AIFU Inc. (AIFU) Q4 2015 Earnings Report, Transcript and Summary

Thank you for standing by for CNinsure's Fourth Quarter and Fiscal Year 2015 Earnings Conference Call. [Operator Instructions] After the management's prepared remarks there will be a question-and-answer session, please follow the instructions given at the time if you would 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 website at ir.cninsure.net under the Events & Webcasts section. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ms. Oasis Qiu, CNinsure's Investor Relation Officer.

Good morning everyone. Welcome to our fourth quarter and fiscal year 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 are 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 fourth quarter and fiscal year 2015 and take your questions after the prepared remarks. Now I will turn the call over to Mr. Wang.

[Foreign Language] Good morning, thanks for joining us in our fourth quarter and fiscal year 2015 earnings conference call. I’m happy to have our CFO Mr. Peng Ge here with me and now I will give you an update of our financial and operational results in the fourth quarter and fiscal year 2015 and then Mr. Ge and I will take your questions at the end of the report. [Foreign Language] Firstly, I would like to share with you an overview of our financial performance. CNinsure wrapped out the year of 2015 with a robust business growth exceeding our prior guidance. We achieved approximately RMB10 billion insurance premium, which are largely in line with the target that we set out at the beginning of the year. Our net revenue and net income attributable to shareholders were up 35.9% and 103.5% respectively in the fourth quarter of 2015 and up 31.5% and 29.9% respectively for the fiscal year 2015. [Foreign Language] In 2015, we made significant progress across our various businesses and online initiatives. Now I’d to share some of the business highlights with you. Firstly, our P&C insurance agency, amid sluggish macroeconomic environment, the P&C insurance industry in China slowdown with a modest growth of 11% in 2015. Despite the industrial slowdown, our P&C insurance agency business revenue went up 29.2% year-over-year for the fourth quarter and 28.6% year-over-year for the 2015. The growth was primarily derived from the combined effect of an increase in the commission rates that we received from the insurance companies, and strengthen and promotion of CNpad App mobile app during the fourth quarter of 2015. As a result of the successful marketing campaigns, insurance premiums generated from P&C insurance agency business reported a year-over-year growth of 22.8% for the fourth quarter and a year-over-year growth of 15% for the year of 2015, once again outperforming the industry. [Foreign Language] Now let's look at our life insurance agency business. The first year insurance premiums for long term life insurance products sales grew 100% year-over-year for the fourth quarter and 50% year-over-year for the year of 2015, primarily due to our successful marketing promotion and cross selling strategies as well as the recovery of the life insurance market. Renewal of life insurance products performed well too with a 13-month persistent ratio of 85.8%, driving life insurance agency revenue to grow strongly by 96.5% year-over-year for the fourth quarter and 62.2% for 2015. Life insurance agency business is playing an increasing important role in fueling the overall business growth of the company. [Foreign Language] And thirdly is our insurance brokerage business. And despite the high base in 2014, our insurance brokerage business had another year of wonderful performance growing 62% year-over-year for the fourth quarter and 58.7% year-over-year for 2015 as a result of our efforts to actively attract non-affiliate brokers, develop new geographic markets and expand distribution channels, and through continuous product innovation. We are proud that Fanhua Bocheng Insurance Brokerage Co., the operating entity of our insurance brokerage operation was ranked in the sixth place for two consecutive years according to the latest rankings of the top 20 China insurance brokerage companies compiled by the CIRC marking an impressive improvement compared to the 21st place in 2014 and it’s a strong evidence of our market leadership. [Foreign Language] Now let's turn to our claim adjusting business. We have witnessed a remarkable operation improvement in our claims adjustment business in the second half of 2015, which was mainly attributable to the integration of our nationwide P&C and auto insurance claims adjusting network and more centralized coordination of human facility and market resources. For the fourth quarter of 2015, our claims adjustment business continued a positive growth momentum starting from the previous quarter and achieved a year-over-year growth of 13.4% for the fourth quarter and 3.7% for 2015. [Foreign Language] We've also made impressive progress with our online platforms. Firstly, our CNpad App, as we continue to improve CNpad App in terms of technological support that of this operation and user experience. CNpad App was gaining strong traction in 2015 with the number of downloads topping over 10,000. Active users were up 81.9% year-over-year to approximately 63,000. Premiums generated through CNpad App amounted to approximately RMB3 billion, up 131.7% year-over-year increasing its contribution to the total premiums up to 30.2% from 15.6% in 2014. And approximately 60% of our auto insurance business and new life insurance policy sales were transacted through CNpad App. The excellent growth in CNpad App adaption is strategically important to us because it allows us to attract more sub-agents to join us and drive our business growth while reducing our operating efficiencies - while increasing our operational efficiency and reducing our operating expenses. [Foreign Language] And secondly is our eHuzhu platform. In 2015, eHuzhu transformed as driving force from sole dependence on interior resources to a neutralization of both interior and exterior resources and presented a lot of good surprises to us. By the end of 2015, the number of registered members of the eHuzhu have increased 1.5 times to over 670,000. RMB12.2 million was raised for 58 members in eHuzhu platform during the one and half years since its commencement. eHuzhu is by far the largest and most influential professional mutual aid Internet platform in China. And we believe that eHuzhu has unimaginable potential going ahead. [Foreign Language] Baoxian.com had booming growth in both active users and insurance premiums. Members of active users grew to 72,000 representing an approximately 8-fold growth. Insurance premiums generated on or through Baoxian.com increased 189% year-over-year to RMB48 million. And the number of insurance policies sold through Baoxian.com grew almost 80% year-over-year to 517,000 in 2015. [Foreign Language] Looking ahead with the attractive growth opportunities for independent insurance intermediaries like CNinsure, presented by favorable stay on regulatory policies and changes in consumer consumption habits resulting from easier and faster Internet access in China. At the same time, insurance companies and the Internet companies are exploring ways to establish market presence in the Internet insurance space, while more and more new online professional insurance distribution platforms spin-off in China, market competition is intensifying. We believe that with our expenses geographic footprint, our increase in the mobile enabled offline agent network, our boom in online channels and our capital base, we are well positioned to take advantage of the market opportunities to capture market shares despite the challenges. [Foreign Language] CNinsure’s solid performance in 2015 witnessed by achievement of approximately RMB10 billion insurance premiums and RMB200 million of net income is evidence of the strength of our business model and the successful execution of our growth strategies. After accepting the current market environment, I am encouraged by our success in executing our O2O strategies, we have decided to invest no less than RMB500 million in marketing campaigns, expanding our sales and service network and further improvement of our O2O platforms in 2016. We plan to continue investing in these areas in the next two years. Our target is to achieve RMB100 billion in insurance premiums and over RMB1 billion of operating profit within the next 8 years. [Foreign Language] 2015 marked the beginning of this RMB100 billion premium trend. In 2016, we will focus on expanding such volume and acquiring market share to be more specific. [Foreign Language] Firstly, we will continue to expand our sales and service network. In the second half of 2015, we kicked off market research in several provinces in preparation for entering this new market. With our Jiangxi branch starting to generate revenues by end of 2015, our sales network expanded to 18 provinces. In 2016, we anticipate to set up 10 provincial level branches and 100 city level branches. It is also our goal to further expand our service network to cover all areas at or above country level. [Foreign Language] Secondly, we will carry out marketing and promotions of our mobile app targeting 5 million sub-agents in China. Our goal is to increase the activated downloads of our mobile app to 500,000 times with an approximately 10% penetration amongst sub-agents. [Foreign Language] Thirdly, as we position ourselves as a B2B open platform provider for insurance product and services, we will actively open up O2O platforms. We will then explore cooperation with third-party Internet platforms to diversify our online traffic base, which is currently made up of organic and affiliate traffic and boost the development of our online platforms. [Foreign Language] Fourthly, we will also see opportunities to acquire leading Internet financial service companies to further diversify our product and service offering then increase the competitiveness of our O2O platforms. [Foreign Language] As we execute this strategy, we have confident that CNinsure will be able to flow insurance premiums by over 40% and total net revenues by over 30% in 2016. Although the investments we discussed throughout this call may tend to rarely put pressure on our bottom line in the near-term, we believe that the optimal strategic approach with CNinsure is to focus on rapidly expanding our sales volumes and further solidifying our market leadership, which will enable us to capture more market share and ultimately achieve higher profitability and high returns to our shareholders over the long run. [Foreign Language] Thank you. Now, our management will open the floor for your questions.

[Operator Instructions] Our first question comes from the line of Patricia Cheng from CLSA. Please go ahead.

Thank you. [Foreign Language] The questions are from Patricia Cheng from CLSA, and she has three questions. The first one is regarding our marketing plans in 2016, and we mentioned that we are going to spend RMB500 million in 2016 in the marketing campaigns and developing our O2O platform as well as network expansion. And our goal is to achieve RMB100 billion in premiums in 8 years. She wonders how much will be the - overall spending will be in the - and then in how many years is it going to take for us to achieve - for us to spend those money in order to achieve the target. And the second question is regarding our Internet platform. What kind of products that CNinsure is selling and is that - product that we are selling, is there any difference from the other Internet platforms and what is our competitiveness. And third question is regarding the insurance companies that we are cooperating. She noticed that nowadays there are a lot of new insurance companies entering the market whether or not there will be any chance for CNinsure to cooperate with those new insurance companies.

[Foreign Language] Firstly I would like to explain the rationale behind the investments, the massive investment decision. Firstly, as I mentioned in the prepared remarks, we have seen that the regulatory environment for insurance intermediary - independent insurance intermediaries are getting more favorable. Firstly, the State Council issued a ten new guidance basically encouraged the insurance industry to play a more important role in the economic development in China. And accordingly the CIRC, the insurance regulator promulgated a lot of favorable regulations and also amended the insurance law. And among those amendments, the regulation for the establishment of insurance agencies and for them to establish branches are relaxed significantly and it makes it easier for them to set up new branches and expand their network. And also the license requirement for insurance agents are also removed from the insurance law and also the regulations issued by the CIRC. So we expect that immediately into agent migration from insurance companies into independent insurance intermediary space. And in addition, we are also seeing the changes in consumers’ consumption preferences due to the easier and faster access to Internet. And then customers are more confident to shop in their minds and make comparison before buying for any products and the younger generation becoming a more mainstream buyers in the Internet space. So against this backdrop, more and more companies are entering are seeing these growth opportunities and because of that we have seen that the Internet insurance has been growing quite strongly in the past couple of years. And right now the third-party insurance distribution platform, there are like hundred - over several hundreds of them already in China. And the insurance company, as well as some leading Internet companies are also exploring ways to tapping into the Internet insurance market in China. Well, it’s kind of an opportunity for CNinsure as well as challenges in terms of opportunities. That’s because in the past few years CNinsure has made a lot of preparation and we believe that we are well positioned to take advantage of those opportunities. But in terms of challenges, as I mentioned, there have like several hundreds of Internet third-party Internet insurance distribution platforms and also the traditional insurance agencies and brokerage companies are also seeking every opportunity to grab market share which means that if we do not make any massive investments now, CNinsure, our leading position will be threatened and will become marginalized. So that’s why we decided to make such a large investment in 2016 as well as extend the suspending trends [ph] we have only made a detail work plan for 2016 and we may continue the investments in 2017 and 2018, but probably the direction for the investment and maybe the amount of the investment might be different from 2015. [Foreign Language] And secondly, as for the insurance products that CNinsure is selling, to be honest, there is not much differentiation in terms of the insurance products compared to other Internet platforms so far, after all the insurance market is a highly regulated market and the products need to be - basically need to be approved by the CIRC before selling to consumers. So there is not much differentiations in insurance product in the market in the whole insurance market. Well, based on our experience in the cards that we accumulated in the past decades in insurance distributions, we believe that our insurance distribution actually the O2O model is the best model for insurance distribution and it needs - basically it needs a seamless integration of online operations and offline support to better provide services to the consumers. So whoever who has the leading position will have the advantages in terms of technology, in terms of marketing, user experience and services whatever will be - will have the strongest competitiveness in the market. For CNinsure, we are quite confident about our position since over the past decade CNinsure has established a national-wide service network and our sales network still cover most of the major - all the major most economic developed regions in China so far. And then in terms of technology, we believe that we are one of the leading players in the whole insurance industry in China right now. And CNinsure definitely enjoy a lot of competitive edge here and one of the advantage is that right now lot of third party Internet platforms have been actively pursuing cooperation with CNinsure in terms of contractual relationship, in terms of data, in terms of insurance policy and in terms of the services. So that’s why CNinsure we position ourselves as a B2B open platform providing insurance products and services to various channels. So we are going to open our contractual relationship and then gather service and technological support and also operation support to those various channels. And then looking at the insurance companies, they are exploring the Internet insurance market as well. We believe that they will focus their resources to be a better insurance underwriters while for the Internet companies we believe that even though there are some competitions, there is also chances for us cooperate with them. [Foreign Language] We have made an estimate if we can maintain a 35% growth on a compounded basis in terms of insurance premiums in the next eight years, our annuity insurance premiums will achieve RMB100 billion and we believe that with enough investments and marketing expenses and investments efforts we can drive our business growth and RMB100 billion could be a quite reasonable target. And when we can achieve that target and we also expect that we can achieve like over RMB1 billion operating profit. Thank you.

Thank you. Our next question comes from the line of Zhuo Ling from VBA. Please go ahead.

[Foreign Language] First of all, he would like to congratulate CNinsure on our good results and his question is about the number of our sales agents. The number of sales agents grew from 2,000 last year to approximately 11,000, so basically the growth is over 90%. He wonder whether all this 11,000 agents are in-house sales based agents or whether or not they are new agents that we [indiscernible]

[Foreign Language] Well, we would like to confirm that those are our commission based agents and as I mentioned, the regulatory environment is getting more favorable especially the regulation has removed the licensing requirements for sales agents and we believe that sales agents remain to be a major driving force for insurance sales in the industry and that’s why we have - actually we have been aggressively recruiting new sales agents in 2015 and we believe that and we will continue to do that in 2016. And it’s our target to further double the number of our sales agents in 2016.

[Foreign Language]

And Zhuo Ling would like to confirm with that whether our target is double the number of sales agents in 2016 and the answer is yes.

And also he wonder whether or not the way we recruit the sales agents, are we going to use - you are going to recruit the sales agents [indiscernible] or by acquisition and we would like to confirm that, we are going to use the sales agents to join CNinsure.

[Foreign Language] And the key operational target that we set for 2016 is that we hope that there will be 500,000 downloaded and activated CNinsure app and which means that the penetration rate among the 5 million sales agents in the industry will be like 10% and we hope that the number of app or number of active users will double in 2016.

Thank you. Your next question comes from the line of [indiscernible] Please go ahead.

Yes, thank you and congratulations also on a good quarter. Another question on your sales agents. What kind of turnover do you expect with this rapid growth of agents? How much training is involved and how long do you think they will stay with you? And also what kind of productivity would you think that they are working full time for you or they have other jobs also? Thank you.

[Foreign Language]

[Foreign Language] Theoretically speaking, these sales agents are working on a part time basis for CNinsure. They might have a full time job elsewhere or they can be sales agents for insurance companies or even for our peers. And then in terms of the productivity, I think it really depends on how attractive our platforms are to them in terms of whether or not we can provide them a good product or whether or not we can provide them good services, so that they can stick to the platforms. And Mr. Wang cited examples like Jingdong and Alibaba and some consumers may more prefer to buy more products from Jingdong and some others more from Alibaba, it really depends on which platform can provide them better products and services. [Foreign Language] And with CNinsure, we'd like to focus more on providing them better products and better technological support and more stronger marketing support as well as better training to attract them to retain in CNinsure. [Foreign Language] And we will also provide them more stronger incentives to change a team of highly productive sales agents and [Foreign Language] Okay. Thank you.

Thank you. Our next question comes from the line of Albert Tan [ph], private investor. Please go ahead.

[Foreign Language] There are two questions. The first question is regarding the use of our capital. In 2013, we had about few billion RMB in short term investments and use from this short term investments was roughly RMB65 million, which means that returns of only like 3%. He thinks that’s not really the best way to use your capital and whether or not the management has given any thoughts about that, whether or not management will plan to use some of the capital to buy back our shares to what you think is in the better interest of the shareholders. And the second question is that as the regulation is changing, the insurance companies are also aggressively recruiting sales agents, whether this process by the insurance company will have any impact on CNinsure?

[Foreign Language] Mr. Wang would take your second question first and your first question will be answered by our CFO.

[Foreign Language] Well, we believe that as the regulatory is getting more favorable or players will try every minute to take advantage of those regulations - the new and it is also perfectly understandable insurance company will like to increase their investment in the internet insurance space. [Foreign Language] And it’s also our judgment that insurance company will increase their investments in internet insurance market and also in recruiting sales agents. However, we do believe that insurance companies, they are the insurance - product providers and basically they provide a single type of product from one single brand and Mr. Wang compares this to the household appliance manufacturers like in China, several brands of household appliance manufacturer in China, they all will try to maintain and increase their brand awareness and increase to expand their service volumes, however, the sales, I think the third party distribution platforms like Gome and Suning will still be their major sales distribution - their sales channels. [Foreign Language] And actually we think that that has improved that insurance companies efforts to invest in Internet space and include South Asia [ph], may not be as successful as they expect. And insurance agents today will still be more inclined to find a one stop - to find a platform that could provide them like one stop products and services and consumers are also more inclined to shop in those platforms that can provide them like all the one stop services and products. [Foreign Language] So we believe that in the future, the largest insurance distributor will be a third-party and independent insurance distributor rather than insurance companies. [Foreign Language] And we’d like to invite our CFO to answer your first question.

[Foreign Language] Firstly, regarding the returns on the short term investments, as you know, we have like RMB2 billion in short term investments and the wealth management products that we invested are, we only accrued use when the products mature and some of the products basically, we have accrued the use on an annual or a semiannual basis. So not all the use of those returns have been reflected in our financial statements, but actually the average returns on those products are in the range of 5% to 6%, but of course in 2016, the interest rate may continue to drop, that means that the return may also decline slightly as well. [Foreign Language] And in terms of the share buyback, looking at the current share price of CNinsure, we do think that it may bring a very good return to shareholders if we buy back some shares and we do not really object to this idea. And however, there are two technical issues here. Firstly, the limitation in terms of a trading volume for any listed company to buy their own shares on the open market. Firstly, we are not allowed to buy more than one-third of the - the daily trading volume cannot be exceeding one-fourth of the average trading volumes in the past 20 days. And then secondly, and we have to wait for the prior bid to complete it before we can’t get our bid to strike a deal. And in 2015, we actually did buy some shares back from the open market. Last year, we got some proceeds in an amount of $2 million and the proceeds are from - actually, the proceeds from the exercise of stock options by our employees. So we are thinking that we’re going to use that $2 million to buy shares, but actually, it took us like 1.5 months to spend all this $2 million to buy those shares. So that means it’s really difficult for us to buy enough shares, even though we have this commitment. And the second problem that we are facing is the strict foreign currency control, right now. And because right now, almost all of our cash are in China right now. So if we want to do a share buyback, we have to convert the money to our overseas accounts and then there will be like a 10% withholding tax and also and we have to get the permission from the regulator to get the money out to overseas accounts. So while we’re trying to - maybe we need to find ways to fix those problems, we are also hoping that we can see better way to use our capital. As Mr. Wang announced our next 8 year plans and our target to achieve like 100 billion sales volumes in the next 8 years and I do think that it might be a better way for us to use the money and bring better returns to shareholders. Thank you.

Thank you. I would now like to hand the conference back to the management team for any closing remarks.

Thank you. So if you have any further questions, please contact us. Thank you.