Fanhua Inc.
Q3 2014 Earnings Call Transcript

Published: 26 Nov 2014

[Operator:]

Thank you for standing-by for CNinsure’s Third Quarter 2014 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’ll be a question-and-answer session. Please follow the instructions given at the time if you’d like to ask a question. For your information this conference call is now being broadcasted live over the Internet. Webcast replay will be available within three hours after the conference is finished. Please visit CNinsure’s IR Web site at ir.cninsure.net under the Events & Webcasts section. Today’s conference call is being recorded, if you have any objections, you may disconnect at this time. I’d now like to turn the meeting over to your host for today’s conference, Ms. Oasis Qiu, CNinsure’s Investor Relation Officer. Thank you, please go ahead.

[Oasis Qiu:]

Good morning. Welcome to our third quarter 2014 earnings conference call. The earnings results were released earlier today and are available on our IR Web site, as well as on newswire. Before we continue, please note that, the discussion today will contain forward-looking statements made under the Safe Harbor provision of the U.S. 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 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 third quarter 2014 and take your questions after the prepared remarks. Now, I would turn the call over to Mr. Wang.

[Chunlin Wang:]

Hello everyone. Thank you for joining us on today’s call. On today’s agenda, I will give you an update on financial highlights for the third quarter 2014 and share with you our O2O strategy development. Our CFO Mr. Peng Ge and I will take your questions after this. As is always an overview on our financial performance in the third quarter, our top-line grew 25.9% year-over-year kicking a record high since the Company started transformation two years ago. The stellar growth which far exceeded our guidance of 15% also outpaced industry growth of 13.4% in terms of insurance premium during the third quarter, partially reflecting the contribution from our O2O strategy. On the expense front, while there was 135.6% year-over-year increase in the operating expenses related to our online and mobile initiatives, the overall expense ratio was 3.1 percentage points down from the third quarter last year and slightly up sequentially, attributable to better expense control after our organizational restructuring last year, and the continued decrease in share-based compensation expenses. Adjusted operating income that excludes expenses incurred by our online and mobile initiatives grew 98.7% from the year ago quarter. And diluted EPS grew by 19.3% year-over-year. Looking at each of our business segments, insurance agency business saw 18.2% year-over-year growth in net revenues, mainly driven by strong growth of our P&C insurance agency business partially offset by the decrease in life insurance agency business. Our P&C insurance agency business recorded 22.4% net revenue growth from the third quarter last year, mainly driven by its 26.9% premium growth, which far exceeded the 15% premium growth in the P&C insurance industry. The robust growth reflected increasing contribution from CNpad application. Net revenues of our life insurance agency business for the third quarter 2014 declined by 7.2% from the year ago quarter, owning to the decrease in commissions from our short-term insurance business and recurring business. The drop in short-term insurance business was mainly due to reclassification of certain short-term insurance business from life insurance agency segment to P&C insurance segment as a result of our organizational restructuring and a decrease in recurring commission ascribed to the decline of new policy sales over the past two years. However, we were encouraged that commissions from the sales of new long-term life insurance policies grew 15.9% from the third quarter last year and that the overall gross margin of our life insurance business slightly improved year-over-year. In the third quarter, net revenue from our claims adjusting business grew 9.5% from the year ago quarter. The growth slowdown was mainly attributable to single-digit growth for our non-auto insurance related business affected by a decrease in the number of special cases of such business during the quarter, but auto insurance related business maintained a double-digit growth. As now auto insurance related business which generally has a higher profit margin decreased as a percentage of the total claims adjusting business during the quarter. The overall gross margin of our claims adjusting business dropped slightly from the year ago quarter. Our insurance brokerage business continued strong growth momentum into the third quarter with net revenues up 215.6% year-over-year, accounting for 12.5% of our total net revenue. As a result of our approach in exploring new opportunities and expanding this business over the past few years, as well as the low base and has been maintaining a [Technical Difficulty] year. Looking forward, we are still confident in its growth in the future. Now let’s look at our online and mobile initiatives. As we continue pushing forward our auto strategy, we have seen exciting progress in our online and mobile initiatives. The CNpad application was made available for free download this May, we were excited to see double sequential growth in the number of downloads and active users. As of September 30, 2014 over 40,000 copies of CNpad App have been downloaded and activated and there were about 22,000 CNpad App users. During the third quarter, revenues contributed by CNpad App reached RMB77 million, up 618.5% and 49.3% year-over-year and quarter-over-quarter respectively, accounting for 14.2% of our total net revenues as compared to 2.5% in the third quarter last year. The CNpad App was also well accepted among sales agents outside CNinsure. Of the total downloads of CNpad App as of September 30, 2014, 39% was downloaded by external sales agents. In terms of product offerings, we have added auto insurance products from 33 insurance companies on CNpad. Nearly 300 now auto P&C insurance and life insurance products are also available. To facilitate more sales transactions, we have successfully enabled electronic data interchange or EDI with six insure partners and are in the process of building up such EDI connections with other eight insurance companies, which not only demonstrated that our insurance partner’s high recognition and destocking CNinsure but also help create stronger competitive barriers for our proprietary mobile sales support system. Now let's turn to eHuzhu, we launched eHuzhu in early July and in the last 13 months since the launch. As of September 30, 2014, the number of paying members of the platform has exceeded 140,000 the rapid growth reflects people’s consent over their vulnerability to critical disease or accidents, given the growth in the pollution and stress in the modern society. Therefore, we are inspired to launch eHuzhu, a mutual aid platform that offers people an affordable, convenient and effective way to cope with certain unexpected unfortunate events. In addition, it also opens up an opportunity for us to accumulate a large number of loyal customer base which would in fact to monetize in insurance healthcare or financial service areas. On August 28th, we launched chetong.net the first public auto insurance after sales service platform in China. The platform is dedicated to aggregating service representatives across the nation to offer location-based auto services, such as car accident inspections, loss assessments, emergency assistance, quick repair and valet driving. We will push forward the development of chetong.net in two phases. During Phase 1, chetong.net will serve as the ground service provider for insurance companies and when it comes to Phase 2 the end consumers will be able to request service directly via chetong.net application. So far, we’ve been talking with several insurance companies or corporations while focusing on attracting service representatives to join the platform. The number of service representatives who have signed up on the platform was growing much faster than we expected. Within one month since the launch, the platform has aggregated over 3,000 service representatives, which is twice the number of our existing claims adjustors. As the regulator encourages further market opening and more innovation, we are taking advantage of the opportunities arising from the market driven reforms in the industry and new technology to build a leading offline to online insurance sales and service platform in China. Based on the progress we’ve achieved so far, we believe that, we are on the right track to achieve our strategic growth and we have widened our gap with our competitors. We will continue to invest in the IT infrastructure and marketing related to our online initiatives, which may impact our bottom-line in the near-term to medium-term, but we have confidence that investment will bring decent returns to shareholders over the long run. We expect our top-line growth in the fourth quarter of 2014 will be around 20%. Thank you.

[Oasis Qiu:]

Now, our CEO Mr. Wang and CFO Mr. Ge will open the floor for your questions. Question-and-Answer session

[Operator:]

[Operator Instructions] Thank you. And your first question comes from the line of Arthur Hall from Hall & Co. Go ahead, please.

[Arthur Hall:]

At a recent presentation in Hong Kong, you projected some dramatic increases in your online revenues and total revenues of about RMB4 billion in 2017. Also projecting that your operating margin would increase from about 2% this year to about 20% in 2017, that is very dramatic. Obviously the market doesn't believe that or the stock wouldn't sell where it does. Could you explain a little bit more how you can get to get that operating margin and when we'll start seeing that? Thank you.

[Chunlin Wang:]

As we have one of our online and mobile initiatives and we believe that we have much more stronger capability to consolidate the market resources. And we expect that starting from 2015 we will be able to grow over 30% year-over-year in terms of top-line and that means that we will be able to double our revenue within three years, so that means by 2017. And we think that should be an achievable target. And then in terms of the operating margin, we do not give any specific guidance during the strategy day, but we do believe that the operating margin will improve overtime and also the cost ratio the growth -- the pace of the growth of the cost will be much slower than the pace of the growth of our revenue.

[Arthur Hall:]

So I would expect then you would see some improvement in the operating margin in 2015?

[Chunlin Wang:]

Yes, we expect so.

[Operator:]

Thank you. [Operator Instructions] Thank you. And the next question comes from the line of [Joe Lynn] from [Bercham]. Go ahead please.

[Unidentified Analyst:]

[Foreign Language]?

[Oasis Qiu:]

The question is related to the increase in investment, in short-term investment. He would like to know what kind of short-term investments are exactly?

[Chunlin Wang:]

The Board has authorized to allocate certain amount of our capital in short-term investments, in investments that has a low risk and relatively better review, the amount is about 1 billion in total, the amount that we have been authorized. And the increase of the short-term investments amounting to 170 million, it’s mainly due to the increase in this kind of short-term investments.

[Unidentified Analyst:]

[Foreign Language]?

[Chunlin Wang:]

The short-term investment mainly consists of trust product, collective trust products, the yield is about 10% and these products are issued by trust companies and then the it also contains certain interbank savings products issued by asset management companies and this kind of product generate a return of 7% annualize return 7%.

[Unidentified Analyst:]

[Foreign Language]?

[Chunlin Wang:]

Before we made the decision to enlarge in these types of products we have done a thorough survey and an assessment on the risk related to this kind of products. For the trust product -- all this trust product come with guarantee and also collateral and then for the interbank savings these are all mainly cash flow between banks and the risk are pretty low.

[Unidentified Analyst:]

[Foreign Language]?

[Chunlin Wang:]

Right, actually -- to clarify actually 39% of the 22,000 users are new agents of CNinsure.

[Unidentified Analyst:]

[Foreign Language]?

[Oasis Qiu:]

So far we have -- there were 40,000 CNpad application downloaded and activated and around 40% have been in use, 40% of our agents have been using this CNpad application and Joe Lynn is asking whether we are going to -- is it possible that all of our agents will start using CNpad in the second quarter of next year? Mr. Wang answered that we actually expect to convert -- to move all our auto insurance business from offline to mobile devices by October 30, 2015.

[Unidentified Analyst:]

[Foreign Language]?

[Oasis Qiu:]

By the end of next year.

[Chunlin Wang:]

Right now, P&C business contributed 70% of our net revenues and of that 70%, 75% to 80% is auto insurance business. And amount of the auto insurance business around 70% to 80% are retail business. And right now, most of the retail business that we believe will be moved to CNpad will be mostly the retail business.

[Unidentified Analyst:]

[Foreign Language]?

[Chunlin Wang:]

So that means about 3 billion insurance premium will be transacted over CNpad application by the end of next year.

[Oasis Qiu:]

What’s the gross margin?

[Chunlin Wang:]

Actually the gross margin for business transacted over CNpad should be basically in line with those transacted offline, but we believe the operating cost, or the gross operating cost will be much slower than revenue growth.

[Unidentified Analyst:]

[Foreign Language]?

[Oasis Qiu:]

How much will the net margin improve owning to the contribution from CNpad application? Well as to this question, Mr. Wang thinks that right now, it is difficult for us to quantify. We may have to make a estimate, so an estimate in the fourth quarter and hopefully we can give you an answer then. But we believe that the operating cost ratio do roll through several stages in the initial stage of investment, because we need to invest in the to build out the infrastructure, there was a slight increase in the operating cost, but right now the operating cost ratio is flattish year-over-year right now. And then going forward, we believe that it will go down.

[Unidentified Analyst:]

[Foreign Language]?

[Oasis Qiu:]

I am sorry I will translate a question. So the question is why top-line growth was much faster than before in the third quarter, but actually even though we gave the guidance of 15% and this was relatively conservative. In the first half of 2014 our top-line also grew by 20.8% and the growth momentum continued into the third quarter. And we do have a belief that we should be able to grow by over 30% in 2015.

[Operator:]

[Operator Instructions] Thank you. The next question comes from the line of George Wong. Go ahead please.

[Unidentified Analyst:]

Well first of all we observe that your earnings have been on an improvement track in the first two quarters of this year and for the third quarter the sales growth was also quite remarkable. However this earnings and also top-line growth improvement was badly reflected in your stock price. Since you do have a lot of cash, and given the low price -- low stock price, has management ever talked about doing a share buyback, or any other means to increase shareholder value?

[Chunlin Wang:]

The management remains committed to increasing shareholder value. However, probably in the past two years the management has been focused a lot of energy on bringing a turnaround in our fundamentals. And we actually believe that without a turnaround in our earnings or top-line growth any means to -- any means that anything we do in a capital market will not be sustainable. But right now as we have our online and mobile initiatives has started to up and running and we are back to the growth chart, probably it’s time for us to sit down and think about what options we have to increase the capital of the stock price, improve the stock price and increase shareholder value and there are a lot of options, several options in front of us and we need to consider about it.

[Unidentified Analyst:]

Well you have made a lot of effort to develop -- to expand your Internet presence over the past year, and actually you did come up with something. However, it seems that the stock market did not really appreciate the effort. And as the other investors mentioned just now, that the -- your investment in this online and mobile initiatives, for example like the investment in CNpad, will contribute to bring the cost down. However the stock market may not be -- fully understand that. Could you please elaborate a little bit more on the impact of your Internet strategy on CNinsure?

[Chunlin Wang:]

Yes indeed our mobile initiative did help drive our sales growth in the third quarter. However, we still believe that we are at a very initial stage, very early stage of development of the online and mobile initiative. We just rolled out this platform not long ago. So I believe that the achievement is still not enough. The development of our online and mobile initiative is performing much better than we expected, but we still believe that there is still more to come. For example, such as three online initiatives that we have been build out for example, first our CNpad, we believe that by the end of this year, by December the monthly premium contribution from CNpad application will reach 300 million monthly. And then secondly for chetong.net, right now their registered service representative the number of registered service representative is about 9,000 and we believe that -- and this number is a little bit more than the number of claims adjusters of [indiscernible] and in fact the number will increase to 30,000 by the end of next year which is also equal to the number of claims adjusters of [indiscernible] group and within three years we expect the number will increase to 80,000 which is equal to the total number of claims adjustors in the market right now. And then thirdly for the eHuzhu platform, right now we have about 20,000 -- we have over 20,000 paying members. And right now we are working to persuading some institutions to join the platform. And we believe that by -- with that coming, we will be able to achieve a target of over 1 million members within the next several years. And in order to exert more impact on the market, we will first of all expand increase our investments in the marketing of this online and mobile initiative. And then secondly, we will also -- we hope probably we can achieve some strategic partnership with some mainstream, -- with some insurance company, which we believe will help us to consolidate the process more rapidly. We believe that we have several advantages as compared to our peers, first of all, we are the early movers and then secondly, we have done a lot of research in the market and trends. And then thirdly, we have accumulated a large number of the talent including the IT talent and also the operational talent. And then fourthly it’s our brand awareness amongst in the industry.

[Unidentified Analyst:]

Congratulations on the good results and also wish you best of luck in the future results and thank you.

[Operator:]

Thank you. We have no further questions at this time. I’ll hand back to Ms. Qiu and Mr. Wang for closing remarks.

[Oasis Qiu:]

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