AIX Inc (AIFU) 2014 Q3 法說會逐字稿

Thank you for standing by for CNinsure's third quarter 2014 earnings conference call. (Operator instructions). After the management's prepared remarks, there will be a question and answer session. (Operator instructions).

For your information, this conference call is now being broadcasted live over the internet. Webcast replay will be available within three hours after the conference has finished. Please visit CNinsure's IR website at ir.cninsure.net under the events and webcasts section. Today's conference call is being recorded. (Operator instructions).

I would now like to turn the meeting over to your host for today's conference, Ms Oasis Qiu, CNinsure's Investor Relation Officer. Thank you, please go ahead.

Good morning. Welcome to our third quarter 2014 earnings conference call. The earnings 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 US Private Securities Litigation Reform Act of 1995.

The accuracy of those 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 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.

Joining us today is our Chief Executive Officer, Mr. Chunlin Wang, and Chief Financial Officer, Mr. Peng Ge. They will walk you through our financial and operating performance in the third quarter 2014 and take your questions after the prepared remarks.

Now I will turn the call over to Mr. Wang.

(interpreted) Hello everyone. Thank you for joining us on today's call. On today's agenda, I will give you an update on financial highlights for the third quarter 2014 and share with you our O2O strategy developments. Our CFO, Mr. Peng Ge, and I will take your questions after this.

Just to start with, an overview on our financial performance in the third quarter. Our topline grew 25.9% year-over-year hitting a record high since the Company started its strategic transformation two years ago. The stellar growth which far exceeded our guidance of 15% also outpaced industry growth of 13.4% in terms of insurance premiums during the third quarter, partially reflecting the contribution from our O2O strategy.

On the expense front, while there was 135.6% year-over-year increase in the operating expenses related to our online and mobile initiatives, the overall expense ratio was 3.1 percentage points down from the third quarter last year and slightly up sequentially, attributable to better expense control after our organizational restructuring last year and the continued decrease in share based compensation expenses. Adjusted operating income that excludes expenses incurred by our online and mobile initiatives grew 98.7% from the year ago quarter and diluted EPS grew by 19.3% year-over-year.

Looking at each of our business lines, insurance agency business saw 18.2% year-over-year growth in net revenues, mainly driven by strong growth of our P&C insurance agency business, partially offset by the decrease in life insurance agency business.

Our P&C insurance agency business reported 22.4% net revenue growth from the third quarter last year, mainly driven by its 26.9% premium growth which far exceeded the 15% premium growth in the P&C insurance industry. The (inaudible) growth reflected increasing contributions from CNpad applications.

Net revenues of our life insurance agency business for the third quarter 2014 declined by 7.2% from the year ago quarter owing to the decrease in commissions from our short term insurance business and recurring business. The drop in short term insurance business was mainly due to reclassification of certain short term insurance business from life insurance agency segment to P&C insurance agency segment as a result of our organizational restructuring and the decrease in the current commissions was ascribed to the decline of new policy sales over the past two years.

However, we were encouraged that commissions from the sales of new long term life insurance policies grew 15.9% from the third quarter last year and that the overall gross margin of our life insurance business slightly improved year-over-year.

In the third quarter net revenues from our claims adjusting business grew 9.5% from the year-ago quarter. The growth slowdown was mainly attributable to single digit growth of our non-auto insurance related business, affected by a decrease in the number of settled cases of such business during the quarter. But auto insurance related business maintained a double digit growth, as non-auto insurance related business, which generally has a higher profit margin, decreased as a percentage of the total claims adjusting business during the quarter. The overall gross margin of our claims adjusting business jumped slightly from the year-ago quarter.

Our insurance brokerage business continued strong growth momentum into the third quarter, with net revenues up 215.6% year over year, accounting for 12.5% of our total net revenues. As a result of our efforts in exploring new opportunities and expanding this business over the past few years, as well as the low base, we have been maintaining a (technical difficulty) year. Looking forward we are still confident in this growth in the future.

Now, let us look at our online and mobile initiatives. As we continue pushing forward our O2O strategy, we have seen exciting progress in our online and mobile initiatives. The CNpad application was made available for free download this May. We were excited to see [double] sequential growth in the number of downloads and active users. As of September 30, 2014, over 40,000 copies of CNpad app have been downloaded and activated and there were about 22,000 CNpad app users.

During the third quarter, revenues contributed by CNpad app reached RMB77 million, up 618.5% and 49.3% year over year and quarter over quarter, respectively, accounting for 14.2% of our total net revenues as compared to 2.5% in the third quarter last year. The CNpad app was also well accepted amongst sales agents outside CNinsure. Of the total downloads of CNpad app as of September 30, 2014, 39% were downloaded by external sales agents.

In terms of product offerings, we have added auto insurance products from 33 insurance companies on CNpad. Nearly 300 non-auto P&C insurance and life insurance products are also available. To facilitate more sales transactions, we have successfully enabled electronic data interchange, or EDI, with six insurer partners and are in the process of building up such EDI connections with other eight insurance companies. Which not only demonstrated that our insurance partners high recognition and (inaudible) in CNinsure, but also help create stronger competitive barriers for our proprietary mobile sales support system.

Now let's turn to eHuzhu. We launched eHuzhu in early July and in the last (inaudible) since the launch as of September 30, 2014, the number of paying members of the platform has exceeded 140,000. The rapid growth reflects people's concerns over their vulnerability to critical disease or [accident], given the [rise] in pollution and stress in the modern society.

Therefore we are inspired to launch eHuzhu, a mutual aid platform that offers people an affordable, convenient and effective way to cope with certain unexpected, unfortunate events. In addition, it also opens up an opportunity for us to accumulate a large number of loyal customer base, which would expect to monetize in insurance, health care or financial service area.

On August 28, we launched chetong.net, the first public auto insurance after sales service platform in China. The platform is dedicated to aggregating service representatives across the nation to offer location based auto services, such as car accident inspections, loss assessment, emergency assistance, quick repair and valet driving.

We will push forward the development of chetong.net in two phases. During phase one, chetong.net will serve as the claims service provider for insurance companies. When it comes to phase two, the end consumers will be able to request service directly via chetong.net applications.

So far we have been talking with several insurance companies or corporations while focusing on attracting service representatives to join the platforms. The number of service representatives who have signed up on the platform was growing much faster than we expected. Within one month since the launch, the platform has aggregated over 3,000 service representatives, which is twice the number of our existing claims adjusters.

As the regulator encourages further market opening and more innovation, we are taking advantage of the opportunities arising from the market driven reform in the industry and new technology to build a leading offline to online insurance sales and services platform in China.

Based on the progress we have achieved so far, we believe that we are on the right track to choose our strategic growth and we have widened our gap with our competitors. We will continue to invest in the IT infrastructure and marketing related to our online initiatives, which may impact our bottom line in the near to medium term. But we have confidence that the investment will bring decent returns to shareholders over the long run.

We expect our topline growth in the fourth quarter of 2014 will be around 20%. Thank you.

Now, our CEO, Mr. Wang, and CFO, Mr. Ge, will open the floor for your questions.

(Operator instructions).

Your first question comes from the line of Arthur Hall from Hall & Co. Go ahead, please.

Thank you. At a recent presentation in Hong Kong, you projected some dramatic increases in your online revenues and total revenues of about RMB4 billion in 2017. Also projecting that your operating margin would increase from about 2% this year to about 20% in 2017. That is very dramatic. Obviously the market doesn't believe that or the stock wouldn't sell where it does.

Could you explain a little bit more how you can get to get that operating margin and when we'll start seeing that? Thank you.

(interpreted) As we have wind up our online and mobile initiatives and we believe that we have much more stronger capability to consolidate the market resources. We expect that starting from 2015 we will be able to grow over 30% year-over-year in terms of top line, and that means that we'll be able to double our revenue within three years; that means by 2017. We think that should be an achievable target.

Then in terms of the operating margin we do not give any specific guidance during the strategy day, but we do believe that the operating margin will improve over time and also the cost ratios. The pace of the growth of the costs will be much slower than the pace of the growth of our revenue.

So I would expect then you would see some improvement in the operating margin in 2015.

(interpreted) Yes, we expect so.

All right, thank you.

Thank you.

Thank you. (Operator Instructions) Thank you, now this next question comes from the line of (inaudible) from (inaudible), go ahead please.

(interpreted) This question is related to the increase in short term investment. He would like to know what kind of short term investments are exactly.

(interpreted) The Board has authorized us to allocate a certain amount of our capital in short term investments in investments that have a low risk and relatively (inaudible). The amount is about 1 billion in total, the amount that we have been authorized. The increase of the short term investments amounting to 117 million is mainly due to the increase in this kind of short term investments.

(spoken in foreign language)

(interpreted) The short term investment mainly consists of trust products -- collective trust products. The yield is about 10% and these products are issued by trust companies. And then it also contains short term interbank savings products issued by asset management companies, and this kind of product generates a return of 7% -- annualized return, 7%.

(spoken in foreign language)

(interpreted) Before we made a decision to invest in this type of product we have a done a thorough survey and an assessment on the risk related to these kind of products. For the trust products -- all the trust products come with guarantee and also collateral. Then for the interbank savings, these are all mainly cash flow between banks and the risks are pretty low.

(spoken in foreign language)

(interpreted) Right, actually -- to clarify, actually 39% of the 22,000 users are new agents of CNinsure.

(spoken in foreign language)

(spoken in foreign language)

(spoken in foreign language)

(interpreted) So far we have -- there were 40,000 CNpad applications downloaded and activated, and around 40% have been in use. 40% of our agents have been using this CNpad application. (Inaudible) is asking whether we are going to -- is it possible that all of our agents will start using CNpad in the second quarter of next year. Mr Wang answers that we actually expect to convert -- to move all of our auto insurance business from offline to mobile devices by October 30, 2014 -- 2015, sorry.

(spoken in foreign language)

By the end of next year.

(interpreted) Right now P&C businesses contributed 70% of our net revenues and of that 70%, 75% to 80% is auto insurance business. Amounts of the auto insurance business, around 70% to 80% are retail business. And right now most of the retail business that we believe will be moved to CNpad will be mostly the retail business.

(spoken in foreign language)

(interpreted) That means about 3 billion insurance premiums will be transacted over CNpad applications by the end of next year.

(spoken in foreign language)

As gross margin.

(interpreted) Actually the gross margins for business transacted over CNpad should be basically in line with those transacted offline. But with the (inaudible) operating cost -- the gross operating costs will be much slower than the revenue growth.

(interpreted) How much will the net margin improve owing to the contribution from CNpad application?

Well, as to this question Mr Wang thinks that right now it's difficult for us to quantify. We may have to make an estimate, so an estimate in the first quarter. Hopefully we can give you an answer then.

But we believe that the operating cost ratios do roll through several stages. In the initial stage of investment, because we need to invest in the -- to build up the infrastructure, there might -- there was a slight increase in the operating cost.

Right now the operating cost ratio is right -- it's likely -- it's flattish year-over-year right now. Then going forward we believe that it will go down.

(Spoken in foreign language)

Sorry, translating the question. So the question is, why our topline growth was much faster than before in the third quarter?

(interpreted) The first --.

(Spoken in foreign language)

(interpreted) Actually even though we give the guidance of 15%, this is -- was relatively conservative. In the first half of 2014 our topline also grew by 20.8%. That growth momentum continues into the third quarter. We still believe that we should be able to grow by over 30% in 2015.

(Spoken in foreign language)

Thank you.

(operator instructions).

[George Wong]. Go ahead please.

(interpreted) Well, first of all we observe that your (inaudible) having it on an improvement track in the first two quarters of this year. For the third quarter the sales growth was also quite remarkable.

However, this earnings and also topline growth improvement was badly reflected in your stock price. Since you do have a lot of cash, and given the low price -- low stock price, has management ever talked about doing a share buyback, or any other means to increase shareholder value?

(interpreted) The management remain committed to increasing shareholder value. However, probably in the past two years the management has been focusing a lot of energies on bringing a turnaround in our fundamentals.

We actually believe that without a turnaround in our earnings or topline growth, any (inaudible) -- anything that we do in a capital market would not be sustainable.

Right now as we have -- our online and mobile initiatives have started to -- up and running, and we are back to the growth track, probably it's time for us to sit down and think about what options we have to increase the capital of the stock price, improve the stock price, and increase shareholder value.

There are a lot of options, several options in front of us, and we need to consider about it.

(interpreted) Well, you have made a lot of effort to develop -- expand your internet presence over the past year, and actually did come up with something. However, it seems that the stock market did not really appreciate the effort.

And as the other master has mentioned just now, that the -- your investment in this online and mobile initiatives, for example like the investment in CNpad, will help -- will contribute to bring the cost down.

However, the stock market may not fully understand that. Could you please elaborate a little bit more on the impact of your internet strategy, on CNinsure?

(interpreted) Yes indeed our mobile initiative, it has driven our sales growth in the third quarter. However, we still believe that we are at an initial -- a very initial stage, very early stage, of development of the online and mobile initiative. We just rolled out this platform not long ago so I believe that the achievement is still not enough.

The development of our online and mobile initiatives are performing much better than we expected, but we still believe that there's still more to come. For example, the three online initiatives that we have been [grown out]. For example, first of all the CNpad. We believe that by the end of this year, by December, the monthly premium contribution from the CNpad application will reach 200 million monthly.

And then secondly for chetong.net, right now the registered service representatives -- the number of the registered service representatives is about 9,000. This number is a little bit more than the number of claims adjusters of (inaudible).

We expect the number will increase to 30,000 by the end of next year, which is also equal to the number of claims adjusters of [PI6]. Within three years we expect the number will increase to 80,000, which is equal to the total number of claims adjusters in the market right now.

Then thirdly, for the eHuzhu platform, right now we have about 20,000 -- we have over 20,000 paying members. Right now we are working to persuading some institutions to join the platform. We believe that by -- with that coming, we will be able to achieve a target of over 1 million members, within the next several years.

In order to exert more impact on the market, we will first of all expand -- increase our investment in the marketing of this online and mobile initiative.

Then secondly we will also -- we are hopeful we can achieve some strategic partnership with some mainstream -- with insurance company, which we believe will help us to consolidate with those with more [rapidly].

I believe that we have several advantages, as compared to our peers. First of all, we are the early movers. And then secondly we have done a lot of research in the market and the trends.

And then thirdly we have accumulated a large number of talent, including the IT talent and also the operational talent. Then fourthly is our brand awareness among -- in the industry.

(interpreted) Congratulations on the good result, and also wish you the best of luck in the future results, and thank you.

Thank you. We have no further questions at this time. I'll hand back to Ms Qiu and Mr Wong for closing remarks.

Thank you all for joining us on today's conference call. If you have any further questions please feel free to contact us. Thank you.

Thank you ladies and gentlemen. That does conclude our conference for today. Thank you for your attendance. You may --.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.