Fanhua Inc. (NASDAQ:FANH) Q2 2023 Earnings Call Transcript

Fanhua Inc. (NASDAQ:FANH) Q2 2023 Earnings Call Transcript August 31, 2023

Operator: Thank you for standing by for Fanhua’s Second Quarter 2023 Earnings Conference Call. [Operator instructions] For your information, this conference call is now broadcast alive over the Internet. Webcast replays will be available within 3 hours after the conference is finished, please visit Q – Fanhua’s IR website at ir.fanhuaholding.com under the Event and Webcast section. Today’s conference is being recorded. I would now like to turn the meeting over to your host for today’s conference, Ms. Oasis Qiu, Fanhua’s Investor Relations Manager. Please go ahead.

Oasis Qiu: Good morning. Welcome to our second 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 provision of the US Private Securities Litigation Reform Act of 1995. The accuracy of this statement 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 Co-Chairman and Chief Executive Officer, Mr. Yinan Hu; Co-Chairman and Chief Strategy Officer, Mr. Ben Lin, and Chief Financial Officer, Mr. Peng Ge. Mr. Hu will start a call by sharing his view on recent market trends and our strategy positioning, followed by Ben who will provide a review of our financial and operational highlights and discuss our business outlook going forward. There will be a Q&A session after the prepared remarks. Now, I will turn the call over to Mr. Hu. Ben will translate for Mr. Hu.

Yinan Hu: Good morning and good evening to everyone in the call. Thank you for joining today’s call. The Chinese economy is currently undergoing a major transformation. Old models of production disintegrating while new models of production are developing. This transition is also the root cause of challenges faced by the Chinese economy at present time. However, with its huge and growing market size, China’s economy continues to exhibit strong resilience and great potentials. The fundamentals sustaining China’s long-term outlook remains positive and will continue to provide a favorable business environment for all industries and for our company Fanhua. For China’s Insurance market, the previously mass agent model is gradually phased out, and the new professional based model catering to customer demand have yet to take center stage.

Currently, there are fewer than 1 million truly professional trained salespeople in the insurance industry. However, to meet the substantial demand of China’s vast middle class population, an aging society for effective retirement and legacy planning, we estimate that there exists a shortfall of at least 2 million professional advisors in the market. In recent quarters, we have observed an increasing number of quality agents coming from a diverse range of sectors outside of the insurance industry to join our industry, they are in great need of an enabling platform that can support their ongoing development. This factor is yet to become a substantial driving force for the industry’s next phase of growth. We believe that Fanhua’s strategy of professionalism, specialization, digitalization and open platform fits perfectly well to this emerging trend.

Our results over the past few quarters I think it’s good evidence that our strategic implementation over the past two years is becoming effective and Fanhua has taken on a fresh new look. As such last week, we officially announced our new mission statement vision and core values, which are intended to solidify the roadmap to guide everyone at Fanhua to work together to propel the company towards achieving sustainable, high quality growth. Fanhua will uphold the highest ethical standards to promote our core values of integrity, professionalism, openness and innovation while striving to become a globally leading technology driven financial services platform dedicated to empowering the growth of independent financial advisors and fostering the sustainable value creation for our clients.

This September, Fanhua will celebrate its 25th anniversary since our listing in 2007, the company has consistently delivered substantial returns to shareholders through buybacks and dividends. Looking ahead to the next 25 years, guided by a new mission and vision, we’re confident that by continuing to push forward, our defined strategies will continue to create value for our shareholders.

Ben Lin: Thank you, Chairman. I joined as many of you know, I joined Fanhua in July. I spent many years in the industry as a sell side insurance analyst and a number of years as an investor at a large US equity fund. My position at Fanhua is to be in charge of our overseas development and also our capital markets work. I hope to bring the years of experience I’ve had in analyzing the insurance market across the globe to help Fanhua achieve our objective of becoming a globally leading financial services platform. I will now take everyone through our second quarter results, which we are very, very pleased with. So firstly, in terms of revenue growth, we grew 61% over the quarter. And in terms of operating income, the numbers grew basically 177%, beating our prior guidance.

In terms of our earnings growth, it came in at 192% in terms of adjusted EPS, in terms of our cash position, total cash and cash equivalents stood at RMB1.6 billion. All of this basically is an illustration that we are basically getting consistent results from the execution of our core strategy. Underpinning these numbers, let me go through in terms of our operational highlights. So if you look at the premiums, our premiums grew 55% year-on-year, which is significantly ahead of the industry growth of 23.7%. More importantly, in terms of life insurance first year premium, we grew 153% year-on-year, while the average of Chinese listed insurers was 89%. So obviously, without doubt, some of our growth in the second quarter came from very strong industry tailwinds, namely the pricing change that took place over the quarter.

The most important indicator for us is really the improvement in advisor quality. So the number of MDRTs increased by 228%, while as the premium agent category, which is basically agents selling premiums above RMB100,000 OVER the quarter grew 163% year-on-year, and agents who basically sold more than RMB10,000 over the quarter grew 29%. Without a doubt, these are the three categories that we now will continue to focus on. And in terms of productivity, our MDRT agents grew their productivity by 21.7% to RMB1.3 million over the quarter. In terms of contribution from our top tier agents, they now account for 57% of our premium over the quarter versus 37% last year. In terms of our renewal premium, it also had very, very strong results, increased by 28.7% over the quarter, and that’s mainly driven by a significant improvement in our persistency ratio.

A 13 month persistency ratio came in at 95.1%, which represented a 3.4 percentage point increase from last year. And our 25 month persistency ratio came in at 88.3%, an increase of three percentage points from last year. Our digitization and open platform strategy continues to deliver in the form of improvement in operational efficiency. So you can see that our digitization and open platform expenses as a percentage of our revenue now is at 28.9%. And including all the other expenses, you can see that our operating expense ratio decreased by 9.7 percentage points year-on-year. We continue to make significant investments in IT. On a quarterly run rate basis, it amounts to about RMB20 million a quarter. The contribution from our open platform strategy is becoming more and more evident.

You can see that in terms of organic first year premium, it came in at RMB1 billion, an increase of 90.6%. More importantly, though, our open platform first year premium came in at RMB550 million, an increase of 135% year-on-year. In terms of contributions now, our open platform and acquisitions we made over the last 12 months now account for 35% of our first year premium and 32% of our revenue mix. Lastly, in terms of business outlook, we maintain our life insurance first year premium target of 50% year-on-year growth to RMB3.7 billion and we also maintain our adjusted EBITDA growth target of 50% year-on-year for the full year of 2023. And obviously, there’s a lot of questions about the outlook for the industry post the pricing change that we saw in the second quarter and the first month of the third quarter.

Our take is that look, this industry has gone through many cycles of pricing rate change over the past decade and we’re confident that the industry will continue to develop through these different stages and cycles. The important thing is that the overall return environment of financial products in China is declining. If you look at wealth management products out there in the market, the returns are below 3%. So insurance products, which now has a return being capped at 3%, is still very attractive as a form of savings product in the market. And our view is that this industry downturn presents excellent opportunities for market consolidation and expansion with our significant financial resources and open platform strategy, we think we’re well positioned to take advantage of this opportunity to facilitate acquisitions and also invite more third party brokers onto our open platform.

Lastly, I want to go through our capital allocation and our overseas expansion plan. So one of the attractions of our business model is that we are very asset light, we’re very capital light. And as a result, our business is able to generate very attractive operating cash flows every quarter and each year Over the last 16 years since our listing, Fanhua has generated an accumulated operating cash flow of RMB4 billion. And our cash reserve is now at RMB1.6 billion. And in the past, we have had a strong track record of steady shareholder return through dividend and share buyback on an accumulated basis since our listing, we have returned RMB2.8 billion to our shareholders in the form of dividend and share buyback. A lot of it actually came through in the last five years.

Our consideration and capital allocation strategy now are that, number one, we are temporarily suspending our dividend policy. And this is precisely because that we think that we are at a point in time where there are immense consolidation opportunities out there, as well as the opportunity to grow overseas. In terms of our overseas expansion plan, what we want to highlight is that the intermediary sector in Asia remains very small compared to mature markets like the US or Europe. Some of you may know there are basically over 800 brokers in Hong Kong. It’s a very fragmented market, a lot of them are subscale, and we think that we are at a point in time where leading technology platforms like Fanhua in China can take some of the expertise and grow overseas.

We are looking at expanding into Hong Kong and potentially in Southeast Asia as well because these are markets, we think is very, very underserved by the broker market and what they lack is the technology expertise that we could potentially provide. So that sums up the presentation that we have prepared for you and we now turn to Q &A.

Oasis Qiu: Hello, Maggie. We are ready to open the floor for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Coco Gong of Morgan Stanley.

Coco Gong: Hi, everyone. I’m from Morgan Stanley, Coco. Thanks for management to give me this opportunity to ask the very first question. First of all, congratulations to the company on very excellent results. The very first question from me would be about the expansion to Hong Kong and Southeast Asia markets. Maybe it’s more towards then, because we want to understand what would be the specific plans that the company is thinking about, what goals is the company trying to achieve. Maybe you can share with us a little bit of a detail on that. The second would be what is the company seeing from the first line of agents on the economic recovery in China? That’s sort of a question that a lot of investors are very curious about. That’s all. Thank you.

Ben Lin: Okay, so I’ll just, if you don’t mind, from now on, the Q &A session, I would like to respond in English. If I do have to pass the question on to some of my colleagues, I can help them translate. So I’ll take the first question and Chairman Hu will take the second question on the Chinese economy. In terms of our overseas expansion plans, we are at the very early stages of crafting out our strategy. But we can tell you this, we have a very clear focus on what we want to do. It’s going to be based on technology export and partnership. We’re not looking to build frontline teams in big scale by entering Hong Kong or Singapore, et cetera. That’s not what you should expect from us. Having looked at this industry for many, many years, I am a strong believer that the intermediary segment in Asia remains the only greenfield amongst the financial services industry across the region.

And my view is that this is a very underserved segment in terms of technology. As you understand, there are some insurance companies like Zhong An or Ping An to export some of the insurer tech to Southeast Asia and the rest of the world. But those are basically mainly catered for insurance companies’ needs. There’s actually no broker company out there that is developing technology to empower offline and online sales for the traditional industry, for the traditional sales industry. And we see significant market potential in the region. As I mentioned earlier, if you look at Hong Kong, you have 850 brokers in Hong Kong. They’re all very, very small. They don’t have the capacity to invest in technology. While if you look at China, we are really leading the world now in terms of digital sales of almost everything.

So in insurance, you are seeing a growing trend of agents using technology to create their own IT. They do basically lead generation through social media. They basically use their own expertise to create digital IT. And some of the recent trends we’re seeing is that there’s going to be a trend of using AI to drive a lot of those tasks. And so we think we are at a point where technology can drive consolidation of the brokerage market in Hong Kong and in Southeast Asia. And Fanhua is very well positioned to take advantage of that, given our expertise. We have 25 years of experience of selling P&C and life insurance products online and offline. And we have proven that in China we also have the financial resources to invest in this area. I mentioned earlier, each quarter we’re basically spending about RMB20 odd million on technology.

So we are very confident that this is the right path. And so please give us some time to find the right partner to pursue this path outside of China.