Huize Holding Ltd Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to Huize Holding Limited Second Quarter 2020 Earnings Call. 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 Webcast section. Now I'd like to hand the conference over to your speaker host today, Ms. Harriet Hu, Huize's Investor Relations Manager. Please go ahead, Harriet.

Thank you, Rob. Hello, everyone, and welcome to our second quarter 2020 earnings conference call. The financial and operating results were released earlier today and are currently available on our IR website as well as on Newswire. 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 in our earnings release and filings with the SEC. Joining us today are our founder and CEO, Mr. Cunjun Ma; COO, Mr. Li Jiang; CFO, Mr. Minghan Xiao; and CSO, Mr. Ronald Tam. Mr. Ma will start the call by providing an overview of the company's performance and operational highlights for the second quarter of 2020. Mr. Tam will then provide details on the financial results for the period before we open up the call for questions. Now I will turn the call over to Mr. Ma.

Hello, everyone, and thank you for joining Huize Holding Limited's Second Quarter 2020 Earnings Conference Call. In the second quarter, we achieved solid operational and financial results as a leading online insurance platform for the younger generation in China. Throughout the quarter, the global COVID-19 pandemic continued to exert significant pressure on people's disposable income, consumer spending, and the overall development of China's insurance industry. Despite these challenges, we maintained our growth trajectory and achieved strong double-digit GWP growth, increasing our market share due to our commitment to transforming long-term life and health insurance distribution. This transformation is driven by our advanced technology and data-focused online platform model. During the quarter, total GWP facilitated on our platform rose by 51% year-over-year to reach RMB 596 million, while total operating revenue increased to RMB 235 million, surpassing the high end of our previously announced guidance. I would now like to review some of our key competitive advantages in detail. This should help everyone understand how we manage to sustain our growth trajectory and outperform more traditional industry peers during the second quarter. The combination of our long-term life and health insurance strategy and online business model has expanded our economic moats and enhanced our resilience during the economic downturn. In the second quarter, long-term life and health gross written premiums accounted for 93% of our total gross written premiums, marking the third consecutive quarter in which this ratio has remained above 90%. More importantly, our gross written premiums for long-term health insurance grew by 40% year-over-year to RMB 399.9 million. During the second quarter, we maintained the 13th and 25th month persistency ratios, both above 94% for long-term life and health insurance products, which we believe ranks our platform among the leading industry peers. The outstanding persistency ratio metrics demonstrate the quality of the customers acquired from our online content-driven marketing channels and further indicate a high level of customer retention. Our integration of artificial intelligence, big data analysis, and other innovative technologies has continued to enhance our platform and competitive advantages. During the quarter, we utilized these capabilities to optimize our platform features and introduce new smart insurance applications. This work has not only strengthened product customization and risk management for our insurer partners but has also improved the service experience for our customers. In the long run, it will contribute to better customer conversion rates and increased customer lifetime value. For instance, in May 2020, we launched our AI proposal application, which uses algorithms, big data analysis, and machine learning technologies. This application can quickly process customer inputs to identify and recommend the most suitable products while reducing the waiting period to just minutes. Our consultants now dedicate their time to providing in-depth explanations of specific guaranteed clauses, policy features, and other relevant product details, allowing them to serve more customers. Consequently, the launch of the AI proposal has significantly enhanced consultant efficiency and productivity, as well as improved the service experience for our customers. In June, we recognized the importance of product innovation and quality risk management and announced our partnership with Southwestern University of Finance and Economics. Together, we will establish a research laboratory focused on applying innovative technologies in the insurance sector, such as big data and knowledge graph construction. In insurance, well-developed knowledge graphs can integrate all data related to policyholders and beneficiaries to create more accurate forecasts and reduce the risk of adverse selection. The Institute of Big Data at Southwestern University excels in this field. Moving forward, we plan to continue forming valuable partnerships to enhance our technical capabilities and strengthen our leadership in the Asian tech market. In summary, we once again delivered solid financial and operating results in the quarter, further showcasing the resilience of our business model and technical advantages as a data and technology empowered insurance distribution platform. We believe that the business model we have developed and continue to optimize is key to better serving our customers and enhancing customer lifetime value. Moving forward, we plan to continue investing in technology, such as data analytics and machine learning, to further improve our capabilities in risk management, product customization, customer experience, and operational efficiency. Every crisis presents an opportunity. We believe that the outbreak of COVID-19 has educated the market and accelerated the shift from offline to online consumer behavior, a trend that we believe is here to stay. We believe Huize is involved in the most appealing segment of the online insurance market, focusing on transforming the distribution of long-term life and health insurance products, which is expected to achieve growth rates higher than the industry average. In the long term, as the epidemic gradually recedes and the economy recovers, we believe we are well positioned to capture the industry's response and take advantage of the growing opportunities. This concludes my prepared remarks for today. I will now turn the call over to our CFO, Mr. Ronald Tam, who will provide an overview of our key financial highlights for the quarter.

Thank you, Mr. Ma. Thank you, Harriet, and hi, everyone. It's Ron here. In summary, I think that our second quarter results have shown the market that our online business model is very resilient. And again, we delivered robust double-digit GWP and topline revenue growth despite the continued challenging macroeconomic environment as well as continued bottom line profitability for the ninth straight quarter. For the second quarter, GWP facilitated was RMB 596 million, which was up 51% year-over-year, far outpacing average industry growth rates in the period. Although COVID-19 has gradually been brought under control in China, recurrent outbreaks in various pockets of the country continue to reemerge; for example, recently in Beijing, Shanghai, and Shenzhen. The pandemic continues to have a large dampening effect on consumers' willingness to spend money on discretionary and financial products, particularly relatively higher ticket-sized long-term life and health insurance policies, which is our product's key strategic focus. In terms of gross written premium breakdown, first-year premiums accounted for RMB 319.7 million, which represents a 12.5% year-over-year growth. Renewal premiums accounted for RMB 276.3 million, which represents a 1.5x year-over-year growth. Our strong continued renewal premiums growth demonstrates the quality of customer acquisition through our content-driven marketing channels online. As Mr. Ma has touched upon earlier, we have achieved industry-leading 13th month and 25th month persistency ratios for long-term policies due for renewal during the quarter. Renewal premiums accounted for 46.4% of our total GWP in the quarter as compared to 28% in the same period last year. Our strong renewal premiums growth will continue to drive better visibility through our revenue line and provide a stable and recurring stream of revenues going forward. On the business side, provide current and potential insurance companies partners with further positive reassurance of the quality of our online customer acquisition abilities. During the quarter, we continued to execute on our focus on long-term life and health insurance distribution, with long-term life and health products accounting for 93% of total GWP facilitated in the quarter, marking the third consecutive quarter for this metric to come in above 90%. Our long-term health segment continues to demonstrate strong growth momentum, with GWP increasing by 40% year-over-year to RMB 400 million. Now turning to our revenue line. Total operating revenue for the quarter was RMB 235 million, which was up by 17.6% year-over-year and exceeding our previous guidance given to the market in the first quarter. The increase in revenue was primarily driven by the increase in brokerage income due to the 51% increase in GWP, which we mentioned before. Turning to the cost items. Cost of revenue for the quarter increased by 10.7% year-over-year to RMB 139.8 million, primarily due to the increased personnel costs paid to insurance consultants and service fees to our user traffic channel partners, which is generally in line with our overall revenue growth. As a percentage of total revenues, total cost of revenue declined to 59.5% in the quarter from 63.2% in the same period of 2019, which translates roughly to a 3.7 percentage point improvement in gross margins year-over-year. That also demonstrates the operating leverage that we are able to achieve in the quarter. Selling expenses for the quarter increased by 42.7% year-over-year to RMB 48.1 million, which was primarily attributable to the increase in our sales and marketing headcount during the last 12 months, as well as an increase in share-based compensation, and to a lesser extent, an increase in advertising and marketing expenses in comparison to last year. G&A expenses decreased year-over-year by 44.5% to RMB 43.5 million. The decrease was primarily due to a one-off share-based expense in the same period last year. The decrease amounted to RMB 15.5 million in the second quarter compared to RMB 61.8 million last year. If we strip out the effect of SBC from G&A in the quarter, G&A expenses grew by 70.3% year-over-year to RMB 28 million from RMB 16.5 million, accounting for 11.9% of our revenues as compared to 8.2% last year. R&D expenses: We continue to invest heavily in R&D, as explained before, in our AI applications and also in beefing up our R&D headcount. For the quarter, R&D expenses grew by 41.9% year-over-year to RMB 10.6 million, which is primarily attributable to the increase in headcount, as we continue to invest in technology enhancements throughout the business procedures. During the second quarter, net loss was RMB 3.7 million, while non-GAAP net profit for the quarter was RMB 14.1 million, representing a 9 consecutive profitable quarter on a non-GAAP basis. We continue to exercise financial discipline and prudence in light of the current challenging macro environment and maintain a relatively strong liquidity and healthy financial position. As of quarter-end, we had a combined balance of cash and cash equivalents of approximately USD 63 million. Going forward, this robust liquidity position will allow us to undertake more aggressive growth strategies in the second half of the year and capitalize on potential attractive investment opportunities. Now turning to our Q3 outlook. With regards to the Q3 revenue, we expect total operating revenue to be in the range of RMB 310 million to RMB 340 million. This forecast obviously only reflects the current and preliminary views on the market and operational conditions and is subject to change caused by various uncertainties, including those relating to the ongoing COVID-19 pandemic. With that, this concludes our prepared remarks for today, and we would like to open up the call for Q&A.

Thank you very much. We will now start the question-and-answer session. Your first question comes from Michelle Ma from Citigroup.

So my first question is about the operating revenue guidance. For the third quarter this year, the guidance is between RMB 310 million and RMB 340 million, which appears to be a significant increase compared to the second quarter. Ron just mentioned that the strong cash position enables Huize to pursue a more aggressive strategy. I’m curious about how aggressive this strategy will be to achieve such strong quarter-over-quarter revenue growth. My second question is regarding our competitor. We observed that after we launched our new product in June, which was well-received in the market, our competitors introduced a similar product akin to the Super Mario series. How does management view the overall competitive landscape and what steps can we take to differentiate ourselves?

For the first question regarding our cash position and Q3 guidance, I believe our revenue outlook for Q3 is significantly stronger than in the previous two quarters, which were heavily impacted by the challenging economic environment. Entering the third quarter, we continue to face economic pressures, but we are also beginning to see signs of moderate recovery within our business. This is why we are projecting quarter-on-quarter growth of 30% to 45%, which is considerable compared to recent quarters. In terms of our strategy, we have been prudent with the IPO proceeds. In our earnings reports over the last two quarters, we have not invested much capital in marketing or aggressive promotional programs. However, in the third quarter, we expect to engage in more aggressive incentive campaigns, particularly with our channel partners. Additionally, we plan to allocate more resources to enhance our organic traffic, such as through SEO marketing on search engines. We anticipate that our marketing and advertising expenses in the second half will increase by about 50% compared to the first half, as we grow more confident in the overall economy and in consumers' willingness to purchase protection insurance online. This addresses the first question.

Thank you. Let me quickly translate. Our COO, Mr. Li Jiang, addressed the second question. Since 2015, our company has achieved significant success and has been a leader in the industry for customized products developed in collaboration with our insurance company partners. We've launched several successful branded products. As a result, competitors in the industry are likely to follow our lead. As we consider ourselves the clear leader in this area, we believe our market share surpasses that of the second, third, and fourth competitors combined. We maintain a strong leadership position in this product segment. Additionally, since the last quarter of last year, our results show that we have been expanding into other products, particularly annuity products, which we anticipate will become increasingly important for distribution in the latter half of this year, as there appears to be a growing preference for savings-oriented products rather than protection products. We have created a business plan to support this initiative, and we aim to enhance our distribution of additional products within our mix in the second half of the year. Regarding the new definition of critical illness products under the Chinese regulatory framework, we plan to launch new products in the fourth quarter. This reflects our strong in-house product customization and co-branding capabilities with our insurance partners, which gives us a competitive edge over smaller competitors in the market. So, I think Mr. Ma just mentioned a couple of additional points. In terms of new product innovation, we believe that we have always been the innovator in the industry and have been followed by other competitors. We have consistently maintained our lead in new product innovation. The two main elements that help us sustain our strong leadership are, first, the extensive database we have developed over the last 14 years of operation. We possess proprietary intelligence data regarding our client base, along with historical purchasing, underwriting, and claims processing data. Second, we have a robust user base with 6.5 million effective users accumulated to this point. These two elements empower us to retain our leadership position.

Thank you very much. As there are no further questions at this time, I would like to turn the conference over to our management for their closing remarks. Please proceed.

Okay. Thanks, everyone, for joining the call today, and we look forward to sharing our results for the third quarter. See you next time, and take care. Thank you.