Huize(HUIZ) - 2023 Q4 - Annual Report

PART I Key Information This section details Huize's holding company structure, operating in China through a VIE, outlines significant risks including regulatory oversight and HFCAA compliance, and presents selected consolidated financial data showing a return to profitability in 2023 with a net profit of RMB 70.6 million - Huize Holding Limited, a Cayman Islands holding company, conducts operations in China primarily through a Variable Interest Entity (VIE) due to PRC foreign investment restrictions in internet and insurance intermediary businesses, meaning investors hold shares in the Cayman entity, not the Chinese operating entity[13][14][117] - The company was not identified as a Commission-Identified Issuer under the HFCAA for fiscal years 2022 and 2023 due to PCAOB inspection of its auditor, but future obstruction could lead to ADS trading prohibition in the U.S. after two consecutive years of non-inspection[19][139] Selected Consolidated Financial Data (2021-2023) | Indicator | 2021 (RMB'000) | 2022 (RMB'000) | 2023 (RMB'000) | 2023 (US$'000) | | :--- | :--- | :--- | :--- | :--- | | Total Operating Revenue | 2,245,016 | 1,157,908 | 1,195,552 | 168,390 | | Operating (Loss)/Profit | (114,411) | (43,673) | 51,039 | 7,189 | | Net (Loss)/Profit | (107,717) | (33,740) | 70,554 | 9,939 | | Net (Loss)/Profit Attributable to Huize | (107,666) | (31,187) | 70,188 | 9,887 | | Total Assets | 1,857,454 | 1,089,614 | 947,006 | 133,383 | | Total Liabilities | 1,496,541 | 747,589 | 536,591 | 75,577 | | Net cash (used in)/provided by operating activities | (175,917) | (85,067) | 137,351 | 19,345 | Risk Factors The company faces significant risks across its business, corporate structure, and operating environment, including intense competition, regulatory changes, VIE arrangement scrutiny, HFCAA trading prohibitions, stringent cybersecurity laws, and potential Nasdaq delisting due to minimum bid price requirements - Operating in China's highly competitive and evolving online insurance industry, the company faces challenges in predicting future prospects, navigating complex regulations, maintaining profitability after past losses, and managing user traffic channel relationships[41][47][53] - The VIE structure, crucial for China operations, poses significant risks, as PRC government non-compliance rulings could lead to severe penalties, including forced relinquishment of interests in operating entities[42][117][118] - Subject to PRC government oversight, including cybersecurity reviews for foreign listings, non-compliance with CSRC filing requirements and CAC cybersecurity regulations could result in fines, operational restrictions, and negative impact on ADS value[140][142][144] - The company's ADSs face Nasdaq delisting risk, having received a January 5, 2024, notification for failing to meet the US$1.00 minimum bid price, with a grace period until July 3, 2024, to regain compliance[178][179] Information on the Company This section provides a comprehensive overview of Huize's business as an independent online insurance platform in China, detailing its history, platform, focus on young clients, partnerships with 123 insurers, revenue generation from brokerage fees, technology infrastructure, and the VIE structure within the PRC regulatory framework - Huize operates as an independent online insurance platform, connecting 123 insurer partners with 9.3 million cumulative clients as of December 31, 2023, without bearing underwriting risks[216][217][231] Gross Written Premiums (GWP) Facilitated by Product Type (in RMB million) | Type of Insurance Products | Sub-Category | GWP in 2021 | GWP in 2022 | GWP in 2023 | | :--- | :--- | :--- | :--- | :--- | | Life and Health Insurance | Life and annuity insurance | 2,186.4 | 2,131.6 | 3,441.3 | | | Long-term health insurance | 2,617.1 | 2,440.9 | 1,914.8 | | | Short-term health insurance | 38.6 | 108.9 | 51.9 | | Property & casualty insurance | | 176.1 | 226.5 | 392.9 | - The company primarily targets the younger generation, with an average client age of 34.4 for life and health insurance products in 2023, which contributed 91.2% of brokerage income as the main revenue driver[216][223] - A significant portion of business derives from tailor-made insurance products developed with insurer partners, accounting for approximately 52.4% of total GWP facilitated in 2023[217][333] Operating and Financial Review and Prospects This section analyzes Huize's financial performance and condition, highlighting a return to net profit of RMB 70.6 million in 2023 driven by increased revenue and cost optimization, with liquidity supported by cash from operations and financing Results of Operations Comparison (2022 vs. 2023) | Metric (RMB'000) | 2022 | 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Total Operating Revenue | 1,157,908 | 1,195,552 | +3.3% | | Total Operating Costs & Expenses | 1,201,581 | 1,144,513 | -4.7% | | Operating (Loss)/Profit | (43,673) | 51,039 | N/A | | Net (Loss)/Profit | (33,740) | 70,554 | N/A | - The 2023 operating revenue increase was primarily driven by higher brokerage income, resulting from a significant rise in first-year premiums facilitated, growing from RMB 1,846.6 million in 2022 to RMB 2,621.7 million in 2023[345] - Operating expenses decreased due to cost optimization, including a 22.8% reduction in general and administrative expenses and an 11.8% decrease in selling expenses, primarily from lower personnel costs and reduced office space[346] Summary of Cash Flows (RMB'000) | Cash Flow Activity | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Net cash (used in)/provided by operating activities | (175,917) | (85,067) | 137,351 | | Net cash provided by/(used in) investing activities | (80,926) | (56,286) | (61,023) | | Net cash provided by/(used in) financing activities | 141,891 | (101,133) | (133,555) | Directors, Senior Management, and Employees This section details the company's leadership, compensation, and governance, highlighting Mr. Cunjun Ma's decisive voting power, the dual-class share structure, board committee composition, and employee distribution by function - The company is led by founder, Chairman, and CEO, Mr. Cunjun Ma, who possesses over 25 years of experience in the insurance industry[373] - As of February 29, 2024, CEO Mr. Cunjun Ma controlled 77.4% of total voting power through direct holdings, controlled entities, and voting power delegations, granting him decisive influence over corporate matters due to a dual-class structure where Class B shares carry 15 votes each[184][397][398] Employee Distribution by Function (as of Dec 31, 2023) | Function | Number of Employees | % of Total | | :--- | :--- | :--- | | Insurance consulting | 405 | 36.4% | | Sales, marketing and training | 239 | 21.5% | | Client service | 132 | 11.9% | | Product management | 36 | 3.2% | | Research and technology | 140 | 12.6% | | General and administrative | 161 | 14.5% | | Total | 1,113 | 100.0% | - The company has established an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee, each composed of independent directors Bin Wei, Jun Ge, and Aaron Xiaolei Hou[387] Major Shareholders and Related Party Transactions This section details the company's ownership structure, highlighting CEO Mr. Cunjun Ma's significant voting control, and outlines key related party transactions, primarily involving the VIE contractual arrangements and services from affiliated technology and channel promotion companies - The company's China operations are conducted through contractual arrangements with its VIE and its shareholders, constituting a significant related party relationship[402] - As of February 29, 2024, CEO Mr. Cunjun Ma controlled 77.4% of total voting power through direct holdings, controlled entities, and voting power delegations[397][398] - In 2023, the company incurred RMB 1.9 million in service fees to Xiaoke Huixuan (Shenzhen) Technology Co., Ltd. for technology services and RMB 7.4 million to Huibao Huipei (Shenzhen) Technology Co., Ltd. for channel promotion services[411][640] Financial Information This section appends the company's consolidated financial statements, notes the absence of material legal proceedings, and outlines the dividend policy of retaining earnings for business expansion, subject to PRC regulations on cash transfers - The company has no present plan to pay cash dividends on its common shares in the foreseeable future, intending to retain available funds for business operations and expansion[414] - The company's ability to pay dividends depends on receiving funds from its PRC subsidiaries, which is subject to PRC laws, regulations, and foreign exchange controls[367][414] - The company is not currently involved in any material legal or administrative proceedings[413] Additional Information This section outlines the company's dual-class share structure, PRC foreign exchange regulations, taxation implications in various jurisdictions, and the potential for Passive Foreign Investment Company (PFIC) classification for U.S. Holders - The company operates with a dual-class share structure, where Class A common shares have one vote and Class B common shares have 15 votes per share, concentrating voting power with Class B holders[419] - The company believes it was not a Passive Foreign Investment Company (PFIC) for the 2023 taxable year, though this annual determination is subject to change, particularly with ADS market price fluctuations[210][459] - Dividends from the company's PRC subsidiary to its Hong Kong holding company are subject to a 10% withholding tax, potentially reduced to 5% under the China-Hong Kong tax treaty if conditions are met[354][674] Controls and Procedures This section states that management concluded disclosure controls and procedures were ineffective as of December 31, 2023, due to a material weakness in financial reporting personnel, with remediation efforts ongoing, and notes the company's exemption from auditor attestation as an emerging growth company - Management identified a material weakness in internal control over financial reporting as of December 31, 2023[69][483] - The material weakness stems from a lack of sufficient and competent financial reporting and accounting personnel with adequate knowledge of U.S. GAAP and SEC reporting requirements[69][483] - Remediation measures, including training programs, have been implemented but require further validation, with plans to recruit more qualified personnel and strengthen the financial reporting function[69][483] - As an emerging growth company, Huize is exempt from the requirement for its independent registered public accounting firm to provide an attestation report on internal control over financial reporting[483][484] Cybersecurity This section details the company's multi-layered cybersecurity defense system, its integration into enterprise risk management, board oversight with quarterly updates, and a three-line operational defense model, noting no material cybersecurity incidents to date - The company employs a multi-layered cybersecurity defense system and has integrated cybersecurity risk management into its overall enterprise risk management framework[496] - Cybersecurity oversight is managed by the board of directors, receiving quarterly updates from management, including the CEO, co-CFOs, and cybersecurity officer[497] - An operational three-line defense model is implemented, involving an information security committee, information security and legal departments, and other functional departments to manage security risks[498] - As of the report date, the company has not experienced any material cybersecurity incidents that have materially affected its business, operations, or financial condition[496] PART III Financial Statements This section contains the audited consolidated financial statements of Huize Holding Limited for fiscal years 2021-2023, prepared under U.S. GAAP, including balance sheets, income statements, equity changes, and cash flows, with an unqualified auditor's opinion from PricewaterhouseCoopers Zhong Tian LLP Consolidated Balance Sheet Summary (RMB'000) | Account | As of Dec 31, 2022 | As of Dec 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | 750,739 | 606,460 | | Total Assets | 1,089,614 | 947,006 | | Total Current Liabilities | 559,066 | 395,044 | | Total Liabilities | 747,589 | 536,591 | | Total Shareholders' Equity | 342,025 | 410,415 | Consolidated Statement of Comprehensive Income Summary (RMB'000) | Account | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Total operating revenue | 2,245,016 | 1,157,908 | 1,195,552 | | Total operating costs and expenses | (2,359,427) | (1,201,581) | (1,144,513) | | Operating income/(loss) | (114,411) | (43,673) | 51,039 | | Net profit/(loss) | (107,717) | (33,740) | 70,554 | | Net profit/(loss) attributable to Huize | (107,666) | (31,187) | 70,188 | - The company adopted the Current Expected Credit Loss (CECL) methodology under ASC Topic 326 on January 1, 2023, replacing the previous incurred loss methodology for estimating allowances for doubtful accounts[568][569] - The company's revenue primarily derives from insurance brokerage services, recognized upon policy issuance and premium collection, with transaction price including variable consideration estimated using the expected value method[597]