Huize Holding Ltd Q3 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to Huize Holdings Limited's Third Quarter 2020 Earnings Call. This 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 would like to hand the conference over to your speaker, your host today, Ms. Harriet Hu, Huize's Investor Relations Director. Please go ahead, Harriet.

Thank you, operator. Hello, everyone, and welcome to our third 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. I would also note that we'll 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 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 third 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's Third Quarter 2020 Earnings Conference Call. As China gradually recovers from the COVID-19 epidemic, the year-over-year growth rate of per capita disposable income turned from negative to positive in the third quarter of 2020 according to the National Bureau of Statistics. Additionally, we have noticed a steady increase in people's awareness of insurance and a growing tendency for consumers to purchase insurance products online. In light of the recovery trends in the industry and broader economy, we remain committed to executing our unique long-term insurance product strategies along with our strong digital development capabilities. As a result, we achieved double-digit year-over-year growth in total GWP and total operating revenue, reaching record quarterly highs. During this quarter, total GWP facilitated on our platform rose by 41.2% year-over-year to RMB 779 million, while total operating revenue increased by 22.9% year-over-year to RMB 348 million, once again surpassing the upper end of our previously announced guidance. This growth and profitability during a period of uncertainty demonstrate the strength of our business model and the effectiveness of our strategic focus on transforming the distribution of long-term life and health insurance products. Before providing additional updates on our quarterly business progress, I would like to first discuss our focus on long-term insurance products. During the third quarter, long-term life and health gross written premium accounted for 92.9% of total gross written premium, a ratio that has remained around 90% for the past four consecutive quarters. Additionally, gross written premium for long-term health insurance increased by 47.1% year-over-year to RMB 649 million. Our ability to maintain such strong rates is largely due to our first-mover advantage in the online long-term insurance space, where we have built significant strengths in brand influence and professional capabilities that are challenging for other industry players to replicate. Our emphasis on long-term insurance products offers several benefits. Firstly, these products yield higher commission rates and generate recurring revenues through policy renewals. Secondly, our long-term product focus allows us to develop more enduring relationships with clients and fosters greater customer loyalty. Our persistency ratio for long-term life and health insurance in the 13th and 25th months of the policy remained stable at 94%, which is relatively high in the industry. This strong client retention rate gives us the opportunity to maximize customer lifetime value as we can adapt to and meet the evolving protection needs of clients at different life stages. In line with our focus on developing long-term insurance products, we also concentrate on building our core competencies. As a pioneering insurance e-commerce platform in China, we have accumulated a significant amount of multidimensional client data and transaction data over the past 14 years. By leveraging our superior data resources, we have been able to develop more comprehensive client products, implement more precise risk management practices, and enhance our understanding of client-specific insurance needs, product design mechanisms, and risk-adjusted pricing to provide clients with more valuable and tailored insurance products. For example, we officially launched a critical illness insurance product called Darvin 3. Shortly after its launch, this product gained immense popularity. In September, Darvin 3 received the Popular Health Insurance Products of 2020 award. This marks the sixth time that our Darwin critical illness series of insurance products has won such awards in the industry, further demonstrating the series' outstanding reputation as well as our exceptional product design capabilities. Beyond our value, our positioning continues to gain recognition in the third quarter. For instance, in September, Huize was featured in Hurun's China Digital Insurance Agencies 2020 list and categorized among the top tier of companies regarding innovation capabilities and market performance over the past two years. Looking ahead, we strongly believe that the market will increasingly recognize the significance of online insurance products and their service channels, alongside the ongoing trend of separating insurance underwriting from distribution as China's insurance market develops. Therefore, we are keen to take advantage of this opportunity and evaluate our progress with momentum on our side. I would also like to discuss our future development strategies. Many of our insurance clients come from families in first- and second-tier cities, which have a high potential for customer lifetime value. We will be establishing offline service centers in select first- and second-tier cities to better meet their specific needs for higher-quality products and premium insurance services, thereby maximizing these customers' lifetime values. Over the next three years, we are committed to investing in a comprehensive strategic upgrade for the core Huize platform as we transition into the post-COVID era, where consumers are seeking greater innovation in insurance products and a digital transformation of the insurance purchasing and service experience. We aim to create an insurance process and service cloud platform that incorporates core technologies such as cloud computing, big data analytics, and artificial intelligence. We believe that this upgraded platform will enhance the integration of online and offline channels, further empower our ecosystem's partners with data and technology, and ultimately allow the industry to reach insurance clients in all scenarios, offering them a broader range of personalized insurance products and services throughout their life cycles more efficiently.

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 and Harriet, and hello, everyone. In summary, our third quarter results show a very clear recovery trend in China's insurance industry as a whole, and in particular, a pickup in underlying growth momentum as shown in the quarter-on-quarter growth across the long-term and short-term product spectrum. As economic activity resumes and domestic travel activity picks up steam, all thanks to the successful containment of COVID in the country. In particular, during the quarter, we have achieved record quarterly highs for both total GWP facilitated as well as our total operating revenue. For Q3, we added 259,000 new insurance customers, taking our total cumulative insurance clients to 6.7 million. GWP facilitated during the quarter totaled RMB 779 million, which was a record quarter, up 41.2% year-over-year and 30.7% on a sequential basis. GWP contribution from our two largest product segments, long-term health and long-term life, grew by 47.1% and 49.4%, respectively, year-over-year. In particular, in terms of first-year premiums, long-term health, our largest product segment, increased by 68.1% quarter-on-quarter, amounting to RMB 250 million, which accounts for 70% of total first-year premiums of RMB 358 million for the quarter. The strong sequential growth is primarily attributable to our leading top-selling critical illness product, Darwin 3, which we have co-developed with Sinatay Life Insurance. The product launch also helped contribute significant growth in GWP for co-developed insurance products with our insurer partners, which increased by 65% to RMB 436 million, accounting for 56% of our total GWP facilitated during the quarter. This metric continues to demonstrate the deepening engagement we have with our upstream insurance company partners as we continue to deliver strong persistency ratios from our long-term insurance customers, with 13th month and 26 months persistency ratios averaging 94% during the quarter. Now turning to our revenues. Total operating revenue for Q3 was RMB 348.5 million, again, a record quarter high, which was up by 22.9% year-over-year and outperformed our guidance previously given to the market in our Q2 results. The increase in revenue was primarily driven by the increase in brokerage income due to the 41.2% increase in total GWP facilitated during the quarter. Cost of revenue for Q3 increased by 24% year-over-year to RMB 234.7 million, primarily due to increased service fees paid to our user traffic channel partners, which is generally in line with our revenue growth. Selling expenses for the quarter increased by 43.9% year-over-year to RMB 57.9 million, which was primarily attributable to the increase in our sales and marketing headcount during the past 12 months as well as an increase in advertising and marketing spend during the third quarter, which increased by 78% year-over-year as we looks to increase spend in line with the improving industry fundamentals along with the overall recovery in the economy. G&A expenses for the quarter decreased by 0.6% year-over-year to RMB 30.5 million. This decrease was primarily due to the decrease in share-based compensation expenses, which amounted to RMB 2.8 million in the third quarter as compared to RMB 10.5 million in the previous year. Excluding the impact of SBC from our G&A in Q3, G&A expenses grew by 37.1% year-over-year to RMB 27.6 million. R&D expenses for the quarter grew by 41.7% year-over-year to RMB 11.5 million as we continue to increase our headcount in areas of data analytics and AI-related R&D efforts. During the third quarter, we achieved a GAAP net profit of RMB 14.7 million, while non-GAAP net profit for the quarter was RMB 20.4 million. We continue to maintain robust liquidity and a strong financial position. During the quarter, we recorded a net operating cash flow of RMB 72 million. And as of the quarter-end, we had a combined balance of cash and cash equivalents of approximately USD 65.7 million. Now with regards to our Q4 outlook, we currently expect total operating revenue to be in the range of RMB 330 million to RMB 350 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 pandemic globally. This concludes our prepared remarks for today. We will now open up the call to Q&A. Thank you. Operator?

Your first question comes from indiscernible from Citigroup.

I have three questions mainly. First, we would like to ask management about the guidance on the FY growth outlook in 2021, particularly concerning annuities and health insurance. Related to that, we would also like to know whether the focus for 2021 will be on growth or profit generation. Additionally, I'm curious about your plans or preparations regarding the exits of your pre-IPO principal shareholder, since we understand there is a lockup period per shareholder.

Okay. Thanks for the questions. I think there are three questions here. I will take the first question first regarding the full year outlook for, I guess, first-year premium for the business. What we've seen overall in the first half was a relative deceleration in terms of overall industry growth. As a result, I think the business has also shown a consistent trend along with the industry. I think in the second half of the year, you can see that sequentially, there was a relatively strong rebound in our new business in the third quarter. And then in the fourth quarter, despite it being a traditionally seasonally weak season, we are still seeing relatively good momentum going through as general market conditions rebound. Overall, I think for the full year, it will be relatively flat versus last year in the first-year premium, but obviously subject to how the industry dynamics have been improving in the second half of the year. The second question was regarding the growth focus for next year. The question was really on whether we will be prioritizing overall top-line growth versus profitability. For us, I think next year will be a year for us not just to continue executing on our existing business strategy for our long-term product, which we will definitely see improvement next year, given the market conditions have been rebounding. We will also be going into new product segments. As you noted in your remarks, we will be scaling up our annuities or savings-related product business next year. We are targeting a contribution from this new product vertical of approximately 20% of our total first-year premium for next year from savings-related products, particularly annuities, which we've seen also a very sharp focus from the insurance companies as a whole in terms of the new year product launch initiative. The third question was regarding the IPO pre-IPO investor intentions post-lockup. We focus on our business execution, but we maintain good and consistent dialogue with our existing shareholders, particularly the larger shareholders. Both of them have indicated to us that they remain very confident in the long-term growth potential. There would be opportunities for monetization for some of the shareholders as and when they see fit. So we will keep close dialogue with investors, and should there be any opportunities, we'll be in close coordination with investors to ensure there will be an orderly market for this potential monetization prospect for public investors.

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

Okay. Thanks for joining the call today, and we look forward to sharing our results next time. During this period, keep safe and healthy, everyone. Thank you very much.

Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now all disconnect.