Dear shareholders:

• BUSINESS REVIEW

  Revitalising Terminal Pharmacies with Innovative Marketing

  During the first half of 2017, the Group sought to increase sales by implementing a sales strategy of differentiation for pharmacy chain stores and terminal pharmacies in different regions, aiming to increase the sales to pharmacies with a primary focus on meeting consumers’ requirements. During the first half of 2017, the Group’s marketing teams tailored precise marketing plans for selected pharmacy chain stores which had been in close cooperation with us. We successfully developed several terminals with strong sales of Two Teas and LARLLY Orlistat, which became exemplary models for other terminals. This has contributed to notable growth in sales to partner pharmacies, which has in turn increased sales of the entire pharmacy network in the surrounding regions of such pharmacies, resulting ultimately in the growth of sales to pharmacies in the market generally. The driving force provided by the exemplary pharmacies has helped to consolidate our existing consumer base while attracting new buyers, creating a spillover effect that has enhanced sales for the entire region. Such measures have not only enhanced the brand image of Besunyen, but have also been much welcomed and supported by pharmacy chain stores.

  Enhancing Competitiveness of Sales Team with Flattened Sales Management Structure

  
  

  During the first half of 2017, the Group managed its sales regime by introducing a flattened structure. The previous three-tiered organisation formed by the major sales regions, provincial offices and local regions was restructured into a two-tiered organisation formed by the business departments and the regional offices, comprising 13 business departments and 49 regional offices. With a simplified management hierarchy, operating efficiency under the new organisation has been significantly enhanced. Meanwhile, the Group focused its staff training effort on the 49 regional offices, with a view to prioritising, grooming and building a pool of talents. Frontline sales representatives were formed into working teams of three. With the benefit of concerted efforts and synergies, the overall competitiveness of the sales teams has been substantially enhanced.

  
  

  “Thousand Faces” Packaging Design Underpinning Young and Energetic Brand Positioning

  
  

  Market researches and observations on consumer behavior indicate that women aged 18 to 24 constitute the dominant population group of the weight losing market, accounting for approximately 54% of the target population group in this market. They have manifold expectations for slimming tea products, such as fashionable packaging, good tasting and notable efficacy. They typically trust weight-losing products and related information searched via the mobile internet, namely, their handsets, through which they would also make their purchases. A whole new idea of product packaging has emerged with expectations for light-hearted, playful and personalised designs and an increasing addiction to internet slangs. To stay in tune with young consumers, the Group introduced exclusive comic-style new packagings for the online versions of its core product lines, namely, Besunyen Detox Tea, Besunyen Slimming Tea and Besunyen Xian Xian Tea, during the first half of 2017. A gift set packaging for Besunyen Detox Tea was launched to meet the consumers’ needs of long-term use. We are also working on a new “Thousand Faces” (千人千面) packaging design for the offline version of Besunyen Xian Xian Tea as part of our efforts in brand transformation towards a stronger appeal for young buyers and a more professional image in relation to weight management.

  
  

  Strategic Cooperation with m.111.com.cn for Mutual Success in the Big Health Industry

  
  

  On 27 February 2017, the Group entered into a strategic cooperation agreement in Beijing with m.111.com.cn (1藥網). As a specialised and precisely-targeted pharmacare e-commerce platform, m.111.com.cn has many years of experience in the operation of big data accumulations, online services and supply-chain operations. The strategic cooperation between the Group and m.111.com.cn would enable mutual sharing of superior resources for the joint promotion of the Group’s new products. The two parties would unite their respective strengths in the areas of resource sharings, big data applications, innovative marketings and specialised services. Furthermore, the two parties would be engaged in a joint effort to promote the “Alliance for Certified Products” (“正品聯盟”) and develop brand new partnerships for strategic cooperation for mutual success in the big health industry.

  
  

  Broader Approaches for Brand Promotion Through New-Media Marketing

  
  

  In view of the robust development of the mobile internet and the decreasing age of consumer groups, the Group has also diversified to variety shows on the mobile internet from traditional TV media programmes in terms of the channel and form of its advertising placements. During the first half of 2017, the Group provided a title sponsorship for “We Are 17” (《我們十七歲》), a variety show of Tencent whose audiences fell mainly within the age group of 20 to 39 with a largely balanced mix of genders, resulting in a viewership in excess of 100 million for Besunyen commercials. In addition to marketing through entertainment shows, the said advertising placement has successfully communicated with the consumers that the official change of Chinese product name of Besunyen Slimming Tea from “碧生源牌減肥茶” to “碧生源牌常菁茶” is for the purpose of brand rejuvenation, while mitigating the impact of regulatory control introduced by national policies. This was also in line with the communications theory that calls for identification with consumer groups and their preferences.

  
  

  During the first half of 2017, the Group also launched three live broadcast shows — “A Visit to the Production Plant of Besunyen” (“走進碧生源工廠”), “Let Go of the Fat” (“放開那個肉肉”) and “Mysterious Invitation from Besunyen — Unlocking the Secret Chamber of the Intestine” (“碧生源神秘邀請函之解鎖腸道密室”) — on the Internet through www.yizhibo.com (“一直播”), a live broadcast platform on the internet. The shows have generated an aggregate of approximately 30 million views and the number of new customers has increased substantially as a result. This innovative and exploratory attempt at new media marketing has enriched our Group’s brand communication, enabling us to stay in tune with young consumers through more diversified approaches. We started to implement the live broadcast model on m.111.com.cn, our strategic partner, and then moved on in gradual transition towww.yizhibo.com, a popular live broadcast platform, through which we effectively tapped the Weibo population and gained direct access to millions of fans leveraging the “Internet Star” economy to assure basic viewership. The contents were increasingly attuned to younger audience with the imparting of a younger brand tone for Besunyen.

  
  

  Moreover, in order to increase exposure of our branded products and win over new users, the Group made 9 different versions of 1-minute micro-videos in June 2017 to promote the Besunyen brand, with a special emphasis on precise targeting at young consumers.

  
  

  As a result of adjustments to the Group’s strategy for advertising placements, our investment in advertisements via media reduced substantially for the first half of 2017. For our investment in advertisements via new media, the Group has not yet formulated an established system. The Group will therefore continue to explore investment in advertisements via traditional media and new media and strive to devise effective marketing and advertising plans with high reaches at low costs.

  
  

  In-Depth Development of E-Commerce Channels in an Effort to Build an E-Commerce Based Enterprise

  
  

  In connection with e-commerce, the Group has committed additional resources to B2C while sustaining its B2B business and adopted the B2C repeat purchase rate as a key indicator. During the first half of 2017, there was a notable increase in the number of users conducting repeat purchases. At the same time, stronger efforts were made to consolidate e-commerce channels as distributors with subpar e-commerce ability were terminated in an effort to optimise the portfolio of channel distributors. New B2C users were acquired to the maximum extent through new approaches in marketing and communication. In terms of channel development, classified Besunyen food stores as well as Besunyen concession counters were opened on mainstream e-commerce platforms. During the first half of 2017, the Group’s e-commerce department was engaged in ongoing development of the two product categories of slimming products and laxatives, laying a solid foundation for the subsequent continuous attainment of excellent sales results.

  
  

  “One Focus and Two Dimensions” — Product Strategy with a Special Focus on New Products for E-Commerce Sales

  
  

  Through the recruitment of high-level talents, the R&D centre of the Group has improved its organisational structure, which boasts general capabilities in the research and development of pharmaceuticals, health food and other food items on the back of 5 core technological segments, namely, pharmacological research, analytical research of Chinese medicines, pharmaceutical formulation development, pilot production process, as well as patent application and legal compliance.

  
  

  Since April 2017, the Group has been launching new products on e-commerce platform, such as L-carnitine coffee powder drink, fruit and vegetable enzyme powder drink as well as brown sugar ginger tea with rose and ginseng powder drink. Coupled with the 2 flavours of nutritious meal replacement milkshakes (coconut milk/pineapple and peach) launched in 2016, nutritious meal replacement milkshakes in 3 flavours (strawberry/cranberry, walnut/almond and pumpkin/taro) have also been launched to develop a full range of meal replacement milkshake products in a variety of flavours. As of now, the Group’s slimming product line features a portfolio of weight-control products, i.e. “OTC pharmaceutical product: LARLLY Orlistat” + “health food products: Slimming Tea and Xian Xian Tea” + “other food products: nutritious meal replacement milkshakes and L-carnitine coffee”. As for digestive health product line, a rich portfolio of digestive health food is formed with fruit and vegetable composite enzyme powder drink, health food product Detox Tea and probiotic powder drink products.

  
  

  Brand Vigor and Vibrancy Enhanced by Collaboration with Academy Award of Advertising Festival for Nine Years in a Row

  
  

  The Group was the title sponsor of the 15th Academy Award of Advertising Festival of Chinese College Students (Spring Session). We also organised the “Besunyen Cup” Advertising Contest with participants from 40 colleges and universities in 30 cities, including 20 creativity seminars and 21 product exhibitions in the sidelines. More than 1,000 college departments received official posters and creative briefs with designated themes.

  
  

  The “Besunyen Cup” Advertising Contest accepted submission of creative works under the theme of “Besunyen— Your Partner in Slimming” in the forms of graphic advertisement, marketing plan, advertising text and micro- film, TV/movie advertisement and HTML5 mobile interaction. On 19 May 2017, the contest was held at the plant of the Group with more than 143,300 groups of qualified work as well as over 186,402 pieces of work received.

  
  

  Currently in its 15th session, the Academy Award of Advertising Festival of Chinese College Students is a creativity contest among universities organised by the China Advertising Association, the influence of which has been extended from the colleges to the advertising industry in general. This year is the ninth year of cooperation between Besunyen and the Academy Award and also the sixth time Besunyen has obtained the title sponsorship of the advertising contest. Over the past 9 years, Besunyen has become a leading brand in this industry which is deeply rooted in the mind of university students following our in-depth market development efforts targeted at universities. The record-high entries received for the contest this year have contributed to wider perspectives and new ideas in applications in the Group’s marketing activities and advertising creations.

  
  

  As a veteran adjudicator for the Academy Award, the Group has developed a strong pool of talents for the future. After holding roadshow seminars on brand education for university students for 9 years, we have also established solid relationships and direct connections with industry leaders, such as famous professors in domestic vocational colleges, industry celebrities, academics specialised in communication theories, and creative directors of international 4A advertising agencies.

  
  

• OUTLOOK

  Macro-Economy

  Macro-economic data announced by the National Bureau of Statistics has indicated a 6.9% GDP growth for the first half of 2017, suggesting stable economic development for China with growth prospects. In the medium-tolong term, China will be entering the second phase of economic transformation, characterised by a narrowed decline in economic growth with increasing factors favourable to a stable trend of moderate or strong growth. Quality improvement and efficiency enhancement will become a principal consideration in economic growth.

  Development of Full-Service Platform for Frontline Sales with Continuous Emphasis on Sales to Pharmacies and Key Chain Stores

  In the second half of 2017, the Group will focus on building a full-service platform for frontline sales at the head office to implement integrated management of sales administration, sales personnel, sales finance and market IT. One-stop supporting services will be provided to frontline sales personnel on this unified platform. Meanwhile, the Group will continue to focus on strategic cooperation with key chain stores to achieve increase in the sales to all the pharmacy chain stores with a view to underpinning the attainment of our full-year sales target.

  The Group will continue to focus on the expansion of e-commerce platform in the strategic development of its channel. In the second half of 2017, an omnichannel model will be built, and the weight management solutions and laxative solutions of the Group will be further promoted and popularised among Internet users, as the Group strives to build its e-commerce platform into a functional product incubation platform.

  Further Implementation of New-Media Marketing to Facilitate Precise Placement of Brand Promotion Contents

  In the second half of 2017, the Group will resort to new media platforms and seek to introduce a marketing model based on “We Media + Internet”, leveraging www.yizhibo.com and other channels for short-video marketing. The content provider will be upgraded from advertising creation and production to a planning, creativity and production team focused on micro-videos. The media agency supplier will be upgraded to the agency and planner of Internet media platforms. The advertising project, comprising content production, activity planning, rewards for consumers, debut of new products and launch of new videos, will be elaborated to match popular dates throughout the year for sales promotion, thereby enhancing the connection between advertising contents and sales. We expect the new-media marketing model to contribute to the Group’s sales growth. We Media such as Weibo and Weixin will be utilised internally for staff training and education, as well as externally to ensure maximum exposure of our brand contents through multiple channels. We will maintain effective customer management and enhance customer loyalty by enhancing our good reputation and increasing public awareness of our brand.

  Ongoing Advancement of New Product R&D

  The Group will develop new-generation slimming and laxative health food, as well as new health food products for throat-clearing and hepatotoxicity in the forms of tea bag, tablet and capsule. While engaged in planned development of new products, the R&D centre and production centre will work together to procure the launch of health food products for which approvals have been obtained, so as to ensure the ongoing provision of new health food products.

  In the second half of 2017, the Group will launch 2 new health food products and a number of new herbal powder drinks on e-commerce platforms. Zhongshan Wanyuan New Medicine Research and Development Co., Ltd. (“Zhongshan Wanyuan”), a company contemplated to be acquired by the Group, is also expediting the development of Orlistat bulk pharmaceuticals and certain new drugs.

  
  

Chairman and CEO

Zhao Yihong

Hong Kong, 15 August 2017