AIFU Inc. (AIFU) Q2 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Fanhua Inc. second quarter and first half 2017 earnings conference call. At this time all participants are in a listen only mode. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday, the 22 of August 2017. I would now like to hand the conference over to your first speaker today, Ms. Oasis Qiu. Thank you. Please go ahead.

Good morning. Welcome to our Second Quarter and First Half 2017 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 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 these forward-looking information, except as required under applicable law. Joining us today are our Chief Executive Officer, Mr. Chunlin Wang; our Board Chairman, Mr. Hu Yinan; Chief Financial Officer, Mr. Peng Ge. Mr. Wang will walk you through our financial results in the second quarter of 2017. And then he and Mr. Hu, Mr. Ge will take your questions after the prepared remarks. Now we turn the call over to Mr. Wang.

Thank you for joining us on today's conference call. Here with me, we have our Chairman of the Board, Mr. Yinan Hu; our Chief Financial Officer, Mr. Peng Ge. We will begin today's call with a review of our second quarter 2017 financial and operational performance, followed by a brief discussion of our business outlook. Then we will have a Q&A session after the report.

Hello, everyone. I am Hu Yinan.

Hello, everyone. I am Peng Ge. Welcome to join us on the call.

First of all, looking at the industry landscape, since last year, China has been tightening its control over the financial market. A series of new regulations have been issued by the Central Bank and the CIRC, CBRC and CSRC, aiming at fixing the financial system and guarding against financial risk. New rules rolled out by the CIRC in the past year cover a wide range of issues, from risk inspection, rectifying market orders, cracking down on irregularities, protection of consumer interest, to relying product mix of insurance companies, showcasing the regulator's commitment to tightening supervision and steering the insurance industry back to its focus on protectional oriented insurance products. Among other things, the number 76 notice issued by the CIRC in September 2016 specify that insurance companies must make adjustments to its current product design before April 1, 2017, including decreasing valuation interest rate of universal life insurance products, liability reserve and improving the risk protection from proportion of personal life insurance products. As these new regulations and rules took effect, especially the implementation of the number 76 notice, a bout of popular insurance products were forced to be off the shelves on April 1, 2017, across the industry. As a result, total insurance premiums in the Chinese insurance industry only grew 6.4% year-on-year in the second quarter of 2017, among which the P&C insurance premiums grew 14.1% year-on-year, while life insurance premiums only grew 2.9% year-on-year, the lowest level in the past few years. In the meantime, we can also see that the CIRC's emphasis on protection-oriented insurance business has yielded positive results as follows. Firstly, evaluation of business structure adjustments. Long-term protectional-type traditional life insurance business accounted for 52.9% of the total life insurance premiums, up 16.7% -- 16.7 percentage points from year-end of 2016. Regular term life insurance products also accounted for higher proportion of the total new insurance policy sales. And secondly, professional insurance intermediary companies have become an increasingly important channel for small-, medium-sized companies, with fair strategic value getting more and more appreciated. Now let's turn to the financial performance in the second quarter of first -- and first half 2017 for Fanhua. Against the industry backdrop in the second quarter of 2017, we recorded RMB1 billion in total net revenues, a decrease of 5% year-on-year, among which revenues from life insurance business achieved RMB590 million, up 187.9% year-on-year. And revenues from P&C insurance business decreased 50% year-on-year to RMB350 million. Operating income registered RMB71.2 million, beating expectations. Net income attributable to the company shareholders achieved RMB140 million, up 352.7% on a year-on-year basis. As for the first half of 2017, we recorded RMB2.5 billion in total net revenues, up 25.7%, among which revenues from life insurance business achieved RMB1.2 billion, up 229.8% from a year ago. And revenues from P&C insurance business decreased 20% year-on-year to 1.2 -- RMB 1.1 billion. Operating income registered RMB 130 million. Net income attributable to the company shareholders recorded RMB 210 million, up 317.2% on a year-on-year basis. Now let's look at the performance of each of our three business segments. First of all, life insurance business segment. As we mentioned just now, in the second quarter of 2017, a bout of popular insurance products were taken off shelves, while the approval process of new products by the regulator was delayed. It also took time to prepare for putting new products back on shelves and provide training to sales agents. As a result, we have suffered from lack of supply of our major life insurance products for nearly a month. Despite that, our new term life insurance product sales still grew 143.7% year-on-year to RMB 390 million in terms of standard insurance premiums. Persistency ratio continued to improve, with 13-month persistency ratio of term life insurance products rising to 93.3% from 89% a year ago, while 25-month persistency ratio of the term life insurance products hit a 85% record high, showcasing the high recognition our customers place on our products and service quality. By the continued rapid growth of new insurance business, life insurance business has become a major source of revenues for us, as we expected, with its contribution to our total net revenues increasing to 58.2% from 19.2% a year ago. And secondly, the P&C insurance segment. The fierce competition in the P&C insurance market brought great damage to the commission's spread-based profit model of P&C insurance intermediaries. The financial performance of our P&C insurance business in the first quarter of 2017 might be revealing. In the first quarter, our P&C insurance business only recorded 7.4% in gross margin, whereas operating cost was over 7%, which means that our operating income was close to zero. As the CIRC continue to push ahead a second round of auto insurance pricing reform, competition will become more and more intense, which may make P&C insurance business for insurance intermediaries more susceptible to losses. In view of this trend, the management decided to relinquish all of our noncore and low-margin P&C channel business, which previously accounted for nearly 50% of our overall P&C insurance business. And we only retained the retail P&C insurance business, which we believe will be conducive to the development of life insurance business. As a result of this decision as well as the suspension of cooperation with PICC P&C, revenues from P&C insurance business dropped 55% year-on-year, and its contribution to total net revenues also decreased to 34.6% during the quarter. And thirdly, the claim adjusting business segment. Despite the impact of the suspended business cooperation with PICC P&C, revenues generated by the claims adjusting business in the second quarter only decreased 10% year-on-year. The half one results were largely attributable to our term-adjusting team's maturity and also the competitiveness of its brand. Next I will share with you some updates on our business operations in the second quarter of 2017. Last October, we announced a fundamental business guideline whereby the company will continue to actively pursue opportunities to grow our life insurance business through expanding and strengthening our sales force. In the meantime, we are dedicated to enhancing our market competence by offering a wide spectrum of financial products and services and best-in-class technology, which we believe is the key to fulfilling our mission to help sales agents and team leaders become the top income earners in the Chinese insurance industry and achieving our goal to become a market leader that can generate hundreds of billions insurance premiums each year. Following this guideline, we continue to press ahead with our various key initiatives and are happy to see continued progress. Firstly, our sales force continued to expand. Over the past year, we have seen a rapid growth in the number of sales agents and sales outlets. As of June 30, 2017, we recorded 856 sales outlets, representing a year-on-year increase of 73.3%. And the number of registered agents reached 328,000, up 116.6% year-on-year. We have seen increasing contribution from newly joined sales agents as well. Take life insurance business as example. Over 20% of the new life insurance premiums during the second quarter was contributed by new sales agents. Secondly, we've been working on further diversifying our product suppliers. In the first half of 2017, our top two product suppliers were Tianan Life and Huaxia Insurance, which respectively contributed 38.4% and 36.4% of our total life insurance business in terms of standard annualized life insurance premiums. In the second quarter of 2017, we commenced strategic cooperation with ICBC Asia life and Evergrande Life, which have yielded positive results. In June -- and ICBC Asia life and Evergrande Life Insurance contributed 7.7% and 2.8%, respectively, to our total life insurance business in terms of standard life insurance premiums, while the combined contribution with Tianan Life and Huaxia Life Insurance in June decreased 6.8% compared with that of May, implying a more diversified product supply structure. And thirdly, we are pleased to see continued rapid development across our various online platforms. And firstly, CNpad, as of June 30, 2017, 294,000 copies of CNpad App were downloaded and activated, up 114% year-on-year. Transaction volume reached RMB920 million [RMB 923.3 million] in terms of insurance premiums, up 23.1% year-over-year. And more than 60% of our auto and life insurance policies were transacted through CNpad App. We aim to put all of our key auto insurance business online by the end of 2017. And secondly, Baoxian.com, the online marketplace for health insurance and accidental insurance as well as travel insurance. In the second quarter, Baoxian.com recorded RMB44.7 million in insurance premiums, up 131.8% year-on-year. The number of accumulated users reached 1 million, up 189.3% year-on-year. Baoxian.com was already making profits in the first half 2017. And thirdly, eHuzhu, the online mutual aid community. As of June 30, 2017, the number of accumulated registered members of eHuzhu exceeded 1.8 million, more than four times larger than that of a year ago. Since March this year, we have endeavored to raise the number of active users through marketing campaigns and product adjustments, and we are glad to see a net increase of around 10,000 active members each month. And looking ahead to the next quarter, our major focus will be to further reform our P&C insurance business model, namely to transform it towards a platform-based and digitalized operating model. As evidenced by the financial performance of our P&C insurance business in the first half 2016 and 2017, the original profit model of earnings profits from commission spread has come to an end. The future competition in the P&C insurance business market must be the competition of cost and efficiency. A radical reform is inevitable. In view of that, with the approval from the Board of Directors, management decided that the company will abandon the original profit model and transform to a new model of earning profits through platform management fee and technology service fee. The major features of this platform are as follows. Firstly, after five years of development, our CNpad App is mature in technology and operation. It has become the best trading tool and platform in the industry. And secondly, we decide to give the industry full access to CNpad App, through which the demand side and supply side of the P&C insurance business can complete a transaction on this platform at their discretion. And thirdly, Fanhua will serve as a matchmaker between the demand side and supply side instead of the previous role of a broker in its relationship with P&C insurance companies, clients, other insurance intermediary companies and third-party Internet insurance platforms. From now on, the company will no longer charge insurance companies commissions or pay commissions to sales agents or other distribution channels for the P&C insurance business. Instead, we will charge both the demand side and supply side platform management fee and technology service fees based on the actual amount of premiums transacted over CNpad App. Fanhua will be committed to creating a business model like Taobao of the insurance industry. And fourthly, with this model in place, we expect to see a major decline in top line, but the impact on our gross margin and operating margin will be positive. From a long-term perspective, we expect that the move to substantially reduce -- the move will be -- substantially reduce our operating costs and elevate our overall profitability. We are convinced that this model represents the future direction for operating P&C insurance business in the Chinese insurance market. The explosive growth of China's life insurance market and wealth management market has just begun, and we believe a well-organized sales network will become the most valuable market resources in the future. With the accelerating trend of sales agent migration and life insurance companies shifting focus to protection-oriented life insurance business, our decision to further develop our life insurance business through expanding and strengthening our sales force is a timely one. Rapidly growing our life insurance business will require a robust, well organized and disciplined sales force. To that end, we will channel more resources to building out our platform and operating capability. We will focus on the key areas of regional expansion, office set up, staff recruitment, assembling our sales team, sales agent management system development, as well as marketing and training. We believe these initiatives are necessary to enhance the company's competitiveness and ensure sustainable development over the longer term. Given that, we expect that the operating income in the third quarter of 2017 will be no less than RMB50 million. Thank you. Now the management will open the floor for your questions.

[Operator Instructions] Your first question comes from the line of [Hsieh Yen] from CICC.

[Foreign Language]

The first question is from Hsieh Yen from CICC. And first of all, he congratulates Fanhua for our results, and he has two questions. The first question is regarding our selling expenses. Our selling expenses dropped about 60% in the second quarter. And he understand that it was mainly due to cancellation of a subsidy provided to sales agents in the quarter. Will that impact the growth of our sales in the next few quarters? And the second quarter -- the second question is regarding our investment income. The investment income increased by over 120%, and he's wondering what kind of -- and the investment income mainly related to the short-term investments. He is wondering what kind of products we invested for this short-term investment. And also…

[Foreign Language]

And Mr. Wang would like to answer the first question. Actually, because -- the reason for decline in our selling expenses was because as the sales subsidy has become a, kind of, regular payment. We have actually accounted it as a commission cost. We don't really think that this will impact our sales growth.

[Foreign Language]

And the second question regarding our investment income, the reason for the rapid increase in our investment income was mainly due these kind of products on -- have a term of roughly one year, and a lot of these products mature in the second quarter. And as we only recognize the investment income when received, so we have a higher investment income during the second quarter. And most of this short investment are invested in interbank savings deposit, kind of, products.

[Operator Instructions] Your next question comes from the line of Arthur Hall of Hallco Incorporated. Go ahead. Please ask your question.

Could you explain the reason for the large increase in the amounts due from related parties? It seemed like it was an unusual amount of increase. And also, do you have a target for the number of sales agents at year-end?

[Foreign Language]

[Foreign Language]

Please -- may Mr. Ge answer the first question?

[Foreign Language]

[Foreign Language]

[Foreign Language]

The receivable from related parties is mainly related to the revolving loans that we provided to CISG, the company that we invested, in which we hold about 20%. And the loan -- the amount of the loans was about RMB 370 million with annualized interest rate of 7.3%. And basically, this is a short-term bridge loan that CISG needs to cover their needs for their loan issuance business, and we expect them to pay back the loans by the end of next quarter.

[Foreign language]

And our target to -- our target for the number of sales agents is 400,000 by the end of this year.

Thank you very much and congratulations on a good quarter.

Next question comes from the line of [Sihen Ku] of Open Door, go ahead please ask your question.

[Foreign language]

Sizhen has two questions. The first question is regarding our term on the P&C insurance operating model. As we say, we are going to transform our profit model from the commissions front-based to platform based, under which we will charge platform management fee and technology service fee instead of commissions. And when are we going to start this platform-based model? And right now, P&C business still accounted for 34.6% of the total net revenues when -- so under the new model, will this revenues totally disappear? Or will it be offset by the platform management fee and the technology service fee? And how much can we offset? And then the second question is regarding our investment income. We have recorded about RMB100 million investment income in the second quarter. And is this investment income related to the investment in Puyi as well as CISG? As for Puyi as we understand, currently we own about 15%, and CISG we own about 20%. So is it related to these two companies? Is the investment income related to these two companies? And what's our plans are for these two companies?

[Foreign Language]

Mr. Wang will take the first question, and Mr. Ge will answer the second question.

[Foreign Language]

As for the first question, actually, we have been doing a lot of research on this platform-based model for quite a long time, and we have been basically trying to adapt this model according to the market trends, according to the changes in the market. And right now, we have submitted the proposal to the board, and we already got their approval. We expect to complete the transaction to the platform-based model by the end of September. And under this new business model, the way to look at our P&C business or the main metrics to benchmark our P&C business will be the transaction volume as well as the platform management fee as well as the technology service fee and which will be basically the net gross profit for us. And as a result of this change, our top line may decline significantly. But in the longer period, we hope that by 2018, our P&C insurance business revenue will be flattish in terms of revenues. And in 2019, our top line will continue to grow significantly, and we will return back to profitability on our P&C business. Thank you.

[Foreign Language]

So Mr. Ge's answer basically said, in the second quarter, we had about RMB100 million investment income, and that's mainly dues from the short-term investments, as we mentioned just now, mainly related to the interbank deposit products. And another RMB120 million are actually share of income from affiliates, and that's mainly the profits -- the share of profit that we got from CISG, in which we currently own about 20%. As for the future plan on -- for these two companies, business wise, we will definitely support -- continue to support the growth of their business, as financial products and services is a key part of our overall strategy, so we'll continue to support their growth. But as for -- whether or not we're going to take a further step on the equity wise, that will depend on how the financial market environment evolves overtime, as currently the financial market is under a strict control by the Central Bank as well as the regulators, amidst the financial regulations at this stage. And then, as Mr. Ge emphasized again, on business wise, we'll continue to support their development because there are still quite strong demand for these type of products in the market.

Your next question comes from the line of Mr. [Jessie Go] of [Taiping Asset Management]. Go ahead please ask your question.

Sorry, it's from [Indiscernible] International.

The question is from [Jessie] from [indiscernible] International. she's wondering whether we have any plan to introduce our new customers in the second half. And as for Tianan Life and Huaxia Life, which are currently our top product supplies, how their contribution will change in the second quarter -- in second half?

[Foreign Language]

As I mentioned just now, the insurance intermediary channel has become a more important channel for the small and medium-sized companies, and our strategic value is better appreciated by them. And we have been seeing a lot of small, medium-sized company actively pursuing completion with Fanhua, and we expect to have more strategic cooperation -- contracts with insurance -- some insurance companies in the third quarter and the fourth quarter. But we will be more selective in terms of that -- in terms of our considerations that we need to find the best company that can enhance our product portfolio competitiveness in the market as well as can provide better brand recognition for the customers. And then as for the revenue contribution from Tianan and Huaxia we do expect that -- the contribution to come down a little bit more so that we don't have so much concentrated product supply.

[Foreign Language]

And what about [indiscernible] introduced new product suppliers? So normally, are we happy to introduce one or two new product supplier, one each quarter? Or that actually depends on how much new cooperation that we've been discussing with new insurance companies? It doesn't matter how much -- we don't have any specific number?

[Foreign Language]

Unlike P&C insurance business, for the life insurance contracts, it's not -- actually, it's not the more the better. And we tend to be relatively concentrate on the cooperation with a certain number of life insurance companies. So we will basically control the pace of introducing new product suppliers. We don't really have a specific target to achieve. And when we choose the product suppliers, we will basically analyze their own position as well as our market needs to decide who to cooperate with.

[Foreign language]

So right now Fanhua basically has a much more stronger bargaining power or has much more larger space over who to cooperate with and what type of products we can sell.

[Operator Instructions] Next question again is for [Sizen Ku] of Open Door, go ahead please ask your question.

[Foreign language]

The question is from Shizen Ku and he's asking, by the end of June, our cash and cash equivalents was about RMB 700 million. Does it include the short-term investments? And if not -- if included -- if including the short-term investments, what's the net cash amount at the end of the second quarter?

[Foreign language]

[Foreign language]

And our financial manager, [Li Lee], will take this question. And she says that by the end of second quarter, we had about 60 -- RMB 620 million cash and cash equivalents and RMB 2.3 billion short investments. So that means that our net cash position was about RMB 3 billion.

[Foreign Language]

How are you going to spend it?

[Foreign Language]

Let's give a chance for our Chairman to answer the question.

[Foreign Language]

The management and the board are in active discussion of several options on how we can better give returns to shareholders. And so basically, we have been listed for almost 10 years, and he's happy to see that Fanhua has achieved a sustainable profitability, and he's also happy that over 20 years of development, things are inceptions, Fanhua has found the right business model that can generate sustainable growth and sustainable profitability. So right now, the board has been thinking, what is the right way to better return -- to enhance our shareholder value.

There are no further questions at this time. I would now like to hand the conference back to today's presenter. Go ahead. Please continue.

[Foreign Language]

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

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.