Dear shareholders:

• INDUSTRY, MARKET AND COMPETITION

  Besunyen Detox Tea and Besunyen Slimming Tea enjoy absolute competitive advantages when compared with similar products in the market. According to a survey report on national retail pharmacies issued by National Medical Products Administration Southern Medicine Economic Research Institute in March 2022, in 2021, based on the retail pharmacy sales of health products, medicines or other types of products, Besunyen Slimming Tea ranked among the top for twelve consecutive years in the market segment of slimming products with a market share of approximately 22.74% in 2021, representing a year-on-year increase of 0.36 percentage point. The availability of diversified laxative products in retail pharmacy market provides consumers with more options on product, and together with the effect from factors like post-pandemic, the market share of Besunyen Detox Tea in 2021 suffered a year-on-year decrease of 1.2 percentage points to approximately 12.69%, ranking first in the market. With respect to the e-commerce market segment for weight-loss medicines, in 2021, according to the statistics of Alibaba's “Business Consultant”, the proportion of the market segment of Orlistat on the overall market sales under the e-commerce platforms of Ali Group did not suffer a significant decrease, however since all firms adopted a strategy of product price competition, the overall market sales amount of Orlistat decreased from approximately RMB1.3 billion in 2020 to approximately RMB855 million in 2021, among which the market share of Besunyen Orlistat accounted for approximately 28.85%, ranking top one in the market, while the sales amount generated from these products for the Group recorded a significant decrease when compared to the number from last year. As a result, the sales team is actively contacting business platforms with a wider coverage and by now a new layout is established on short video platforms like Kuaishou and Douyin. On products front, the Company is actively working on research and development of products that suit the needs of the current consumer groups, with the aim of generating new performance growth for the Group.

• BUSINESS REVIEW

  Setting up three main business divisions and adjusting business operation model

  In an effort to strengthen the management on marketing system, the Group set up the OTC Business Division, the E-commerce Business Division and the New Retail Business Division in 2021, and established a “service + management” business operation model in the marketing system. After adjustment, the OTC Business Division is comprised of the National Key-Account (NKA) Division, the Local Key-Account (LKA) Division, the Business Operation Division and nine main business regions. Each department supported each other on product training, business negotiation, chain cooperation, terminal construction and the formulation of marketing strategies, thus providing a complete system protection for the marketing of each product. In 2021, through real time monitoring the inventory cycles and turnover rates of various products, strengthening the sense of operation of each business team, reviewing operational data regularly and evaluating the input and output of various operational expenses, the OTC Business Division could ensure profit maximation even the income did not meet the anticipation.

  The internal organizational structure of the E-commerce Business Division has been adjusted during the second half of 2021, and is now comprised of three main business lines and four main platforms. The three main business lines are distinguished in accordance with the product types for which they are responsible, including the drug business line, the Four Teas (i.e. the Three Teas and Besunyen Relief Tea) business line and the new products business line. The four main platforms are segregated in accordance with the business model they support for, which are the promotion platform, the content platform, the live-streaming platform and the member platform. In the meantime, as the proportion of sales of pharmaceutical big health products on e-commerce channels kept increasing, the E-commerce Business Division set up the large pharmacy shops on main e-commerce platforms, acting as the sales agent for the products from other brands, among which the sales amount of the cross-border product “VitaRealm PowerEye Kids” ranked first among the agents of this foreign brand.

  With the help from the professional operation team, the New Retail Business Division carried out systematic management on short video and live-streaming marketing in 2021. It also commenced a brand strategic cooperation with Kuaishou platform. By promoting the Group's business model of short video and live-streaming commerce, the New Retail Business Division continuously provided help to personalized marketing team in deep exploration of customer value and enhanced the performance. The nutrition consultant team of the New Retail Business Division provided quality and professional services to customers through the social customer management system platform and AI customer services tools newly introduced, and thus increasing the repurchase rate of products.

  In order to plan, organize, direct and coordinate the sales system of the Group in a more efficient way, the Group set up the Operation Management Division in 2021. The Operation Management Division is responsible for the comprehensive management on the strategy, decision-making, finance, human resources and IT aspects of all marketing segments that include the e-commerce, new retail and OTC of the Group, to promote the formulation and implementation of marketing plan in each business segment, and to assist each business division in matters such as formulating organizational structure and performance appraisal. Meanwhile, the Operation Management Division also continuously promoted the establishment of digitalized marketing, sorted out the requirement for the digitalization on each marketing segment and followed up on its implementation, thus providing help in enhancing the level of sales management of the Group.

  Deepening the development on young consumer groups by leveraging the brand communication way in multi-channels

  The Group continued to promote the content marketing by soft placement and customization of short plays to strengthen product usage scenarios, and there were four TV dramas with our product placement in 2021. In addition, the Group leveraged the advantage of media on high-speed railway to create an immersive advertising environment for Besunyen Orlistat, thus promoting the effective communication with consumers within the area of high-speed railway and stimulating the demand and desire of purchase from consumers. On the front of brand rejuvenation, the Group continuously explored on transformation and its layout. In December 2021, “The Commencement Ceremony for the Collection Activity of Spring Competition of Academy Award 2022” was held in Xiamen. The Academy Award 2022 covered 2,578 colleges and universities, and collected a total of 14,148 works of 12,047 groups, injecting the innovation from the young generation into the brand. The Group insisted in penetrating the brand value into the young generation in order to capture the consumption market of such group.

  Strengthening own R&D capabilities and developing products in multiple categories

  In 2021, the Group continued to implement the product strategy of “One Focus and Two Dimensions” in respect of research and development and unswervingly took “herbs and health regimen” as the core philosophy of the Group's diversified products layout. Through internal research and development, introduction from external parties as well as cooperation in research and development, the Group's research and development system and product strategy were adjusted continuously. During the year of 2021, the research and development centre assisted each business team in rolling out twelve types of medicines and foods for special uses, eleven types of health food and sixty-two types of general food, which included jelly drops candies with probiotic, light calorie milk tea, “Anranyin” from Burning Queen line and pressed candy of white kidney beans with Sodium hyaluronate, gradually completing the Group's product structure and layout by expanding into pharmaceuticals and general food based on health food.

  On technological innovation front, in 2021, the Group continuously enhanced its leverage in the resources of external scientific research, and participated in the project “Modernisation of Chinese Medicine”, a key research and development plan of the Ministry of Science and Technology, and established a cooperative research and development platform with various renowned research institutes such as Beijing University of Chinese Medicine. Meanwhile, the Group organised the “Innovation and Development Seminar on the Integration of Production, Study and Research of Chinese Medicines” in conjunction with a number of experts and scholars in the field of Chinese medicine, and had in-depth exchanges on the inheritance and innovation of traditional Chinese medicine under the new situation. In 2021, the Group actively involved itself in the layout of intellectual property rights, and “Besunyen Yanyuan Granules” obtained Beijing New Technology and New Product (Service) Certificate jointly issued by six departments including Beijing Municipal Science & Technology Commission, Beijing Municipal Commission of Development and Reform, and Beijing Municipal Bureau of Economy and Information Technology.

  Both Zhongshan Wanhan and Zhongshan Wanyuan under the Group have the qualifications of high-tech enterprise. Zhongshan Wanhan was among the first batch of innovative benchmark enterprises in Zhongshan and was recognised as an engineering and technology centre in Guangdong Province and Zhongshan, whereas Zhongshan Wanyuan was recognised as an innovative research institution in Guangdong Province. In 2021, Zhongshan Wanhan and Zhongshan Wanyuan focused on research and development of endocrine metabolites, ophthalmic drugs, and antiviral drugs. In addition, Zhongshan Wanhan and Zhongshan Wanyuan attached great importance to intellectual property rights. Zhongshan Wanhan concluded “Orlistat Core Technology and High-Value Patent Cultivation Programme” under the high-value patent cultivation project of Zhongshan. The invention patent of “aqueous eye drops for the treatment of increased intraocular pressure” jointly declared by 

  Zhongshan Wanhan and Zhongshan Wanyuan won the China Patent Award. The levofloxacin eye drops produced by Zhongshan Wanhan was included in the catalog for the national drug centralized procurement in 2020 and supplied to 16 provinces in the PRC, while its sodium hyaluronate eye drops was included in the catalog for the national drug centralized procurement in 2021 and supplied to 15 provinces in the PRC.

  Rebuilding the management system of Xueyinghua and accelerating the progress for the launch of products

  In 2021, upon acquiring Xueyinghua, the Group upgraded and rebuilt its production, quality, equipment, safety and finance management systems. The Group readjusted the personnel organisation structure of Xueyinghua, renovated the production equipment and fire protection system in its workshop, upgraded the instruments and equipment in its laboratory. In the meantime, the Group completed a general upgrade of the documentation of the GMP quality management system of Xueyinghua, and set up the EAS system to ensure that the whole 

  process of procurement, warehousing, inspection, production and stock-out of materials and products can be tracked. On accelerating the launch of products to the market, Xueyinghua obtained Medicine Production License, with which it possessed the production qualification on tablets, hard capsules and soft capsules (including preprocessing and extraction of traditional Chinese medicine). In November 2021, Xueyinghua officially commenced production, and it had successively produced a total of seven batches of three types of products, namely Benproperine Phosphate capsules, Xinnaoqing soft capsules and Vitamin E soft capsules.

  Formulating the fully digitalized operation system for leading the transformation of business through IT

  The Group continued its process on implementing digital transformation in an effort to formulate a fully digitalized operation system, and to capture the diversified demands from users precisely through the digitalized operation, at the same time it continued to promote the digitalization of user services and professional upgrading. The Group implemented data panel project in 2021, in which the ERP system acted as the core and connected other core business systems such as OA system, cost control system, flow system and e-commerce CRM, such that the operational status of each business segment, including mission and goal, product income and money returned, could be shown in real time, thus providing reliable data support in decision-making. Through the data panel project, the Group established a unified data asset base and data asset safety management system, laying a good foundation for expanding the depth of data mining and the application of business scenarios in the future. In addition, the Group promoted RPA project in each business division, assisting business personnel to complete the repetitive works with clear rules such as batch extraction of data, batch reply, batch data capture and calculating statistics, in order to enhance working efficiency and lower the operation cost.

  In 2021, the Group set up the e-commerce warehousing outsourcing management model on goods management front, commenced the operation of FineEx Platform and Phoenix Bird Cloud warehouse and brought innovation to warehouse management business model. In addition, with the support of IT department, the interconnection of data between internal goods management system and third party warehousing system was created.

• SOCIAL WELFARE

  Over the years, the Group has been actively fulfilling its social responsibilities and pursuing the concept of sustainable development. It partnered with Beijing Charity Association to establish the “Besunyen Special Charity Fund” for charity and public welfare undertakings, including carrying out social assistance activities, providing services to the underprivileged and playing a supplementary role in social security.

  In response to the natural disaster of heavy precipitation in Henan Province in 2021, the e-commerce team of the Group successively joined hands with China Foundation for Poverty Alleviation and “Duoduo Maicai (多多買菜)” platform to donate goods and materials to the communities affected for the purpose of relief and postdisaster recovery.

• AWARDS AND HONOURS

  Selected as one of the “Excellent Case of Social Responsibility” in 2021 China CSR Cloud Summit

  At the 2021 China CSR Cloud Summit with the theme of “igniting hope by love, implementing commitment through actions” held in December 2021, the Group was selected as one of the “Excellent Cases of Social Responsibility”. The Group upheld integrity and social contribution as the core business philosophy since its establishment, to give back to society with a grateful heart, and to perform social responsibility actively.

• OUTLOOK

  According to the economic data released by the National Bureau of Statistics, the global economy continued to recover in 2021, however it still suffered from the impact of the emergence of variants of novel coronavirus, the uncertainties of the COVID-19 pandemic and inflation. The spread of pandemic was effectively controlled in China, and the Chinese economy in general remained its recovery trend and experienced a steady rise. The growth rate of GDP reached 8.1% in 2021, which showed that China became the important driving force for the growth of global economy. According to the “Outline of the 14th Five-Year Plan for National Economic and Social Development and Long-Range Objectives for 2035 of the People's Republic of China (《中華人民共和國國民經濟和社會發展第十四個五年規劃和2035年遠景目標綱要》)”, the State will put the protection of people's health in a strategic position for priority development, adhere to the prevention-first directive, deeply implement the Healthy China initiative, refine national health promotion policies, weave a stable protection network for national public health, and provide comprehensive, full-lifecycle health services for the people. The big health industry will usher in an important period of strategic opportunities. However, compared with developed countries, the penetration rate and per capita consumption amount for health products in China are still at a lower level, which shows there is a large room for improvement in the industry. In the post-pandemic era, there is an increasing public health demand, with the driving forces from aging population and economic growth, the health product industry will enter a critical growth period. In addition, with the acceleration in the promotion of development in digitalized technology and artificial intelligence industries in the PRC, there will be a transformation in the product structure and consumption mode in the health product market, and the health product industry will enter a period of transformation and development at the same time.

  Going forward, the Group will keep on cultivating the two major areas of weight loss and weight management as well as laxative and gastrointestinal health, while launching innovative and competitive products in terms of technological level, product form and external packaging, so as to meet new consumer demands. Moreover, taking advantage of its own research and development capability and product reserves, the Group will develop the entire industry chain of medicines, health food, medical devices and general food, thereby achieving the advancement of marketing strategy from focusing on product selling to brand value building. The Group will combine the demand of market consumption in the post-pandemic era, make scientific response, actively seek changes, and actively explore the marketing model suitable for itself, so as to fully release the brand potential.

  The White Paper on the Digitalization of China Big Health Industry 2021 outlined that, as the digital technology is increasingly matured, the big health industry is gradually experiencing a transformation to digitalization, and such transformation is inevitable for the big health industry. As an enterprise that is deep-rooted in big health industry for more than 20 years, the Group will continue to improve the fully digitalized operation system, and strengthen the capability of digitalized health services through the integration of resources from technology development and research, production and manufacturing, brand marketing, e-commerce operation, in order to formulate a digitalized user operation system, and to serve the diversified demand for national health continuously.

Chairman and CEO

Zhao Yihong

Hong Kong, 18 March 2022