Fanhua Inc. (“Fanhua” or “the Company”) (Nasdaq: FANH), a leading
independent financial services provider in China, today issued its
response to an external research report (the “Report”) which caused
unusual trading activities of the Company’s stock price on January
17, 2019.
The Company’s management reiterates that all
business planning and operational decisions made by the management
are intended for the long-term and healthy development of the
Company, so as to maximize shareholders’ interests and ensure
continuous dividend distribution to our shareholders. The Report
was a deliberate attempt to ‘impact the Company’s share price and
profit from the loss of other shareholders. It lacked basic
knowledge of the insurance industry, made deliberate out-of-context
misinterpretation and misrepresented facts so as to mislead the
public. In order to defend the interests of its shareholders, the
Company hereby provides its response to the key allegations raised
in the Report as below:
1. The Company’s divestiture of its property and
casualty (the “P&C”) insurance subsidiaries is a correct and
proper strategic decision. The positive operation results that
Fanhua benefited from such divestiture have been fully reflected in
2018.
As a result of the persistently intense
competition in the P&C insurance market, the gross margin of
the Company’s P&C insurance agency business dropped from 22% in
2013 to approximately 8% in 2017, while the back office operating
expense ratio related to P&C insurance business exceeded 8% in
2017, which meant that the profit from this business line dropped
to breakeven. The gross margin of the Company’s P&C insurance
business was expected to further deteriorate due to sustained
fierce competition. Fanhua management believed that if there is no
change made, its P&C business division would bring heavy losses
to the Company.
Therefore, in August 2017, the Company announced
the transition of its P&C insurance business from a
commission-based business model to a platform fee-based business
model. At the same time, Fanhua transferred Fanhua Times Insurance
Sales & Service Co., Ltd. and other P&C insurance
subsidiaries to Beijing Cheche Technology Co., Ltd. (“Cheche”),
while retaining its online auto insurance transaction platform
CNpad Auto, which not only would ensure that Fanhua’s sales agents
could still provide their clients with diversified insurance
products, but would also significantly reduce the Company’s back
office cost and improve its gross margin significantly.
The Company’s operation results in the first
nine months of 2018 clearly demonstrated the positive effect of the
divestiture of its P&C subsidiaries, as shown below:
(RMB. In Million ) |
2017 9M |
2018 9M |
% |
Net revenues |
3,398 |
|
2,599 |
|
-23.5 |
% |
Income from operation |
211 |
|
342 |
|
62.1 |
% |
Operating margin |
6.2 |
% |
13.2 |
% |
112.9 |
% |
Upon completion of the transfer transaction
described above, there has been a clear separation of legal and
financial relationship between Fanhua and its former P&C
subsidiaries. However, as our P&C insurance business has
been transformed to a platform traffic business model, Fanhua
maintains business cooperation with Cheche in the way that Fanhua
introduces user traffic to Cheche while Cheche is responsible for
transaction processing, for which Fanhua charges Cheche certain
platform service fees based on the transaction volume. The Company
expects the business relationship with Cheche to continue so
long as it provides benefits to both parties.
Cheche is a leading internet-based auto
insurance platform in China. Its shareholders include well-known
China-based venture capital firms such as Beijing Shunwei Venture
Capital Co., Ltd., China Huarong Asset Management Co., Ltd., and
China Capital Group. Neither Fanhua nor Fanhua’s management team
has any prior ties to or equity interest in Cheche.
The Report confuses two individuals who share
the same name. It has been shown that Yang, who is the shareholder
of Sichuan Boxin Xinrui Co., Ltd., and the other Yang, who is a
team leader of our Neijiang, Sichuan branch, as referred to in the
Report, have the same name coincidently, but they are not the same
person. Mr. Yinan Hu, the Company’s founder and director, has
confirmed that he doesn’t know either of
them.
The divested subsidiaries are P&C insurance
agencies while the Report estimated their business value by
benchmarking the net margin of a company that is primarily engaged
in the distribution of life insurance products. This inconsistency
shows a clear lack of basic understanding of the insurance
distribution business in China. In reality, there is distinctive
difference between P&C and life insurance business, including
significant differences in their respective profit margins.
2. The management firmly believes that the next five
years will witness a rapid expansion of middle class families in
China and an accelerated separation between production and
distribution in the life insurance industry. To seize this historic
opportunity, the Company formulated the 521 development plan, aimed
at achieving its goals of generating RMB2 billion annual net income
and RMB10 billion annual first year premiums of life insurance
business in five years. It serves as a great tool to energize our
entire group to move towards the same goals, with united focuses on
building a brighter future for the Company.
The 521 plan is not unique nor a new invention
by Fanhua. There have been similar plans adopted by other US-listed
companies.
The 521 plan is legal and we have obtained prior
approval from our board of directors (the “Board”) for its
implementation. It is a business development tool for the Company
as well as a stock ownership plan for our key employees and sales
team leaders. Details about the 521 development plan have been made
available to the public in our periodic filings.
Sources of the stock pool for the 521 development plan consist of
both purchase of existing shares and new share issuance. The
existing shares were purchased at fair market price and relevant
disclosure has been made public.
On the announcement date of the 521 development
plan, the stock of the Company closed at US$36.83 per ADS. The
purchase price of US$29 per ADS for the existing shares was
determined based on the average closing prices in the 30 days prior
to the Board approval. Although our current stock price remains
below the eventual subscription price for the stocks under the 521
development plan, we believe that the Company’s value will be
reflected in its stock price as long as the operating objectives
under the 521 plan are realized and the Company maintains its
regular dividend policy.
3. The Company has maintained strong cash reserve,
enabling the effective implementation of its quarterly dividend
policy, share repurchase program and 521 development
plan.
From 2013 to 2017, our total cash position
(consisting of cash and cash equivalents, short term investments
and short term loan receivables) has steadily grown as we have
consistently generated profits. Our principal sources of cash
reserve have been cash generated from operating profits in the past
decade, in addition to the proceeds from our initial public
offering and a follow-on offering. We have gradually increased
allocation of our cash position to investments in short-term
financial products since 2013, in order to increase yields from our
cash.
Changes in Cash Position
(RMB: in Million ) |
2013.12.31 |
2014.12.31 |
2015.12.31 |
2016.12.31 |
2017.12.31 |
2018.09.30 |
Cash and cash equivalent |
2,285 |
2,099 |
1,115 |
237 |
364 |
661 |
Short Term Investments |
254 |
689 |
2,026 |
2,798 |
2,498 |
1,681 |
Short Term Loan Receivable |
144 |
210 |
37 |
32 |
500 |
50 |
Total |
2,683 |
2,998 |
3,178 |
3,067 |
3,362 |
2,392 |
In 2018, the Company spent a total of US$97.9
million on dividend payments and share buyback program.
Approximately RMB195.8 million will be used on the 521 development
plan.
Our strong cash position is the key reason that
we are able to successfully implement quarterly dividend payments,
share repurchase program and 521 development plan.
4. The removal of the VIE structure enabled our global
investors to directly invest in China’s largest insurance
intermediary group, and cleared obstacles for offshore dividend
distribution.
Our organizational structure and the changes in
the organization structure used to be quite complicated, due to
many historical reasons, such as the changes in legal environment,
market competition and different development stages of our Company.
Especially prior to 2012, only regional agencies were allowed
pursuant to laws and regulations prevailing at the time. Therefore,
we had to either acquire or set up new agencies in each province in
order to expand our market presence. At the peak time we had over
40 agency subsidiaries. In 2012, we obtained several national
operating licenses and we immediately initiated conversion of our
regional agency subsidiaries into branches of our
subsidiaries with national operating licenses. After several years’
efforts, our organizational structure has simplified and
become clearer, which has been presented clearly on the Company’s
2017 20-F.
5. The Company never provided “guarantee” to
Chengchuang’s products
Neither Fanhua’s Board members nor management
have any financial or equity connection with Chengchuang
Investment. The Company has no knowledge of
Chengchuang’s business operation and it is impossible for the
Company to provide “guarantee” to any of Chengchuang’s
products.
Fanhua has remained a light-asset cash
generating company that bears no borrowing or any financial
guarantee.
6. The relocation of the head office of the Company’s
life insurance operation and its intended establishment of a back
office center are normal business activities.
As previously announced, as part of Tianfu New
Area’s investment introduction project, Fanhua Lianxin Insurance
Sales Co., Ltd., the Company’s wholly-owned subsidiary, which is
the holding company of its life insurance operation, completed the
relocation and registration of its head office from Beijing to the
Tianfu New Area of Sichuan Province on August 27, 2018.
As a result of the relocation, on November 2,
2018, the Company received a one-time incentive payment of RMB8
million from the local government. Fanhua Lianxin will also be
eligible to enjoy certain favorable tax treatment and fiscal
incentives in proportion to its contribution to the local
economy.
In 2016, the Renshou County Government expressed
its support for Fanhua to publicly bid for a parcel of land in the
Tianfu New Area to establish a back office center, pursuant to its
policy of attracting investment to develop the local economy. As
Fanhua had neither a license nor interest in real estate
development, on July 16, 2016, Fanhua established a joint venture
with an independent third-party real estate developer, Sichuan
Tianyi Real Estate Development Co., Ltd. (“Sichuan Tianyi”). Under
this arrangement, Sichuan Tianyi would be responsible for
developing the land and providing all funding for the development
and bear all loss or profits that potentially could derive from the
development, while Fanhua would have a right to purchase certain
properties at a discount. Fanhua would not provide any loan,
guarantee or other funding for the development.
Our management is saddened that the Report
aimed to cast doubts on the integrity of the management. Our
management has and will continue to prove that they have faithfully
carried out their fiduciary duties to shareholders with continued
profit growth and increasing dividend distribution. Our management
firmly believes that the Company’s profit will speak for them and
the Company’s continued strong results and sustainable dividend
payment will prove the emptiness of the mistaken Report.
Our management has full confidence in achieving
solid growth in the Company’s operating profit in 2019. As such,
our management will submit a proposal to the Board to increase the
dividend per ADS for fiscal year 2019.
Our management would like to extend its sincere
gratitude to investors for their continued support and the Company
will reward them for their trust with its best
performance.
About Fanhua Inc.
Fanhua Inc. is a leading independent
online-to-offline financial services provider. Through our online
platforms and offline sales and service network, we offer a wide
variety of financial products and services to individuals and
businesses, including property and casualty and life insurance
products. We also provide insurance claims adjusting services, such
as damage assessments, surveys, authentications and loss
estimations, as well as value-added services, such as emergency
vehicle roadside assistance. Our online platforms include: (1) Lan
Zhanggui, an all-in-one platform which allows our agents to access
and purchase a wide variety of insurance products, including life
insurance, auto insurance, accident insurance, travel insurance and
standard health insurance products from multiple insurance
companies on their mobile devices; (2) CNpad, a mobile sales
support application; (3) Baoxian.com, an online entry portal for
comparing and purchasing health, accident, travel and homeowner
insurance products; and (4) eHuzhu (www.ehuzhu.com), a non-profit
online mutual aid platform in China.
As of September 30, 2018, our distribution and
service network consisted of 754 sales and service outlets covering
31 provinces.
For more information about Fanhua Inc., please
visit http://ir.fanhuaholdings.com/.
Forward-looking Statements
This press release contains statements of a
forward-looking nature. These statements, including the statements
relating to the Company's future financial and operating results,
are made under the "safe harbor" provisions of the U.S. Private
Securities Litigation Reform Act of 1995. You can identify these
forward-looking statements by terminology such as "will,"
"expects," "believes," "anticipates," "intends," "estimates" and
similar statements. Among other things, management's quotations and
the Business Outlook section contain forward-looking statements.
These forward-looking statements involve known and unknown risks
and uncertainties and are based on current expectations,
assumptions, estimates and projections about Fanhua and
the industry. Potential risks and uncertainties include, but are
not limited to, Fanhua’s ability to attract and retain key
personnel and productive agents, its ability to maintain existing
and develop new business relationships with insurance companies,
its ability to execute its growth strategy, its ability to adapt to
the evolving regulatory environment in the Chinese insurance
industry, its ability to compete effectively against its
competitors, quarterly variations in its operating results caused
by factors beyond its control and macroeconomic conditions
in China and their potential impact on the sales of
insurance products. All information provided in this press release
is as of the date hereof, and Fanhua undertakes no
obligation to update any forward-looking statements to reflect
subsequent occurring events or circumstances, or changes in its
expectations, except as may be required by law.
Although Fanhua believes that the expectations expressed
in these forward-looking statements are reasonable, it cannot
assure you that its expectations will turn out to be correct, and
investors are cautioned that actual results may differ materially
from the anticipated results. Further information regarding risks
and uncertainties faced by Fanhua is included
in Fanhua's filings with the U.S. Securities and
Exchange Commission, including its annual report on Form 20-F.
For more information about Fanhua Inc., please
visit http://ir.fanhuaholdings.com/.
CONTACT: Oasis QiuInvestor Relations ManagerTel: (8620)
83883191Email: qiusr@fanhuaholdings.com
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