Huize Holding Ltd Q2 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by. And welcome to Huize Holding Limited Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the management prepare remarks, we will have a question-and-answer session. Today's conference call is being recorded and a webcast reply would be available. Please visit Huize’s IR website at ir.huize.com, under the Events and Webcast section. I’d now like to hand the conference over to your speaker host today, Ms. Harriet Hu, Huize’s Investor Relations Director. Please go ahead, Harriet.

Thank you, operator. Hello, everyone and welcome to our earnings conference call for the second quarter of 2023. 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 press 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 the 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 second quarter of 2023. 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 second quarter 2023 earnings conference call. In the second quarter, the macroeconomy continued its recovery, and conditions in the insurance industry improved. The life insurance industry's consumer confidence index rose to 68.2, surpassing levels seen in the same periods of 2021 and 2022. Capitalizing on this positive trend, along with our strengths in long-term insurance products, online to offline integration, and product innovation, we achieved encouraging results. Total gross written premiums on our platform reached RMB1.4 billion, a substantial increase of 58% year-over-year. Our operating revenue climbed by 48.3% year-over-year to RMB370 million. Additionally, we recorded our first quarter of consecutive non-GAAP net profit at RMB19 million. In terms of product distribution, first-year premiums facilitated on our platform surged by 85.2% year-over-year to about RMB900 million. Renewal premiums grew steadily, rising by 24% year-over-year to RMB480 million. During the quarter, we took advantage of the growing demand for savings products, leveraging our product diversity and omni-channel distribution capabilities. This led to a 136% year-over-year increase in first-year premiums for our long-term savings products, reaching RMB670 million, while long-term health products saw a 10.4% increase to RMB140 million. Long-term insurance products contributed 93.6% to our gross written premiums, marking the 15th consecutive quarter above 90%. Our customer base remains youthful and engaged, and we are focused on maximizing the lifetime value of our clients. By the end of the second quarter, we had 8.9 million insurance clients, with around 66% from higher-tier cities, averaging 34.4 years of age. The average ticket size for long-term insurance products grew by 56.4% year-over-year to approximately RMB5,400, while savings products averaged about RMB63,000, up by 43.2% year-over-year. As of late May, our persistence ratios for long-term insurance in the 13th and 25th months were above 95%, which is among the highest in the industry. We worked with 110 insurer partners and optimized our product offerings, aiming to provide customized and reliable solutions. This included collaborations with Ping An Health Insurance and Ping An Property and Casualty Insurance to co-develop specialized long-term medical and accident insurance products for children. We also strengthened ties with various subsidiaries of China Pacific Insurance Group, launching products tailored to specific customer needs. In the second quarter, our online to offline insurance service ecosystem continued to show positive results. We have established branches in 18 provinces and cities, covering major Tier 1 locations. Our To-A segment has been exploring new technologies, empowering independent agents with tools like reLink to manage users more efficiently. In this segment, first-year premiums reached RMB160 million, marking a 270% increase year-over-year. In the Q3 segment, we maintained a customer-centric approach, fine-tuning our operations to meet client needs and risks while providing targeted products and services. We launched brand promotions and customer engagement activities that successfully reached over 60,000 users and resulted in over 20,000 sales conversions. In the first half of 2023, Huize assisted with 37,000 insurance claim cases, totaling approximately RMB290 million in settlements. Going forward, we aim to create mutual benefits for insurance companies and customers, highlighting the value of insurance intermediaries to drive sustainable industry growth. For customers, we plan to enhance our offerings and reinforce user engagement. For insurance partners, we will seek to identify new growth drivers to reduce operational costs and enhance efficiency. This concludes my remarks. I will now turn the call over to our CFO, Mr. Ron Tam, for an overview of our key financial highlights for the second quarter.

Thank you, Mr. Ma and Harriet, and good evening, everyone, in the Asia time zone. In the second quarter, amidst further recovery in consumer confidence and total incomes, the insurance industry in China grew steadily. Sector-wide gross written premiums increased by 22% year-over-year to RMB900 billion during the quarter. At Huize, we leveraged our O2O-integrated insurance service ecosystem, and our business will continue to significantly outpace the broader market. We have delivered a 58% year-over-year increase in total GWP facilitated on our platform, which reached RMB1.4 billion in the second quarter. We have also added about 200,000 new customers to our ecosystem in the second quarter, bringing the total number to 8.9 million at the end of the June quarter. During the quarter, we recorded a non-GAAP net profit of RMB19 million, marking our third consecutive quarter of profitability and putting us on track to meet the upward revised full-year non-GAAP net profit guidance of RMB15 million that we issued in the last quarter. This can be attributed to the successful execution of our key business strategies. First, we continued our strategic focus on long-term insurance products, with GWP contribution from this product remaining above 90% for the 15th straight quarter. Second, we continued to target high-quality mass affluent customers and empower insurance agents through our omnichannel distribution platform with product offerings and sophisticated technologies. Our To-A, To-C business line remained solid with total FYP of RMB156 million in the second quarter, representing a year-over-year increase of over 2 times and a sequential increase of over 1 times. And third, we continue to emphasize optimizing operational efficiency throughout our business, and this can be demonstrated by the improving operating leverage and profitability for the quarter. Some key highlights and takeaways from this quarter's operating results include the following. Total gross written premiums increased by 58% year-over-year, reaching RMB1.4 billion, and this growth was mainly driven by an 85.2% year-over-year increase in first-year premiums, or FYP, as well as a 24% year-over-year increase in renewal premiums. Our persistency ratios for long-term life and health insurance remain at an industry-high level. As of May, the 13th and 25th month persistency ratios are maintained at above 95% respectively. The average ticket size for our long-term savings insurance products increased by 44% year-over-year to about RMB63,000. These positive metrics reflect our high-quality customer profile and our relentless efforts to enhance upselling opportunities and tap into the lifetime value potential of our customer base. In the second quarter, we solidified our market-leading position in long-term savings products, particularly with the increase in sum assured whole life and retirement annuities product categories. The FYP of our long-term savings product surged by 1.4 times year-over-year to RMB665 million. The FYP of our long-term health products also increased by 10.4% year-over-year to RMB139 million in the second quarter. Looking ahead, we anticipate achieving a more balanced product mix between the long-term health and savings categories in alignment with the evolving customer needs. The robust growth in FYP helped drive a 48% year-over-year increase in our total operating revenue, which reached RMB368 million in the second quarter. We remain focused on tightening marketing channel costs and optimizing our operations to improve our margins and efficiencies. As a result, our operating costs in the second quarter increased at a slower pace than revenue, rising 40% year-over-year to RMB244 million, leading to a healthy improvement in our gross margin to 34% compared to 30% in the second quarter of last year. In Q2, our total operating expenses continued to decrease, falling by 1.8% year-over-year, resulting in an expense to revenue ratio improvement to 32% in the second quarter from 48% over the same period of last year. Our GAAP and non-GAAP net profit figures were approximately RMB14 million and RMB19 million in the second quarter respectively. At the end of the second quarter, we continued to maintain ample liquidity, as demonstrated by our combined balance of cash and cash equivalents of RMB248 million. We have continued to repurchase shares from the open market under our existing share repurchase mandate. And as of the end of the June quarter, we have repurchased an aggregate of approximately 1 million ADSs, demonstrating our continued confidence in the business prospects and our long-term growth outlook. Moving forward, leveraging our continued investments in generative AI technologies will further improve operational efficiencies across our business value chain, strengthening the integration of our O2O ecosystem and reaching our product and service offerings across all scenarios and empowering our agent and insurance partners with technology enhancements. This effort should help us gain market share and solidify our position as a top-tier digital insurance product and service platform, ultimately striving to enhance shareholder value and achieve sustainable business resilience. Now turning to our outlook for the year. While we remain cautiously optimistic regarding the macro and insurance industry outlook in China, in light of the better-than-expected results in the first half and our strong execution in acquiring high-quality customers from the market, improving cost efficiencies and enhancing customer engagement, we once again revised our outlook guidance upwards and currently expect to achieve a non-GAAP net profit of not less than RMB60 million in 2023. And with that, we will now open up the call to questions. Thank you, and over to you, operator.

Ladies and gentlemen, we now begin the question-and-answer session. The first question comes from Coco Gong at Morgan Stanley. Please go ahead; your line is open.

Hi, thanks. So, hi everyone. I'm Coco from Morgan Stanley. Congratulations to the management on the various results. I have two questions. The first one is about the product transition and product performance potentially in the third quarter and the first half of next year, especially in light of the interest rate hike on August 1. I'm curious if management anticipates any sort of product transition and how performance is expected to be in the third quarter. Additionally, considering the high base this year, how is management planning for the first half of next year? My second question is regarding Huize's strategy in the Greater Bay Area, particularly with the new products launched with CPIC Life Hong Kong. What is the outlook and strategy for this opportunity area?

All right. Thank you for the questions, Coco. It's Ron here. So regarding your first question on the outlook for Q3, I think indeed the 3.5% pricing products have come off the shelves effective from August 1. In Q3, we do have the month of July contributing to our Q3 results. So we can say that the July sales numbers are quite strong across the board. And I think as one of the leading participants in this industry, we also benefited from good sales in July. In the fourth quarter, the overall industry is going through an adaptation phase with respect to the product structure. A lot of people are discussing what the mainstream product will be coming to the market in the next two quarters. Many insurance companies have rolled out the 3.0% pricing product already. This will be the traditional type products, increasing sum assured with guaranteed 3% or close to 3%, should I say. There's also an anticipation of rollout of products with variable returns, slightly lower, like 2.5% guarantee but variable returns depending on the investment performance. The whole industry is still going through this adaptation right now. It is a bit too early to tell. But we do think that the overall savings product category will continue to be well-received by the average insurance customer in China, mainly due to the continued anticipation of a declining rate environment leading to the relative attractiveness of these savings products compared to other wealth management alternatives in China, for example, bank deposits and other wealth management products in the market. So our anticipation is that the savings product category will continue to perform well, but in the short term, there may be a slight lukewarm market demand for such products, particularly on the back of the strong sales in the second quarter and the month of July itself. So that will be the outlook from a product perspective. Regarding the Greater Bay Area business plans, overall we have been in the industry for 17 years already, and we have the benefit of being geographically located in the center, or the heart, of GBA in Shanghai and Shenzhen. So we are now capitalizing on this new opportunity on potential cross-border activities, and this latest product launch with CPIC Hong Kong Life is a testament to our continued innovation in providing the right products for customers in our respective markets. This month marks our first foray into the Hong Kong market with this product targeting Hong Kong customers and new immigrants into Hong Kong from China; these two sets of customers are prime target customers for this product. We believe that this product will address this market niche very precisely, and we do have a very strong anticipation for the sales of this new product with CPIC Hong Kong.

Thank you for your question. We’ll now take the next question from Mindy Gao for CLSA. Please go ahead. Your line is open.

Thank you for taking my question. This is Mindy from CLSA. My first question is about the trend in gross margin. How do you see the gross margin trend in the second half and what is the rationale behind it? My second question is regarding your plans for overseas expansion. Can you provide more details on where you are planning to expand overseas and when you expect to see a significant contribution to revenue from this aspect of the business? Thank you.

Thank you, Mindy. It's Ron here. Two questions. The first question on our gross margin outlook. I think we have been demonstrating that we have achieved cost efficiencies throughout our business lines. As a result, our gross margin for the second quarter has improved by almost 4 percentage points from the same period last year. We intend to maintain gross margins at the current level through three main areas. One, we continue to have very disciplined cost control on the marketing spend and on our customer acquisition channel cost. We have been quite stringent with our direct acquisition budgets. We have been focused on harvesting our existing customer base as well in terms of repurchases. We have achieved more than a 3% repurchase rate from our direct To-C business line in this quarter. This demonstrates that we have been able to achieve premium growth from our existing customer base while balancing that very carefully with new customer acquisition spend to attract new customers. Secondly, we continue to invest in technology and have been deploying more capital into AI efforts. We expect to yield efficiency enhancements on many aspects of our business across the value chain. This combination of measures and strategies will help us maintain our gross margins at the current level. The second question regarding overseas expansion; I think Hong Kong is our first destination in terms of our international strategy or expansion. Hong Kong is a natural extension for our Mainland China business because it offers a very good opportunity in the overall market. We expect the market to recover significantly this year. As a major player in the mainland Chinese insurance brokerage industry, with the brand recognition we have among many Hong Kong local residents, we believe that our brand equity can help us achieve a decent market share in the Hong Kong local market as well. We're targeting to become a top-tier broker in the Hong Kong market within the next three years and achieve a meaningful market share. In addition, we are looking into potential investment opportunities in Southeast Asia. We're still in the early phase of identifying potential joint venture partners in targeted countries in Southeast Asia.

Thank you for your question. We’re now taking the next question from Michelle Ma from Citi. Please proceed; your line is open.

The first question is regarding our perspective on AI technology. For smaller companies, should we focus on being a first mover or early adopter, or should we adopt the technology of the larger industry leaders? I would like to understand the management's view on this matter. The second question pertains to our operating leverage, which seems to be deteriorating. Considering the optimistic net profit projections for the entire year and the second half, should we prioritize ongoing expansion or concentrate more on cost control? Additionally, what is the revenue growth forecast for the second half? Thank you.

Thank you, Michelle. I'll take your questions. Regarding the first question on AI, we don't really see it as a first mover or second mover issue. The more pertinent question is whether a company has the right data to deploy AI technology effectively. We have over 17 years of transaction data encompassing pre-sales consultations, daily conversations between our consultants and end customers, underwriting data, and claims processing data from our Xiao Ma Claim Service. This data helps us effectively train AI algorithms internally, so we can potentially derive game-changing AI technologies to deploy in-house. We believe we have the network advantage for AI because we hold proprietary data within our platform. In the next six to 12 months, we expect to announce some milestone achievements regarding our AI efforts. Regarding your second question, some expenses may have increased in the second quarter, but we will maintain cost discipline very rigidly, especially given the challenging macroeconomic environment in China. We believe overall business dynamics with respect to Huize continue to be solid and resilient. We have a positive long-term outlook in terms of market share for digital brokerage. The second half of this year appears constructive. There may be some product transitions during this period. Ultimately, it depends on what the market and customers demand. We think savings products will remain mainstream in the insurance industry and we already have a backlog of new products to launch in Q3 and Q4.

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

And this concludes the conference for today. Thank you for participating. You may all disconnect.