AIFU Inc. (AIFU) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by for Fanhua’s Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. All the lines have been placed on mute to prevent background noise. After the management’s prepared remarks, there will be a question-and-answer session. Please follow the instructions given at 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 being finished. Please visit Fanhua’s IR website at ir.fanhuaholdings.com under the Events & Webcasts section. Today’s conference call 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, Fanhua’s Investor Relations Manager. Please go ahead.

Good morning. Welcome to our third quarter 2019 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 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; our Chief Financial Officer, Mr. Peng Ge; and Board Secretary, Lily Lee. Mr. Wang will provide a review of our financial and operational highlights in the third quarter 2019. And then he, Mr. Ge and Mrs. Lee will take your questions after the prepared remarks. Now I will turn the call over to Mr. Wang.

[Mandarin] [Interpreted] We have our Chief Financial Officer, Mr. Peng Ge; and our Board Secretary, Mrs. Lily Lee. We will begin today’s call by giving a brief analysis about recent market developments, followed by an overview of our third quarter 2019 financial and operation results and our growth outlook in the fourth quarter 2019. There will be a Q&A session after the report. [Mandarin] [Interpreted] In the first part we would like to share a bit of management’s view on the industry dynamics. On amid the on-going U.S. China trade war, there has been no sign of relaxation in regulatory supervision in China’s financial market, industry-wide transformation and adjustment has felt in the life insurance market in China has been a continuous quarter-by-quarter slowdown in growth over the past nine months of 2019. Negative growth is expected in new premiums for regular individual life insurance business in the industry for the full year of 2019. If the trade war drags on and the regulatory environment remains tightened, we expect that the life insurance industry may remain under huge pressure to deliver growth in 2020, due to the following factors: Firstly, lack of product innovation; and secondly, lower buying desire as more consumers choose to stay on the sidelines in view of market uncertainty; and third, increasing difficulty in recruiting and retaining sales agents across the industry. [Mandarin] [Interpreted] Although this industry-wide adjustment period may continue for a while, we firmly believe that such adjustment is temporary since the key forces that drive industry growth, such as consumer buying power and increasing demand for insurance products, have not changed fundamentally and the trend of the industry’s spiral growth is irreversible. We are convinced that through continuous regulatory overhaul, the industry will transition to a period of more healthy, sustainable and rapid development in the medium-to-long term. [Mandarin] [Interpreted] As for our financial and operating results, in the third quarter 2019 our operating income achieved RMB151.4 million representing a growth of 21.6% year-over-year. Non-GAAP operating income decreased 10.4% year-over-year to RMB111.6 million, which was in-line with our previous guidance. The decrease in non-GAAP operating income was primarily due to a comparison with a high base in the same period last year as a result of a one-off performance bonus income of approximately RMB38 million that we’ve received from one of our insurance partners in the same period last year. [Mandarin] [Interpreted] In the third quarter 2019, Fanhua’s life insurance business registered a strong growth of 42% year-over-year to RMB2.1 billion significantly outpacing industry growth of which renewal insurance premiums grew by 46% year-over-year to RMB1.4 billion and first year regular premiums grew by 34.5% to RMB683.6 million, while annualized premiums equivalent grew by 6.2% to RMB419.1 million. [Mandarin] [Interpreted] In the third quarter of 2019 our annuity insurance product accounted for 29.8% of our total life insurance business in terms of annualized life insurance premium as compared to 11.3% in the same period last year, while long term health insurance accounted for 65.3% as compared to 76.5% last year. And endowment [ph] insurance term life insurance and whole life insurance collectively accounted for 4.9%. [Mandarin] [Interpreted] In the third quarter 2019 we had more balanced and diversified mix of products suppliers with Huaxia accounting for 25.4% of our total life insurance revenues, Sinatay 22.6% EUM 21.6%, and Tian’an 13.9%, respectively. Net revenues of the claims adjusting business were RMB94.8 million for the third quarter of 2019, up 18.6% year-over-year. The increase was mainly due to strong growth in medical insurance-related claims adjusting business. In the third quarter of 2019, we have completed cleaning up our sales force in accordance with the regulatory requirements. In the meantime, we still maintain a steady growth of approximately 50,000 new recruits per quarter. As of September 30, 2019 the number of registered sales agents in Fanhua was 658,145 including 54,696 who were added to in the same quarter of 2019. [Mandarin] [Interpreted] During the third quarter 2019, we’ve achieved remarkable results in implementing our one thousand reserve entrepreneurial sales team campaign. As of September 30, 2019, Fanhua has introduced over 600 new reserve entrepreneurial sales teams, which we believe will start to make positive contributions to our business growth in 2020. [Mandarin] [Interpreted] Meanwhile, we’ve steadily and vigorously rolled out our Shenzhou 100 strategy nationwide, which will lay a solid foundation for our rapid development in the next years to come. [Mandarin] [Interpreted] Next, I’m going to share a bit update of our technology empowerment. Over the past few years, Fanhua has been dedicated huge efforts to research and development of proprietary technologies. We have invested IT [ph] infrastructure which empowers our sales agents to manage their sales and marketing activities more efficiently, while improving our operating efficiency and customer experience. [Mandarin] [Interpreted] In the third quarter of 2019 after one and a half years efforts we have successfully launched an upgraded internet based [Indiscernible] business system, which featured more intelligence and mobile service support as far as Integrated Data Processing across dozens of insurance companies. We believe that this new system would provide stronger scalability to support our future business expansion while driving efficiency. [Mandarin] [Interpreted] Our online platforms maintains a solid growth momentum and on which eHuzhu has gathered approximately 3.8 million effective registered members as of September 30, 2019, helping more than 2,900 families raise an aggregated amount of RMB509 million financial aid. Five years into operation, started to experiment on monetization by providing certain value-added services, in addition to charging it's members a management fee of RMB1 per person since early this year, a total of RMB1.8 million management fee was collected as of September 30, 2019. [Mandarin] [Interpreted] Meanwhile, Baowang maintained solid growth versus the number of registered accounts increasing by 30.8% from a year ago to 2.6 million as of the end of September 2019. And the number of his active customer accounts during the third quarter of 2019 increased by 12.8% from a year ago to over 150,000. Insurance premiums generated through Baowang was RMB86.6 million in the third quarter of 2019 versus a year-over-year increase on 19.6%. [Mandarin] [Interpreted] Fourthly a bit of update on our quarterly dividend payout trend. Dividend for the third quarter 2019 is USD0.30 per ADS payable on around December 19, 2019 to shareholders of record on December 05, 2019. Going forward, we expect to maintain our quarterly dividend policy unchanged. [Mandarin] [Interpreted] Firstly, our business outlook in the fourth quarter of 2019. In light of the industry dynamics and our on-going strategic initiatives, we expect that our annualized premium is equivalent to grow by no less than 10% year-over-year, and non-GAAP operating income to grow by no less than 20% year-over-year for the fourth quarter of 2019. When any industry undergoes adjustment, there tends to be a reshuffle in the competitive landscape with accelerating consolidation and as a result the big one becomes bigger, while the strong one become stronger is no exception in the insurance industry. [Mandarin] [Interpreted] As the leading independent insurance agencies in China, Fanhua will take full advantage of the adjustment period to make strategy deployment, so as to further solidify our leading position by capitalizing on the favorable opportunities presented by the accelerated separation of insurance underwriting and distribution, we will stay focused on executing the Shenzhou 100 strategy and the 1000 Reserve Entrepreneurial Sales Teams Campaign, through which we aim to further strengthen our sales force by attracting elite sales and managerial talents, and further tap into the market potential in medium and large-sized cities in China. We believe these initiatives will position the Company well to embrace the next round of explosive growth in the China’s insurance industry over the long run. Thank you. [Mandarin] [Interpreted] Thank you. Now our management will open the floor for your questions.

[Operator Instructions] Your first question is from Dan Tian from CICC. Your line is open.

[Mandarin] [Interpreted] This is Dan Tian and he has two questions. The first question is regarding to our number of sales agents and annualized premium equivalent. He is wondering why a number of our sales agent and APE decreased sequentially from the second quarter? And what happened? What those causes for this? And the second question is regarding to the year opening strategies of our business partners?

[Mandarin] [Interpreted] Thank you for the questions. In regard to your first question, answering both in two parts, first part is according to the number of sales agents and a decrease in number of sales agents mainly due to the sales force cleanup as required by the regulator. And basically the low code bureaus of the CBRC have attached great importance to this requirement and even given a maximum on -- given a cap on the number of sales agents that each agency can have. So as the number one sales agent -- insurance agencies in many of the regions in China, we have followed strictly followed the requirement of the local CBRC bureau. So that's why the number of our sales agents decreased in new countries in the second quarter. [Indiscernible] the sales force cleanup, the performance, number of performance agents also decreased slightly.

[Mandarin] [Interpreted] And after the sales force cleanup, we also have a more clear direction on clear targets in terms of the growth in our sales force and we expect to continue to maintain a steady pace of new crews going forward and to expect that to grow approximately 50,000 per quarter going forward.

[Mandarin] [Interpreted] And secondly regarding to the decrease in our new business, in China, particularly in the life insurance industry is a kind of seasonality or in the implementation of campaigns throughout the year by insurance company. In beginning of the year, there is a year opening sales campaigns and then followed by what we call April and May joined promotional campaigns. And then followed by -- like golden period in September and October where insurance company will also put more efforts to promote sales wide. In July and August, usually the focus will be on increasing the number of sales agents. I think the promotional campaigns in September and October force in two separate quarters. So usually the third quarter will be relatively weak than the first quarter and the second quarter. So except that if insurance company have some special promotional activities like discontinued product line, so that may prompt the sales in that particular quarter. Otherwise, it's usually normal that the business in the third quarter will be relatively lower than the second quarter..

[Mandarin] [Interpreted] Regarding to the opening sales, probably insurance intermediate companies make face a little bit complicated situation here this year. Firstly, there's more, there will be probably more competitions from insurance companies. For example, China lines and beyond, they actually started their year opening sales in October, which is far earlier than usual than previous years. I think maybe this is their efforts to get more market share than their competitors. And now secondly, another factor that might affect our year opening sales is that recently the CBRC has assembled a meeting among over 10 insurance companies, which offer annuity products versus a same interest rate of 4.025%. And basically, the CBRC require them to discontinue this type of products probably by mid-December.

[Mandarin] [Interpreted] We will keep a close watch on the market development and we will also take measures to adapt to the market changes in times and our year opening sales strategy is basically we are going to kick start our year opening sales before December 10th this year. Thank you.

Your next question is from Yuan Xue. Your line is open.

[Mandarin] [Interpreted] This is Yuan Xue from CICC and has two questions. The first question is regarding the change in our first year commission rate. Is it increased or decreased from last quarter? And then secondly, is regarding to the recent developments in our Shenzhou 100 strategy?

[Mandarin] [Interpreted] Our first commission [ph] rate is remains unchanged at around 112% in the third quarter.

[Mandarin] [Interpreted] And going to the second question Shenzhou 100 strategy is our medium term and long term strategy. And since we launched these strategies in August, we have received very enthusiastic response from the market and currently we have spread our Shenzhou provincial branch into three separate provincial branches, which is the Shangdong provincial branch, Guangdong provincial branch and Liaoning provincial branch, divided by region, different regions in Shangdong. And in the meantime we also have been in close contact with the managerial talent in top six insurance companies who have particular profiles as top managerial personnels are there or in – born in the 1980s.

[Mandarin] [Interpreted] Starting from next year, we expect that as more and more new provincial branches will be established in the next three years, and we believe that we will be able to retrieve this target to establish nearly one third provincial branches by then, which will lay a solid foundation to our social growth. Thank you.

Your next question is from Debra Fiakas from Crystal Equity. Please go ahead.

Thank you. And thank you for taking my question in English. My first question, I have two. The first one is about the 600 new reserve sales teams. I was wondering, if you could tell us more about the teams, are they -- how large they are? How many people are on the sales teams? One or many? And also, if you have expectations for turnover in these teams related to the regulatory effort to register and sort of clean up the sales forces, if you will? And then also, I wondered if you could tell us the number of hours that they're trained, how much training they get? And then my second question is really about the number of active users of the Lan Zhanggui platform. The number went down this year, there's there's fewer active users, but I wondered if you could explain about their performance are -- is each one of the active users selling more per person, or you know, selling less, if you could just tell us about the performance of the ones that the you have retained? Thank you very much.

[Mandarin] [Interpreted] Thank you. Regarding to your first question, our 1000 reserve entrepreneurial staff agents content, which we launched in our half years operational conference in earlier in June, July, and the Shenzhou 100 strategy which we launched in August and September. Those of the strategies and content are launching according to our judgment to the market development, especially our adjustment that the market is undergoing a transformation, and we think that we must take advantage of this opportunity to do more fundamental work, just all besides our infrastructure, our sales force and the 1000 reserve entrepreneurial sales team content is our efforts to shift our focus from recruiting individual sales agents to kind of structural recruitment, i.e. recruitment of sales agents and teams. As you may know, Fanhua has innovated a entrepreneurial sales agent system. This reserve entrepreneur sales team, they may not have met the standards of as a entrepreneur sales team.

[Mandarin] [Interpreted] The typical profile of reserve entrepreneurial sales teams are basically they should be -- the members should be dedicated in insurance industry and then secondly, they the sales team will be able to generate over 50,000 APE each month for three months, consecutive three consecutive months, and then thirdly the team should have a listed performance, effective performing agents

[Mandarin] [Interpreted] As for these certificates that according to the CRCs requirements, we currently after the sales force teamed up, we now all of our sales agents have been properly registered with the CBRC and have been issued with our certificates to indicate that they are allowed to sell insurance under someone's name. And for all the new recruits, they will also be property registered and issued with the certificate. As for the training, we will provide all the new recruits standardized training activities as well as differentiated training programs in according to their specific needs.

[Mandarin] [Interpreted] As for the active users of Lan Zhanggui the decrease is mainly due to the sales force cleanup as regulatory requirements as required. Our first year premium recorded as strong growth year-over-year. So that means that per person productivity also improved significantly. Thank you.

We don't have any other questions as of the moment, please continue presenters.

Thank you. If you have any further questions, please feel free to contact us. Thank you for joining the call. Thank you.

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