Huize(US:HUIZ)2020-04-24 12:22PART I ITEM 3. KEY INFORMATION 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 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 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 predict303133 - 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 penalties119120 - 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 matters198199 - 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 enacted184185186 ITEM 4. INFORMATION ON THE COMPANY 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 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 2011241 - In June 2019, the company restructured to control its PRC operating entity, Huiye Tianze, via a VIE structure to comply with PRC foreign ownership restrictions245 - 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 million246 Business Overview 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, 2019250251 - The client base primarily comprises the younger generation, with the average age of life and health insurance purchasers in 2019 being 32251265 | 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 year252253 Organizational Structure 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 operations437 - 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 benefits439440441442 Operating and Financial Review and Prospects 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 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 growth474 - 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 products475 - 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 compensation476478 - 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 2019480490 Liquidity and Capital Resources 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 regulations527 - 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 regulations539 Directors, Senior Management, and Employees 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 - 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 employees565574 - 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 functions595596 - 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 power199600 Financial Information 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 expansion618 - As a holding company, its ability to pay dividends depends on receiving distributions from its China subsidiaries, which are subject to PRC regulations619 Quantitative and Qualitative Disclosures About Market Risk 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, 2019687690 - 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 quarter693 PART II Material Modifications to the Rights of Security Holders and Use of Proceeds 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 million701 Controls and Procedures 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 effective704 - 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 requirements706707 - 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 framework708 Corporate Governance 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 exemptions718 - 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 directors232 PART III Financial Statements 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 2018725729 - The company early adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2017, using the full retrospective method500811 - 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 million917918