Fanhua Inc. (FANH) Q4 2018 Earnings Conference Call Transcript
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Fanhua Inc. (NASDAQ: FANH)
Q4 2018 Earnings Conference Call
March 11, 2019, 9:00 p.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Thank you for standing by for Fanhua's Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. All lines have been placed on mute to prevent background noise. After the Management's prepared remarks, there will be a question-and-answer session. Please follow the instructions given at that time, if you would like to ask a question. For your information, this conference call is now being broadcasted live over the Internet. The webcast replay will be available within three hours after the conference is finished. Please visit Fanhua's IR website at ir.fanhuaholdings.com under the Events & Webcasts section. Today's conference call is being recorded. If you have any objections, you may disconnect at this time.
I will now turn the meeting over to your host for today's conference, Ms. Oasis Qiu, Fanhua's Investor Relations Manager.
Oasis Qiu -- Investor Relations Manager
Good morning. Welcome to our fourth quarter and fiscal 2018 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 US 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 these forward-looking information except as required under applicable law.
Joining us today are our Chief Executive Officer, Mr. Chunlin Wang; Chief Financial Officer, Mr. Peng Ge; and Board Secretary, Lily Lee (ph). Mr. Wang will provide a review of our financial and operational highlights in the fourth quarter and fiscal year 2018. He; Mr. Ge; and Mrs. Lee would take your questions after the prepared remarks.
Now, I will turn the call over to Mr. Wang.
Chunlin Wang -- Chief Executive Officer & Chairman
(foreign language)
Hello everyone, welcome to join us on today's conference call. Here with me, we have our Chief Financial Officer, Mr. Peng Ge; and our Board secretary, Mrs. Lily Lee. We will begin today's call by reviewing our fourth quarter and fiscal year 2018 financial results, then I will share some of the operational highlights in 2018 followed by a brief discussion of our business outlook for 2019. There will be a Q&A session after the report.
(foreign language)
As the circular No. 134 issued by the CIRC in 2017 continued to exert its impact in 2018. And against the backdrop of tightened regulation focusing on steering the China's life insurance industry back to its fundamental function of providing protection to the society, we report a solid set of key operating metrics, which beat our prior expectations.
(foreign language)
Of which our annualized insurance premiums on regular life insurance products reached RMB1.9 billion in 2018, up 3.8% from a year ago, while renewal insurance premiums registered a growth of 119.3% year-over-year to RMB3.7 billion, leading to a total of RMB6.2 billion life insurance premiums, representing a growth of 46.2% year-over-year.
(foreign language)
Our operating income grew 55.9% year-over-year to RMB425.7 million in 2018, with net income growing 35.8% year-over-year to RMB609.9 million and earnings per American Deposit Shares, up 34.8% year-over-year to US$1.43. We distributed cash dividend of US$1.00 per ADS in 2018, representing a dividend payout ratio of 69.9%.
(foreign language)
In the fourth quarter of 2018, we had stellar growth of 80.9% year-on-year growth in total insurance premiums to RMB1.7 billion, of which annualized premiums equivalent on regular life insurance products grew by 37.7% to RMB467.9 million and renewal insurance premiums were RMB1.1 billion, up 100.4% year-over-year.
(Foreign language)
We wrapped up the year with strong note in the fourth quarter of 2018, with an operating income increasing by 34.3% from a year ago to RMB83.4 million.
(foreign language)
And in the second part, I would like to discuss some of the key operational highlights in 2018.
(foreign language)
Fanhua made steady progress on expanding our sales force to 1 million, while many insurance companies face increasing difficulty to recruit and retain agents. As of December 31st, 2018, we added over 300,000 sales agents from a year ago, and the total number of our sales agents top over 800,000, it shows that separation of product design and distribution is an inevitable trend, and Fanhua is the best choice to embrace this trend. We firmly believe that we will be able to reach our target of 1 million sales agents by 2019.
(foreign language)
In 2018, all of our provincial subsidiaries or branches, which have been operating for more than a year have become profitable. In addition, except for eHuzhu, which is essentially a public charity platform, all of our other online platforms have also achieved profitability.
(foreign language)
In 2018, of all our provincial branches or subsidiaries, there are 5, which can each generate more than RMB100 million annualized life insurance premiums each year and 10, which can each generate more than RMB15 million (ph) annualized life insurance premiums each year. And all of them can each generate more than RMB10 million annualized life insurance premiums equivalent each year. This are the strong testament of a robust operation and development of our subsidiaries and branches nationwide.
(foreign language)
In 2018, we made some solid achievements in sales network development. As of December 31st, 2018, we added 180 new sales outlets to a total of 682.
(foreign language)
In 2018, Baoxian.com generated RMB1.3 billion insurance premiums, representing a growth of 80% from a year ago, with approximately RMB10 operating profit. It has become a leading internet insurance service provider in China.
(foreign language)
In 2018, eHuzhu continued to pursue steady and healthy development. As of December 31st, 2018, it has added 800,000 new registered members, and the number of effective members reached 3.4 million. Since its exception (ph), it has raised RMB314 million funds and helped more than 1,840 families. It has won wide recognition from its members and become a good window to showcase Fanhua's brand image.
(foreign language)
In 2018, Lan Zhanggui has gathered more than 807,000 registered users including approximately 150,000 users, who have sold at least one life insurance policy through the platform during the year, generating a total of RMB2.3 new life insurance premiums. Meanwhile, we continue to improve the digital tools user experience by adding and optimizing its key features especially the features related to agent recruitments, insurance proposal, checking and notification, online training and training courses development, online system building and event announcement centers (ph). There are several technologies related to Lan Zhanggui are leading the industry.
(foreign language)
In 2018, Fanhua has welcomed more than 20 new managers and 35 senior executives in the Group and our operating subsidiaries and branches, who are the backbones that helped significantly strengthen the Company's management and operational capacities during the year.
(foreign language)
Our accomplishments have won the recognition of the media, our clients and the general public. Fanhua and our subsidiaries were honored with several awards during 2018 including the Outstanding Brand of the Year 2017 (sic) awarded to Fanhua Inc.; China Leadership and Outstanding Insurance Intermediary of the year 2018; and the Best Insurance Intermediary Brand of the year 2018 in the 13th China Insurance Innovation Awards granted to our wholly subsidiary, Fanhua Insurance Sales and Service Group Limited. The Internet insurance Platform of the year 2017 won by Baoxian.com and Internet Enterprise Social Responsibility award won by eHuzhu at the 8th China Public Charity Festival.
In addition, one case handled by our subsidiary, Fanhua insurance Claims and Loss Adjustors related to loss -- assessment for a catastrophic loss taken at Dominion (ph) manufacturer was named among the top 10 leading examples of risk management in China in 2017. We are also honored to ranked 46 among Fortune's Top 100 Fastest-Growing Companies, and we are included in MSCI China Small Cap Index. We were also ranked among the Top 20 Global Insurance Brokers in 2017 according to AM Best, and we have been in the list for four consecutive years.
(foreign language)
In the third part, I'd like to share with our view on the outlook in 2019 and in the first quarter of 2019. And looking ahead to 2019, as the complex international geopolitical landscape adds to uncertainty in the macroeconomic environment in China and abroad, the China Banking and Insurance Regulatory Commission will inevitably focus on the theme of strict regulatory supervision and risk control in 2019. However, we are convinced that we are on track toward a continued growth, benefiting from a rapidly expanding middle class in China and accelerated trend of division of manufacturing from distribution, and based on China's scalable platform, rapidly expanding sales force, nationwide footprint and large customer base built over the past 20 years.
(foreign language)
As such, we expect our annualized premium equivalent on regular life insurance products to increase by 30% year-on-year, and operating income to increase by 40% year-over-year in the first quarter of 2019.
(foreign language)
For 2019, we expect annualized premium equivalent on life insurance products to increase by 30% year-over-year to RMB2.5 billion. Renewal insurance premiums to grow by 50% year-over-year to RMB5.6 billion, and operating income to grow by 40% to RMB600 million.
(foreign language)
Now, operating income and share of income of affiliate may decline in 2019, primarily because firstly, investment income is expected to drop mainly due to a decrease in cash reserve, as a result of the Company's increasing spending on share buybacks and dividends and the loans related to the Company's 521 development plan. And secondly, the interest derived from the loans related to the Company's 521 development plan won't be recognized, as interest income in the Company's income statements and instead will be recorded as additional paying capital when received according to relevant rules under the US GAAP. And thirdly, CNFinance Holdings, in which Fanhua owns 18.5% equity interests, intends to upgrade its business model from heavy-asset model to light-asset platform model, which may impact its profit in 2019.
As a result of the aforementioned factors, we expect a slight increase in net income attributable to shareholders in 2019 on a year-on-year basis. However, as the shares related to the 521 development plan will be treated as treasury shares, which won't be included in the shares used for calculating basic earnings per share, according to relevant rules under the US GAAP, we anticipate the growth of our basic earnings per share will be approximately 10%.
(foreign language)
At the board meeting held on March 8th, 2019 at the Company's headquarter, our Board of Directors passed the and below resolutions: firstly, the Board approved to increase the Company's annual dividend by 20% from US$1.0 per ADS in 2018 to US$1.2 per ADS in 2019, which will be paid on a quarterly basis. The management believes that firstly, our strong cash reserve of RMB2.3 billion, as of year end of 2018 should be sufficient to support our need for future business development, since we currently primarily rely on organic growth to expand our business. And secondly, the long term regular life insurance business that Fanhua focuses on has high embedded value and cash value, which will provide a strong base for sustainable cash generation in the long run. And thirdly, our cash dividend is determined based on the Company's operating cash flow to make sure that dividend distribution won't eat into the Company's existing cash reserve.
(foreign language)
So secondly, the Board approved a share repurchase program, authorizing the Management to execute the repurchase of up to US$200 million of the Company's ADS by December 31st, 2019, in any form that the management may deem appropriate.
(foreign language)
To our dearest shareholders and all of our friends, who are concerned about us, I'd like to take this opportunity to solemnly announce that the erode (ph) of separation of product -- production and distribution in the China life insurance industry has arrived, which will present a once in a lifetime golden opportunity to Fanhua and Fanhua's employees and sales teams. Fanhua model is the right direction in which all Fanhua employees and sales teams should forge ahead as one. The Fanhua's 521 development plan will be the core engine to drivers maybe this (ph) drive by leaps and bounds.
We believe that with no borrowing profit growth and continued increase in dividends, the Company will be able to build trust and win support from our shareholders. I firmly believe that the aspiration to become a company that can generate 100s of (ph) billions of insurance premiums won't be just a dream. To achieve these targets, we Fanhua people are dedicated to fulfilling our mission and sparing no efforts to pursue continued development with all of our sales force under my command, whatever might come being a difficulty or a challenge, we are not afraid, and we will work as one to tackle all of the obstacles to achieve our goals. I love Fanhua. Thank you.
Oasis Qiu -- Investor Relations Manager
Now, the Management will open the floor for questions.
Questions and Answers:
Operator
Thank you. Ladies gentlemen, we'll now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Yuan Xue from CICC. Please ask your question.
Yuan Xue -- CICC -- Analyst
(foreign language)
Yeah. CICC. Two questions. Firstly, Company announced a major increase in annual dividend in 2019 to -- and basically increased the annual dividend from US$1.0 per ADS to US$1.2 per ADS. In view of the fact that the Company's dividend payout ratio is already pretty high, though the increase in dividend payout will put pressures on the Company's operating cash flow and operations?
And the second question, Company expect to grow annualized premium equivalents by 30% year-on-year in 2019. What are the drivers behind the growth? Is it because the Company expect the number of sales agents to continue to grow? Or is it because Company expect to sign more contract and establish more partnership with more insurance companies. And what is the year-opening sales look like at this stage?
Chunlin Wang -- Chief Executive Officer & Chairman
(foreign language)
In 2018, our dividend payout ratio was approximately 69% against -- as a percentage of the net income attributable to shareholders. And for the dividends in 2019, after deducting the impact from the 521 development plan and even though, we increased the annual dividend by 20%, in terms of the operating cash fraud (ph), the cash fraud impact is more or less the same in 2018.
(foreign language)
We expect our operating profit to grow by 40% in 2019, which is -- will be a strong base to support our dividend distributions in 2019. And then secondly, we had about RMB2.3 billion in cash and cash equivalents and short-term investments by the year end in 2018. As the Company, currently primarily rely on organic growth to develop our business, and we do not have a lot of M&A trends in the short-term, we believe that our current cash reserve should be sufficient to support our continued business growth. And then thirdly, the long-term life insurance business that Fanhua is -- sort of specialized at and focuses on has high embedded value and high cash value and which will support the Company to continue to generate strong cash flow. So dividend payment will not use that -- will not eat into our current cash reserve.
(foreign language)
We started distributing life insurance business in 2005 and over the past decade, we have put a lot of focuses on business quality i.e. the persistency ratio of our life insurance business, and also focused a lot of energies to build up our technological capabilities and improving our services, as well as accumulating talent. So as a result, when the life insurance industry took off in 2015 (ph), we are able to generate growth much faster than that -- most of the insurance companies, and however, even much faster than a lot of peers in the independent insurance intermediaries.
(foreign language)
So therefore despite the tightening regulations in the past two years, we continued to able to benefit from the expanding middle class in China and continued to benefit from the acceleration of the trend of separation of production and distribution in the China life insurance industry. We believe that we are well positioned to sustain growth amid difficulties and as well as to achieve a much faster growth than the industry, when the -- the industry wants one-stop (ph).
(foreign language)
Thank you.
Yuan Xue -- CICC -- Analyst
(foreign language)
Operator
(Operator Instructions) Our next question comes from the line of Arthur Hall from Hallco Incorporation (ph). Please ask your question.
Arthur Hall -- Hallco Incorporation -- Analyst
Yes, congratulations on a very good quarter, and your statement on your vision -- your vision for the Company. My question is related to the primary insurance companies that underwrite your insurance. Could you list the top three or four and the percentage they -- they -- you expect them to do in 2019?
Oasis Qiu -- Investor Relations Manager
(foreign language)
Chunlin Wang -- Chief Executive Officer & Chairman
(foreign language)
We have maintained very good relationship with all our business partners. But of course, we'll adjust our cooperation with our insurance company partners in different stages depending on their product offerings and depending their services support, as well as the terms that they cooperate with us.
(foreign language)
Our top three life Insurance companies partners are Huaxia, Tian'an, and Aegon. And currently, we have more diversified and more broad life insurance business partners structure. And -- and in addition to that we have also continued to keep a very active partnership with 10 other life insurance companies.
(foreign language)
In 2019, we expect more and more insurance companies, especially the small and medium sized insurance company will have more stronger political role to cooperate with independent insurance intermediaries. And as a result, we do expect the shares generated by Huaxia and Tian'an to come down, as a total percentage of our life insurance business.
Arthur Hall -- Hallco Incorporation -- Analyst
Okay. Thank you.
Oasis Qiu -- Investor Relations Manager
Thank you.
Operator
Thank you. There are no questions at this time. I will now hand the call back to today's operator. Please continue. Presenter, you may continue. Thank you.
Chunlin Wang -- Chief Executive Officer & Chairman
(foreign language)
Oasis Qiu -- Investor Relations Manager
Hello, operator.
Operator
Yes, there are no questions. Please continue.
Oasis Qiu -- Investor Relations Manager
If there's no further questions, OK thank you for joining us everyone. If you have any further questions just feel free to contact us. Thank you.
Operator
Thank you. Ladies and gentlemen that does conclude our conference for today. Thank you for participating. You may all disconnect.
Duration: 46 minutes
Call participants:
Oasis Qiu -- Investor Relations Manager
Chunlin Wang -- Chief Executive Officer & Chairman
Yuan Xue -- CICC -- Analyst
Arthur Hall -- Hallco Incorporation -- Analyst
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