AIFU Inc. (AIFU) Q3 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by for CNinsure’s Third Quarter 2016 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. [Operator Instructions] For your information, this conference is now being broadcasted live over the Internet. A 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 Relations Officer.

Good morning. Welcome to our third quarter 2016 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 U.S. Private Securities Litigation Reform Act of 1995. The accuracy of such 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 our CFO, Mr. Peng Ge. Wang will walk you through our financial and operating results in the third quarter 2016, and to your questions after the prepared remarks. Now, I will turn the call over to Mr. Wang.

[Interpreted] Good morning. Thank you for joining us in our third quarter 2016 earnings conference call. I will give you an update on our financial and operational results in the third quarter 2016 and to your questions at the end of the report. During the third quarter of 2016, China’s insurance industry maintained a healthy [inaudible] development with insurance premiums growing 19.1% year-over-year, of which P&C and life insurance premiums were up 9.3% and 24.4%, respectively. Sorry. During the same period, CNinsure continued to record accelerated growth with insurance premiums and revenues growing 52% and 66.3% from a year ago, respectively. Again, exceeding our expectations, operating income turned positive to RMB7.5 million from losses in the previous two quarters. We’re glad to see solid performance across various business segments. Firstly, P&C insurance premiums were up 44% year-over-year with insurance premiums from the P&C agency and brokerage segment increasing 46.9% and 31.7% year-over-year, respectively. Revenues from P&C agency and brokerage segments grew 56.8% and 41.9%, respectively. And secondly, life insurance and agency insurance premiums were up 125.3% year-over-year. And noticeably, first year insurance premiums from term life insurance increased 330% from a year ago and 13 months’ persistency ratio was over 90%. Revenues from life insurance agency segment also increased by 200.5% year-over-year. And thirdly, our Claims Adjusting segment grew by 3.4% year-over-year. And next, I would like to go over a few operational highlights in the third quarter. Firstly, we continue to make progress on expanding sales force and extending our market presence, which has injected new growth momentum to our business. For the past nine months, we set up new branches in Anhui, Guangxi, Qingdao, Yunnan and Inner Mongolia provinces, some of which have started to generate business in the third quarter. We added nearly 200 sales outlets and doubled the number of our sales agents by 100,000 year-over-year. During the third quarter of 2016, 13% of the total premiums were contributed by this new agents. Secondly, our marketing activities yielded remarkable results. During the third quarter of 2016, we spent about RMB108 million on marketing subsidies and advertising adding up to RMB280 million for the first nine months of 2016. The total amount of the marketing expenses spent was slightly lower than our earlier estimates, but the results were far better than expected. Although, the subsidies were provided to agents for selling also insurance [online] [ph] which had proved to be quite effective in attracting new agents and driving the growth of our auto insurance sales. As a large portion of this new agents have prior experience in selling life insurance products, there’s a high potential that this new agents could cross-sell our life insurance product as well, which we believe will lay a solid foundation to drive the sustainable and rapid development of our life insurance business and improve our profitability. Thirdly, the integration of our P&C and life insurance agencies presented more cross-selling opportunities for our business. Diversified financial product offerings are one of our distinctive advantages to attract new agents and we are making continuous efforts to improve our organizational structure, system and training mechanism to support our agents on cross-selling. During the third quarter of 2016, the number of insurance agents who have sold both P&C and life insurance policies increased 38% from the same period in 2015. In the past nine months as our business grew rapidly, we’re seeing continued improvements in our operational results quarter-over-quarter. And in the third quarter, we finally reversed losses in the past two quarters into positive operating income of RMB7.5 million, which would contribute, we attribute to the following reasons. Firstly, our life insurance business moved much faster than our expectations. As of today, over 90% of our life insurance premiums is derived from long-term [regular protection type][ph] products, which generated higher gross margin than P&C business, particularly the renewal business. For the third quarter of 2016, life insurance has taken up over 22.1% of our total net revenues, as compared to 12.2% over a year ago, thus driving sequential improvement of our overall gross margin up to the highest level this year. Secondly, the wider adoption of IT technology has led to effective cost control. Since 2014, we have been switching forward the transitions of our business from offline to online by promoting CNpad mobile application. We encourage our agents to transact their auto insurance and life insurance policies via CNpad app and help their clients purchase standardized and fragmented insurance products, such as dental health and travel insurance on Baoxian.com. During the third quarter of 2016, CNpad and Baoxian.com contributed RMB976.1 million and RMB19.4 million of the insurance premium, respectively, accounting for 26.6% in aggregate of our total insurance premiums and 37% of our auto insurance business and 72% of our new term life insurance business were transacted through the CNpad mobile app in the third quarter of 2016. New technology not only helps agents manage their business more efficiently, but also reduces work load in the back-office and saves operating expenses. Compared to a year ago, CNinsure had nearly 200 more sales outlets doubledsales force and over 50% business growth, while our operating expense ratio excluding marketing expenses decreased for several consecutive quarters. In the third quarter of 2016, adjusted operating expenses ratio, which excluded margin expenses was 13.8% compared to 20.9% in the same period last year. Based on the solid performance in the third quarter of 2016, we are optimistic about the growth outlook in the fourth quarter in 2016. We expect the total net revenues to grow more than 40% in the first quarter of 2016. Now, management will open the floor for your questions.

Thank you. [Operator Instructions] Our first question today comes from the line of Bolun Tang from CICC. Your line is now open.

Morning management. Congratulations on the great result. I think this is good and solid sets of results, which beat my expectation. Two questions from me. My first question is regarding with the selling expense subsidy, which seems to be RMB108 million in this quarter. Considering that you have already achieved a positive operating profits even [affecting] [ph] such a huge amount of subsidy, and also your full-year subsidy should be kept at roughly RMB500 million. In my calculation, I think, for the full-year since you have already achieved almost a RMB100 million profits in the full-year, it seems that your profits are likely to be positive, which is significantly better than your previous guidance of net just RMB100 million, is that true? Could you give me some color on the ground and could you also let us know if you would like to increase your guidance for the profits? My second question is regarding with recent regulatory development. So basically, the Chinese regulator has announced to keep some restrictions on the agents of insurance, which insurance from - which the agents from an insurance can only sell products – can only sell the products, which the insurance allowed to. Just want to understand what’s the impact, is it positive on the insurance intermediates, or is it negative? Thank you.

[Interpreted] Based on the performance in the past three quarters, it is true that our marketing campaign has produced positive results, which basically be our expectations. And so based on that, we expect that our net profit will probably be around RMB100 million. And then on the operating income front, the operating income may [largely still] [ph] record a minor loss or a break-even. We believe the new regulation is definitely positive to the industry and to the CNinsure. In the past, basically the regulations restricted sales agent from insurance company to sell products from other companies. But right now in response to the market demand or response to the requirement of the sales agents, it’s now allowed the sales agents – entire sales agents of insurance company to sell products from other companies. So it’s basically, the restriction has been losing up quite a lot, only under the condition that it’s permitted by insurance company. So it’s basically a much improvement – a great improvement on development of – on the regulation front.

Okay, got it. Very clear. Thank you. That’s very helpful.

Thank you.

Our next question today comes from the line of [indiscernible] Incorporated. Your line is now open.

Yes, thank you. Do you have a target on the number of sales agents, where you will start to slowdown the growth and reduce the subsidies, is it 200,000, 250,000, where would that number kind of be, where you would slowdown the subsidies? And have your competitors responded with subsidies – similar subsidies to try to combat that? Thank you.

[Interpreted] We have a clear target in terms of the number of sales agents. And our goal is to achieve - to increase the number of our sales agents to 500,000 to 600,000 by the end of 2017, and 800,000 to 1 million by the end of 2018. Our judgment is that driven by the further development of the insurance intermediary sector and also the demand of the consumers there will be a migration of sales agents from insurance company to insurance intermediary sector. So basically, there will be a lot of sales agents who used to work for insurance companies, who will come – become independent and join the insurance intermediary companies. The marketing strategy – the marketing subsidy strategy has proved to be quite effective based on our results in the past quarters. So we will continue to implement that strategy, but of course, we may address it or optimize this marketing programs from time to time based on the actual results. So we will use this subsidy program to take advantage of the opportunities presented by the migration trends, I mean, the migration sales agents from insurance company to insurance intermediary sector, and in order to further increase our market position – enhance our market position and leadership. As of the amount of the subsidy, we will provide target for the budget early next year.

All right. Thank you. It’s a very ambitious strategy.

[Operator Instructions] I think that we have no further questions on the line now. I’d now like to hand the conference back to Ms. Qiu for closing remarks.

Thank you for joining us on today’s conference call. If you have any further questions, please contact me directly. Thank you.