Ladies and gentlemen, thank you for standing by, and welcome to Huize Holding Limited's First Quarter 2020 Earnings Call. Please note, this event is being recorded. I would now like to hand the conference over to your host today, Mr. Jack Wang, Vice President of ICR, the company's Investor Relations partner. Please go ahead, Jack.

Thank you, operator. Hello, everyone. Welcome to Huize Holding Limited First Quarter 2020 Earnings Conference Call. The company's financial and operating results were released by our newswire services earlier today and are currently available online. Participants on today's call will include our Founder and CEO, Mr. Cunjun Ma; COO, Mr. Li Jiang; CFO, Mr. Minghan Xiao; CFO, Mr. Ronald Tam; and IR Manager, Ms. Harriet Hu. Mr. Ma will start the call by providing an overview of the company and performance highlights for the first quarter of 2020. Mr. Tam will then provide details on the company's operating and financial results for the quarter before we open the call for your questions. As a reminder, this conference is being recorded. In addition, a webcast replay of this conference call will be available on our IR website at ir.huize.com. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies 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 and reconciled to the most comparable measures reported under the generally accepted accounting principles in our earnings release and filings with the SEC. With that, I will now turn the call over to our Founder and CEO, Mr. Cunjun Ma. Please go ahead, sir.

Thank you for joining us today. As a reminder, we will be making forward-looking statements during this call, and we encourage you to review our safe harbor statement in the earnings press release. Additionally, we will be discussing non-GAAP measures, which are explained and reconciled with the most comparable GAAP measures in our earnings release and SEC filings. Now, I will hand the call over to our Founder and CEO, Mr. Cunjun Ma. Please proceed.

Hello, everyone, and thank you all for joining the Huize Holding Limited First Quarter 2020 Earnings Conference Call. First of all, before diving into our quarterly performance, all of us at Huize hope that you and your loved ones are staying safe and healthy. As the pandemic has spread across the globe, we are all facing new challenges to our everyday routine and normal ways of life. Nevertheless, we are also witnessing the best in humanity as ordinary people continue to step up and help each other in extraordinary ways. On behalf of the entire team here at Huize, I would like to express my gratitude to those medical professionals, public service personnel, and others working on the front lines around the world. Witnessing and hearing of your fearless acts in support of the greater good provides us with strength, courage, and hope. Moreover, your work serves as a source of further inspiration for us to continue developing the insurance industry throughout China so that people can more easily access the protection they need to ensure the well-being of themselves and their families. During the quarter, the operating pressure on the insurance industry increased while its overall development slowed down. Despite these uncertain macro conditions, we delivered strong results due to our prudent expansion strategy, the competitive advantages of our online platform business model, and our seasoned leadership team with deep insurance industry experience. In the first quarter, total gross written premiums, or GWP, facilitated on our platform increased by 40.6% year-over-year to RMB 597.9 million. Total operating revenue reached RMB 248.7 million, and total non-GAAP net profit reached RMB 22.2 million, representing an increase of 265.6% on a sequential basis. Overall, we are pleased with the solid results we achieved despite the severe impact on normal business activity brought by the unfortunate COVID-19 outbreak and the longer-than-usual Chinese New Year holiday in the first quarter.

Premiums facilitated on our platform increased by 40.6% year-over-year to RMB 597.9 million. Total operating revenue reached RMB 248.7 million, and total non-GAAP net profit reached RMB 22.2 million, marking a 265.6% increase on a sequential basis. Overall, we are pleased with the strong results we achieved despite the significant impact on normal business activities caused by the unfortunate COVID-19 outbreak and the extended Chinese New Year holiday in the first quarter.

I would now like to take a moment to add some additional color on how we are ensuring the development of our business in the face of the COVID-19 pandemic. In terms of operating strategy, we have always focused on the sale of long-term insurance. During the first quarter, long-term life and health GWP accounted for 93.8% of our total GWP, a ratio which has stayed above 90% for the past two consecutive quarters. More importantly, our GWP for long-term health insurance increased by 52.6% year-over-year to RMB 505.5 million. We have also made efforts to cope with the negative effects of the pandemic. In the first quarter, for example, we reduced operating costs by 7.3% quarter-over-quarter, while sales expenses decreased by 14.3% quarter-over-quarter due to the reduction in advertising. It's also important to highlight that we have long been committed to seeking the balance between business growth and financial stability, and we're able to establish healthy cash positions before the COVID-19 outbreak. As a result of these policies, Huize has established a solid and long-lasting foundation, which has proven to be essential to both weathering the current market headwinds and setting us up well for growth going forward.

The reduction in advertising led to a 3% decrease quarter-over-quarter. It is also crucial to emphasize that we have consistently focused on balancing business growth with financial stability, allowing us to secure healthy cash positions prior to the COVID-19 pandemic. These strategies have provided Huize with a strong and enduring foundation, essential for navigating the current market challenges and positioning us for future growth.

Regarding our business model, Huize has been deeply involved in the insurance industry for 14 years and has developed an Internet insurance ecosystem around its closed-loop online platform. The insurance ecosystem is driven by innovative technology and data analysis that supports our customer acquisition and education, product sales, and after-sales customer service capabilities. As we have witnessed across industries, the pandemic has accelerated the shift in consumer behavior from offline to online. Huize has benefited from this trend and continued to attract and convert new users, thereby achieving double-digit growth in total GWP during the pandemic. Additionally, during the period, Huize launched a COVID-19 Zone on its website, mobile app, and other social media channels to provide real-time pandemic situation information and related query tools. At the same time, our online claim service enabled users to submit and process their insurance claims safely without physical contact. Our ability to rapidly launch these supportive functions further illustrates our well-developed expense and effective technology support. In the future, we will maintain our dedication to serving the needs of insurance clients, continue to optimize our user experience by improving functions and services, and strive to become the go-to platform for online insurance in China.

Our online claim service allowed users to submit and process their insurance claims safely without needing physical contact. Our capability to quickly implement these supportive features demonstrates our strong expense management and effective technology infrastructure. Moving forward, we will remain committed to meeting the needs of our insurance clients, enhance our user experience by refining our functions and services, and aim to become the leading platform for online insurance in China.

As mentioned before, we have a long-proven track record of operations for more than 14 years. The core management team of Huize comes from leading insurance, Internet, and financial institutions. Our long-term accumulation of experience and strong management team have enabled us to achieve a faster and stronger recovery than our more traditional offline industry peers. At the beginning of the outbreak, Huize set up an internal control office for epidemic prevention and a special working group while organizing a personnel protection service training for all staff who would attend online, helping to ensure maximum operational efficiency as well as the health of our employees. On February 3, our IT systems were capable of supporting our staff in their remote work from home to ensure effective business development and service delivery.

At the beginning of the outbreak, Huize established an internal control office for epidemic prevention and a specialized working group while providing personnel protection service training for all staff attending online, which helped maintain operational efficiency and employee health. On February 3, our IT systems were ready to support our staff in their remote work from home, ensuring effective business development and service delivery.

It is worth noting that as the pandemic reached their turning point, our health insurance sales are expected to exhibit a positive growth trajectory driven by our long-term strategic focus in this area. On the one hand, China's health insurance industry is experiencing rapid growth. On the other hand, people's healthcare and insurance awareness will be greatly stimulated after the pandemic, resulting in a substantial increase in health insurance demand. This is similar to the gradual containment of SARS in 2003 when, from May to August, health insurance displayed and post its growth trend with the highest monthly year-over-year growth rate exceeding 300%. Meanwhile, the pandemic forced the education of the market and promoted online insurance; we believe that users have experienced the convenience of online insurance policies purchased, online renewal, and online claim services. For the first time, user behaviors have changed. In addition, compared to the mature insurance markets of Europe and the U.S., insurance penetration in China is still low. Therefore, there is still room for the further growth of our online insurance business. With the increase in per capita disposable income and people's growing awareness of insurance in China, we are confident in the prospects for both the development of the company and the entire industry over the long term.

User behaviors have changed for the first time. Additionally, compared to the mature insurance markets of Europe and the U.S., insurance penetration in China remains low. Thus, there is significant potential for further growth in our online insurance business. With rising per capita disposable income and an increasing awareness of insurance among the Chinese population, we are optimistic about the long-term prospects for both our company's development and the entire industry.

Finally, I would also like to share the operational results for the month of April. Total GWP facilitated in April reached RMB 240 million, of which first-year premiums accounted for more than 60%. Although we may have to face some challenges in the short term, we believe that the general impact of increased insurance awareness is both profound and long-lasting. While the outbreak of COVID-19 has gradually been brought under control, we are optimistic about the recovery of the insurance industry as well as the macro economy. Leveraging our prudent operating strategy, experienced management team, and stable financial conditions, we have strong aspirations to continue our growth and expansion moving forward.

We have to face some challenges in the short term, but we believe that the overall effect of increased insurance awareness is significant and enduring. As the COVID-19 outbreak has been mostly contained, we are hopeful about the rebound of the insurance sector and the broader economy. With our cautious operating approach, seasoned management, and solid financial standing, we are eager to continue our growth and expansion in the future.

This concludes my prepared remarks for today. With that, I will now turn the call over to our CFO, Mr. Ronald Tam. He will provide an overview of our key operational and financial highlights for the quarter.

Thank you, Mr. Ma, and thank you, Harriet, and hello, everyone. To our Asian participants, thanks so much for joining us on a Friday night. Just now, Mr. Ma mentioned some key metrics for Q1 as well as our April run rate numbers. I think I would like to first start by providing some more details on these metrics to help set up the context of the line-by-line discussions of our Q1 results. For Q1, GWP facilitated on our platform was RMB 597.9 million, which was up 40.6% year-over-year. As you can appreciate, given the impact of COVID-19 on overall economic activity, which has resulted in the disruption of normal business operations in both February and March, Q1 was a very tough quarter for the entire industry in general in terms of new policy distribution. The pandemic obviously affected the average consumer's willingness to spend money on discretionary items, especially on insurance products like our long-term life and health products, which is our strategic focus for a long time. The fact that we have been able to deliver double-digit growth for GWP in the first quarter is a big testament to our online business model as well as a swift transition to a remote working system for our staff. In addition, given that we have established ourselves as a pure online insurance brokerage platform in our 14 years of history, we are also relatively insulated from the negative impact on productivity as compared to some of our more traditional offline industry peers. To further breakdown the GWP figure for Q1, renewal premiums accounted for RMB 321 million, growing by 2.8x from the same period of last year. Renewal premiums accounted for 53.7% of our total GWP in Q1 as compared to 19.7% in the same period of last year. I think two key takeaways from these metrics are that, number one, we are starting to see better visibility on the contribution from renewal premiums to the overall revenue line, which will help to provide a more stable and recurring stream of revenues going forward, and number two, these strong renewal metrics also demonstrate the quality of our long-term life and health insurance customers with high renewal rates, which will further provide our insurer partners with positive reassurance on the quality of our customer acquisition online and further strengthen our dual engine business model of servicing both insurance customers and insurance companies. In terms of first-year premiums, as we have explained before, we saw a negative impact on new policy sales in Q1 due to COVID-19. First-year premiums facilitated in Q1 were down by 19.1% year-over-year. However, if we look at our long-term health segment, we were actually able to deliver robust growth, ramping up our first-year premiums by 18% quarter-over-quarter in Q1. More importantly, long-term life and health GWP accounted for 93.8% of our total GWP in Q1, which marked the second consecutive quarter for this metric to come in above 90% as we continue to execute on our focus of long-term life and health. Now turning to our revenue line. Total operating revenue for Q1 was RMB 248.7 million, which was down by 1.1% year-over-year. The slight decline in revenue despite a double-digit growth in overall GWP was primarily attributable to the increased proportion of renewal premiums in the GWP figure, as we explained before, coupled with the decrease in first-year premiums facilitated during Q1 as a result of COVID-19. As we received lower brokerage commission rates for renewal premiums as compared to first-year premiums, the combination of these two key factors resulted in a lower average brokerage commission rate of 41.4% in Q1 as compared to 58.8% in the same period last year. However, if we look at our average brokerage commission rate, it's actually improved quarter-over-quarter from 39.5% in Q4 of 2019 due to a higher proportion of long-term health products in the GWP in Q1. Now turning to our cost items. The cost of revenue for Q1 decreased by 4% year-over-year to RMB 147.8 million, primarily due to a slowdown in client acquisition activity during February and March, which resulted in decreased personnel costs paid to our insurance consultants and decreased service fees paid to our user traffic channel partners. As a percentage of total revenues, total cost of revenues declined to 59.4% in the quarter from 61.4% in the same period last year. Selling expenses for the quarter increased by 83.1% year-over-year to RMB 53 million, which was primarily attributable to the increase in our sales and marketing headcount during 2019 as well as increased advertising and marketing expenses in comparison to last year. However, selling expenses were down by 14.3% on a sequential basis as we reined in our spending following the outbreak of COVID-19 in the first quarter. Our decision to scale back our advertising and marketing budget in Q1 was made in line with our belief that spending money during the pandemic would likely deliver less optimal ROI during the quarter. Therefore, our resources will be better spent later as the economy and industry gradually recover in the second half of the year. G&A expenses for the quarter increased by 112% year-over-year to RMB 39 million. This growth was primarily due to the increase in share-based compensation expenses, which grew to RMB 19.1 million in the quarter, and to a lesser extent, the increase in G&A headcount and professional fees. If we strip off the effect of SBC from the G&A number, G&A expenses only grew by 50.3% year-over-year and actually decreased by 17.1% on a sequential basis. R&D expenses for the quarter grew by 74.4% year-over-year to RMB 11.2 million, primarily attributable to the increased headcount of R&D personnel during the year. On a sequential basis, R&D expenses will be essentially flat from last quarter. During the first quarter, net loss was RMB 2.3 million, while non-GAAP net profit for the quarter was RMB 22.2 million, which represents our eighth consecutive profitable quarter on a non-GAAP basis. It is very important to note our strong liquidity and healthy financial position, which we believe is of paramount importance in the context of the current challenging macro environment. As of the end of the quarter, we had a combined cash and cash equivalents balance of RMB 500.2 million or roughly USD 17 million. Going forward, this robust liquidity position will enable us to weather the current headwinds and, more importantly, capitalize on those growth opportunities, which we believe will emerge as we come out of the bottom in the second half of this year. With regards to our Q2 outlook, Mr. Ma already shared some run rate numbers in April. I would like to add some additional color here. In April, our platform facilitated approximately RMB 240 million compared to RMB 598 million for the entire Q1. More notably, of that RMB 240 million, first-year premiums accounted for approximately 60% or RMB 150 million in comparison to RMB 277 million for the whole Q1. We are quite encouraged by these run rate numbers for April as they do point to positive signs of recovery. However, we do remain cautiously optimistic about the rest of the quarter. Provided that we do not experience a second wave outbreak in China, coming to our formal guidance for the next quarter, Q2, we currently expect total operating revenue to be in the range of RMB 210 million to RMB 230 million. This forecast reflects the company's current and preliminary views on the market and operational conditions, which are subject to change caused by various uncertainties, including those related to the ongoing COVID-19 pandemic. That concludes our prepared remarks for today, and I'd like to turn the call to Q&A for now. Thank you.

We have our first question from Tian Dan from CICC.

That concludes our prepared remarks for today, and I would like to turn the call to Q&A for now. Thank you. We have our first question from the line of Tian Dan from CICC.

Okay. Let me repeat the question in English. The question comes from CICC and is about the growth rates for first-year premiums for both the 2B channel and 2C channel in the first quarter.

Right.

I think the answer to this question is that we have reported overall first-year premium numbers for the quarter. For both the indirect and direct channels, they are down at a comparable rate of around 18% to 20% year-over-year.

Our next question from the line of Michelle Ma from Citigroup.

I would like to know the breakdown of new premium versus renewal premium of the GWP facilitated in the first quarter. Additionally, I would like more details on the new premium, specifically how much is from annuity products compared to critical unit products. My second question relates to share-based compensation. For the first quarter, I would like to know how this was allocated and what the guideline is for the full year regarding this expense.

Thank you, Michelle. I appreciate your questions. Let me address both of them. The first question was about the breakdown of our gross written premium for the first quarter in terms of first-year and renewal premiums. We had a total of approximately RMB 598 million. Of that, RMB 276.6 million comes from first-year premiums and RMB 321.3 million comes from renewal premiums. For the breakdown of first-year premiums in Q1, about 80% is from critical illness, with only a minimal contribution from annuity products in the first quarter; however, we anticipate contributions from annuity products in the second quarter. The remaining first-year premiums will come from short-term products. Regarding your second question on share-based compensation, we have released a scheme in the market, but we are currently still undergoing the share option process for the rest of the year. Therefore, we are unable to provide guidance on this figure right now, but we will make the necessary disclosures once we have more definitive information.

As there are no further questions at this time, I would like to hand the conference back to our management for closing remarks.

Okay. It's Ron here. Thanks so much again for joining us today and for joining us on a Friday night in Asia. Hope you all can stay safe and healthy, and I look forward to the next call for Q2. Thank you very much.

Thank you. That concludes our conference for today. Thank you for your participation. You may all disconnect your lines now. Thank you.

Thank you.