Huize Holding Limited (NASDAQ:HUIZ) Q4 2020 Results Conference Call March 10, 2021 7:00 AM ET Company Participants Harriet Hu - IR Director Cunjun Ma - Founder and CEO Ronald Tam - Co-CFO Conference Call Participants Michelle Ma - Citigroup Joey Yang - CLSA Brian Li - AMTD Group Operator Ladies and gentlemen, thank you for standing by, and welcome to Huize Holding Limited’s Fourth Quarter and Full Year 2020 Earnings Conference Call. [Operator Instructions] Today’s conference call is being recorded, and a we ...

PART I [ITEM 3. KEY INFORMATION](index=7&type=section&id=ITEM%203.%20KEY%20INFORMATION) This section presents selected financial data, highlighting significant revenue growth and a shift to profitability from 2017 to 2019, alongside a comprehensive list of risks related to business, corporate structure, China operations, and ADSs [Selected Financial Data](index=7&type=section&id=A.%20Selected%20Financial%20Data) The company achieved strong growth from 2017 to 2019, with total operating revenue increasing from **RMB 263.3 million** to **RMB 993.3 million**, transitioning from a **net loss of RMB 97.0 million** in 2017 to a **net profit of RMB 15.0 million** in 2019 | Financial Metric | 2017 (RMB million) | 2018 (RMB million) | 2019 (RMB million) | 2019 (US$ million) | | :--- | :--- | :--- | :--- | :--- | | **Total operating revenue** | 263.3 | 508.8 | 993.3 | 142.7 | | **Operating (loss)/profit** | (100.3) | 24.8 | 1.6 | 0.2 | | **Net (loss)/profit** | (97.0) | 2.9 | 15.0 | 2.2 | | Balance Sheet Item | As of Dec 31, 2018 (RMB million) | As of Dec 31, 2019 (RMB million) | As of Dec 31, 2019 (US$ million) | | :--- | :--- | :--- | :--- | | **Total assets** | 334.1 | 508.8 | 73.1 | | **Total liabilities** | 297.5 | 362.8 | 52.1 | | **Total shareholders' (deficit)/equity** | (385.2) | (308.7) | (44.3) | | Cash Flow Item | 2017 (RMB million) | 2018 (RMB million) | 2019 (RMB million) | 2019 (US$ million) | | :--- | :--- | :--- | :--- | :--- | | **Net cash (used in)/ provided by operating activities** | (85.3) | 66.9 | 118.0 | 17.0 | | **Net cash provided by/(used in) investing activities** | 57.8 | (3.6) | (6.9) | (0.9) | | **Net cash provided by/(used in) financing activities** | 23.0 | 48.6 | (14.1) | (2.0) | [Risk Factors](index=9&type=section&id=D.%20Risk%20Factors) The company faces significant risks from China's highly regulated and competitive online insurance industry, including evolving laws, VIE structure, and operational challenges, alongside market volatility and governance risks for ADS holders - Operating in China's rapidly evolving and highly competitive online insurance industry, the company faces a complex and changing regulatory environment, making future prospects difficult to predict[30](index=30&type=chunk)[31](index=31&type=chunk)[33](index=33&type=chunk) - The company relies on a **Variable Interest Entity (VIE) structure** for China operations due to foreign ownership restrictions, posing risks if PRC authorities deem arrangements non-compliant, potentially leading to severe penalties[119](index=119&type=chunk)[120](index=120&type=chunk) - A dual-class voting structure grants Class B shares **15 votes per share** versus one for Class A, with CEO Mr. Cunjun Ma controlling **76.5% of total voting power** as of March 31, 2020, ensuring decisive influence over corporate matters[198](index=198&type=chunk)[199](index=199&type=chunk) - The PCAOB's inability to inspect the auditor's work on China operations may deprive investors of inspection benefits and poses a delisting risk if new legislation is enacted[184](index=184&type=chunk)[185](index=185&type=chunk)[186](index=186&type=chunk) [ITEM 4. INFORMATION ON THE COMPANY](index=53&type=section&id=ITEM%204.%20INFORMATION%20ON%20THE%20COMPANY) This section details the company's history, business operations, and organizational structure, including its 2006 founding, 2019 VIE restructuring, 2020 IPO, online platform, client focus, product offerings, and reliance on contractual arrangements for China operations [History and Development of the Company](index=53&type=section&id=A.%20History%20and%20Development%20of%20the%20Company) The company's online insurance business began in 2006, followed by a June 2019 VIE restructuring for its IPO, which raised **US$47.7 million** in net proceeds when ADSs commenced trading on Nasdaq on February 11, 2020 - The company's business under the "Huize" brand commenced in **2006**, with Huize Insurance Brokerage Co., Ltd. established in **2011**[241](index=241&type=chunk) - In **June 2019**, the company restructured to control its PRC operating entity, Huiye Tianze, via a **VIE structure** to comply with PRC foreign ownership restrictions[245](index=245&type=chunk) - The company completed its IPO on the Nasdaq Global Market on **February 11, 2020**, under the symbol "HUIZ," raising net proceeds of approximately **US$47.7 million**[246](index=246&type=chunk) [Business Overview](index=54&type=section&id=B.%20Business%20Overview) Huize operates as an independent online insurance platform in China, connecting insurer partners with a young client base, focusing on life and health insurance, which generated **91.9% of brokerage income** in 2019, and co-developing tailor-made products - The company operates as an independent online insurance platform, distributing products for insurer partners without underwriting risk, having cumulatively served **6.3 million insurance clients** as of December 31, 2019[250](index=250&type=chunk)[251](index=251&type=chunk) - The client base primarily comprises the younger generation, with the average age of life and health insurance purchasers in 2019 being **32**[251](index=251&type=chunk)[265](index=265&type=chunk) | Metric | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | **Cumulative Insurance Clients** | ~3.7 million | ~5.3 million | ~6.3 million | | **GWP Facilitated** (RMB million) | 617.5 | 941.0 | 2,014.3 | | **Total Operating Revenue** (RMB million) | 263.3 | 508.8 | 991.3 | - Life and health insurance products are the primary focus, contributing **91.9% of brokerage income** in 2019, with tailor-made products accounting for **36.3% of GWP facilitated** in the same year[252](index=252&type=chunk)[253](index=253&type=chunk) [Organizational Structure](index=82&type=section&id=C.%20Organizational%20Structure) The Cayman Islands holding entity operates its China business through a **VIE structure**, with its WFOE controlling the PRC operating entity via contractual agreements to comply with PRC foreign ownership restrictions in internet and insurance brokerage sectors - Due to PRC legal restrictions on foreign ownership in internet and insurance brokerage, the company relies on contractual arrangements with its **VIE (Shenzhen Huiye Tianze Investment Holding Co., Ltd.)** and its shareholders for China operations[437](index=437&type=chunk) - Contractual arrangements, including Power of Attorney, Equity Pledge, Exclusive Business Cooperation, and Exclusive Option Agreements, collectively enable the company to exercise effective control over the VIE and receive its economic benefits[439](index=439&type=chunk)[440](index=440&type=chunk)[441](index=441&type=chunk)[442](index=442&type=chunk) [Operating and Financial Review and Prospects](index=84&type=section&id=ITEM%205.%20OPERATING%20AND%20FINANCIAL%20REVIEW%20AND%20PROSPECTS) This section analyzes financial performance and condition, noting **95.2% total operating revenue growth** in 2019 driven by brokerage income from long-term health insurance, increased operating costs from channel expenses and share-based compensation, a **net profit of RMB 15.0 million**, and liquidity primarily funded by operations subject to PRC regulations [Operating Results](index=84&type=section&id=A.%20Operating%20Results) In 2019, total operating revenue increased by **95.2% to RMB 993.3 million**, driven by brokerage income from long-term health insurance, while operating costs and expenses grew **104.9% to RMB 991.7 million** due to channel costs and share-based compensation, resulting in a **net profit of RMB 15.0 million** - Total operating revenue grew **95.2%** from **RMB 508.8 million** in 2018 to **RMB 993.3 million (US$142.7 million)** in 2019, primarily driven by brokerage income growth[474](index=474&type=chunk) - Brokerage income increased due to a rise in **GWP facilitated** (from **RMB 941.0 million** in 2018 to **RMB 2,014.3 million** in 2019) and a favorable product mix with more high-margin long-term health insurance products[475](index=475&type=chunk) - Total operating costs and expenses increased by **104.9%** in 2019, primarily from a **99.0% increase in channel costs** and a **250.2% increase in G&A expenses**, largely due to **RMB 88.0 million** in share-based compensation[476](index=476&type=chunk)[478](index=478&type=chunk) - The company achieved profitability in 2018 with a **net profit of RMB 2.9 million**, a significant improvement from a **net loss of RMB 97.0 million** in 2017, with net profit growing to **RMB 15.0 million** in 2019[480](index=480&type=chunk)[490](index=490&type=chunk) [Liquidity and Capital Resources](index=96&type=section&id=B.%20Liquidity%20and%20Capital%20Resources) The company's operations are financed by cash from operations and historical financing, with **RMB 88.1 million** in cash and cash equivalents as of December 31, 2019, and **RMB 118.0 million** net cash from operating activities in 2019, though liquidity is subject to PRC regulations on currency conversion and dividend distribution due to **99.6% of cash** being held in China by the VIE | Cash Flow Summary | 2018 (RMB million) | 2019 (RMB million) | | :--- | :--- | :--- | | **Net cash provided by operating activities** | 66.9 | 118.0 | | **Net cash used in investing activities** | (3.6) | (6.9) | | **Net cash provided by/(used in) financing activities** | 48.6 | (14.1) | - As of December 31, 2019, **99.6%** of the company's cash and cash equivalents were held in China and denominated in Renminbi, primarily by the VIE, with access subject to contractual arrangements and PRC regulations[527](index=527&type=chunk) - The company's ability to pay dividends relies on distributions from its WFOE, which are subject to PRC laws requiring statutory reserve fund contributions and foreign exchange regulations[539](index=539&type=chunk) [Directors, Senior Management, and Employees](index=100&type=section&id=ITEM%206.%20DIRECTORS%2C%20SENIOR%20MANAGEMENT%2C%20AND%20EMPLOYEES) This section details the company's leadership, compensation, board structure, and employee base, including executive backgrounds, **RMB 9.2 million** in executive compensation for 2019, board committees, **1,160 employees** as of year-end 2019, and CEO Cunjun Ma's **76.5% voting power** through a dual-class share structure - For the fiscal year ended December 31, 2019, aggregate cash compensation paid to executive officers totaled **RMB 9.2 million (US$1.3 million)**[559](index=559&type=chunk) - The company operates two share incentive plans, the Global Share Incentive Plan and the 2019 Share Incentive Plan, granting options and restricted shares to directors, officers, and employees[565](index=565&type=chunk)[574](index=574&type=chunk) - As of December 31, 2019, the company employed **1,160 individuals**, with Sales, marketing and training (**33.7%**) and Insurance consulting (**31.8%**) being the largest functions[595](index=595&type=chunk)[596](index=596&type=chunk) - As of March 31, 2020, Chairman and CEO Mr. Cunjun Ma beneficially owns all Class B common shares and delegated voting power over certain Class A shares, controlling **76.5% of the company's aggregate voting power**[199](index=199&type=chunk)[600](index=600&type=chunk) [Financial Information](index=112&type=section&id=ITEM%208.%20FINANCIAL%20INFORMATION) This section confirms the consolidated financial statements are appended, states no material legal proceedings are currently active, and outlines a dividend policy of retaining future earnings for business growth, with dividend payments dependent on PRC subsidiary distributions and regulations - The company currently has no plans to pay cash dividends, intending to retain future earnings for business operations and expansion[618](index=618&type=chunk) - As a holding company, its ability to pay dividends depends on receiving distributions from its China subsidiaries, which are subject to PRC regulations[619](index=619&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=123&type=section&id=ITEM%2011.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company's primary market risks are foreign exchange risk, mainly from RMB-to-USD translation, and seasonality, with life and health insurance sales peaking in Q1 and travel insurance in Q3 - The company's primary market risk is foreign exchange risk, as its RMB-denominated business is traded in U.S. dollars via ADSs; a **10% RMB depreciation** would decrease cash and cash equivalents by **US$1.3 million** as of December 31, 2019[687](index=687&type=chunk)[690](index=690&type=chunk) - The business experiences seasonality, with life and health insurance product orders typically higher in the first quarter and property & casualty products, primarily travel insurance, peaking in the third quarter[693](index=693&type=chunk) PART II [Material Modifications to the Rights of Security Holders and Use of Proceeds](index=126&type=section&id=ITEM%2014.%20MATERIAL%20MODIFICATIONS%20TO%20THE%20RIGHTS%20OF%20SECURITY%20HOLDERS%20AND%20USE%20OF%20PROCEEDS) This section details the use of proceeds from the company's February 2020 IPO, which generated approximately **US$47.7 million** in net proceeds from the offering of **5,322,453 ADSs** and will be used as disclosed in the registration statement - The company's initial public offering in **February 2020** raised net proceeds of approximately **US$47.7 million** after deducting total expenses of **US$8.7 million**[701](index=701&type=chunk) [Controls and Procedures](index=127&type=section&id=ITEM%2015.%20CONTROLS%20AND%20PROCEDURES) Management concluded that as of December 31, 2019, disclosure controls and procedures were not effective due to a material weakness in internal control over financial reporting, stemming from insufficient accounting personnel with U.S. GAAP and SEC reporting knowledge, which the company plans to remediate - Management concluded that as of December 31, 2019, the company's disclosure controls and procedures were **not effective**[704](index=704&type=chunk) - A material weakness in internal control over financial reporting was identified due to insufficient and incompetent financial reporting and accounting personnel lacking knowledge of U.S. GAAP and SEC reporting requirements[706](index=706&type=chunk)[707](index=707&type=chunk) - The company plans to remediate the material weakness by recruiting qualified financial personnel, implementing U.S. GAAP training, and strengthening its financial reporting function and control framework[708](index=708&type=chunk) [Corporate Governance](index=129&type=section&id=ITEM%2016.G.%20CORPORATE%20GOVERNANCE) As a Cayman Islands company listed on Nasdaq, Huize is subject to Nasdaq's corporate governance rules but may follow home country practices, though it currently does not plan to, and is a "controlled company" due to the CEO's majority voting power, allowing for certain board independence exemptions - As a foreign private issuer, the company may follow home country (Cayman Islands) corporate governance practices, which differ from Nasdaq standards, but currently does not plan to utilize these exemptions[718](index=718&type=chunk) - The company is a "controlled company" under Nasdaq rules because CEO Mr. Cunjun Ma holds **more than 50% of total voting power**, exempting it from requirements such as having a majority of independent directors[232](index=232&type=chunk) PART III [Financial Statements](index=129&type=section&id=ITEM%2018.%20FINANCIAL%20STATEMENTS) This section presents the audited consolidated financial statements for Huize Holding Limited for fiscal years 2017-2019, prepared under U.S. GAAP, including the independent auditor's report, balance sheets, statements of comprehensive income, changes in shareholders' equity, cash flows, and detailed notes - The financial statements were audited by **PricewaterhouseCoopers Zhong Tian LLP**, who has served as the company's auditor since **2018**[725](index=725&type=chunk)[729](index=729&type=chunk) - The company early adopted **ASU 2014-09, Revenue from Contracts with Customers (Topic 606)**, on **January 1, 2017**, using the full retrospective method[500](index=500&type=chunk)[811](index=811&type=chunk) - Subsequent to the reporting period, the **COVID-19 outbreak** may adversely affect 2020 business operations and financial results, and in **April 2020**, the board authorized a share repurchase program of up to **US$10 million**[917](index=917&type=chunk)[918](index=918&type=chunk)