Fanhua Inc. (NASDAQ:FANH) Q2 2019 Earnings Conference Call August 20, 2019 9:00 PM ET

Company Participants

Oasis Qiu - Investor Relations Manager
Chunlin Wang - Chairman and Chief Executive Officer
Peng Ge - Chief Financial Officer

Conference Call Participants

Dan Tian - CICC
Jenny Zhang - Morgan Stanley
Yuan Xue - CICC

Operator

Thank you for standing by for Fanhua’s Second Quarter and First-Half 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. All the lines have been placed on mute to prevent background noise. After 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. Thank you. Please go ahead, ma’am.

Oasis Qiu

Good morning. Welcome to our second quarter and first-half 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 United States 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; 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 second quarter and first-half of 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.

Chunlin Wang

[Mandarin] [Interpreted]

Thank you for joining us on today’s conference call. Here with me 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 second quarter and first-half 2019 financial and operation results and our growth outlook in the second-half 2019. And then there will be a Q&A session after the report.

With the intensifying trade conflict between the United States and China and increasing complexity and uncertainty in the international geopolitical landscape, the security and stability of the financial system has been a top priority for the Chinese State and Regulatory Authorities since early 2018.

In early 2019, we have seen further tightening of regulatory supervision. As a result, new premiums for individual regular life insurance products in the life insurance industry dropped significantly in 2018 and the first-half 2019. It is expected that such negative growth in the industry may continue into the second-half of 2019.

In the first-half 2019, as compared to 16% year-over-year growth of the life insurance industry, our life insurance business registered solid growth of 39.1% year-over-year to RMB4.2 billion in terms of total insurance premiums, of which first year premiums increased by 19.5% year-over-year to RMB1.5 billion, annualized insurance premiums was flattish year-over-year at RMB1.2 billion and renewal insurance premiums grew by 53.6% year-over-year to approximately RMB2.6 billion.

Non-GAAP adjusted operating income was RMB247.1 million for the first-half of 2019, representing an increase of 13.5% from a year ago.

In the second quarter of 2019, our life insurance business grew by 32.9% year-over-year to RMB2 billion in terms of total insurance premiums outpacing the overall industry growth of 12.1%. Our 13-month persistency ratio remained above 91%, which translated into a 64.5% year-over-year growth and renewal insurance premiums to approximately RMB1.3 billion. Revenues from renewal business accounted for 24.2% in terms of the total life insurance revenue, increasing from 15.8% in the same period last year.

In the second quarter of 2019, our first year premiums was flattish year-over-year at around RMB709.3 million and annualized insurance premiums decreased by approximately 12.9% to RMB485.3 million. The decrease of annualized insurance premiums was because one of our best-selling insurance products will be taken off shell at the end of June 2018, resulting in a surge of sales in June 2018. As a result, the annualized insurance premiums in one single-month in June 2018 reached as high as RMB330 million, while the annualized premiums in June 2019 was RMB205 million, representing a decrease of 37.9% since there was no such sales activity in the second quarter 2019.

Non-GAAP adjusted operating income was RMB117.4 million for the second quarter 2019, representing a decrease of 8% for the corresponding period in 2018. The decrease mainly reflects the decrease of annualized premiums due to the above mentioned reasons.

In the second quarter of 2019, we have more diversified life insurance product mix and more balanced mix of product suppliers. Our top five life insurance company partners accounted for 85% of our total life insurance business in terms of first year commissions was Huaxia accounting for 27.3%, EUM 26%, [indiscernible] 18.9% and Tian’an 12.6%, respectively.

As for the development of our online platform, in the second quarter of 2019, over 96% of our insurance products were sold through Fanhua’s online platforms. On June 15, 2019, Fanhua and Lan Zhanggui won the Top 20 China Insurtech Innovation for the Year 2019 and Top 50 Excellent Insurance Innovation Projects for the Year 2019 awards, respectively, which were initiated and organized by Molecular Laboratory, a professional Insurtech new media. The awards mark the high recognitions of Fanhua’s innovation and achievements in insurance technology.

Our online platforms maintained a solid growth momentum in the second quarter of 2019. Firstly, Lan Zhanggui, the number of activated accounts hit 812,097 times as of June 30, 2019. In the second quarter 2019, the number of active users were 56,993.

Secondly, CNpad Auto Insurance App, the number of activated accounts have reached 595,416 times as of June 30, 2019, representing an increase of 28.2% year-over-year. Insurance premiums generated through CNpad Auto Insurance App was RMB328.8 million in the second quarter 2019.

Thirdly, Baoxian.com, the number of registered customer accounts on Baoxian.com was 2.5 million as of Jun 30, 2019, up 36.4% from a year ago. In the second quarter 2019, the number of active customer accounts was 115,251, up 28.6% from a year ago. And insurance premiums generated on Baoxian.com through direct sales was RMB93.4 million in the second quarter, with an year-over-year increase of 32.1%.

Firstly, eHuzhu, as of June 30, 2019, the number of effective registered members was 3.7 million and more than 2,600 families got financial aid through the platform, accumulated amount of payout is RMB439.3 million, with a per capita aid over RMB0.2 million, which was far above the industry average by 92.9%, making it the largest mutual aid platform in terms of the per case payout amount.

Firstly, chetong.com, the number of qualified registered claims service representatives on Chetong.net was more than 17,000 as of June 30, 2019, with accumulated orders approximately RMB2 million.

And the other major business developments in – during the quarter are as follows: First of all, dividend payout. The dividend in the second quarter 2019 is US$0.3 per ADS and will be paid on or around September 19, 2019 to shareholders of record on September 4, 2019. Fanhua will continue to maintain our quarterly dividend policy and provide shareholders with stable returns.

Secondly, share buyback program. Since the Board of Directors announced our share buyback program in March 2019, as of August 19, 2019, an aggregate of US$2.4 million ADS have been repurchased for approximately 69.5% U.S. dollar – sorry, US$69.5 million pursuant to the company share buyback programs implemented in 2018 and 2019. The company has bought a total of US$3.9 million ADS for approximately US$104.9 million. Management will continue to execute the outstanding share buyback plan.

Management believes that firstly, with the expanding household disposal income and rising insurance awareness, there will be burgeoning demand for insurance products among Chinese consumers.

Secondly, amidst the irreversible trend of the separation of insurance underwriting and distribution, independent insurance intermediaries will benefit from the great opportunities arising from the structural transformation.

In view of this analysis, management made the decisions as follows: Firstly, adjusting our financial guidance for 2019. For the second-half of 2019, we expect annualized insurance premiums to grow by 15% year-over-year and non-GAAP adjusted operating income to grow by no less than 10% year-over-year. For the full-year of 2019, annualized insurance premiums are expected to grow by 5% year-over-year and non-GAAP operating income is expected to increase by no less than 10% year-over-year.

Secondly, launching a Shenzhou 100 business development strategy. The key of this strategy is to expand our sales network in large and medium-sized cities in China, as part of our efforts to pursue high-quality growth. Under the Shenzhou 100 strategy, we target at establishing more Tier one branches in large and medium-sized cities in China within the next five years. This Tier one branches will be directly under the management of the group at equal level.

We believe the implementation of the Shenzhou 100 strategy will help attract more professional managerial talents from the insurance industry to join Fanhua and further optimize the structure of our agency force, and therefore, allowing more elite agents to start their own business in Fanhua. It will also enable us to accumulate and tap into higher-end customer base on a larger scale.

Fanhua has continued to outpace industry growth in the second quarter and first-half 2019. And we are confident that we will continue to maintain such growth rate, which outpace the industry in the second-half of 2019 and this fully indicated the healthy and solid base of our operations. We have full confidence that the implementation of the Shenzhou 100 strategy will inject a strong momentum into Fanhua to drive our continued growth in the long run. Thank you.

Now the management will open floor for the questions.

Question-and-Answer Session

Operator

Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have the first question from the line of Dan Tian from CICC. Please go ahead. Dan, your line is open, you can ask your question now.

Oasis Qiu

Hello, operator, we can’t hear the question. Could you check what’s the problem?

Operator

Dan, your line is open, you can ask your question. Maybe you’ve muted your line, please unmute your line.

Dan Tian

[Mandarin]

Oasis Qiu

[Interpreted] I’m Dan Tian from CICC, and I have three questions. The first is regarding to the change in the first year commission spread in the second quarter?

And the second question is regarding the implication of the ongoing regulatory requirements once agency cleanup on our business?

And the third question is regarding to the reasons behind the decrease in our investment income in the second quarter? Is it because of decreasing cash reserve as a result of the loan provided to the participants of 521 Plan? And how much interest has the company accrued from the interest related to the loan provided to participants for the 521 Plan?

Chunlin Wang

[Mandarin]

Oasis Qiu

[Interpreted] Thank you for the questions. And I will answer your first two questions and I will allow our CFO, Mr. Ge to answer your last question. And firstly, regarding to the change in commission spreads, as a matter of fact in the second quarter, our gross margin has increased year-over-year, which indicated that our first year commission spread has improved as well.

And in general, in – actually the commissioned rate for the first year was relatively higher in the first quarter than the second quarter because of the year opening sales and insurance companies were more willing to invest a little bit more promotional fees to push their sales. While in the second quarter, the commission rate has returned to normal level.

And then in terms of the overall commission, the structure between different – our different insurance suppliers, insurance products suppliers, the new product suppliers are paying a little bit higher than those product supplier that we have already established business relationships for much longer time.

And secondly, regarding to the sales force cleanup, to be honest, the regulatory requirements for sales force cleanup does have some impact on companies like us, which have large headcounts in the short-term after all a lot of local regulatory authorities do have their own targets to achieve in terms of the – cleaning up the sales force. And even though we have maintained a pace of recruiting 20,000 sales agents on average in the second quarter, after the cleanup, our total number of registered sales agents has decreased to 810,000.

We have a strong feel that currently the trend of the separation of insurance underwriting and distribution is accelerating. So we need to make strategic deployments to embrace the second round of explosive growth for Fanhua. We have just hosted our first-half year on operational conference just about an hour ago, and we have made two business plans. The first business plan is that, we plan to introduce 1,000 prep teams, sales teams between the second-half of this year to the – to March of next year.

In terms of prep teams, this is defined as the high-quality sales agents, and 1,000 prep teams will be transformed into 200 entrepreneurial sales teams. So this will be the first step that we need to take in order to pursue high-quality growth.

And the second positive footnote of the acceleration of the trend of the insurance underwriting and distribution is that, we have seen more and more managerial personalities in insurance companies provincial branches willing to join Fanhua. And we believe that, as I mentioned just now, we’re planning to launch a Shenzhou 100 development strategy.

And this acceleration of the separation of insurance underwriting and distribution means that the timing for us to launch this Shenzhou 100 strategy has arrived. And this will further impose our growth momentum to achieve our operation target of RMB10 billion insurance premiums in terms of new insurance premiums for the next few years.

With the implementation of this 1,000 prep sales team battle and the Shenzhou 100 strategy, we believe that we will be well-positioned to embrace the next round of explosive growth.

Chunlin Wang

[Mandarin]

Oasis Qiu

[Interpreted] Thank you.

Chunlin Wang

[Mandarin]

Oasis Qiu

[Interpreted] And I would like to invite our CFO, Mr. Ge to answer your last question.

Peng Ge

[Mandarin]

Oasis Qiu

[Interpreted] As for the decrease in our short-term – in our investment income that mainly due to three reasons. First of all, is due to the decrease in our available cash for short-term investments as a result of our continued share buyback and dividend payment as our cash used to support 521 development plan.

And then secondly, I also has something to do with the structure of our product – short-term investment product portfolio. According to the current accounting principles, we will recognize the investment income only upon maturity of the short-term investment products. So there might be frustration of investment income from quarter-to-quarter due to the different maturity time of the short-term investment products. And then thirdly, we are also seeing a decrease in the use from wealth management products in China right now due to the lower interest rate environment.

As for the interest related to the loan that we provided to the participants of 521 Plan. According to our discussion with our auditors, we will not recognize the interest related to the loan, which means that the interest won’t be reflected in our investment income. And as a matter of fact, the interest will be reflected in the equity at the end of the time period, which means that at the end of the five-year period. Thank you.

Operator

Thank you. The next question comes from the line of Jenny Zhang from Morgan Stanley. Please go ahead.

Jenny Zhang

[Mandarin]

Oasis Qiu

[Interpreted] I’m Jenny from Morgan Stanley, and I have two questions. The first question is that the reason we are wondering, what’s the reason behind the increase in selling expenses after deducting the share-based compensation expenses? In light of the current challenging operation market environment, will the company plan to increase investments to boost sales. So will we expect a continued increase in selling expenses in the coming quarters?

And the second question is that, we appreciate that the company has provided a very detailed cash flow statement. However, I noticed that the operating cash flow is negative in the second quarter. I wonder what’s the reason behind that? Is it normal duration, or is it a one-off items? So is it affected by some one-off factors?

Chunlin Wang

[Mandarin]

Oasis Qiu

[Interpreted] I will answer the first question, and our CFO will answer the second question.

Chunlin Wang

[Mandarin]

Oasis Qiu

[Interpreted] Firstly, regarding the increase in the selling expenses, it actually affected our execution of our strategy to increase our market presence in large and medium-sized cities in China over the past two years. And we do believe that the bigger growth will come from the large and medium-sized cities in China in the future. So in the past few years, especially in the past few quarters, we have seen an increase in rental expenses and an increase in the salary to the increase in headcount. We have expanded our office or rental space in order to get prepared to introduce more talents and introduce more sales teams.

Though in the short-term, it may put some pressure on our selling expenses. But I believe that in the long run, it will be helpful to improve our competitiveness in the large and medium-sized cities and also improve our gross margins.

Chunlin Wang

[Mandarin]

Oasis Qiu

[Interpreted] Thank you

Jenny Zhang

[Mandarin]

Oasis Qiu

[Interpreted] And regarding to the increase in the account receivables in the second quarter compared to last year, it was now due to the company’s tax timing arrangement, as well as the local tax bill – authorities tax collection plans. We have postpone the issuers on invoices in the second quarter to July and August. So as a result of the delay in invoice insurance, we were not able to collect the accounts receivables from insurance companies, and thus, affecting our operating cash flow in the second quarter. However, it doesn’t – it didn’t affect our income statement.

We have already recognized the revenues accordingly, according to contract with the insurance companies. And we have already started to issue invoices related to those account receivables in July and August. So that means that those accounts receivable will be settled in the third quarter and which will be reflected in the cash flow statements in the third quarter. Thank you

Operator

Okay. we’ll move to the next question now. The next question comes from the line of Yuan Xue from CICC. Please go ahead.

Yuan Xue

[Mandarin]

Oasis Qiu

[Interpreted] I’m Yuan Xue from CICC. I have one question. In light of the challenging market environment and also the increasing competition among insurance companies on products front, how does that affect the company?

Chunlin Wang

[Mandarin]

Oasis Qiu

[Interpreted] Even though professional rent insurance product has become a ton of widget demand and now – among consumers, but there are not many innovation allowed due to the tight regulatory provisions. So the market kind of lack of incentives provided to consumers to stimulate their desire to buy more insurance products. And as a result of that, the life insurance industry may still suffer from pressures – may still be under pressure to growth.

So in light of that, the competition among insurance company will become more intensified after all the insurance company want to maintain their market share and to achieve their operation targets.

Chunlin Wang

[Mandarin]

Oasis Qiu

[Interpreted] Thank you.

Yuan Xue

[Mandarin]

Operator

As there are no further questions, I would like to hand the conference back to our presenters for today.

Oasis Qiu

Thank you for participating on today’s conference call. If you have any further questions, please feel free to contact us. Thank you.

Operator

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