NXT-listed Oceania Natural, the food supplement firm, has reported a first-half loss after softer sales while it focused on building new direct channels in China.
The Auckland company's unaudited interim financial statements for the six months ending Sept.30 show it made a net loss of $316,528 compared to a $155,000 profit in the same period last year and a $182,000 profit for the full-year.
The company sells products derived from manuka honey and noni juice. Competitor products have been selling at heavily discounted prices in China, which chairman and chief executive Walker Zhong said could be an attempt to reduce surplus stock, a market price correction, or a rise in counterfeit products.
He warned Oceania's gross margins will be impacted if the price discounts continue and become the norm, with forecast revenue and gross margin targets likely to come under pressure.
Revenue dropped to just over $1 million from $3.3 million in the previous six months. Sales from its New Zealand operations in the half-year dropped to $513,405 both domestically and offshore while its new ONL Wuxi company, which serves as its Chinese headquarters, reported sales of $544,514 in its first month of operation.
ONL Wuxi is a subsidiary of another new joint venture subsidiary it has set up in Hong Kong to grow its distribution network in China. In July Oceania Natural secured HK$19.5 million in funding from Chinese and New Zealand investors to establish Oceania Natural Asia Limited, in which it has retained a 51 percent stake. Many of ONL Asia's investors are said to have extensive distribution networks in China.
Zhong said investing heavily into establishing direct channels to consumers had provided less time to focus on expanding its indirect sales channels which were softer during the reporting period.
"However, with the framework for direct channels now established, we are working closely with our current third-party distributors, which service geographic regions outside of our direct channels, to assist with their promotional efforts and enhance their product knowledge of the expanding ONL product range," he said.
Changing regulations in China mean that businesses building physical presences there with direct-to-consumer relationships will benefit over those relying on third party distributors, pure online sales, or informal trade channels, he said.
He expects sales to lift in the further quarter over the busy Christmas trading period. While sales efforts had been mostly focused on China, it had also been exploring new markets with trial shipments to Japan, Taiwan, and Singapore.
To address the issue of a large number of fake premium-branded honey products being sold online and in retail shops, the company has developed a mobile scanning authentication technology, TrustONL, which runs on the WeChat mobile app. It allows consumers to use their mobile phones to scan the products to verify their authenticity. The company has also negotiated an agreement with China's largest insurer, Property and Casualty Company, to control and produce its product labelling, including a QR code.
Oceania launched a new funding initiative in August - issuing manuka bonds to increase its bulk honey inventory. The 12 to 18-month bonds offer an 8 percent interest rate per annum. In a business update to the market at the end of October, the company said it was pleased with the uptake of the bonds with a total $533,000 worth issued as at October 25 of which $326,000 had been bought by wholesale investors secured over specific barrels of honey purchased by their subscription.
Zhong said the bond offer would continue as long as there was investor interest and a need for honey supply. The company is also talking to New Zealand honey suppliers directly to purchase the bulk honey volumes it needs.
Oceania shares last traded at $2.65 compared to its original price of 64 cents when it made a compliance listing on NZX's fledgling NXT board in March.