HUIZ 慧择

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Huize Holdings Limited's Third Quarter 2020 Earnings Call. [Operator Instructions] This conference call is being recorded and a webcast replay will be available. Please visit Huize's IR website at ir.huize.com under the Events and Webcasts section. Now I would like to hand the conference over to your speaker, your host today, Ms. Harriet Hu, Huize's Investor Relations Director. Please go ahead, Harriet.

Harriet Hu

Thank you, operator. Hello, everyone, and welcome to our third quarter 2020 earnings conference call. The financial and operating results were released earlier today and are currently available on our IR website as well as on newswire. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. With also notes that we'll discuss non-GAAP measures today, which are more thoroughly explained in our earnings release and filings with the SEC. Joining us today are our Founder and CEO, Mr. Cunjun Ma; COO, Mr. Li Jiang; CFO, Mr. Minghan Xiao; and Co-CFO, Mr. Ronald Tam. Mr. Ma will start the call by providing an overview of the company's performance and operational highlights for the third quarter of 2020. Mr. Tam will then provide details on the financial results for the period before we open up the call for questions. Now I will turn the call over to Mr. Ma.

Cunjun Ma

[Foreign Language]

Harriet Hu

[Interpreted] Hello, everyone, and thank you all for joining Huize's Third Quarter 2020 Earnings Conference Call. As China gradually recovers from the COVID-19 epidemic, the year-over-year growth rate of per capita disposable income reversed from negative to positive in the third quarter of 2020 according to the National Bureau of Statistics. At the same time, we continue to observe a steady increase of people's insurance awareness as well as increasing adoption of online purchase of insurance products by consumers. In light of the industry's and broader economy's recovery trends, we continue to focus on executing our unique long-term insurance product strategies as well as our leading digital development capabilities. As a result, we achieved double-digit year-over-year growth in both total GWP and total operating revenue, hitting record quarterly highs. During the quarter, total GWP facilitated on our platform increased by 41.2% year-over-year to RMB 779 million while total operating revenue increased by 22.9% year-over-year to RMB 348 million, once again exceeding the high end of our previously announced guidance range. Such growth and profitability during the period of uncertainty continue to showcase the viability of our business model as well as the efficacy of our strategic focus on transforming the distribution of long-term life and health insurance products.

Cunjun Ma

[Foreign Language]

Harriet Hu

[Interpreted] Before providing additional updates on our quarterly business progress, I would like to first discuss why we focus on long-term insurance products. During the third quarter, long-term life and health GWP accounted for 92.9% of total GWP, a ratio which has stayed about 90% for the past 4 consecutive quarters. At the same time, GWP for long-term health insurance increased by 47.1% year-over-year to RMB 649 million. Our ability to maintain such strong rates is largely driven by our first-mover advantage in the online long-term insurance space where we have formed many competitive strengths in brand influence and professional capabilities, which we believe are also difficult for other industry players to replicate. Our focus on long-term insurance products has a number of advantages. On the one hand, long-term insurance products generate higher commission rates as well as recurring revenues via policy renewals. On the other hand, our long-term products focus enabled us to form more long-standing relationships with clients and grants better client loyalty. Our persistency ratio for long-term life and health insurance in the 13th and 25th month of the policy remained stable at 94%, a relatively high level in the industry. The high client retention rate provides us an opportunity to maximize customer lifetime value as we are able to explore and serve the evolving protection needs of clients in different stages of life.

Cunjun Ma

[Foreign Language]

Harriet Hu

[Interpreted] In line with our focus on developing long-term insurance products, we also concentrate on building our core competencies. As a pioneering insurance e-commerce platform in China, we have accumulated a massive amount of multidimensional client data and transaction data over the past 14 years. By harnessing our superior data resources, we have been able to develop more comprehensive client products, employ more precise risk management practices and deepen our understanding of client-specific insurance needs, product design mechanisms and risk-adjusted pricing to provide clients with a more valuable and customized insurance products. For example, we officially launched a critical illness insurance product referred to as the Darvin 3. Soon after its launch, this product became extremely popular. In September, Darvin 3 won the Popular Health Insurance Products of 2020 awards. This was the sixth time that our Darwin critical illness series of insurance products has won such in awards in the industry, further illustrating the series' exceptional reputation as well as our first rate product design capabilities. Beyond our value and positioning also continues to gain recognition in the third quarter. For example, in September, Huize was included in Hurun's China Digital Insurance Agencies 2020 list and was group among the first tier level of companies in terms of innovation capabilities and market performance throughout the past 2 years. Going forward, we firmly believe that the market will increasingly understands the importance of online insurance products and their service channel as well as the steady trends of separation between insurance underwriting and distribution in the industry as China's insurance market matures. As such, we are eager to capitalize on this opportunity and assess our development with the wind at our backs.

Cunjun Ma

[Foreign Language]

Harriet Hu

[Interpreted] I would also like to talk about our future development strategies. Many of the insurance clients we have served come from families in first- and second-tier cities with high customer lifetime value potential. We will be rolling out offline service centers in select first and second-tier cities in order to better serve their differentiated demand for higher-quality products and premium insurance services in order to maximize these customers' lifetime values. . Over the next 3 years, we will take the opportunity to invest in a comprehensive strategic upgrade for the core Huize's platform as we evolve into the post-COVID era, where consumers demand further innovation in insurance products and digital transformation of the insurance purchase and service experience. That targeting to build an insurance process and service cloud platform, incorporating core technologies such as cloud computing, big data analytics and artificial intelligence. We envisage the upgraded platform will accelerate the integration of online and offline channels, further empower upstream and downstream partners in our ecosystem with data and technology and ultimately enable the industry as a whole to reach insurance clients in all scenarios and provide them with a fuller range of personalized insurance products and services throughout their entire life cycle more efficiently.

Cunjun Ma

[Foreign Language]

Harriet Hu

[Interpreted] This concludes my prepared remarks for today. I will now turn the call over to our CFO, Mr. Ronald Tam. He will provide an overview of our key financial highlights for the quarter.

Kwok Ho Tam

Thank you, Mr. Ma and Harriet, and hello, everyone. In summary, our third quarter results show a very clear recovery trend in China's insurance industry as a whole. And in particular, a pickup in underlying growth momentum as shown on a quarter-on-quarter growth across the long-term and short-term product spectrum. As economic activity resumes and domestic travel activity picks up steam, all in successful containment of COVID in the country. In particular, during the quarter, we have achieved record quarterly highs for both total GWP facilitated as well as our total operating revenue. For Q3, we added 259,000 new insurance customers, taking our total cumulative insurance client of 6.7 million. GWP facilitated during the quarter totaled RMB 779 million, which was a record quarter, up 41.2% year-over-year and 30.7% on a sequential basis. GWP contribution from our 2 largest product segments, long-term health and long-term life, grew by 47.1% and 49.4%, respectively, year-over-year. In particular, in terms of first year premiums, long-term health, our largest product segment, increased by 68.1% quarter-on-quarter, amounting to RMB 250 million, which accounts for 70% of total first year premiums of RMB 358 million for the quarter. The strong sequential growth is primarily attributable to our leading top-selling critical illness product, Darwin 3, which we have codeveloped with Sinatay Life Insurance. The successful product launch also helped contribute significant growth in GWP for codeveloped insurance products with our insurer partners, which increased by 65% to RMB 436 million, and accounting for 56% of our total GWP facilitated during the quarter. This metric continues to demonstrate the deepening engagement we have with our upstream insurance companies partners as we continue to deliver strong persistency ratios from our long-term insurance customers with 13th month and 26 months persistency ratios averaging 94% during the quarter. Now turning to our revenues. Total operating revenue for Q3 was RMB 348.5 million, again, a record quarter high, which was up by 22.9% year-over-year and outperform our guidance previously given to the market in our Q2 results. The increase in revenue was primarily driven by the increase in brokerage income due to the 41.2% increase in total GWP facilitated during the quarter. Cost of revenue for Q3 increased by 24% year-over-year to RMB 234.7 million, primarily due to increased service fees paid to our user traffic channel partners, which is generally in line with our revenue growth. Selling expenses for the quarter increased by 43.9% year-over-year to RMB 57.9 million, which was primarily attributable to the increase in our sales and marketing headcount during the past 12 months as well as an increase in advertising and marketing spend during the third quarter, which increased by 78% year-over-year as we look to increase spend in line with the improving industry fundamentals along with the overall recovery in the economy. G&A expenses for the quarter decreased by 0.6% year-over-year to RMB 30.5 million. This decrease was primarily due to the decrease in share-based compensation expenses, which amounted to RMB 2.8 million in the third quarter as compared to RMB 10.5 million in the previous year. Excluding the impact of SBC from our G&A in Q3, G&A expenses grew by 37.1% year-over-year to RMB 27.6 million. R&D expenses for the quarter grew by 41.7% year-over-year to RMB 11.5 million as we continue to increase our headcount in areas of data analytics and AI-related R&D efforts. During the third quarter, we achieved a GAAP net profit of RMB 14.7 million, while non-GAAP net profit for the quarter was RMB 20.4 million. We continue to maintain robust liquidity and a strong financial position. During the quarter, we recorded a net operating cash flow of RMB 72 million. And as for the quarter-end, we had a combined balance of cash and cash equivalents of approximately USD 65.7 million. Now with regards to our Q4 outlook, we currently expect total operating revenue to be in the range of RMB 330 million to RMB 350 million. This forecast reflects the company's current and preliminary views on the market and operational conditions, which are subject to change caused by various uncertainties, including those related to the ongoing COVID pandemic globally. This concludes our prepared remarks for today. We will now open up the call to Q&A. Thank you. Operator?

Operator

[Operator Instructions] Your first question comes from [indiscernible] from Citigroup.

Unknown Analyst

[Foreign Language] So I have 3 questions primarily. The first one is, we would like to ask management regarding the guidance on the FY growth outlook in 2021, especially regarding annuities and health insurance. And related to that, we would also like to know whether growth or profit generation with the quite the focus for 2021? Also, I'm interested to know what are your arrangements or preparations regarding the exits of your pre-IPO principal shareholder since we understand the lockup per shareholder?

Kwok Ho Tam

Okay. Thanks for the questions. And I think there's 3 questions here. I think I'll take the first question first regarding the full year outlook for, I guess, first year premium for the business. I think that what we've seen overall in the first half was relative to deceleration in terms of overall industry growth. And as a result, I think the business has also shown a consistent trend along the industry. I think in the second half of the year, you can see that sequentially, there was a relatively strong rebound in terms of our new business in the third quarter. And then fourth quarter, I think that despite being a seasonally weak -- traditional seasonally weak season, we are still seeing a relatively good momentum going through the fourth quarter as general market conditions rebound. So overall, I think for the full year, I think it will be relatively flat versus last year in the first year premium. But obviously [indiscernible] how the industry dynamics have been improving in the second half of the year. The second question was regarding the growth focus for next year. I think that the question was really on whether we'll be prioritizing overall top line growth versus profitability. I think that for us, I think the next year will be a year for us for not just continue to execute on our existing business strategy on our long-term product, which we then will see definitely improvement next year, given the market conditions have been rebounding. We will also be going into new product segments. And as you have noted in your remarks that we'll be scaling up our annuities or savings-related product business in the next year. And we'll be looking to target a contribution from this new product vertical, approximately 20% of our total FYP for next year from savings-related products and particularly annuities products, which we've seen also a very sharp focus from the insurance companies as a whole in terms of the new year product launch initiative. And the third question is regarding the IPO -- the pre IPO investor intentions post the lockup. Obviously, we, as a company, we focus on our business execution, but we maintain good and consistent dialogue with our existing shareholders and particularly the larger shareholders. And we believe that both of the shareholders have been indicating to us that they are -- that they remain very confident in the long-term growth potential. And there would be opportunity for maybe monetization for some of the shareholders as and when they have seen -- when they arrive. So I think we will be keeping close dialog with investors. And should there be any opportunities, we'll be in close coordination with investors to make sure that there will be an orderly market for this potential monetization prospect for public investors.

Operator

[Operator Instructions] As there are no further questions at this time, I'd like to hand the conference back to our management for closing remarks.

Kwok Ho Tam

Okay. Thanks for joining the call today, and we look forward to sharing our results in the next time. And during the period, keep safe and healthy, everyone. Thank you very much.

Operator

Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now all disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]