Dear Fellow Shareholders,

As countries started to move progressively from the pandemic phase to an endemic phase towards the end of 2022, the Chinese government remained committed to its stringent measures and “zero-COVID” policy which it had implemented since early 2020 to control the outbreak of COVID-19. The policy mandated strict measures including, but not limited to, controlling human traffic in each city to reduce the flow and concentration of people, and issuing directives mandating the temporary closure of business operations of all enterprises, including those of the Group’s subsidiaries in China.

This “zero-COVID” policy resulted in disruptions across the supply chain, spurring inflationary pressure on raw materials and logistics. In December 2022, the Chinese government’s sudden shift away from the policy led to a surge in COVID-19 infections across the nation, resulting in a substantial number of the Group’s employees being infected in December 2022 and January 2023, and causing a temporary cessation of the Group’s operations in China. In addition, the harvesting of sweet potatoes from the Group’s contracted farmlands could not be carried out as the farmers were also infected with COVID-19. All this resulted in a lower volume of fresh sweet potatoes and snack food products available, particularly from December 2022 to March 2023. Hence, we missed out on the potential sales for the peak Chinese New Year season, which dampened our revenue in the second half of FY2023 and resulted in an adverse impact on the Group’s financial performance for the financial year ended 31 March 2023 (“FY2023”).

For FY2023, the Group recorded a 24.0% year-on-year decline in revenue from RMB 289.1 million for the financial year ended 31 March 2022 (“FY2022”) to RMB 219.6 million. The gross profit decreased in tandem with the lower revenue despite a better sales mix of higher-margin snack products that lifted gross profit margin slightly from 26.8% in FY2022 to 27.0% in FY2023. The lack of economies of scale on the back of rising inflationary pressure despite stringent cost management efforts, resulted in the Group recording a net loss after tax of RMB 14.2 million in FY2023, a reversal from a net profit of RMB 3.7 million in FY2022.

We saw the critical need to improve our sales revenue as well as costs savings through the management of perishability and disposal.

In All Readiness

Whilst Zixin Group was established as a biotechnology company with a focus on sweet potatoes, it took us many years of effort and persistence to build a sustainable and integrated circular economy industrial value chain, achieving a breakthrough in the traditional and fragmented agricultural industry.

The sweet potato agricultural sector is often faced with constant constraints of (i) the high possibility of spoilage due to the perishability of fresh sweet potatoes after harvest, and (ii) the higher proportion of waste materials of sweet potato stems, leaves, and peels produced against the harvests of consumable sweet potatoes. This is despite our competencies in providing quality sweet potato seedlings and modern farming solutions and techniques to raise harvest yield and quality of sweet potatoes. We saw the critical need to improve our sales revenue as well as costs savings through the management of perishability and disposal.

The initiative by the Liánchéng County Government in allocating land, constructing premises, and offering favourable lease terms, in a bid to attract third-party operators in the areas of cold storage warehousing and animal feed manufacturing to support the sweet potato agricultural industry in Liánchéng County in response to the nation’s drive to accelerate growth in the agricultural sector, is timely and a boon to our Group.

We will be able to maintain the freshness and increase the shelf life of sweet potatoes with the cold storage warehouses. This will reduce the risk of spoilage and open up the opportunity for us to increase our cultivation base which in turn, could potentially raise our earnings from sales of fresh sweet potatoes and semi-processed sweet potato products given the ability to store the fresh produce longer.

Barring any unforeseen circumstances, we expect to return to profitability in FY2024 as the supporting industries will commence operations in the fourth quarter of 2023, in order to be in time for the harvesting season.

Apart from that, the three blocks meant for fermentation plants, out of the intended 17 blocks of standard factory buildings to support the recovery and recycling of sweet potato waste materials where waste is converted into base ingredients for animal feeds, will allow us to monetise our prior research and development (“R&D”) success in producing nutritional and cost-efficient base ingredients of animal feed from waste materials including spoiled sweet potatoes, and sweet potato peels, stems and leaves with our proven probiotics fermentation solutions and techniques. We could potentially supply waste resources from our own contracted farmlands of 8,268.6 mu as well as those in Liánchéng County and around the outskirts of the county, which is in an aggregate of approximately 390,000 mu of cultivable sweet potato farmland.

The completion of our infrastructure comprising a high-tech manufacturing facility, research laboratories and office in March 2023, led us to commence the purchase and installation of equipment and machinery as well as the interior furnishings for the built-up area of approximately 23,000m² . We estimate the commissioning of the production capacity to recover nutrients from sweet potato peels to produce 35,000 tonnes per annum of functional food including purple sweet potato powder that can be used in the bakery industry, to commence by end of the financial year ending 31 March 2024 (“FY2024”). This could potentially allow the Group to monetise our prior R&D investment, and at the same time, maximise the discarded sweet potato peels before sending them to the fermentation plants as waste resources for the base ingredients of animal feeds.

We believe our ability to better manage our upstream sources of consistently good quality and supply of seedlings and fresh sweet potatoes will further lower our business risk and bring forth sustainable growth across our integrated circular economy industrial value chain. Barring any unforeseen circumstances, we expect to return to profitability in FY2024 as the supporting industries will commence operations in the fourth quarter of 2023, in order to be in time for the harvesting season.

Tailwinds Abound

Being one of the first-movers in agri-tech more than 10 years ago, we have experienced an uphill climb. We are truly thankful that our relentless efforts in demonstrating the feasibility of incorporating science and technology into agricultural processes has transformed us into an integrated agri-tech industrial value chain operator.

Our prior years of investments in R&D were targeted at addressing our internal concerns as we construct the industrial value chain. According to the ‘2023 China Agriculture and Rural Trend Report: Accelerate the construction of an agricultural power’ (1), it was mentioned that China’s 14th Five-Year Plan emphasised food security and the Chinese government’s determination to expand the agricultural sector to safeguard against the declining global food supply and high food prices in the international markets.

We think it is timely to expand our agricultural genomics research coverage to the whole of China. We believe our expansion into data and analytics to unlock valuable insights, which can potentially enhance the genomics of sweet potato varieties and cultivation solutions to address the suitability of cultivation in agricultural driven regions in China, and be the game changer for the nation. This spurred our strategic collaboration agreement with the Agricultural Genomics Institute at Shenzhen which is a government-supported scientific research organisation held by the Chinese Academy of Agricultural Sciences (2) (the “Strategic Collaboration”).

To utilise the valuable resources from the Strategic Collaboration, we have also formed a joint venture, Shenzhen Zixin Provenance Biotechnology Co., Ltd., with Fujian Good Villa Agroecological Technology Co., Ltd, and AgSino China Digital Nutrition Technology (Shenzhen) Co., Ltd., who have the expertise in agroecology and digital agriculture, respectively. We believe this initiative will accelerate growth and innovation for the sweet potato industry in China, when implemented through our integrated circular economy industrial value chain business model.

Correspondingly, we also believe our initiatives and efforts could contribute positively to the local communities in the agricultural sector and be of some assistance in addressing national food security concerns. The recent announcements about our participation in rural revitalisation projects (3-5) – in Língāo County, Hǎinán Province, and Lánkǎo County, Kāifēng City, Hénán Province, will demonstrate Zixin Group’s scalable integrated circular economy industrial value chain beyond our base in Liánchéng County, Fújiàn Province.

We are truly appreciative of the patience and support of our stakeholders, particularly our employees, business partners, and shareholders, as we strive towards enhancing agricultural modernisation in the sweet potato agricultural industry and driving economic developments in a bid to revitalise the rural villages in China. Material developments of the Group will be announced as and when they arise.

Acknowledgements and Appreciation

On behalf of the Board, I would like to express my gratitude to all members of the Group for their dedication and hard work, and also our fellow Directors for their valuable guidance and support, as we emerge from the pandemic with a stronger foundation.

We are thankful to our business partners, customers, and shareholders, for your continuous support and confidence in our sustainable integrated sweet potato circular economy industrial value chain business model. We will strive towards rebuilding profitability for the Group with our established industrial value chain in Liánchéng County and replicating our successful business model progressively in those selected regions in China.

LIANG CHENGWANG
Executive Chairman & Chief Executive Officer