented raw materials on a full scale in 2021 and continue to build the technological strength and differentiated competitive advantages of truly unique Byhealth products. So far, Byhealth has obtained over 60 patents for its raw materials and formulas.

1. Whole-Chain Digitalization

We aim to launch a consumer-centered whole-chain digitalization from the consumer side and build to-C data marketing and user service capabilities. This is called the "new infrastructure" of Byhealth.

After several years of exploration, Byhealth has made gratifying progress and leading advantages in the digitalization of e-commerce in 2020. Through the digitization of strategy, media placement and membership, the internal and external chains have been interconnected, significantly increasing ROI and the awareness, interest, purchase and loyalty (AIPL), as well as a member pool where delicacy management can be applied.

We will focus on the whole marketing chain project in 2021, hoping to complete the comprehensive digital transformation and empowerment of the traditional core business segments in about two years, and becoming a pioneer in the digital transformation of traditional consumer goods.

1. Super Supply Chain

It means to quickly meet the increasingly uncertain and personalized user needs and to achieve both the user experience and the overall efficiency and performance of the enterprise. In 2021, we will focus on building our own e-commerce warehousing and logistics systems to achieve the closed-loop of to-C data online. Meanwhile, we will work hard for an intelligent and flexible production and supply chain.

1. User Assets Operation

Simply put, it is the ability to make friends with consumers. The traditional 4P marketing (product, price, place, promotion) missed another important P (people), that is, unique & alive consumers. I believe that user assets operation will be the core assets and capabilities of a consumer goods company in the future. Brands that lose their ability in user assets operation will eventually lose everything.

This is an unbenchmarked territory. We will continue to work hard in 2021 and try despite errors.

To equip and ensure the implementation of the strategy, we still need an important infrastructure project, namely, the rejuvenation of Byhealth.

If we look at the present from the future, rejuvenation is inevitable. Starting from 2020, we have preliminarily completed the adjustment and building of the strategic structure of the e-commerce business, functional foods, and pharmaceutical segments. We have worked on the rejuvenation of the organization, mechanism, and products with an aim to break organizational inertia and maintain Byhealth’s innovative strength and competitiveness for times of uncertainties in the future. We aim to build an innovative, agile, efficient and flexible organizational structure and operational decision-making mechanism.

For the new three-year plan for 2021-2023, we have set big goals and are confident that we can face up to this challenge. The new three-year plan is essentially for a successful future in 2024 and beyond. Now we must begin to form and build new core competitive advantages of Byhealth. We must be strategically confident and tactically humble.

The seemingly beautiful data of the past cannot conceal the huge challenges lying ahead. Let’s draw a 3D graph and take a look at the Byhealth strategy from the three dimensions of length, width, and height:

1. Length. The further one looks into the future, the more clearly one sees. We should look at the present from a future’s perspective. 

If we look at another three-year plan starting from 2024, what certain and exclusive core competitive advantages that we will have to face up to the future challenges when facing a retail market of a bigger magnitude and the changes and uncertainties in the wider consumer industry driven by digitalization and younger target groups?

1. Width. We are very strong against our visible existing competitors, but the gap and room for improvement are noticeable when compared to some brands in the wider consumer industry, especially some new & vigorous brands.

1. Height. Looking at the world, how should we balance opportunities and challenges & pressure?

The market is extremely cruel. It does not give any player a sense of absolute security. Who doesn't want a sense of absolute security? But no one can have it. If you do not stay alert and make a seemingly insignificant mistake, you may be kicked out of the game and do not even get a chance to say goodbye.

The market is also extremely fair. The opportunity for change is fairly presented to everyone. When an industry undergoes discontinuous changes, large, small and medium-sized enterprises and individuals are put at the same starting point.

I used the boiling frog fable a few times in the past year. If only a few frogs are in tepid water, their buddies can warn them. It would be hopeless if all the frogs hold a party in tepid water. The pleasant tepid water makes a frog want to stay in it. The frog will not be able to jump out even if it wants to when the tepid water is slowly brought to a boil. The frog may not even feel the heat when the water is brought to a boil and will die in it.

The painful reality of 2020 shows that herd immunity does not work. Not taking risks is the biggest risk. Do not turn your vested interests into a burden.

The pandemic has accelerated the structural changes of channels in China's VDS industry. After the online channels ranked first with 37% in 2019, surpassing the direct sales channels, the percentage was expected to be 44% in 2020, having a much bigger lead. The direct sales channels dropped from 42% in 2018 to 35% in 2019, and it continued to drop to 30% in 2020. Pharmacies had stable numbers, ranging from 19% to 20% in 2017-2019, and the number was expected to be 18% in 2020. Other channels have maintained a relatively stable range of 8-9% in the past five years.

In the future, China's VDS will have a polarized development. One is functional health foods, and the other is high-frequency FMCG foods. As its name implies, vitamin & dietary supplement (VDS) is essentially a nutritional supplement apart from diet, which helps people with the intake of balanced nutrition and regulation of human body functions for specific groups. VDS cannot replace a normal diet, nor can it replace medications. Therefore, for functional health foods, the competition will focus on the sophisticated & cutting-edge technological aspects of products. The competition is all about the technology and R&D strength of an enterprise. As for the high-frequency FMCG foods, the VDS industry will have big opportunities and room for development.

We should capture the attention of the post-1995 generation and pay attention to the post-2000 generation. The younger generations are confident, unique, spiritual, and love sharing. There are other factors such as penetration of the market to lower-tier cities, cultural awakening and pan-entertainment. These will become a new engine for the growth of China's consumer industry. In the VDS category on Tmall, the Gen-Z, refined mothers, and urban blue-collars have become the top 3 buyer groups, and their numbers are growing at a steady rate of over 100%. Byhealth must embrace a digital age, omni-channel marketing, and young & lively new consumer groups and build its own new core competitiveness to win in the future.

A few months ago, we released Byhealth’s Core Values version 2.0 on the 25th anniversary of the establishment of the company, which include three points:

1. Integrity over intelligence: Byhealth must live up to its philosophy of making nutritional products of the highest quality in the world for families and friends rather than for clients. Products not suitable for the consumption of our kids, family members and friends must NOT be produced or released.

1. Embrace change through innovation & respond to change with speed. An old map will never lead you to a new continent.

1. Respect everyone and enjoy every day. Giving is receiving. The more you give, the more you receive. 

A core strategy of Byhealth is the “Total Consumer-oriented Approach" aiming to create value for our users’ health. With dreams & ambition, we will continue on the journey of consumer health products. Byhealth will not stop even when we become a global leader in the VDS industry. We must win the race against our competitors and this era.

2021 is a new starting point for Byhealth’s new three-year plan. I ask myself from time to time: Which will come first, a greater opportunity or a greater crisis? I remain vigilant and will not compromise the future for the present! Decision-making is all about choices. When you are in a dilemma, always choose the long-term interests. Never compromise the future and never leave risks to the future, and never trade the future for some short-term gains or a temporary solution.

We start from scratch to face up to every challenge. Too much emphasis on the present means there is no future.

A good runner in a Marathon is not the one with a head start but continuous momentum. 

I wish the best for a young Byhealth and China’s young VDS industry!

In 2021, the past pandemic shall be over, let’s embark on the journey in the dawn. Wish the nation and people peace and prosperity.

Liang Yunchao

Chairman of the board of Byhealth

March 5, 2021

[1] “VDS in Chinese pharmacies” includes vitamin and dietary supplements, weight management and sports nutrition.