AIX Inc (AIFU) 2010 Q4 法說會逐字稿

Thank you for standing by for CNinsure 2010 Earnings Conference Call. (Operator Instructions) I would now like to turn the call over to your host today for the conference is Ms Oasis Qiu, CNinsure Investor Relations Officer.

Good morning, welcome to our fourth quarter and fiscal year 2010 earnings conference call. Our fourth quarter and fiscal 2010 initial results were released earlier today and are available on our IR website, as well as on Newswire. Before we continue please note that the discussion today will contain forward-looking statements, made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

The accuracy of the 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 to the SEC, including our registration statement on Form 20F.

We do not undertake any obligation to update this forward looking information except as required under applicable law. Today the call will be hosted by our Chairman and Chief Executive Officer, Mr Yinan Hu and our Chief Financial Officer Mr Peng Ge. As we did before, I will go over the management's prepared remarks before turning the call to the management for the Q&A session. On today's agenda we will discuss the operational and financial highlights for the fourth quarter and fiscal year 2010 and share with you the business outlook for the next year.

Driven by the robust growth in the insurance industry CNinsure continued to deliver solid growth in the fourth quarter with total net revenue growing 26.3% to RMB 449 million and net income attributable to the Company shareholders growing 34.9% to RMB 126.5 million year over year.

Excluding non-recurring investment income incurred by the business combination achieved in stages net income attributable to the Company's shareholders for the fourth quarter grew 32.4% from the corresponding period of 2009, which exceeded the previous guidance of approximately 32%, year over year growth.

The financial performance for the fiscal year 2010 is also impressive. Compared with last year total net revenues were up 28.6% reflecting the impact of the ongoing fees based revenue scheme when net income attributable to the Company's shareholders grew 40.4% or diluted EPS grew 31.6% year over year.

Our three existing business lines maintained stellar growth momentum. CNinsure's premiums generated by us in the fourth quarter grew 20.9% year over year largely attributable to our extensive sales network and economies of scale. It is also encouraging to see that our overall P&C commission rate has been on a steady rise since the CIRC removed the older insurance commission rate cap in mid-2010.

Net revenues of our life insurance business for fiscal year 2010 recorded over 100% year over year growth and accounted for 32.8% of our total net revenues as compared to 20% a year ago. The life insurance business is one of our strategic focuses in the coming years. In 2011 we will remain focused on long term custom designed products with our corporate to corporate co-operation pilot and strengthening the sales of such products to enhance our profitability.

Meanwhile to cater to customers' needs for diversifying insurance protection and wealth management products, we also anticipate through F4 short term life and group life insurance business. This initiative coincides with the tightening on the bank assurance channel by the China Banking Regulatory Commission since November 2010, which we believe will bring great growth opportunities for CNinsure as the new regulation is likely to push insurers to seek alternative distribution channels for the sales of short term life insurance products.

In terms of the (inaudible) business recorded solid results with 25.9% year over year net revenue growth in 2010 and further increased our market share by leveraging on our strengths on the P&C insurance since we have included the outsourcing of all the insurance claims adjusting.

This ends our corporate to corporate co-operation with P&C insurance companies which have helped significantly drive the growth of our order insurance related claims adjusting business. In the meantime we also devoted lots of efforts to forging a high caliber, professional claims adjusting team to establish our leading competitive edge in the marine and cargo as well as other non-auto related P&C claims adjustment statement.

For the coming year we will focus on refining the business mix of our claims adjusting statement by putting more resources to develop non-auto P&C insurance claims adjusting business which is generally more profitable.

As for the growth strategies, going forward we will continue consolidating the insurance intermediary market through acquisitions to further entrench our leading position in the insurance intermediary sector. Meanwhile organic growth will remain to be the main driver of the Company's growth and we intend to maintain organic growth momentum by recruiting more sales agents and improving their productivity, which is expected to result in more contribution from organic growth going forward.

In recent years we have noted that insurance distribution channels are becoming more and more diversified and service oriented. Telemarketing and online sales which is more convenient, successful and efficient than the traditional ground distribution have rapidly gained popularity among consumers as the Internet becomes more popular in China.

By the end of 2010 the number of net users in China surged to 457 million. The Internet penetration rate increased to 34.3% and the number of online shoppers grew 48.6% year over year. Market survey results also showed that 8% of its respondents chose to purchase insurance online or through (inaudible), up from 3% in 2009.

However insurance premiums generated through telemarketing and online sales in China were only 0.67%, far below the over 25% in the US. It is our firm belief that telemarketing and online sales will continue strong growth momentum in the coming years and will become an increasingly important channel for the distribution of insurance products where we cater to people's new consumption habits but there are lower management expenses and costs for product distribution by 58% to 70% as compared to the traditional distribution channel. Also it is available to customers anywhere and anytime.

Therefore in anticipation of the rise of this new channel we have decided that ecommerce insurance will become a new strategic focus for CNinsure in the next five years in addition to the life insurance business.

Strategic investment will be made to reinforce our ecommerce platform and build up China's first online hub and center by incorporating our nationwide sales and service network into the in-house ecommerce platforms.

Looking back we are quite proud of what we have achieved in the past year and we are excited about the growth opportunities that lie ahead. However we have also realized that after three years of rapid expansion it is high time that we turn more attention to review and enhance our organizational infrastructure to lay a more solid foundation for the achievement of our long term goals for the next 10 years.

Therefore we set 2011 as the year of review and enhancement for CNinsure during which we aim to execute our growth strategies more prudently and enhance our capabilities in risk control to enable sustainable growth in the long run. The review and enhancement work will be mainly focused on the following four areas.

First to optimize profit models with the emphasis on high profitability and enhanced cashflows. Secondly to streamline our organizational structure to enable more effective and direct control over our wealth business units and thirdly to build a unified corporate culture to avoid internal friction and potential risk to organizational stability. Fourthly to strengthen organizational development at regional subsidiary level.

Looking forward to 2011 we are facing a lot of uncertainties from both inside and outside the Company such as our growing demand for talent due to our business expansion and organizational development. The potential increase in labor costs in light of the rising inflation expectation, possible change in domestic macroeconomic policies and the uncertainties that rise from the CRC's tightening of supervision on the insurance intermediary industry sector.

As our management team has consistently proved its execution capability to view the Company's success and glory against lots of challenges and turmoil we are confident that we will be still be able to tide over all those difficulties and challenges ahead to firmly entrench our leading position in the insurance intermediary industry.

Now I will turn the call over to my colleague, (inaudible), she will review our CFO's prepared remarks.

I am pleased to report solid results for the fourth quarter and full year 2010. The numbers I will refer to will be in RMB unless otherwise indicated. Total net revenue for the fourth quarter 2010 was RMB449 million, up 26.3% from the year ago quarter. Net for the fiscal year 2010 were RMB1,485 million, up 28.6% from 2009.

Total operating costs and expenses for the fourth quarter 2010 were RMB 316.4 million up 29% from the year ago quarter and that for fiscal 2010 were RMB1,053.4 million up 27.1% from 2009. Commissions and fees expenses for the fourth quarter 2010 were RMB 212.2 million up 19.8% from the year ago quarter and that for fiscal year 2010 were RMB708.4 million up 22.2% from 2009.

Selling expenses for the fourth quarter 2010 were RMB23.4 million up 52.3% from the year ago quarter and that for fiscal year 2010 were RMB73.6 million up 48.6% from 2009. General and administrative expenses for the fourth quarter 2010 were RMB80.8 million up 52.9% from the year ago quarter and that for fiscal year 2010 were RMB271.4 million up 36.2% from 2009.

As a result of the foregoing factors, income from operations for the fourth quarter of 2010 were RMB132.7 million up 20.4% from the year ago quarter and that for the fiscal year 2010 were RMB431.6 million up 32.3% from 2009. For the fourth quarter 2010 the operating margin was 29.5% compared to 31% from the year ago quarter and that for the fiscal year 2010 operating margin was 29.1% compared to 28.2% from 2009.

Interest income for the fourth quarter 2010 was RMB7.2 million up 0.6% from the year ago quarter and that for fiscal 2010 was RMB26.9 million down 19.1% from 2009. The effective income tax rate was 17.1% for the fourth quarter of 2010. compared to 24.1% from the fourth quarter of 2009. The effective income tax rate was 19.3% for fiscal year 2010 compared to 25.6% for 2009.

Net income attributable to the Company's shareholders for the fourth quarter of 2010 was RMB126.5 million up 34.9% from the year ago quarter. That for fiscal year 2010 was RMB422.3 million up 40.4% from 2009. Net margins for the fourth quarter 2010 were 28.2% as compared with 26.4% for the same period of 2009. That for the full year was 28.4% as compared to 26.1% for 2009.

Basic net income per ADS was RMB2.514 for the fourth quarter of 2010, representing an increase of 22.3% from RMB2.055 for the corresponding period of 2009. Fully diluted net income per ADS was RMB2.447 for the fourth quarter of 2010, representing an increase of 22.7% from RMB1.995 from the corresponding period of 2009.

For the full year basic net income per ADS was RMB8.816 up 33.7% from RMB6.594 for fiscal year 2009. Fully diluted net income per ADS was RMB8.529 up 31.6% from RMB6.481 for fiscal year 2009. As of 31 December 2010, the Company had RMB1.9 billion) in cash and cash equivalents.

Turning to our net income attributable to the Company's shareholders excluding non recurring investment income incurred by business combination achieved in stages and the estimated strategic expanding on ecommerce insurance to grow by approximately 20% to 23% for the first quarter of 2011 compared to the corresponding period of 2010.

This forecast reflects CNinsure's current and preliminary view which is subject to change. Now our CEO Mr Hu and our CFO Mr Ge will open the floor for your questions.

We will now begin our question and answer session. Our first question is Fawne Jiang from Brean Murray Carret & Co. Please begin.

Hi, this is Fawne Jiang from Brean Murray, Carret & Co. My first question is actually regarding your 2011 first quarter guidance. Could you give us some color? You know what is the growth assumption built in for the guidance regarding each of your segments, namely P&C, Life versus claim adjusting?

(interpreted) From a revenue perspective we are looking at 20% growth in revenue for P&C and the claims adjustment business. Then for Life we are looking for say the same growth for the first quarter. The overall business is going to grow like 25% in terms of revenue.

In terms of net income attributable to shareholders we are looking at 20% to 23% for the first quarter which has taken the following factors into consideration. Firstly is the high inflation expectation for this year, which has possibly put some pressure on our expenses and costs.

Secondly we have started 2011 as the year to review and enhance our business and organizational structure, which means we may need to recruit more high caliber talent to work for the Company. Thirdly the competition in telemarketing and online sales among insurance companies has been getting more and more intensified.

It will also impose some threats or difficulties for us to acquire insurance premiums. Therefore given the above factors from a more conservative perspective we have set the target for net income at roughly 20% to 23% for the first quarter.

Thank you, that is helpful. My second question is actually related to your investment in the ecommerce insurance platform. Could you - as far as we understand, I think a couple of insurance companies have been investing in their online or telemarketing platforms. Like for example, Ping An seems to be a very formidable competitor. I just wonder with the CNinsure's strategy to differentiate and what is the timetable for the platform?

(interpreted) We have actually planned to grow our ecommerce business more slowly or more steadily. However the competitive landscape in telemarketing and online sales has been evolving very rapidly and we have seen that a lot of the insurance companies have been investing heavily in this regard.

Therefore we intend to set up a new plan as for how we are going to develop this line of business for the next few years. The consensus that we have reached among the management that we are going to accelerate the development in this field and also the investment will be quite significant.

We have got to complete this new plan within two months and by then we will make a public announcement to the markets with details of these plans. Also the impact on our financial statements from this strategic investment for the next few years. Insurance companies have also made a lot of massive investments in developing their ecommerce platforms.

For example like Ping An and PICC and other P&C insurance companies have also been following suit. We expect to see quite intense competition among insurance companies in 2011 and 2012. For CNinsure we have actually drawn on experience from mature business models from developed countries like the UK and the US.

The idea for us is to launch a price comparison website whereby consumers can find very convenient price quotes from different insurance companies. It is not only just a comparison of prices but also a comparison of services and also brands from different insurance companies.

So instead of logging on the different websites of different insurance companies people can find the direct price quote of price comparisons from various insurance companies. So this is the whole idea of our price comparison website that we are going to build.

Thank you that is helpful. My last question is actually regarding your operating expenses for 2011. You mentioned that you are seeing increasing labor costs, also other expenses apart from inflation pressure. On the sale and marketing side you may increase your advertisement expenses as well. I just wonder what is management's guidance on the operating expenses level in 2011?

(interpreted) Firstly our sales and marketing expenses will be mainly spent on our ecommerce platform. As we mentioned we're going to launch our official plan, detailed plan within two months, so by then we will also make known to the public how much the sales and marketing expenses will be needed.

Secondly, because of the high inflation expectation we do see pressures on our labor costs and the tendency in other industries in China is about 10% increase on labor costs and we are also expecting approximately 10% to 15% increase in the labor costs.

Thirdly, we have seen that in the past few years there are a lot of improvements need to be done to our organization development and construction at our regional subsidiaries levels and this will also result in an increase in the number of regional managers in the subsidiaries, and that overall we expect that the operating expenses and revenue ratio will be approximately 23% for 2011.

Thanks and congrats on the solid quarter.

Our next question is Peter O'Brien from Standard Chartered Bank. Please begin.

Good morning everyone and congratulations on good results once again.

I have three questions. Firstly, given the Q1 guidance, just to clarify, have you now dropped the previous sort of full year guidance of 30% for 2011?

This is your first question?

Yes.

(interpreted) Yes, as I have mentioned, I said just now we face a lot of uncertainties in 2011 from both inside and outside which will result in an increase - a pressure of increase in our costs. We expect like 20% to 23% for first quarter but that is based on a relatively high base in the first quarter of last year, so in terms of absolute number I think 20% to 23% growth is still quite a satisfactory number for us.

Secondly, we have experienced three years of rapid growth, but we do realize that if the Company continues such rapid growth momentum there might be some potential risk to the Company's business, the Company's stability, therefore we address our strategies lightly and we intend to enhance - to do more improvements or enhancement work to our internal organization structure and we defined 2011 as the year for review and enhancement which will mainly focus on four areas, in order to make sure that the Company - in order to make a more solid foundation for a more sustainable growth of the Company for the long-run.

Firstly, the first area will be on optimize our profit model and to enhance profitability and cash flow, and secondly we're going to streamline or simplify our organization structure to avoid any - and then thirdly is to build a unified cultural or value propositions in the Company to avoid any internal friction; to calm the stability of the organization. And fourthly we will also do a lot of work to enhance our organization development within our subsidiaries at below the provincial levels.

Okay, thank you. Second question - a brief one - what is the current status of the share buy-back? I think the results announcement just gives the status at the end of last year?

(interpreted) The window period for trading of CNInsure shares - they are actually closed 31 December, so we did not buy back any additional shares after that.

Okay, thank you, and the final question - you mentioned the improving trends of the P&C commission rate. Please could you quantify that? Thank you.

(interpreted) The P&C commission rate has increased from approximately 17% in the third quarter to approximately 18% in the fourth quarter. But one of the factors that contribute to the growth of our commission rate in the first quarter is actually the recognition of corporate-to-corporate performance based bonus on the P&C side, so we expect this increase could be a short-term or temporary situation. For the next couple of quarters we expect the commission rate will remain flat at roughly 17% to 18%.

Okay, that's great. Thank you very much.

Our next question is Joe Kwong from CICC. Please begin.

(spoken in Chinese)

(interpreted)

This is Joe Kwong from CICC. He has one question only and the question is that last year there have been a lot of rumors, in particular on the accounting of the share incentive rise on the large side. He understands the fourth quarter results were not audited yet. He would like to know the progress of our auditing by our auditor.

Our CFO would like to take this question and his answer is that yes indeed there have been a lot of rumors and we have done a lot explanation and clarification to the markets in detail at the end of last year and we have put all this explanation and clarification in written forms and handed the report to our auditor, so our auditor has a true understanding of this matter.

They have also conducted independent investigations and interviews among our sub-agents at the end of this year - starting from the end of last year - however the results or conclusions of the auditing results can only be showed when they have completed the results on our full year results by then end of April.

Right now our auditor has been conducting onsite auditing already and the process - the staff compliance auditing process is also in compliance with our preset timetable. We are quite confident that we are able to file the annual report for last year to SEC in accordance with this timetable.

(spoken in Chinese)

Our next question is Charlie Cho from BofA Merrill Lynch. Please begin.

(spoken in Chinese)

The first question is about the progress of our four new profit centers and also what is the impact from cash flow perspective?

(interpreted) Our four profit centers - i.e. the insurance brokers business and ecommerce insurance business and consumer credit brokerage business and wealth management business has been progressing as we expect. We have also mentioned before that, but we expect these four new profit centers will not contribute immediately to the Company's results until maybe two to three years later.

As for the consumer credit broker business or i.e. the [CFFG], to be honest their business has been impacted by the changes in the macroeconomic policies, particularly the tightening of the credit policy starting in fourth quarter of last year. But we expect these changes in policy, the impact will be temporary. From a long-term perspective we still believe that four of our profit centers still enjoy great growth (inaudible).

We need to emphasize one of the profit centers - which is the ecommerce insurance business - we have actually, we plan to build this new profit centers wealth. Ecommerce is only one of the four business centers, but right now, after two quarters of market surveys and judgments we have actually decided out of the eight profit centers for the insurance business and also the life insurance - ecommerce and life insurance will be two of our strategic focus and we plan to concentrate, to put more resources on developing our ecommerce platform - as well as the life insurance business.

(spoken in Chinese)

The second question is that regarding our acquisition strategies - as he understands acquisition is still the major driver of our growth, however since CNInsure has decided to terminate cooperation with Chengdu Jingshi, how we are going to move forward our acquisitions and how to avoid the risk (inaudible) by acquisitions.

(interpreted) All our peers, including AON, Brown and Brown, all have adopted acquisition as one of their strategies to grow their business. Take AON for example, they have done over 220 acquisition cases in the past 20 years, therefore in the insurance business acquisition is actually an inevitable way for us to enhance our competitiveness and to grow rapidly.

In China, due to the early stage characteristics of this industry. The acquisition involves a lot of risk and CNInsure has terminated the cooperation with Chengdu Jingshi - CNInsure may have to face a lot of uncertainties in acquisitions in selecting the acquisition targets and also maybe face more risk in acquisitions.

Therefore when we do acquisitions we're going to be more prudent and more cautious and we will be more selective in terms of selecting the acquisition targets and more emphasis on select the high quality companies. Therefore it's likely that the pace of our acquisitions will be slowed down.

Our next question is [Jenny Tsang from TMO]. Please begin.

Congratulations for another great quarter. I have one question regarding the claim and according to your press release it looks like claim is the only area we see professional reductions, and the professional numbers - actually to professional claim adjuster numbers has dropped about like less than 100 professionals in this area.

May I know what's the growth rate for the claim area and what's your expectation for the future? Does that mean actually your claim actually will be - the growth of your claim will be hold by the professional numbers?

(interpreted) The reduction is mainly related to our auto insurance claims have dropped in professionals and generally these professionals they have to go through several training stages before they are formally admitted to the Company's systems, and those that are not qualified during the training stages will be eliminated from our professional sales force, hence the reduction.

It has also something to do with the strategy in growing the claims adjusting business and we actually intend to refine the business mix of our claims adjusting business and hope that marine and cargo and now auto P&C insurance business will account for a bigger proportion in the overall claims adjusting business.

Then for the auto insurance claims adjusting business we do not really encourage them to grow too aggressively because the growth of this business is really related - has much to do with the skills of the professionals. We would not like the aggressive growth. It will affect our service quality and also our relationship with our major clients, and therefore I would like to focus more to enhancing the personal skills of our professionals before launching a more aggressive growth.

In terms of the growth, the claims adjusting business has been slowed down a little bit, but compared to the overall industry, the claims adjusting industry, CNInsure claims adjusting business is still the fastest growing company, particularly as compared to our major competitor - the number one claims adjusting firms in China - we are still growing faster, much faster than this company, and the gap between CNInsure and this company has been further decreased.

From a long-term perspective I'm still quite optimistic about the growth prospect of this business line. For the first nine months of last year the industry, the claims adjusting industry grew about 5.76% while our claims adjusting firms have been growing 25.89%, so it has been growing much faster than the overall industry.

However, starting from fourth quarter, I actually demanded this business line to slow down the growth and to see the growth in quality rather than in sales volume and numbers and I would like it to focus more in increasing its profitability and also to enhance its professional skills. Therefore, for the next quarters I am looking at 20% growth. This will be a comfortable number for me.

Our next question is Carolyn Qiu from Oppenheimer. Please begin.

Hi, this is Carolyn Qiu calling on behalf of Katherine Lu. Thank you for taking my question. My first question is regarding your guidance again. You talk about 25% top line growth in first quarter 2011. Can you talk about how much that is coming from organic growth and how much is coming from acquisition?

(spoken in Chinese)

Hey Oasis, my question is regarding revenue growth - 25%

Yes, I see.

(interpreted) The revenue growth will be mainly coming from organic growth. We do not have any acquisition projects in the pipeline for first quarter.

Great, also is there any reason you're not giving out a full year guidance for 2011?

(interpreted) As we mentioned, it will take us one to two months to complete our plans for developing the ecommerce business and this plan will have a major impact on our financial performance - financial results for 2011 and also for the next few years, therefore we would like to wait until we get this plan done before we announce what the impacts and what's the outlook for 2011.

My next question is - you mentioned that there's a new regulatory change that limited the scope of insurance product sales in commercial banks, did you see any improvement in your life insurance business related to this change?

(interpreted) Before this year, our life insurance revenues mainly come from long-term traditional life insurance products and we do not really worry much what the bank insurance channels, therefore this new regulation has had no, any major impact on our life insurance business yet.

(interpreted) But we also noticed a trend among insurance companies that they're paying more and more emphasis for the sales of long-term life insurance products, and we did see that life insurance companies are providing more favorable terms to insurance companies and pay more attention to the uninsured.

Our last question is Elaine Chen from JP Morgan. Please begin.

Hi. I have two questions. The first is actually related to commission rate for the non-life operation. I know that the management is still in the process of finalizing the plan for ecommerce platform, but can you give me some indication how will this impact the commission rate for non-life, given that non-life still accounts for the bulk of your operation? Will the 17% to 18% commission rate talked about be maintained or should we expect a lower rate with the launch of the ecommerce platform?

And the second question is actually related to the dividend. Given the present of the share buy-back scheme and the possible slower growth in net income, how would that impact the dividend payout policy for CNInsure?

(interpreted) We have two channels for distribution of non-life insurance products. One is the traditional channel that relies on sub-agents and the second one is emerging ecommerce product channels. And these two channels basically target a different group of customers for those that are less price sensitive and more service focused they will actually choose to - they would prefer to choose to renew their insurance premiums through sub-agents, particularly because auto insurance is insurance that requires a lot of services, particularly after the accidents do happen to them.

We still believe that the traditional channels will account for a significant proportion in the markets and for the next few years we still 20% growth in this traditional business for CNInsure. CNInsure's market share in this market's still pretty low and the growth potential is still huge. For commissions we expect it will be stabilized and even has a chance to increase lightly and for the ecommerce sales channels it will be mainly used for - it will be mainly targeted at the new generation and those people that are more price sensitive.

We also expect this channel will pick up its importance, gaining more importance in the markets, but still we don't expect there will be any direct conflict between these two channels given the low penetration rate in China.

This business - one of the advantages of this ecommerce business - there will be no time limits or no geographic limits for development of this business and once it starts to take off we expect there will be explosive growth in this business line.

(interpreted) The company has no fixed dividend policy for the past two years. Whether or not we're going to declare dividend will depend on the growth opportunities that CNInsure is facing and also our cash position at that time, so we will still make judgments on depending on two (inaudible) before we decide whether or not to declare dividends in the future.

Thank you.

Thank you for your participation in CNInsure conference. There will be a webcast replayed within an hour. Please visit CNInsure IR website at www.CNInsure.net under the investor relations section. Thank you all for attending. You may not disconnect and goodbye.