Huize Holding Ltd Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for being here, and welcome to Huize Holding Limited’s Fourth Quarter and Full Year 2020 Earnings Conference Call. Today’s call is being recorded, and a replay will be available on Huize’s Investor Relations website under Events and Webcasts. I will now turn the call over to your speaker host today, Ms. Harriet Hu, Huize’s Investor Relations Director. Please proceed, Harriet.

Thank you, operator. Hello, everyone, and welcome to our earnings conference call for the fourth quarter and full year of 2020. Our financial and operating results were released earlier today and are currently available on both our IR website and the 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 the use of 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; Co-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 fourth quarter of 2020. Mr. Tam will then provide details on the financial results for the period before we open up the call for questions. I will now turn the call over to Mr. Ma.

Joining us today are our Founder and CEO, Mr. Cunjun Ma; COO, Mr. Li Jiang; Co-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 fourth quarter of 2020. Mr. Tam will then provide details on the financial results for 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 Huize’s Fourth Quarter and Full Year 2020 Earnings Conference Call. 2020 marked an important milestone for Huize. We are officially listed on NASDAQ despite challenging capital market conditions, due to our position as one of the pioneers in China’s online insurance industry. In February, the pandemic was at its peak in China, and it was not an easy task for us to complete our IPO. Therefore, I would like to express my gratitude to all shareholders and investors for your support and trust. Despite the uncertain macro conditions throughout the year, we delivered robust results due to our years of experience in the insurance industry, the competitive advantages of our online platform business model, unique focus on long-term insurance product distribution, and our leading digital development capabilities. During the year, total GWP facilitated on our platform increased by 50% year-over-year to RMB 3 billion, while total operating revenue increased by 22.8% year-over-year to RMB 1.22 billion. Particularly in the fourth quarter, we capitalized on the recovery trends in the industry and overall economy, with both total GWP and total operating revenue increasing by more than 50% year-over-year, reaching new quarterly highs. On the business strategy front, Huize pursued the long-term development of user value in place of short-term traffic monetization. Our differentiated long-term insurance product strategy enhanced our resilience during the market downturn and generated sustainable growth momentum. In 2020, long-term life and health GWP accounted for 93.4% of total GWP, increasing from 87.4% in 2019. Meanwhile, GWP for long-term health insurance increased by 50.6% year-over-year to RMB 2.14 billion. Over the past three consecutive quarters, persistency ratios for long-term life and health insurance in the 13 and 26 months have remained about 94%. We believe that Huize’s capabilities in online acquisition of high-quality clients, as well as its higher client retention, are difficult for our competitors to replicate. In terms of product innovation, leveraging our massive and multidimensional user data and insurance transaction data, we have been able to design more valuable and customized insurance products for our clients with this understanding of their insurance needs. For example, we launched the Darwin 3 critical illness insurance, which was yet another success of our original Darwin product line. We also took the lead in the customization of annuity products, launching our first online version of joint-life annuity, which was also a unique feature and innovation in China’s online insurance market. In 2020, GWP for co-developed insurance products with our insurer partners totaled RMB 1.29 billion, and accounted for 42.7% of total GWP compared with 36.3% in 2019. Regarding offline structure, we maintained our user-centric focus, constantly improving our platform functions and services to optimize user experience. In 2020, Huize further upgraded its client service centers system, combining an automatic portal with human assistance and increasing its service fleet by up to five times. During the year, the number of claimed cases assisted by Huize increased by 22% year-over-year to 43,000, and the claimed amount increased by 71% year-over-year to RMB 242 million. As the pandemic accelerated online insurance consumption, our differentiated services and market reputation enabled us to continue attracting and converting new users. By the end of 2020, the number of Huize’s accumulated insurance clients has increased to 6.85 million. Moving to technology development, we embedded AI algorithms, data intelligence, and machine learning into our key business processes. We accumulate data from transactions, extract knowledge from this data, and apply the knowledge to our services in order to achieve win-win in terms of cost reduction and efficiency improvements. For example, on the front end, we launched an AI Proposal application in 2020. This application can quickly process user interest and recommend optimal insurance products. It has not only boosted the efficiency and prospectivity of our consultants, but also improved our clients’ experience. On the middle end, Huize’s new consultant workstation has been officially put into use. It provides analytical tools such as user portraits and user preferences to empower our consultants. Meanwhile, the same-screen explanation function also provides clients with an immersive and interactive experience. On the back end, our intelligent inspection system can transcribe, calculate, and analyze multichannel voice and text information to improve the efficiency of our compliance personnel and reduce operating and compliance risks. Then, on our operational and financial growth, our industry value and positioning continue to gain recognition. During the year, Huize research institute released a list of top 10 Chinese digital insurance agencies in 2020, with Huize placing among the first tier level of companies in terms of innovation capabilities and market performance over the past two years. At the same time, Huize was included in KPMG’s 2020 China leading fintech top 50 list as a result of our development in insurance technology. This was also the fourth consecutive year that we’ve been shortlisted. Such achievements are the driving force behind our ongoing developments and assessments. Looking ahead, we are confident in the process of the online insurance industry in China and we aim to further establish Huize as the go-to-digital insurance service platform for new generation consumers empowered by data and technology. In order to achieve this goal, our team will focus on the following aspects in 2021. First, we will fully embrace digitalization, continuously strengthen our technology research and development as well as talent acquisition, and enhance Huize’s core competencies. At the same time, we will optimize our corporate culture and governance structure to ensure better adaptations to the ongoing digital transformation. Second, we will promote a comprehensive strategic upgrade by expanding our offline business in core cities such as Shanghai and Shenzhen by setting up high-value client service centers to further optimize the service experience and maximize clients’ lifetime value. Third, we will strengthen our collaborations with upstream and downstream partners along the industry value chain to enrich our product offerings and improve service capabilities. We expect Huize to become a more open platform with a wider range of products and services and its ecosystem related to insurance, including medical and health care. Fourth, we will take full advantage of the capital markets, actively identify high-quality investment targets, and improve our platform’s value proposition and market positioning through mergers and acquisitions to further realize our development strategy. 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. It’s Ron here. In summary, we are very excited to report yet another strong set of results for the fourth quarter, in which we have delivered record quarterly numbers again for both total GWP facilitated on our platform as well as total operating revenues, which has beaten our previous guidance given to the market. For the first time in a single quarter, we managed to facilitate over RMB 1 billion in first EM renewal premiums. The corresponding strong top-line performance continues to reflect importantly, the underlying recovery trend in the Chinese insurance industry following a containment of COVID in the country, as well as the increasing adoption of online purchases of insurance products among key target customers represented by a new generation of young affluent consumers from high-tier cities in China. From a product perspective, our key focus in critical illness products, particularly co-developed products with our insurer partners, continues to drive a large part of the GWP growth in the long-term health segment of the business. With total GWP contribution of RMB 589 million in the quarter, which is up 61% year-over-year. Mr. Ma earlier mentioned Darwin 3 in his prepared remarks, which we co-developed together with Sinatay Life Insurance; it was the best-selling critical illness product during the quarter. We continue to see a strong momentum being carried into the new year for Q1 of 2021, ahead of the transition to the new critical illness definition regime for the overall industry. In addition to critical illness, we have also successfully ramped up distribution of savings insurance products, including annuities as well as whole life insurance during the quarter, which amounted to first-year GWP of RMB 228 million, capitalizing on the seasonally strong market demand for savings insurance products during the year-end and pre-Chinese New Year period. Our efforts in broadening our product portfolio also reflect our continuing focus on providing our customers with additional product offerings along their life cycles, which in turn helps create better engagement with our users and drive higher customer lifetime value for the platform. Overall, total GWP facilitated during the quarter totaled RMB 1 billion, of which RMB 613 million was trust fee premiums, representing an increase of 40% year-over-year, and RMB 433.5 million in renewal premiums, which is up 1.1x year-over-year. Here, I would like to highlight the continued strong renewal metrics, which again demonstrates the high-quality clients that our platform is able to acquire through our multichannel marketing strategies. We continue to see robust persistency during the quarter, with 13 and 26 months persistency ratios being maintained at about 94%. Now turning to our revenue line, total operating revenues for Q4 was RMB 388.1 million, again, a record quarterly high, which was up by 50.3% year-over-year and outperformed our guidance previously given to the market in our Q3 results. The increase in revenue was primarily driven by the rise in brokerage income due to the 63% increase in total GWP facilitated in the quarter. Cost of revenue for Q4 increased to RMB 291.2 million, primarily due to increased service fees paid to our user traffic channel partners. Selling expenses for the quarter increased by 15.7% year-over-year to RMB 71.5 million, which was primarily attributable to an increase in advertising and marketing spend in the quarter, which increased by 43% year-over-year. You can see that we proactively increased marketing spend during the quarter to capitalize on the significant market demand for critical illness products in the period. G&A expenses for the quarter increased by 8.1% year-over-year to RMB 37.3 million. This increase was primarily due to the rise in G&A salaries and professional service expenses, offset by a decrease in share-based compensation expenses. R&D expenses for the quarter grew by 33.9% year-over-year to RMB 15.8 million as we continue to invest in AI applications for our platform and increasing R&D and data analytics headcount. During the fourth quarter, we recorded a GAAP net loss of RMB 27 million. We continue to maintain robust liquidity and a strong financial position. As of the quarter end, we had a combined balance of cash and cash equivalents of approximately USD 62 million. As for our outlook for the first quarter of the year, as we briefly touched upon earlier, we invested quite heavily in marketing spend in the last quarter. We have also undertaken incentive campaigns with our channel partners to capture a disproportionate market share during Q4 in light of the significant market demand for the old definition critical illness products. Now we are seeing strong demand building over in the first quarter of the new year. As a result, we are on track to achieve yet another record quarter for total operating revenues. Regarding our formal Q1 guidance, we currently expect total operating revenues for Q1 to be in the range of RMB 650 million to RMB 700 million, representing, at the low end, over 1.6x growth year-over-year. This forecast reflects the company’s current and preliminary views on the market and operational conditions, which are obviously subject to change caused by various uncertainties, including those related to the ongoing COVID-19 pandemic. With that, this concludes our prepared remarks for today, and we will now open up the call to Q&A. Thank you, operator.

Your first question comes from Michelle Ma of Citigroup.

My first question is about the new critical illness product and its updated definition. How do the prices of the new products compare to the previous versions? Are they still competitive? Additionally, how are overall sales performing in February? My second question concerns the new regulations set to take effect this year and next year on February 1, May 1, and January 1 of next year. What challenges does management anticipate in meeting these new regulations?

Thank you, Michelle. It’s Ron here. Let me take the questions for the team. So the first question regarding the new critical illness product. I think it’s very early to say, given that we have just launched the new Darwin #5 literally today, so results are still yet to be seen. But we believe that the new product, obviously, is another iteration of the product. Again, this time, we are working with Sinatay Life Insurance. We believe that the new products should be able to drive sales, probably in the second half of this year. Any new product coming online requires a period of marketing and education for the clients at large through our direct and marketing channels. So I think it’s still very early days to tell. However, we are obviously very confident that the new definition product would also be well received by the market. The strong numbers we have previewed for Q1 are mainly coming from the old definition product, which we mentioned earlier. We see significant demand coming from Q4 into Q1, especially given the deadline of January 31 for both of the products in the market. We are witnessing strong demand in that month of January. As for the second question regarding regulatory changes, I would say that, given where we are in the industry as one of the leading operators, we are in constant dialogue with the regulators. In fact, we are one of the consultative members on the Board of the relevant regulatory bodies in terms of formulating the relevant policies or new regulatory measures. To that effect, we are already anticipating such changes. Most of the regulatory changes are focused on ensuring that the sales process of insurance products is conducted in a compliant manner. For example, they now require that all conversations or interactions with customers must be tracked and provided to the client on an as-required basis. We are very proud to say that we have already an online system capable of achieving this requirement, enabling clients to request any records of conversations they have with our consultants. Regarding the other regulatory changes, they are now setting certain requirements for insurance companies to meet in order to provide insurance products online. For example, core solvency ratio requirements and credit rating requirements for four consecutive quarters. These requirements will come into effect in the upcoming year, and the regulators are providing adequate time for industry participants, including both insurance companies and brokerages like us, to adapt to the changes. Overall, the industry is hopeful regarding these changes. As one of the leading players in the market, we are very well-positioned to manage them. That answers the second question.

Your next question comes from the line of Joey Yang of CLSA.

So my first question is about the products. We understand that the Darwin #5 officially launched today. We also understand that with the AI platform, there are products that are not customized. Could management clarify the difference between these two types of products and which one might provide a better profit margin? Is there a preference for one type over the other? My second question concerns the take rate in Q4. We noticed a slight decrease in Q4 compared to previous quarters. Simultaneously, we see that the first-year premium accounted for about 60% of the Q4 premium. I'm curious about what caused the decreasing take rate in Q4. Is this related to a higher sales volume of short-term insurance products? Lastly, I would like to inquire about the latest updates on the offline service centers mentioned by Mr. Ma, as well as what our selling points are for attracting talented employees to these centers.

Thank you, Joey, for your questions and for following us. I'll respond on behalf of the team. The first question was about our product mix in gross written premiums and whether we prefer customized or co-developed products over standard off-the-shelf offerings. The straightforward answer is that we always prioritize the customer's needs. Our users are often drawn to the exceptional value of our critical illness products, which we co-develop with insurance partners. As a result, we slightly prefer customized or co-developed products that we create with companies like Sinatay, as these usually offer the best value available in the market. Naturally, customers tend to inquire more about these products. We favor co-developed products as they strengthen our relationships with our insurance partners, leading to better arrangements. For instance, Darwin #5 marks our second collaboration with Sinatay, which we hope will yield improved treatment from our partners. Additionally, our strong persistency rates provide reassurance to insurers about collaborating with us on future products. Regarding the second question about the take rate, the explanation lies in the specific product mix related to first-year premiums in the fourth quarter. In Q4, we achieved 21% of our first-year premium fee from annuities and 16% from whole life insurance, with this new product segment emerging in Q4. Together, these accounted for 37% of the first-year premiums that quarter. Annuities generally come with lower commission rates for first-year premiums versus critical illness or long-term life insurance, which explains the slight decline in take rates in Q4. This period typically sees increased contributions from annuity and savings-related products, which drives those trends. As for the third question on offline plans, we are launching our offline presence this year. Last year, we paused these plans due to COVID, but recent positive momentum has motivated us to advance these initiatives. Our offline presence will improve interactions and engagement with our existing users, allowing us to leverage our in-house data to concentrate on high-value customers. In the first phase, we plan to begin services in top-tier cities like Shanghai and Shenzhen, hiring fewer than 100 people to accelerate this initiative. We are looking to attract professional talent by emphasizing our online business leads and internal user database to encourage repeat purchases and enhance lifetime values.

Your next question comes from the line of Brian Li of AMTD Group.

I have noticed that you have RMB 100 million in accounts payable on your balance sheet. Could you provide more details about this item?

Sure. Thanks, Brian, and thanks for joining the call today. The simple answer is that the strong month of December we experienced as a business created a lot of the account payable balance at the end of the year. So it really had to do with the strong month of December from a business perspective.

Your next question comes from the line of Jan Oli of Securities.

My first question is about the mergers and acquisitions mentioned by Mr. Ma. Is your company planning to acquire another deal this year? What are the potential targets? My second question is still about the offline service center. What are the main functions of those offline service centers?

Thank you. It’s Ron here. Let me address the first question regarding M&A targets. We are focusing our investment in three key areas. The first area includes some existing channel partners we have engaged with over the past three years; these could present interesting collaboration opportunities for better integration into our distribution and marketing channels. The second area encompasses both online and offline brokerages that could synergize with our core business—online brokerages would help us expand horizontally to capture more market share, while offline brokerages would assist in transitioning from online to offline services. The third area involves other insure-tech platforms that utilize innovative technologies in business processes, such as customer service, underwriting, and augmented reality technologies. These will be our primary M&A target areas. Mr. Ma will address the second question regarding the strategy for our offline centers.

There could be a horizontal expansion capturing better market share, while offline would complement our online strategy to accelerate the transition from online to offline. The third area could be other insure-tech platforms with innovative technologies in business processes, whether it be in customer service, underwriting, use of AR technologies, and so forth. These will be the major M&A target areas for us. Mr. Ma will comment on the second question regarding the strategy for the offline centers.

Thank you. That’s Mr. Ma commenting on the second question. To summarize, we are really aiming to leverage Huize’s core online platform that has developed over the last 15 years to serve higher-value customers efficiently. Given our internal customer data, we can segment and target high-value customers initially. This testing phase for rolling out the offline service plans will evolve, so we kindly ask for the market's patience. We'll keep investors updated on our offline business plans in subsequent calls.

Your next question comes from C.C. Wang of Independence Investment.

Hello, can you hear me?

Yes.

Thank you. We understand that Huize is leveraging its resources to attract new users and fulfill customer needs. However, as an online insurance aggregator, the brand is currently not well-known to the end users. Do you have any plans to improve brand recognition for our holdings? Huize has achieved record financial performance, and even though there was a price surge before the recent downturn, I believe Huize still has a low profile among overseas investors. For instance, when compared to a U.S. company—a similar insurtech firm with revenue of only CNY 60,000 but a market cap of CNY 50 billion—does Huize plan to boost investor awareness and exposure to adjust capital estimations?

Thank you. It’s Ron here. I’ll take these questions for the team. For the first question on brand recognition, I believe we've been around for 15 years. The proud aspect is that we built on limited capital support, and we have been stringently managing our budget while still achieving a significant listing in the U.S. market. We acknowledge we need to do more on the branding side, and in 2021, we're allocating more funds towards building bigger brand presence in the consumer and capital markets. As for the second question, several external factors over the past year affected our visibility. For instance, the timing of COVID-19 impacted us. We were first in line for a Chinese IPO after the COVID outbreak. Various events, like the controversies around Luckin Coffee, have shaken confidence in smaller capital Chinese A-D-Rs. Additionally, ongoing U.S.-China trade tensions contribute to depressed sentiment toward Chinese stocks. However, in recent months, liquidity in our stock has significantly improved. We've seen more investor engagement thanks to financial performance and investor outreach over the last 6-8 months. Our visibility in capital markets is indeed improving, and we plan to intensify our investor relations and outreach efforts this year.

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

Okay. Thank you very much, everyone, for joining this call, and appreciate your strong participation. We look forward to the next call for the first quarter of 2021. Thank you very much.

Thank you for joining us today. Thank you.

Thank you.

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