Huize Holding - Earnings Call - Q3 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to Huize's third quarter 2024 earnings conference call. At this time, all participants are in the listen-only mode. After the management's prepared remarks, we will have a question-and-answer session. Today's conference call is being recorded, and the webcast replay will be available on Huize's IR website at ir.huize.com under the Events and Webcast section. Now I'd like to hand the conference over to your speaker host today, Mr. Kenny Lo, Huize's Investor Relations Manager. Please go ahead, Kenny.

Kenny Lo (Corporate Development and Investor Relations Director)

Thank you, Operator. Hello everyone, and welcome to our third quarter 2024 earnings conference call. Our financial and operational results were released earlier today and are currently available on both our IR website and GlobeNewswire services. Before we continue, I'd like to refer you to the safe harbor statement in our earnings press release, which also applies to this call, as we will be making forward-looking statements. Please 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 Xiao, Co-CFO, Mr. Minghan Xiao, and Co-CFO, Mr. Ron Tam. Mr. Ma will start the call by providing an overview of the company's performance and operational highlights, followed by Mr.

Tam, who will go over our financial results for the quarter before we open up the call for questions. I will now turn the call over to Mr. Ma.

Cunjun Ma (Chairman and CEO)

[Foreign language]

In Q3 2024, as the effects of the government's policy mix began to materialize and market confidence improved, China's macroeconomy showed signs of steady recovery. In September, the State Council issued the opinions on strengthening supervision, preventing risks, and promoting high-quality development of the insurance industry, charting a course for the high-quality development of the insurance sector. In response to industry trends, Huize's refined its product strategy, capitalized on market opportunities, and built on its international expansion efforts over the past two years. As a result, the company achieved strong performance this quarter. In Q3, gross revenue premiums, or GWP, facilitated across all platforms, reached RMB 2.06 billion, setting a new quarterly record. Total revenue amounted to RMB 370 million, and net profit reached RMB 18.7 million, delivering a solid and commendable result.

[Foreign language]

In the third quarter, total first-year premiums, or FYP, facilitated on the platform, amounted to approximately RMB 1.25 billion, up 110% year-over-year. Renewal premiums reached approximately RMB 706 million, up 18% year-over-year. From a product mix perspective, savings products were among the most popular insurance offerings prior to the bank adjustment of the assumed interest rate. In the third quarter, FYP from savings products saw a 1.5-fold increase year-over-year. Notably, FYP for whole life insurance reached approximately RMB 765 million, up 150% year-over-year. Meanwhile, our short-term insurance business recorded double-digit growth, with gross written premiums climbing 40% year-over-year to approximately RMB 129 million. This further enhanced our ability to provide diversified product offerings.

[Foreign language]

Building on our profound customer insights and service capabilities, we remain committed to serving high-quality customers and delivering superior service experience. By the end of the third quarter, the cumulative number of insurance clients served surpassed a significant milestone of 10 million. The average age of customers who purchased long-term insurance products in the third quarter was 35, among which 68.7% were located in high-tier cities, reflecting our high-quality customer profile. The average FYP take size of long-term insurance products rose nearly 140% to approximately RMB 9,630. The average FYP take size of savings product reached approximately RMB 79,000, up 59% year-over-year. As of the end of August, 13-month and 25-month persistency ratios for long-term insurance both exceeded 95%, remaining at an industry high level.

[Foreign language]

As of the end of the third quarter, we maintained stable partnerships with 123 insurance companies. Drawing on deep insights into customer needs and leveraging our product development capabilities, we continued to introduce new tailored insurance offerings, enriching our product matrix. In August, we partnered with CPIC P&C to launch Little Scholar Accident and Health Insurance, covering two critical areas of protection for students. Meanwhile, we continued to iterate and upgrade our existing products. In September, we partnered with New China Life Insurance to launch the upgraded Bliss 2.0 lifetime annuity insurance, leveraging product innovation to support the high-quality development of the national third-pillar pension system.

[Foreign language]

Powered by AI, we have been driving the digital upgrade of our sales operations and developed a suite of AI-powered tools that can improve internal efficiency and business development capabilities. Since the beginning of this year, we have leveraged AI to swiftly generate high-quality marketing materials, including articles, infographics, videos, and customized digital avatars, enabling widespread content distribution on social media. Meanwhile, AI-powered knowledge bases and customer service tools provide efficient insurance support for external users, agents, and back office teams, streamlining their access to information and solutions. In terms of sales tools, AI enables the intelligent generation and optimization of proposals and underwriting tools, providing precise support to the sales team. Furthermore, we introduced an AI sales assistant that can conduct semantic analysis and evaluate the sales stage to help formulate more target communication strategies.

By year-end, these initiatives are expected to drive a 50% improvement in content production, further enhancing the service capabilities of our teams.

[Foreign language]

This year, we have made encouraging and continuous progress in expanding our international business. In the third quarter of 2023, even with strong performance in our domestic business, our international business contribution to total revenue reached a new record high of 19%, up 8 percentage points compared to the previous quarter, mainly driven by the strong demand for premium products in our international business.

[Foreign language]

Our international growth at Huize's first, to diversify revenue streams by expanding into overseas markets, and second, to establish new growth trajectories and foster the group's long-term sustainable development. To this end, we have established the headquarters of our overseas brand, Poni Insurtech, in Singapore, positioning it as the strategic hub for our international operations. Through mergers and acquisitions and joint ventures, we are working with local partners to accelerate our expansion into Southeast Asia with a clear regional business model. Hong Kong and Singapore will cater to the inbound insurance needs of high net worth and mass affluent clients in the region. While in the VIP markets of Vietnam, Indonesia, and the Philippines, we will focus on the high growth potential of these markets, enhancing digital insurance penetrations by offering embedded insurance solutions, further expanding user coverage and market share.

[Foreign language]

In September, we have successfully entered the Vietnam market with the acquisition of a leading insurance tech platform, Global Care. In October, we jointly launched Global Care.vn with Global Care in Vietnam, an insurance comparison platform positioned as a one-stop insurance supermarket to provide consumers with a superior, transparent, and user-friendly insurance shopping experience. This milestone signifies the continued deepening of our international expansion. The successful expansion into the Vietnam market has not only reinforced our leadership in the international expansion journey, but also set a benchmark for future market expansion.

[Foreign language]

Looking forward, we plan to enter two additional overseas markets within the next 12 months: Singapore and the Philippines. In the Philippines, we have identified a well-established electronic service provider and plan to form a joint venture combining Huize's technological capabilities with our partners' local resources to promote digital insurance services for local consumers. In Singapore, we have formed an experienced team and are in the process of applying for an insurance brokerage license. We plan to further develop high-end insurance services in the region and establish another key insurance service hub in our international expansion journey. By 2026, we target our international business will account for 30% of our total revenue, driving diversified growth and creating long-term value to the group.

[Foreign language]

2024 has been a year of both challenges and opportunities. Leveraging our deep understanding of consumer needs and exceptional product capabilities, we have demonstrated remarkable resilience by adapting our business strategies amid industry transformation, while also experiencing significant growth in our international business. Looking ahead to 2025, the Chinese insurance market continues to present opportunities for development. We will continue to collaborate closely with insurance companies to maximize and leverage our combined resources and strengths, while launching a diverse range of innovative customized products tailored to the market needs and trends. Moreover, we will proactively capitalize on opportunities in the international markets, particularly in emerging Southeast Asian markets, to enhance Huize's competitiveness. With these efforts, we aim to inject new growth momentum into the company and remain committed to delivering greater value for our shareholders.

[Foreign language]

This concludes my prepared remarks for today. I will now turn the call over to our CFO, Mr. Ron Tam, who will provide an overview of our key financial highlights for the third quarter.

Ron Tam (Co-CFO and Head of International)

Thank you, Mr. Ma and Kenny. Good morning to our friends in the U.S., and good evening everyone from Asia. So just to quickly recap the third quarter results, I think we have delivered a very strong set of record results in terms of GWP facilitated on a platform amid the challenging macro environment in the industry landscape. Total GWP, which is a record quarterly high of RMB 2 billion, while our total FYP also more than doubled to RMB 1.35 billion. We also recorded a non-GAAP net profit of RMB 18.3 million for the quarter. Our robust ability to meet evolving consumer demand for long-term insurance products amid ongoing regulatory reforms can be attributed to our efficient omnichannel distribution network, covering online and offline channels, our relentless efforts to attract high-quality customers, our sophisticated product innovation capabilities, and our proprietary AI solutions.

More importantly, we are the pioneer in the industry to initiate international expansion, a strategic move that is set to become a new growth driver for our long-term sustainable development. Our strategic focus has still remained on long-term insurance products, which have accounted for over 90% of our premiums facilitated for five years. Meanwhile, our omnichannel distribution ecosystem and proprietary AI tools further strengthen our customer acquisition and engagement capabilities. In the third quarter, we added about 287,000 new customers to our ecosystem, bringing our total number of customers to a milestone of 10 million mark as of the end of the third quarter. The repurchase ratio for our long-term insurance products stood at a very high 40.2% during the quarter as well, which highlights our ability to continuously upsell, cross-sell, and capitalize on the lifetime value potential of our high-quality customer base.

Our open platform architecture continues to empower both our internal financial advisors and also external independent financial advisors, or IFAs. Total FYP for our To-A business surged by 102% year-over-year to CNY 181 million in the third quarter. We also leveraged our self-developed AI solutions to streamline operations and further enhance operational efficiency. In the third quarter, our expense-to-revenue ratio improved by 5 percentage points year-over-year to 24%. I will also highlight other key achievements over the quarter, which includes the following. Number one, renewal premiums increased by 18% year-over-year to approximately CNY 706 million, which again is underpinned by our high persistency ratios for long-term life and health insurance, which as of the end of August remained at an industry-leading high level of over 95% for both the 13th month and 25th month.

The average ticket size of our long-term savings products reached a record high of over 78,000 RMB in the third quarter, which is up by 59% year-over-year, partly reflecting an increased contribution from premium product sales in our international market segment, which is predominantly Hong Kong. We continue to pursue a balanced mix between long-term health and savings products. FYP for our long-term health products surged by 67% year-over-year to approximately RMB 173 million, primarily driven by our customized products with CPIC. Meanwhile, FYP from short-term health and P&C products sustained a steady growth of 14% year-over-year to approximately RMB 129 million. In terms of our liquidity position, our financial position remains very robust, with a combined balance of cash and cash equivalents of RMB 243 million, or $35 million as of the end of September.

Going forward, we will continue to empower our insurance agents, our distribution partners, and our IFA partners with an optimized omnichannel distribution ecosystem, our rich product offerings, and advanced AI tools to support customer acquisition and engagement. In parallel, we continue to leverage on our successful China-proven business model to capitalize on the tremendous untapped market opportunities across Southeast Asia through our international arm, Poni Insurtech. Our total international revenue contribution for this quarter rose to 19% of total group revenues, which is up from 11% in the last quarter, which is mainly driven by our ongoing expansion of the business in our Hong Kong segment. Alongside our expansion in Hong Kong, in September, we completed the acquisition of a controlling stake in Global Care, our Vietnam-based subsidiary.

We have since enhanced the Global Care platform with innovative customized insurance products, distribution partnerships, and comprehensive AI solutions, which is aiming to accelerate business growth through its mainly embedded insurance model. We are confident that we can achieve a more prominent revenue contribution from our Vietnam operations in the new year 2025. Moreover, as we have alluded to earlier in the opening remarks, we plan to enter two further markets in Southeast Asia, which is mainly Singapore and the Philippines, in the next 12 months. We believe that these initiatives will further diversify our revenue streams and serve as new growth drivers to enhance long-term shareholder value. We are now presently on track to achieve our international revenue contribution target of 30% of group revenues by 2026.

In summary, we are very well positioned to benefit from China's evolving industry landscape, which is expected to foster healthy and sustainable growth across the entire insurance value chain. We will also capitalize on growing economies, larger young demographics, urbanizing middle-class populations, and an increasing demand for digital insurance solutions in Southeast Asia to expand our international footprint. We are confident that our strategies will further solidify our position as Asia's leading insurance technology platform, connecting consumers, insurance carriers, and distribution partners digitally and efficiently through our data-driven and AI-powered solutions. My final remark on our recent capital markets development: as of yesterday, December 9, our ADS ratio change has become effective, which in effect has a 5 to 1 reverse split effect on our shares outstanding and share price. This has been reflected in the market trading as of yesterday.

With that closing remark, we will now open up the call to questions. Thank you, and over to you, Operator.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, please press star 11 on your telephone keypad. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. There may be a short pause as questions are collated. Once again, that's star 11 for questions. We'll now take our first question from the line of Amy Chen from Citi. Please ask your question, Amy.

Amy Chen (Assistant Manager)

Hi. Thank you very much, and congratulations on a very decent quarter, especially very strong GWP growth. My first question would be on your full-year guidance for net profit. It's very good to see that Huize has turned profitable again in the third quarter. What would be your outlook for the fourth quarter and also for the next year of 2025? The second question is mainly expense-wise. First, I noticed that actually the gross margin has seen a little bit of pressure in the third quarter this year. Do you think that the impact of the expense rationalization in the broker channel has been fully reviewed, or do you think that gross margin could be further pressured going on? Secondly, we noticed that the G&A expenses actually rose quite significantly, and management actually attributed this to an increase in rental and utility expenses. Would you mind elaborating more on this?

Thank you very much.

Ron Tam (Co-CFO and Head of International)

Right. Thank you, Amy. Thanks for joining us again, as always, so with regards to a few questions, I will just address one by one. In terms of the first question on our full-year guidance for 2024, I think we would like to say that Q3 has been a very strong quarter, mainly due to a couple of reasons, and I think the most prevalent one has to do with the so-called adjustment of the interest rate in the mainland China products relating to the savings products category. That has driven a lot of upfront demand by customers or the overall market into the month of July and August, and particularly in August, so some of the demand has been front-loaded into Q3, and as a result, we think Q4, what we envisage is a somewhat lukewarm recovery in this particular product category on the savings side.

But we do have an offsetting growth continuously in our offshore market, which is predominantly our Hong Kong segment, is still seeing strong momentum in the months leading up to the current December month. So there would be some offsetting effect on that part. But overall, we think that still, given that our mainland China business consists of the predominant share of our overall FYP and revenue as a result, and therefore we think that the Q4 quarter would likely be less strong as a quarter as compared to Q3. The other factor that we have to deal with right now is the overall product transition into the new regime of the PAR products, which is now being promoted mostly by the intermediaries, in particular, the brokerages like ourselves.

And therefore, the change of the mind share and the mindset of the consumers from the traditional savings products into the PAR product, it still takes time to mature. We think that this probably is a process for the next two to three quarters. And therefore, we think that as a result as well, Q4 on the savings category, we do see that the demand will be definitely not as strong as we've seen in Q3. So at this point in time, we think that the fourth quarter would be less strong as Q3. So that's the first question. The second question on gross margins, you have correctly noted that the gross margin has declined to around 27% in the third quarter, which is a slight drop from the levels in Q2.

We do think that this level of gross margin has fully reflected the effect of the so-called expense rationalization on the brokerage channel or Bao Xing Gui. The regulatory effect also has to do with a decline in the overall commission rates, and therefore, as a result, because a lot of our business also is in partnerships with other distribution channels partners, right, and therefore, as a result of that, the channel economics needs to be adjusted to compensate for the decline in commission rates, the headline commission rates or take rate, and therefore, the gross margin has been compressed a bit as a result of the cost structure or the economic structure for the value chain.

We do see that this level should more or less be. We think that at least on the mainland China business side, should remain relatively steady going forward in the next few quarters as the full effects of the rationalization have been felt in Q2 and Q3. And on your third question on G&A expenses, we do note that on a quarter-on-quarter basis, it has trended down from Q2. And we do not expect that G&A expense to materially increase from this point onwards because we are highly focused on further optimization of our overall cost structure across our selling expenses, G&A, and R&D, especially with the fixed cost base. We have a very strong and clear target to improve our cost-to-revenue ratio in this particular part of the cost structure of the company.

Amy Chen (Assistant Manager)

Thank you very much. That's very clear.

Ron Tam (Co-CFO and Head of International)

Thank you, Amy.

Operator (participant)

Thank you. As a reminder to ask a question, please press star 11 again. Your next question comes from the line of Ray Guo from CICC. Please ask your question, Ray.

Ray Guo (Equity Analyst)

Hi, thank you. I have one question for the management. And does the company have any plans or further plans on the health management industry? Because the commercial insurance companies are likely to have access to medical data of hospitals. And Huize has any further plan on the health management industry? And another one is about the 2025 FYP guidance. Do we have any guidance on the amount of 2025 FYP? Thank you.

Ron Tam (Co-CFO and Head of International)

Right. Thank you. Thank you, Ray, for joining the call. For the first question, I think your question was about whether we have plans to enter the healthcare services segment or the healthcare industry because we have a very strong focus on life and health insurance as a whole. We do have plans. Actually, we do have already established our own internet healthcare platform, although the business model and business scale has been still at a startup stage. I think our focus going forward would still continue to be coming up with the right customized products to tackle market pain points, especially on the consumer side.

Because what we see that going forward is the trends that we are seeing in the healthcare industry, for example, the DRG reforms, which will lead to, we believe, a very strong necessity among consumers to upgrade their healthcare coverage with respect to pursuing commercial insurance to complement to what they have already on a social security level. So we are setting our focus on the mid to high-end medical health product going forward in the next two to three years. Our plans is already we have solid plans to come up with a customized product in the near future, probably in the next two quarters, that would provide good coverage to our target customers in respect of these overall healthcare reforms that we are seeing in the industry. So that's the first question. Second question on guidance for full year 2025.

We do think that right now is a little bit early. We're providing guidance to the market when we reach our Q4 results, which will be scheduled for a few months down the road. Thank you, Ray.

Operator (participant)

Do you have any follow-up question, Ray? All right. Thank you. So as a reminder to ask a question, please press star 11 on your telephone keypad. All right. I'm showing no further questions. And with that, I'll turn the conference back to Mr. Kenny Lo for closing comments.

Kenny Lo (Corporate Development and Investor Relations Director)

Thank you, Operator. In closing, on behalf of Huize's management team, we would like to thank you for your participation in today's call. If you require any further information, feel free to reach out to us. Thank you for joining us today. This concludes the call.

Operator (participant)

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.