AIX Inc (AIFU) 2023 Q1 法說會逐字稿

Thank you for standing by for Fanhua's First Quarter 2023 Earnings Conference Call. (Operator Instructions) For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within 3 hours after the conference is finished. Please visit Fanhua's IR website at ir.fanhuaholdings.com under the Events & Webcasts section. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I'd now like to turn the meeting over to your host for today's conference, Ms. Oasis Qiu, Fanhua's Investor Relations Manager.

Good morning. Welcome to our first quarter 2023 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 U.S. 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 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 are our Chairman and Chief Executive Officer, Mr. Yinan Hu; Chief Financial Officer, Mr. Peng Ge; and Chief Operating Officer, Mr. Lichong Liu. Mr. Hu will provide a review of our financial and operational highlights in the first quarter of 2023. There will be a Q&A session after the prepared remarks. Now I will turn the call over to Mr. Hu.

(foreign language)

[Interpreted] Good morning, and good evening. Thank you for joining today's conference call.

(foreign language)

[Interpreted] I will be repeating some of the highlights of our first quarter results reported last week in our earnings release. As we mentioned, with the positive macro and industry environment over the first quarter of 2023, Fanhua achieved strong results over the period with solid growth across various key operating metrics.

(foreign language)

[Interpreted] Total premiums up by 29% to RMB 4.4 billion, significantly outpacing life insurance industry premium growth of 8.9%. New business premiums up by 51.4% to RMB 851.9 million, significantly above the 15% growth rate achieved by the listed Chinese life insurers. Total revenues up by 20.6% year-on-year to RMB 827.7 million, and operating income was up by 193.1% to RMB 60.4 million, significantly exceeding our previous estimate.

(foreign language)

[Interpreted] For this quarter, we have expressed our results relative to our industry and key listed insurance peers. We have made this comparison to demonstrate that we are executing on our well-defined strategy of driving sustainable growth in our business through professionalism, specialization, digitalization and open platform. This strategy is starting to set us apart from our competitors as demonstrated by our first quarter results.

(foreign language)

[Interpreted] Next, please allow me to go over 3 key operation highlights that are direct results from the execution of our strategy.

(foreign language)

[Interpreted] Firstly, our strategic focus on quality growth produced a significant increase in agent quality and productivity. Our number of 100,000 premium agents and Million Dollar Round Table members professional agents grew 27% year-on-year. The productivity of these high-performing agents also grew by 18% and 37% year-on-year, respectively. And together, they accounted for 42% of our sales over the period, up from 32% in the same period last year.

(foreign language)

[Interpreted] Secondly, we are already seeing material contribution from our open platform and our acquisitions over the past 2 quarters. As at the end of the quarter, our open cloud service business division has connected with over 300 external institutions and grew new business premiums by over 100% to over RMB 80.6 million. We're also executing on our strategy of consolidating the industry through M&A and made 3 acquisitions over the period, including [Zhongrong Beijing], a leading managing general agency in China, as well as 2 other leading agency companies. Looking ahead, we aim to utilize the managing general agency model to accelerate the consolidation of licensed small to medium insurance intermediaries in the market. As of the end of the quarter, Zhongrong Beijing is connected with 400 licensed brokers and contributed RMB 119 million in new business premium over the quarter.

(foreign language)

[Interpreted] Finally, our strategic focus on digitalization is also delivering material operational gains. The execution of our digital strategy is not only leading to high productivity for agents on our platform, but also helping a slight improvement in customer service and business quality. During the quarter, both the 13-month and 25-month persistency ratios improved to industry-leading levels of 93% and 87%, respectively. Achieving higher persistency ratios translates to high-quality business for our insurance clients and in turn, drives renewal bonuses for our business.

(foreign language)

[Interpreted] The digital focus, when combined with our open platform strategy, have allowed us to deliver significant economies of scale and operational efficiency improvement. This is reflected in the substantial reduction in operating expense ratio to 25.9% from 31.3% in the same period last year despite significant increases in investments in digitalization and open platform initiatives to RMB 21.3 million in the first quarter of 2023, up from [17.3 percent million] in the same period last year. And here, I would like to mention that the acquisitions we have thus far have only delivered revenue contributions instead of operating income contribution as we are still in the process of integrating these acquired entities into Fanhua and results were not yet reflected in our financial results in the first quarter. However, as the integration of our IT and back-end systems completed in the second half of this year, we expect to see material expense synergies and revenue synergies to be reflected in our future results.

(foreign language)

[Interpreted] Our operational target for 2023 is to grow our life insurance first year premium and operating profit by 50% and no less than 50% year-on-year. We believe the first quarter's strong results will lay a solid foundation for us to achieve this full year target. And we are also confident that for the second quarter, we will also -- we'll be able to achieve [a CR] target. And we're also making full preparation for the third quarter and the second half.

(foreign language)

[Interpreted] To fully prepare for the second half and -- as well as our future -- in the future year -- in the next few years, we will continue to stick to our strategy of pursuing sustainable growth through professionalism, specialization, digitalization and open platform. And in the coming quarters, we will focus on the strategic execution on the following initiatives.

(foreign language)

[Interpreted] Firstly, we continue to expand our service offerings to establish our differentiated competitive advantages, focusing on serving the diverse needs of our customers and their families over the entire cycle -- entire life cycle by facilitating insurance sales in various service settings, leveraging on our abundant services resources, including insurance trust, health care, elderly care services and education solutions.

(foreign language)

[Interpreted] Secondly, we plan to train 3,000 external candidates as Fanhua's Family Office Consultants, or FOC, thereby helping us to attract top talent in the industry. This year, we plan to increase spending on hosting these FOC training courses -- or the insurance trust training courses to train and certify 3,000 external elite agents, increasing professionalism and providing another point of differentiation.

(foreign language)

[Interpreted] Thirdly, we will implement [full] license holder plan among our agents. In response to the regulatory requirements for tier management of agents, we will provide targeted training to our top agents, including those who are MDRT members, according to their personal professional levels to help them obtain financial professional qualifications and certifications so as to further improve their professional image and productivity.

(foreign language)

[Interpreted] Fourthly, we intend to accelerate market consolidation through open platform strategy and M&A. We plan to fully open our platform to the industry to develop digital talents, particularly targeted and dedicated independent sales teams who can bring in high-quality business. For 2023, our target is to migrate [500] of our platform's institutional customers to our digital training system.

(foreign language)

[Interpreted] 2023 is an important year for Fanhua. It marks the 25th anniversary of our company. It is a milestone that [feels] each and every one of us at Fanhua, which we are truly proud for. Over the past 25 years, we are proud that we have navigated through China's economic and financial industry cycles, each time emerging stronger than before. For me personally, this is my second time being Chairman and CEO of Fanhua, having left the position of being CEO of the company in 2011 and left the position of being Chairman of the company in 2017. This is a company I founded 25 years ago. By no exaggeration, it's my second child, and I have always had the best interest of the company at heart.

(foreign language)

[Interpreted] Looking ahead, we intend to invest significantly in our human resources capability to attract the best individual talent in the market across all levels, from the Board level to senior managers to our frontline agents. We are confident that with the right strategy, the right team and the right execution, Fanhua will -- the Fanhua we will create over the next 25 years and beyond will be able to deliver the results expected from all our stakeholders.

(foreign language)

[Interpreted] This concludes my presentation. Now the floor will open for your questions. Thank you.

(Operator Instructions) Our first question comes from the line of [Yuyu Zhang] from CICC.

[Interpreted] So the first question is related to the finished product demand. So previously, Chinese insurance regulators have asked insurers to lower estimated insurance for new products. So do you see a boost in savings for that demand? And how do you expect the momentum of savings product sales? And the second question, we also see in the last year in Q1 the average take rate of the [higher] product fell strong gradually. We know it's mainly due to the changing product mix and [reduced renewal] commission. I think there's really a negative impact on our brokerage income while our FYP has a really good performance. So could you share some more color on how you see the future trend of your take and what actions will you take to raise it? And the last question in terms of the open platform strategy. In the previous conference call, you said you plan to invest or acquire around 10 small or middle-sized insurance agencies. And is this plan changed?

(foreign language)

[Interpreted] Thank you for the questions, [Yuyu]. This is CEO, Mr. Yinan Hu. Mr. Hu would like to invite Mr. Lichong, our Chief Operating Officer, to address the first question; and our CFO to answer your second question regarding the trend in our commission rate. And he himself will answer your third question regarding to the M&A progress.

(foreign language)

[Interpreted] So with the imminent downward adjustment in the guaranteed returns from life insurance products in the new product pricing, we do see very strong demand for savings products, including annuity and whole life insurance products. However, in the second half, how will that change? We still believe that for the longer term, the demand will remain robust for savings products because of the 3 contributing factors. Firstly, we are seeing the acceleration in aging population and lower risk appetite among consumers and -- while the aging population still have very strong demand for products that can cater to their needs in their retirements.

And then secondly, we have seen the downward trend in interest rate in the long term. So even though the assumed interest rate for new product pricing adjusted downward to 3%, that still provides quite attractive returns. And thirdly, with the softening economy, we're seeing a kind of consumption downgrade and also investment product downgrade in terms of -- because of the softening economy, there are not many attractive investment choices, while insurance still offers a safe -- a kind of a safe asset class. Thank you.

(foreign language)

[Interpreted] The CFO would like to answer this question. First of all, he would like to clarify on the definition of commission rates. And from insurance point of view, we're actually seeing that the commission rate will probably in the downward trend to be in line with the international practice as well as regulators' requirements or regulators' wish to lower the cost -- financial cost for financial institutions in China. And then for Fanhua, and because we sell a wide variety of products, so product -- the changes in product mix as well as the term that customers choose to pay their premiums will have impact on the overall commission rate. However, on the basis of annualized equivalent -- annualized premium equivalent basis, our first year commission rate remains quite high. And -- but having said that, I would like to emphasize that the key operating metrics that the company actually focus on are first year premiums, net revenues, gross margins as well as persistency ratio. I think these are the better operating metrics to measure the company's financial health.

(foreign language)

[Interpreted] As Mr. Liu mentioned that there will be some changes in savings products with the upcoming transition to the new product pricing, which means that the cost for insurance company will be lower. And for -- probably, that will impact our sales capabilities in the short term. However, in the longer term, we still believe that the demand for savings products will remain robust. And also, having said that, we still believe that for a sales -- for insurance intermediaries, their key competitive advantage should be on the ability to offer a comprehensive service or comprehensive solution to address customers' diverse demand instead of simply selling insurance products. As Mr. Hu mentioned that we actually would like to offer -- further broaden our service offerings to include trust services, health care and elderly care as well as education solutions to customers. And we believe this is the key for us to further enhance our competitive advantages.

(foreign language)

[Interpreted] Mr. Hu also mentioned that we target at growing our first year premiums and operating income by 50% year-over-year for 2023. I believe that if we can achieve this 50% full year target, you will also see a continued improvement in our gross margin, net profit margin as well as persistency ratio.

(foreign language)

[Interpreted] And this is Mr. Hu, CEO of the company. He would like to address your questions on our M&A strategy. And basically, the industry is evolving towards the pursue of high-quality growth, which means that higher business quality with lower costs.

(foreign language)

[Interpreted] What's happening in the market right now is actually in favor of our M&A strategy or, i.e., creates a much more favorable environment for us to pursue acquisitions. So we will stick to our open platform strategy and M&A strategy. There's no change to our acquisition target for this year.

(foreign language)

[Interpreted] M&A is not purely business combination. I think the basis for our acquisitions [will rely] on technology, our digital capabilities in AI technology [and their] applications.

(foreign language)

[Interpreted] In the longer term, we believe that technology will be a key contributor to drive business growth for insurance intermediaries. And in this front, I'm quite confident that Fanhua has stayed far ahead of our peers in terms of IT investments and technological capabilities in China as well as in Asia.

(foreign language)

[Interpreted] However, right now in China and in other Asian markets that we observe, technological investment is not really enough, and that's a key reason that restricts the further growth of insurance intermediaries. However, we believe that the demand for technology is quite strong, while we are also seeing that a lot of licensed insurance intermediary companies as well as independent agents cannot really afford to invest in IT systems on their own.

(foreign language)

[Interpreted] So the core of our M&A is to export our digital -- our technological advantages and digital capabilities so that we can allow more insurance intermediary companies to benefit from Fanhua's technological advantages and help them to double their sales capabilities while lowering their operating expenses and building momentum for sustainable growth.

(foreign language)

[Interpreted] And for our future M&A targets, we are actually looking at technological empowerment to these acquired entities, and we pursue quality instead of quantity.

Our next question comes from the line of Dan Wang from JPMorgan.

(foreign language)

[Interpreted] So the question is from JPMorgan. He has 3 questions. The first question is regarding our agents' productivity. In the first quarter, we see a strong improvement in agent productivity, but probably that's because of a low base last year. And he wonder whether or not the high productivity of our agents will be sustainable in view of the fierce competition in the market. And the second question is regarding the company's share buyback plan, the progress. The company announced a share buyback plan in December of last year. But now that with the company's M&A strategies, probably the company would like to reserve more cash to pay for the acquisitions. How the company's capital deployment plan to be, and what's the plan for share buybacks?

And the third question is regarding regulation. The regulator has adopted quite high regulations to supervise the insurance intermediary market. But we believe that with a more stringent compliance framework and a more stricter supervision on business quality of the company, that will help the company to improve sales volume as well as lower risk. So what's the opportunity there for the company?

(foreign language)

[Interpreted] Again, the 3 questions will be divided among the management. Our COO, Mr. Liu, will answer your first question regarding agent productivity, and Mr. Ge will answer the second question regarding share buyback. And Mr. Hu himself will answer your third question regarding the regulation.

(foreign language)

[Interpreted] We are actually seeing that over the past few years, the number of agents has dropped significantly in the market. And on the contrary, the productivity of agents, [per cap] productivity, actually have been increasing. I believe that there are 2 reasons. First of all, the demand -- the customer's demand has transitioned from kind of relatively lower-end products, i.e., critical illness products, to higher-value products, savings type of products. And for this type of savings product, the ticket size is larger. And then secondly, because these products are more complicated and requires a more comprehensive financial knowledge or knowledge in wealth management areas, so usually, this type of products are sold by higher agent -- higher-end agents.

And then secondly, for the critical illness products, this kind of product has somewhat kind of replaced by online medical insurance products. And for those agents who can only sell critical illness products will naturally be replaced as well. So only those who are knowledgeable enough, who have more comprehensive knowledge, can stay in the industry.

(foreign language)

[Interpreted] Fanhua has shifted our focus to serving middle class or high net worth individuals or ultrahigh net worth individuals. And these customer groups require more professional services by higher-end customers -- more professional sales agents. So that's why in the past few years, we have step up investments to recruit professional agents and to train professional agents as well as increase our investment in digitalization to increase the empowerment to our agents to help them to improve their professional capabilities. And as a result, we have saw -- we have seen a 50% growth in the number of MDRT agents in the past years. And in the first quarter, we also see substantial growth in the number of MDRT agents. So we have this right strategy.

And in addition to that, we believe that service is also quite crucial. So that's why we have considered insurance plus services or insurance plus wealth management, elderly care, insurance trust services as an important part of our overall strategy. We believe that with these service offerings, our agents -- our top agents will be able to serve the diverse demand of our high-end customers. So with the customer demand and with the ability of these top agents, I believe that the policy amount of our -- the product that we sell and also the productivity of our agents will remain at quite high level.

(foreign language)

[Interpreted] Mr. Ge would like to answer your second question on share buyback. So I believe that Fanhua is a quite responsible company to shareholders. I have recapped on the use of capital since IPO. We have spent around CNY 1.7 billion on cash dividends since our IPO and spent around CNY 700 million on share buyback, so totaling RMB 2.4 billion, which represented over 50% of our total operating cash [growth], amounting to like CNY 4 billion. So that shows our commitment to maximize shareholder returns.

(foreign language)

[Interpreted] In the past 3 years since 2020, due to the COVID-19 and the softening economy, the industry has undergone substantial changes. Fanhua, however, has sticked to our strategy, and we have saw a material contribution from the execution of our strategy in the first quarter of 2023. In my view, I believe that our cash should be earmarked to build momentum for sustainable repeat growth in the future in the longer term, including our initiatives such as M&A.

(foreign language)

[Interpreted] And because of what's happening in the past 3 years, our stock has been significantly undervalued. We believe that share buybacks will be much more efficient means to maximize shareholder returns compared to dividends. So that's why we announced a $20 million share buyback plan last December. And despite the restriction of the window period and the restriction on the trading volume that the company can buy, we have purchased about 72,000 ADS amounting to USD 600,000.

(foreign language)

[Interpreted] That's the progress that we've made in terms of our share buyback.

(foreign language)

[Interpreted] And I would like to add a comment on your first question. This is also the strategy that we have stick to over the past 15 years. We believe that no matter how professional or how elite the sales agents are, if they only sell insurance products, probably it will not be sustainable for them to sustain high productivity by solely selling insurance products. So transition to become a financial adviser that can offer more comprehensive solutions to their customers covering not just insurance but also insurance trust, trust planning or legal advices, that will enable them to better serve customer demand and sustain higher productivity. And I believe that it's an irreversible trend for agents to transition or transform themselves to become a financial adviser for their customers.

(foreign language)

[Interpreted] So that will require a much higher -- that [puts actually] much higher requirements on the compliance of the companies on regulatory compliance. This is a huge challenge. But at the same time, it also pose great opportunities for the company. I believe that any company who can help other institutions or independent agents to address the compliance issues, they will have the future.

(foreign language)

[Interpreted] My long-term vision has been to transform the company from a sales insurance intermediary into a platform company or an infrastructure platform provider to the industry. And this is what we have been pushing forward in the past few years, and we like -- we are dedicated to providing an infrastructure platform to the whole industry. And we are also working on building a unified compliance model and a unified risk management model on the basis of our digital technology.

(foreign language)

[Interpreted] Right now, our existing organizations contributed 80% of our revenues. I'm hoping that in the future, 60% of the revenues will be generated by the services -- or the platform services that we've provided to the industry.

(foreign language)

[Interpreted] The new regulation changes pose great challenges to a lot of industry players. However, we see it as great opportunities for Fanhua. In response to the market changes and also to capture the market opportunities, we have retained Boston Consulting Group as our consultants to give us advices on our open platform strategy. And so far, BCG has completed their first phase of work, and this has actually helped us greatly deliver great results. And I believe that this will be helpful for us to build our digital compliance model and digital risk management model going forward.

I'm showing no further questions. I'll now turn the conference back to Ms. Oasis Qiu for closing remarks.

Thank you for participating in our conference call. If you have any further questions, please feel free to contact us. Thank you.

Thank you. That concludes today's conference call. Thank you for participating. You may now disconnect. .

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]