Fanhua Inc.
Q2 2013 Earnings Call Transcript

Published: 21 Aug 2013

[Operator:]

Ladies and gentlemen, thank you for standing by for CNinsure's second quarter and first half of 2013 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question and answer session. Please follow the instructions given at that time, if you would wish to ask a question. Please be advised, this conference call is now being broadcasted live over the internet, and a webcast replay will be available within three hours after the conference has ended. Please visit CNinsure's IR website, at ir.cninsure.net, under the events and webcasts section. Today's conference is being recorded. If there are any objections, please disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ms. Oasis Qiu, CNinsure's Investor Relations Officer.

[Oasis Qiu:]

Good morning, everyone. Welcome to our second quarter and first half 2013 earnings conference call. The earnings results were released earlier today and are available on our IR website, as well as on the newswire. Before we continue, please know that the discussion today will contain forward-looking statements, made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. The accuracy of these statements 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 is our Chief Executive Officer, Mr. Chunlin Wang, and Chief Financial Officer, Mr. Peng Ge. They will walk you through our financial and operating performance in the second quarter and first half 2013, and take your questions after the prepared remarks. Now I will turn the call over to Mr. Wang.

[Chunlin Wang:]

(Interpreted). Hello everyone. Thank you for joining us on the call. On today's agenda, our CFO, Mr. Peng Ge and I will discuss the operational and financial highlights for the second quarter 2013 and share with you our business outlook for the rest of the year. We will take your questions after this. China insurance industry grew 11.5% year over year in total gross premiums for the first half of the year, while property and casualty insurance premiums maintained a year-on-year growth of 16.6% [measured in] by a modest increase in car sales. Fierce price competition in the sector continued into the second quarter, further squeezing the underwriting process of many P&C insurance companies. In the life insurance sector, [top] sales of short-term investment-linked policies boosted life insurance premium growth during the second quarter, driving a 8.9% year-on-year growth in the first half of the year. While such [common] policies offer limited support to long-term embedded value, new business value in the life insurance sector remained in the weak growth territory. In [favor] of the market dynamics, we believe that we must keep abreast of the market changes, in order to stay on the top. Over the past six months, we have devoted a lot of effort to [develop] the use of technology and strengthen our capacity to better serve our clients, with comprehensive financial services and products. We are pleased with the progress that we've made on executing strategy. During the second quarter, our mobile business support system has been put into operation in [Guangdong], Sichuan and [Hubei] provinces. And an internal testing has been expanded to [Liaoning] and Hunan provinces. The aggregate number of CNpad, the workstation of the mobile business support system that was sold, exceeded 480 units as of June 30, 2013. And those units contributed over RMB15 million in premiums during the first half of 2013. Besides, we were pleased to see premium contributions (inaudible) back to CNpad, which [RMB36,900] per month], slightly higher than we previously expected. While there are still a lot of challenges ahead, we believe that to use the mobile technology in insurance sales is a trend of our time, in alliance with the direction of the insurance industry's transition. We are proud that we are the first one to adopt mobile technology and [non-insurance] intermediaries in China, and are able to balance that from the first mover advantages. We are strongly committed to implementing our e-commerce strategy with mobile support system as top priority, while exploring opportunities to grow B2C and B2B2C business. Looking ahead to the second half 2013, we will accelerate sales of CNpads in more regions, strive for expanding the operation of the mobile sales support system in all of our P&C subsidiaries in major cities by the end of October, and achieve the annual sales target of 5,000 units for 2013. On system development front, we will focus on improving user experience by simplifying data [info] process and enhancing back-end processing capacity, including improving quotation accuracy. In the meantime, we will start working on developing module to enable broader range of products available with CNpad, including non-auto P&C products, life insurance, and wealth management products. Apart from that, we also plan to moderately allocate resources to expand our B2C website. We expect to complete a system upgrade by the end of the year. In the meantime, we expect to broaden our product offerings on the website and launch product-specific promotional activities in a small scale, in order to improve staff, agents, and direct customers' awareness of the website. And meanwhile, we are also preparing to open a flagship store on China's largest retail e-commerce website, Tmall.com, by the end of the year. Since early 2012, when we began offering wealth management products to our clients, we have seen a rapid growth in customers and sales volume, while we expanded our (inaudible). As of the end of the second quarter 2013, we had established financial planning studios in key cities of six provinces, boosted the number of wealth management customers, increasing by 530, to over 1,800 and the value of wealth management products we distributed exceeding RMB240 million during the second quarter of 2013. While we offer wealth management products to meet customers' need for asset accumulation, during the second quarter, we shifted our focus for life insurance products back to protection products, to address our customers' specific demand for protection. Under this framework, we have been proactively exploring new product opportunities by selling healthcare fund in Beijing and Shanghai, promoting the [timing] program and cooperating with insurance company and broker on product design, such as cancer insurance and short-term consumption type protection and products, etc. In order to support our strategy to build comprehensive financial service platforms and promote adoption of e-commerce technology, as well as improve operational efficiency and cut operational costs, we've decided to push forward in organizational integration, which ends at integrating our various business units into one unified platform. First of all, three of our business units, namely P&C insurance business unit, Life Insurance business unit, and e-commerce business unit will be restructured into three product line divisions, under the CNinsure insurance sales service group. Secondly, the [partly] functional departments of this business unit, such as administration, human resources, finance, business management and operational management departments will be merged and essentially managed at the headquarter. Thirdly, subsidiaries that were actively engaged in P&C insurance and life insurance distribution will then be -- will be merged together to establish one unified operational and management platform, in order to reduce the operational cost of this subsidiary and enhance the efficiency. Fourthly, we will provide both P&C and life insurance sales agents then access to a wide range of product offerings, including life insurance, P&C products, and technology support so as to help them earn more money in a more cost effective and productive way. We believe all these moves are imperative to the rollout of our strategy to develop comprehensive financial services and promote the adoption of technology in the future. All these initiatives will strengthen our commitment, continuously enhancing our core competence, which we believe will prepare us well for a strong rebound and long-term systemic growth. With that, I will turn the call over to our CFO. Thank you.

[Peng Ge:]

(Interpreted). Thank you. Hello, everyone. I'm pleased to report our financial results for the second quarter of 2013. Our total net revenues for the second quarter 2013 recorded a growth of 2.8% year over year. The slowdown in growth rate was primarily due to a drop of 30.5% year on year in net revenue from life insurance business, primarily as the result of a decline in new business premiums. The drop in new business premium was mainly because we adjusted our sales focus from participating policies to traditional policies -- to traditional protection policies, which generally generate lower per policy premiums, while the number of new policies sold during the quarter was flattish as compared to a year ago quarter, reflecting a stable sales capability of life insurance sales team. There were other delays on customers' expectations after pricing deregulation for traditional life insurance product, as it is believed that premiums will drop once the pricing is liberalized. The growth of recurring premiums remained a strong momentum, with over 31% growth year over year, partially attributable to a high 13-month persistency ratio of over 80%. As a whole, the total life insurance premium in the second quarter recorded a slight increase, as compared to the corresponding period of 2012. Total net revenues of our P&C insurance segment grew 10.9% from the year ago quarter. And our claims adjustment business maintained a healthy growth, with net revenues for second quarter up 14.6% year over year, mainly attributable to the robust growth of the auto-related business. Total operation costs and expenses for the second quarter of 2013 was up 7.4%. Commissions and fees expenses for the second quarter of 2013 was up 17.6% from the year ago quarter, primarily reflecting rising labor cost and rising auto commission rate that we pay to our sales agents, as a result of the increased market competition. Selling expenses for the second quarter 2013 was up 16.1% from the year ago quarter. The increase was primarily due to increases in office, gasoline and vehicle expenses incurred by the claims adjusting segment. General and administrative expenses for the second quarter of 2013 was down 20.2% from the year ago quarter, primarily due to decreases in share-based compensation expenses, related to certain options granted on March 12, 2012, which are required to be recognized on an accelerated basis. And such expenses are expected to decrease each year, since the [front]. Interest income for the second quarter 2013 was down 9.5% from the year ago quarter. The decrease in interest income was primarily due to a decrease in bank interest rate from the corresponding period in 2012, and a decrease in the bank deposits. As we increase short-term investments, the aggregate value of the third-party products that we invested in was approximately RMB233 million. Income tax expenses for the second quarter 2013 was down 69.7% from the year ago quarter. As a result of the following factors, net income attributable to the Company's shareholders for the second quarter 2013 was down 36.3% from the year ago quarter. As of June 30, 2013, the Company has RMB2.3 million in cash and cash -- RMB2.3b in cash and cash equivalents. CNinsure expected total net revenue to grow by approximately 5% for the third quarter of 2013, compared to the corresponding period in 2012. This forecast reflects CNinsure's current view, which is subject to change. Thank you. Now our CEO, Mr. Wang, and our CFO, Mr. Ge, will open the floor for your questions.

[Operator:]

Ladies and gentlemen, we'll now begin the question and answer session. (Operator Instructions). And your first question comes from the line of [Richard Fasselnek] of [Watford Investment]. Please ask your question.

[[Richard Fasselnek]:]

Hi. Thank you for the call. My question was just regarding the share buyback that was initiated last November, the $30 million share buyback. How much of that $30 million share buyback was actually executed?

[Oasis Qiu:]

(Chinese language spoken)

[Peng Ge:]

(Interpreted). We were authorized by the Board to buy back a maximum amount of 30 million shares in open market. And we have tried buying shares during the window period. And we bought a total of -- ADS with a total value of $1.5 million. And so far we haven't continued buying back shares because -- due to the low liquidity of our stock and also because the restriction by the SEC on insider trading. It's very difficult for us to buy as much shares as we want.

[[Richard Fasselnek]:]

Have you thought of other ways of returning capital to shareholders?

[Oasis Qiu:]

(Chinese language spoken)

[Peng Ge:]

(Interpreted). We will consider, from both long-term and short-term perspective. From long-term perspective, we think that it's important to return the cash to our shareholders, and to actually return a long-term value to them. And the organization integration and also our strategy is to develop financial business and also to bring more technology into our business is actually the initiatives that we would like -- want to prepare for, to bring CNinsure back to a long-term strong growth, and which we think actually is predictable within the next couple of years. And this is a better way to return to our shareholders a long-term value. And then secondly, from a short-term perspective, we will balance our capital requirements for business growth, as well as the interest of the shareholders. And of course, we will also need to submit this observation to our Board for consideration, to make a reasonable way to return to our shareholders.

[[Richard Fasselnek]:]

Well yes, unless you're going to make an acquisition, it seems to me that your net cash balance is so large that it's more than capable of supporting whatever growth initiatives you have, as well as returning a significant amount of that capital to shareholders. You highlight your significant net cash position in your press release. But it's just sitting there. And if your numbers are to be believed, it's sizeable and it should be supportive of your growth initiatives, as well as returning a significant amount to shareholders, whether it's through a special one-time dividend or a more meaningful and genuine share buyback than what was previously executed. It just really sort of beggars belief that you need to sit there with that much cash. That's all I have to say. Thank you.

[Oasis Qiu:]

(Chinese language spoken)

[Peng Ge:]

(Interpreted). As Mr. Wang mentioned just now, our strategy is to develop a comprehensive financial services business as well as to develop our e-commerce business. As everybody knows, e-commerce development requires a huge investment as we have seen in many other peers. And as for the comprehensive financial services, it is actually a golden time for companies like our size to explore in this sector and we would like to keep looking for new opportunities and there have been actually a lot of business opportunities and we would either look for new targets or seeking opportunities to increase our shareholdings in those companies that we already own a minority interest. And also, we are seeing the government is holding a more open-minded attitude towards opening the market further and they might loosen up the license issuance a little bit. So we would need to evaluate how much capital we will need to invest in this area to explore this new opportunities. And as for share buyback. It is true that we want to have more meaningful share buyback. However, due to the SEC's restriction on our daily trading volume, and also on the bidding price, it is very difficult for us to buy as much as we wanted that I mentioned just now. So it is not how much money we would like to commit to, it is the actual restriction that we are kind of suggested to. So we would like to see, you know, how much we can buy and how this share buyback can boost our stock price [component] but having said that, we will submit that consideration to our board for their consideration.

[[Richard Fasselnek]:]

Okay, thank you. I guess my last question is again, it is just closing this perceived valuation discount and have you considered maybe getting a dual listing in Hong Kong? I mean, you are kind of an orphan stock here. You don’t have a lot of credibility and you aren't followed too widely by the analyst community. Maybe you are misunderstood by the investment community here in the US and you might be better served by getting a listing in Hong Kong if you can get a listing in Hong Kong. Have you considered a dual listing structure?

[Oasis Qiu:]

(Chinese language spoken)

[Chunlin Wang:]

(Interpreted). We strictly followed -- keep compliance what the SEC requirements and regulations on disclosure. If we ever have such kind of trend or decision, we will disclose to the market.

[[Richard Fasselnek]:]

Okay, great. Thanks.

[Oasis Qiu:]

Thanks.

[Operator:]

And your next question comes from the line of [Alfred Hall] of [Halco]. Please ask your question.

[[Alfred Hall]:]

Thank you. Two questions. In the fourth quarter last year, you indicated that the EP business margins were bottoming and would expect to improve. That hasn’t happened in the first two quarters. Would you expect that to happen in the remainder of the year and into the next year? Your margins are currently at a level of about 26% versus about 50% several years ago. The second question, what is the difference in the interest income between your cash holdings and the increased holdings of short-term investments. Thank you.

[Oasis Qiu:]

(Chinese language spoken)

[Peng Ge:]

(Chinese language spoken)

[Chunlin Wang:]

(Chinese language spoken)

[Oasis Qiu:]

First of all, for this quarter, our P&C gross margin was about 25.7% as compared to over like 30% last year quarter. But if we compare it sequentially, compare with the first quarter and the fourth quarter of last year, the gross margin for P&C was kind of flattish and I remember their gross margin for the first quarter was also 25 something. So basically in line with expectation. But an additional comment from our CEO, Mr. Wang says that we had original expected the gross margin should be bottomed out in November, however, the development market evolved a little bit differently from what we anticipated and it is mainly due to the competition in the P&C market getting more exacerbated. As we can see from the component of a lot of insurance -- P&C insurance companies, and they have suffered from underwriting loss, 70% of this company has suffered underwriting loss in the first half this year. So in this environment, under this environment, we are still able to maintain a relatively stable gross margin so that is [thankful] to the fundamental work that we have done last year. And we expect that our gross margins should be able to see a slight increase by the fourth quarter or early next year.

[Chunlin Wang:]

(Chinese language spoken)

[Oasis Qiu:]

And Mr. Ge would like to answer your second question as to the different trend in interest income and short term investment. Previously, most of our cash are put into the bank as CD with an annual return of 2.5%. However, we are expecting that a further decrease of interest rate will be the trend in the future and there are a lot of wealth management product available with a relatively high return so we invested some of our cash into the short term wealth management product but our investment policy is very conservative and those products are comparable to the low risk and with a return of about 6% to 8% annual dues. And on accounting front, we will recognize the return, the use of those -- on those investment products as it happens and rather than accrue the returns on a quarterly basis. So that is why you have seen a decrease in our interest income but when the -- when we got the use of -- interest income to increase. Thank you.

[[Alfred Hall]:]

Thank you.

[Operator:]

And your next question comes from the line of Patricia Cheng of CLSA. Please ask your question.

[Patricia Cheng:]

(Interpreted). This is Patricia Cheng from CLSA and she has two questions regarding to our business. And this question is with regards to the gross margin, as we mentioned that our P&C gross margin will have a rebound on probably in the fourth quarter or next year, and Patricia is asking what will be the drivers. Is it due to a decrease in the commission that we pay to our sales agent or an increase of the commission that we receive from insurance companies. So to -- or to simply put, is it because we are able to negotiate with the insurance companies for better terms? And then the second question is with regarding our expectations of revenue growth for the third quarter, which is 5% growth, what will be the drivers for the growth?

[Chunlin Wang:]

(Interpreted). As mentioned just now, over 70% of P&C insurance company have been suffering from underwriting loss and this is not tolerated by the CIRC as well as the shareholders of this insurance company. And according to the message that I have got from the regulator and the insurance company, we believe that the competition, the price competition in the P&C market will ease up gradually and the market will be more rationalized. And we believe that we can actually benefit more from this more regulated and better -- more rationalized market. And over the (inaudible) we actually think that the P&C market has kind of a cycle which comes from -- which begins from an underwriting loss and then the market becomes more rationalized and then insurance company become more profitable and then it begins competing for market shares again and initiate a price competition which is resulting in another underwriting loss and then the market becomes rationalized again. So we believe that the market will probably follow that cycle again and at this time, we believe that the price competition has come to a point that neither the regulator and insurance company can tolerate anymore. So I am quite -- this is why I feel confident about the prospect in the P&C market. And then secondly, we believe that the organization integration that we would like to push forward will help slow down the cost increase or even stabilize our cost increase. And then, also, with the integrations, our P&C agents and life agents will have more opportunities to cross out products which will help them to boost their revenues as well as our revenue. And then coming to your second question on our 5% net revenue gross expectation, and we believe that this target should be achievable based on our expectation that life insurance -- there is very limited room for our life insurance new business to go down further and for this quarter, our new business -- new life insurance business decreased by 30% and the delay for the third quarter -- the new life business should be -- the decrease should be no higher than 15%. Thank you, Patricia.

[Patricia Cheng:]

(Interpreted). Thank you.

[Operator:]

And your next question comes from the line of Andy Nahas of Prospect Fund. Please ask your question.

[Andy Nahas:]

Yes. Thank you. You were talking earlier about using the cash on the balance sheet to grow the business and that is the best way to use the cash, is to grow the company in the future. I wanted to know how many times bigger or how big in annual revenue do you think CNinsure will become in the very long run without acquisitions and why?

[Oasis Qiu:]

(Chinese language spoken)

[Chunlin Wang:]

(Interpreted). We expect our annual revenue should be growing by double digits in 2014.

[Andy Nahas:]

Okay, I guess I'm thinking more longer-term than that, you know, how big in annual revenue do you think this company will become in the long run and without acquisitions, and why do you think that?

[Oasis Qiu:]

(Chinese language spoken). Chunlin Wang^ (Interpreted). I think it is foreseeable that we will be able to maintain a double digit growth for at least five years starting from 2014.

[Andy Nahas:]

Okay, and the other question I have is you have a website and you have sales agents, and what I'm wondering is how important is the website for generating revenues for the Company. What is the purpose of the websites or is it really the sales agents generating the revenues?

[Oasis Qiu:]

(Chinese language spoken).

[Chunlin Wang:]

(Interpreted). To be honest, this is the website, the contribution from this website is kind of limited as for e-commerce development requires a huge investment in marketing and advertising. However, we are -- we believe that the timing for the B2C market is still not ready, and so that is why we are putting the marketing and advertising on hold before we actually see the opportunities coming. Right now, at this stage, we are kind of maintaining the website operations and keep looking for opportunities and the entry point for -- to explore the e-commerce opportunities is the mobile technology, based on the fact that right now, the mobile technology is the trend of our time and also based on the advantage that we already have which is a large number of sales force. So we are using this mobile technology to help our agents to increase their productivity, their efficiency and allow them to sell more products to the CNpad. And right now, we are still perfecting the technology of the system and we believe that the contributions -- we will see more meaningful contribution from this area in the next years. And I would like to share with you to highlight when we promote the use of our CNpad among our sales agent, first of all is the per unit productivity as we originally expected, the annual per unit productivity should be around 300,000 and however, based on the result in the second quarter, so far, we have sold like 480 units of CNpad and a per unit productivity has actually -- getting close to 500,000 so which is much higher than we originally anticipated. And then secondly, based on the feedback from the sales agent who has been using CNpad and they feel that CNpad do help them a lot and they still kind of more kind of rely on CNpad to conduct its business. Right now, we are still controlling the pace of the CNpad while we are working on perfecting the technology and broaden -- continue to broaden the product offerings available to CNpad to make sure that our agents have better using experience.

[Andy Nahas:]

Okay, and one last question. Over the next five years, what area will be the biggest growth driver for you? Will it be property casualty, will it be life insurance, or wealth management, do you think?

[Chunlin Wang:]

(Interpreted). I think we can summarize our drivers for the next five years in three words, first through phases, first is the comprehensive financial services which consist of a wide range of products including life insurance, P&C insurance, wealth management products and we describe those comprehensive financial service as a [nuclear] weapon and then the second driver is the e-commerce business and we regarded as kind of a missile weapon for us. And then thirdly, the organizational integration which enables to integrate our various business units which used to be operated separately into a unified platform and we regard this as kind of an aircraft carrier for us. So this will be the three drivers.

[Andy Nahas:]

Okay, thank you.

[Oasis Qiu:]

Thanks.

[Operator:]

Thank you. Ladies and gentlemen, as there are no further questions, that does conclude our conference for today. Thanks for participating and you may all disconnect.