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Edited Transcript of FANH earnings conference call or presentation 21-Nov-19 1:00am GMT

Q3 2019 Fanhua Inc Earnings Call

Guangzhou, Guangdong Nov 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Fanhua Inc earnings conference call or presentation Thursday, November 21, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chunlin Wang

Fanhua Inc. - Chairman & CEO

* Oasis Qiu

Fanhua Inc. - IR Manager

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Conference Call Participants

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* Dan Tian

China International Capital Corporation Limited, Research Division - Analyst

* Debra Ann Fiakas

Crystal Equity Research, LLC - MD, Managing Member & Small Cap Strategist

* Yuan Xue

China International Capital Corporation Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by for Fanhua's Third Quarter 2019 Earnings Conference Call. (Operator Instructions) For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within 3 hours after the conference is finished. Please visit Fanhua's IR website ir.fanhuaholdings.com 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, Fanhua's Investor Relations Manager. Please go ahead.

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Oasis Qiu, Fanhua Inc. - IR Manager [2]

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Good morning. Welcome to our third quarter 2019 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 not limited to, those outlined in our filings with the SEC, including our registration

(technical difficulty)

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Operator [3]

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Our speaker line has experienced some technical difficulty. Please stay on the line as we adjust the technical issue. Excuse me, speaker line is now back.

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Oasis Qiu, Fanhua Inc. - IR Manager [4]

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Hello, sorry for disruption, our lines got accidentally disconnected. So sorry for the confusion. So we just talk about our risk factors just now, so I will continue with this. As I mentioned just now, we have provided forward-looking statements made under the safe harbor provision 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 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 are our Chief Executive Officer, Mr. Chunlin Wang; our Chief Financial Officer, Mr. Peng Ge; and Board Secretary, Lily Lee. Mr. Wang will provide a review of financial and operational highlights in the third quarter 2019 and then he -- Mr.Ge, and Mrs. Lee will take your questions after the prepared remarks.

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

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [5]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [6]

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[Interpreted] We have our Chief Financial Officer, Mr. Peng Ge, and our Board Secretary, Mrs. Lily Lee. We will begin today's call by giving a brief analysis about recent market developments, followed by an overview of our third quarter 2019 financial and operational results and our growth outlook in the fourth quarter 2019. There will be a Q&A session after the report.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [7]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [8]

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[Interpreted] In the first part, I would like to share a bit of management's view on the industry dynamics. Amid the ongoing U.S.-China trade war, there has been no sign of relaxation in regulatory supervision in China's financial markets. Industry-wide transformation and adjustment persists in the life insurance market in China as it witnessed a continuous quarter-by-quarter slowdown in growth over the past 9 months of 2019. Negative growth is expected in new premiums for regular individual life insurance business in the industry for the full year of 2019. If the trade war drags on and the regulatory environment remains tightened, we expect that the life insurance industry may remain under huge pressure to deliver growth in 2020 due to the following factors: firstly, lack of product innovation; and secondly, lower buying desire as more consumers choose to stay on the sidelines in views of the market uncertainty; and third, increasing difficulty in recruiting and retaining sales agents across the industry.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [9]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [10]

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[Interpreted] Although this industry-wide adjustment period may continue for a while, we firmly believe that such adjustment is temporary since the key forces that drive industry growth, such as consumer buying power and increasing demand for insurance products, have not changed fundamentally and the trend of the industry's spiral growth is reversible. We are convinced that through continuous regulatory overhaul, the industry would transition to a period of more healthy, sustainable and rapid development in the medium-to-long term.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [11]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [12]

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[Interpreted] As for our financial and operating results, in the third quarter 2019, our operating income achieved RMB 151.4 million, representing a growth of 21.6% year-over-year. Non-GAAP operating income decreased to 10.4% year-over-year to RMB 111.6 million, which was in line with our previous guidance. The decrease in non-GAAP operating income was primarily due to a comparison with the high base in the same period last year as a result of a one-off performance bonus income of approximately RMB 38 million that we've received from one of our insurance partners in the same period last year.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [13]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [14]

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[Interpreted] In the third quarter of 2019, Fanhua's life insurance business registered a strong growth of 42% year-over-year to RMB 2.1 billion, significantly outpacing industry growth, of which renewal insurance premiums grew by 46% year-over-year to RMB 1.4 billion. And first year regular premiums grew by 34.5% to RMB 683.6 million, while annualized premium equivalent grew by 6.2% to RMB 419.1 million.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [15]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [16]

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[Interpreted] In the third quarter 2019, our annuity insurance products accounted for 29.8% of our total life insurance business in terms of annualized life insurance premiums as compared to 11.3% in the same period last year, while long-term health insurance accounted for 65.3% as compared to 76.5% last year. And endowment insurance, term life insurance and whole life insurance collectively accounted for 4.9%.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [17]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [18]

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[Interpreted] In the third quarter 2019, we had more balanced and diversified mix of product suppliers, with Huaxia accounting for 25.4% of our total life insurance revenues; Sinatay 22.6%; Aeon, 21.6%; and Tian'an, 13.9%, respectively.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [19]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [20]

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[Interpreted] Net revenues of our claims adjusting business were 94.8% -- sorry, RMB 94.8 million for the third quarter 2019, up 18.6% year-over-year. The increase was mainly due to strong growth in medical insurance-related claims adjusting business.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [21]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [22]

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[Interpreted] In the third quarter 2019, we have completed cleaning up our sales force in accordance with the regulatory requirements. In the meantime, we still maintain a steady growth of approximately 50,000 new crews per quarter. As of September 30, 2019, the number of registered sales agents in Fanhua was 658,145, including 54,696, who were added during the third quarter of 2019.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [23]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [24]

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[Interpreted] During the third quarter of 2019, we've achieved remarkable results in implementing our 1,000 Reserve Entrepreneurial Sales Team Campaign. As of September 30, 2019, Fanhua has introduced over 600 new reserve entrepreneurial sales teams, which we believe will start to make positive contributions, drive business growth into 2020.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [25]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [26]

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[Interpreted] Meanwhile, we've steadily and vigorously rolled out our Shenzhou 100 strategy nationwide, which will lay a solid foundation for our rapid development in the next years to come.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [27]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [28]

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[Interpreted] Next, I'm going to share a bit update of our technology empowerment. Over the past few years, Fanhua has been dedicated huge efforts to research and development of proprietary technologies. We have invested heavily in our technology infrastructure, which empowers our sales agents to manage their sales and marketing activities more efficiently, while improving our operating efficiency and customer experience.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [29]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [30]

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[Interpreted] In the third quarter of 2019, after 1.5 years efforts, we have successfully launched an upgraded Internet-based core business system, which featured more intelligent and mobile service port as far as integrated data processing across dozens of insurance companies. We believe that this new system will provide stronger scalability to support our future business expansion, while driving efficiency.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [31]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [32]

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[Interpreted] Our online platforms maintained a solid growth momentum, of which eHuzhu has gathered approximately 3.8 million effective registered members as of September 30, 2019, helping more than 2,900 families raise an aggregate amount of RMB 509 million financial aid. 5 years into operation, eHuzhu started to experiment on monetization by providing certain value-added services in addition to charging its members a management fee of RMB 1 per person per month since early this year. A total of RMB 1.8 million management fee was collected as of September 30, 2019.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [33]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [34]

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[Interpreted] Meanwhile, Fanhua maintained solid growth with the number of its registered accounts increasing by 30.8% from a year ago to 2.6 million as of the end of September 2019. And the number of its active customer accounts during the third quarter of 2019 increased by 12.8% from a year ago to over 150,000. Insurance premiums generated to Baowang was RMB 86.6 million in the third quarter of 2019 with a year-over-year increase of 19.6%.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [35]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [36]

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[Interpreted] Fourthly, a bit of update on our quarterly dividend payout plan. Dividend for the third quarter 2019 is USD 0.30 per ADS payable on or around December 19, 2019, to shareholders of record on December 5, 2019. Going forward, we expect to maintain our quarterly dividend policy unchanged.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [37]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [38]

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[Interpreted] Fifthly, our business outlook in the fourth quarter of 2019. In light of the industry dynamics and our ongoing strategic initiatives, we expect that our annualized premiums equivalent to grow by no less than 10% year-over-year. And non-GAAP operating income to grow by no less than 20% year-over-year for the fourth quarter 2019.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [39]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [40]

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[Interpreted] When any industry undergoes adjustment, there tends to be a reshuffle in the competitive landscape with accelerating consolidation. And as a result, the big one becomes bigger, while the strong one becomes stronger. There's no exception in the insurance industry.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [41]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [42]

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[Interpreted] As the leading independent insurance agency in China, Fanhua will take full advantage of the adjustment period to make strategic deployment, so as to further solidify our leading position, by capitalizing on the favorable opportunities presented by the accelerated separation of insurance underwriting and distribution. We will stay focused on executing the Shenzhou 100 strategy and the 1,000 Reserve Entrepreneurial Sales Team Campaign, through which we aim to further strengthen our sales force by attracting elite sales and managerial talents, and further tap into the market potential in medium and large-sized cities in China.

We believe these initiatives will position the company well to embrace the next round of explosive growth in the China's insurance industry over the long run. Thank you.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [43]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [44]

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[Interpreted] Thank you. Now our management will open the floor for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Dan Tian from CICC.

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Dan Tian, China International Capital Corporation Limited, Research Division - Analyst [2]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [3]

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[Interpreted] This is Dan Tian from CICC, and he has two questions. The first question is regarding to our number of sales agents and annualized premium equivalent. He's wondering why a number of our sales agents and APE decreased sequentially from the second quarter? And what happened? What's the causes for this? And the second question is regarding to the year opening strategies of our business partners.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [4]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [5]

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[Interpreted] Thank you for the questions. Regard to your first question, it actually involves 2 parts. First part is regarding to the number of our sales agents. The decrease in the number of sales agents was mainly due to the sales force cleanup as required by the regulator. And basically, the local bureaus of the CBRC have attached great importance to this requirement, and even given a cap on the number of the sales agents that each agencies can have. So as the #1 insurance agencies in many of the regions in China, we have strictly followed the requirements of the local CBRC bureaus. So that's why the numbers of our sales agents decreased significantly from the second quarter.

And as the result of the sales force cleanup, the number of performing agents also decreased slightly.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [6]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [7]

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[Interpreted] And after the sales force cleanup, we also have a more clear direction or clear target in terms of the growth in our sales force, and we expect to continue to maintain a steady pace of new recruits going forward, and we expect that we'll recruit approximately 50,000 each quarter going forward.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [8]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [9]

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[Interpreted] And secondly, regarding to the decrease in our new business. In China, particularly in the life insurance industry, there is a kind of seasonality in the implementation of campaigns throughout the year by insurance companies. In the beginning of the year, there's year opening sales campaign and then followed by, what we call, April and May joint promotional campaigns. And then followed by golden period in September and October when the insurance company will also put more efforts to promote sales. While in July and August, usually the focus will be on increasing sales agents. Since the promotional campaigns in September and October falls in 2 separate quarters, so usually the third quarter will be relatively weak than the first quarter and the second quarter. So except that if my insurance company has some special promotional activities like a discontinued product line, so that may (inaudible) in that particular quarter. Otherwise, it's usually normal that the business in the third quarter will be relatively lower than the second quarter.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [10]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [11]

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[Interpreted] Regarding to the year opening sales, probably insurance intermediary companies may face a little bit complicated situations here, this year. Firstly, there will be probably more competitions from insurance companies. For example, China Life and Ping An, they actually started their year opening sales in October, which is far earlier than usual, than previous years. I think maybe this is their efforts to get more market shares than their competitors.

And then secondly, another factor that might affect our year opening sales is that recently, the CBIRC has assembled a meeting among over 10 insurance companies, which offer annuity products with an assumed interest rate of 4.025%. And basically, the CBIRC require them to discontinue the sales of this type of products, probably by mid-December.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [12]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [13]

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[Interpreted] We will keep a close watch on the market development, and we will also take measures to adapt to the market changes in time. And our year opening sales strategy is basically we're going to kick start our year opening sales before December 10 this year.

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Operator [14]

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Your next question is from Xue, Yuan.

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Yuan Xue, China International Capital Corporation Limited, Research Division - Research Analyst [15]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [16]

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[Interpreted] This is Xue, Yuan from CICC, and he has two questions. The first question is regarding the change in our first year commission rate, is it increased or decreased from last quarter? And then secondly, it is regarding to the recent developments in our Shenzhou 100 strategy.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [17]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [18]

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[Interpreted] Our first year commissions rate remains unchanged at around [120%] (corrected by company after the call) in the third quarter.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [19]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [20]

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[Interpreted] And as for to the second question, Shenzhou 100 strategy is our medium-term and long-term strategy. And since we launched the strategies in August, we have received very enthusiastic response from the market. Currently, we have split our Shandong provincial branch into 3 separate provincial branches, which is the Shandong provincial branch, [Jiaodong] provincial branch and [Lu'nan] provincial branch, divided by regions -- different regions in Shandong. And in the meantime, we also have been in close contact with the managerial talents in top 6 insurance companies. And the typical profile of these top managerial personnels are that they are born in the 1980s.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [21]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [22]

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[Interpreted] Starting from next year, we expect more and more new provincial branches will be established in the next 3 years. And we believe that we will be able to achieve this target to establish nearly 100 provincial branches by then, which will lay a solid foundation to our future growth.

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Operator [23]

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Your next question is from Debra Fiakas from Crystal Equity.

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Debra Ann Fiakas, Crystal Equity Research, LLC - MD, Managing Member & Small Cap Strategist [24]

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Thank you for taking my question in English. My first question, I have two. The first one is about the 600 new reserve sales teams. I was wondering if you could tell us more about the teams, are they -- how large they are, how many people are on the sales teams, 1 or many? And also, if you have expectations for turnover in these teams related to the regulatory effort to register and sort of clean up the sales forces, if you will. And then also, I wondered if you could tell us the number of hours that they're trained, how much training they get? And then my second question is really about the number of active users of the Lan Zhanggui platform. The number went down this year. There's fewer active users. But I wondered if you could explain their -- about their performance. Is each 1 of the active users selling more per person or selling less? If you could just tell us about the performance of the ones that you have retained?

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Oasis Qiu, Fanhua Inc. - IR Manager [25]

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(foreign language) Thank you. Regarding to your first question, our 1,000 reserve entrepreneurial sales agents campaigns, which we launched in our half-year operational conference earlier in July and the Shenzhou 100 strategy, which we launched in August and September, those are the strategies and campaigns are launched according to our judgment to the market development, especially our judgment that the market is undergoing an adjustment. And we think that we must take advantage of this opportunity to do more fundamental work to solidify our infrastructure and our sales force. And the 1,000 Reserve Entrepreneurial Sales Teams Campaigns is our effort to shift our focus from recruiting individual sales agents to kind of structural recruitment, i.e., recruitment of sales agents in teams. As you may note, Fanhua has innovated entrepreneurial sales agents system, but this reserve entrepreneurial sales team, they may not have met the standards as an entrepreneurial sales team.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [26]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [27]

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[Interpreted] The typical profile of reserve entrepreneurial sales teams are, basically the members should be dedicated in insurance industry. And then secondly, the sales team will be able to generate over 50,000 APEs each month for for 3 consecutive months. And then thirdly, the team should have at least 6 effective performing agents.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [28]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [29]

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[Interpreted] As for these certificates, in according to the CBIRC requirements, after the sales force clean-up, all of our sales agents have been properly registered with the CBRC and have been issued with our certificates to indicate that they are allowed to sell insurance under Fanhua's name. And for all the new recruits, they will also be properly registered and issued with the certificate. As for the training, we will provide all the new recruits standardized training activities as well as differentiated training programs according to their specific needs.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [30]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [31]

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[Interpreted] As for the active users of the Lan Zhanggui, the decrease is mainly due to the sales force cleanup as regulator required, but first year premiums recorded a strong growth year-over-year. So that means that per person productivity also improved significantly.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [32]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [33]

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[Interpreted] Thank you.

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Operator [34]

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We don't have any other questions as of the moment. Please continue, presenters.

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Oasis Qiu, Fanhua Inc. - IR Manager [35]

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Thank you.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [36]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [37]

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If you have any further questions, please feel free to contact us. Thank you for joining us on the call. Thank you.

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Operator [38]

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Ladies and gentlemen, that does conclude our call for today. Thank you for participating. You may all disconnect.