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CNinsure Inc. (NASDAQ:CISG)

Q2 2014 Earnings Conference Call

August 25, 2014 9:00 PM ET

Executives

Oasis Qiu - IR Officer

Chunlin Wang - CEO

Peng Ge - CFO

Analysts

Arthur Hall - Hallco Inc.

Andy Nahas - The Prospect Fund

Adam Smith - Columbia Business School

Colin McBirney - PIMCO

Operator

Thank you for standing by CNinsure's Second Quarter 2014 Earnings Conference Call. (Operator Instructions) For your information, this conference call is now being broadcast live over the Internet. Web cast replay will be available within three hours after the conference is finished. Please visit CNinsure's IR website at ir.cninsure.net, under the Events and Webcasts section. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host for today's conference, Ms. Oasis Qiu, CNinsure's Investor Relations Officer.

Oasis Qiu

Good morning. Welcome to our second quarter 2014 earnings conference call. The earnings results were released earlier today and are available on our IR website as well as on newswire.

Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause our actual results to differ materially from those projected or anticipated. Such risks and uncertainties include but are 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 is our Chief Executive Officer, Mr. Chunlin Wang; and Chief Financial Officer, Mr. Peng Ge. They will walk you through our financial and operating performance in the second quarter 2014, answer your questions after the prepared remarks.

Now I will turn the call over to Mr. Wang.

Chunlin Wang

[Interpreted].

Hello everyone, thank you for joining us on today's call. On today's agenda, I will give you an update on the financial highlights for the second quarter 2014, and share with you our strategic development. Our CFO, Mr. Peng Ge and I will take your questions after this.

Firstly, looking at the industry performance, China insurance industry slightly recovered this year with total gross premiums up 21% year-over-year in the first half 2014. While gross premiums in the P&C sector was up 16% from the first half 2013, in life insurance sector, market condition was much improved, which resulted in an upsurge in new business sales, posting a 23% growth in total premiums from the first half of 2013.

Now looking at our financial performance, benefiting from our transformation and restructuring, we were back to double-digit growth, with a strong rebound in top line and bottom line growth for three consecutive quarters. During the second quarter of 2014, our total net revenues once again beat guidance up by 20.8%, a record high for the prior 10 quarters. Our operating profit was up 95 times, primarily driven by the strong growth in top line as well as because our gross margins -- the flattish gross margins and the improved expense ratio, both year-over-year and quarter-over-quarter, and the decline in the expense ratio was primarily attributable to an effective cost control due to the restructuring, and a decrease in share-based compensation expenses, which translated into a substantial growth in operating profit and adjusted EBITDA during the quarter. As a result, our EPS for the second quarter 2014 was up 163.4% year-over-year.

Looking at each of our business segments, our traditional business continued to maintain stable growth, while new business segments continued a very strong growth momentum into the second quarter.

Insurance Agency business segment, which accounted for 74.6% of our total net revenues, reported 9.7% revenue growth year-over-year in the second quarter of 2014. The insurance premiums generated by our P&C agency business grew solidly by 18.5% year-over-year during the quarter outpacing industry growth, while its revenue grew 10.9% from the second quarter of 2013, lower than the volume growth, primarily reflecting a slight drop in P&C insurance market commission rate in an easing competition environment. Gross margin of our P&C agency business remains flat.

Our life insurance agency business has finally yielded positive growth of 2.7% and 15.4% year-over-year and quarter-over-quarter respectively, after two years of struggling in the segment market. This growth was mainly driven by a rebound of over 35%, both year-over-year and quarter-over-quarter in the commissions of new business reversing the downward trend of the past two years, and partially offset by the year-over-year decline of commissions from short-term insurance sales and recurring business.

During the quarter, the gross margin of our life insurance agency business saw an increase year-over-year.

Our claims adjusting business maintained solid growth, with revenues up 22.6% year-over-year during the quarter, primarily driven by the strong growth in the non-auto related P&C claims adjustment business. Its overall gross margin was stable at well above 40%.

Our insurance brokerage business continued a very strong growth momentum into the second quarter with net revenues up 421.3% year-over-year, accounting for 10.8% of our total net revenues. The growth in the segment was largely attributable to our efforts to expanding market channels, and building our operating platforms to offer more professional support by establishing strategic cooperation with multiple insurance companies, encouraging product innovation, and proactively introducing global reinsurers to support local business, etcetera.

Firstly, with regard to the progress in our Internet initiatives. While further strengthening our offline sales and service capabilities, we continue to focus resources on developing our online initiatives to support offline operations. We are glad that we have made a great deal of progress.

Firstly, CNpad application was well accepted among our insurance agents, since it was available for free download in May. Within two months, since then the downloads were up by more than 11,000. The aggregate copies of the application downloaded were over 70,000, of which more than 8,000 copies were actively used introducing insurance premiums.

Insurance premiums generated from the app were approximately RMB237 million for the second quarter 2014, up 6.7 times as compared to a year ago, and RMB436 million for the first half 2014, accounting for 15.9% of our total P&C insurance agency business as compared to 2% in the first half of 2013.

As more transactions were completed through mobile devices, there was a substantial improvement in the productivity of our back office staff. We believe that as mobile transaction volume continues to rise, our back office operation expenses and sales overhead costs to go down gradually.

Secondly, on July 3, 2014, we launched eHuzhu, which is the first non-profit online mutual aid platform in China. eHuzhu's first program targets the principal providers of families between the ages of 20 and 50, and offers certain amount of financial aid to program members or their families should the provider be diagnosed with cancer or suffer an accidental death. Each program member pledges to donate certain amount to the fund in each case of cancer or accidental death. We, as the platform operator do not assume any underwriting risk.

As of August 25, 2014, less than two months since the launching of the platform, more than 60,000 members have registered on the platform, of which more than 49,000 have signed up for the program. The program is in line with our commitments to fulfill our social responsibility. It also offers a good way to help our agents develop and retain customers.

We are dedicated to embracing the Internet by building online financial products and services vertical portals, and then also ecological circle to support our offline sales and service networks. Also over three years of exploration, we now have a clear vision of our strategic direction, our goals, and the path to achieving it. Over the past year, we have rolled out several customer acquisition and online transaction platforms, including CNpad application and eHuzhu programs.

In the meantime, we have completed restructuring of our offline operations, which boasts a well-established nationwide sales and services network to provide our clients with the highest quality of financial products and services.

Starting from the third quarter of 2014, we will devote lot of efforts to strengthening our online customer acquisition and transaction platforms, and to seamlessly connecting our offline sales and service capabilities with our online platforms. Several intensive marketing programs will also be initiated. In order to provide more visibility into the company's growth prospects, we plan to host a corporate day in mid October to announce our O2O internet strategy and its impact on our financial results.

Looking ahead to the third quarter 2014, we expect our top line to grow by approximately 15%. We remain upbeat about our future, and believe that we have the right strategy, and are on-track to further solidify our leading position and achieve strong sustainable growth over the long term. Thank you.

Now our CEO Mr. Wang, and Mr. Ge, CFO, will open the floor for your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Arthur Hall of Hallco Incorporated. Please ask your question.

Arthur Hall - Hallco Inc.

Yes. Congratulations on an improving result. You have increased your investment in the trust product substantially to 600 million in the quarter, could you discuss the average yield on those products and your prospects for increasing the investment even further? And also the safety, the relative safety of those products? Thanks.

Oasis Qiu

[Foreign Language].

Peng Ge

[Interpreted].

Well, we have been granted a -- we have been authorized by the Board to decide -- to allow the management to invest in a certain type of trust plan with relatively high yield and low risk; and when we select this trust plan, we will have very stringent requirements. First of all, we are required to select only the top 20 of the 30 trust plans, and then secondly, we need to have a very clear understanding, and we need to be very comfortable about the underlying assets and the risk control capabilities of the relative trust company, and the average yield of these products are about 7% to 8%, which is much higher than the bank savings.

Arthur Hall - Hallco Inc.

Thank you very much. Could you talk about the further increases in those investments?

Oasis Qiu

[Foreign Language].

Peng Ge

[Interpreted].

First of all, cash reserves have to be put aside for -- to support our strategic developments, to support the growth of the company. And as Mr. Wang mentioned that we have some plans, we have some online initiatives this year. So I believe that we will have certain -- we will acquire large amounts of investments in our internet strategies in the near term. So there won't be a very big increase in our investment and in any of the short term trust products.

Arthur Hall - Hallco Inc.

All right. Thank you.

Oasis Qiu

Thank you, Arthur.

Operator

Thank you. Your next question comes from the line of Andy Nahas of Prospect Fund. Please ask your question.

Andy Nahas - The Prospect Fund

I was wondering if you could tell me about the likelihood of any potential partnerships with any of the big internet companies in China? And also, I was wondering if you could give a little bit more description of what you might discuss at the corporate day in October that you had mentioned?

Oasis Qiu

[Foreign Language].

Chunlin Wang

[Interpreted].

First of all, we have been looking for potential cooperation with some big Internet companies in China, but the only precondition is that, we must have certain foundation in our online initiatives, so that there will be better bargaining power for us when we talk with these major Internet companies. And we would like to develop our own online initiatives that can actually complement certain [indiscernible] of these Internet companies. So this is the direction that we have been working on, and then secondly regarding to what we are going to discuss in the Corporate Day, basically we would like to give some -- regarding our O2O strategy, our strategic directions, and how the Internet initiatives will support our offline sales and service network, and how these online platforms and the offline operations will be [similarly] (ph) connected with each other in order to achieve the results, help the company to achieve better efficiency and reduce our operating costs.

Andy Nahas - The Prospect Fund

Great. Thank you.

Oasis Qiu

Thank you, Andy.

Operator

Thank you. Your next question comes from the line of Adam Smith from Columbia Business School. Please ask your question.

Adam Smith - Columbia Business School

Hi gentlemen. Thank you so much. Great news, it seems like recently with CNinsure’s stock price, could you comment on the recent jump on the stock price and the recent news release regarding settlement of the recent situation with the lawsuit? Thank you.

Oasis Qiu

[Foreign Language].

Chunlin Wang

[Interpreted].

First of all, I think the stock performance in certain ways reflect our earnings performance in the past quarters. After we have seen improvement in our top line and bottom line growth for three consecutive quarters, we are back to double digit growth again. And then secondly, our efforts to invest in the online initiative is also in line with the current trend, and we are at the frontlines of actually, in terms of our internet presence in the insurance intermediary sector, so that should give some comfort to investors.

We have obtained the final approval from the court on the agreement to settle the client's action lawsuit in July; and we think that's a good thing. That means that we can put this further behind, and we can focus more of our energies on executing our internet strategies to drive the company's further growth. So, I am happy about the settlement.

Adam Smith - Columbia Business School

Thank you.

Oasis Qiu

Thanks.

Operator

Thank you. Once again, your next question comes from the line of Andy Nahas of Prospect Fund. Please ask your question.

Andy Nahas - The Prospect Fund

Yes. So I want to congratulate you on the 20% growth, by the way, which seems to be improving. I wonder, do you think you will reach to a point of maybe even 30% growth rate in the future, and if so, what will be the cause of that?

Oasis Qiu

[Foreign Language].

Peng Ge

[Interpreted].

We plan to host a conference in October, and in order to give [indiscernible].

Operator

Thank you. Your next question comes from the line of Colin McBirney of PIMCO. Please ask your question.

Colin McBirney - PIMCO

Hi guys. Congratulations on a solid quarter. I was just hoping that you could kind of talk through your plans for deploying your excess capital. To my opinion, you guys have a great business capital-weight [ph], and I guess, the excess cash on your balance sheet is somewhat of a drag on your return. And so I was wondering, what your plans are for returning cash to shareholders or deploying cash, and what sort of return opportunities you might be seeing in terms of what returns you get on the cash you could deploy, and what those opportunities look like? Thank you.

Oasis Qiu

[Foreign Language].

Chunlin Wang

[Interpreted].

In order to achieve our strategic growth, our cash spending plan will be as follow; first of all, in order to execute our O2O strategies, we need to further strengthen our offline sales and sales network, and it's also in line with the regulatory requirement actually. So firstly, we need to use some cash to buyback the minority interest of our subsidiaries, so that we can have full control over these subsidiaries, and our offline sales and sales network can similarly connect with the online platform.

And then secondly, we need to [indiscernible] some capital to invest in the IT infrastructure, related to, first of all the CNpad, which is our mobile sales support system; and then secondly, related to a LBS-technology base, claims platforms, and further details will be announced in our Corporate Day.

And certainly, there will be some investments to -- in terms of marketing of our B2C platforms. Right now, I think the major attractiveness of big major internet companies that they have a huge customer base, and then -- in order to acquire our own direct customers, we also need to invest in the advertising and marketing program. As Mr. Wang just mentioned that, we launched eHuzhu program one and a half month ago. We didn't do any advertising actually, but just within two and half months, we already had like 60,000 members. So we have kind of feeling that, actually customers do have a lot of demand for financial and insurance services. So that's what we are going to do, we are going to initiate the marketing program, and then we need to invest in this area.

And then, fourthly, as you may know that insurance industry, and the financial services industry in China are highly regulated; and as CNinsure's scale continues to expand and our social interest continues to increase, we may participate in the upstream companies by either subscribing for minority shares in some upstream companies or setup joint ventures. So we need to also earmark certain capital in this area as well.

Operator

Thank you. Your next question comes from the line of private investor Albert Twan [ph]. Please ask your question.

Unidentified Analyst

[Foreign Language].

Oasis Qiu

[Foreign Language].

Chunlin Wang

[Interpreted].

First of all, the accounts receivable primarily represents the insurance commissions incurred during our day-to-day operations; because there is a certain settlement period for the insurance commission in January at about one month, so it's something that occurred during the normal day-to-day operations. And then secondly, the other receivable mainly represents the interest income, encouraged by the interbank savings, as part of our investment in the trust plans. And then certainly, the amount due to related parties, that's amount related to one-off really and then, which is BFSG, and also Jintai team. We have granted 200 million loan to BFSG, and about 130 million loan to Jintai Asset Management Company, and these loan facilities have been approved by our board, and we do not expect the amount of the loan welfare to increase, that will be stabilized at the current level.

Unidentified Analyst

Thank you.

Operator

Thank you. (Operator Instructions). Thank you. There are no other questions on the line. I would now like to hand the conference back to today's presenters, please continue.

Oasis Qiu

Thank you for joining us on today's call. So if there are nay further questions, please feel free to contact me. Thank you.

Operator

Ladies and gentlemen, that does conclude today's conference. Thank you for participating. You may now disconnect.

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Source: CNinsure's (CISG) Chunlin Wang on Q2 2014 Results - Earnings Call Transcript

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