Huize Holding Ltd (HUIZ) 2021 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Huize Holding Limited First Half and Second Quarter 2021 Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded and a webcast replay will be available. Please visit Huize IR website at ir.huize.com under the Events and Webcasts section.

I'd now like to hand the conference over to your speaker host for today's conference, Ms. Harriet Hu, Huize's Investor Relations Director. Please go ahead, ma'am.

Thank you, operator. Hello, everyone, and welcome to our earnings conference call for the first half and second quarter of 2021. Our financial and operating results were released earlier today and are currently available on both our IR website and the Newswire.

Before we continue, I would like to refer you to the safe harbor statements in our earnings press release, which also applies to this call as we will be making forward-looking statements.

Please also note that we will discuss non-GAAP measures today, which are more thoroughly explained in our earnings release and filings with the SEC.

Joining us today are our Founder and CEO, Mr. Cunjun Ma; COO, Mr. Li Jiang; Co-CFO, Mr. Minghan Xiao; and Co-CFO, Mr. Ronald Tam. Mr. Ma will start the call by providing an overview of the Company's performance and operational highlights for the first half and second quarter of 2021. Mr. Tam will then provide details on the financial results for the period before we open up the call for questions.

I will now turn the call over to Mr. Ma.

(foreign language)

[Interpreted] Hello, everyone, and thank you for joining Huize's first half and second quarter 2021 earnings conference call. We achieved record results in the first half, which is particularly commendable given the challenging environment we currently face. Total gross written premiums (GWP) facilitated on our platform increased by 72.7% year-over-year to RMB 2.06 billion, well above the industry average growth in the first half. And total operating revenue nearly doubled to RMB 950 million. In the second quarter, most life insurance companies reported year-over-year declines in GWP due to seasonalities from jumpstart sales at the beginning of the year and the statutory definition change of critical illness. Nonetheless, we have demonstrated strong resilience in our operations during this traditionally slow season with total GWP amounting to RMB 670 million in the second quarter, sustaining a double-digit growth year-over-year.

(foreign language)

[Interpreted] Apart from the robust growth in total GWP and operating revenue, our cumulative number of insurance clients and insured clients reached 7.2 and 60.3 million, respectively. I would like to further emphasize the differentiation of our user profiles and how this could benefit our business. In the first half, about 72% of long-term insurance customers were from higher tier cities with an average age of 33 years old. In terms of first year premium, the average ticket size of our long-term insurance products has maintained at a relatively high level of RMB 4,332 in the first half. While the average ticket size of our savings insurance products has reached RMB 28,439 in the first half. Moreover in the first half, our persistency ratios for long-term life and health insurance in the 13th and 25th months has maintained at above 95%. We believe these indicators highlight the strong stickiness and high lifetime value of Huize's customers.

(foreign language)

[Interpreted] In the first half, GWP for long-term life and health insurance products accounted for 95.3% of our total GWP. This, not only demonstrates our competitive edge in both sales and service capabilities among China's online insurance platforms, but also proves our prominent position in long-term insurance products after years of operations. Our strategic focus on distributing long-term insurance products can help extend the reach to customers through various services and the multi-dimensional user data and increased precision of our user profile will be strategically important for us to optimize our customized products, improve our service capabilities and build our ecosystem. At the same time, we have further expanded the depth and breadth of our product coverage with a diversified product portfolio, including protection, savings insurance, and retirement planning products, covering the entire customer life cycle, thereby, tapping the value of existing markets and exploring the growth potential from new markets.

It's worth mentioning that our savings insurance, including annuity and long-term life insurance contributed to 23.6% of first year premiums in the first half, increasing from 17.1% over the same period last year.

(foreign language)

[Interpreted] Product innovation is one of Huize's core competencies. In the first half, we continue to make progress on new product design and innovation. As a result, GWP for co-developed insurance products accounted for 55.1% of total GWP, increasing significantly by 14.3 percentage points from the same period last year. In April, the CBIRC issued a guidance that emphasized the "personalization, differentiation and customization" of insurance products. This signals that the customization of insurance products will be a major trend moving forward, and we believe that InsurTech capability is the key to drive product customization.

For example, we have recently partnered with Sun Life Everbright Life Insurance to launch Everbright Smart Choice, a retirement annuity product. When developing this product, we identified numerous pain points in the market and resolved them one-by-one through our long accumulated user data and machine learning algorithms. At the same time, we used AI technology to estimate the combination of premium rates and terms and conditions of the product that best suite our clients' interest, thereby, creating a comprehensive and innovative product that stands out in the market.

Finally, our online marketing strategy has significantly reduced the promotion cost of our products, enhancing our price competitiveness over other mainstream off-line products.

(foreign language)

[Interpreted] On top of product customization, we are also committed to enhancing our service capabilities. We believe that insurance industry has moved to a "quality and sustainable" growth phase and the traditional business model of relying on numerous insurance agents has reached an inflection point. Rather, future competition in the industry will focus on solving problems and creating value for customers. Since the beginning of the year, we have been exploring and building value-added service system to provide users with online consultation, early cancer screening and other health management services. In July, we partnered with Sungrow to launch immune cell cryopreservation as a value-added service to meet demand for high-end and diversified healthcare services of millennial customers. We believe such services throughout the duration of the policy will not only increase the core competitiveness of our platforms in the marketplace, but also help us to create longer-term engagement with our users and maximize their lifetime value.

(foreign language)

[Interpreted] Digitalization and technology are the core strengths for the development of the Huize 3.0 era. We believe that embedding technologies such as data analytics and AI into key business processes will help improve the operating efficiency and risk management capability of our platform. Our calculation shows that AI proposal application has made it possible to save up to 83% of our consultants' time and the average time needed to complete a transaction has been halved. Our technology has also been critical to our platforms' regulatory compliance, with our AI-driven quality assurance system, enabling us to achieve full coverage of consultants' conversation inspections through NLP technology. This has significantly improved our quality assurance efficiency by over 80x and accumulated over 200 million lines of conversation data.

(foreign language)

[Interpreted] Finally, I would like to share with you an important milestone in our O2O integration strategy. We have entered into an MoU with Shengs Life and General to acquire a controlling interest in the company. We believe Shengs Life and General has accumulated deep customer insights in the mass affluent life and health insurance market. Leveraging its robust sales team of professional industry veterans, extensive coverage, and experience of serving clients, Shengs Life and General greatly complements our last-mile off-line presence, allowing us to provide products and services both online and off-line, which will further improve the market presence of our customized products and enhance the brand awareness of Huize. We intend to utilize our digital capabilities to empower Shengs Life and General, accelerating the establishment of our open insurance product and service platform covering sales management, product offerings and back-end support, with the aim to significantly enhance the efficiency of traditional insurance operations. We look forward to the business expansion and realizing revenue growth synergies from this mutually beneficial integration.

(foreign language)

(foreign language) This concludes my prepared remarks for today. I will now turn the call over to our CFO, Mr. Ronald Tam, who will provide an overview of our key financial highlights for the first half and second quarter.

Thank you, Mr. Ma and Harriet. And hi, everyone. We are very pleased to report a set of record first half operating and financial results in terms of both total gross written premiums, or GWP, facilitated on our platform, as well as total operating revenues. In the first half of 2021, total GWP amounted to RMB 2.1 billion, representing a very strong growth of 72.7% year-over-year. First year premiums, or FYP, accounted for RMB 1.2 billion, or 57.9% of total GWP, which has doubled from the same period of last year. Renewal premiums accounted for RMB 868 million, or 42.1% of total GWP, representing a year-on-year increase of 45.4% in the first half. And as of the half year mark, we have already achieved over two-thirds of the total GWP for the entire year of 2020 and almost 80% of total revenue for last year.

In the first quarter of the year, we recall that we have capitalized on the tremendous market demand for critical illness products by consumers by taking upon a more aggressive approach on marketing spend and customer acquisition strategies, which has resulted in a very strong 2.2x growth in FYP in Q1, as well as the acquisition of many high-quality users onto our platform, with average FYP per policy of over RMB 4,000.

For the second quarter, as we have expected it to be a relatively slower quarter due to seasonality as a result of the jumpstart sales campaign in Q1 and also expected softness in the critical illness product segment after the absorption of pent-up demand in the first quarter, we have, therefore, strategically focused on the marketing and distribution of savings insurance products, including our customized endowment life insurance and annuity products, which we have co-developed with our insurance carrier partners. As a result of our strategy, we have maintained a healthy growth in total GWP of 12% year-over-year to RMB 668 million in the second quarter. This was driven by the robust year-on-year growth in renewal premiums of 32%, which again is a testament to the high-quality of the users that our platform is able to attract and acquire through our marketing channels, as evidenced by the consistently high 13th month and 25th month persistency ratios of over 95% that we have achieved during the second quarter.

As for FYP, although in the second quarter, we saw a modest 5% decrease year-over-year, mainly on the back of a slow pickup in critical illness market demand, we were still able to drive through a very strong growth in the distribution of savings insurance products, which has accounted for 38.2% of total FYP distributed in the second quarter. Another highlight with respect to the savings insurance products segment is that, 31% of the FYP in saving insurance was contributed by repeat purchases from our existing users on the platform, which again speaks to the high-quality of our 7 million plus user base. And in particular, the high LTV, or lifetime value potential of our users, given the high average ticket size of over RMB 28,000 that we have achieved in distributing our savings insurance products. We are continuing to see very strong momentum in our savings insurance products segments going into the third quarter, which again will greatly complement to our overall FYP and top line growth for the rest of the year and also becoming an increasingly important contributor to our general diversification in our revenue and overall product portfolio.

Now, turning to the financial line items. Total operating revenue for the second quarter was RMB 218.6 million, which is a slight decrease of 7% year-over-year. The decrease was primarily due to the 5% decrease in FYP facilitated, as we mentioned earlier, which totaled RMB 303 million for the quarter, but offset by a strong 32% increase in renewal premiums, which amounted to RMB 364.8 million in the second quarter.

Operating costs for the quarter increased by 8% year-over-year to RMB 152 million, which is primarily due to increased customer acquisition and channel costs.

Selling expenses for the quarter increased by 62% year-over-year to RMB 77.9 million, mainly attributable to increased salaries and employment benefits due to the increase in sales and marketing headcount, as well as an increase in advertising and marketing expenses, which is offset by a decrease in share-based compensation expenses. Selling expenses as a percentage of total operating revenue for the first half, however, has decreased from 20.9% last year to 16.2% this year, representing a 4.7 percentage points improvement year-over-year.

G&A expenses for the quarter decreased by 7% year-over-year to RMB 43.5 million, primarily due to a decrease in share-based compensation expenses. The G&A expense to revenue ratio also decreased to 9.9% in the first half this year from 17% in the same period of last year, resulting in a 7.1 percentage point improvement, which is a reflection of the overall operating efficiency and leverage that we have demonstrated.

During the quarter, we have continued to invest heavily in our technology upgrades for our core platform, and R&D expenses for the quarter grew by 104.3% year-over-year to RMB 25.7 million, which was mainly driven by an increase in technology investment and the related number of R&D personnel increase. Overall, for the quarter, we have recorded a GAAP net loss of RMB 77 million.

We continue to maintain a robust liquidity and a strong financial position. As of quarter end, we had a combined balance of cash and cash equivalents of approximately $67 million.

And coming to our official guidance. We currently expect total operating revenue for the full-year of 2021 to be approximately RMB 1.7 billion, which represents approximately a 40% growth rate year-over-year. This forecast reflects the Company's current and preliminary views on the market and operational conditions, which are subject to change caused by various uncertainties, including those related to the ongoing COVID-19 pandemic globally and also any recurring waves of infections in China.

With that, that concludes our prepared remarks for today's call. We will now turn the call over to Q&A session. Thank you.

(Operator Instructions) We have the first question from the line of Michelle Ma from Citi.

(foreign language) So my first question is regarding to a recent directory crackdown on irregularities in the online insurance sales space. So just wondering what's the impact on our 2B channel?

And the second question is about our future strategy. So we have obviously a large amount of cash on balance. So, will we have any like new initiatives regarding future business strategy, especially we mentioned before that we want to strengthen our 2C channel previously. So -- and still going forward?

Michelle, it's Ron here. Let me take your questions. So the first question regarding regulations, I think the market has obviously been quite concerned overall, not just in our industry, but also across various sectors on the recent wave of government regulations coming out to the market. So I think, in particular, relating to the insurance industry, or the Internet insurance industry, particularly where we are participating in, the recent number 87 document, the context of which is actually not any new regulations, it's more of a reemphasis on the implementation timetable for the underlying regulations that was actually released in December of last year and was coming into effect in this February of this year. So overall, of course, I think Huize has a long-established platform with 15 years of track record. We are very embracive of this new regulatory regime and development because it's definitely good for the overall long-term sustainable growth of the industry as a whole. And as one of the most leading and compliant platforms in the industry, I think that we see ourselves as a beneficiary of the regulatory developments.

So, particularly with pertaining to the points relating to the regulations, I think that the regulators are more focused on miss-selling activities by platforms, forced bundled sales of insurance products, non compliance operations during the business processes and so forth. So, I think given that we have been adapting to the changes since last year or late last year, we have already taken a complete and comprehensive review of our operations so that we have established relevant rules and policies with respect to our own self-operated activities, as well as the other channels that we cooperate with to make sure that all the contents or marketing materials that will be delivered to the marketplace, which will be consumed or read by the users to be compliant from a regulatory standpoint.

And also, I think that on mis-selling or product pricing perspective, because that we have always been more focused on the higher value long-term health products, we are less involved with the short-term medical or reimbursement kind of insurance products, where I think most of them is selling may fall into. So I think that overall, as a conclusion, I think that we are very well coped as a platform to manage through these regulatory changes as we don't see any particular material impact on the business as a whole.

So going on to your second question on the cash balance and our potential use of this cash resources, I think that we have obviously just announced the Shengs Life and General acquisition. And overall, that will be a very important element to accelerate our online to off-line integration strategy as our CEO mentioned in his prepared remarks. And also to make sure that we have been able to deepen our engagement with our customers and to be able to generate more lifetime value through the additional off-line coverage or in-person interactions with customers. So, M&A definitely will be potential areas where we can deploy our cash resources.

Secondly, I think that we're also very focused on implementing and executing on our new open platform strategy, which we are still in the very early stage, which will require additional capital with respect to increasing our investment in the core platform and technology, and that is reflected in our continued investment in R&D since we have stated on the IPO.

And thirdly, I think that we will also be increasing investments in our branding and marketing to further improve our 2C business and to be able to generate more traffic to the platform on an organic basis.

I hope that answers your questions, Michelle.

We have the next question from the line of Edwin Liu from CLSA.

(foreign language) So, it's good to see that the savings insurance has accounted for a larger portion of the FYP. So I just want to understand more about the details of the savings insurance. In particular, if we are to calculate take rate with denominator as FYP, what would be the take rate level for the savings insurance? And also, if we calculate the cost of revenue percentage of the brokerage income for the savings insurance, what would be the level, especially if we compare to other type of products like the long-term health insurance?

Okay. So, on your question on latest development on the saving insurance products, I think that, first of all, I think it's very encouraging to see that we are making headways into scaling up this portion of the portfolio, not only because of the weakness or softness in critical illness, as we all know in the market, but also as a long-term strategy for us to extract further LTV from our existing users. And also, we have touched upon the relatively high proportion of repeat purchases of savings insurance products from our existing users. So I think that is a very good reflection of our overall business strategy and it's working out fine.

With respect to the take rate or commission rate, I think to put it simply, take an example from our latest endowment life insurance product, I think you're looking at roughly around 10 percentage points to 20 percentage points commission rate, a bit lower than our typical customized long-term critical illness products. But I think you need to bear in mind also that the average ticket size for this product is quite a lot higher than critical illness products. So I think we've been telling the market and disclosing to the market that, on average, the CI products we distribute carries around RMB 4,000-ish kind of ticket size on average. But now we're seeing that the average savings insurance products are growing at around RMB 28,000. So I think despite the relatively lower take rate, if you will, but the overall economic accretion to our P&L or to our revenue line is actually quite promising. So I think that would be the answer to your commission rate or take rate question.

In terms of costs, I think that if you look at our Q2 results versus our Q1 on a quarter-on-quarter basis, you can actually see that there's a 5 percentage points improvement on the gross margin. So, I think that also is partly due to the reasons I stated above.

We have the next question from the line of Allen Feng from Morgan Stanley.

(foreign language) I have two quick questions for management today. So first, should we continue to expect an increase of mix for savings products in the upcoming quarters, given that the critical unit sales are still pretty weak in China?

And secondly, so you talked about a lot about the O2O synergies between the Shengs Life & General agency and your core business. Could you maybe just elaborate and give us a few examples?

Okay. So two questions here. I think the first question on the proportion or contribution from our savings insurance products going forward in the second half this year. I think you're very correct to point out that it's very likely that we'll see an increasing proportion or contribution from savings products in the third quarter and fourth quarter due to the overall market sentiment around the CI products. And also, I think the consumers right now as a whole is definitely more geared towards consuming life insurance or annuities products. So I think you can also see that we have recently just launched the new retirement annuity product with Sun Life Everbright. So I think that's a very good example of how we are constantly adapting to market changes and also leveraging on our product development expertise to co-develop and work with our insurance carrier partners. I think that the endowment life insurance product that we have co-developed with Hong Kang Life has been doing very well in the second and third quarter. I think we can also disclose on this call that we're also seeing already sequential growth, quite strong growth in this area. So I think we can expect that there will be a meaningful increase in the contribution from savings in the third and fourth quarter.

However, I think that the critical illness product should come back to life, if you will, towards the end of this year. We're also gearing up towards launching a new product in this space, probably towards the back end of this quarter or next quarter. And I think with the new product launch, we should also be able to drive improved sales in this area, given that we have a more innovative and probably more market-friendly product design features so that we can encourage ourselves -- our own consultants, also our channel partners to market and distribute this new product.

With respect to the potential integration revenue synergies with the off-line agencies at Shengs Life & General that we have targeted, I think that there are a few things that we can probably look forward to. I think the most important thing is that, we are able to leverage on the off-line presence to serve our customers on an off-line context. So not just that we can see them face-to-face, we can further deepen the engagement with them to understand more about their needs and their family's needs, and therefore, to have a more insightful customer profile, which will feed back to our own consultants for cross-selling and upselling opportunities.

The other thing that we can also derive synergies from is because the comprehensive suite of products that we have on the Huize platform, we are also being able to provide to this off-line partner on immediately -- on an overnight basis so that we can empower them with a full suite of products. As you can probably understand, typically, in China, for these regional agencies, they suffer from a rapid lack of product supply from the mainstream insurance companies. And also, they probably receive less favorable commissions treatment from the insurance carriers. So by plugging into the Huize system, obviously, we can empower them on the product supply. We can also empower them on our digital platform and digital tools to increase the efficiency of the off-line agents, therefore, to improve productivity further on a per agent per month basis. So, I think that will be the overall concept they're looking at with respect to this acquisition.

Hope that's clear.

We have the next question from the line of Qingqing Mao from CICC.

(foreign language) My first question is about the savings products. We can see an increase in the proportion of savings products. What percentage of savings products are from existing customers?

(foreign language) The second question is, have we seen the drop of [traffic cost] (corrected by the company after the call) due to the headwind posted through online education industry in the second quarter?

Two questions here. First question was about the savings product, how much of the FYP is coming from existing users? So I think we have actually touched upon this earlier. We see that in the second quarter around 31% of our savings product is coming from repeat purchases or on all existing users on the platform who have purchased a policy with us before. So that's the answer to the first question.

And the second question on the traffic cost trend recently the overall headwinds facing the edtech sector. I think that what we have seen here at Huize is that, we do not see -- perhaps, we have a very different marketing strategy than our peers and the target customers that the edtech sector look at is probably not exactly the users that we are targeting. So we do not see a material or obvious impact on where we see cost of acquisition on our platform.

At this time, I would like to hand the call back to the speakers for any closing remarks.

Thank you, operator. Thank you, everyone. So we would like to thank you all for joining the call today. And if you require any further information, so please feel free to reach out to us. Thank you for joining us today.

Thank you.

Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.