CNinsure Inc. Q3 2008 Earnings Call Transcript

Nov.25.08 | About: CNinsure Inc. (CISG)

CNinsure Inc. (NASDAQ:CISG)

Q3 2008 Earnings Call Transcript

November 24, 2008, 8:00 pm ET

Executives

Yinan Hu – Chairman and CEO

Peng Ge – VP and CFO

Analysts

Kenneth Yue – Fox-Pitt Kelton

Mike Grasher – Piper Jaffray

Aaron Lou [ph] – Morgan Stanley

Operator

Welcome to our third quarter 2008 earnings conference call. In this call, Mr. Yinan Hu, our Chairman and Chief Executive Officer, and Mr. Peng Ge, our Chief Financial Officer, will discuss the CNinsure financial results and business operations for the third quarter 2008. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question-and-answer session. Please follow the instructions given at that time if you want to ask a question. For your information, this conference call is being broadcast live over the Internet. Webcast replay will be available within an hour after the conference is finished. Please visit www.cninsure.net under the Investor Relations section.

Before we begin, I’d like to remind you that during the course of this call, we’ll be making forward-looking statements, which are subject to risks and uncertainties. You can also identify forward-looking statements by terminologies such as will, expects, anticipates, future, intends, plans, believes, estimates and similar statements. 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 Securities and Exchange Commission, including our annual report on Form 20-F. We do not undertake any obligation to update this forward-looking information except as required under applicable law.

Now I’d like to invite Mr. Yinan Hu to address you. Please begin.

Yinan Hu

(Interpreted) Thank you for joining us on today’s earnings call. With me on the call today is Mr. Peng Ge, our Chief Financial Officer, and Fred Jin, our Chief Operating Officer. To begin with, I would like to say that it’s our great pleasure to report another quarter of solid financial results, particularly under the current market conditions.

The third quarter was not exactly a smooth quarter for us. Our business was slightly impacted by the Olympic Games as (inaudible) has been pre-released in the second quarter. In addition, the new CIRC regulation, which ends up further regulating the P&C insurance market, also had one month impact on our P&C revenues. What makes us particularly proud is that with the recorded 80.6% growth in net revenues over the same period of last year despite all of these negative effects, we continue to achieve solid growth across all of our business in line with our plan.

In our P&C insurance segment, commissions and fees revenues grew by approximately 44%, accounting for roughly 72% of our total commissions and fees revenues. Life insurance business also showed pretty good, strong growth momentum in the third quarter, growing by 206% over the same period of last year and contributing more than 14% of the total revenues.

The last, but not the least, was our claims adjusting business. We added this business to our portfolio in the first quarter of this year by acquiring free leading insurance adjusting firms. During the third quarter, the aggregate revenues from the claims adjusting business has grown 52% over last quarter and accounted for 13% of the total revenues. We are quite satisfied with the contribution of this new segment, not only in terms of revenues but also the complementary function of this business line to our retail distribution part. Now that’s more sophisticated, well added after service [ph] will just become available to our customers.

Our net income grew at a slower pace than our net revenues in the third quarter. This had much to do with the termination of the tax holiday starting from this year and also our status as a NASDAQ listed company. Since our IPO last October, we’ve seen a significant increase in share-based compensation, SOX compliance related expenses, professional fees, et cetera. But perhaps more importantly, we have devoted and will continue to devote substantial human and financial resources to upgrading our operating platform, including introducing a new human resources system and building IT infrastructure, co-business operating system, financial and accounting system, as well as e-learning system.

The impact on our G&A expenses may continue in the short-term because of this investment. However, we believe that this investment is crucial to in-housing our core competitiveness and establishing cost leadership. We expect that our profitability will pick up over time as our operational efficiency (inaudible) and we achieved better economies of scale. Basically we’re seeing that investment is in the best interest of our long-term success.

I would like to highlight two major developments in the third quarter that we expect to have significant impact on us over the next quarter. The first was the regulatory change that I have just mentioned. This regulation comes into effect since September 1, and we expect it to have a continued impact on our revenues over the next couple of quarters. But I would like to point out that since we are also paying less to our sales agents, the impact on our net income will be quite minimum.

In addition, we regard this regulation as positive rather than negative in the long-term because it is helpful for the healthy development of the industry and will accelerate the further consolidation of the front end market, providing substantial opportunities for leading players like CNinsure to expand our market presence.

The second major development was the announcement we made in September regarding the acquisition of Datong, a life insurance intermediary company based in Beijing. During our road show we have been asked over and over again why we would invest 220 million RMB in a new startup, which hasn’t even shown any revenue on their balance sheet. The reply was always like this.

What interests us most is the management team led by Mr. Lin, who is the former Senior Vice President of the New China Life, which is the fifth largest life insurance company in China. Mr. Lin is a legendary figure in the life insurance sector, highly respected for his strong capability in leading the sales of individual life insurance. But more importantly, he and his team are firm believers of the independent insurance distribution channel because they believe there will be a division labor (inaudible) and insurers sooner or later.

Based on his track record of success and the common wish with CNinsure to develop opportunities in the life insurance distribution channel, we signed an acquisition agreement with Datong providing for a 50%, 45% ownership structure under pre-cautious [ph] measures, the consideration will be paid in ten equal installments over three years subject to the fulfillment of targets relating to the number of sales teams, sales agents, premiums and profit.

Regard Datong as a strong addition to our life insurance distribution capability, and we anticipate it will be a significant contributor to the growth of our life insurance business. Furthermore, we hope the joining of Mr. Lin and his team, we will attract more talent to venture into (inaudible) insurance intermediary et cetera, and become part of the CNinsure. So, even though the total consideration is 220 million, we express that [ph] as only 220 million because the payments will be paid in ten installments.

Now before turning the call over to our CFO, I would like to share with you our observation on the industry and also our growth prospects in the fourth quarter of 2008 as well as 2008. In the first half of this year, the insurance market registered 51% growth in premiums managed by the massive sales of investment related products to which was so through the channels.

However, we don’t think this is a healthy and sustainable growth and that we have seen insurance companies cutting back sales of those kinds of products (inaudible) both due to the pressure on their solvency and also because of the weak performance on the Asia stock market. As a result, we expect the overall premiums will be on a downward slope in the next quarter. However, we are still quite optimistic about the gross profit of the insurance industry because those factors driving the demand for protection-oriented insurance such as GDP growth, aging population, and high saving deposits are still there.

Given the low insurance penetration and density level in China, we think there is still huge potential in the protection-oriented insurance segment, which is still basically on track. While the sales of investment-related products slowed down, we are also seeing – we are seeing insurance companies returning their sales focus back to the protection-oriented insurance products. CNinsure has been building our strength in the retail distribution of these kinds of products such as long-term whole life insurance and then individual auto insurance since our inception. So we are quite confident to take advantage of this favorable trend.

Looking ahead to the fourth quarter and 2008, we remain optimistic while the market is getting more challenging given the economic downturn. We believe that opportunities also become more abundant for strong (inaudible) companies. With the strong financial position of 1.6 billion RMB in cash, we believe that we are well positioned to fully execute our business plans and capitalize on opportunities lying ahead.

Now I would turn the call over to our CFO, Mr. Peng Ge, to review the financial results.

Peng Ge

(Interpreted) Thank you, and welcome all of you on the call. I’m very pleased to be here to review our performance in the third quarter. The numbers I would refer to will be in RMB unless otherwise indicated.

Total net revenues for the third quarter ended September 30, 2008 were 211 million RMB, representing an increase of 80.5% from 116.9 million RMB for the corresponding period of 2007. Total operating costs and expenses were 154.2 million RMB for the third quarter of 2008, representing an increase of 100% from 77.1 million RMB for the corresponding period last year.

Commissions and fees expenses were 110.3 million RMB for the third quarter of 2008, representing an increase of 77.4% from 62.2 million RMB for the corresponding period of last year. Selling expenses were 4.1 million RMB for the third quarter of 2008, representing an increase of 77.5% from 2.3 million RMB for the corresponding period of 2007. General and administrative expenses were 39.7 million RMB for the third quarter of this year, representing an increase of 216.3% from 12.6 million RMB over the same period last year.

Income from operations was 56.8 million RMB for the third quarter of 2008, increasing 42.7% from 39.8 million RMB for the same period last year. Operating margin was 26.9% for this quarter as compared with 34.0% for the same period of last year. Interest income for the third quarter of 2008 was 12.9 million RMB, increasing of 379.7% from 2.7 million RMB for the same period of last year. The increase was primarily attributable to the proceeds from our IPO in October 2007.

Income tax expense for the third quarter of 2008 was 16.4 million RMB, increasing 1,917.9% from 0.8 million RMB for the corresponding period of 2007. Net income was 52.2 million RMB for the third quarter of 2008, representing an increase of 23% from 42.4 million RMB for the same period of last year. Net margin was 24.7% for the third quarter as compared with 36.3% for the same period of last year.

Fully diluted net income per ADS was 1.144 RMB for the third quarter of 2008 compared with 1.244 RMB for the same period of last year. As of September 30, 2008, the CNinsure still had 1,611.4 million RMB in cash and cash equivalents.

For the fourth quarter 2008, we expect the total net revenues to be in the range of 235 million RMB and 250 million RMB, reflecting the impact of the new regulations issued by the CIRC, which come into effect on September 1, 2008.

All right. So, we are not open for questions. CEO and CFO, as well as COO will be ready for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) The first question is Kenneth from Fox-Pitt Kelton. Please go ahead.

Kenneth Yue – Fox-Pitt Kelton

Hi. This is Kenneth Yue from Fox-Pitt Kelton. I’ve got two questions basically. First question is with regard to the strategic partnership with Ping An Life, can you please give us some rough estimate of how much in percentage of your income came from Ping An Life so far in 2008? And do you expect a similar proportion of income coming from Sino Life going forward? And my second question is with regard to the acquisition of 55% interest in Beijing Fanhua Datong Investment Management Company Limited, can you to describe that [ph] to us a rough estimate of the price multiple of the deal? Thank you.

Yinan Hu

(Interpreted) All right. Coming up to your first question, as you probably know that we had – in terms of P&C particular ordering insurance, we have had collaborations with major companies, including Ping An. But the Asian life style is a bit different. This is really our sort of first time ever to be collaborating with Ping An Life Insurance sector, particularly on a corporate-to-corporate agreement basis. In terms of the total revenue we received from this kind of corporation, I would say it’s very minimum for year 2008. This is what we have done with Ping An Life Insurance. We have signed a corporate-to-corporate agreement saying we are going to sell a specifically tailor-made life insurance product for Ping An Life. Our major preference is to see whether we can make any progress in terms, one, corporate-to-corporate agreement; two, designing specifically tailor-made product just for the sale of our sales forces. And we made progress in these areas. But in terms of the total revenue, it’s a minimum number. We have also tried similar efforts with some other companies. The latest, for example, is our collaboration with Swiss Reinsurance and also the Sino Life Insurance in China. We are going to do so in the coming year 2009 and even in putting more efforts in this regard. That’s for your first question.

Kenneth Yue – Fox-Pitt Kelton

Thank you.

Yinan Hu

(Interpreted) I’m coming to the second now. All right. Sorry for the interruption. We had a minor discussion here. Coming over to your second question, our collaboration – or our acquisition of 55% of Datong – Datong Insurance in Beijing, okay, let me emphasize the two basic – the fundamental things we have been contemplating in the whole process. First of all, while buying this company and the payment, as previously introduced, is arranged in ten equal installments subject to two things. One, there will be a guaranteed performance over there. This is not only the total sales revenue, but also their establishment, their presence in different locations, and also the total number of their sales agents, sales outlets. These things combined will be forming the basic performance criteria for us to fulfill our payment obligations.

And second, if Datong does not fulfill the above mentioned criteria, their shares – their 45% shares will be kicked back proportionately back to CNinsure. So in other words, we think our risk window in the whole process will probably – will most likely be limited only to 20 million RMB. Having said that, we have also done our calculation. According to the guaranteed performance of Datong, we would see roughly about 300% increase of their revenue in the coming three years. And also in terms of P/E, we think the P/E in the first year is a bit high. It’s roughly in the range of about 18 times multiple. And in year two, it’s roughly about six P/E multiple. And in year three, it’s three P/E multiple. So that’s how we strike this pricing mechanism for the acquisition of Datong. The other thing I really have to mention is something to do with the corporate strategy. The management has really determined that life insurance – to grow life insurance business will be the focus of the company in the coming year for obvious reasons.

It’s embedded value, it’s renewed premium in the long run, the real benefits coming out of this scale. And also by nurturing a big sales force in the coming year, we cannot only sell life insurance but any other possible financial instruments in the future. So with this massive presence nationwide and also this sales force establishment, we think we’ll be in a better position to negotiate with various insurers in the market. It’s kind of corporate-to-corporate agreement, which in a nutshell will give the company more higher commission rate than any single piece-of-meal approach.

Kenneth Yue – Fox-Pitt Kelton

Thank you for the answer. Thanks.

Yinan Hu

(Interpreted) Thank you.

Operator

The next question is Mike from Piper. Please go ahead. Mike, you can ask your question now. Thank you.

Yinan Hu

(Interpreted) Mike, I can’t hear you.

Mike Grasher – Piper Jaffray

Hello?

Yinan Hu

(Interpreted) Yes, Mike.

Mike Grasher – Piper Jaffray

Hi. Okay. I guess a couple of questions here. First of all, an accounting question just in terms of the change in goodwill in the quarter sequentially. I’m wondering what created the change.

Peng Ge

(Interpreted) Okay. Can we do it – Mike, can we do it one by one?

Mike Grasher – Piper Jaffray

Yes, that’s fine.

Peng Ge

(Interpreted) Okay. The change you mentioned in terms of goodwill, actually it’s an increase of the goodwill. Right, Mike? This is mainly due to more acquisition. Accordingly to the appraisal done by that company called American Appraisal, part of the assets of the acquired company has been attributed to the category of goodwill. So this is why you see the changes in this goodwill area. That’s it for your question?

Mike Grasher – Piper Jaffray

Yes. Just – okay. Moving on then, with the shares where they are, priced at where they are, and we’re looking at cash per share of about $5, might you contemplate doing something different in terms of the capital allocation, perhaps the share repurchase or dividend?

Yinan Hu

(Interpreted) Mike, first of all, let me share with you, on November the 18th, we proposed – sorry, November – Okay. Just to share with you, in our third quarter meeting of Board of Directors, we’ve been talking about couple of things mentioned by you just now. Here is what the management is going to do. We are going to propose a share buyback proposal in the shareholders meeting scheduled on December 18. To the effect of that, the company is proposing to use no more than $20 million to buy back certain amount of shares in the open market. This is mainly due to the current situation. We think that the company remains strong.

The fundamentals are still there. We’ve been working very hard to stick to our previous strategy and operation trends. But obviously, we think the share price has been very much undervalued, and this is probably due to the overall financial market in the world. And this also has something to do with the slowdown also of the economy in China. But at the same time, we think this probably presents not only challenges, but also opportunities for the company. But you are right, Mike, when you say in the future where we have to think about how we’re going to utilize the resources available to us more prudently and efficiently.

It is our general consensus that the current situation – under the current situation, we’re probably going to be more prudent in terms of utilizing the resources. What we are going to do in addition to that proposal, we’re going to lay – to take advantage of this opportunity to lay a more solid foundation for the future sustainable development of the company, so in order to really meet the challenge after this downturn of this run-off economic development.

Mike Grasher – Piper Jaffray

Okay. And then just to tie that in, I read through the press release, I hear your commentary about expectations for next quarter and then also your expectations in 2009. With the slower economy, with unemployment going higher, you still seem to be exuding quite a bit of confidence in terms of being able to grow abundantly in there. Can you just talk a little bit more about why that is? Is it the vast opportunity that’s in front of you? Is it different culture in terms of protecting lives? Just a bit more commentary around that.

Yinan Hu

(Interpreted) Mike, coming to your question, we do have a confidence to remain optimistic concerning the growth of the company and the overall economic situation in China. You are quite right that maybe we are in a pretty different market situation. Right here in China, you could (inaudible) to say that you see the sign of slowdown of the economy, but the positive signs are the latest government policy promulgating roughly 4 trillion of the investment in the coming years – 4 trillion RMB investment in the coming years. And the first round of investment in the amount of 100 billion RMB has been initiated and will be implemented before the end of this year. And we think this overall stimulated package of the government will be taking its effect in the coming two quarters. That’s the overall situation.

And secondly, in the rural market, you also see that lot of stimulated packages being introduced. The main focus is actually if almost the privatization of that land belonging or being leased to various farmers, this will enable a total number of roughly 700 million people residing in the countryside to have more income to consume in the future. That’s something to do with the macro level of the economy. At the micro level, if we really look into the driving sectors of the insurance sector, particularly for intermediaries like CNinsure, we see that the fundamental driving factors are still there. We talk about the population dividend. We talk about the total insurance density and penetration.

We still see the GDP growth most likely will be maintained at the 9% level. And we also see the accumulation of (inaudible) and also we also see that our geographical presence across the country, the increasing numbers of our sales forces, and also the ever-increasing commission rate being paid out by insurance. These things remain unchanged. And perhaps more important is that although the insurance market will be mainly affected in the bank insurance sector while that’s not our focus, CNinsure has always been speaking to the sales of individual long-term life insurance. Those products in areas like participating are universal. They are seeking long-term protection-oriented kind of features rather than this kind of short-term investment features.

And this is something really needed by the consumers and also really needed by various insurers despite the current situation. And I think all these driving factors, both at the macro level and also the micro level, and also looking into what are the driving factors in pushing CNinsure going forward. This is why we think we are having this confidence in making the prediction you can see for the next quarter and even for the year 2009. Mike, let me make one more remark here. You mentioned just now whether we are in a different kind of market situation or different kind of culture. Indeed, yes we are. Actually that is the confidence of consumers, or the confidence of consumer of their view towards the overall financial market, the financial institutions.

Because right here in China, we have all the big four state-owned banks and also a dozen of the share cost – shareholding kind of financial institutions like banks and also insurance companies. It doesn’t matter what kind of composition or mix of their share structure is, all of them has been regarded by the consumers that the government will stand behind them friendly. And the government is also making lots of announcements saying that they will not sort of step aside just watching things, coming, seeing the financial institutions collecting them et cetera. So this actually has been a very positive encouragement to the consumer to really boost and establish their confidence over the financial market. And this is probably going to help them to consume in a more relaxed way in the coming years.

Mike Grasher – Piper Jaffray

Okay. Thanks very much. That’s helpful to get that perspective on things. And then I just – just one brief comment and we can move forward. I’m still showing – I’m looking at the goodwill number again and it looks like a sequential decline in the goodwill number. So maybe we could just visit with this offline and talk about another time just to keep things moving. But I’m still – I’m not showing an increase, I’m seeing a decline sequentially in the goodwill number.

Peng Ge

(Interpreted) Mike, can we call you, or you would call us on separate occasion to discuss this goodwill issue?

Mike Grasher – Piper Jaffray

Absolutely, yes. Yes. And thanks very much for having the call.

Yinan Hu

Thank you.

Operator

Thank you. Our next question is Aaron Lou [ph] from Morgan Stanley. Please go ahead.

Aaron Lou – Morgan Stanley

(Interpreted) We see still increase of business in the adjusting area comparing the numbers of third quarter with that of the second quarter. So could you, Mr. Hu, explain, where does this growth come from?

Yinan Hu

(Interpreted) Within our scope of adjusting business, we are actually covering three areas. First is the adjusting done in the P&C area, property and casualty area, and second is in the marine and cargo business sector, and lastly is in the auto insurance surveyor and adjusting. Of course, we know that in terms of property losses, like the losses caused by the natural disaster, either the snowstorm or the earthquake that happened in early half of this year, this adjusting process is relatively low. And (inaudible) usually doesn’t reflect in the current season and it will be reflected in the coming two or three seasons – quarters. Of course, this is contributing to the overall revenue of our adjusting business, particularly for this year, but we don’t really hope that this will be happening all the time. It doesn’t – it’s not going to happen all the time.

But marine and cargo and also auto surveyors, they are more steady sources of income for us. The marine and cargo business, the company being purchased is called the Tinhum [ph], which is really the leading marine cargo surveyor in China, and also honestly the profit margin in this area is relatively high. And perhaps the most important contribution of the business mix is coming from these auto insurance surveyors, which has been a constant and ever increasing part of our business. And so this is why we see that this is going to be renewed in the coming quarters. And also in terms of auto insurance surveyors, lot of the insurance companies, they have been outsourcing this part of the business process to third parties like CNinsure. Simply we’re being able to do it in a more cost-effective way. Hope that answers your question.

Aaron Lou – Morgan Stanley

Yes. Okay, thank you.

Operator

Thank you, everyone. Currently, there are no more questions in queue. Would you like to continue with the closing comments, please?

Yinan Hu

(Interpreted) All right. Before running up the press conference, I’d like to say we are really pleased to speak to you over the phone once again. And we are also happy to what we have been able to achieve up till now. And we’d like to take advantage of this opportunity to thank you, all the investors, all the analysts, and all the people who have been giving cash to CNinsure. Despite the change in the world financial markets as well as the overall economic situation in China, the management is still confident to lead CNinsure to move forward according to our original business plan. So we’re going to seek every business opportunity. We are going to do our utmost really to deliver the results, satisfactory results, to our shareholders and to our investors.

Unidentified Participant

Mike, are you still there?

Mike Grasher – Piper Jaffray

Yes, I am here.

Unidentified Participant

Mike, okay. Mr. Ge, CFO, would like to come back and take a little bit more time coming back to your question.

Peng Ge

(Interpreted) Yes, you are right to notice that the reduction of goodwill. This is mainly because we have hired American Appraisal to do the goodwill assessment. Part of that once been determined will be denominated in the category of goodwill. But again, this number has gone through the auditing of the ETT [ph]. And they think that part of that goodwill will be taken out and be put under the category of intangible assets. This is the only reason causing the decrease of goodwill, but they have nothing to do with the possibility or with the fact that the acquired company hasn’t been able to deliver what they have promised to do. There is nothing to do with this. This is only because of the adjustment that part of the goodwill been taken out and put into the intangible assets. And that intangible asset is probably going to be amortized according to US GAAP.

Mike Grasher – Piper Jaffray

Okay. So just to clarify, it was a transfer from the goodwill account to intangible asset; it was not any impairment of the goodwill asset?

Peng Ge

(Interpreted) That’s correct. It’s not the impairment.

Mike Grasher – Piper Jaffray

Thank you very much.

Unidentified Participant

Hi, Bob.

Operator

Yes.

Unidentified Participant

Thank you for everybody’s attending this conference. We are closing this conference. And if you have any question, please contact me or either Mr. Fred Jin or our CFO.

Operator

Thank you for your participation in CNinsure’s conference. There will be a webcast replay within an hour. Please visit www.cninsure.net, under the Investor Relations section. Thank you all for attending. You may now disconnect now. Good bye.

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