Fanhua Inc.
Q1 2015 Earnings Call Transcript

Published: 20 May 2015

[Operator:]

Thank you for standing by for CNinsure’s First Quarter 2015 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. Webcast replay will be available within three hours after the conference is finished. Please visit CNinsure’s IR website at ir.cninsure.net, under the Events and Webcasts section. Today’s conference is being recorded. If you have any objection, 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, CNinsure’s Investor Relations Officer.

[Oasis Qiu:]

Good morning. Welcome to our first quarter 2015 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 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 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 first quarter 2015, and take your questions after their prepared remarks. Now I will turn the call over to Mr. Wang.

[Chunlin Wang:]

[Interpreted] Thanks to all of you for joining us this morning. I welcome this opportunity to give you an update on our results for the first quarter 2015 and the progress in executing on our O2O strategy. After that, I will provide a bit more color on some of the frequently asked questions by investors. Our CFO, Mr. Ge, and I will take your questions after the prepared remarks. Entering 2015, we remain focused on expanding the influence and transaction volume of our sales and service platform. In an effort to constantly strengthen our leading market position and further expand our market share. And this effort enable us to generate RMB 2.1 billion insurance premium in the first quarter 2015, up 17.7% year-over-year, marking a good start to achieve our full year target of RMB 10 billion in insurance premium. This solid growth was attributable to both strong P&C and life insurance sales. P&C insurance business combining both the retail and brokerage business, experienced 18.7% year-over-year growth in insurance premium, ahead of the 12.6% growth in the overall P&C insurance sector in China; while our life insurance business also showed record growth with over 50% upsurge in new policy sales in the first quarter 2015 as compared to the year-ago quarter. Driven by the strong growth in our insurance distribution business segments, total net revenue for the first quarter 2015 was up 24.3% year-over-year. We are also pleased that the development of our online initiatives has contributed significantly to improving operating efficiency and decreasing cost, as evident by adjusted expense ratio down to 18.2% in the first quarter 2015 from 22.2% in the same period last year. Adjusted operating income excluding expenses incurred by online and mobile initiatives for the first quarter 2015 grew 24.3% year-over-year representing an increase at same pace with total net revenues. Looking at each of our business line, net revenues of our insurance agency business grew 23.3% year-over-year to RMB 430 million in the first quarter 2015, accounting for 74.8% of our total net revenues. First of all is our P&C insurance agency business, driven by strong sales growth and the continued increase in commission rate, the P&C insurance agency business segment reported 22.3% growth in net revenues in the first quarter 2015 with a big portion consummated on CNpad application increasing from 14.6% to 34.7% year-over-year. Net revenues of our life insurance agency business in the first quarter 2015 were up 29.9% from the year-ago quarter, representing over 20% growth for the second consecutive quarter resulting in that ending negative growth trend over the past two years, back to high growth track. The strong growth was fuelled by an upsurge in new policy sales, which resulted in 60% increase in commission derived from new policy sales year-over-year. We were also encouraged to see that our 13-month persistency ratio remained at above 82% ahead of the average level across the industry. Our insurance brokerage business continued with strong growth momentum into the first quarter with net revenues significantly up 70% year-over-year, accounting for 14.9% of our total net revenues, as compared to a 11% for the year-ago quarter, thus becoming our second largest revenue source growing the insurance agency business segment. The impressive performance was mainly ascribed to our effective expansion in sales channels and demonstration into new areas to market our innovative insurance solutions. Insurance claims adjusting business reported negative growth for the first time with net revenues for the first quarter 2015, down 5.7% year-over-year, mainly due to firstly a decline in non-auto P&C insurance claims adjusting cases, as there were fewer natural disasters over the past years. And secondly, a decline in our auto-related business, because one of our insurer partners reduced claim services outsource to third party service providers like us. And then because of the portion of our now auto P&C insurance claims adjusting business, which generally have higher gross margin drop in the first quarter, gross margin of our claims adjusting business declined year-over-year, which also posted pressure now overall gross margin. Now looking ahead as we step up investments, we achieve our goals in building a public service platform for insurance industry. With that, our insurance claims adjusting business will return to growth track in the third quarter this year. Now turning to the progress that we made in our O2O strategy. In the first quarter 2015, we step up investments in pushing forward our O2O strategy, and we’re excited to see great progress in each of our online initiatives. Firstly, CNpad mobile application now supports price comparison and transaction on mobile devices for insurance products from 37 P&C insurers and five life insurance companies. By the end of the first quarter 2015, the number of accumulated activated downloads for CNpad App were over 63,000 copies and 8,000 was added in the first quarter 2015 of which over half were downloaded and activated by newly joined self-agents. Insurance premiums generated through CNpad App in the first quarter 2015, which RMB520 million, up 163.7% year-over-year, contributing 24.6% to our total insurance premiums, as compared to a 11.1% for a year ago quarter. Secondly, Chetong.net with 14,000 registered service representatives by the end of the first quarter 2015 has processed over 34,000 claims during the quarter, of which 20,000 was handled in March, reflecting a notable accelerated growth momentum on a monthly basis. Our aim of building Chetong.net as a public service platform for the insurance industry was well received by a lot of small, medium-sized insurance companies. Currently, we have signed corporation agreements with 25 partners, including 21 insurance companies. Thirdly, eHuzhu has accumulated over 300,000 registered members as of date. Donations related to fee mutual aid cases, including one for a member diagnosed with cancer and two for accidental death have been made after verification. We also see news on the regulatory front. The CRRC issue, the trial measures on regulating mutual insurance organization in early 2015. And therefore, we have submitted an application to establish a mutual insurance company and operating eHuzhu in accordance with the criteria of a mutual insurance company to - in order to get prepared to capitalize R&D opportunities in the mutual insurance market in China. And then I would like to use the next card of the pool, to discuss some of the most frequently asked questions that we’ve received recently, in particular, regarding our strategy. And the first question is that, in China right now professional insurance intermediaries only have very small market share and the emergence of online platforms set up by Internet companies and insurance companies also pose threat to professional insurance intermediaries. How can insurance intermediary companies and CNinsure standout from this fierce competition? Insurance intermediaries are not only immediate sales channels for insurance companies, but also an important force driving the innovation and development of the insurance market in international insurance markets. There should be no exception in China. We believe that by transforming themselves from a labor intensive model to a service-oriented and knowledge-based model and by leveraging our new technology, professional expertise and innovation in customer service to achieve low-cost policy acquisition, high value-added customized service, and quality user experience, independent insurance intermediaries in China will not be eliminated, but will become a more vigorous market for us. Firstly for standardized products, we believe that only those independent insurance intermediaries who have the advantage in low cost policy acquisition can distinguish themselves from the competition. Insurance comparison websites provides an effective way to improve efficiency and lower cost as they can aggregate a variety of commoditized retail products from various insurance companies, allowing customers to easily research compare and buy insurance policies online. In the United States and UK, insurance comparison websites have become a major channel for insurance companies to sell standardized products, while in China the market has just been unfolding. Now with the pilot project of the auto-insurance pricing reform being rolled out in six provinces in China, and with the deepening reform and further proliferation of PC and mobile internet in China, we believe there’s huge scope for growth for insurance comparison websites in China. Secondly, independent insurance intermediaries should transform themselves from offering low value-added services to high value-added services. Insurance broker is one good example, for many large projects commercial insurance products such as construction insurance, special property and casualty insurance for our business. Due to the competitive structure, it can hardly be covered by one single insurance policy and therefore requires the expertise of professional insurance brokers to offer the insurers advisory on risk management and on providing, designing insurance solutions. The ante-barrel [ph] for such kind of commercial insurance brokerage services is much higher than retail business. In 2012, insurance brokerage premiums were RMB 6.2 billion, compared to overseas market there is still huge growth potential for insurance brokers in China. Insurance claims adjuster is another example. A lot of commercial insurance are complicate and may cover a wide range of risks. The claims process also requires the expertise of professional claims adjusters which are also indispensable. In addition, independent insurance intermediaries can also play an important role in the life insurance sector. Homogeneity is the common denominator in the present life insurance market. As consumers become more sophisticated, this growing conflict this between similar type of product and consumer demand for personalized product and services, where independent insurance intermediaries, they can bring huge value to customers by working with insurance underwriters in the product design process based on their firsthand knowledge of customers’ needs and market trend, and customizing customer’s insurance trend that best fit their needs, according to their social status, consumption behaviors or family structure. Customer service is what builds the success of independent insurance intermediaries. Take property and casualty insurance for instance, after-sales services are important factor for insurance companies to build customer loyalty. Right now, there are also some property and casualty related services providers in the market. For auto services, there are car repair shops, emergency assistance centers, designated driving centers, auto care and maintenance shops, accessories and parts dealers, auto club and rental service, et cetera. It can be quite costly to buy each of the single auto service for insurance companies or for car owners. If this one public platform that can aggregate all these service, it will be instrumental to lower the average cost and facilitate better customer experience. Therefore, P&C insurance-related services aggregators also have a great potential to benefit from the huge demand for high quality after-sales service. These observations are also the key reasons behind our decision to give up on our comfort zone of the existing business model and transform towards an auto model by leveraging on the Internet to achieve low-cost parts acquisition. And secondly, continuing to strengthen the expertise and service capability of our underground sales and service support, consisting of life insurance advisors, brokers, and claims adjusters. And thirdly, building a public platform for the insurance industry and aggregating the claims adjustment in auto services. In order to push forward our strategic transition, we plan to invest more than RMB 21 billion [ph] to build a unified O2O platform. Then many people ask, what makes us believe that we can succeed in our transition. How can we compete with Internet giants and insurance companies who are also building their own online platform? We believe that it’s manageable that Internet companies will cap into the insurance industry, and insurance companies establish their online service platforms. But for an insurance market still an early stage of development, such as in China more players coming into the industry will help accelerate the formation of consumption habit of purchasing insurance online, nurturing insurance e-commerce environment. Insurance companies establishing their own online sales platforms helps a lot in driving transparency in the insurance market, and enhancing consumers understanding on the insurance product. However, there still needs a market consolidator to provide a platform for consumers to search and compare, and find the suitable insurance solution with most attractive price and services among whole bunch of similar products in the pool. Professional insurance intermediary company as an independent third-party has a natural advantage to serve as a market consolidator to fulfill consumer’s needs for price and product comparison. As for Internet companies tapping into insurance area, their biggest advantage is their online traffic. But regarding a better understanding in customer needs and the capability in offering topnotch after-sales service, they still need a support from a professional and extensive service network offline. Therefore, despite a strong online content, Internet companies can only be a channel or a portal website, if they have neither insurance business sphere nor extensive insurance service network offline. It is just like e-commerce business without logistics. With CNinsure our competence or the key for success in transforming into an O2O platform is our experience in the insurance business and service capability. Firstly, we have established strong offline sales and service capability into professional insurance intermediary industry over the past 16 years with a geographic coverage of 27 provinces in China and over 500 sales and services outlets across the nation and over 60,000 sales agents. We generated 8 billion insurance premiums annually in 2014, comparable to a medium-sized P&C insurance company. And what we have achieved over the past decade constitute an unparalleled competitiveness against our competitors. Apart from our offline content, their close relationship that we have built with a wide range of insurance companies since conception is another strength. Currently, we have partnerships with over 70 insurance companies in China of which 31 are P&C insurance companies and 17 life insurance companies, and they have entered a cooperation with this at the quarter level. And this enabled us to win support from insurance companies more easily when developing our online initiatives, which is also one of the contents that distinguish us from other competitors. The O2O platform we have committed to building include online and offline operations, while our strong offline capability has been well-established over the past 16 years, we are also encouraged by the progress achieved shortly each time when we launch our online platforms including CNpad app, Baoxian.com, Chetong.net and eHuzhu over the past three years. And this achievement were mainly ascribed to our solid outbound [ph] foundation as we have already have tens-of-thousands of our employees and agents helping in marketing and building up our brand awareness online to word of mouth. And that’s the reason why we are able to accomplish more with half of the efforts. We understand the concerns [or even doubted] [ph] on our strategic transition and we remain committed to addressing this concern in our strategy execution. And we were excited to see impressive growth in our strategy execution over the past few years, which drove the company back to strong and stable growth over the past year-and-a-half. As we speed up investments in technology and marketing, we believe that we will be able to achieve our target of generating RMB 10 billion insurance premiums in 2015 and further expanding our market share. Thank you.

[Oasis Qiu:]

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

[Operator:]

[Operator Instructions] Your first question today, comes from the line of Andy Nahas from Prospect Fund. Andy, please go ahead.

[Andy Nahas:]

Thank you. First of all, congratulations on the strong growth. I was wondering what - can you comment on the - give an update on the pricing deregulation for life insurance and auto-insurance? As that becomes more rolled out, what do you think that will do for your growth rate going forward?

[Chunlin Wang:]

[Interpreted] First of all, the life insurance pricing deregulation started in 2013 and after two years gradual implementation it already started to show some positive impact on the market and also on CNinsure’s financial results. For example, we have achieved or we have entered into cooperation with Taikang Life, which is one of the leading life insurance companies in China. And there the revenues from Taikang Life contributed 40% of our total new party sales in the first quarter. And we believe that because of the product innovations driven as result of this life insurance pricing deregulation. And in this year we are planning to hold three products column together with insurance companies. One will be related to the life insurance underwriting and also as well as related to life insurance re-insurance. And we believe that this initiative and also this further product innovation will help push forward further growth of our life insurance business. And for the O2O insurance pricing deregulation, we believe that the reality of the CRRC is to push forward its reform cautiously. And as far as we - a pilot project will be launched in the - on June 1 in six provinces and it will be implemented on a steady pace and we don’t really believe that it will bring drastic changes to the market in the near term. But for the long-term we believe this is a positive policy. And first of all it will help further push - increase the market competition among insurance companies. And we actually believe that insurance intermediaries will be benefitting from this more fierce competition among insurance companies. And then secondly and with the new auto-insurance pricing deregulation, the - currently, the provincial pricing raise enjoyed by the telemarketing and online sales channel will be broken, because one of the pricing structures for insurance companies to set their price is actually - is channeled, so that means that other channels like CNinsure could be one of the channel that can enjoy a better pricing rate. So we believe that that will help the development of our business going forward. Thank you.

[Operator:]

Your next question today comes from the line of Henry Guo from Summit Research Partners. Henry, please go ahead.

[Henry Guo:]

Hey, thanks for taking the question. So two quick ones, So first is the on the top line, I remember management mentioned in the last conference call that the whole year net revenue expectation is about 30% year-over-year growth. So now we’re approaching the end of May, we should have more visibility, is there any update regarding the net revenue guidance for the year? And secondly, on margin, so it would be great if management can provide some color in terms of the margin trend, how you think about the margin for the guidance of the year. Thank you.

[Chunlin Wang:]

[Interpreted] First of all, we have already provided guidance for the second quarter, for the top line growth of 30%. And we are also confident that we can achieve 30% growth for the whole fiscal year. In terms of the earnings, excluding the investments in online initiative, and we also believe that we can achieve 20% to 30% growth in terms of operating income. Thank you, Henry.

[Operator:]

[Operator Instructions] Your next question today comes from the line of Zhu Ling from BBA. Zhu, please go ahead.

[Zhu Ling:]

[Interpreted] The question is from Zhu Ling and he’s asking the strategic investment by Alltrust, is there any update on the strategy or business cooperation with Alltrust so far?

[Chunlin Wang:]

[Interpreted] We have already entered the agreement with Alltrust in terms of the strategic investments, but the transaction - the completion of the transaction is still subject to regulatory approval. And having said that, actually, I have scheduled a meeting with the management of Alltrust next Monday to discuss our further cooperation with Alltrust in terms of business on further business cooperation. And we do believe that the strategic investment will help push forward and will help deepen our cooperation going forward.

[Zhu Ling:]

[Foreign Language]

[Chunlin Wang:]

[Interpreted] Alltrust also have high expectations of our future cooperation on this strategic investment - after this strategic investment.

[Operator:]

Your next question today comes from the line of Rohit Sah from TCW Group. Rohit, please go ahead.

[Rohit Sah:]

Yes, Hi. I’m looking at your operating cash flow numbers, and there are some items which I need a more detailed explanation. First one is, in the operating cash flow item, it says changes in operating cash - assets and liabilities minus RMB38 million, that’s up from minus almost RMB7 million last year. Can you explain how this happened, how did you manage to drain RMB38 million in operating assets and liabilities? And within the operating cash flow activity, it is also a negative RMB2 million on investment income. So how did you manage to lose RMB2 million on investment income, I know it’s a very small amount, but still the negative is the problem?

[Peng Ge:]

[Interpreted] The question will be answered by our CFO, Mr. Ge. And the first question regarding our cash flow, actually, CNinsure, we don’t have any debt and the liability is mainly because of the difference between the commission receivable and also the commissions payable to sales agents and because of the longer turnover period for the commissions receivable and hence the negative impact on the operating cash flow. And then secondly for the investment income and according to the accounting principle actually we can only recognize the investments from the investment income when received, because the investment income is mainly related to the - our investment in truck products, and also to interbank savings deposits. And we only recognize it when received, and because of the - because of some of the payments of those dues - or interest are paid on a semiannual basis. So in the first quarter, there is less investment income.

[Rohit Sah:]

Okay. So can you give us an idea of how many account receivable days you have and how many account payable days you have?

[Unidentified Company Representative:]

[Interpreted] Account receivables. The accounts receivable as of now - as of the first quarter?

[Rohit Sah:]

No, no, not account receivables, but account receivable days?

[Unidentified Company Representative:]

[Interpreted] Basically there is settlement periods about two months. So we already received 80% of all the amounts receivable.

[Rohit Sah:]

Okay. And for account payable - account payable date?

[Unidentified Company Representative:]

[Foreign Language]

[Chunlin Wang:]

[Interpreted] Basically, it attracts [ph] our accounts receivable.

[Rohit Sah:]

Okay. And so they roughly match, I mean, there is not a big difference, only a - you got a two-month accounts receivable and a one-month accounts payable, so your working cycle is really one-month account receivable days being more. So that seems - the RMB38 million seems a bit high even if you allow for that one-month extra unless your sales are growing very, very fast?

[Unidentified Company Representative:]

[Interpreted] Normally, the accounts receivable match the accounts payable. But for the first quarter, because - the big difference was, because it’s also the season to pay the bonus and the bonus for the employees, because the accounts payables also includes the bonus for employees and also the professional fees. And also during this season, we pay our legal fees and audit fees, and so that’s why it caused the big difference.

[Rohit Sah:]

Okay, okay. So, sure, leaving aside the seasonal issues, should we assume that this negative change in operating assets is actually a leading indicator for your future cash flow?

[Chunlin Wang:]

[Interpreted] Well, basically in the past, because we are quite comfortable and our cash flow was positive. But going forward, it’s also that our cash flow will become negative and that’s because of how the way that we’re using our capital. And in the first quarter, we have acquired some minority interest from our subsidiaries. And we’re going to continue to buy out the minority interest going forward. And then secondly, when we have a year mark huge expenses in - to invest in the online initiatives, you might be - you might notice that actually if we exclude the investment in online initiatives, our operating income actually reported a probably strong positive growth. But yes, indeed the investment in online initiatives will continue going forward and that will have some negative impact on our cash flow. And then thirdly, on the Internet phase it’s possible that we will have some M&A activities going on. And overall, this capital expenditure will have some negative impact on our cash flow. So the cash flow will be negative in the future change going forward.

[Rohit Sah:]

Okay. I want to turn to the cost of insurance agency business…

[Oasis Qiu:]

Okay.

[Rohit Sah:]

In the press release that you gave, you said that there was a 26.7% increase in the agency - P&C agency business, and 39% increase in the life insurance business because of increased commissions paid out to sales agents, as a result of increased market competition offsetting the increase in commission rates that we received from insurance companies. What was the commission rate that you were paying before this? What are those now? Now, it says increased market competition, so where are you seeing this competition from which drove you to increase the commission payouts to sales agents?

[Chunlin Wang:]

[Interpreted] The competition mainly come from insurance company, because right now actually, our peers cannot really pose any threat to us due to our scale, and we have better - we have much more stronger - we have stronger bargaining power with insurance companies, but the competition mainly come from insurance companies. And as for the changes in commissions, it can be reflected in the changes on gross margins. Historically, our gross margins were as high as 40% to 50%, but right now it has dropped to around 23%. So basically, reflecting the increase in commission payout to the sales agent in a country two to three years.

[Operator:]

There are no further questions on the line. I would now like to hand the conference back to Ms. Qiu for closing remarks.

[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, this does conclude our conference for today. We thank you for your participation. You may now disconnect.