AIX Inc (AIFU) 2010 Q1 法說會逐字稿

Thank you for standing by for CNinsure's first quarter 2010 earnings conference call. (Operator Instructions). For your information, this conference call is now being broadcast live over the Internet. Webcast replay will be available within an hour after the conference is finished. Please visit www.cninsure.net under the Investor Relations section. Today's conference is being recorded. If you have any objections you may disconnect at this time. I would like to turn the meeting over to your host for today's conference call, Ms. Oasis Qiu, CNinsure's Investor Relations Officer. Ms. Oasis Qiu, please begin.

Okay, I will turn the call to Mr. Hu. Welcome to our first quarter 2010 earnings conference call. Our first quarter 2010 earnings results were released earlier today and are available on our IR website as well as on the newswires.

Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause our actual results to differ materially from those projected or anticipated. Such risks and uncertainties include but are not limited to those outlined in our filings with the SEC, including our registration statement on Form 20-F. We do not undertake any obligation to update this forward-looking information except as required under applicable law.

Today here with me are our Chairman and Chief Executive Officer, Mr. Yinan Hu, our Chief Financial Officer, Mr. Peng Ge, and our Chief Operating Officer and Chief Information Officer, Mr. Feng Jin. Now I will turn the call to Mr. Hu for the opening remarks.

(Interpreted). Thank you for joining us on today's conference call. As we did in our previous earnings conference call, our Investor Relations Officer, Ms. Oasis Qiu will walk you through the Company's first quarter 2010 operating and financial results and discuss its business outlook on behalf of the management. Mr. Ge, Mr. Jin and I will take your questions in the Q&A section.

Thank you Mr. Hu. Thank you for all joining us in today's conference call. Against the backdrop of the industry wide product mix restructuring and the CIRC's call for insurers to change the [process] of development, CNinsure has delivered another quarter of success, with the strong top line and bottom line growth, which once again exceeded our previous guidance.

Total net revenues recorded 30.6% year-over-year growth and net income attributable to the Company's shareholders grew by 47.9% year-over-year. If excluding the net effect of the acquisition of additional equity interest in an insurance agency, net income attributable to the Company's shareholders grew by 31% year-over-year. This strong results marks a inspiring beginning for our journey in 2010.

In the first quarter we have seen solid growth across all our business lines, with Life Insurance business outpacing the other business lines. Revenues from our Life Insurance business grew by 156.7% year-over-year and now accounting for 31% of our total revenues as compared to 20% by year end of 2009.We were also encouraged to see improvement in the gross margin of our Life Insurance business, attributable to the increase of volume based performance bonus and the accumulation of renewal commissions.

Our P&C insurance business in terms of the insurance premium generated by CNinsure, grew over 30% year-over-year, although the revenues of our P&C insurance business declined, slowed down a little bit due to the adoption of our fee based revenue scheme as well as the decline in the auto commission rate. But we would like to mention that the decline in the auto commission rate has no impact on the overall gross margins of our P&C business. Excluding the impact of the fee based revenue scheme, the gross margin of our P&C business in the first quarter was almost 2% higher than that of last year.

In addition we would like to mention that the CIRC recently issued a circular that requires non-interference by the provincial bureaus over insurance companies' autonomy in business operations, including in setting commission rates paid out to insurance intermediaries. We expect that policy will help stabilize the commission rate that we receive from insurance companies on the P&C side.

As regards our claims adjusting business, in the past two years, with the support of CNinsure's standardized operating platform, our claims adjusting business, (inaudible), has achieved great synergy with our existing business, driven by both the successful business integration among four of our affiliated claims adjusting firms and by leveraging the business relations that we have developed with insurance companies through the distribution of P&C insurance products. In the first quarter our claims adjusting business still maintained strong growth momentum with 70.2% year-over-year growth in terms of revenues. And the gross margin also increased to 48% in the first quarter from 42% for the same period of last year.

The past decade has witnessed the ups and downs of China's insurance intermediary sector and the sowing stage of CNinsure. After a decade of development, we have seized the first mover advantage to establish scale and build up a strong sales force that can hardly be (inaudible).

Recently we have achieved our fifth strategic partnership agreement at the Group level with the PICC P&C Company, the largest P&C insurance company in China, and became the first insurance intermediary that has established strategic partnerships with China's top three P&C insurance companies.

We expect this agreement to strengthen our P&C and claims adjusting business. And more importantly, on the one hand the signing of such strategic agreements with the leading insurance companies demonstrates our sales capability is well recognized by them. On the other hand, it signifies the deepening division of labor and the more important role insurance intermediaries have been playing in the insurance market.

We aim to continue to leverage our operating platform to build the first insurance supermarket that offers a broad range of products and services to meet customers' needs. We strongly believe that a common operating platform could create a win-win situation for both the upstream product suppliers and downstream distributors, by reducing their operating costs and improving their efficiency. Since our IPO in 2007, we have leveraged lots of sources -- resources to build such an operating platform and expand our sales and distribution network.

The deepening division of labor in the insurance industry today has presented insurance intermediaries with unprecedented opportunities. Currently, China is undergoing an industrial restructuring with the shift of focus from primary sector and the industrial sector to the service sector, which will lead to a wider opening of the insurance and financial service market.

Looking ahead we also see enormous opportunities in the consumer financial service sector, driven by China's continued and steady economic growth. Building on our insurance leadership in the insurance intermediary sector and with the management's insight and their strong execution capability, we are confident that we will be able to capitalize on these favorable opportunities by developing new distribution channels and diversifying our product and service offerings so as to maintain a stable and sustainable growth in the long run.

Now I would like to walk you through the financial performance for the first quarter of 2010 on behalf of our CFO, Mr. Peng Ge. The numbers I will refer to will be in CNY unless otherwise indicated.

I am pleased to report solid financial results for first quarter 2010. Total net revenues for the first quarter 2010 were CNY282m, up 30.6% from the year ago quarter. Total operating costs and expenses for the first quarter 2010 were CNY209.3m, up 23.1% from the year ago quarter. Commissions and fees expenses for first quarter 2010 were CNY141m, up 15.9% from the year ago quarter. Selling expenses for the first quarter 2010 were CNY14.5m, up 86.5% from the year ago quarter. General and administrative expenses for the first quarter 2010 were CNY53.9m up 32.7% from the year ago quarter.

As a result of the foregoing factors, income from operations for the first quarter 2010 was CNY72.7m, up 58.3% from the year ago quarter. For first quarter 2010, operating margin was 25.8%, compared to 21.3% for the year ago quarter. Interest income for the first quarter 2010 was CNY6.3m down 35.7% from the year ago quarter. Income tax expenses for the first quarter 2010 was CNY23m, up 48.3% from the year ago quarter. The effective income tax was 25.7% for the first quarter 2010 compared to 27.4% for the corresponding period of last year.

Net income attributable to the Company's shareholders for the first quarter 2010 was CNY67.3m, up 47.9% from the year ago quarter. Net income attributable to the Company's shareholders excluding the investment income and deferred tax rate expense in relation to the acquisition of the additional equity interests in Hebei Fanlian was CNY59.7m for the first quarter 2010 up 31% from the year ago quarter. Net margin for the first quarter 2010 was 23.9% as compared with 21.1% for the same period of 2009. Basic net income per ADS for the first quarter 2010 was CNY1.476 up 47.9% from CNY0.998 for the year ago quarter. Fully diluted net income per ADS for the first quarter 2010 was CNY1.429 up 43.3% from CNY0.997 for year ago quarter.

As of March 31, 2010, the Company had CNY1,346.2m in cash and cash equivalents.

CNinsure expects its net income attributable to the Company's shareholders to grow by approximately 35% for the second quarter of 2010 compared to the corresponding period of 2009.

Now our CEO, Mr. Hu, our CFO, Mr. Ge, and CIO and COO, Mr. Feng Jin, will open the call for your questions.

Thank you. We will now begin our question and answer session. (Operator Instructions). Our first question is from Sean Jiang with Roth Capital.

Hello everyone. This is Sean Jiang from Roth Capital. (Spoken inforeign language). So my first question is regarding the strong growth in your Life Insurance segment. Now I see the number is about 31% of total revenue. So how much of that revenue is contributed from Beijing Datong?

And what's the major reason for this strong growth in the Life segment?

(Interpreted). The strong growth of our Life Insurance business in the first quarter is attributable to the accumulation that we have done over the past two years, particularly in terms of our efforts to assemble our sales team as well as our effort to train, continuously train our sales agents as well as to recruit top talent into our network.

And if you would like to break down the contributions from our business segments, Life Insurance business segment, Datong contributed CNY37m revenues in the first quarter, almost 10 times bigger than the same period last year. But of course last year that was a very low base which was only CNY3m in revenues. And our first Life Insurance business segment also achieved very strong growth with over 60% growth year-over-year and that was about CNY50m revenues.

And the reason for strong growth first of all was attributable to our stable strong sales team as well as the accumulation of renewal commissions as well as the performance bonus. As you know we have about 70% of our life insurance policies with those long term protection oriented insurance, life insurance products. And this kind of products can bring us recurring commission rates for on many years to come in the range, which can be in the range of 15 to 20 years.

Okay, thank you. My second question is on the P&C side. So excluding the impacts of the adoption of the fee based platform, what's the actual growth rate for P&C segment if you compare on the apple to apple basis? (Spoken in foreign language).

(Interpreted). As we mentioned just now in the first quarter in terms of insurance premiums our P&C insurance business it grew by 32%. And the growth in revenues slowed down in the first quarter due to first of all the adoption of the fee based revenue scheme and secondly, the decline in our auto commission rates, the commission rates for auto insurance.

On the P&C side, the commission rates that we received from insurance companies was about 16% in the first quarter and the gross margin was 57%. And then on the Life side, for the first year the commission rate has been improved from last year. In the first quarter it was 68% compared to 65% in the year ago and the gross margin was 38%.

Okay, thank you. My last question is regarding your, the new marketing strategy you announced last quarter. You mentioned that you're going to launch online marketing and a telemarketing strategy. Can you provide us more some update on this initiative?

We aim to complete the groundwork building for launching these two projects. We are in the process of promoting these two programs.

Okay, thank you. That's all my questions.

Thank you. Our next question is from CICC, [Jiao Xiuing].

(Spoken in foreign language).

The first question coming from [Xiuing] from CICC and the question was about the contribution from the CFSG, the consumer credit brokerage company that we acquired last year and whether this company has been impacted by the tight credit policy that China is implementing.

(Interpreted). In the first quarter CFSG contributed CNY3.5m net income to our investment income. And their performance has actually up to our satisfaction. From the macro perspective it was indeed that the housing market was impacted by this tight credit policy but the CFSG, since their market share was still tiny, the impact on them was largely offset by their rapid expansion to grab market share from other companies. And they would like -- this year they plan to implement a kind of policy that more emphasizes charging fees from the company -- the people, the individuals who would like to ask for the loans.

(Spoken in foreign language).

The share-based compensation that we recorded in the first quarter was CNY5m.

Okay.

(Interpreted). We have granted three options in total since our IPO and in the first quarter we recorded CNY4.5m share-based compensation expenses in the first quarter. And we expect that expenses will increase to CNY6m each quarter.

(Spoken in foreign language).

Thank you. (Operator Instructions). Our next question is from RCM, Terence Law.

(Spoken in foreign language).

You mentioned that there was a decline in our commission rate of auto insurance and this gentleman asked whether -- what's the impact on our gross margins on the P&C side and what's our expectation for the full year.

(Interpreted). The decline in the auto insurance commission rate can be traced back to 2008, November 2008 when the CIRC issued the regulations to tighten control over the P&C insurance market including tightening control over the commission rate -- commission payout ratios by insurance companies to insurance intermediaries.

So in the first quarter that kind of regulations have been fully implemented and if you look at the commissions that we received from insurance companies, that commission actually includes, composed of three parts. Including the basic commissions for the -- which we actually pass on to individual sales agents as the cost. And it also includes the volume-based bonus as well as the quality-based bonus. And the decline in the overall auto insurance commission rate comes from the decline in the basic commission for sales agents, which means we will offset that reduction by paying less to our sales agents. So in the first quarter we have actually seen an improvement in our gross margin.

And looking ahead, the CIRC has recently issued a kind of (inaudible) that their local bureaus should not participate or should not intervene the insurance companies' decision-making in terms of setting commission rate paid out -- commission payout ratios. And therefore we expect that the decline of the auto insurance commission rate will reach the bottom very soon and commission rate of CNinsure should be able to stabilize. Thank you.

Thank you. Our next question is from (inaudible) from [Michelle Lung].

(Interpreted). First of all congratulations for a great quarter. (Spoken in foreign language).

And Michelle's quite interested in knowing about the outlook of our business. And we know that the consumer financial business is the business line that we newly add and she would like to note when this business line will contribute more significantly to our overall net income or revenues.

(Interpreted). CFSG, the consumer credit brokerage company that we acquired recently, has been operating in the consumer financial sector for over 10 years and they started to record an explosive growth since 2007. We acquired about 20.58% equity interest in this company in late 2009 and we expect this company, their strong growth momentum can be maintained. The target of their management was to maintain a growth rate of over 40% for the years to come and we believe that we should be able to balance it from this strong growth momentum. And we would like to and we intend to further increase our stake in this company but as things opened this still subject to the further negotiation with their management team.

(Spoken in foreign language).

We acquired additional equity interests in two insurance agencies in April and Michelle would like to know whether she can expect the same strong growth she has seen in Datong.

(Interpreted). Datong is a national operating insurance agency primarily engaged in life insurance business while these two insurance agencies they primarily engage in P&C insurance distribution and they are regional players. But in terms of growth you can expect strong growth from these two companies as well. And we expect they will be the largest players in their respective regions.

(Spoken in foreign language).

Thank you. (Operator Instructions). Our next question is from RCM, Terence Law.

(Spoken in foreign language).

Cathay Capital, who is our principal shareholder, recently announced the stock distribution to their shareholders as dividends. And this gentleman would like to know whether the same thing will happen to another private equity investor of ours.

(Interpreted). We think that there are several reasons for Cathay Capital's distribution of the stock to their shareholders. First of all this Cathay Investment Fund was established in 1992 and the firm invested in CNInsure in 2001. That means that this firm has far exceeded their investment cycle and just has reached the stage of winding down the shares. And secondly according to Cathay Capital there was a change to the taxation, US taxation rules and if they do not distribute the stock sor do not return the investment profits to their shareholders there might be a burdensome taxation issue incurred.

And thirdly, and also according to Cathay Capital over 60% to 70% of the shareholders of this Cathay Investment Fund are long-term shareholders and they would like to have the opportunity to be long-term shareholders of CNInsure directly and so this stock distribution also reflects their opinion.

And we have also talked with CDH to ask them their intentions about the shares that they're holding and their answer is that they would not distribute the dividends -- they would not distribute the stocks to their shareholders and they don't have any intention to sell down the shares on a massive scale.

And we believe that it is unlikely to have the same thing happening to CDH since their investment -- they are at a very different investment cycle as the Cathay Investment Fund. CDH invested in CNInsure in 2005 so they have not yet reached the stage of winding down. And the Chairman of CDH is still the director of CNInsure's Board and he has been very supportive to CNInsure's long-term growth strategy. Thank you.

Thank you. (Operator Instructions). There are currently no questions. Ms. Oasis Qiu, would you like to have any closing comments?

No.

Thank you. Thank you for all your participation in CNInsure's conference. There will be a webcast replay within an hour. Please visit CNInsure IR website at www.cninsure.net under the Investor Relations section. Thank you all for your attending. You may now disconnect. Goodbye.

Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.