Management Discussion And Analysis

The Coronavirus disease (“COVID-19”) pandemic has caused severe disruptions to the world for more than two years now. I believe most companies including BESHOM Group would have started the year 2021 on a hopeful note in light of the rapid rollout of the COVID-19 vaccination programmes. However, the recovery path was not as fast and smooth as most have anticipated.

The Group continues to demonstrate strength and agility in the way we do business and serve our customers. While we remain resilient, our financial performance was again challenged and tested by the extremely difficult operating environment in a year of many false starts. In the financial year ended 30 April 2022 (“FY2022”), the Group posted revenue of RM209.6 million (FY2021: RM271.4 million). This represented a decrease of 22.8% as compared to the financial year ended 30 April 2021 (“FY2021”), mainly caused by a 33.1% drop in revenue in the MLM segment. The extended pandemic took a big toll on consumer confidence, with fatigue setting in amidst new uncertainties and risks on many fronts, including geopolitics, global and domestic economics, supply chain disruptions and inflation. Thankfully, the Wholesale and Retail segments did relatively better – Wholesale revenue fell by 9.3% while Retail revenue edged up by 3.2%, thanks to the intermittent recovery of footfall during various phases of the National Recovery Plan (“NRP”).

In tandem with the drop in revenue, the Group recorded a 23.0% decline in profit before taxation (“PBT”) to RM40.3 million for FY2022 (FY2021: RM52.3 million). On an after-tax basis, the return on shareholders’ equity still worked out to a respectable 8.9%. That the consumer-centric BESHOM Group was able to deliver a 8.9% return on equity is testimony to its underlying resilience which is anchored by the agility and commitment of the Management team. Indeed, the reduced profitability should be taken in the context of the very tough business conditions. Management and staff have put in enormous efforts to navigate the constantly evolving pandemic as they strive to keep the businesses ongoing and our stakeholders safe.

FY2022 Performance Snapshot:

FINANCIAL POSITION

The Group maintained a robust balance sheet with net cash position of RM117.3 million at the close of FY2022. Total assets of the Group amounted to RM370.1 million, while total liabilities comprising mainly trade and other payables amounted to RM41.0 million. The cash holding of the Group comprising financial assets, cash and cash equivalents made up more than 30% of the Group’s total assets, giving us a high level of liquidity and flexibility. Total equity attributable to shareholders at the close of FY2022 was RM317.1 million (FY2021: RM312.7 million), which improved by approximately RM4.4 million. Net assets per share attributable to ordinary equity holders of the Group (“NA”) fell slightly to RM1.06 at the close of FY2022 (FY2021: RM1.08) following the distribution of one (1) treasury share for every twenty six (26) ordinary shares held in HAI-O as share dividend in FY2022.

CASH AND CAPITAL MANAGEMENT

The Group manages its capital structure with the objective of enhancing long-term shareholder value. The continuity of the Group as a going concern remains the priority from a capital management aspect. This is achieved through regular reviews of the capital structure of the Group to strike a balance between shareholder returns in the form of dividend and a strong balance sheet. The distribution of dividend for each financial year will take into account the projected operating cash flows requirements, capital commitments and strategic investment opportunities, if any, arising from time to time. The Company remains committed on the policy to distribute at least 50% of the PAT as dividend to shareholders.

Cash dividends paid to shareholders in FY2022 are as summarised below:

A final single tier dividend of 5 sen per share in respect of FY2022 has been proposed by the Board and will be tabled for shareholders’ approval at the forthcoming Annual General Meeting. Although the financial performance of the Group has been affected by the prolonged health crisis, the Company is still committed to provide sustainable returns to our shareholders as we balance long-term strategic growth opportunities and proactive management of capital.

MLM SEGMENT

The MLM segment is the largest revenue and profit contributor to the Group, contributing approximately 55.1% and 52.3% of total Group revenue and PBT in FY2022. This key segment continues to face unprecedented challenges from the COVID-19 pandemic, with revenue and PBT decreasing by 33.1% and 37.9% to RM115.4 million and RM21.1 million, as compared to RM172.4 million and RM34.0 million, respectively, in the preceding FY2021.

The management of the MLM segment has taken the persistent challenges in their stride and relentlessly endeavoured to adapt and adjust to the changing conditions. When physical events were disallowed, virtual engagements with distributors and members were stepped up via our enhanced digital platforms, resulting in the increase of sales conversion through e-Commerce platforms from 18% in FY2021 to 28% of MLM sales in FY2022. MLM’s product focus on small ticket items has also helped digital conversion in FY2022.

With the ongoing enhancement in our digital adoption efforts, we believe sales conversion will continue to step up through our e-Commerce platforms.

For FY2022, the products mix of the MLM segment is set out below:

Navigating through the uncertainties of COVID-19 has been a dominant feature of the last two years and our efforts have been focused on supporting our distributors and members whilst keeping them safe as we continue to explore and adjust the way the business is operated amidst the constant flux. COVID-19, and the associated lockdown, have disrupted many lives with varied and sometimes overwhelming impact on individual distributors and members. We have worked hard to support our distributors and members, but continue to face pressures to retain and recruit new members due to competition from casual employment opportunities such as food delivery.

Despite the reopening of all economic and social sectors in the second half of the financial year, the MLM segment has yet to see full recovery to the business. Consumer sentiment and spending power remain weak and further dampened by inflationary concerns, while the spread of the COVID-19 variants still discourages active participation of physical events. We see challenges ahead and will continue to sustain and fortify business continuity via forward thinking, anticipation, prompt execution and nimble adjustment of business plans. The MLM segment will require a longer time to rebuild momentum and enjoy the results of its marketing strategies, but it is making steady progress to emerge stronger.

PRODUCT DEVELOPMENT

The MLM segment had a good pipeline with the launch of nine products in FY2022, including two new products: Airy Ventz and Nurich Puri-C, and seven remaining products being extension of our existing range: PB Thera Short Bra, Cozuma Dazzle Me Eyeshadow, Marine Essence Beauty Bar, Infinence HydraActive Eye & Lip Cleansing Water, D’Chef Paella Sauce and D’Chef Chilli Crab Sauce. Both Airy Ventz and Nurich Puri-C were launched to capture the demand for pandemic-driven products. Global air purifier demand is expected to grow by more than 10%, while Nurich Puri-C which combines highly absorbable Vitamin C and D3 in one tablet meets the demand for health supplements to enhance immunity.

We will continue to develop new products to cater for market demand, with various new products already in the pipeline for the next financial year. The majority of the new products to be launched will be extension of our existing range to leverage on the established brand recognition by consumers, such as PB Thera and Marine Essence brands.

RETAIN AND RECRUIT

Our broad-based members network has been the proud testament of the MLM segment. Inevitably, we have experienced a contraction in membership renewal and recruitment during the extended pandemic due to a combination of factors including the prohibition of mega physical events and the weak consumer sentiment, as well as competition from casual employment such as food delivery. We see this as a temporary setback and is working hard to rebuild the network. Initiatives are underway to provide support to our distributors and members through these trying times. Among others, we have reduced renewal/joining fee to retain existing members and to attract new members, and are also helping members to hone their digital marketing skills via the e-SHOM Academy. An Essential Starter Kit containing our best-selling products have been introduced at affordable prices to equip entrepreneurial new members with an additional tool to start a new business for themselves. In view of the reduced spending power in general, the MLM segment has also collaborated with myIOU to provide a digital payment solution option so that members can buy products without having to make full payment upfront (Buy Now Pay Later).

DIGITAL ADOPTION ENTRENCHMENT

To ensure sustainability of buying interest and enhancement of overall buying experience, we have implemented various initiatives to strengthen our business digitally and to foster the entrenchment of digital adoption among our distributors and members. We will continue to invest to sustain our brand image in the social media and digital platforms including regular updates and frequent uploading of new contents on Facebook, Telegram etc. In addition, our revamped member portal was launched in July 2021 with various enhancements so that members can easily access to product and promotional information, including the mechanics involving tier discounts and product selections. We are also encouraging digital adoption among our staff with bi-monthly zoom gatherings to conduct product talk and to share MLM’s latest updates and information.

COST CONTROL & MARGIN MANAGEMENT

Cost optimisation remains an ongoing Group-wide initiative. Management continues to explore many aspects to manage products margins including cost control for raw materials, packaging and logistics. Leveraging on our good relationship with suppliers and marketing agencies, sponsorships have been sought for various products campaigns and promotions to reduce costs and sustain profitability. We are grateful to suppliers who are willing to work hand in hand with us in this difficult business climate.

WHOLESALE SEGMENT

The Wholesale segment performed remarkably well in FY2021, boosted by overwhelming response to the “last buy” sales promotion prior to price revisions for Chinese medicated tonic. Against the high base in FY2021, Wholesale revenue and PBT fell 9.3% and 10.1% in FY2022 to RM53.1 million and RM12.4 million respectively. The segment suffered a steeper decline in revenue and PBT in the 1st half of FY2022 due to reduced demand from restaurants and Chinese medical halls, our major customers in the Wholesale segment, which were affected by the MCO. It was also affected by supply chain disruptions and higher shipping cost arising from the sustained border closure in China where some products were sourced. While the economy began to reopen in the 2nd half of FY2022, many businesses and consumers remained cautious. Despite higher revenue and PBT recorded in the 2nd half of FY2022, the increase was not able to offset the larger drop in the 1st half of the financial year.

Similar to the past financial years, Chinese medicated wines and liquors category (64%) was the largest contributor in terms of product mix under the Wholesale segment, followed by healthcare & nutrition products (20%), as set out below:

In order to remain a trusted wholesale supplier, the Wholesale segment has taken into consideration the volatile and challenging operating environment in formulating its business strategies which include the following:

PRODUCT DEVELOPMENT AND ENHANCEMENT

We have successfully relaunched one of our signature products, Yang Sheng Chiew (养生酒), with a fresh yet classy new packaging to attract younger consumers. As part of the rebranding campaign, promotional activities were run on AstroGo and Astro AEC Live Broadcast to promote the health benefits of the medicated tonic. Both campaigns have collectively brought in sales of more than 1,600 Yang Sheng Chiew sets.

As part of the push for pandemic-related products, promotional activities were focused on healthcare and wellness products. The packaging of Lian Hua Cool Burst was refreshed during the financial year to include the Hai-O logo as part of the effort to reinforce collaboration between the supplier and the Hai-O Group. Lian Hua Cool Burst is a mask coolant and freshener with sanitizing function.

Sales of Chinese New Year hampers have done well in FY2022 as Management was able to accurately gauge demand. Hamper sales rose more than 30% in terms of units sold and revenue in FY2022.

The extension of house brand products under our fastmoving consumer goods (“FMCG”) category is another product development focus. In light of the generally weakened spending power, the Wholesale segment plans to roll out more affordable healthcare related FMCG products, targeting at young consumers who tend to have faster product acceptance, shorter consumption cycles and higher consumption volume. In this respect, I am excited that that a few FMCG products are at an advanced stage of development and slated for launching in FY2023.

EXPANSION OF MARKET PRESENCE

Continuous efforts were spent on expansion of market presence to enhance business sustainability and promote brand loyalty. In FY2022, we added 77 new customers/listing spots in our database, comprising mainly wholesalers, supermarkets and pharmacies. New customers added to the list recently included Watsons Pharmacy and 7-11 convenient stores.

DIGITAL ADOPTION AND COST OPTIMISATION

Ongoing efforts have continued on digital adoption and cost optimisation to support business sustainability. A major digital initiative is the enhancement of the warehousing system through barcoding and logistics management based on a new SAP system. When the new warehousing system goes live in FY2023, we expect to shorten processing time while increasing accuracy, transparency and traceability of orders and delivery. We are at our final leg of implementation, migrating and integrating a massive volume of information between the old and new systems.

MARKETING AND PROMOTION

In light of MCO restrictions especially in the first half of FY2022, many marketing and promotion activities were conducted online and through social media platforms. Apart from Astro Go and Astro AEC Live, we also leveraged on our official online stores at Shopee and Lazada to carry out live marketing activities. Key Opinion Leaders (KOL) were engaged to promote our products at Hai-O e-store and social media platforms including Facebook and Youtube concurrently with promotional sales activities at other online platforms such as Prestomall and Youbeli.

A notable mention was the Classic Culinary Inspired Online Competition (古早味新煮意网络争霸赛) held in collaboration with Oriental Cuisine Magazine on 25 September 2021. This two-week event attracted a total of 334,000 viewers, reaching as high as 35,000 viewers for the Grand Final.

RETAIL SEGMENT

The Retail and Wholesale segments faced contrasting fortunes in their financial results. Unlike Wholesale which did remarkably well in FY2021, the Retail segment was badly hit by prolonged lockdowns and pandemic restrictions. From this depressed base, it was able to rebound at a faster pace when the economy started to gradually reopen and footfall recovered on the path of NRP from June 2021. The Retail segment recorded revenue and PBT of RM37.0 million and RM3.4 million in FY2022, an improvement of 3.2% and 183.5% as compared to RM35.8 million and RM1.2 million respectively in FY2021. Although Retail revenue was only marginally higher than FY2021, PBT almost tripled on the back of aggressive promotional activities for higher-margin house brand products and cost optimisation initiatives. Sales from ecommerce platform accounted for 4.3% of total segment sales.

General and high value herbs, healthcare & nutrition products contributed 70% of total Retail sales in FY2022. Chinese medicated wines and liquors brought in another 20%, with the remaining from sundry goods and others, as shown below:

STRATEGIC MARKETING INITIATIVES

The commendable results achieved by the Retail segment reflected relentless efforts initiated by management. In FY2022, we adopted multifaceted marketing and promotion strategies to drive revenue, tapping both internal and external marketing platforms to conduct various forms of promotional activities.

Strategic marketing initiatives were planned to create awareness, sustain buying interest, foster demand and to lock in sales. We have formed strategic partnerships with Public Bank, UOB Bank, TK Bakery, Grab Pay & Maxis APP and REN TCM to leverage on their already established platforms to promote our brands and products. Among others, instant cashback was offered to entice high spending customers and special sales was arranged for Public Bank staff.

In FY2022, various thematic marketing campaigns were conducted, including several tied to online marketplace events such as 11/11 Sale, Shopee/Lazada Birthday Sale, Chinese New Year, Raya Holiday Deals, Labour Day Weekend, Mother’s Day and Parent’s Day Special. Concurrently, product thematic promotional events were launched, some were co-sponsored by manufacturers, to promote our house brands. HOR Health Fair (海鸥保健周), which aimed to capitalise on heightened demand for health supplements during the pandemic, has received very positive response. Meanwhile, our signature products, i.e. Honbo Green Propolis (巴西绿色蜂胶), Hai-O Cordyceps Capsule (冬虫夏草丸), Hai-O Ming Zhu Bai Feng Wan (明珠白凤丸) and Zhen-G Health Tonic (养元酒), were actively promoted throughout the year.

In the current environment of high inflation, customers have generally responded well to special discount vouchers and limited time offers. Distributions of promotional vouchers were made through Hai-O e-store (e.g. birthday vouchers), business partners online platforms, social media platforms while physical flyers targeted specific consumers such as confinement centres. To ensure a seamless buying experience for customers both online and at our physical stores, we have revamped and relaunched the Hai-O e-store in August 2021 and also provided regular trainings to our retail outlet personnel.

COST OPTIMISATION

As with other segments, the Retail segment has continued to explore ways to optimise cost and enhance business sustainability and profitability. In FY2022, we rationalised two under-performing physical outlets, one in AEON Bandar Utama and one in Jalan Sultan. Apart from outlet rationalisation, the segment results also benefited from rental concessions during MCO as well as electricity saving initiative to cut cost and play a role in energy sustainability.

OTHER OPERATING ACTIVITIES

The contributions of other operating activities are derived primarily from rental income of investment properties and manufacturing of health supplements, insurance and credit & leasing business.

The main revenue contributors in FY2022 were manufacturing activities and income from rental of investment properties. In aggregate the other operating activities recorded a revenue of RM4.1 million for FY2022, which was lower than FY2021 revenue of RM4.6 million. However, PBT reported improved marginally by 3.5% to RM3.4 million (FY2021: RM3.3 million), thanks to higher rental income received for the year augmented by effective cost control.

During the pandemic-hit years of 2020 and 2021, the Group has demonstrated its ability to navigate unprecedented uncertainties arising from operational and economic volatility. Our efforts to fortify a solid foundation for business sustainability and continuity over the years have been put to the test, and the very challenging times have also given us the opportunity to adjust and refine our sustainability measures to stay abreast in the constant flux. I am gratified that management and staff have shown the highest level of commitment and perseverance, pushing their limits to stand the Group in good stead.

Despite a strong rebound in 2021, the outlook remains cloudy with the global economy entering a pronounced slowdown amid fresh threats from COVID-19 variants, heightened geopolitical risks, supply disruption and inflation, adding to the broader issues of rising debt and income inequality at a time when global monetary policy is being tightened. Accordingly, the Group will need to remain vigilant and carefully calibrate business strategies against the backdrop of persistent business disruptions. The COVID-19 crisis has underscored the importance to be nimble and to anticipate, adapt and adjust to changing circumstances.

The Group is well supported by its solid financial position and strategic plans put in place by management to mitigate business risks. We will continue to prioritise digital adoption across all segments for our increasingly connected customers, while also intensifying product development alongside ongoing cost optimisation initiatives.

SEGMENT'S STRATEGIES

Notwithstanding the current choppy and unpredictable business environment, the Group is expected to maintain its financial resilience and optimise its operations to navigate further challenges ahead. The Board remain positive that the Group will continue to deliver value to shareholders in the coming years.

On behalf of the Board, I would like to thank our customers, business partners, government agencies and shareholders for staying with us through the pandemic. I am also grateful for the sound advice and guidance from the Board. Above all, I am proud of our management and employees who have shown outstanding commitment and dedication in delivering your best to ensure business continuity and long-term sustainable values.

I would also like to take this opportunity to pay tribute to my beloved late father, Mr Tan Kai Hee, not only for his love as a father but also for his support as my first mentor and friend. He has many traits that I respect and admire and have always tried to emulate. Thank you dad, for the great legacy that you have left for the Hai-O family.

Tan Keng Kang
Group Managing Director