Huize Holding Limited (HUIZ) Q1 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Huize Holding Limited First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the management’s prepared remarks, there will be a question-and-answer session. Today’s conference call is being recorded and a webcast replay will be available. Please visit Huize’s IR website at ir.huize.com under the Events and Webcasts section. Now I’d like to hand the conference over to your speaker host today, Ms. Harriet Hu, Huize’s Investor Relations Director. Please go ahead, Harriet.

Thank you, operator. Hello, everyone, and welcome to our earnings conference call for the first quarter of 2021. Our financial and operating results were released earlier today and are currently available on our IR website and the newswire. Before we continue, I would like to refer you to the Safe Harbor statement in our earnings press release, which also applies today’s call as we will be making forward-looking statements. Please also note that we will discuss non-GAAP measures today, which are more thoroughly explained in our earnings release and filings with the SEC. Joining us today are our Founder and CEO, Mr. Cunjun Ma; COO, Mr. Li Jiang; Co-CFO, Mr. Minghan Xiao; and Co-CFO, Mr. Ronald Tam. Mr. Ma will start the call by providing an overview of the company’s performance and operational highlights for the first quarter of 2021. Mr. Tam will then provide details on the financial results for the period before we open up the call for questions. I will now turn the call over to Mr. Ma.

[Foreign Language] Hello, everyone, and thank you all for joining Huize’s first quarter 2021 earnings conference call. In the first quarter, China’s insurance market maintained steady growth, driven by continued improvements in the pandemic situation in China, seasonal strength for the life and health insurance sector and the increasing market demand caused better transition between old and new statutory definition of vertical illness. According to data released by the CBIRC, the insurance industry achieved insurance premium income of RMB1.8 billion in the first quarter, an increase of 5.5 percentage points from the last period – from the same period last year. Among the health insurance segment increased by 16.1% year-over-year to RMB306.6 billion. With the backdrop of strong industry fundamentals, Huize continues to strengthen its core capabilities, accelerate it’s digital transformation and capture greater market share. Total GWP facilitated on our platform increased by 1.3 times year-over-year to RMB9.4 billion, while total operating revenue nearly doubled to RMB713million, both achieving record quarterly highs. [Foreign Language] Huize has been making steady progress on our long-term insurance strategies. As part of our commitment to providing the first long-term insurance policy for younger generation, we chose to focus on offering a long-term health insurance policy with a higher threshold for online sales. This strategy is driven by three main factors. First, the payment terms for critical illness insurance policy can often be as long as 20 or even 30 years. The longer the user stays on our platform, the longer our service and interaction period is, making it easier to establish trust and increase user stickiness. Second, as younger users age and entering into more mature life stages, new insurance needs will emerge. For example, when they start a family, they will naturally consider coverage for their children, such as critical illness insurance and education savings insurance. Serving users’ evolving needs and generation repeat purchase opportunities are the core of Huize’s operations in creating long-term user value. Third, a long-term relationship allows us to obtain more user data from the sales on the working and planned activities to generate more accurate user profiles. These deep insights on user needs, preferences and purchasing behaviors enable us to create higher growth insurance products, while also providing us a foundation in presenting adverse selection. [Foreign Language] Next, I would like to share a few key indicators that highlight the value of our insurance user base. First, our user profile. As of this quarter end, the cumulative number of insurance clients reached 7 million and the cumulative number of insured clients was approximately 558.4 million. Among insurance clients who purchase long-term insurance products in the first quarter, 73.2% were from higher-tier cities and their average age was 32.7 years old, demonstrating strong insurance awareness. The second indicator is the average ticket side. In the first quarter, the average first year premium for long-term policies distributed was around RMB 4,508. The third indicator is our persistency ratio. Starting from the second quarter of last year, persistency ratio for long-term life and health insurance in the 13th and 25th months have maintained at about 94% for four consecutive quarters. Ultimately, we believe that the long-term insurance business is a competition for user quality instead of user traffic. Our advantages in customer targeting as well as our business positioning and differentiation in the industry are demonstrated through our user insurance consumption capacity and the average quality of our user profile. [Foreign Language] From a product perspective, the new statutory definitions of vertical illness grows both challenges and opportunities to the critical illness insurance market. Leveraging our years of experience and continuous improvement in product customization capabilities, we upgraded our product soon after the revised definition went into effect and ensured the continuity of our quality product supply. In April, we held our first online product launch conference, sharing for thousands, the highlights of a suite of eight new customized products launched in the first quarter. For example, China endowment life insurance, it’s yet another innovation in our savings product customization. Different from traditional whole life insurance, this product includes both safe plans and maturity plans, providing protection as well as staffing function in a single insurance policy. Meanwhile, the new-definition critical illness product, Darwin 5 Glory, provides a long specific drugs such as targeted cancer medication and immunotherapy drugs. Moreover, it provides additional coverage for malignant tumors. The insured clients can receive up to three payments with 40% of the amount insured, each subjecting to a one-year waiting period, helping clients break the limit of mandatory three years waiting period stated by most of the products in the market. Furthermore, additional coverage for mild, moderate and severe illnesses is optional, which offers more flexibility. In the long-term, we believe there is still room for greater demand for critical illness protection, and we will continue to explore and develop children’s critical illness insurance products, multiple claims products, products for impaired life and other innovative products with value-added services. [Foreign Language] In terms of digital transformation, during the quarter, we acquired authoritative certificates and qualifications in technology and R&D, including the information security management system certification, the information technology services management system certification, and our R&D center has successfully achieved CMMI maturity level three certification. Such recognition signifies Huize’s sound R&D capabilities and our high standard of information security. And we will continue to develop and optimize our technologies in order to provide users with quality products and efficient and safe services. [Foreign Language] Regarding our online to offline strategies, we have established a service team in Shenzhen and put into trial operation during the quarter. Target users were selected based on multidimensional user data accumulated on our platform, driven by refined user purchase management capability. Our offline team initiated contact with local users who have met purchases on our platform and demonstrating stronger insurance demand and higher potential to convert. By offering differentiated products, such as family health insurance coverage and endowment insurance, we are laying the foundation for solving the last-mile program of high-end product conversion by connecting online traffic with premium offline services. [Foreign Language] With the official implementation of the regulation of Internet insurance business in China, the online insurance industry is expected to thrive in a more sustainable and healthy environment. Maintaining compliance and strong corporate governance has always been an important aspect of Huize’s management. As the industry enters a phase of fast and healthy development, Huize will continue to focus on users, policy our core capabilities, improve operational efficiency and provide users with more diversified and personalized products and services through both online and offline channels. Moreover, we want take the opportunity presented by the accelerating digital transformation of the insurance industry; empower upstream and downstream partners and the whole insurance ecosystem with data and technology; develop more mature insurance technology solutions, and strive to achieve sustainable development and high-quality growth going forward. [Foreign Language] This concludes my prepared remarks for today. I will now turn the call over to our CFO, Mr. Ronald Tam. He will provide an overview of our key financial highlights for the quarter.

Thank you, Mr. Ma. and Harriet, and hi, everyone. We’re very, very pleased to report another record quarter for Q1 in terms of total GWP facilitated on the platform as well as our total operating revenue. For the first quarter, total GWP amounted to RMB1.4 billion, representing a very strong 1.3x growth year-over-year. In particular, first year premiums or, FYP, accounted for RMB889.8 million of the RMB1.4 billion total, or approximately 54% of total GWP, which represents 2.2x growth year-over-year. The strong operating performance in FYP, on the one hand, is a result of industry factors, particularly with respect to the transition of credit unions definition from old to new regime during the period, which really consummated in spike in consumer demand in the month of January as well as the traditional seasonal strength in the auspicious push start kind of the period in the first quarter for the industry. On the other hand, the strong growth in FYP can also be attributed to our more aggressive marketing spend during the quarter in terms of both customer acquisition and service fees paid to our channel partners. In order to really capture a disproportionate market share vis-a-vis the competition. And given our focus on acquiring high quality and long-term insurance customers, we believe the quarterly result has shown that efforts so far. In terms of renewal business, renewal premiums accounted for RMB504 million, or 36% of the RMB1.4 billion total GWP, representing a year-over-year increase of 57%. As Ma has touched on earlier, we are very proud to report consistently strong persistency metrics, maintaining about 94% plus for 13th and 25th months persistencies during the past quarter. We believe that high persistency is very critical as we continue to drive efforts to increase the lifetime value of our customers, which we have demonstrated by our increased distribution of savings insurance products during the quarter. In the first quarter, approximately 18.6% of our FYP was contributed from long-term life and annuity products distribution. We have been able to generate repeat purchases from our existing users for savings products, with about 39% of accumulated savings products customers having purchased one or more policies before on our platform. In terms of product mix, in the first quarter, as mentioned earlier, due to market industry factors as well as a proactive marketing strategies to capture market share, our GWP for long-term health insurance increased by 123% year-over-year to RMB1.1 billion. During the quarter, GWP for long-term life and health insurance accounted for approximately 96.9% of total GWP. And GWP for co-developed products with our insurance company partners were approximately RMB850 million, accounting for 61% of total GWP distributors and representing an increase of 10 percentage points from the same period of last year, which continues to reflect our increasing engagement with our upstream industry partners. Among them, the most well-known products, Darwin number 3, which is for the best-selling critical illness insurance products online, which we developed with Sinatay Life Insurance, contemplating first year premiums of approximately RMB320 million in the quarter. Now turning to our revenue. Total operating revenue for Q1 was RMB735 million, again a record quarterly high, which was up by 196% year-over-year, and outperformed our guidance previously given to the market in our previous conference call. The increase in revenues were primarily driven by the increase in brokerage income due to the 133% increase in total GWP facilitated during the quarter. Cost of revenue for Q1 increased to RMB557 million, primarily on the back of increased service fees paid to our channel partners in earlier. Selling expenses for the quarter increased by 45.4% year-over-year to RMB77 million, which was primarily attributable to an increase in advertising and marketing spend during the quarter, which increased by almost 1x year-over-year, as we, again, aggressively increased spend during the quarter to capitalize on the significant market opportunities and demand for critical illness products. The increase in selling expenses is also attributable to increased sales and marketing year-over-year. G&A expenses for the quarter increased by 38.7% year-over-year to RMB54.1 million. This increase was primarily attributable to the increased rental expense due to office expansion as well as an increase in G&A salaries and employment benefits, which is offset by a decrease in share-based compensation expenses year-over-year. R&D expenses for the quarter grew by 58.4% to RMB18.8 million, which is mainly driven by our investments – our continued investment in overall R&D and data analytics headcount. For the quarter, we have recorded a GAAP net profit of RMB28.5 million. If we exclude share-based compensation, non-GAAP profit was RMB38.7 million. We continue to maintain robust liquidity and a relatively strong financial position as of quarter end, with a combined balance of cash and cash equivalents of approximately US$76 million. Turning to our Q2 guidance. We currently expect total operating revenue for Q2 to be in the range of RMB230 million to RMB250 million. We note that is essentially flat last year as we observed that market demand for critical illness products has been largely absorbed in advance during the Q1 period. And Q2 is a traditionally slow quarter for Chinese insurance industry. Taken together with Q1, the guidance represents our first half revenue growth of 1x year-over-year versus the same half of last year. This forecast reflects the Company’s current and preliminary views on the market conditions and operational conditions, which are subject to change caused by various uncertainties, which includes the ongoing COVID-19 pandemic globally. With that, it concludes our prepared remarks for today. We will now open up the call to Q&A. Thank you.

Operator, we can start Q&A session now.

[Operator Instructions] Your first question comes from the line of [indiscernible] Securities. Please ask your question.

[Foreign Language] Okay. I will translate the question into English. So [indiscernible] is asking that the company’s agility for the first quarter is very good. And he wanted to know that how much of the GWP was coming from repurchased clients, and how much from new customers? And also, he want to know that what’s the company’s following customer acquisition strategy? And also, he wants to know that if there are any available data regarding the repurchase rates that the company can share?

Okay. It’s Ron here, and let me address this question for the team. I think in terms of repeat purchases, we’re definitely increasing our efforts in maintaining existing customers and engagement and also trying to increase life-time values with these customers. And I think that, I just mentioned in our prepared remarks that around 39% of our savings products coming from repeat purchases. And we also shared that around – approximately 19% of the FYP for the first quarter comes from savings related products. So with those two numbers, you can basically have an idea of roughly, let’s say, less than 10% of the customers are repeat purchases. So I think this number is still relatively low and definitely, there’s a lot of upside and room for growth in this area. I think we have mentioned before to the market, for the last three years or so target, it has been ramped up and scaled up most of the efforts that we have been spending, obviously, towards acquiring new customers from the market. But with the, I guess, established bit of customers that we have, and the data insights that we have into our existing customers, we are definitely going to increase engagement and drive long-term values and life time values with the customers that we have through more precise data analytics. And that’s why also we’ve been investing heavily on the R&D asset to making sure that our company efficiently clean and empower our agents, our consultants to pursue these repeat purchase customers. And Ma mentioned before that the online to offline strategy, this is also a very critical piece or starting point for us to drive LTVs on the platform. And I think, right now, the initiative is still very much in the trial phase. We have not established a trial team in Shenzhen to really scale up the business. And I think that we will be happy to share more details, I guess, metrics with the market when we have reached more critical plans. Hope that answers the question.

Okay. Thank you, Ron.

Your next question comes from the line of [indiscernible] of CLSA. Please ask your question.

[Foreign Language] My question is related to the new regulation for the internet insurance sales, which is expected to be implemented in January next year. Within the rule, there are some requirements in terms of pricing and also expense ratio. So I just wonder what kind of corresponding measures have placed on the expenses. Thank you.

Great. Thanks, Edwin [ph] for joining the call. So I think a very quick response to the regulatory questions is that we’re obviously in constant dialogue with both regulator side as well as more importantly, our industry partners. With respect to the insurance companies, I think, right now, this new rule, which you just mentioned, it’s actually still in consolidative phase. Although there’s a likely of being passed through and being enacted or effective next year. I think what we try to do as a platform is that, first of all, compliant operations is the key. And I guess, in terms of our own internal systems upgrades and so forth, we are quite confident that we can be able to be ready when certain rules are coming to impact. With respect to the industry pricing, et cetera, I think this is still a bit lower at this stage. I think the industry, as a whole, has still time to reach consensus. But I think the critical aspect for Huize is that we have very strong relationships with our insurance company partners as we have demonstrated through our years of track record in terms of customizing products with our upstream partners. And therefore, in terms of product design, pricing and structure. I think we are very well positioned to manage and cope with the changes that’s maybe brought about by the regulatory changes.

Great. Thank you.

Thank you.

[Operator Instructions] Next question comes from the line of [indiscernible] of CICC. Please ask your question.

[Foreign Language] Thanks for taking my question. It’s [indiscernible] from CICC. My first question is, we have seen some negative effects caused by the switch of critical unit definition. When do you think this effect would fade away? My second question is, how do you expect the trend of profitability considering the increasing marketing expenses?

Okay, thanks. Again, thanks for joining the call. I guess two questions here. The first relating to the CI products in the market. Definitely, I think that the first quarter has seen a significant spike in demand for the old definition products in the marketplace. And I think a lot of the industry participants, including ourselves, has tried to really proactively capture market share during the period and that’s reflected in the, I guess, upward trend in the cost side of things. And I think that also brings us a lot of good customers, good quality customers during the period. And I think the effort was very well for the long-term business of the company. I think for the new definition products to really come on stream and become, I guess, scale-up the sales in the market, I think, that we probably need to wait until the later part of this quarter when the products are now being marketed for a long period of time and being more well understood by the market and by the consumers. So I think that probably we’ll see more recovery in critical illness product distribution in the month of June and into the third quarter of the year the year. So I think that’s the first question. In terms of the second question on our view on profitability, I think that you can see in the first quarter with the strong revenue growth and that also demonstrates the platform’s scalability in terms of both our 2C and 2B business. We have been able to achieve such a significant growth in the single quarter without really increasing a lot of investment in our headcount and so forth. So it demonstrates the scalability and also the operating leverage for the business. We have also shown that we have been tactical this quarter. Going forward, in the next few quarters, I think that, definitely, Q2 will be a very slow quarter as you can see from our guidance. So Q2 is likely not very profitable. I think that going forward, we will see how market dynamic would evolve, and I think that, for us, will be balancing growth comparability as a major objective for the rest of the year.

Thanks.

Thank you.

Your next question comes from the line of Ehsernta Fu from Citigroup. Please ask your question.

Okay, thank you. [Foreign Language] So the first question that we have is we – we would like to understand impact the suspension of mutual aid platforms on business plans, whether we have been effectively approaching new customers. And second, ultimately it is to our clients. And on the other hand, I want to know if we see any impact from continuous rise of point of sale, which in certain medical instruments and that it means lately. And lastly, now if you can give us some [indiscernible] because it, obviously, gives identify for the business we operate in. Thank you.

Okay. Thank you, Ehsernta. I guess you had three questions there. The first question about Q2. I guess that’s the question. So obviously, we have seen that the market players have been shutting down various mutual aid platforms or mutual aid programs. I think, overall, this is a very realistic reflection of the healthy and long-term sustainable development of the industry. I think the regulators are taking a stance on this aspect. And I think, overall, it should mean that the competition for tropical users maybe alleviate a little bit. But I guess for Huize, we have been very laser focused – focusing on the long-term insurance products segments in the marketplace. And I think most of these platforms, the targeted customers or the user profile may not be exactly what we are looking for as our core strategy. So I think the impact will be relatively limited in terms of the business to our strategy. So that’s the first question. The second question on cleaning by and the impact on this new government initiative. I think overall, it should be very encouraging in terms of promoting general populations insurance awareness and the propensity to procure protection for themselves and the family. Again, I think that the target audience here, which is directive, is really people who are maybe a bit more of an advance age or people or who are not a standard kind of clientele for the commercial insurance or the medical reimbursement insurance customers. So I think that with this new policy from the government, it might affect more with respect to the platforms that are more focused on short-term insurance products, the medical insurance product like the reimbursement products. But for ourselves, we are more, again, on the critical illness side, on the long-term life and health side. And I think that this may not necessarily have a very big impact on our business. So we’re – again, we are very focused on targeting the higher-tier cities customers, people who are relatively young of age with higher income level and relatively better education background and would desire a high-quality sustainable protection policy for their own and for the family. So with regards to the third question on guidance, I think that the Q2 guidance is a reflection of reality. I think we are seeing weakness in the market, not just ourselves but across the board, particularly with respect to the incumbents. The top five insurance incumbents in the country are facing some headwinds during this quarter. I think this really has to do with the so-called critical illness absorption of demand in first quarter. So I think Q2 and Q1 as a whole taken together, again, I think is still a very strong year-over-year revenue growth of almost 1x. And I think for the second half of the year, we’re still sticking to our company’s practice of giving quarterly guidance. So I think that we will wait until the next quarter to give further indications on the rest of the year. Thank you.

Okay. Thank you, Ron.

Your next question comes from the line of Xinqi Liu of Guotai. Please ask your question.

[Foreign Language] So I just have one question. Has the management has shared some views about the competition landscape, i.e., comparing with these traditional insurers and other online platforms? Thanks.

Okay. Thank you, again. So I think the question on the competitive differentiation of Huize versus our other competing platforms or the, I guess, the more traditional offline brokerages. I think – first of all, I think that we are very focused on utilizing technology and data to help mix everything more efficiently, which is our genesis of the business model from 15 years ago. I think that we have really solved some of the pain points in the marketplace, including providing customers about more comprehensive suite of products to select some, providing them with the tools to compare and contest products to get the best value for money product for themselves and both products for themselves. I think the challenges are being faced by the traditional industry players are with respect to maybe some of the aging agent force and maybe more of a homogeneous product offering to the consumers. So I guess, we differentiate by standing from the customer’s perspective, allowing to get the best insurance product for their own needs. I guess the other depressing factor, which is very critical, is the user base that we have. We have now 7 million users on our platform, accumulated in our platform. Both of these customers are very young with the average age of 32.7 years. And most important of all, 73% of these clients are coming from the high-tier cities in China. So I think that with respect to our product strategy, we have always been targeting relatively high ticket size. We have disclosures now that the average ticket size for a long-term policy is RMB4,500, which also reflected the quality of the user base that we are able to generate and to acquire through our online marketing channels. And we have also been able to deliver a consistent persistency ratios at 94%, I think, that is maybe probably at the top quartile in the marketplace and also given our insurance company partners with additional confidence in working with us together to develop more innovative and more suitable products for the market.

Thank you.

Thank you.

Your last question comes from the line of Halsey Wu of AMTD Group. Please ask your question.

[Technical Difficulty]

[Foreign Language]

[Technical Difficulty]

[Foreign Language]

As there are no questions. I’d like to hand the conference back to the management for the closing remarks.

Hi. Thank you for joining with us today, and we look forward to seeing you next time. Thank you.

This concludes today’s conference call Thank you for participating. You may now disconnect.

Thank you, everyone. Good night. Thank you.