Fanhua Inc.
Q4 2016 Earnings Call Transcript

Published: 7 Mar 2017

[Operator:]

Ladies and gentlemen, thank you for standing by for Fanhua’s Fourth Quarter and Fiscal Year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. All lines have been placed on mute to prevent background noise. After the management’s prepared remarks, there will be a question-and-answer session. Please follow the instructions given at that time if you would like to ask a question. For your information, this conference is now being broadcasted live over the Internet. A webcast replay will be available within three hours after the conference is finished. Please visit Fanhua’s IR website at ir.fanhuaholdings.com under the Events & Webcasts section. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today’s conference, Ms. Oasis Qiu, Fanhua’s Investor Relations Officer.

[Oasis Qiu:]

Welcome to our fourth quarter and fiscal year 2016 earnings conference call. The earnings results were released earlier today, and are available on our IR website, as well as on Newswire. Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. The accuracy of this statement may be impacted by a number of business risks and uncertainties that could cause our actual results to differ materially from those projected or anticipated. Such risks and uncertainties include but are not limited to those outlined in our filings with the SEC, including our registration statement on Form 20-F. We do not undertake any obligation to update this forward-looking information, except as required under applicable law. Joining us today are our Chief Executive Officer, Mr. Chunlin Wang; Chairman, Mr. Yinan Hu; and Chief Financial Officer, Mr. Peng Ge. Mr. Wang will walk you through our financial results in the fourth quarter and fiscal year 2016, and then the management and the Board Chairman will take your questions after the prepared remarks. Now, I will turn the call over to Mr. Wang.

[Chunlin Wang:]

[Interpreted] Good morning and welcome to joining us in our fourth quarter and fiscal year 2016 earnings result. I'll give you an update of our financial and operational results and Mr. Yinan Hu and Mr. Peng Ge and I will take questions at the end of the report. Firstly, I will give you an overview of our overall financial performance in the fourth quarter and fiscal year 2016. In 2016, the China’s insurance market records the highest growth rate in eight years with total insurance premiums growing by 27.5% year-on-year to RMB3.1 trillion. The P&C and life insurance sectors grew 9.1% and 36.5% respectively. 2016 was also a fruitful year for CNpad. Total insurance premiums generated by the company which RMB14.6 billion up 49.7% year-on-year and our net revenues were RMB4.7 billion up 66.2% year-on-year, which once again significantly beat our prior guidance. The exceptional results bear a solid testament to the successful execution of our growth strategy. One of the major highlights of the 2016 full year results was optimize business mix. Life insurance business as a percentage of total revenues improved from 11.3% in 2015 to 21.1% in 2016 as a result of a 209.6% year-on-year growth to RMB990.5 million in total net revenues divide from our life insurance segment. The results were attributable to both an explosive growth of 375.9% year-on-year in new policy sales to over RMB1.0 billion in 2016 and a 27.1% growth a renewal insurance premium to RMB928.5 million in 2016. Thirteen months persistency ratio improved significantly from 85.8% same period last year to 91.2% by the end of 2016, which is comparable to the average level of the top tier life insurance companies in China and the best among our peers in the insurance intermediary sector. The rapidly growing life insurance business has become a major source of revenue and profits for the company. P&C business was still the biggest revenue contributor accounting for 71.8% of our total net revenues in 2016. Net revenues derived from P&C insurance business grew 53.0% to RMB3.4 billion in 2016 of which net revenues from P&C agency insurance segment and insurance brokerage segment grew 52.2% and 67.3% respectively. In terms of insurance premiums, P&C insurance business grew 43.4% from a year ago, outpacing the industry growth of 9.1%. At the beginning of this year, we set a target of achieving over a billion annual operating profits within the next eight years. We had expected to invest up to RMB500 million in marketing activities. And as a result, we might have operating loss in 2016 and 2017 and breakeven in 2018 before getting on track to high profit growth in 2019. However, the operating results went far better than we had previously anticipated. We spent approximately RMB420 million on marketing programs in 2016 and generated RMB14 million operating profit two years ahead of expectation. We recorded operating loss in the first quarter of 2016 then the loss was narrowed down in the second quarter of 2016 and turn into profit in the third quarter of 2016. Now the operating profit increased sequentially to RMB34.7 million in the fourth quarter of 2016. The performance in the past four quarters pointed to a trend towards a sustainable profit growth going forward. Depended [ph] on expected performance in 2016 was led by two major reasons; number one, the exceptional growth of our life insurance business, and number two, this continued benefit of the adoption of CNpad and our organizational restructuring. Despite rapid business expansion, the increase of operating expenses was much lower than business growth. Excluding marketing expenses, our operating expense ratio has been on a decline for several quarters in a row in 2016. Year 2016 the beginning of our eight year plan goal of achieving over RMB1 billion operating income within eight years, we actively carried out a series strategic measures in 2016, such as extending our sales and service network coverage, expanding our sales force and promoting the wider adoption of mobile transaction app. We are glad that this efforts use it notable results. Firstly, in order to further expand our sales volume and get more market share, we set out to establish our presence in several new markets in 2016. During the year, we expanded our sales network to 21 provinces from 17 provinces in 2015. We have five new branches at provincial level in Anhui, Guangxi, Yunnan, Inner Mongolia provinces and Qingdao respectively and 334 more sales outlets. We believe these new branches in our list will bring more vitality to the company. Secondly, we make steady progress in sales force expansion. To achieve our eight year goal sales force development is the key. In 2016, by leveraging on our unique entrepreneurship program diversified product offerings and leading online platforms together with our flexible margin strategies, we step up efforts to attract top entrepreneurial team leaders and individual sales agents to join Fanhua. As a result, the number of our sales agents has almost doubled in 2016 as compared to 2015, which we believe will serve as the platform for the fast and sustainable development of our P&C and life insurance business in the future. Thirdly, we’ve done a smart adoption of our mobile transaction app. By the end of last September, we have successfully concluded the transition of our CNpad app to version 2.0 nationwide. With improved user experience and functionalities, CNpad app has become a powerful tool to help agents manage their presence more efficiently. It also plays an important role in attracting more agents to Fanhua. By the end of 2016, more than 212,000 copies of CNpad has been downloaded, representing an increase of 93.4% year-over-year. CNpad app contributed 39.3% of the insurance premiums of our auto insurance business compared to 37% in the previous quarter and over 90% of our new term life insurance policies which transacted through CNpad app. Looking back to the financial results of the last four quarters, we can see that the adoption of CNpad app has significant to help improve our operational efficiency as refracted by continuous declining adjusted operating expense ratio. For 2017, we will focus on improving and strengthening the profitability of the company by further expanding our life insurance business. We are confident that the company will continue to maintain strong growth momentum and achieve high profit growth beginning from 2017. We expect to achieve no less than RMB180 million operating income in 2017. Earlier this morning, we announced the board resolution regarding the adoption of a dividend policy. We had a track record of positive earnings and accumulated over RMB2 billion net profit in the past 10 years since our IPO in 2007. We have maintained a strong cash position but our management have been very cautious in spending the cash in the past few years. And the caution was partially due to our lack of visibility in the operation of our online initiative in the past two years. However, the 2016 financial results prove the effectiveness of our marketing campaigns and our growth strategies and also strengthen our confidence in the Company’s profitability process. Based and this, the management believe that it is the proper time to share the operating results with our shareholders and therefore propose to the board to all our shareholders in the form of cash dividends. We were committed to consistently bring in sustainable solid returns to our shareholders going forward. Thank you. Now, the management and chairman will open the floor for your questions.

[Operator:]

[Operator Instructions] Our first question today comes from the line of [indiscernible] from CICC. Please ask your question.

[Unidentified Analyst:]

[Interpreted] The questions were from CICC and he has three questions. The first question is regarding the suspension of business cooperation between PICC P&C and Fanhua. Can the management give a little bit more explanation on that incident? And what’s the reason for the suspension of business cooperation? And is all the insurance intermediary that PICC has suspended to cooperation so far and do the company expects that the cooperation was all insurance company can make up that difference. And also what the impact on the company’s agency and claims adjustment business?

[Chunlin Wang:]

[Interpreted] It is at your quiet sudden notice and risk our subsidiaries were verbally notified by the local branches of PICC P&C in the afternoon of last Thursday. And so far, we haven’t received any form of written notification from PICC P&C. So we don’t know for sure the actual reasons behind the suspension of business cooperation. The only reason that we got was actually from the explanations provided by the local branches of PICC when they gave it a verbal notice that it was - it might be caused by some internal investigations, ongoing internal investigation in PICC P&C. And as for whether any other insurance intermediaries were also given the same notice of the suspension of the risk operation, we don't know over that. And we don't - we haven’t received any signs or received any notification from other insurance companies about their intention to start cooperation with us. So we are still conducting our normal business operations and continued business operations with other insurance companies as usual. And after the notification from - after receiving the notice from PICC P&C, we have responded quickly and we have validated impact and also make trends to direct the business, the previously divide from PICC P&C to other insurance companies and as well as strengthen our strategic cooperation with our exiting - with our other existing business partners. And so far, we have business cooperation with PICC P&C on three areas including the insurance brokerage business, the insurance agency business, which mainly include the auto insurance business and then thirdly the claims adjustment business. In terms of the insurance brokerage business, the disruption of business cooperation may have more direct impact on the revenues on our insurance agency sorry - on insurance brokerage business. And then for the claims adjustment business, the disruption of business may have impact on both revenue and also profit. And for the agency business, we think that there won't be any big impact basically the impact will be quite limited because the auto insurance market is quite competitive, so it's easy to get alternative product providers. And actually as a matter of fact, after the notice that received from PICC, other insurance companies has basically offered more stronger support and also better terms to us in order to cooperate with us. And then in terms of the over impact, we do expect that the revenue may decrease in 2017 as a result, but the impact on the profit will be limited, because first of all on the P&C insurance business, we already started to subsidize auto insurance business in 2016, so the profit derived from this part of business was already quite small. And then for the claims adjustment business as we mentioned, there might be impact on both revenue and profit, but because claims adjustment business only accounted for 7% of our total revenues as at the end of 2016. And PICC contributed approximately 14% of our total claims adjustment revenues. So the impact on the revenue should be quite small and as well the impact on the profit side obviously to be quite small as well. In 2016, we have undertaken a strategy which is to focus more resources on the development of life insurance business by basically subsidize P&C business in order to gather agents to generate more cross selling opportunities for life insurance - for the development of life insurance business. And so far, life insurance business is the major profit contributor for the company and we're going to continue their strategy in 2017. And after the evaluation, we will maintain original profit guidance. We still believe that we can achieve the profits go down we said previously.

[Unidentified Analyst:]

Okay, thank you.

[Chunlin Wang:]

Thank you.

[Unidentified Analyst:]

[Interpreted] Sorry, the second question is regarding our life insurance agency growth momentum going forward. As absorbed, there has been a job in the sales of our universal life insurance product while the growths on premiums for the more traditional life insurance products has been recorded a very strong growth. Do you see any increasing demands from life insurance under life insurance companies to sell more traditional long term protection type of products through Fanhua?

[Chunlin Wang:]

[Interpreted] Starting from the second half of last year, the CRIC has been a focused quite a lot, has been emphasized quite a lot about that about the fact that insurance industry should return to its basic function of offering protection to the society. So the CRIC issued some kind of restriction, some rules that restrict it of banking products. And they also have required the bank channels should sell more longer term health insurance products and traditional life insurance products. So we can see that the insurance company, the life insurance company that started to attach more importance to the sales of traditional life insurance products. And we also see more life insurance companies to oppose the company to for more in-depth cooperation for the sales of this type of products. And insurance companies are also more willing to invest more to know the sales of long term life insurance products and how the insurance products and that’s also one of the major reason that drive strong growth of growth insurance premiums. Thank you.

[Unidentified Analyst:]

[Interpreted] The third question is regarding our dividends announcements. Actually the first time, the company announced - ever announced a dividend policies. Can the market expect, can expect a more regular dividend payment going forward and then therefore would like to make add a comment on your previous question?

[Peng Ge:]

[Interpreted] Well I’d like to answer your last question first. Well the management has been thinking quiet a lots about what’s the proper way to return to shareholders. And we have also noticed that our stock price haven’t been performing very strongly and so we are thinking what’s a better way to enhance shareholder returns. However, in the previous years, the company has been exploring out growth strategies. And as Mr. Wang mentioned just now, we haven’t seen a lot of certainties or visibility on our online strategies. So that’s why we’ve been very cautious to make any decision. However, after we reported the 2016 results, we the management feel more confident about growth prospect already. And also we feel more confident of our profitability outlook as far as our future cash flow outlook going forward. So that’s why the management proposed to the board that probably we should have a dividend policy to return to give better returns to our shareholders. And the proposal was well supported by the board in the board meetings, at the end of February. And this dividend announcement is not one-off thing, it’s going to be a regular dividend policy that we hope that we can continue to maintain an annual dividend payments going forward. Mr. Wang let add few comments on your second question regarding the growth of a life insurance business momentum.

[Chunlin Wang:]

And we the management has true confident that in 2017, the life insurance business will double in terms of service volume. And in that we also have confidence that our operating income will grow by over 50% in the next three years on a compound growth basis. Thank you.

[Operator:]

Our next question today comes from the line of Ryan Robert from MCM. Please ask your question.

[Ryan Robert:]

Good morning and thank you for taking my question. My question was actually on the margins for the year, I see that you reiterated the future guidance for operating profit is pretty strong for the full year. I was just curious if that reflects any increase in margin versus 2016 at the operating level?

[Chunlin Wang:]

[Interpreted] That’s right observation. And as we expect, life insurance business will increase in terms of percentage of our total revenues. The gross margin level will improve as we develop that. And secondly, we also expect the operating expense ratio will continue to go down - go forward and that will also help improve our overall margin. And we expect our gross margin will be maintained around 25% and net margin at 5% in 2017 as the average margins level for overall business.

[Ryan Robert:]

Right, let me ask kind of a quick follow-up on that one, so in terms of the original thought process in terms of 2016 to increase the selling and marketing expenses, so I guess what changed and kind of going forward, how should we look at that expense line obviously ramped up significantly in 2016, but it sounds like that's going to come back quite a bit in 2017, I’m wondering if you can give us some color on that?

[Chunlin Wang:]

[Interpreted] We made a huge investment on marketing activities in 2016 and that's one of the major reasons for increase in selling expenses. And the investment in marketing expenses has helped driven the company's growth quite a lot, especially the strong growth from life insurance business at over 100% in 2016. So we can see that this marketing strategy has been quite status and we’re going to continue in this kind of investment, because it will become a record investment we will probably do it in a different way, and it will be become may increase commission payouts to promote the P&C sales goal to generate a more cross selling opportunity for our life insurance business. So there's a lot of cash - the gross margin on our P&C side may decline, but as we mentioned the life insurance business will increase in terms of percentage of our total revenues, it boosted the gross margins overall.

[Ryan Robert:]

Gotcha, thank you, that's very helpful and congratulations on the solid end to the year.

[Oasis Qiu:]

Thanks.

[Operator:]

[Operator Instructions] There are no further questions on the line today. I would not like to hand the conference back to management, please continue.

[Oasis Qiu:]

Thank you for joining us on today's conference call. If you have any further questions, please feel free to contact us. Thank you.

[Operator:]

Ladies and gentlemen that concludes out conference for today. We thank you all for your participation. You may now disconnect.