Huize(HUIZ) - 2021 Q4 - Annual Report

Part I Item 3. KEY INFORMATION Huize's corporate structure, relying on a VIE in China, faces significant risks from PRC regulations and potential delisting, alongside presenting key consolidated financial data - Huize Holding Limited operates as a Cayman Islands holding company, conducting business in China through a Variable Interest Entity (VIE) due to PRC foreign investment restrictions, meaning investors purchase equity in the holding company, not PRC operating entities[12][13] - The company's VIE structure faces significant risks, including potential PRC government non-compliance rulings and uncertain enforceability of contractual arrangements in PRC courts[13][127][128] - The company holds necessary PRC licenses but faces risks from potential future CSRC approvals for offshore offerings and CAC cybersecurity reviews, which could impact financing and operations[17] - In 2020 and 2021, the Cayman holding company transferred a total of RMB 196.7 million to its PRC subsidiary and VIE subsidiaries for operations, with no dividends paid to the holding company or U.S. investors[18] D. Risk Factors The company faces significant business, structural, and operational risks, including regulatory challenges, VIE enforceability, and potential delisting under the HFCAA - Key business and industry risks include operating in a highly regulated and competitive online insurance industry, historical net losses, dependence on user traffic channels, and data privacy and cybersecurity risks[39][40] - Key corporate structure risks include reliance on VIE contractual arrangements, potential conflicts of interest with VIE shareholders, and uncertainties regarding PRC Foreign Investment Law and equity pledge enforceability[41][42] - Key risks of doing business in China include the PCAOB's inability to inspect the company's auditor, potentially leading to ADSs trading prohibition under HFCAA by 2024, and significant PRC government oversight and regulatory uncertainties[43][145][146] - Key risks related to the company's ADSs include high price volatility, the founder's 76.5% decisive voting influence through a dual-class structure, and no expected dividends in the foreseeable future[44][182][187] Selected Consolidated Financial Data (2019-2021) | Financial Metric | 2019 (RMB thousands) | 2020 (RMB thousands) | 2021 (RMB thousands) | | :--- | :--- | :--- | :--- | | Total operating revenue | 993,319 | 1,220,222 | 2,245,016 | | Operating (loss)/profit | 1,639 | (25,911) | (114,411) | | Net (loss)/profit | 14,968 | (18,292) | (107,717) | | Total assets | 508,805 | 1,335,976 | 1,857,454 | | Total liabilities | 362,831 | 867,293 | 1,496,541 | | Net cash provided by/(used in) operating activities | 118,024 | 137,666 | (175,917) | Item 4. INFORMATION ON THE COMPANY This section outlines Huize's history, business model as an online insurance platform, strategic acquisitions, and its operational reliance on a VIE structure - Founded in 2006, the company reorganized in 2019 to establish its VIE structure and completed its IPO on Nasdaq in February 2020, raising approximately US$47.7 million in net proceeds[219][220] - In December 2021, the company acquired 100% equity in Shanghai Senhao Insurance Agency Co., Ltd. to expand its business network[222] Key Business Metrics (2019-2021) | Metric | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Cumulative insurance clients (million) | 6.3 | 6.8 | 7.5 | | Cumulative insured (million) | 53.2 | 57.6 | 62.5 | | GWP facilitated (RMB million) | 2,014.3 | 3,019.9 | 5,018.2 | - The company partners with 109 insurer partners as of December 31, 2021, with the top five accounting for 78.4% of total operating revenue in 2021, up from 63.0% in 2020[237][352] - Life and health insurance products are the primary revenue driver, contributing 97.2% of brokerage income in 2021, with annuity and endowment products accounting for 46.8% within this category[222] Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section analyzes Huize's financial performance from 2019-2021, highlighting significant revenue growth, increased operating losses, and liquidity status, along with key accounting policies Results of Operations Summary (2019-2021) | Metric (RMB thousands) | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Total operating revenue | 993,319 | 1,220,222 | 2,245,016 | | Total operating costs and expenses | (991,680) | (1,246,133) | (2,359,427) | | Operating (loss)/profit | 1,639 | (25,911) | (114,411) | | Net (loss)/profit | 14,968 | (18,292) | (107,717) | - Operating revenue increased by 84.0% in 2021, driven by a 66.2% increase in total GWP facilitated and 99.2% growth in first-year premiums (FYP)[361][362] - Cost of revenue increased by 107.5% in 2021, primarily due to higher channel costs for user traffic to expand the client base and boost sales[362] - The company's liquidity is supported by RMB 381.2 million in cash and cash equivalents and RMB 227.8 million in restricted cash as of December 31, 2021, despite net cash used in operating activities of RMB 175.9 million in 2021[387][390] Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section details the company's leadership, executive compensation, dual-class share structure, and employee breakdown by function - In 2021, aggregate cash compensation for executive officers was RMB 17.9 million (US$2.8 million), and for non-executive directors was RMB 1.0 million (US$0.2 million)[409] - As of February 28, 2022, Chairman and CEO Mr. Cunjun Ma held 76.5% of total voting power through a dual-class share structure, granting him decisive control[187][429] Employee Headcount by Function (as of Dec 31, 2021) | Function | Number of Employees | % of Total | | :--- | :--- | :--- | | Insurance consulting | 379 | 23.1% | | Sales, marketing and training | 599 | 36.4% | | Client service | 89 | 5.4% | | Product management | 50 | 3.0% | | Research and technology | 376 | 22.9% | | General and administrative | 151 | 9.2% | | Total | 1,644 | 100.0% | - The company operates two share incentive plans, with significant options and restricted shares granted to directors, executive officers, and employees as of February 28, 2022[411][414][415] Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section outlines major shareholders and key related party transactions, primarily focusing on the VIE contractual arrangements and shareholder registration rights - The most significant related party transactions are contractual arrangements with the VIE and its shareholders, enabling the company to control and consolidate the VIE's financial results[431] - A shareholders' agreement grants certain investors registration rights, including demand and piggyback rights, which terminate five years after the IPO[432][433][434] - In 2021, the company incurred RMB 11.8 million in service fees to Xiaoke Huixuan (Shenzhen) Technology Co., Ltd., a company under Huize's significant influence[439] Item 8. FINANCIAL INFORMATION This section confirms the inclusion of consolidated financial statements, absence of material legal proceedings, and the company's dividend policy of retaining earnings for growth - The company is not currently involved in any material legal or administrative proceedings[440] - The company has no present plan to pay cash dividends, intending to retain future earnings for business expansion, with dividend payments also subject to PRC profit distribution regulations[440][441] Item 10. ADDITIONAL INFORMATION This section details the dual-class share structure and tax implications for the company and investors across Cayman Islands, PRC, and U.S., including PFIC risk - The company operates a dual-class share structure where Class B common shares carry 15 votes per share compared to one vote for Class A shares, with Class B convertible to Class A[444] - As an exempted company in the Cayman Islands, the company is not subject to local profits, income, gains, or appreciation taxes there[454] - There is a risk that PRC tax authorities could classify the Cayman Islands holding company as a PRC resident enterprise, subjecting it to a 25% enterprise income tax on global income and potential dividend withholding tax[455][456] - For U.S. investors, there is a risk of the company being classified as a Passive Foreign Investment Company (PFIC), which has increased due to ADSs market price fluctuations and could result in adverse U.S. federal income tax consequences[215][462] Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section addresses the company's market risks, primarily foreign exchange risk due to RMB-USD exposure, minimal interest rate risk, and business seasonality - The company's primary market risk is foreign exchange, with a 10% RMB depreciation against the U.S. dollar resulting in a US$5.2 million decrease in cash and cash equivalents as of December 31, 2021[468][469] - Interest rate risk is not material as all company borrowings bear a fixed interest rate[470] - The business experiences seasonality, with life and health insurance sales typically stronger in the first quarter and travel insurance sales higher in the third quarter[471] Part II Item 15. CONTROLS AND PROCEDURES This section reports on the ineffectiveness of internal controls as of December 31, 2021, due to a material weakness in accounting personnel, and outlines remediation efforts - Management concluded that the company's disclosure controls and procedures were not effective as of December 31, 2021[480] - A material weakness in internal control over financial reporting was identified due to a lack of sufficient and competent financial reporting and accounting personnel with U.S. GAAP and SEC reporting knowledge[117][483] - Remediation efforts include recruiting qualified financial personnel, implementing U.S. GAAP training, and planning additional resources to strengthen financial reporting[483] Part III Item 18. FINANCIAL STATEMENTS This section presents the company's audited consolidated financial statements for 2019-2021, prepared under U.S. GAAP and audited by PricewaterhouseCoopers Zhong Tian LLP Consolidated Balance Sheet Summary (as of Dec 31) | (RMB thousands) | 2020 | 2021 | | :--- | :--- | :--- | | Total current assets | 1,008,355 | 1,420,684 | | Total assets | 1,335,976 | 1,857,454 | | Total current liabilities | 556,566 | 1,222,241 | | Total liabilities | 867,293 | 1,496,541 | | Total shareholders' equity | 468,683 | 360,913 | Consolidated Statement of Comprehensive Income/(Loss) Summary (Year Ended Dec 31) | (RMB thousands) | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Total operating revenue | 993,319 | 1,220,222 | 2,245,016 | | Total operating costs | (631,368) | (816,353) | (1,690,757) | | Operating income/(loss) | 1,639 | (25,911) | (114,411) | | Net profit/(loss) | 14,968 | (18,292) | (107,717) | | Net loss attributable to common shareholders | (25,383) | (21,492) | (107,666) | Consolidated Statement of Cash Flows Summary (Year Ended Dec 31) | (RMB thousands) | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by/(used in) operating activities | 118,024 | 137,666 | (175,917) | | Net cash used in investing activities | (6,927) | (31,078) | (80,926) | | Net cash (used in)/provided by financing activities | (14,079) | 383,053 | 141,891 | | Net increase/(decrease) in cash | 97,056 | 479,621 | (119,964) | | Cash and cash equivalents at end of year | 249,327 | 728,948 | 608,984 |