AIFU Inc. (AIFU) Q4 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the CNinsure's 2012 Q4 Earnings Conference Call. At this time all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday March the 5th 2013 and the webcast replay will also be available within three hours after the conference is finished. Please visit the CNinsure IR website. I would now like to turn the conference over to your first speaker today's, Ms. Oasis Qui, Thank you. Please go ahead.

Welcome to our fourth quarter and full year 2012 earnings conference call. The earnings results were released earlier today and are available on our IR website at ir@cninsure.net, 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 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 walk you through our financial and operating performance in the fourth quarter and full year 2012 and discuss our strategies in 2013. They will take your questions after the prepared remarks. Now, I would turn the call over to Mr. Wang. Chunlin Wang – CEO: [Foreign language – Chinese] [Interpreted] Hello, everyone. Thank you for joining us on today's conference call. During 2012, China's insurance industry continued to show weak growth momentum to what the growth of P&C insurance has come to an hold and the life insurance remain in the low single-digit growth territory, again this we are encouraged that we met our previous expectation and maintained our market position with the 4.0% and 4.6% top line growth in the fourth quarter and fiscal year 2012 respectively. Looking at our three major business lines, our P&C insurance business, we achieved a 6.0% and 5.6% revenue growth in the fourth quarter and the fiscal year 2012 respectively, even though we abandoned some channel business which we thought they are high cost and high management risk. And secondly, on the life insurance business side impacted by the industry-wide sluggish sales of individual life insurance, our life insurance business suffered a negative growth in the sales of new policies and as a result recorded a drop of 7.8% and 1.5% in revenue in the fourth quarter and fiscal year 2012 respectively. However, benefiting from the long-term effect of life insurance business and high 13-month persistency ratio of over 82%, the recurring life insurance commissions continued strong growth momentum with a year-on-year growth of 35.8% and 19.9% in the fourth quarter and fiscal year 2012 respectively. Third, growth of claims adjusting business remained stable with net revenues increasing 4.4% and 7.7% for the fourth quarter and fiscal year 2012 respectively. The gross margin declined significantly compared to 2011, which was largely attributable to intensified market competition among insurers which forces to increased commission to our sales agents to safeguard our market position. However, we are pleased to see that the gross margin declined in the third quarter in 2012 and was improved slightly in the fourth quarter of 2012. 2012 is a transition and adjustment year for CNinsure. I am glad that with the joint efforts by all staff in CNinsure while maintaining cognitive growth we have also made important breakthroughs in various aspects as follows. Firstly, our organization structure has been substantially simplified. In 2012, we obtained approval by the CRIC to establish CNinsure Sales Service Group Company Limited which is the first insurance sales service group company in China. On the one hand, it demonstrates CRIC’s high recognition of CNinusre’s development and it’s important to further division of labor in the industry. On the other hand, the establishment of the group company offers CNinsure a way to remove the VIE arrangement and change our wholly-owned affiliate insurance agencies into branches of our two national operating insurance agencies that’s wholly controlled by the group company. As of the end of 2012, CNinsure has achieved direct or indirect equity control over 32 insurance intermediaries through the group company and the two affiliated national insurance intermediaries. In addition, our proposal to convert the first batch of 14 subsidiaries into branches have just been approved by the CRIC a couple of days ago. Secondly, we further classified the profit models of our various business units. For P&C business, we plan to leverage on the CNpads to commence sales force expansion and enhance our channel support platform to commence channel development. For life insurance business, we devoted efforts to building up capabilities, offer comprehensive financial services and products and to cater to the mid to high-end customer markets and increasing our market presence in major cities. For the claims adjusting business, we continue to enhance to leverage and with our agencies and brokerage firms for business sharing. In addition, we are dedicated to strengthening the back office support and technology to build a complete service platform that can serve insurance companies of all sizes in China. We are glad that by classifying the profit models, each of our business unit has found its own way to strong revenue streams which we believe will lay a solid foundation for a major breakthrough in profitability growth in 2013. Thirdly, our proprietary mobile sales support system was put into operation. We launched CNpad in October 2012 and started trial operation of the device in the subsidiaries in Guangdong province. So while we have over 200 units in operations announced as agents contributing over RMB30 million premiums, which was about our expectation. In the mean time, we have initiated internal testing of the system in P&C subsidiaries in Sichuan and Hebei provinces which are also progressing well. We believe that the application of the new technology will help our operating entities significantly improve the overall operating efficiency and reduce costs, as well as increase the stickiness of our platform to sales agents. Through the enhancement and transition in 2011 and 2012, the largest growth capability of the company is greatly strengthened which prepares as well for a major turnaround in 2013. We expect growth momentum will resume in 2013 and gross margin to gradually pick up over the third quarter of 2012. Within the P&C business units, economies of scale will become more evident while we continued strengthen in cooperation with insurance planners on a quarter-to-quarter basis. Within the life insurance business unit, we expect 13-month persistency ratio will maintain at high level of over 82% and the total number of high net worth individual customers will reach 10,000. For claims adjusting business, we anticipate to establish a leading position in China in terms of both sales volume and profitability. Last but not the least, we target on selling 10,000 units of CNpads in 2013. In 2013, we are dedicated to bringing more technology and comprehensive financial services into our business. Since then we will accelerate network expansions in major cities and penetrate into mid to high-end customer markets. Secondly, we will innovate to come up with more high value-added products to meet the demand of mid to high-end customers for comprehensive financial assistance and products. Thirdly, we will continue investment in technology and target at growing our CNpad’s terminal to mobile sales support system nationwide in 2013 in order to improve the operating efficiency and reduce operating cost for the company. Fourthly, we will continue to optimize the profit model of our various business units to enhance their profitability. We expect 2013 to be a critical year for a major turnaround for CNinsure. We will spare no efforts to execute our strategy of bringing more financial products as well as technology into our business in order to create a more solid base for the company’s sustainable, healthy and strong growth and deliver higher returns to shareholders in the long run. Thank you. Now, I would turn the call over to our CFO, Mr. Mr. Peng Ge.

[Foreign language – Chinese] [Interpreted] Thanks, Mr. Wang. I am pleased to report our financial results for the first quarter and the fiscal year of 2012. The numbers I will refer to will be in RMB unless otherwise indicated. Total revenue for the fourth quarter of 2102 were RMB435.8 million, up 4.1% from the year ago quarter. And then for the fiscal year 2012 were RMB1.6 billion, up 4.6% from 2011. The operating costs and expenses for the fourth quarter 2012 were RMB429.4 million, down 70% from the year ago quarter and then for the fiscal year 2012 were RMB1.5 billion, down 32.9% from 2011. Commissions and fees expenses for the fourth quarter 2012 were RMB311.8 million, up 27.1% from the year ago quarter and then for fiscal year 2012 were RMB1.1 billion, up 36.3% from 2011. Selling expenses for the fourth quarter of 2012 were RMB19.3 million, down 2.8% from the year ago quarter and then for fiscal year 2012 were RMB78.4 million, up 0.08% from 2011. General and administrative expenses for the fourth quarter 2012 were RMB98.3 million, down 24.3% from the year ago quarter and then for fiscal year 2012 were RMB356 million, up 6.8% from 2011. The decrease for fourth quarter of 2012 were primarily due to a decrease in share-based compensation expenses. The share-based compensation expenses in 2011 were primarily associated with the cancellation of stock options in November 2011. The increase in general and administrative expenses for the fiscal year 2012 were primarily due to the increase in share-based compensation expenses, which is mainly associated with the grant of the options in March 2012 and the increase in expenses in 2012. Impairment loss on intangible assets and goodwill for the fourth quarter 2012 were nil and as compared to RMB1 billion for the year ago quarter which reflected a material decline in the fair value of the company as at year end of 2011 and the expected adverse impact of overall economic uncertainties in China, growth slowdown within the Chinese insurance market and our strategic business transition on its earnings in the next two to three years. As a result of the foregoing factors, operating income for the fourth quarter of 2012 was RMB6.4 million, compared to loss of RMB1.0 billion for the corresponding period of 2011 and then for the fiscal year 2012 was RMB65.8 million compared to operating loss of RMB 748.8 million for the corresponding period 2011. Non-GAAP operating income excluding share-based compensation expenses and impairment loss for the fourth quarter of 2012 was RMB19.3 million down 73.6% from the year ago quarter and for the fiscal year 2012, which exclude the share-based compensation expenses, professional fees related to the withdrawn non-binding going-private proposal and losses on intangible assets and goodwill for the fiscal year 2011 and 2012 was RMB132.7 million, down 54.7% from 2011. Non-GAAP operating margin was 4.4% for the fourth quarter of 2012 compared to 17.5% for the corresponding period of 2011. For the fiscal year 2012, non-GAAP operating margin was 8.4% compared to 24.8% for the 2011. Interest income for the fourth quarter of 2012 was RMB20.1 million up 21.0% from the year ago quarter and then for fiscal year 2012 was RMB90.3 million up 73.6% from 2011. The income tax expenses for the fourth quarter of 2012 was RMB9.5 million down 48.7% for the corresponding period of 2011 and then for fiscal year 2012 was RMB60.4 million, down 40.1% from 2011. Net income attributable to the Company's shareholders was RMB20.1 million for the fourth quarter of 2012, compared to net loss attributable to the Company's shareholders of RMB718.6 million for the year ago quarter. Net income attributable to the Company’s shareholders for fiscal year 2012 was RMB130.5 million, compared to a net loss attributable both to the Company’s shareholders of RMB299.4 million in fiscal year 2011. For the fourth quarter of 2012, non-GAAP net income attributable to the Company's shareholders excluding impairment losses on goodwill and intangible assets for the fourth quarter of 2011. Share-based compensation expenses for the fourth quarter of 2012 and the corresponding period in 2011. Refunds from the selling shareholder of certain acquired subsidiaries for the fourth quarter of 2012 and the corresponding period in 2011 and net income from discontinued operations for the fourth quarter of 2011 was RMB28.5 million down 62.6% from the year ago quarter. Non-GAAP net margin was 6.5% for the fourth quarter of 2012, compared to 18.2% for the year ago quarter. For fiscal year 2012, non-GAAP net income attributable to the Company’s shareholders excluding impairment losses on goodwill and intangible assets net of tax for fiscal year 2011, share-based compensation expenses for fiscal year 2011 and 2012. Professional fees relating to a non-binding going-private proposal for fiscal year 2011, refunds from the selling shareholders of certain acquired subsidiaries for the fiscal year 2011 and 2012. Cash bonus received from the government for fiscal year 2011 and net income from discontinued operations for fiscal year 2011 was RMB192.9 million for fiscal year which representing a decrease of 47.5% from RMB367.6 million for fiscal year 2011. Basic and diluted net income per ADS was close to RMB0.40 for the fourth quarter of 2012, compared to basic and diluted net loss per ADS of RMB14.34 for the year ago quarter. For fiscal year 2012, basic and diluted net income per ADS was RMB2.6 compared to basic and diluted net loss per ADS of RMB5.97 in fiscal year 2011. Non-GAAP basic net income per ADS was RMB0.57 for the fourth quarter of 2012, representing a decrease of 62.5% from RMB1.52 for the corresponding period in 2011. Non-GAAP basic and diluted net income per ADS was both RMB0.57 for the fourth quarter of 2012, down 62.5% and 62.7% respectively from the year ago quarter. Non-GAAP basic and diluted net income per ADS for the full year was RMB3.84 down 47.5% and 47.7% respectively from 2011. As of December 31, 2012, the Company had RMB2.5 billion in cash and cash equivalents. We initially expected that total net revenues to grow by approximately 5% for the first quarter of 2013 compared to the corresponding period in 2012. This forecast reflects CNinsure’s current view which is subject to change. Thank you. Thank you. We will open the floor for questions.

Ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Christy He from Morgan Stanley please ask your question. Christy He – Morgan Stanley: [Foreign language – Chinese]

[Interpreted] This is Christy from Morgan Stanley. She has three questions. The first question is regarding our commission rate for the P&C business in the fourth quarter and what was it in the third quarter and the year ago quarter? And the second question is regarding our share buyback program. We announced the RMB30 million in our share buyback program to purchase ADS on the open market and we bought about 190,000 ADS, she wants what was the average price and going forward would we will continue to buyback shares on the open market and the third question is regarding the capital expenditures. We have RMB2.5 billion on cash and cash equivalents as of the end of 2012. She wonder how much we are going to invest in e-commerce and in our initiatives in the next two years.

[Foreign Language – Chinese]

[Interpreted] Mr. Ge, our CFO would like to take the first two questions and Mr. Wang will answer the last question. Regarding the commission for our P&C business, for the fourth quarter of 2012, it was around 23.7% as compared to 19% last year and the annual average was about 22.48% and for the life insurance business the commissions for the new policies, for the first year commission was about 113% for 2012 as compared to 119% last year. And the second question regarding the share buyback, we guided buying back shares during the window period in November and December after the quarter ended and we bought a total of $1.5 million in value of the shares. And as a result, we also saw that our stock price pick up because of the share buyback. And then after the quarter, at the end of the fiscal quarter because we did not made plan and we cannot buy any shares during the – billing trading period, but the program is still valid and we will continue to buy shares when the windows open after this financial release. And some investors may think that we are doing the share buyback program aggressively enough, given the number of the shares that we bought. However, that’s because some objectives within on – the SEC has very strict regulations to avoid the companies to manipulate the stock price through share buybacks. So they have some restrictions on the trading volume and also the trading methods for the company to buy shares on open market. So that’s why the numbers of shares that we purchased was actually below our expectation. And in addition to that, you may have noticed that our Chairman Mr. Hu has filed a 13-G amendment and he personally has bought 1% of the CNinsure shares on the open market during the window period.

[Foreign Language – Chinese]

[Interpreted] And last question regarding the capital expenditure, Mr. Wang says that, while now the insurance industry in a transitional period, and a lot of new trends have emerged and actually present a lot of opportunity for CNinsure such as the divisional labor in industry and also the professionalized of the affiliated insurance intermediaries as well as the e-commerce development. While we are somewhat lucky that in faced with the opportunities and we still have so much cash in hand that we can make use of, and so going forward, first of all we are going to continue to invest in e-commerce business. The CNpad has come to life in October last year and we have successfully started the trial operations in Guangdong as we said that 200 units of CNpad has been put into operations contributing RMB20 million premiums during the trial period trial operation period and we are committed to continue and promote the applications CNpad among sales agents and we start to launch it nationwide at the end of this year. And our target is to sell 150,000 units of CNpad within five years and 200,000 units in ten years. And total investment will be around RMB500 million. And the second area that we would need to invest in the minority interest share buyback and as we say, we just established a group company and we like to convert our subsidiary into branches and that will require a certain amount of capital investment and we think that it will be RMB1 billion in total. And we have the first batch of the subsidiary that we like to convert into branches which is fourteen of them and the proposal regarding the conversion has been approved by the CRIC. We believe that this initiative will be very helpful to further improve our corporate governance and the third area for investment. As we say that, we are going to continue to expand our market presence in the urban areas for the life insurance business and also we are going to promote channel development for the P&C business and one should view a that as the platform for the claims adjusting business that will also require RMB300 million investment. And the fourth but not the last, the share buyback, we will continue to buyback shares and we will make plans to continue safeguard our stock stability and also to protect the shareholders’ interest. And also the CNinsure Puyi Investment, in which we own about 20% equity interest and this new company has been doing quite well and we do want to further increase our shareholding in these two companies when they perform better. Thank you.

Your next question comes from the line of (inaudible).

Your forecast of 5% revenue growth in the first quarter doesn’t exactly seem like a breakthrough, do you expect that to accelerate in later quarters to higher growth and also can your gross margin return to the 35% or 40% level that it was about a year ago? Thank you.

[Foreign Language – Chinese]

[Foreign Language – Chinese]

[Interpreted] We do expect that revenue will pick up gradually in 2013 over 2012 and we already see signs of that in the fourth quarter of this year and we expect the top line will grow within 10% for 2013. As for the gross margin, what we can say is that, we think third quarter 2012 was the bottom in terms of gross margin and to grow into – slowly over compared to the third 2012, but as for whether or not to cover back to the 35% to 40% we may have to look at like the second part of 2014.

Thank you.

Your next question comes from the line of Andy Nahas from Prospect Fund. Andy Nahas – Prospect Fund: Yes, thank you, just a strategic and long-term question if it’s alright. First of all, one of the things I like about your business is the recurring revenue nature of the property casualty business and is there anyway to make renewals automatic, in other words I think it requires a little bit of a labor intensity to people to renew with you after one year and I am wondering if there is a way you can make those renewals more automatic. Secondly, longer term well, I know the government is allowing the insurance companies to sell mutual funds in the future. Do you think for yourselves that selling mutual will become a big deal for you in the long run? And then finally, this is a very long-term, question, how many times bigger in you personal opinion, do you think your annual revenue will become in the very long run compared to the current size?

[Foreign Language – Chinese]

[Foreign Language – Chinese]

[Interpreted] Thank you for the questions and those are pretty good questions. First of all, to that P&C business the policy is not to go – renew right now. But we think that with the applications the things we have developed functionalities to have agents to better the commissions – the policy takers and also send policy renewal reminders to help improve the renewal rate. On the P&C business side and we believe that this is indeed a very high value-add going forward to work on in the future. Now we have the solution, now and secondly, for the mutual fund sales, actually we started trying selling funds as well as trusted products in 2012. And a total value of the trust products that were sold RMB800 million and that really helped our agents to cater to develop more customers and also to improve the loyalty of the customers. And for 2013, we actually started this year as a – the theme for this year is comprehensive financial services and products as well as technology advance. So in terms of the comprehensive financial services and development that means we are going to introduce – we are going to sell more mutual funds and trust products. And then the technology front, we mean that we are going to do more technology innovation and also to work hard to promote the application of CNpad. And we have a target, we have a long-term is to have RMB100 billion annual premium within 10 years time and with this application. For CNpad, we believe that we can achieve that target, because as we say we are going to sell 200,000 units of CNpad in 10 years, and we estimate each of the unit of CNpad can contribute 300,000 to 500,000 premiums, RMB premium. So that will achieve our target help us achieve the RMB100 billion premium target in ten years time. And so we expect that, top line growth will record a double-digit growth starting from the second half of 2014 and in 2015, we will see very strong growth.

[Foreign Language – Chinese]

[Interpreted] And we would provide update on the progress of the CNpad on the quarterly and also on an annual basis. Andy Nahas – Prospect Fund: Oasis, did you say the double-digit revenue growth will start in 2014 or later in 2013.

In the second half of 2014. Andy Nahas – Prospect Fund: Because you are already talking about 10% growth this year, I think it’s earlier.

[Foreign language – Chinese]

[Foreign Language – Chinese]

[Interpreted] Higher end double-digit growth for 2014. Andy Nahas – Prospect Fund: Okay, thank you very much.

There are no further questions at this time. Please continue.

Thank you for participating in the CNinsure’s conference call. If you have any further questions, please feel free to contact me. Thank you.