Huize Holding Ltd Q3 FY2022 Earnings Call

Thank you, operator. Hello, everyone and welcome to our earnings conference call for the third quarter of 2022. 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 the 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; Co-CFO, Mr. Minghan Xiao; and Co-CFO, Mr. Kwok Tam. Mr. Ma will start the call by providing an overview of the company’s performance and operational highlights for the third quarter of 2022. 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 for joining Huize’s third quarter 2022 earnings conference call. For the third quarter, Huize reported another set of results that underlines our resilience in the face of an uncertain operating environment characterized by the ongoing impact of COVID-19, a relatively moderate recovery in consumer confidence, and the deepening consolidation of the insurance industry. During the quarter, we continued to make progress on implementing our strategic roadmap to build an omnichannel digital insurance service ecosystem that integrates agents, businesses, and customers, further refining our competitive edge in customer insights, product innovation, and professional insurance services. In the third quarter, total gross written premium, or GWP, facilitated on our platform increased by 29.4% year-over-year to RMB1.3 billion, and our total operating revenue increased by 11.7% year-over-year to RMB352 million. In terms of product mix, we have responded to market demand by enhancing our focus on promoting savings insurance products, and this strategy has produced remarkable results. In the third quarter, the total first-year premiums or FYP facilitated on our platform increased by 34% year-over-year to RMB685 million, of which the FYP of savings products amounted to RMB509 million, reflecting a 49.3% year-over-year increase. These results reflect our asset-light business model and market-driven product offerings sustaining our high-quality business growth. Meanwhile, thanks to the snowball effect and the high user stickiness generated by our strategic focus on long-term insurance products, our renewal premiums increased by 24.1% year-over-year to RMB564 million, providing us with a valuable source of stable cash inflow in this challenging macro environment. We have been sharing the operating metrics of our long-term insurance business with investors since 2020, and we are very proud of the solid foundation laid down by this business. In the third quarter, the GWP contribution of our long-term insurance products was 93.9%, remaining above 90% for the 12th consecutive quarter. We have maintained a high-quality user profile as our cumulative number of insurance clients continues to grow, reaching 8.3 million as of September. In the third quarter, about 65.2% of our long-term insurance customers were from higher-tier cities with an average age of 33.7 years. In terms of FYP, the average ticket size of long-term insurance products and long-term savings products was approximately RMB6,108 and RMB40,000 in the third quarter, respectively. Our average persistency ratios for long-term life and health insurance in the 13th and 25th month remained at industry-high levels of 91% and 96% in the first seven months of 2022, respectively. As of the end of the third quarter, we have cooperated with 106 insurer partners to co-develop a wide range of cost-effective and high-quality customer products to stimulate market demand in areas including critical illness, medical, pension, and accident insurance. In the third quarter, the GWP contribution of co-developed products increased by 23.7 percentage points year-over-year to 72.9%. Since September, we have launched various customized products, such as Darwin Critical Care #7, a customized increasing whole life insurance product, and a comprehensive family insurance product. Of particular note was the launch of Darwin Critical Care #7, the latest critical illness insurance product offering in the Darwin Critical Care series, which offers additional benefits for severe and mild malignant tumors and carcinoma in situ, as well as ICU hospitalization benefits covering major diseases outside the list of severe, moderate, and mild illnesses, providing extensive protection for our users and their families. We also continue to make progress on executing our three-year agents, businesses, customers strategic business plan. Our 2A business has achieved pleasing results since its launch at the beginning of the year. The FYP facilitated by our 2A business increased by 53.3% sequentially to RMB65 million in the third quarter and reached a total of RMB120 million in the first nine months, becoming a key driver of our future business growth. In terms of customers, we have actively launched promotional activities, including live streaming interactions and value-added services customized for different groups of users, such as new parents and high-value users, which have enabled us to achieve sales conversion of more than 10,000 users in the third quarter. On the 2B side, we continue to export various digital tools and technologies to insurance companies, including the supply chain risk management system, NLP intelligent quality control system, digital acceleration engine, and business intelligence dashboard. Our goal is to drive the digital and intelligent transformation of insurance companies, empowering them in areas of business development, customer service, product development, and ultimately enabling them to grow their business sustainably. In the first nine months, the total revenue contribution of our technology service business was approximately RMB14 million. Meanwhile, our capabilities in driving innovation and R&D development have earned industry recognition by being selected as one of the new distinctive specialized and sophisticated SMEs in Sichuan province in 2022, which highlights our competitive advantages in developing short-term products and solutions. Meanwhile, we continued to reduce our fixed cost base to improve operational efficiency. In the third quarter, our total operating expenses decreased by 27.8% year-over-year. In particular, our selling expenses declined by 32.4% year-over-year, driving our selling expense to revenue ratio 10.4 percentage points lower on a year-over-year basis and demonstrating the great strides we have made in improving our overall operational efficiency. Against the backdrop of China’s accelerated economic recovery and the digital transformation of the insurance industry, we believe that building an omnichannel digital insurance service ecosystem, advancing the O2O integration of our products and services, and strengthening our technology service capabilities will sustain our leading position in the digital insurance intermediary business. We will strive to optimize our capital allocation to diversify our business and drive sustainable, long-term, high-quality growth. This concludes my prepared remarks for today. I will now turn the call over to our CFO, Mr. Kwok Tam, who will provide an overview of our key financial highlights for the third quarter of 2022.

Thank you, Mr. Ma and Harriet. Good evening, everyone. The third quarter has proven to be a very difficult quarter on multiple fronts. In particular, the ongoing pandemic-related restrictions imposed with lockdowns on a considerable part of the economy have weighed on consumer confidence and income expectations, which resulted in the first demand for insurance by consumers in China, especially for products such as long-term health insurance. The lingering uncertainties with respect to the outcomes of the ongoing PCAOB inspections of the audit working papers of Chinese ADR companies and the corresponding potential delisting risk of Chinese ADRs have also led to further dislocations in the soft prices of ourselves as well as our peers, contributing to an overall extremely challenging capital markets environment. Despite the difficult macro environment, we have been very focused on executing our key strategy. On the product front, we continue to focus on driving the distribution of savings insurance products, which continues to be welcomed by the consumer market given its relative attractiveness compared to bank deposits in a declining rate environment in China. On the channel front, our new 2A 2C business line continued to deliver strong growth momentum in the offline space, generating in excess of RMB120 million of FYP already in the first nine months of the year. And on the corporate front, we continue to implement firm-wide cost savings measures with a strong focus on expense control across our business lines. As a result of our business strategy, we managed to achieve double-digit growth across all of our key metrics. In the second quarter, total GWP increased by 29.4% year-over-year to RMB1.2 billion, which was driven by the strong growth in FYP of 34% year-over-year to RMB685 million. On a sequential basis, FYP in the third quarter grew by 41.3%, which was contributed by the continued momentum in our long-term savings insurance products segment. The results again demonstrate the agility of our platform to adapt to the changing regulatory and market environment and the successful execution of our product strategy focusing on the co-development and distribution of the increasing whole life insurance product category in 2022. The highly successful product IP that we launched, Timma Ni Ju series, which we co-developed with Hong Kong Life and exclusive to Huize’s platform, continues to be one of our key top-selling products on our platform during the third quarter. Together with our co-developed retirement and annuity products with other insurer partners such as Sun Life Everbright and Sinatay Insurance, the long-term savings insurance product category, excluding annuities, recorded very strong FYP growth of 1.9x year-over-year. Our renewal metrics continue to be robust with renewal premiums increasing by 24.1% year-over-year to RMB561 million. Mr. Ma already touched on sound persistency metrics in his remarks, which continue to demonstrate the relatively high quality of our customer acquisition and the attractive customer profile the digital distribution ecosystem brings to our insurer partners during this difficult macro environment. As of the end of the third quarter, our customer base has further grown to reach the 8.3 million mark. Customer lifetime values are still showing consistent accretion to an average ticket size of well over RMB40,000 per long-term savings insurance product distribution in the third quarter. Along with the growth in GWP and FYP, our total operating revenue increased by 11.6% year-over-year to RMB352 million in the third quarter. As mentioned in the previous quarter, we continue to place strong emphasis on the optimization of our overall corporate cost structure and to further drive operational efficiencies. In the third quarter, our operating costs overall were RMB248.7 million, representing an increase of 6.7% year-over-year. As a result, our gross margin improved by 3.3 percentage points from 26% to 29.3%. Our continued focus on reducing firm-wide costs and expenses has resulted in a 24% year-over-year decrease in our SG&A expenses, while our R&D expenses also decreased further by 45% year-over-year. For the third quarter, we recorded a net loss of RMB10.5 million, which narrowed significantly by 87% from the same period last year, reflecting both our top-line growth this quarter as well as improved operational efficiency. At the end of the third quarter, we continue to maintain a strong liquidity position as evidenced by our combined balance of cash and cash equivalents of RMB307 million. We have continued to repurchase shares from the open market under our existing share repurchase program. As of the end of the third quarter, we have repurchased an aggregate of 308 million ADSs. Our business plan will enable us to build and scale an omnichannel digital insurance service ecosystem, placing us firmly in the top tier of insurance intermediaries in China and becoming a digital partner of choice for our upstream insurer partners as we move into an age of insurance distribution for new generation consumers, demanding innovative solutions on the product side as well as seamless digital experiences and professional customer service. We believe that the underlying long-term secular growth trends for China’s insurance industry remain firmly intact, especially for an increasing share of product distribution to be contributed by digital intermediaries like ourselves, providing tremendous opportunities for us to allocate capital to create shareholder value and sustain a high-quality long-term business growth. Lastly, as disclosed in our recent announcement, we would like to make a quick note on the recent notice that we have received from the NASDAQ Listing office with respect to the compliance with continued listing requirements due to our share price being below $1. We note that many companies currently listed on the NASDAQ market, especially our peers in the China ADR space, are also facing a similar situation due to the current dislocations in market valuation resulting from geopolitical and PCAOB-related risks. We would note to investors that common market practices adopted by companies to regain compliance include an adjustment in the ADS to common share ratio or a reverse stock split, which would result in the share price regaining compliance with NASDAQ requirements. We will continue to closely monitor market conditions, which are expected to continue to be quite volatile, and we could implement the aforementioned measures within the 180-day grace period allowed under NASDAQ rules. We reiterate that the receipt of the notice from NASDAQ does not affect the company’s business operations at all. With that, it concludes our prepared remarks for today, and we will now open up the call to Q&A. Thank you, and over to you, operator.

Thank you. The first question comes from an analyst at CICC. Please go ahead.

We have two questions regarding the ABC strategy. The first one is in terms of the 2A segment, what’s the profile of the agents who currently have the partnership with you? By what means can you allocate the collaboration with more high-quality agents under your ABC strategy in the future? The second question is, what do you expect from your 2B segment? And how will this product business contribute to earnings in the future? Thank you.

Thank you for the questions. It’s Ron here. Regarding the first question on the 2A business, we have been running the 2A 2C business for 11 months now since the start of the year. We have been targeting experienced insurance agents from the marketplace, many of whom carry over five years of experience in life and health insurance policy sales. Most of these agents that we target can complete the entire customer service or customer journey—from customer acquisition to business development, assistance with underwriting, and post-policy administration services. So we believe that the Huize model of empowering independent agents has so far proven successful. I think it really relates to our advantage in providing a comprehensive product supply matrix through our SaaS platform, and we can enable and empower the agents via the mature digital tools we have deployed for in-house consultants. This framework is being extended to the 2A business line for independent agents in the marketplace. Regarding the 2B segment, since the IPO, we have been deploying meaningful capital to develop the technology service capabilities of Huize. Since the start of this year, we’ve begun exporting these services to our upstream insurer partners. So far, we’ve signed up a few reputable names such as Piping Life and Great Wall Insurance. The tools we’re deploying in-house, covering customer relationship management, compliance, underwriting assistance, and claims, have all been exported to the insurance companies that are signing up for our 2B business. For the first nine months, we have achieved a revenue of around $13 million, which is expected to grow at a high rate over the next two to three years as we begin to scale the business with the word of mouth from our initial clients' successes. We believe over the next two to three years we will roll out more products to the market and accelerate the business growth by partnering with other insurance companies. Given that we have already made significant investments in the last two years, we expect the two business lines to have a relatively higher margin compared to our core insurance distribution business. Therefore, we anticipate generating positive cash flow in the next year. Thank you.

Next question comes from Michelle Ma of Citi. Please proceed.

Thank you. Thank you, management, and congratulations on such a good result. My first question is a follow-up about our offline agents; what’s currently the average monthly income? Could you give us a sense on this? The second question is about the outlook. For the fourth quarter, you mentioned you will achieve quarterly profitability. We noticed that the cost/income ratio has improved impressively, so just wondering about the sustainability and what’s the outlook for next year’s profitability? You mentioned we will see positive cash flow, but how about the profitability? Do you have any view on the revenue growth and expense growth next year? Thank you.

Thank you, Michelle. Thanks for joining again. So, regarding the first question on the 2A business, the offline agents' productivity or take-home salary depends on the individual agents’ productivity. Overall, the productivity of the agents has been relatively robust and on a comparative level to our own in-house created consultants. Thus, I believe that the take-home pay on an average monthly basis will exceed RMB10,000, which compares favorably with respect to offline brokerages or agencies or even with third-party agents within the incumbent insurance companies themselves. Most of the agents are located in Tier 1 and Tier 2 cities. We have always focused on the mass affluent market sector within China, targeting the 400 million or so middle-class consumers. Therefore, the 2A, 2C business line will also be in sync with our affordable creative platform's focus area in terms of the end-user market. Regarding the profitability outlook, in Q3 we demonstrated substantial improvement, as our net earnings loss has nearly reached a breakeven level. We are on course for a profitable quarter in Q4. For next year, we see a positive outlook, especially with recent news indicating that the regulators appear to be pivoting towards a reopening. The investment community seems to have a consensus that the reopening could happen in the spring of next year. With consumer confidence returning and a broader economic recovery, we anticipate the growth trajectory has been reset this year. We expect to revert to a trend growth rate of around 30% CAGR for the next two to three years, which I consider a reasonable starting point. Our gross margin for this quarter is around 30%, and we expect those margins to remain stable. We anticipate seeing meaningful renewals contributing to the bottom line next quarter due to substantial quarter-over-quarter benefits we experienced last year. Therefore, for the entire next year, we target a meaningful mid to high-single-digit net margin as a starting point. Thank you for your questions.

For the questions, we will move to the next question. Our next question comes from the line of Connie Liu of China Renaissance. Please proceed.

Hi. This is Connie from China Renaissance. Thank you, management, for giving me this chance. I have one question about products. Could you please share more details of the new products launched in the third quarter? Is there any plan for the fourth quarter or in 2023? Thanks.

Alright. Thank you, and thanks for joining the call today. Regarding new product launches, Mr. Ma mentioned in his opening remarks that we have launched several products in the third quarter. These cover the entire customer lifetime value spectrum, from health to savings, pension, annuities, and children’s healthcare. Next year, we also intend to iterate and launch more products. The average timeline we examine for producing or launching a new product in each various sub-category is around three to six months. As we collaborate with different insurer partners, we aim to introduce diverse products specializing in different sub-sectors of the market. Our continued product development and launches are critical to the Asia business plan, and this is an area we remain committed to innovating as we gather further insights from our ABC business lines. We have achieved a meaningful increase in the proportion of contribution from our customized products to our overall FYP, indicating our strong relationships and deep engagement with our insurer partners on the product front. I hope that answers your question. Thank you.

Thank you for the questions. There are no more questions from the line. I would like to hand the call back to the management for closing remarks.

Thank you, operator. On behalf of Huize’s management team, we would like to thank you for your participation in today’s call. If you require any further information, please feel free to reach out to us. Thank you for joining us today. This concludes the call.

Thank you.