Earnings Call: Q1 2021

May 18, 2021

Ladies and gentlemen, thank you for standing by and welcome to Huar's Holdings Limited's 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 Q1's IR website at ir. Kewiz.com under the Events and Webcast section. Now I'd like to hand the conference over to your speaker host today, Ms. Harriet Qiu, Qiu's Investor Relations Director. Please go ahead, Hu is. Thank you, operator. Hello, everyone, and welcome to our earnings conference call for the Q1 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 apply to this 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. Sun Jin Ma COO, Mr. Li Jiang Co CFO, Mr. Minhan Xiao and Co CFO, Mr. Ronald Tan. Mr. Ma will start the call by providing an overview of the company's performance and operational highlights for the Q4 of 2021. Mr. Chen will then provide details on the financial results the period before we open up the call for questions. I will now turn the call over to Mr. Ma. Hello, everyone, and thank you all for joining Huizhou's Q1 2021 earnings conference call. In the Q1, China's insurance market maintained steady growth, driven by continuous improvement in the pandemic situation in China. Business strength for the life and health insurance sector and the increasing market demand caused by the transition between old and new statutory definitions of critical illness. According to data released by the CBRS Agency, Agency, the insurance industry achieved insurance premium income of RMB1.8 billion in the Q1, an increase of 5.5 percentage points from the same period last year. Among them, the health insurance segment increased by 16.1% year over year to RMB306.6 billion, With the backdrop of strong industry fundamentals, Huizeng continues to strengthen its core capabilities, accelerate additional transformation and capture greater market share. Total GWP facilitated on our platform increased by 1.3x year over year to RMB1.4 million, while total operating revenue nearly doubled to RMB713 1,000,000, both achieving record for Huizhe has been making steady progress on our long term insurance strategy. As part of our commitment to providing the 1st long term insurance policy for younger generations, we chose to focus on offering a long term health insurance policy with a higher threshold for online sales. This strategy is driven by 3 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. 2nd, as younger users age and enter 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 generating repeat purchase opportunities are the core of Huizhou's operations in creating long term user value. 3rd, a long term relationship allows us to obtain more user data from the sales, underwriting and planned activities to generate more accurate user profiles. This deep insight on user needs, preferences and purchasing behaviors enable us to create higher growth insurance products, while also providing us a foundation in presenting effort selections. Next, I would like to share a few key indicators that highlight the value cumulative number of insurance clients reached 7,000,000 and the cumulative number of insurance clients was approximately 58,400,000. Among insurance clients who purchased long term insurance products in the Q1, 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 size. In the Q1, the average 1st year premium for long term policies distributed was around RMB 4,508. The 3rd indicator is our consistency ratio. Starting from the Q2 of last year, persistency ratios for long term life and health insurance in the 13th 25th month have maintained at about 94% for 4 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. From a product perspective, the new statutory definitions of critical illness brought 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 products soon after the revised definition went into effect and ensured the continuity of our quality product supply. In April, we held our 1st online product launch conference, sharing with 1,000 the highlights of a suite of 8 new customized products launched in the Q1. For example, Jinba Yizu Endowment Life Insurance is yet another innovation in our saving 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 for your illness product, Starwin 5 Chlorine provides a launch for specific drugs such as targeted cancer medications and immunotherapy drugs. Moreover, it provides additional coverage for malignant tumors. The insured clients can receive up to 3 payments with 40% of the amount insured, each subjecting to a 1 year waiting period, helping clients break the remainder of mandatory 3 year waiting period aided 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. In terms of digital transformation, during the quarter, we acquired authoritative certificates and qualifications in technology and R and D, including the Information Security Management System Certification, the Information Technology Services Management System Certification and our R and D center has successfully achieved CMNI Maturity Level 3 Certification. Such recognition signifies Huiz's sound R and 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. Regarding our online to offline strategy, we have established a service team in Shenzhen and put into trial operations during the quarter. Target users were selected based on multidimensional user data accumulated on our platform, driven by refined user portraits, management capabilities. Our offline team initiated contact with local users who have made 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 problem of high end product conversion by connecting online traffic with premium offline services. 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 Huizhou's management. As the industry enters a phase of fast and healthy development, Huizi will continue to focus on users, polish 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 will this opportunity presented by the accelerating regional 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. This concludes my prepared remarks for today. I will now turn the call over to our CFO, Mr. Ronald Chen. He will provide an overview of our key financial highlights for the quarter. Thank you, Mr. Ma and Eric and hi, everyone. We're very pleased to report another record quarter for Q1 in terms of both total GWP facilitated on the platform as well as our total operating revenue. For the Q1, total GWP amounted to RMB104 1,000,000,000, representing a very strong one time period growth year over year. In particular, the 1st year premiums or FYP accounted for RMB889.8 million of the RMB1.4 billion or approximately 64% of total which represents 2.2x growth year over year over year. The strong operating performance in FIP on the one hand is the result of industry factors, particularly with respect to the transition of federal owner's definition from old to new regime during the period, which really consummated in a spike in consumer demand in the month of January as well as the traditional seasonal strength in the auspicious good start of kind of full period in the Q1 for the industry industry. On the other hand, a strong growth in FYTE can also be attributed to our more aggressive marketing spend during the quarter in terms of both customer acquisition and service fees at our channel partners. In order to really capture the disproportionate market share vis a vis the competition And given our focus on acquiring high quality long term insurance customers, we believe the quarterly results have shown that the effort was performed well. In terms of renewal business, renewal premiums accounted for RMB504 1,000,000 or 36% of the RMB1.4 billion, representing a year over year increase of 57%. As Martin has touched on earlier, we are very proud to report consistently strong persistency metric factor, maintaining about 94% plus or 13th 25th month efficiencies during the past quarter. We believe that life efficiency is very critical as we continue to drive access to increase the lifetime value for our customers, which we have demonstrated by our increased distribution of savings insurance products in the quarter. In the Q1, approximately 18.6% of our FYP was contributed from long term life and annuity products distribution. We have been able to generate and pay purchases from our existing users for savings products with about 30% to 90% of accumulated savings product customers having purchased 1 or more policies before on our platform platform. In terms of product mix, in the Q1, as mentioned earlier, due to market interest factors as well as 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 of co developed products with our insurance company partners were approximately RMB850 1,000,000, 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 product, our number 3, which is for the best selling critical illness insurance products online, which we developed with the 7 day life insurance, contributed 1st year premiums of approximately RMB320 1,000,000 in the Q4. Now turning to our revenue. Total operating revenue for Q1 was RMB 735 1,000,000, a record quarterly high, which was up by 196% year over year and outperformed our guidance previously given to the market in our previous company's quarters. The increase in revenues was primarily driven by the increase in brokerage income due to the 133% increase in total GWP facilitated during the 4th quarter. Cost of revenue for Q1 increased to RMB557 1,000,000, unmarried on the back of increased service fees paid to our channel partners, as we have mentioned earlier. Selling expenses for the quarter increased by 45.4 percent year over year to RMB77 1,000,000, 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 collectively increased spend during the quarter to to capitalize on the significant market opportunity and demand for critical illness products. The increase in study expenses is also attributable to increased sales and marketing headcount year over year. G and A expenses for the quarter increased by 38.7% year over year to RMB54.1 million. This increase was primarily attributable to the increased vendor expenses, due to office expansion as well as an increase in G and A salaries and foreign benefits, which was offset by a decrease in share based compensation expenses year over year. R and D expenses for the quarter grew by 8.4% to RMB18.8 million, which is mainly driven by our investment by continued investment in overall RMB and data analytics headcount. For the quarter, we have recorded a GAAP net profit of RMB38.5 million. If we exclude share based compensation, non GAAP profit was RMB38.7 million. We continue to maintain robust liquidity and a rapidly strong financial position as of short end, with a combined balance of cash and cash equivalents of approximately US36 million dollars Turning to our Q2 guidance, we currently expect total operating revenue for Q2 to be in the range of RMB230 1,000,000 to RMB250 1,000,000. We note that it 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 sufficiently slow quarter for Chinese insurance industry. Taken together with Q1, the guidance represents a first half revenue growth of 1x on year over year versus the same half of last year. This forecast reflects the company's current and preliminary views on market conditions and operational conditions, which is subject to change caused by various uncertainties, which includes the ongoing COVID-nineteen pandemic globally. With that, it concludes our prepared remarks for today. We will now open up the call to Q and A. Thank you. Your first question comes from the line of Kang Xu of Huangshan Securities. Please ask your question. Okay. I will translate your questions into English. So, Shikang from Hua Cheng is asking that the company's GDP for the Q1 is very good and he wanted to know that how much of the GWP was coming from repurchase clients and how much from new customers? And also, he wants to know that what's the company's following customer acquisition strategy? And also, he want to know that is there 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 prepaid purchases, we're definitely increasing our efforts in maintaining existing customers and engagement and also trying to increase lifetime values with these customers. And I think that I just mentioned in our prepared results that around 39% of our savings products are coming from repurchases. And we also shared that around approximately 19% of the FYP for the Q1 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 wetly low and definitely there's a lot of upside and room for growth in this area. I think we have mentioned before the market for the last 3 years or so, the participants being ramped up and scaled up. Most of the efforts that we have been spending are obviously towards acquiring new customers in the market. But with the, I guess, established business 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 long term value to the customers that we have through more precise data analytics. And that's why also we've been investing heavily on the R and D aspect to making sure that our platform can efficiently stream and empower our agents or consultants to pursue these repeat purchase customers. And we've put Maazu mentioned before, with the online to offline strategy, this is also a very critical piece or starting point for us to acquire LTVs on the platform. And I think that right now the initiative is still very much going to be trial based. We have now established a trial team in Shenzhen to really scale up the business and I think that we will be happy to share more detailed, I guess, metrics with the market when we have reached more critical mass. Hope that answers the question. Thank you. Okay. Thank you very much. Your next question comes from the line of Edwin Liu of CLSA. Please ask your question. 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 has played in excess? Thank you. Great. Thanks, everyone, for joining the call. So I think a very quick response to the regulatory question is that we're obviously in constant dialogue with both at the later side as well as more importantly our industry partners. With respect to the insurance company, I think right now this new rule you just mentioned, is actually still in consultative phase. Although there's a likelihood being passed through and being enacted or effective next year, I think what we try to do as a platform is that, 1st of all, complying operations is 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 get ready when certain rules are coming to impact. With respect to the industry pricing, etcetera, I think this is still a bit lower at this stage. I think the industry as a whole is still trying to reach consensus. But I think the critical aspect for Fraser 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 focus the changes that should maybe drop the top line the regulatory changes. Your next question comes from the line of Ping Hing Nao of CICP. Please ask your question. This is Qingqing Mao from CICC. My first question is, we have seen some negative effects caused by the switch of tradable unit definition. When do you think these effects would fade away? My second question is, how do you expect the trend of profitability considering the increasing marketing expenses? Okay. Thanks, Tianjin. Again, thanks for joining the call. I guess two questions here. The first is relating to the CI products in the market. Definitely, I think that the Q1 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 rough out 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 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 longer 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 you could expect in the Q3 of the year. So I think that's the first question. In terms of the second question on our view on 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 investments in our headcount and so forth. So it demonstrates the capability and also the operating leverage of the business as we have also shown that we have been comfortable 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 advanced and profitable. I think that going forward, we will see how market dynamics will evolve and I think that for us we'll be balancing growth and profitability as a major objective for the rest of the year. Your next question comes from the line of Sankal Puni from Citigroup. Please ask your question. So the first question that we have is we would like to understand the impact of mutual aid platforms on these assessments, whether we have effectively sourcing new customers and providing all the mutual aid to our clients? And on the other hand, I want to know if there's any impact from continuous rise of Huizhou, which give us some quarter basis, the operating. Okay. Thank you, Hansa. I guess you had 3 questions there. The first question about Houtu, 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 stand on this aspect. And I think overall, it should mean that the competition for traffic or users may be alleviated a little bit. But I guess for Quaiza, we have been very laser focused on focusing on the long term insurance product segments in the marketplace. And I think most of these platforms, the targeted customers or the Visa 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 Fei Ning Bao and the impact on this new government initiative. I think overall, it should be very encouraging in terms of promoting general population insurance awareness and in the and people tend to procure protection for themselves and their families. And again, I think that the target audience here with this directive is really people who are maybe a bit more of an advanced age or people who are not the standard kind of clientele for the commercial insurance or the medical reimbursement insurance such as this. 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 products like a reimbursement product. 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 are again, we are very focused on targeting the higher tier cities customers, people who are very young of age with higher income levels and with a better education background and who 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 where we are seeing are seeing weakness in the market, not just ourselves that are across the board. Particularly with respect to the incumbents, the top 5 insurance incumbents in the country are facing headwinds during this quarter. I think this really has to do with the so called critical illness absorption of demand in the Q1. So I think Q2 and Q1 as well, sticking together, again, I think it's still a very strong year over year revenue growth of almost 1.8%. And I think for second half of the year, we're still sticking to our company's factors of giving quarterly guidance. So I think that we will wait until the next quarter to give further indication on the rest of the year. Thank you. Okay. Thank you, Ron. Your next question comes from the line of Tian Lee of Wai Tai. Please ask your question. So I just have one question. Can the management share some view about the competition landscape, I. E. Comparing Huizhou with traditional insurance and other online platform? Thanks. Okay. Thank you, Yan. So I think the question on the competitive differentiation equation versus our other competing platforms or the, I guess, the more traditional offline bookages. I think, first of all, I think that we are very focused on utilizing technology and data to help make everything more efficient, which is our genesis of the business model from 15 years ago. I think that have really helped some of the team calls in the marketplace, including providing customers with a more comprehensive suite of products with flex on, providing them quicker tools to compare and contrast products to get the best value for money products for themselves and the most suitable products for themselves. I think the challenges that are being faced by the traditional industry players are with respect to maybe some of the aging aging force and maybe more of a homogeneous product offering to the consumers. So I guess we differentiate by saying from the customer's own needs. I guess the other depressing factor, which is very critical, is the user base that we have. We are now 7,000,000 users on our platform, accumulated on 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 just now that the average ticket size for a long term policy is RMB 4,500, which also reflects the quality of the user 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 efficiency ratio at 94%. I think that is maybe probably the top quartile in the marketplace and also giving our insurance company partners the additional confidence in working with us together to develop more innovative and more suitable products for the market. Thank you. Thank you. Thank you. Thank you. Your last question comes from the line of Vahal Sehu of AMTD Group. Please ask your question. 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