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Fanhua Q4 Result.  Beat And Raise

|Includes: Fanhua Inc. (FANH)

Summary

Q4 Revenue -47%. (expected impact from Circular #134).

Operating Income +191%.

Net Income +70%, Diluted Net Income for ADS +61%.

Q1 2018 Operating Income Guidance RMB80.0 million (+29% QoQ).

(In thousands, except per ADS) 2016Q4
(NYSEARCA:RMB)
2017Q4
(RMB)
2017Q4
(US$)
Change %
Total net revenues 1,323,378 690,476 106,124 -47.8
Operating income 21,344 62,143 9,551 191.1
Net income attributable to
the Company's shareholders2
74,594 126,874 19,500 70.1
Diluted net income per ADS 1.23 1.98 0.30 61.0

Financial Highlights for Year 2017:

(In thousands, except per ADS) 2016
(RMB)
2017
(RMB)
2017
(US$)
Change %
Total net revenues 4,082,884 4,088,473 628,386 0.1
Operating (loss) income (8,466 ) 273,136 41,980 N/A
Net income attributable to
the Company's shareholders
157,047 449,228 69,045 186.0
Diluted net income per ADS 2.60 7.29 1.13 180.4

Fanhua Reports Fourth Quarter and Fiscal Year 2017 Unaudited Financial Results And Declares Quarterly Dividend


GUANGZHOU, China , March 12, 2018 (GLOBE NEWSWIRE) -- Fanhua Inc. , (Nasdaq:FANH), (the "Company" or "Fanhua"), a leading independent online-to-offline ("O2O") financial services provider in China , today announced its unaudited financial results for the fourth quarter and fiscal year ended December 31, 20171.

On March 9, 2018 , its Board of Directors declared a quarterly dividend of US$0.01 per ordinary share, or US$0.20 per ADS, amounting to a total of US$13.0 million , which represents 66.7% of the Company's net income attributable to shareholders for the fourth quarter of 2017. The dividend will be payable on or around April 10, 2018 to shareholders of record on March 26, 2018 .

Financial Highlights for the Fourth Quarter of 2017:

(In thousands, except per ADS) 2016Q4
(RMB)
2017Q4
(RMB)
2017Q4
(US$)
Change %
Total net revenues 1,323,378 690,476 106,124 -47.8
Operating income 21,344 62,143 9,551 191.1
Net income attributable to
the Company's shareholders2
74,594 126,874 19,500 70.1
Diluted net income per ADS 1.23 1.98 0.30 61.0

Financial Highlights for Year 2017:

(In thousands, except per ADS) 2016
(RMB)
2017
(RMB)
2017
(US$)
Change %
Total net revenues 4,082,884 4,088,473 628,386 0.1
Operating (loss) income (8,466 ) 273,136 41,980 N/A
Net income attributable to
the Company's shareholders
157,047 449,228 69,045 186.0
Diluted net income per ADS 2.60 7.29 1.13 180.4

Commenting on the fourth quarter and fiscal year 2017 financial results, Mr. Chunlin Wang , chairman and chief executive officer of Fanhua , stated, "Owing to strong performance in the past four quarters, our total operating income in 2017 grew to RMB273.1 million , far above our previous expectation of RMB180 million , and net income attributable to shareholders grew by 186.0% year-over-year to RMB449.2 million .

"During the fourth quarter of 2017, the Chinese life insurance industry reported single digit year-over-year growth of 2.4% following the implementation of Circular No. 134, which banned the fast-return feature of annuity and endowment insurance products and prohibited life insurers from selling universal life insurance as an add-on to regular life policies. Against this backdrop, we still achieved 50% year-over-year growth in life insurance premiums in the same period which contributed to year-over-year growth of approximately 191.1% to RMB62.1 million in our operating income, once again beating guidance.

"As we enter 2018, new premiums were down across the life insurance market during the Jumpstart sales season, due to the drastic decline in the sales of annuity and universal products which used to be the major contributors behind the rapid growth in life insurance premiums in the past two years. Sales in these products have decreased mainly as a result of high bond yields and CIRC-guided product changes towards higher protection features in new product design. Despite that, we believe that the structural growth of the life insurance market will continue as there is still significant room for more growth in the sales of protection-oriented life insurance products.

"As for Fanhua , protection-oriented insurance products have always been and will continue to be our focus. With continued growth in the life insurance business, we are optimistic that our operating income will grow by approximately 40% year-over-year in 2018."

Financial Results for the Fourth Quarter of 2017

Total net revenues were RMB690.5 million ( US$106.1 million ) for the fourth quarter of 2017, representing a decrease of 47.8% from RMB1,323.4 million for the corresponding period in 2016.

  • Net revenues for the life insurance business were RMB490.3 million ( US$75.4 million ) for the fourth quarter of 2017, representing an increase of 35.3% from RMB362.3 million for the corresponding period in 2016. The increase was due to the growth in the number of sales agents and the rapid growth of renewal commissions. Revenues generated from our life insurance business accounted for 71.0% of our total net revenues in the fourth quarter of 2017.

  • Net revenues for the P&C insurance business were RMB101.9 million ( US$15.7 million ) for the fourth quarter of 2017, representing a decrease of 88.1% from RMB857.4 million for the corresponding period in 2016. The decrease was primarily due to i) our decision to terminate lower margin channel businesses starting from the second quarter of 2017 and ii) implementation of a platform business model for our auto insurance business beginning the fourth quarter of 2017. Under the new platform business model, we no longer enter into contracts with property and casualty insurance companies for the distribution of auto insurance products through our individual sales agents to earn profits from the commission spread. Rather, we operate CNpad as a public auto insurance transaction platform which connects insurance distributors with our sales agents and charge insurance distributors technology service fees based on the volume of insurance premiums they transact through CNpad. A technology service fee is typically much smaller than the commission we previously received from insurance companies, though our costs are minimal. Revenues generated from the P&C insurance business accounted for 14.8% of our total net revenues in the fourth quarter of 2017.

  • Net revenues for the claims adjusting business were RMB98.3 million ( US$15.1 million ) for the fourth quarter of 2017, representing a decrease of 5.2% from RMB103.7 million for the corresponding period in 2016. Revenues generated from the claims adjusting business accounted for 14.2% of our total net revenues in the fourth quarter of 2017.

Total operating costs and expenses were RMB628.3 million ( US$96.6 million ) for the fourth quarter of 2017, representing a decrease of 51.7% from RMB1,302.0 million for the corresponding period in 2016.

  • Commission costs were RMB456.4 million ( US$70.1 million ) for the fourth quarter of 2017, representing a decrease of 53.9% from RMB989.8 million for the corresponding period in 2016. The decrease in commission cost was mainly due to the decrease in P&C insurance business, partially offset by the growth of life insurance business.

    - Costs of the life insurance business
    were RMB314.5 million ( US$48.3 million ) for the fourth quarter of 2017, representing an increase of 28.3% from RMB245.1 million for the corresponding period in 2016. The increase was in line with the growth in sales. Costs incurred by the life insurance business accounted for 68.9% of our total commission costs in the fourth quarter of 2017.

    - Costs of the P&C insurance business were RMB84.2 million ( US$12.9 million ) for the fourth quarter of 2017, representing a decrease of 87.8% from RMB687.5 million for the corresponding period in 2016. The decrease was primarily due to the implementation of a platform business model for our P&C insurance business whereby no cost is incurred for the platform model. Costs incurred by the P&C insurance business accounted for 18.5% of our total commission costs in the fourth quarter of 2017.

    - Costs of claims adjusting business were RMB57.6 million ( US$8.9 million ) for the fourth quarter of 2017, representing an increase of 0.5% from RMB57.3 million for the corresponding period in 2016. Costs incurred by the claims adjusting business accounted for 12.6% of our total commission costs in the fourth quarter of 2017.

  • Selling expenses were RMB61.5 million ( US$9.5 million ) for the fourth quarter of 2017, representing a decrease of 63.4% from RMB168.1 million for the corresponding period in 2016. The decrease was primarily because promotional marketing subsidies were paid to sales agents in the fourth quarter of 2016 for selling auto insurance policies while there was no such promotional marketing plan in 2017.

  • General and administrative expenses were RMB110.4 million ( US$17.0 million ) for the fourth quarter of 2017, representing a decrease of 23.4% from RMB144.1 million for the corresponding period in 2016. The decrease was primarily due to a significant reduction in expenses related to P&C insurance agencies as a result of the disposal of our P&C insurance agency subsidiaries in the fourth quarter of 2017, partially offset by an increase in expenses incurred for setting up new offices and staff recruitment as a result of regional expansion.

As a result of the preceding factors, we had an operating income of RMB62.1 million ( US$9.6 million ) for the fourth quarter of 2017, representing an increase of 191.1% from RMB21.3 million for the corresponding period in 2016.

Operating margin was 9.0% for the fourth quarter of 2017, compared to 1.6% for the corresponding period in 2016.

Investment income was RMB39.5 million ( US$6.1 million ) for the fourth quarter of 2017, representing a decrease of 26.6% from RMB53.8 million for the corresponding period in 2016. The investment income represented yields from short-term investments in financial products which mainly consist of inter-bank deposits or collective trust products with terms ranging from half a year to two years and interest payable on a quarterly, semi-annual or annual basis. Our investment income fluctuates from quarter to quarter because investment income is recognized when received.

Interest income was RMB12.4 million ( US$1.9 million ) for the fourth quarter of 2017, representing an increase of 40.3 times from RMB0.3 million for the corresponding period in 2016, primarily due to interest related to amounts due from Sincere Fame International Limited ("Sincere Fame") and Shenzhen Chuangjia Investment Limited Partnership , which beneficially owns 84.6% of Fanhua Puyi Fund Sales Limited .

Income tax expense was RMB38.1 million ( US$5.9 million ) for the fourth quarter of 2017, representing an increase of 102.7% from RMB18.8 million for the corresponding period in 2016. The effective tax rate for the fourth quarter of 2017 was 32.9% compared with 25.1% for the corresponding period in 2016. The increase in effective tax rate was primarily due to the withholding income tax provided pursuant to dividend payments in the fourth quarter of 2017.

Share of income of affiliates was RMB55.2 million ( US$8.5 million ) for the fourth quarter of 2017, representing an increase of 297.1% from RMB13.9 million for the corresponding period in 2016, mainly attributable to an increase of profits from Sincere Fame, a company in which we own 20.6% of the equity interest.

Net income from continuing operations was RMB132.9 million ( US$20.4 million ) for the fourth quarter of 2017, representing an increase of 89.3% from RMB70.2 million for the corresponding period in 2016.

Net loss (income) from discontinued operations was RMB1.2 million ( US$0.2 million ) for the fourth quarter of 2017, mainly representing the loss from disposal of the brokerage segment in the fourth quarter. Net income from discontinued operation was RMB11.7 million for the corresponding period in 2016, representing net income from operation of brokerage segment contribute to the Company.

Net income attributable to the Company's shareholders was RMB126.9 million ( US$19.5 million ) for the fourth quarter of 2017, representing an increase of 70.1% from RMB74.6 million for the corresponding period in 2016.

Net margin was18.4% for the fourth quarter of 2017 compared with 5.6% for the corresponding period in 2016.

Basic and diluted net income per ADS were RMB1.98 ( US$0.30 ) and RMB1.98 ( US$0.30 ) for the fourth quarter of 2017, respectively, representing increases of 54.7% and 61.0% from RMB1.28 and RMB1.23 for the corresponding period in 2016.

Financial Results for Year 2017

Total net revenues were RMB4,088.5 million ( US$628.4 million ) for 2017, representing an increase of 0.1% from RMB4,082.9 million for the corresponding period in 2016.

  • Net revenues for the life insurance business were RMB2,424.4 million ( US$372.6 million ) for 2017, representing an increase of 144.8% from RMB990.5 million in 2016. The increase was due to the growth in the number of sales agents and rapid growth of new policy sales. Revenues generated from our life insurance business accounted for 59.3% of our total net revenues in 2017.

  • Net revenues for the P&C insurance business were RMB1,355.8 million ( US$208.4 million ) for 2017, representing a decrease of 50.8% from RMB2,755.9 million in 2016. The decrease was primarily due to i) our decision to terminate lower margin channel businesses starting from the second quarter of 2017; ii) implementation of a platform business model for our auto insurance business beginning the fourth quarter of 2017; and iii) the suspension of business cooperation with PICC Property and Casualty Company Limited ("PICC P&C") starting from March 1, 2017 . Revenue generated from our P&C insurance business accounted for 33.2% of our total net revenue in 2017.

  • Net revenues for the claims adjusting business were RMB308.3 million ( US$47.4 million ) for 2017, representing a decrease of 8.4% from RMB336.4 million in 2016. Revenues generated from the claims adjusting business accounted for 7.5% of our total net revenues in 2017.

Total operating costs and expenses were RMB3,815.3 million ( US$586.4 million ) for 2017, representing a decrease of 6.7% from RMB4,091.4 million in 2016.

  • Commission costs were RMB3,059.4 million ( US$470.2 million ) for 2017, representing a decrease of 1.5% from RMB3,106.6 million in 2016. The decrease in commission cost was mainly due to the decrease in our P&C insurance business, partially offset by the growth of our life insurance business.

    - Costs of the life insurance business
    were RMB1,636.3 million ( US$251.5 million ) for 2017, representing an increase of 143.1% from RMB673.2 million in 2016. The increase was in line with the growth in sales. Costs incurred by the life insurance business accounted for 53.5% of our total commission costs in 2017.

    - Costs of the P&C insurance business were RMB1,228.5 million ( US$188.8 million ) for 2017, representing a decrease of 45.0% from RMB2,233.6 million in 2016. The decrease was primarily due to the implementation of a platform business model for our P&C insurance business under which no costs are incurred. Costs incurred by the P&C insurance business accounted for 40.1% of our total commission costs in 2017.

    - Costs of claims adjusting business were RMB194.5 million ( US$29.9 million ) for 2017, representing a decrease of 2.7% from RMB199.8 million in 2016. Costs incurred by the claims adjusting business accounted for 6.4% of our total commission costs in 2017.

  • Selling expenses were RMB221.8million ( US$34.1 million ) for 2017, representing a decrease of 55.9% from RMB502.8 million in 2016. The decrease was primarily because promotional marketing subsidies were paid to sales agents in the fourth quarter of 2016 for selling auto insurance policies while there was no such promotional marketing plan in 2017.

  • General and administrative expenses were RMB534.1million ( US$82.1 million ) for 2017, representing an increase of 10.8% from RMB481.9 million in 2016. The increase was primarily due to an increase in expenses incurred for setting up new offices and staff recruitment as a result of regional expansion offset by the reduction in expenses related to P&C insurance agencies as a result of the disposal of most of our P&C insurance agency subsidiaries in the fourth quarter of 2017.

As a result of the preceding factors, we had an operating income of RMB273.1 million ( US$42.0 million ) for 2017, compared with an operating loss of RMB8.5 million in 2016.

Operating margin was 6.7% for 2017, compared to negative 0.2% in 2016.

Investment income was RMB191.8million ( US$29.5 million ) for 2017, representing an increase of 66.3% from RMB115.3 million in 2016. The investment income represented yields from short-term investments in financial products which mainly consist of inter-bank deposits or collective trust products with terms ranging from half-a-year to two years and interest payable on a quarterly, semi-annual or annual basis. Our investment income fluctuates from quarter to quarter because investment income is recognized when received.

Interest income was RMB25.9 million ( US$4.0 million ) for 2017, representing an increase of 275.4% from RMB6.9 million in 2016, primarily due to interest related to amounts due from Sincere Fame International Limited ("Sincere Fame") and Shenzhen Chuangjia Investment Limited Partnership , which beneficially owns 84.6% of Fanhua Puyi Fund Sales Limited .

Income tax expense was RMB167.8 million ( US$25.8million ) for 2017, representing an increase of 516.9% from RMB27.2 million in 2016. The effective tax rate for 2017 was 33.2% compared with 22.0% in 2016. The increase in effective tax rate was primarily due to the withholding income tax provision related to dividend payments for the second half of 2017.

Share of income of affiliates was RMB108.9 million ( US$16.7 million ) for 2017, representing an increase of 125.5% from RMB48.3 million in 2016, mainly attributable to an increase of profits from Sincere Fame, a company in which we own 20.6% of the equity interest.

Net income from continuing operations was RMB446.2 million ( US$68.6 million ) for 2017, representing an increase of 207.5% from RMB145.1 million in 2016.

Net income from discontinued operations was RMB5.5 million ( US$0.8 million ) for 2017, mainly representing net income from operation of Brokerage Segment contribute to the Company. Net income from discontinued operation was RMB22.5 million in 2016, representing net income from operation of Brokerage Segment contribute to the Company.

Net income attributable to the Company's shareholders was RMB449.2 million ( US$69.0 million ) for 2017, representing an increase of 186.0% from RMB157.0 million in 2016.

Net margin was 11.0% for 2017 compared with 3.8% in 2016.

Basic and diluted net income per ADS were RMB7.29 ( US$1.13 ) and RMB7.29 ( US$1.13 ) for 2017, respectively, representing increases of 169.0% and 180.4% from RMB2.71 and RMB2.60 in 2016.

As of December 31, 2017 , the Company had RMB2,862.5 million ( US$440.0 million ) in cash, cash equivalents and short term investments.

Key Operational Metrics for Fanhua's Online Initiatives for 2017:

  • CNpad Auto Insurance Mobile Application("CNpad Auto Insurance App") - Our proprietary mobile sales support system:

    - CNpad Auto Insurance App had been downloaded and activated 365,282 times as of December 31, 2017 , representing an increase of 72.0% from 212,317 times as of December 31, 2016 ;

    - The number of active users of CNpad Auto Insurance App3 was 158,778 in 2017, representing an increase of 103.0% from 78,216 in 2016;

    - Insurance premiums generated through CNpad Auto Insurance App were RMB2.7 billion ( US$413.5 million ) in 2017, representing a decrease of 11.7% from RMB3.0 billion for 2016.

  • Lan Zhanggui - Our one-stop insurance service platform that integrates the key functions of both CNpad Auto Insurance and CNpad Life Insurance App, which was launched in October 2017 . All CNpad Life Insurance App accounts have been converted to Lan Zhanggui.

    - Lan Zhanggui had been downloaded and activated 493,360 times as of December 31, 2017 , representing an increase of 132.4% from 212,317 times of downloads of CNpad Life Insurance App as of December 31, 2016 ;

    - The number of active users of Lan Zhanggui4 was 126,603 in 2017, representing an increase of 62.0% from 78,126 active users of CNpad Life Insurance App in 2016;

    - Insurance premiums generated through Lan Zhanggui were RMB2.2 billion ( US$340.9 million ) in 2017, representing an increase of 194.0% from RMB754.4 million generated through CNpad Life Insurance App for 2016.

  • eHuzhu - Our online non-profit mutual aid platform:

    - The number of registered members was 2.7 million as of December 31, 2017 , representing an increase of 101.5% from 1.4 million as of December 31, 2016 .

  • Baoxian.com - Our online insurance platform:

    - The number of registered customer accounts was 1.5 million as of December 31, 2017 , representing an increase of 104.1% from approximately 0.7 million as of December 31, 2016 .

    - The number of active customer accounts5 was 185,611 in 2017, representing an increase of 17.0% from 158,683 in 2016;

    - Insurance premiums generated on or through Baoxian.com was RMB727.0 million ( US$111.7 million ) in 2017, representing an increase of 697.1% from RMB91.2 million in 2016.

Recent Developments

  • As of December 31, 2017 , Fanhua had 506,231 sales agents and 1,226 professional claims, compared with 231,592 sales agents and 1,304 claims adjusters as of December 31, 2016 . As of December 31, 2017 , Fanhua's distribution network consisted of 502 sales outlets in 21 provinces and 144 services outlets in 29 provinces, compared with 746 sales outlets in 21 provinces and 161 service outlets in 29 provinces as of December 31, 2016 .

  • On December 13, 2017 , Fanhua signed a Strategic Partnership Agreement with Aeon Life Insurance Limited , pursuant to which both parties will engage in a deep and comprehensive cooperation in a wide range of areas including product sales, technology service and product design to provide best quality insurance products and services to a broader customer base.
  • On November 17, 2017 , Fanhua won the Influential Insurance Brands Award 2017 at the 12th Insurance Innovation Awards Ceremony, one of the most authoritative and prestigious events in the insurance industry. The panel of judges for the awards included experts in insurance and brand culture as well as the financial media.

Business Outlook

Fanhua expects its operating income to be no less than RMB80.0 million for the first quarter of 2018. This forecast reflects Fanhua's current view, which is subject to change.


Disclosure: I am/we are long FANH.