CNinsure Inc. (NASDAQ:CISG)
Q2 2012 Earnings Call
August 21, 2012 9:00 p.m. ET
Oasis Qiu - Investor Relations Manager
Chunlin Wang - Chief Executive Officer
Peng Ge - Chief Financial Officer
Thank you for standing by for the CNinsure 2012 Q2 Earnings conference call. At this time all participants are in listen-only mode. All lines have been placed on mute prevent background noise. After the management's prepared remarks there will be a question and answer section. (Operator instructions) For your information, this conference call is now 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. 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 Qui, CNinsure Investor Relations Officer.
Welcome to our second quarter and first half 2012 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 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 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 second quarter and first half of 2012 financial and operating results and discussed the progress of our strategic transaction. We will take your questions after the prepared remarks. Now I will turn the call over to Mr. Wang.
Dear shareholders, investors, analysts, good morning. Thank you for joining us on today's conference call. Mr. Peng Ge and I will begin today's call with a review of our second quarter and first half of 2012 financial and operating performance followed by an update on the progress of our strategic transaction. Then we will go into the Q&A session.
The global and domestic macroeconomic situation were increasingly challenging in the first half 2012. China’s GDP growth was estimated to be below 8%, reaching an eight years low. Against this backdrop, the growth slowdown in China’s insurance industry continued into the first half 2012, [with this] to go single digit year-over-year growth of 5.9% in terms of total premiums. P&C insurance sector grew 14.4% from the first half 2011 but the market competition among insurers intensified and insurers had to increase incentives and telemarketing campaigns, which eroded some of their underwriting profits.
Life insurance sector on the other hand only grew 0.23% year-over-year in terms of premiums in the first half of 2012, as insurers continue to face difficulty in agent recruitment and retention, (inaudible) a weak insurance base. Impacted by the macroeconomic situation and structural changes of the China’s insurance industry, our total net revenues was up 2.3% year-on-year in the second quarter of 2012. Cost increases however, offset the revenue growth due to the challenging operating environment. As a result our net income attributable to the company's shareholders for the second quarter of 2012 was down 67.2% and non-GAAP net income attributable to the company's shareholders which excluded share-based compensation expenses, was down 34.2% year-over-year.
Looking at our three major business lines, the net revenues of our P&C insurance segment witnessed a marginal decreases of 0.6% year-on-year, primarily due to increased market competition as insurance companies strengthened the investment in direct sales and telemarketing. Besides insurance companies have been increasing commissions paid to their direct sales channels, just we also need to increase commissions payout to our sales agents benchmarking the market level which further squeezed the profits out of our labor driven sales model and reduced the gross margin of our P&C insurance segment.
On the life insurance side, impacted by the weak performance in the life insurance industry our sales of new policies recorded a negative growth but the total net revenues derived from life insurance business was up nearly 9% from the year ago quarter, primarily driven by the increase in the sales of short-term health insurance and recurring commissions derived from regular premium insurance policies. Recurring premiums recorded a strong growth of 22.5% year-on-year for the second quarter of 2012. Claims adjusting business was relatively stable with net revenues up 7.9% from the year ago quarter, although its gross margin witnessed a slight decrease.
Behind the sudden (inaudible) long, rapid growth of the Chinese insurance market starting from 2011, is inherent efficiency in its expanses development model and industry is in a critical period of structural. In the meantime the regulatory body continues its effort to push the insurance industry in a sustainable and healthy way. Recently, the [CIC] issued a series of rules and regulations that allow insurance companies to broaden their investment scope and continuously launch products and service innovations in an effort to drive insurance companies to strengthen their core competencies in asset management and product design.
We believe such regulatory allows to accelerate further division of labor in the insurance industry. The [CIC] also adopted various measures to ensure the professional insurance intermediaries are strong enough to shoulder the responsibility during the industrial structural changes, such as raising the entry barrier from professional insurance intermediaries, restricting the licenses issuance to ancillary insurance intermediaries then encourage them to either establish professional insurance intermediate companies or cooperate with existing ones. And the CIC also continues to push forward a system of the insurance sales agent margin system and strengthen efforts to deter (inaudible) such as into professional insurance intermediary sector, which was the least (inaudible) to fund outside growth opportunities for large professional insurance intermediaries.
For CNinsure the move can cause increased and sluggish growth of new life insurance policy sales in the past few quarters, again demonstrating that the growth model that CNinsure has relied on in the past has [peaked], which features rapid expansion, low value added and quantity accumulation is shaky against the backdrop of economic structural transformation in China and the ongoing reform on the development model in the Chinese insurance industry. But we are glad that we have foreseen the changes and made a wise decision that in the second half of last year to actively initiate a strategic transition of the company towards ecommerce and higher value added business in order to optimize the process models of our various business units and strengthen the company's long term perspectives.
During the second quarter of 2012, we stayed focused on the transaction and made significant progress in the far end areas. Especially on the ecommerce side we have completed the system development of the mobile South Asian business support system which is a BtoB model of our ecommerce platform and continuously improves the back-office operation, business process, feeder connection, product uploading and interface experience of the system.
We are currently in the process of an integration testing and expect to launch the system terminal (inaudible) or what we call palm tablet in September. Secondly, as part of our new life insurance business strategy which has shifted towards the more urban areas focused and more adverts to the less developed (inaudible) and provide comprehensive financial service. We have completing plotting and promoting the [studio] mechanism in major cities and started to sell wealth management products to our established life insurance network so as to tap into the mid and high end markets.
On the sales team expansion front, we continue promoting the multi-license agent system among our existing sales agent force, in order to improve top performers content in diversified financial services. In the mean time we set adverts to attract new, highly product sales agents to join CNinsure by offering them better telecom support, diversified product offerings and broadened revenue sources.
Although the transaction may continue to weigh upon us in the near to medium term, but we believe the initiative will help the company build a healthier organization structure and more vigorous profit model and more compelling platform and prepare the company both for the burgeoning opportunities arising from wakening demand for asset protection and wealth management services from the expanding middle class in China as China shifts towards a more domestic demand driven economy. We expect our top line and bottom line will trend to the rapid growth phase in 2014.
Thank you. And I now will turn the call over to our CFO Mr. Peng Ge for financial results.
I am pleased to report the results for the second quarter of 2012. The numbers I will refer to will be in RMB unless otherwise indicated. Total net revenues for the second quarter of 2012 were RMB 109.9 million, up 2.3% from the year ago quarter. Total operating cost and expenses for the second quarter 2012 were RMB 392.1 million, up 32.1% from the year ago quarter.
Commissions and fees expenses for the second quarter 2012 were RMB 266.3 million, up 29.8% from the year ago quarter. Selling expenses for the second quarter 2012 were RMB 21 million, you 8.9% from the year ago quarter. General and administrative expenses for the second quarter 2012 were RMB 104.8 million, up 44.7% from the year ago quarter. As a result of the foregoing factors, income from operations for second quarter 2012 was RMB 17.8 million, down 82.8% from the year ago quarter.
Non-GAAP operating income which excludes share-based compensation expenses was RMB 64.5 million of second quarter 2012, down 60% from the year ago quarter. Interest income for second quarter 2012 was RMB 22.5 million, up 71% from the year ago quarter. Effective income tax rate was 33.8% for second quarter 2012 compared to 19.5% for the year ago quarter. Net income attributable to the company's shareholder was RMB 32.8 million for the second quarter of 2012, decreasing 67.2% from the year ago quarter. Net margin was 8% for the second quarter of 2012 compared to 25% for the year ago quarter.
Excluding share-based compensation expenses, non-GAAP net income attributable to the company's shareholder was RMB 69.5 million for the second quarter of 2012, decreasing 34.2% from the year ago quarter. Non-GAAP net margin was 17% for the second quarter 2012 compared to 26.3% for the year ago quarter. Basic and diluted net income per ADS was RMB 0.66 and RMB 0.65 respectively for the second quarter of 2012, down 67.3% and 66.6% from RMB 2 and RMB 1.96 respectively for the year ago quarter.
Non-GAAP adjusted basic and fully diluted net income per ADS, which excluded share-based compensation expenses were RMB 1.39 and RMB 1.38 respectively for the second quarter 2012, representing decreases of 34.2% and 33% from RMB 2.11 and RMB 2.07 for the year ago quarter. As of June 30, 2012, the company had RMB 2.5 billion in cash and cash equivalents. CNinsure expects its total net revenue to remain approximately flat for the third quarter of 2012 compared to the corresponding period in 2011. This [also] reflects CNinsure’s current preliminary view which is subject to change.
Now, Oasis and Mr. Wang, and our CFO Mr. Ge, will open the floor for your questions.
(Operator Instructions) The first question is [Jeff Chen from Investco] Please go ahead.
The question is from [Jeff Chen] and his question is related to our compensation expenses for this quarter which has increased [inconsistently] and we mentioned that reason for the increase is due to adjustments with the recognition measures. He would like us to elaborate a little bit more on this. And he also asked about what will be the compensation expenses level for the coming quarters?
We issued a stock option in earlier this year and the total amount of the cost has been evaluated by an independent appraisal and approved by our auditor. And total amount of the share-based compensation expenses has not changed. And previously we amortized these expenses evenly on a quarterly basis. However, because we adopted a new incentive program which allowed some of our sales agents to participate in the stock option program. And the vesting of their options is tied to their performance and auditors think that we should adopt a more conservative way to recognize the expenses.
So while for this quarter we adopted an accelerated amortization method to recognize the expenses, which result in an increase share-based compensation expenses in the second quarter. But for the coming quarter, the share-based compensation expenses will be back to the normal level which is approximately 12 million (inaudible).
(Operator Instructions) Next question is [Jeff Chen from Investco] Please go ahead.
And the second quarter is regarding cash and how much of the cash is interest bearing and how CNinsure invests this amount of cash? Is it in the form of an deposit in the banks or any other investments?
The cash -- we have a centralized management of the cash by the group and most of the cash right now is totally in the banks in the form of CD or short term deposits. And we also will put some of them in to short term investment with already high interest and already high returns which is allowed by the regulation rules and with minimum risk.
(Operator Instructions) Next question is [Jeff Chen from Investco].
And the question for our CEO Mr. Wang, and the first question is regarding -- he noticed the commission revenue ratio has increased significantly in the second quarter and we mentioned that the reason is because the increase in labor costs and the changes in the operating environment as well as the impact from the direct sales. He wonders how direct sales exert any pressure to intermediaries and whether theses [changes] will continue or will improve in the medium term?
And then the second quarter is regarding that we mentioned that our top line and bottom line will go back to a rapid growth phase in 2014 and what is driver for the growth, and then what the growth rate will be like?
First of all I would like to tell about the channels, the sales channels in these Chinese insurance market. First of all is the direct sales of insurance companies which is comprised of the China marketing and the current sales agents of the insurance companies. And then the second channel is intermediaries including professional intermediaries and ancillary intermediaries. Right the ancillary intermediaries is the largest channel and the direct sales is the second largest channel, while the professional insurance intermediaries only account for 5% to 6% of the market shares in China right now.
So any changes happening in the policies related to the direct sales channel and the ancillary insurance intermediaries in China will have very strong influence on the professional insurance intermediaries. And the current situation is that for the past one to two years, our P&C insurance company has been making a lot of profits and they are competing for more market share and one direct way for them to do that is to raise the commissions, including the commissions paid out to ancillary intermediaries and also to their tied-up agents. So if we as insurer, we don’t increase our commission payout to our sales agents, we will lose the market share.
And also because of the CPIs, the high CPI level, and the increase in the billing cost for sales agents and also the sales agents have higher requirements for their quality of life in the future, they are asking us to pay more commission in order to cover that. Otherwise the current commission level were not attractive enough for them to stay in the industry.
As for looking forward, we don’t really think that this tough competition will be sustainable. Because we are already seeing P&C company’s profits are [fairly] weakening. If they continue this tough competition by paying out more commissions, they will start to make loss again. So the only way for them to [extend] their market share is to improve their service, products and also the brand recognition. And we have already seen insurance companies pay more and more attention to this areas or this route. So we believe that the situation will start to improve next year.
We already are foreseeing this situation starting last year so that’s why we decide to push forward the strategy transition in 2011. And that’s because we think that price competition will not be sustainable, not only for insurance company but the insurer. It’s not really sustainable for us to keep paying more commission out to sales agents to keep them. So we think that the way for us to help the sales agents to make more money is to improve their efficiency, reduce their operating cost and help them to get access to more diversified revenue sources.
And we have also done a lot of things to improve the services and products. For the service, we would like to combine our outbound service company with our claims adjusting segment to establish a service platform. And then we also would like to improvise the sales agents with access (inaudible) the palm tablets or the sales agents support system to help them to do business more easily. And then for the life insurance we are integrating our life insurance segment with (inaudible) wealth management company and a credit brokerage company in order to introduce more diversified products and first offerings to our sales agents. So all this initiatives have been proceeding pretty well as we expect. So that’s why we think that we should be able to get back to the rapid growth chart in 2014. And hopefully we will get another double-digit growth in 2014. We think that the double-digit growth continue for three to five years up to 2014.
(Operator Instructions) The next question is [Jeff Chen from Investco]. Please go ahead.
And next question from Jeff is a [novel] topic. CNinsure has a lot of cash and (inaudible) is pretty low right now. Aside from ecommerce, what else do insurers got to do to make good use of the cash, and then the privatization deal was restored last year. Is CNinsure going to reconsider the possibility given that there are a lot of other Chinese companies have been doing this privatization too. And CNinsure has a lot of cash in the country, since that CNinsure is capable of doing such kind of transaction.
We feel kind of lucky that we have so much cash in hand right now. Because if you look at the current situation in insurance markets and financial services industry, it is a actually a golden age for good company CNinsure to grow bigger. And so we will need adequate cash reserve in hand to take advantage of those opportunities. And as we mentioned we are going to use a lot in the ecommerce and while our main focus on building the BtoB model. But we believe that the BtoC, or the BtoC market, it will become mature in the next couple of years, and when that comes that will require a lot of cash to fund the marketing campaign.
And then we also need a lot of cash to fund the -- to make sure that there is cash for strategy transaction. And looking at the capital market right now, given the current situations we don’t really think that a share buyback or dividend will really be long-lasting to push our stock prices. So we kind of think that we need to reserve more cash to support our business development. And then as for privatization, after the restore of the last privatization deals, the management will like to focus all our energy on the business operation and the company growth. But having said that if there is a right opportunity, if there is a good opportunity and our strategy transaction goes well, we would not really rule out the possibility to consider that.
And the last question is that CNinsure issued stock options with an aggregate price of $6 very much. If the market situation continues and CNinsure doesn’t do any share buyback or dividend declarations and the stock options keep under water, the option as you lose [incentive] function, how does the management think about that?
Because the management and key personal of the company are really quite confident about business operation of CNinsure, so we do believe that our stock price will have upside and the current stock price doesn’t really concern us very much, and we didn’t see a high turnover because the employee is losing faith in the outlook of company. But having said that, we really will consider various possibilities including increasing the cash compensation to employees.
Thank you for your participation in CNinsure conference. There will a webcast repay within an hour. Please visit CNinsure’s IR website www.cninsure.net, under the Investor Relations section. Thank you all for attending. You may now disconnect. Good bye.
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