The accompanying notes are an integral part
of the consolidated financial statements.
Notes to the Consolidated Financial Statements
(In thousands, except for shares
and per share data)
|
(1)
|
Organization
and Description of Business
|
Fanhua
Inc. (the “Company”) (formally known as “CNinsure Inc.”) was incorporated in the Cayman Islands on April 10,
2007 and listed on the Nasdaq on October 31, 2007. The Company, its subsidiaries and its variable interest entities (the “VIEs”)
are collectively referred to as the “Group”. The Group is principally engaged in the provision of agency services and
insurance claims adjusting services in the People’s Republic of China (the “PRC”).
|
(2)
|
Summary
of Significant Accounting Policies
|
|
(a)
|
Basis
of Presentation and Consolidation
|
The
consolidated financial statements of the Group have been prepared in accordance with accounting principles generally accepted
in the United States of America (“US GAAP”). The consolidated financial statements include the financial statements
of the Company, all its subsidiaries and those VIEs of which the Company is the primary beneficiary from the dates they were acquired
or incorporated. All intercompany balances and transactions have been eliminated in consolidation. In addition, the Group consolidates
VIEs of which it is deemed to be the primary beneficiary and absorbs all of the expected losses and residual returns of the entity.
See note 8 for detail.
The
preparation of the consolidated financial statements in conformity with US GAAP requires management of the Group to make a number
of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during
the reported period. The Company’s management based their estimates on historical experience and various other factors believed
to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Significant accounting estimates reflected in the Group’s
consolidated financial statements included valuation of goodwill, allowance for doubtful receivables, convertible loan receivables
valuation assessment, equity-method investment impairment assessment and the valuation of non-controlling interests of the subsidiaries
at acquisition dates. Actual results could differ from those estimates.
|
(c)
|
Cash
and Cash Equivalents and Restricted Cash
|
Cash
and cash equivalents consist of cash on hand, bank deposits and short-term, highly liquid investments that are readily convertible
to known amounts of cash, and have insignificant risk of changes in value related to changes in interest rates.
In
its capacity as an insurance agent, the Group collects premiums from certain insureds and remits the premiums to the
appropriate insurance companies. Accordingly, as reported in the consolidated statements of financial position,
“premiums” are receivables from the insureds of RMB9,553 and RMB3,823 as of December 31, 2017 and 2018,
respectively. Unremitted net insurance premiums are held in a fiduciary capacity until disbursed by the Group. The Group
invests these unremitted funds only in cash accounts held for a short term, and reports such amounts as restricted cash in
the consolidated statements of financial position. Also, restricted cash balance includes guarantee deposits required by
China Insurance Regulatory Commission (“CIRC”) in order to protect insurance premium appropriation by insurance
agency and the entrustment deposit received from the members of eHuzhu, an online mutual aid platform operated by the Group.
The restricted cash balance were RMB65,734 and RMB71,520 as of December 31, 2017 and 2018, respectively.
|
(d)
|
Short
Term Investments
|
Short
term investments are mainly available-for-sale investments in debt securities that do not have a quoted market price in an active
market. Except for short term investments on private funds, the majority of the investments are measured at costs which
approximate their fair values in the consolidated statements of financial position. The Group benchmark the costs of other investments
against fair values of comparable investments and reference to product valuation reports as of the balance sheet date, and categorize
all fair value measures of short term investments as level 2 of the fair value hierarchy. Private funds are measured at fair value.
No impairment loss on short term investments was identified for each of the years ended December 31, 2016, 2017 and 2018.
FANHUA INC.
Notes to the Consolidated Financial
Statements
(In thousands, except for shares
and per share data)
The
short term investments balance were RMB2,498,730 and RMB1,554,060 as of December 31, 2017 and 2018, respectively. The
decline was primarily due to a decrease of cash reserve as a result of cash dividend and share buyback executed in 2018 and loans
related to the Company’s 521 development plan.
|
(e)
|
Accounts
Receivable and Insurance Premium Receivables
|
Accounts
receivable are recorded at the invoiced amount and do not bear interest. Accounts receivable represent fees receivable on agency
and claims adjusting services primarily from insurance companies. Amounts collected on accounts receivable are included in net
cash provided by operating activities in the consolidated statements of cash flows. The allowance for doubtful accounts is the
Group’s best estimate of the amount of probable credit losses in the Group’s existing accounts receivable balance. The Group determines
the allowance based on historical write-off experience. The Group reviews its allowance for doubtful accounts regularly. Past
due balances over 90 days and over a specified amount are reviewed individually for collectability.
Accounts
receivable, net is analyzed as follows:
|
|
As
of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
Accounts receivable
|
|
|
535,392
|
|
|
|
529,715
|
|
Allowance for doubtful accounts
|
|
|
(20,198
|
)
|
|
|
(21,241
|
)
|
Accounts receivable, net
|
|
|
515,194
|
|
|
|
508,474
|
|
The
following table summarizes the movement of the Group’s allowance for doubtful accounts for accounts receivables:
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Balance at the beginning of the year
|
|
|
13,246
|
|
|
|
16,792
|
|
|
|
20,198
|
|
Provision for doubtful accounts
|
|
|
3,700
|
|
|
|
14,052
|
|
|
|
6,791
|
|
Write-offs
|
|
|
(154
|
)
|
|
|
(10,646
|
)
|
|
|
(5,748
|
)
|
Balance at the end of the year
|
|
|
16,792
|
|
|
|
20,198
|
|
|
|
21,241
|
|
Insurance
premium receivables consist of insurance premiums to be collected from the insured, and are recorded at the invoiced amount and
do not bear interest. Amounts collected on insurance premium receivables are included in net cash provided by operating activities
in the consolidated statements of cash flows.
FANHUA INC.
Notes to the Consolidated Financial
Statements
(In thousands, except for shares
and per share data)
|
(f)
|
Property,
Plant and Equipment
|
Property,
plant and equipment are stated at cost. Depreciation and amortization are calculated using the straight-line method over the following
estimated useful lives, taking into account residual value:
|
|
Estimated useful life (Years)
|
|
|
Estimated residual value
|
|
Building
|
|
20-36
|
|
|
0%
|
|
Office equipment, furniture and fixtures
|
|
3-5
|
|
|
0%-3%
|
|
Motor vehicles
|
|
5-10
|
|
|
0%-3%
|
|
Leasehold improvements
|
|
5
|
|
|
0%
|
|
The
depreciation methods and estimated useful lives are reviewed regularly. The following table summarizes the depreciation recognized
in the consolidated statements of income and comprehensive income:
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Operating costs
|
|
|
185
|
|
|
|
43
|
|
|
|
232
|
|
Selling expenses
|
|
|
1,590
|
|
|
|
2,775
|
|
|
|
4,769
|
|
General and administrative expenses
|
|
|
11,717
|
|
|
|
11,281
|
|
|
|
5,832
|
|
Depreciation for the year
|
|
|
13,492
|
|
|
|
14,099
|
|
|
|
10,833
|
|
FANHUA INC.
Notes to the Consolidated Financial
Statements
(In thousands, except for shares
and per share data)
|
(g)
|
Goodwill
and Other Intangible Assets
|
Goodwill
and amortization of intangible assets
Goodwill
represents the excess of costs over fair value of net assets of businesses acquired in a business combination.
Goodwill
is not amortized, but is tested for impairment at the reporting unit level at least on an annual basis at the balance sheet date
or more frequently if certain indicators arise. The Group operated in two reporting units for the year ended December 31, 2018.
The goodwill impairment review is a two-step process. Step 1 consists of a comparison of the fair value of a reporting unit with
its carrying amount. An impairment loss may be recognized if the review indicates that the carrying value of a reporting unit
exceeds its fair value. Estimates of fair value are primarily determined by using discounted cash flows. If the carrying amount
of a reporting unit exceeds its fair value, step 2 requires the fair value of the reporting unit to be allocated to the underlying
assets and liabilities of that reporting unit, resulting in an implied fair value of goodwill. If the carrying amount of the goodwill
of the reporting unit exceeds the implied fair value, an impairment charge is recorded equal to the excess of the carrying amount
over the implied fair value.
The
impairment review is highly judgmental and involves the use of significant estimates and assumptions. These estimates and assumptions
have a significant impact on the amount of any impairment charge recorded. Discounted cash flow methods are dependent upon assumptions
of future sales trends, market conditions and cash flows of each reporting unit over several years. Actual cash flows in the future
may differ significantly from those previously forecasted. Other significant assumptions include growth rates and the discount
rate applicable to future cash flows.
In
2017 and 2018, management compared the carrying value of each reporting unit, inclusive of assigned goodwill, to its respective
fair value which is the step one of the two-step impairment test. The fair value of all reporting units was estimated by using
the income approach. Based on this quantitative test, it was determined that the fair value of each reporting unit tested exceeded
its carrying amount and, therefore, step 2 of the two-step goodwill impairment test was unnecessary. The management concluded
that goodwill was not impaired as of December 31, 2017 and 2018.
Identifiable
intangibles assets are required to be determined separately from goodwill based on their fair values. In particular, an intangible
asset acquired in a business combination should be recognized as an asset separate from goodwill if it satisfies either the “contractual-legal”
or “separability” criterion. Intangible assets with a finite economic life are carried at cost less accumulated amortization.
Amortization for identifiable intangible assets categorized as customer relationships are computed using the accelerated method,
while amortization for other identifiable intangible assets are computed using the straight-line method over the intangible assets’
economic lives. Intangible assets with indefinite economic lives are not amortized but carried at cost less any subsequent accumulated
impairment losses. If an intangible asset that is not being amortized is subsequently determined to have a finite economic life,
it will be tested for impairment and then amortized prospectively over its estimated remaining economic life and accounted for
in the same manner as other intangible assets that are subject to amortization. Intangible assets with indefinite economic lives
are tested for impairment annually or more frequently if events or changes in circumstances indicate that they might be impaired.
Separately
identifiable intangible assets consist of brand names, trade names, customer relationships, non-compete agreements, agency agreement
and licenses, and software and systems.
FANHUA INC.
Notes to the Consolidated Financial
Statements
(In thousands, except for shares
and per share data)
The
intangible assets, net consisted of the following:
|
|
|
|
As of December 31, 2017
|
|
|
|
Useful life
(Years)
|
|
Cost
|
|
|
Accumulated amortization
|
|
|
Accumulated
Impairment loss
|
|
|
Net carrying values
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Brand name
|
|
Indefinite
|
|
|
16,404
|
|
|
|
—
|
|
|
|
(16,404
|
)
|
|
|
—
|
|
Trade name
|
|
9.4 to 10
|
|
|
8,898
|
|
|
|
(6,688
|
)
|
|
|
—
|
|
|
|
2,210
|
|
Customer relationship
|
|
4.6 to 9.8
|
|
|
48,306
|
|
|
|
(45,353
|
)
|
|
|
(2,953
|
)
|
|
|
—
|
|
Non-compete agreement
|
|
3 to 6.25
|
|
|
50,925
|
|
|
|
(21,410
|
)
|
|
|
(29,515
|
)
|
|
|
—
|
|
Agency agreement and license
|
|
4.6 to 9.8
|
|
|
14,535
|
|
|
|
(14,458
|
)
|
|
|
(77
|
)
|
|
|
—
|
|
Software and system
|
|
2 to 10
|
|
|
65,680
|
|
|
|
(50,680
|
)
|
|
|
—
|
|
|
|
15,000
|
|
|
|
|
|
|
204,748
|
|
|
|
(138,589
|
)
|
|
|
(48,949
|
)
|
|
|
17,210
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
Useful
life
(Years)
|
|
Cost
|
|
|
Accumulated amortization
|
|
|
Accumulated
Impairment
loss
|
|
|
Net carrying values
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Brand name
|
|
Indefinite
|
|
|
16,404
|
|
|
|
—
|
|
|
|
(16,404
|
)
|
|
|
—
|
|
Trade name
|
|
9.4 to 10
|
|
|
8,898
|
|
|
|
(7,634
|
)
|
|
|
—
|
|
|
|
1,264
|
|
Customer relationship
|
|
4.6 to 9.8
|
|
|
48,306
|
|
|
|
(45,353
|
)
|
|
|
(2,953
|
)
|
|
|
—
|
|
Non-compete agreement
|
|
3 to 6.25
|
|
|
50,925
|
|
|
|
(21,410
|
)
|
|
|
(29,515
|
)
|
|
|
—
|
|
Agency agreement and license
|
|
4.6 to 9.8
|
|
|
14,535
|
|
|
|
(14,458
|
)
|
|
|
(77
|
)
|
|
|
—
|
|
Software and system
|
|
2 to 10
|
|
|
65,680
|
|
|
|
(65,680
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
204,748
|
|
|
|
(154,535
|
)
|
|
|
(48,949
|
)
|
|
|
1,264
|
|
Aggregate
amortization expenses for intangible assets were RMB20,232, RMB33,177 and RMB15,946 for the years ended December 31, 2016, 2017
and 2018, respectively.
Impairment
of intangible assets with definite lives
The
Group evaluates the recoverability of identifiable intangible assets with determinable useful lives whenever events or changes
in circumstances indicate that these assets’ carrying amounts may not be recoverable. The Group measures the carrying amount of
identifiable intangible assets with determinable useful lives against the estimated undiscounted future cash flows associated
with each asset. Impairment exists when the sum of the expected future net cash flows is less than the carrying value of the asset
being evaluated. Impairment loss is calculated as the amount by which the carrying value of the asset exceeds its fair value.
Fair value is estimated based on various valuation techniques, including the discounted value of estimated future cash flows.
The evaluation of asset impairment requires the Group to make assumptions about future cash flows over the life of the asset being
evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. During
the years ended December 31, 2016, 2017 and 2018, the Group recognized no impairment losses on identifiable intangible assets
with determinable useful lives.
FANHUA INC.
Notes to the Consolidated Financial
Statements
(In thousands, except for shares
and per share data)
Impairment
of indefinite-lived intangible assets
An
intangible asset that is not subject to amortization is tested for impairment at least annually or more frequently if events or
changes in circumstances indicate that the asset might be impaired. Such impairment test is to compare the fair values of assets
with their carrying amounts and an impairment loss is recognized if and when the carrying amounts exceed the fair values. The
estimates of fair values of intangible assets not subject to amortization are determined using various discounted cash flow valuation
methodologies. Significant assumptions are inherent in this process, including estimates of discount rates or market price. Discount
rate assumptions are based on an assessment of the risk inherent in the respective intangible assets. Market prices are based
on potential purchase quote from a third party, if any. During the years ended December 31, 2016, 2017 and 2018, the Group recognized
no impairment losses on its indefinite-lived intangible assets.
The
estimated amortization expenses for the next five years are: RMB942 in 2019, RMB278 in 2020, RMB44 in 2021, nil in 2022 and nil
in 2023.
|
(h)
|
Other
Receivables and Other Current Assets
|
Other
receivables and other current assets mainly consist of loans and amounts due from third parties, advances, deposits, interest
receivables, value-added tax recoverable and prepaid expenses. See Note 4 for details.
|
(i)
|
Investment
in Affiliates
|
The
Group uses the equity method of accounting for investments in which the Group has the ability to exercise significant influence,
but does not have a controlling interest.
The
Group continually reviews its investment in equity investees to determine whether a decline in fair value to an amount below the
carrying value is other-than temporary. The primary factors the Group considers in its determination are the duration and severity
of the decline in fair value; the financial condition, operating performance and the prospects of the equity investee; and other
company specific information such as recent financing rounds. If the decline in fair value is deemed to be other-than-temporary,
the carrying value of the equity investee is written down to fair value.
|
(j)
|
Other
Non-current Assets
|
Other
non-current assets mainly represent investments in equity security of certain private companies which the Group exert no significant
influence and the convertible loan receivable of Beijing Cheche Technology Co., Ltd. (“Cheche”). See note 2(t) for details.
As
a result of adoption of “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets
and Financial Liabilities” (“ASU 2016-01”) in January 1, 2018, equity securities without readily determinable fair
values are measured and recorded using a measurement alternative that measures the securities at cost less impairment, if any,
plus or minus changes resulting from qualifying observable price changes. Prior to January 1, 2018, these securities were accounted
for using the cost method of accounting, measured at cost less other-than temporary impairment. No other-than-temporary impairment
charge was incurred in the years ended December 31, 2016 and 2017. No qualifying observable price changes were noted in the year
ended December 31, 2018, and the adoption of ASU 2016-01 had no material impact on the Company’s consolidated financial
statements.
|
(k)
|
Impairment
of Long-Lived Assets
|
Property,
plant, and equipment, and purchased intangible assets with definite lives, subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows,
an impairment charge is recognized for the amount by which the carrying value of the asset exceeds the fair value of the asset.
|
(l)
|
Insurance
Premium Payables
|
Insurance
premium payables are insurance premiums collected on behalf of insurance companies but not yet remitted as of the balance sheet
dates.
FANHUA INC.
Notes to the Consolidated Financial
Statements
(In thousands, except for shares
and per share data)
|
(m)
|
Subscription
Receivables
|
The
Group entered into share purchase agreements with companies established on behalf of its employees (the “Employee Company”)
for the issuance of 100,000,000 ordinary shares at US$0.27 per ordinary share and 50,000,000 ordinary shares at US$0.29 per ordinary
share in 2014. The issue prices are the average closing prices for the 20 trading days prior to the board approval dates of such
subscriptions. The sale of shares to the Employee Company was completed on December 17, 2014.
In order to facilitate
the purchase of shares by employees as described above, the Group has granted a loan to the Employee Company. The loan bears interest
at a rate of 3.0% per annum and is repayable upon the sale of the shares by employees, termination of employment or within two
years, whichever comes first. Please refer to Note 12 for details. The interest rate was determined with reference to fair market
prices and therefore no interest-related compensation expense was recorded. Upon the expiry of the loan agreement on December
17, 2016, the repayment maturity of the loan was further extended to June 2018 and the loan continues to bear interest at a rate
of 3.0% per annum.
According to FASB
ASC 505-10-45, the loan is recorded as a separate line of deduction from equity in the Group’s consolidated statements of
financial position as of December 31, 2017 and 2018. Interest income accruing from the loan is recognized as non-operating income.
During the year 2018, the principal in the amount of RMB260,492 and interests in the amount of RMB29,224 had been settled while RMB49,438 of principal and RMB5,557 of interest were offset by the Company’s dividend contributions. As
of December 31, 2018, the principal and interest of the loans have been collected.
Treasury
shares represent ordinary shares repurchased by the Group that are no longer outstanding and are held by the Group. The repurchase
of ordinary shares is accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury
stocks. See Note 19 (b) for details.
Income
taxes are accounted for under the asset and liability method. Deferred income taxes are recognized for temporary differences between
the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, net operating loss
carryforwards and credits by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
The
Group presents an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the statements of financial position
as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward,
except to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the
reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the
disallowance of a tax position or the tax law of the applicable jurisdiction does not require the Group to use, and the Group
does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit is presented in the statements of
financial position as a liability.
FANHUA INC.
Notes to the Consolidated Financial
Statements
(In thousands, except for shares
and per share data)
|
(p)
|
Share-based
Compensation
|
All
forms of share-based payments to employees and nonemployees, including stock options and stock purchase plans, are treated the
same as any other form of compensation by recognizing the related cost in the consolidated statements of income and comprehensive
income. The Group recognizes compensation cost for an award with only service conditions that has a graded vesting schedule on
a straight-line basis over the requisite service period for the entire award, provided that the amount of compensation cost recognized
at any date must at least equal to the portion of the grant-date value of the award that is vested at that date. For awards with
both service and performance conditions, if each tranche has an independent performance condition for a specified period of service,
the Group recognizes the compensation cost of each tranche as a separate award on a straight-line basis; if each tranche has performance
conditions that are dependent of activities that occur in the prior service periods, the Group recognizes the compensation cost
on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was,
in-substance, multiple awards. No compensation cost is recognized for instruments that employees and nonemployees forfeit because
a service condition or a performance condition is not satisfied.
Employee
share-based compensation
Compensation
cost related to employee stock options or similar equity instruments is measured at the grant date based on the fair value of
the award and is recognized over the service period, which is usually the vesting period. If an award requires satisfaction of
one or more performance or service conditions (or any combination thereof), compensation cost is recognized if the requisite service
is rendered, while no compensation cost is recognized if the requisite service is not rendered.
Nonemployee
share-based compensation
The
Group early adopted the Financial Accounting Standards Board’s Accounting Standard Update (“ASU”) No. 2018-07,
“Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”
prospectively starting from 2018. Consistent with the accounting requirement for employee share-based compensation, nonemployee
share-based compensation within the scope of Topic 718 are measured at grant-date fair value of the equity instruments, which
the Group is obligated to issue when the service has been rendered and any other conditions necessary to earn the right to benefit
from the instruments have been satisfied.
Liability
award
Options
or similar instruments on shares shall be classified as liabilities if either of the following conditions is met:
|
●
|
The
underlying shares are classified as liabilities;
|
|
●
|
The
Group can be required under any circumstances to settle the option or similar instrument
by transferring cash or other assets.
|
The Group measures
a liability award under a share-based payment arrangement based on the award’s fair value remeasured at each reporting date
until the date of settlement. Compensation cost for each period until settlement shall be based on the change (or a portion of
the change, depending on the percentage of the requisite service that has been rendered at the reporting date) in the fair value
of the instrument for each reporting date.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and
per share data)
Share-based
compensation expenses of RMB4,937, nil and nil for the years ended December 31, 2016, 2017 and 2018, respectively, were included
in the general and administrative expenses.
|
(q)
|
Employee
Benefit Plans
|
As
stipulated by the regulations of the PRC, the Group’s subsidiaries and VIEs in the PRC participate in various defined contribution
plans organized by municipal and provincial governments for its employees. The Group is required to make contributions to these
plans at a percentage of the salaries, bonuses and certain allowances of the employees. Under these plans, certain pension, medical
and other welfare benefits are provided to employees. The Group has no other material obligation for the payment of employee benefits
associated with these plans other than the annual contributions described above. The contributions are charged to the consolidated
statements of income and comprehensive income as they become payable in accordance with the rules of the above mentioned defined
contribution plans.
On
January 1, 2018, the Group adopted ASC 606 “Revenue from Contracts with Customers” (“ASC 606”) and applied
the modified retrospective method to all contracts that were not completed as of January 1, 2018. Results for reporting periods
beginning after January 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and reported under the
accounting standards in effect for the periods presented.
The
Group’s revenue from contracts with insurance companies is derived principally from the provision of agency and claims adjusting
services. According to ASC 606, revenue is recognized at a point in time upon the effective date of the insurance policy, as no
performance obligation exists after the insurance policy was signed. If there are other services within the contract, the Company
estimates the stand-alone selling price for each separate performance obligation, and the corresponding apportioned revenue is
recognized over the period of time in which the customer receives the service, and as the performance obligations are fulfilled
and the Company is entitled to that portion of revenue using the output method for the services. In situations where multiple
performance obligations exist within a contract, the use of estimates is required to allocate the transaction price on a relative
stand-alone selling price basis to each separate performance obligation. The Group determines revenue recognition through the
following steps:
|
●
|
Identification
of the contract, or contracts, with a customer;
|
|
●
|
Identification
of the performance obligation in the contract;
|
|
●
|
Determination
of the transaction price, including the constraint on variable consideration;
|
|
●
|
Allocation
of the transaction price to the performance obligation in the contracts; and
|
|
●
|
Recognition
of revenue when (or as) the Group satisfies a performance obligation.
|
The Group disaggregates
its revenue from different types of service contracts with customers by principal service categories, as the Group believes it
best depicts the nature, amount, timing and uncertainty of its revenue and cash flows. See Note 21 for detail. The following is
a description of the accounting policy for the principal revenue streams of the Group.
Insurance
agency services revenue
For Insurance agency
services, performance obligations are considered met and revenue is recognized when the services are rendered and completed, at
the time an insurance policy becomes effective, that is, when the signed insurance policy is in place and the premium is collected
from the insured. The Group has met all the criteria of revenue recognition when the premiums are collected by the Group or the
respective insurance companies and not before, because collectability is not ensured until receipt of the premium. Accordingly,
the Group does not accrue any commission and fees prior to the receipt of the related premiums.
No
allowance for cancellation has been recognized for agency as the management of the Group estimates, based on its past experience
that the cancellation of policies rarely occurs. Any subsequent commission adjustments in connection with policy cancellations
which have been deminims to date are recognized upon notification from the insurance carriers. Actual commission and fee adjustments
in connection with the cancellation of policies were 0.2%, 0.2% and 0.1% of the total commission and fee revenues during years
ended December 31, 2016, 2017 and 2018, respectively.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and
per share data)
For property insurance
and life insurance agency, the Group may receive a performance bonus from insurance companies as agreed and per contract provisions.
Once an agency achieves its performance obligation, typically a certain sales volume, the bonus will become due. The bonus amount
is computed based on the insurance premium amount multiplied by an agreed-upon percentage. The contingent commissions are recorded
when a performance obligation is being achieved. Prior to the adoption of Topic 606, revenue that was not fixed and determinable
because a contingency existed was not recognized until the contingency was resolved. Under Topic 606, the Company must estimate
the amount of consideration that will be received in the coming year such that a significant reversal of revenue is not probable.
Performance bonus represent a form of variable consideration associated with certain sales volume, for which the Group earn commissions.
In connection with Topic 606, contingent commissions are estimated with a constraint applied and accrued relative to the recognition
of the corresponding core commissions. For the year ended December 31, 2018, the adoption of Topic 606 lead to recognition of contingent
performance bonus by RMB23,166. Also, such performance obligation did not exist in prior years’ service contract with insurance
company.
The
following table illustrates the impact of adopting Topic 606 on the consolidated financial position as of December 31, 2018:
|
|
Year Ended December 31, 2018
|
|
|
|
As reported
|
|
|
Balances without adoption of Topic 606
|
|
|
Effect of Change Higher/(Lower)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
508,474
|
|
|
|
485,308
|
|
|
|
23,166
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Other payables and accrued expenses
|
|
|
254,824
|
|
|
|
253,434
|
|
|
|
1,390
|
|
Income taxes payable
|
|
|
205,189
|
|
|
|
200,834
|
|
|
|
4,355
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
1,799,989
|
|
|
|
1,782,568
|
|
|
|
17,421
|
|
The
following table illustrates the impact of adopting Topic 606 on the consolidated statement of income and comprehensive income for
the year ended December 31, 2018:
|
|
Year Ended December 31, 2018
|
|
|
|
As reported
|
|
|
Balances without adoption of Topic 606
|
|
|
Effect of Change Higher/(Lower)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
Life insurance business
|
|
|
2,870,776
|
|
|
|
2,849,000
|
|
|
|
21,776
|
|
Income taxes expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes expense
|
|
|
224,586
|
|
|
|
220,231
|
|
|
|
4,355
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
617,095
|
|
|
|
599,674
|
|
|
|
17,421
|
|
Insurance
claims adjusting services revenue
For
Insurance claims adjusting services, performance obligations are considered met and revenue is recognized when the services are
rendered and completed, at the time loss adjusting reports are confirmed being received by insurance companies. The Group does
not accrue any service fee before the receipt of an insurance company’s acknowledgement of receiving the adjusting reports.
Any subsequent adjustments in connection with discounts which have been de minims to date are recognized in revenue upon notification
from the insurance companies. Accordingly, the timing of revenue recognition is not materially impacted by the new standard.
Contract
balances
The
Group’s contract balances include accounts receivable and advance from customers. The timing between the recognition of
revenue for effective insurance policy and the receipt of payment is not significant. The estimated accounts receivable in
relation to cancellation of insurance policies within hesitation period is a contract asset included in accounts receivable.
The balances of contract asset are RMB74,119 and RMB84,907 as of January 1, 2018 and December 31, 2018, respectively. In
2018, the amount of contract assets reclassified to receivables as a result of the right to the transaction consideration
becoming unconditional was approximately RMB74,119. The effect of change of adopting Topic 606 in the amount of RMB23,166 is
included in the contract balance of RMB84,907 as of December 31, 2018.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares
and per share data)
The
Group did not recognize any impairment related to contract assets during the year ended December 31, 2018.
The
Group’s advance from customers consists of cash received from customers in advance of revenue recognition, which is a contract
liability. The balances of contract liability are nil and nil as of January 1, 2018 and December 31, 2018, respectively. None
of revenue recognized in the current period that was previously recognized as a contract liability. As of January 1, 2018, the
adoption of Topic 606 was no impact on the Group’s consolidated financial position.
Practical
Expedients and Exemptions
The Group generally
expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded
within sales and marketing expenses in the consolidated statements of operations and comprehensive income, as the amortization
period is less than one year and the Group has elected the practical expedient included in ASC 606.
The
Group has applied the optional exemption provided by ASC 606 to not disclose the value of remaining performance obligations not
yet satisfied as of period end for contracts with original expected duration of one year or less.
Value-Added
Tax, Business Tax and Surcharges
The
Group presents revenue net of sales taxes incurred. The sales taxes amounted to RMB81,890, RMB25,239 and RMB21,508 for the years
ended December 31, 2016, 2017 and 2018, respectively. The State Administration of Taxation and Ministry of Finance jointly issued
a Notice on Preparing for the Full Implementation of the VAT Reform (Cai Shui [2016] No. 36). Accordingly, the Group started to
pay value-added tax instead of business tax from May 1, 2016.
Total
Value-added taxes paid by the Group during the years ended December 31, 2016, 2017 and 2018 amounted to RMB160,556, RMB157,607
and RMB179,317 respectively.
|
(s)
|
Marketing
campaign expense
|
The
Group records its marketing campaign expenses as selling expenses.
Marketing
campaign expenses are incurred to increase the Group’s market share and attract more agents in certain selected regions where
the Group strategically plans to capture higher market shares. These costs are not a necessary expense to sell the insurance policy.
Such expenses are temporary with the terms of regional programs ranging from one to three months, cancellable at any time without
further notice. Marketing campaign expenses are only recognized when such campaigns are officially announced by the Group to the
agents. The Group records the marketing campaign expenses when the related services are provided. During the years ended
December 31, 2016, 2017 and 2018, RMB299,885, Nil and Nil of marketing campaign expenses were included in the selling expenses
balance, respectively. The decrease was primarily due to promotional marketing expenses which were paid to sales agents in 2016,
while no promotional marketing plan of such nature was launched in the year of 2017 and 2018.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and
per share data)
|
(t)
|
Fair
Value of Financial Instruments
|
Fair
value is considered to be the price that would be received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities
required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it
would transact and considers assumptions that market participants would use when pricing the asset or liability. The established
fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level
of input that is significant to the fair value measurement. The three levels of inputs may be used to measure fair value include:
Level
1
|
Applies
to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
|
|
|
Level
2
|
Applies
to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable
for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical
assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived
valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market
data.
|
|
|
Level
3
|
Applies
to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the
measurement of the fair value of the assets or liabilities.
|
The carrying values
of the Group’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, insurance
premium receivables and payables, other receivables, accounts payable and other payables, approximate their fair values due to
the short term nature of these instruments.
Measured
at fair value on a recurring basis
As
of December 31, 2017 and 2018, information about inputs into the fair value measurements of the Group’s assets and liabilities
that are measured at fair value on a recurring basis in periods subsequent to their initial recognition is as follows.
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Description
|
|
As
of
December 31,
2017
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Short-term investments - debt security
|
|
|
2,498,730
|
|
|
|
—
|
|
|
|
2,498,730
|
|
|
|
—
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Description
|
|
As
of
December 31,
2018
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Short-term investments - debt security
|
|
|
1,554,060
|
|
|
|
—
|
|
|
|
1,554,060
|
|
|
|
—
|
|
The
majority of debt security consists of investments in trust products and asset management plans that normally pay a prospective
fixed rate of return. These investments are recorded at fair values on a recurring basis. The Group benchmarks the costs against
fair values of comparable investments with similar measurement terms, such as prevailing market yields, at the balance sheet date.
It is classified as Level 2 of the fair value hierarchy since fair value measurement at reporting date uses significant other
observable inputs.
FANHUA
INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and
per share data)
The Group disposed
of the equity interests in Fanhua Times Sales & Service Co., Ltd., and its subsidiaries that conducts mainly P&C insurance
business (collectively, the “P&C Insurance Division”) to a third party in 2017, namely Beijing Cheche Technology
Co., Ltd. (“Cheche”), for a consideration included cash and a convertible loan receivable. The Group evaluated the
convertible receivable’s settlement provisions and elected the fair value option afforded in ASC 825, Financial Instruments,
to value this instrument. Under such election, the loan receivable is measured initially and subsequently at fair value, with
any changes in the fair value of the instrument being recorded in the consolidated financial statements as a change in fair value
of derivative instruments. The Group estimates the fair value of this instrument by first estimating the fair value of the straight
debt portion. The Group then estimates the fair value of the embedded conversion option based on financial performance and growth
rate of revenue of Cheche. The sum of these two valuations is the fair value of the loan receivable included in other non-current
assets. On October 31, 2017, the date of disposal, the Group used the discounted cash flow method to value the debt portion of
the convertible debt and determined the fair value to be RMB22,000. Based on Cheche’s current and expected financial performance,
industry trend and expected revenue and margin, management determined the fair value of the option to be approximately RMB4,500
as of December 31, 2018 according to the analysis under the Black-Scholes option pricing model. The details of the significant
assumptions of the valuations of the conversion option is included in note 3(b). The Group further considered the fair value of
the straight debt portion of this financial instrument at year ended December 31, 2018. The sum of these two valuations is considered
to be similar with the amount which was initially recognized and retained in other non-current assets. The fair value of convertible
debt was RMB22,000 as of December 31, 2017 and 2018, and there has been no impairment recorded for the convertible loan receivable
during 2018. The convertible debt is classified as Level 3 of the fair value hierarchy since fair value measurement uses unobservable
inputs.
Measured
at fair value on a non-recurring basis
The
Group measures certain assets, including the cost method investments, equity method investments and intangible assets, at fair
value on a nonrecurring basis when they are deemed to be impaired. The fair values of these investments and intangible assets
are determined based on valuation techniques using the best information available, and may include management judgments, future
performance projections, etc. An impairment charge to these investments is recorded when the cost of the investment exceeds its
fair value and this condition is determined to be other-than-temporary. Impairment charge to the intangible assets is recorded
when their carrying amounts may not be recoverable.
On January 1, 2018,
the Group adopted ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities” (“ASU 2016-01”), which requires that equity investments, except for those accounted
for under the equity method or those that result in consolidation of the investee, be measured at fair value, with subsequent changes
in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable
fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions
for the identical or a similar investment of the same issuer. ASU 2016-01 also impacts the presentation and disclosure requirements
for financial instruments.
Goodwill
(Note 6) and intangible assets (Note 2(g)) with indefinite lives are measured at fair value on a nonrecurring basis and they are
recorded at fair value only when impairment is recognized by applying unobservable inputs such as forecasted financial performance
of the acquired business, discount rate, etc. to the discounted cash flow valuation methodology that are significant to the measurement
of the fair value of these assets (Level 3).
The
functional currency of the Company is the United States dollar (“USD”). Assets and liabilities are translated at the
exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates and revenues, expenses,
gains and losses are translated using the average rate for the year. Translation adjustments are reported as cumulative translation
adjustments and are shown as a separate component of other comprehensive income or loss in the consolidated statements of income
and comprehensive income. The Group has chosen the Renminbi (“RMB”) as their reporting currency.
The
functional currency of most of the Company’s subsidiaries and VIEs is RMB. Transactions in other currencies are recorded
in RMB at the rates of exchange prevailing when the transactions occur. Monetary assets and liabilities denominated in other currencies
are translated into RMB at rates of exchange in effect at the balance sheet dates. Exchange gains and losses are recorded in the
consolidated statements of income and comprehensive income.
|
(v)
|
Foreign
Currency Risk
|
The
RMB is not a freely convertible currency. The State Administration for Foreign Exchange, under the authority of the People’s Bank
of China, controls the conversion of RMB into foreign currencies. The value of RMB is subject to changes in central government
policies and international economic and political developments that affect supply and demand in the China Foreign Exchange Trading
System market of cash and cash equivalents and restricted cash. The Group had aggregate amounts of RMB266,392 and RMB216,457 of
cash and cash equivalents and restricted cash denominated in RMB as of December 31, 2017 and 2018, respectively.
The
consolidated financial statements of the Group are stated in RMB. Translations of amounts from RMB into USD are solely for the
convenience of the readers in the United States and were calculated at the rate of US$1.00 = RMB6.8755, representing the noon
buying rate in the City of New York for cable transfers of RMB on December 31, 2018, the last business day in fiscal year 2018,
as set forth in H.10 statistical release of the Federal Reserve Bank of New York. The translation is not intended to imply that
the RMB amounts could have been, or could be, converted, realized or settled into USD at such rate.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and
per share data)
|
(x)
|
Discontinued
Operations
|
Under
ASC 205-20 “Presentation of Financial Statements - Discontinued Operation”, when a component of an entity, as defined
in ASC 205, has been disposed of or is classified as held for sale, the results of its operations, including the gain or loss
on its disposal are classified as discontinued operations and the assets and liabilities of such component are classified as assets
and liabilities attributed to discontinued operations, provided that the operations, assets and liabilities and cash flows of
the component have been eliminated from the entity’s consolidated operations and the entity will no longer have any significant
continuing involvement in the operations of the component.
In
November 2017, the Group completed the sale of its brokerage business. The Group’s results of operations related to discontinued
operations have been restated as discontinued operations on a retrospective basis for all periods presented accordingly.
As of December 31, 2018,
the Group operated two segments: (1) the insurance agency segment, which mainly consists of providing agency services for P&C
insurance products and life insurance products to individual clients, and (2) the claims adjusting segment, which consists of providing
pre-underwriting survey services, claim adjusting services, disposal of residual value services, loading and unloading supervision
services, and consulting services. Details of operating segments are further described in Note 21. Operating segments are defined
as components of an enterprise for which separate financial information is available and evaluated regularly by the Group’s
chief operating decision maker in deciding how to allocate resources and in assessing performance.
Substantially
all revenues of the Group are derived in the PRC and all long-lived assets are located in the PRC.
|
(z)
|
Earnings
per Share (“EPS”) or ADS
|
Basic
EPS is calculated by dividing the net income available to common shareholders by the weighted average number of ordinary shares
/ADS outstanding during the year. Diluted EPS is calculated by using the weighted average number of ordinary shares /ADS outstanding
adjusted to include the potentially dilutive effect of outstanding share-based awards, unless their inclusion in the calculation
is anti-dilutive.
The
contingently issuable shares /ADS related to the 521 Plan (see note 19 for details), are subject to fulfillment of the
performance conditions as stipulated under the 521 Plan. Therefore, these shares are excluded from basic earnings per share
until the shares are fully vested upon the achievement of performance conditions under the 521 Plan by the Participants.
Advertising costs are
expensed as incurred. Advertising costs amounted to RMB18,085, RMB35,741 and RMB34,663, for the years ended December 31, 2016,
2017 and 2018, respectively.
Leases
where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating
leases. Payments made under operating leases are charged to the consolidated statements of income and comprehensive income over
the lease period.
|
(ac)
|
Accumulated
Other Comprehensive Income
|
The
Group presents comprehensive income in the consolidated statements of income and comprehensive income with net income in a continuous
statement.
Accumulated
other comprehensive income mainly represents foreign currency translation adjustments, changes in fair value of short term investments
and share of other comprehensive income of the affiliates for the period.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
|
(ad)
|
Recently Issued Accounting Standards
|
On February 25, 2016,
the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases,” which specifies the accounting
for leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially
measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a
single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis.
In addition, this standard requires both lessees and lessors to disclose certain key information about lease transactions. ASU
2016-02 is effective for publicly-traded companies for annual reporting periods, and interim periods within those years, beginning
after December 15, 2018. Early adoption is permitted. Based on the Company’s preliminary assessment, the Company expects to record
a right-of-use asset of approximately RMB181,576 and a lease liability of approximately RMB181,457 on the adoption date
of January 1, 2019, primarily related to the Company’s leased office space. The Company will use a modified retrospective approach
under ASU 2018-11 and will not restate prior periods. The Group expects to implement new accounting policies as well as to elect
certain practical expedients available to us under ASU 2016-02, including those related to leases with terms of less than 12 months.
In June 2016,
the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments, which is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other
financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected
credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable
and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform
their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs
to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment
to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help
investors and other financial statement users better understand significant estimates and judgments used in estimating credit
losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include
qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements.
In November 2018, this was further updated with the issuance of ASU 2018-19, which excludes operating leases from the scope. In
addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets
with credit deterioration. For public business entities that are U.S. SEC filers, the ASU is effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2019. The Group is in the process of evaluating the impact of
adoption of this guidance on the Group’s consolidated financial statements.
In January 2017, the
FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The update
simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The annual, or interim,
goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment
charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The update
also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment
and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform
the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The update should
be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition.
For public companies, the update is effective for any annual or interim goodwill impairment tests in fiscal years beginning after
December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after
January 1, 2017. The Group expects there is no material impact upon adoption of this guidance on the Group’s consolidated financial
statements.
In August 2018, the
FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value
Measurement, which modifies disclosure requirements for fair value measurements. While some disclosures have been removed
or modified, new disclosures have been added. The guidance is effective for us no later than January 1, 2020. Early
adoption is permitted, where the Company is permitted to early adopt the portion of the guidance regarding the removal or modification
of the fair value measurement disclosures while waiting to adopt the requirement regarding additional disclosures until the effective
date. The Group expects there will be changes in relevant disclosures upon adoption of this guidance on the Group’s consolidated
financial statements.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
|
(3)
|
Acquisitions, disposals and reorganization
|
Disposal of subsidiaries
in 2018
|
a.
|
Disposal of InsCom service
Limited and InsCom Holding Limited
|
In October 2018, the
Group disposed of
InsCom service Limited, InsCom Holding Limited
and their subsidiaries (collectively “InsCom”)
to an independent third party, for a total consideration of RMB11,214, which was settled as of December 31, 2018. No gain or loss
on disposal of InsCom was recognized by the Group, which was determined by the sales consideration equaling to the net book value
of the subsidiaries at the time of disposal. InsCom Service Limited, InsCom Holdings Limited and their subsidiaries are investment
holding companies with no actual business operation after the Group’s restructuring in 2016 and 2017.
Disposal of subsidiaries
in 2017
|
a.
|
Disposal of Beijing Ruisike
Management Consulting Co., Ltd.
|
In January 2017, the
Group disposed Beijing Ruisike Management Consulting Co., Ltd to a third party, for a total cash consideration of RMB20,867, which
was settled as of December 31, 2017. The Group recognized a gain of RMB2,029 on disposal of this subsidiary, which was determined
by the excess of the sales consideration over the net book value of the subsidiary at the time of disposal.
|
b.
|
Disposal of Fanhua Times
Sales & Service Co., Ltd and its subsidiaries
|
In October 2017, the Group
entered into a share transfer agreement with Cheche, which operates an online auto insurance platform. Under this agreement,
the Group disposed of the equity interests in P&C Insurance Division, to Cheche for a total consideration of RMB225,398,
including RMB95,398 cash consideration and RMB130,000 in the value of a convertible loan receivable, which is convertible or collectible
in three years and recognized as other non-current assets. The Group evaluated the convertible loan receivable’s settlement
provisions and elected the fair value option afforded in ASC 825, Financial Instruments, to value this instrument. Under such
election, the loan receivable is measured initially and subsequently at fair value, with any changes in the fair value of the
instrument being recorded in the consolidated financial statements as a change in fair value of derivative instruments. The Group
estimates the fair value of this instrument by first estimating the fair value of the straight debt portion. The Group then estimates
the fair value of the embedded conversion option based on the recent development of Cheche. The sum of these two valuations is
the fair value of the loan receivable included in other non-current assets. On October 31, 2017, the Group used the discounted
cash flow method to value the debt portion of the convertible loan receivable and determined the fair value to be RMB 22,000,
and based on Cheche’s current and expected financial performance, industry trend and expected revenue and margin, management considered
the conversion option to be deeply out of the money and determined the fair value of the option to be immaterial. As a result,
the carrying amount of the convertible loan receivable was adjusted by RMB108,000. The total fair value of RMB 22,000 was initially
recognized and the balance remained the same and retained in other non-current assets as of December 31, 2017.
Based on Cheche’s current and expected financial
performance, industry trend and expected revenue and margin, management determined the fair value of the option to be approximately
RMB4.5 million as of December 31, 2018 according to the analysis under the Black-Scholes option pricing model with detailed
assumptions disclosed as below. The Group further considered the fair value of the straight debt portion of this financial instrument
at year ended December 31, 2018. The sum of these two valuations is considered to be similar with the amount which was initially
recognized and retained in other non-current assets. The fair value of convertible debt was RMB22,000 as of December 31, 2017
and 2018, and there has been no impairment recorded for the convertible loan receivable during 2018.
The convertible loan
receivable also carries a 10% interest return per annum which could be satisfied by cash or converted equity interest in Cheche.
The related interest income in 2017 is about RMB367. When the convertible loan receivable expires, the Group has the right to convert
to the equity interests of Cheche, or recover the principal and interests of the convertible loan receivable according to the agreement.
The Group recognized RMB884 gain on disposal of these subsidiaries in 2017, which was determined by the excess of the cash consideration
and fair value of the convertible loan receivable over the net book value of the subsidiaries, which was calculated to be RMB116,514
at the time of disposal. The net book value of the subsidiaries at the time of disposal also included goodwill allocated to this
disposal in the amount of RMB12,208.
The Company used the
Black-Scholes valuation model in determining the fair value of embedded conversion option, which requires the input of highly subjective
assumptions, including the expected life of the conversion option, stock price volatility, dividend rate and risk-free interest
rate. The assumption used in determining the fair value of the embedded conversion option on the December 31, 2018 were as follows:
Assumptions
|
|
December 31,
2018
|
|
|
|
|
|
Expected dividend yield (Note i)
|
|
|
0.00
|
%
|
Risk-free interest rate (Note ii)
|
|
|
2.48
|
%
|
Expected volatility (Note iii)
|
|
|
58.20
|
%
|
Expected life (Note iv)
|
|
|
1.8 years
|
|
Fair value per ordinary share on grant date
|
|
|
RMB0.04
|
|
(i)
|
Expected dividend yield:
|
The expected dividend yield was
estimated by the Company based on Cheche’s historical dividend policy.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(ii)
|
Risk-free interest rate:
|
Risk-free interest rate was estimated based on the
2-year US Government Bond yield as of the valuation date.
(iii)
|
Expected volatility:
|
As Cheche is a non-listed company,
the Company adopted 58.20% volatility with reference to its annualized standard deviation of the continuously compounded rate of return
on the daily average adjusted share price as of the Valuation Date.
The expected life was the contractual life with Cheche’s
agreement.
|
c.
|
Disposal of Fanhua Bocheng
Brokerage Limited (“Bocheng”)
|
In November 2017, the
Group disposed of Bocheng to a third party for a total consideration of RMB46,582. And the consideration receivable was further
offset by the other payables to Bocheng, see supplemental disclosure of cash flow information for details. Prior to the disposal,
the Group had a liability due to Bocheng in the amount of RMB103,446, which was settled in December 2017. The Group recognized
loss of RMB904 on the disposal of this subsidiary, which was determined by the excess of the net book value of the subsidiary at
the time of disposal over the sales consideration. As a result of this disposal, brokerage’s result of operations should be reclassified
to discontinued operations. Brokerage segment is no longer valid as of December 31, 2017. And accordingly, the segment note disclosure
to the prior year consolidated financial statements have been restated.
As described in Note
2(x), the activities of the brokerage business were segregated and reported
as discontinued operations in the consolidated statements of income and comprehensive income for all periods presented.
The
following table presents a reconciliation of the major classes of line items constituting pretax from discontinued operations
to after-tax profit reported in discontinued operations for the years ended December 31, 2016 and 2017:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
RMB
|
|
|
RMB
|
|
Results of discontinued operations:
|
|
|
|
|
|
|
Total net revenues
|
|
|
617,738
|
|
|
|
172,993
|
|
Total operating costs
|
|
|
(503,926
|
)
|
|
|
(163,079
|
)
|
Selling expenses
|
|
|
(86,019
|
)
|
|
|
(190
|
)
|
General and administrative expenses
|
|
|
(5,287
|
)
|
|
|
(3,380
|
)
|
Other income, net
|
|
|
1,141
|
|
|
|
40
|
|
Loss on disposal of discontinued operations
|
|
|
—
|
|
|
|
(904
|
)
|
Income from discontinued operations before income taxes
|
|
|
23,647
|
|
|
|
5,480
|
|
Income taxes expense
|
|
|
(1,104
|
)
|
|
|
—
|
|
Net income from discontinued operations, net of tax
|
|
|
22,543
|
|
|
|
5,480
|
|
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
RMB
|
|
|
RMB
|
|
Cash flow from discontinued operations:
|
|
|
|
|
|
|
Net cash generated from (used in) operating activities*
|
|
|
(1,616
|
)
|
|
|
8,992
|
|
Net cash used in investing activities
|
|
|
(12
|
)
|
|
|
—
|
|
Net cash generated from financing activities
|
|
|
—
|
|
|
|
—
|
|
Net cash increase (decrease) in cash and, cash equivalents, and restricted cash
|
|
|
(1,628
|
)
|
|
|
8,992
|
|
Cash and cash equivalents and restricted cash at beginning of year
|
|
|
6,659
|
|
|
|
5,031
|
|
Cash and cash equivalents, and restricted cash at the disposal date
|
|
|
—
|
|
|
|
14,023
|
|
Cash and cash equivalents and restricted cash at end of year
|
|
|
5,031
|
|
|
|
—
|
|
|
*
|
Including
adjustment for the loss on disposal of discontinued operations in the amount of RMB904 in 2017.
|
As
of respective closing date of each of these disposals in 2017, the Group has completed the closing procedures of all the above
transactions and has effectively transferred its control of Bocheng to the respective buyers.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
Acquisition
of additional interests in a subsidiary in 2016
On
May 9, 2016, the Group entered into a share purchase agreement with the minority shareholders of InsCom Holding Limited (“InsCom”)
to acquire the remaining 34.9% of the equity interests in InsCom and the outstanding share options of InsCom for a total consideration
of approximately RMB198,776 which consists of (i) RMB179,223 in cash after netting off with the receivable of RMB1,836 in relation
with the exercise of the InsCom share options, and (ii) 7,416,000 ordinary shares of the Company. Upon completion of the acquisition
in May 2016, the Group’s equity interests in InsCom increased from 65.1% to 100%.
The
schedule below discloses the effects of changes in the Group’s ownership in subsidiaries on the Group’s equity:
|
|
Year ended December 31,
2016
|
|
|
|
RMB
|
|
Net income attributable to the Company’s shareholders
|
|
|
157,047
|
|
Decrease in Company’s additional paid-in capital for acquisitions of additional equity interests from noncontrolling interests
|
|
|
(174,779
|
)
|
Changes from net income attributable to Company’s shareholders and transfers to noncontrolling interests
|
|
|
(17,732
|
)
|
Disposals
of subsidiaries in 2016
During
the year ended December 31, 2016, the Group disposed of three subsidiaries, including Shandong Fanhua Mintai Insurance Agency
Co., Ltd (“Shandong Mintai”), Guangdong Huajie Insurance Agency Co., Ltd (“Guangdong Huajie”) and Dongguan
Zhongxin Insurance Agency Co., Ltd (“Dongguan Zhongxin”), for a total cash consideration of RMB30,712. The Group recognized
RMB3,082 gain on disposal of subsidiaries, which was determined by the excess of the sales consideration over the net book value
of the subsidiaries at the time of disposal.
As
of December 31, 2016, the Group has completed the closing procedures of all the above transactions and has effectively transferred
its control of Shandong Mintai, Guangdong Huajie and Dongguan Zhongxin to the respective buyers.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
|
(4)
|
Other
Receivables, net
|
Other
receivables, net are analyzed as follows:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
Advances to staff (i)
|
|
|
14,599
|
|
|
|
10,036
|
|
Advances to entrepreneurial agents (ii)
|
|
|
1,308
|
|
|
|
1,362
|
|
Rental deposits
|
|
|
7,709
|
|
|
|
12,580
|
|
Interest receivables (iii)
|
|
|
23,038
|
|
|
|
18
|
|
Loan to a third party (iv)
|
|
|
513,180
|
|
|
|
—
|
|
Amount due from a third party (v)
|
|
|
42,152
|
|
|
|
19,463
|
|
Amount due from payment platform
|
|
|
591
|
|
|
|
7,082
|
|
Other(vi)
|
|
|
28,804
|
|
|
|
35,609
|
|
|
|
|
631,381
|
|
|
|
86,150
|
|
(i)
|
This
represented advances to staff of the Group for daily business operations which are unsecured, interest-free and repayable
on demand.
|
|
|
(ii)
|
This
represented advances to entrepreneurial agents who provide services to the Group. The advances are used by agents to develop
business. The advances were unsecured, interest-free and repayable on demand.
|
|
|
(iii)
|
This
represented accrued interest income on bank deposits and accrued interest on subscription receivables (Note 2(m)).
|
|
|
(iv)
|
This
represented loan to Shenzhen Chuangjia Investment Partnership Limited (“Chuangjia”) of RMB500,000 and corresponding
interest receivable RMB13,180 as of December 31, 2017. The loan is secured by the 99% equity share of Chengdu Puyi Bohui Information
Technology Limited (“Puyi Bohui”), a major operating subsidiary of Chuangjia, with interest rate 7.3% per annum.
The loan matured in 2018 and the entire principal and interests were fully settled in August 31, 2018.
|
|
|
(v)
|
This
represented the residual balance of uncollected cash consideration due from Cheche, which is related to the disposal of P&C
business. See Note 3 for details.
|
|
|
(vi)
|
This
represented other miscellaneous receivables, including advance for staff of the social insurance and housing fund, prepaid rents,
deposit to the garages for car repairing, prepayment for postage, etc.
|
The
following table summarizes the movement of the Group’s allowance for doubtful accounts for other receivables:
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Balance at the beginning of the year
|
|
|
4,043
|
|
|
|
2,724
|
|
|
|
—
|
|
Write-offs
|
|
|
(1,319
|
)
|
|
|
(2,724
|
)
|
|
|
—
|
|
Balance at the end of the year
|
|
|
2,724
|
|
|
|
—
|
|
|
|
—
|
|
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
|
(5)
|
Property,
Plant and Equipment
|
Property,
plant and equipment, net, is comprised of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
Building
|
|
|
12,317
|
|
|
|
12,317
|
|
Office equipment, furniture and fixtures
|
|
|
119,478
|
|
|
|
129,848
|
|
Motor vehicles
|
|
|
10,443
|
|
|
|
10,292
|
|
Leasehold improvements
|
|
|
6,192
|
|
|
|
14,284
|
|
Total
|
|
|
148,430
|
|
|
|
166,741
|
|
Less: Accumulated depreciation
|
|
|
(122,355
|
)
|
|
|
(128,807
|
)
|
Property, plant and equipment, net
|
|
|
26,075
|
|
|
|
37,934
|
|
No
impairment for property, plant and equipment was recorded for the years ended December 31, 2016, 2017 and 2018.
The
gross amount of goodwill and accumulated impairment losses by segment as of December 31, 2017 and 2018 are as follows:
|
|
Agency
segment
|
|
|
Claims Adjusting segment
|
|
|
Total
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Gross as of January 1, 2017
|
|
|
922,494
|
|
|
|
21,137
|
|
|
|
943,631
|
|
Eliminated on disposal of subsidiaries in 2017 (Note 3)
|
|
|
(790,517
|
)
|
|
|
—
|
|
|
|
(790,517
|
)
|
Gross as of December 31, 2017 and 2018
|
|
|
131,977
|
|
|
|
21,137
|
|
|
|
153,114
|
|
Accumulated impairment loss as of January 1, 2017
|
|
|
(800,417
|
)
|
|
|
(21,137
|
)
|
|
|
(821,554
|
)
|
Eliminated on disposal of subsidiaries in 2017 (Note 3)
|
|
|
778,309
|
|
|
|
—
|
|
|
|
778,309
|
|
Accumulated impairment loss as of December 31, 2017 and 2018
|
|
|
(22,108
|
)
|
|
|
(21,137
|
)
|
|
|
(43,245
|
)
|
Net as of December 31, 2017
|
|
|
109,869
|
|
|
|
—
|
|
|
|
109,869
|
|
Net as of December 31, 2018
|
|
|
109,869
|
|
|
|
—
|
|
|
|
109,869
|
|
The
Group performed the annual impairment analysis as of the balance sheet date. There has been no impairment loss recognized in goodwill
for the years ended December 31, 2016, 2017 and 2018.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
|
(7)
|
Investments
in Affiliates
|
As of December 31, 2018,
the Group’s investments accounted for under the equity method totaled RMB587,517 (as of December 31, 2017: RMB404,783), which
mainly included the investment in CNFinance Holdings Limited, (“CNFinance”, parent company of formerly known as Sincere
Fame International Limited after reorganization in March 2018), amounting to RMB576,048, the investment in Puyi Inc. (“Puyi”)
amounting to RMB11,350 and investment in Teamhead Automobile Surveyors Co., Ltd. (“Teamhead Automobile”) amounting
to RMB119. The increase primarily due to the rapid growth generated by CNfinance.
Investment
in CNFinance
In March 2018, in connection
with the reorganization of Sincere Fame International Limited (“Sincere Fame”), the shareholders of Sincere Fame transferred
all of their equity interests in Sincere Fame in exchange for the ordinary shares of CNFinance. As a result, CNFinance became the
parent company of Sincere Fame and the Company owned 20.6% equity interests in CNFinance. The Company’s equity interest of
CNFinance was diluted from 20.6% to 18.5% after CNFinance’s listing in New York Stock Exchange “NYSE” (symbol:
CNF) on November 7, 2018. CNFinance is a leading home equity loan service provider incorporated in the Cayman Islands and based
in Guangzhou, PRC. Investment in CNFinance is accounted for using the equity method as the Group has significant influence by the
right to nominate one board members out of seven as its third largest shareholder of CNFinance. As of December 31, 2018, the market
value of the Group’s investment in CNFinance was approximately RMB479,605 based on its quoted closing price. The length of
time that the fair value of investment in CNFinance being below its carrying value is a short period since CNFinance was listed
on November 7, 2018, CNFinance’s current financial performance is positive, the Group intends and has the ability to
retain its investment in CNFinance for a period of time sufficient to allow for any anticipated recovery in market value. Hence,
the management considered the investment in CNFinance as at December 31, 2018 is considered as not other than temporary and no
impairment has been recognised during the year ended December 31, 2018.
Investment
in Puyi
In November 2010, through
the Group’s wholly-owned subsidiary Fanhua Fanlian Investment Co., Ltd., or Fanlian, the Group invested RMB10,028 in Fanhua
Puyi Investment Management Co., Ltd., or Puyi Investment for 19.5% equity interests in Puyi Investment. In March 2013, Puyi Investment
was renamed as Fanhua Puyi Fund Sales Co. Ltd., or Puyi Sales after obtaining a license to distribute fund products.
In November 2016, equity
interests in Puyi Sales were diluted from 19.5% to 15.4% as a result of the injection of additional registered capital into Fanhua
Puyi by Chengdu Puyi Bohui Information Technology Co., Ltd., or Puyi Bohui which holds the remaining equity interests of Puyi Sales.
The Group accounted
the initial investment under the cost method before August 2018. In August of 2018, Puyi Inc. or Puyi, an exempted company incorporated
under the laws of the Cayman Islands, which is also the ultimate holding company of Puyi Sales and Puyi Bohui, has started its
process of an initial public offering (“IPO”) in the U.S. capital market. For the IPO purpose, Puyi and its subsidiaries
have conducted certain equity reorganization transactions with the Group. As part of Puyi Inc’s reorganization, in September 2018,
the Group transferred its shares in Puyi Sales to Puyi Bohui with the carrying amount of RMB10,028 in exchange for 4,033,600 Ordinary
Shares of Puyi (“Puyi’s shares”), representing 4.8% of Puyi’s equity interest. No gain or loss on above
transactions was recognized by the Group as management considered that the substance of this transaction is an exchange of shares
as part of Puyi Inc’s reorganization, and the fair value of Puyi’s share is equivalent to the fair value of the Group’s original
equity interests on Fanhua Puyi given up. Puyi was subsequently listed on Nasdaq on March 29, 2019, and the Group’s equity
was then diluted to 4.5% after its IPO. Puyi provides wealth management, corporate finance and asset management services in China.
Since September 5, 2018, investment in Puyi has been accounted for using the equity method as the Group has obtained significant
influence through the right to nominate one out of five board directors of Puyi.
Investment
in Teamhead Automobile
The
Group holds 40% equity interest in Shanghai Teamhead Automobile through one of the Group’s claim adjusting subsidiaries; the affiliate
is a PRC registered company that provides insurance surveyor and loss adjustors services.
During
the years ended December 31, 2016, 2017 and 2018, the Group recognized its share of income of affiliates in the amount of RMB48,293,
RMB108,944 and RMB174,468 respectively. During the years ended December 31, 2016, 2017 and 2018, the Group recognized its share
of other comprehensive loss of affiliates in the amount of RMB37,911, other comprehensive income of RMB1,263, and other comprehensive
loss of RMB1,763, and respectively.
Investments
as of December 31, 2017 and 2018 were as follows:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
Teamhead Automobile
|
|
|
160
|
|
|
|
119
|
|
Puyi
|
|
|
—
|
|
|
|
11,350
|
|
CNFinance
|
|
|
404,623
|
|
|
|
576,048
|
|
Total
|
|
|
404,783
|
|
|
|
587,517
|
|
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
The
summarized financial information of equity method investees is illustrated as below:
|
|
As
of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
Statements of Financial Position
|
|
|
|
|
|
|
Current assets
|
|
|
1,745,693
|
|
|
|
4,413,558
|
|
Non-current assets
|
|
|
16,460,862
|
|
|
|
15,216,534
|
|
Current liabilities
|
|
|
13,022,143
|
|
|
|
16,338,523
|
|
Non-current liabilities
|
|
|
3,355,068
|
|
|
|
1,306
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Results of operation
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Net revenues
|
|
|
1,347,800
|
|
|
|
3,424,351
|
|
|
|
4,419,070
|
|
Gross profit
|
|
|
899,946
|
|
|
|
2,008,070
|
|
|
|
2,461,628
|
|
Income from operations
|
|
|
287,975
|
|
|
|
804,163
|
|
|
|
1,210,690
|
|
Net profit
|
|
|
235,366
|
|
|
|
529,524
|
|
|
|
907,724
|
|
|
(8)
|
Variable
Interest Entities (“VIE”)
|
|
(a)
|
VIEs
related to operations
|
PRC
laws and regulations place certain restrictions on foreign investment in and ownership of insurance agencies, brokerages and on-line
business. Accordingly, the Group conducted some of its operations in China through contractual arrangements among its PRC subsidiaries,
two PRC affiliated entities and the equity shareholders of these PRC affiliated entities, who are PRC nationals.
In recent years, some
rules and regulations governing the insurance intermediary sector in China have begun to encourage foreign investment. The Group
commenced a restructuring which resulted in obtaining controlling or significant equity ownership in each of its affiliated insurance
intermediary companies.
In
May 2016, the Group completed its restructuring and all the individual shareholders had transferred their respective equity interest
in Shenzhen Dianliang Information Technology Co., Ltd and Shenzhen Xinbao Investment Management Co., Ltd to subsidiaries of the
Company. Thereafter, the Group conducts all of its operations in China through its directly owned subsidiaries.
|
(b)
|
VIEs
related to the 521 Plan
|
On June 14, 2018, the
Group announced that its board of directors has approved a 521 Share Incentive Plan (the “521 plan”). The 521 Plan
is designed to incentivize the Group’s employees and independent sales agents (collectively the “Participants”).
The 521 Plan provides Participants an opportunity to benefit from appreciation of the Company’s ordinary shares by purchasing
the Company’s ordinary shares at a stated subscription price of US$27.38 per ADS, in exchange for employee and non-employee
services, if service and performance conditions are achieved. US$27.38 per ADS, is the weighted average of the closing prices of
the repurchase and new share issuance transactions listed below. 10% of the subscription price is paid by the Participant on or
around the grant date, while the remaining 90% of the subscription prices is financed through interest-bearing loans from the Group.
The vesting of the awards is contingent on performance conditions being met during the requisite service periods.
The 521 Plan established
a pool of 280 million ordinary shares (14 million ADS) available to benefit Participants. In establishing the ADS pool, the Group
has:
through
one of the 521 Plan Employee Companies, purchased 7.5 million ADS from Master Trend Limited (“Master Trend”) at US$29
per ADS from June to October 2018
with
consideration amounted to RMB1,465,123. Master Trend is a company controlled by a principal shareholder, who is also
one of the founders of the Group. The Group funded 90% of the purchase price with the remaining 10% funded by Participants;
|
●
|
through
one of the 521 Plan Employee Companies, purchased 7.5 million ADS from Master Trend Limited (“Master Trend”) at
US$29 per ADS from June to October 2018 with consideration amounted to RMB1,465,123. Master Trend is a company controlled
by a principal shareholder, who is also one of the founders of the Group. The Group funded 90% of the
purchase price with the remaining 10% funded by Participants;
|
|
●
|
repurchased 1,423,774
ADS from the open market from August to December 2018 at the average purchase price is US$25.52 per ADS, which have been transferred
to Fanhua Employees Holdings Limited on January 10, 2019;
|
|
●
|
issued 5,076,226 new ADS at US$25.52 per ADS
in January 2019;
|
The Group set the 521
Plan subscription price at US$27.38 per ADS, which is the weighted average closing prices of the above mentioned repurchase and
new share issuance transactions.
Pursuant to the 521
Plan, the Group set up three companies which are Fanhua Employees Holdings Limited, Step Tall Limited and Treasure Chariot Limited
(collectively the “521 Plan Employee Companies”) to hold Group’s ordinary shares on behalf of the Participants
of the 521 Plan. Each of the 521 Plan Employee Companies is a legal entity formed in the British Virgin Islands with a sole shareholder
appointed by the Group. Each shareholder is either an employee, or a founder who is also a shareholder and director of the Group.
FANHUA
INC.
Notes
to the Consolidated Financial Statements
(In
thousands, except for shares and per share data)
The
521 Plan Employee Companies were established by the Group to facilitate the adoption of its 521 Plan. The Group’s ordinary
shares are the only significant assets held by the 521 Plan Employee Companies, which serve as collaterals to the loans issued
by the Group to the Participants. Given the only substantial recourse to the loans issued by the Group are the ordinary shares,
changes (principally decreases) in the value of the ordinary shares held by the 521 Plan Employee Companies will be indirectly
absorbed by the Group and the Group has potential exposure to the economics of the 521 Plan Employee Companies. Therefore, the
Group has variable interests in the 521 Plan Employee Companies. Since none of the 521 Plan Employee Companies’ equity investors
have the obligation to absorb the expected losses or the right to receive the expected residual returns as (i) the depreciation
of the ADS will be indirectly absorbed by the Group and (ii) and the appreciation of the ADS will be absorbed by the Group or
the Participants, as any residual proceeds from the sale of the ADS will revert to Group or the Participants and not the equity
investor as described in the various vesting scenarios in Note 18(b). Therefore, the 521 Plan Employee Companies are deemed to be
VIEs of the Group.
Through the
loan agreements, entrusted share purchase agreements and letters of undertaking described below, the Group controls the
decision-making rights of the 521 Plan Employee Companies with respect to the shares held by the 521 Plan Employee Companies
as collateral to the loans issued to the Participants, and the Group has potential exposure to the economics of the VIEs
resulting from the fluctuation in value of the ADS, which is more than insignificant. The ordinary shares are the only
significant assets held by the 521 Plan Employee Companies. The ordinary shares held by 521 Plan Employee Companies serve as
collateral to the loans issued by the Group to the Participants. Given the only substantial recourse to the loans issued by
the Group are the ordinary shares, decreases in the value of the ordinary shares held by the 521 Plan Employee Companies will
be indirectly absorbed by the Group. Further, the Group will also participate in the variability and absorb the economic
benefits of the 521 Plan Employee Companies, through an increase in value of the shares held by the 521 Plan Employee
Companies, if the performance conditions are not met or partially met based on the profit distribution arrangements. Based on
above, the Group is the primary beneficiary of the 521 Plan Employee Companies and consolidates them because it has the power
to direct the activities that most significantly impact the 521 Plan Employee Companies’ economic performance, and the
obligation to absorb losses of the 521 Plan Employee Companies that could potentially be significant to them and the right to
receive benefits from the 521 Plan Employee Companies that could potentially be significant to the 521 Plan Employee
Companies.
The
following is a summary of the contractual agreements that the Group entered into relating to the 521 Plan:
|
●
|
Loan Agreements and
Entrusted Share Purchase Agreements
|
The
nature and structure of the 521 Plan Employee Companies is that they are investment vehicle companies holding the
Company’s shares on behalf of the Participants for the purpose of the 521 Plan. Loan agreements and entrusted share
purchase agreements were signed among the wholly-owned subsidiary of the Group CISG Holdings Ltd., the 521 Plan Employee
Companies and each of the Participants. To effect the 521 Plan, Participants agreed to pay 10% of the subscription price and
executed a loan agreement with the Group for a loan of 90% of the subscription price of the ordinary shares under the 521
Plan. Participants also each executed an entrusted share purchase agreement with one of the 521 Employee Companies whereby
the 521 Plan Employee Company will legally hold the ordinary shares on behalf of the Participants. As of December 31, 2018,
the loan agreements provide a total of RMB1,270,696 in loans to the VIEs and Participants of the 521 Plan with the sole
purpose of funding the purchases of the Group’s ordinary shares under the 521 Plan. All of the ordinary shares
purchased are pledged as collateral to the Group for the loans and are not yet vested, the Participants cannot direct the
sale of the ordinary shares without the consent of the Group until the ordinary shares are fully vested in accordance with
the 521 Plan’s agreed target performance accumulated for five years. The loan agreement and the entrusted share
purchase agreement will terminate after five years, or upon the termination of agency or employment relationship, or the
settlement of the loan, whichever comes first.
The sole director and sole shareholder
of each of the 521 Plan Employee Companies is either a significant shareholder and director, or an employee of the Group, has executed
a letter of undertaking with the Company. Under the letter of under taking, each individual agrees to follow, without any conditions,
our instructions as to the management of all activities of each of the 521 Plan Employee Companies, as well as any directions from
us concerning transferring the shares or changing directors. Therefore, the Group is deemed to have the power to control the decision-making
rights of the 521 Plan Employee Companies.
As of December 31,
2018, the Group had already transferred 150,000,000 ordinary shares to one of the 521 Plan Employee Companies which were purchased
from Master Trend with consideration of RMB1,465,124. The 10% subscription price contributed by Participants amounted to RMB8,184
and RMB138,328 as of December 31, 2018 and is recorded as current and non-current refundable share right deposits on the statement
of financial position, respectively. The RMB8,184 represents excess contribution received from Participants, which have been fully
refunded in April, 2019.
FANHUA
INC.
Notes
to the Consolidated Financial Statements
(In
thousands, except for shares and per share data)
Risks
in relation to the 521 Plan’s VIE structure
The
variable interest entities or their respective shareholders and directors may fail to perform their obligations under our contractual
arrangements with them.
The 521 Plan Employee
Companies hold the shares on behalf of the Participants. Each of the 521 Plan Employee Companies is a legal entity formed in the
British Virgin Islands with a sole shareholder appointed by the Group. Mr. Yinan Hu, the Group’s director, and two other employees
of the Group are the respective sole shareholder and director of the 521 Plan Employee Companies. The Group’s ordinary shares are
the only significant assets held by the 521 Plan Employee Companies, which serve as collateral to the loans issued by the Group
to the Participants. Given the only substantial recourse to the loans issued by the Group are the ordinary shares of the Group,
changes (principally decreases) in the value of the ordinary shares held by the 521 Plan Employee Companies will be indirectly
absorbed by the Group and the Group has potential exposure to the economics of the 521 Plan Employee Companies.
If
the Group’s VIEs or their shareholders and directors fail to perform their respective obligations under the contractual arrangements,
the Group may have to incur substantial costs and expend additional resources to enforce such arrangements. The Group may also
have to rely on legal remedies under various legal jurisdictions, including seeking specific performance or injunctive relief,
and claiming damages, which the Group cannot assure that it will be effective under the relevant laws and regulations. For example,
if the shareholders of the Group’s VIEs act in bad faith toward the Group, the Group may have to take legal action to compel them
to perform their contractual obligations. In addition, if any third parties claim any interest in the equity interests of the
Group’s VIEs, the Group’s ability to exercise shareholders’ rights or foreclose the shares pledged under the loan agreements
with the Participants may be impaired. If these or other disputes between the shareholders and directors of the Group’s VIEs and
third parties were to impair our control over the Group’s VIEs, its ability to consolidate the financial results of the VIEs would
be affected, which would in turn materially and adversely affect the Group business, financial condition and results of operations.
Summarized
below is the information related to the VIE’s assets and liabilities reported in the Company’s consolidated financial
position after inter group elimination as of December 31, 2017 and 2018, respectively:
|
|
|
As
of December 31,
|
|
|
|
|
2017
|
|
|
|
2018
|
|
|
|
|
RMB
|
|
|
|
RMB
|
|
Total assets
|
|
|
—
|
|
|
|
—
|
|
Total liabilities
|
|
|
—
|
|
|
|
146,512
|
|
Summarized
below is the information related to the financial performance of the VIE’s reported in the Company’s consolidated
statements of operations and comprehensive loss for the years ended December 31, 2016, 2017 and 2018, respectively:
|
|
Year
Ended December 31,
|
|
|
|
2016
(1)
|
|
|
2017
(2)
|
|
|
2018
(2)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Net revenues
|
|
|
33,679
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
|
(4,598
|
)
|
|
|
—
|
|
|
|
—
|
|
Net cash used in operating
activities
|
|
|
(11,536
|
)
|
|
|
—
|
|
|
|
—
|
|
Net cash generated
from investing activities
|
|
|
2,601
|
|
|
|
—
|
|
|
|
—
|
|
Net cash generated
from financing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
Represents
the results and cash flows of Shenzhen Dianliang Information Technology Co., Ltd and
Shenzhen Xinbao Investment Management Co., Ltd. before the restructuring as explained
in note 8(a) above.
|
|
(2)
|
During
2017, there was no VIE. During 2018, the VIEs are related to the 521 Plan as explained
in note 8(b) above, which did not have any operation or cash flows activities during
2018.
|
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
As
of December 31, 2018, the Group had already transferred 150,000,000 ordinary shares to one of the 521
Plan
Employee Companies which were purchased from Master Trend with consideration of RMB1,465,124 at the price of US$29 per ADS These
shares were subscribed by Participants at the final price of US$27.38 per ADS, but initially deposited at 10% contribution of
US$29 per share. The 10% subscription price contributed by Participants amounted to RMB8,184 and RMB138,328 as of December 31,
2018 and is recorded as current and non-current refundable share right deposits on the statement of financial position, respectively.
The RMB8,184 represents excess contribution received from Participants, which have been fully refunded in April, 2019.
|
(9)
|
Other
Payables and Accrued Expenses
|
Components
of other payables and accrued expenses are as follows:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Business and other tax payables
|
|
|
58,970
|
|
|
|
70,237
|
|
Refundable deposits from employees and agents
|
|
|
30,716
|
|
|
|
26,790
|
|
Refundable share rights deposits (Note 8(b))
|
|
|
-
|
|
|
|
8,184
|
|
Professional fees
|
|
|
3,372
|
|
|
|
17,105
|
|
Accrued expenses to third parties
|
|
|
47,139
|
|
|
|
42,324
|
|
Payables for addition of office equipment, furniture and fixtures
|
|
|
8,618
|
|
|
|
8,618
|
|
Contributions from members of eHuzhu mutual aid program
|
|
|
56,890
|
|
|
|
62,459
|
|
Others
|
|
|
36,189
|
|
|
|
19,107
|
|
|
|
|
241,894
|
|
|
|
254,824
|
|
|
(10)
|
Employee
Benefit Plans
|
Employees
of the Group located in the PRC are covered by the retirement schemes defined by local practice and regulations, which are essentially
defined contribution plans.
In
addition, the Group is required by law to contribute certain percentage of applicable salaries for medical insurance benefits,
unemployment and other statutory benefits. The contribution percentages may be different from district to district which is subject
to the specific requirement of local regime government. The PRC government is directly responsible for the payments of the benefits
to these employees.
For the years ended
December 31, 2016, 2017 and 2018, the Group contributed and accrued RMB57,090, RMB66,370 and RMB74,179, respectively.
The
Company is a tax exempted company incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, the Company
is not subject to tax on their income or capital gains. In addition, upon any payments of dividends by the Company to its shareholders,
no Cayman Islands withholding tax is imposed.
The
Group’s subsidiaries and VIEs incorporated in the PRC are subject to Income Tax in the PRC.
On
March 21, 2018, the Hong Kong Legislative Council passed The Inland Revenue (Amendment) (No. 7) Bill 2017 (the “Bill”)
which introduces the two-tiered profits tax rates regime. The Bill was signed into law on March 28, 2018 and was gazetted on the
following day. Under the two-tiered profits tax rates regime, the first 2 million Hong Kong Dollar (“HKD”) of profits
of the qualifying group entity will be taxed at 8.25%, and profits above HKD2 million will be taxed at 16.5%.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
The
provision for current income taxes of the subsidiaries operating in Hong Kong has been calculated by applying the current rate
of taxation of 16.5% for the years ended December 31, 2016 and 2017, and 8.25% for the years ended December 31, 2018.
Pursuant to the relevant laws and regulations
in the PRC, Ying Si Kang Information Technology (Shenzhen) Co., Ltd. (“Ying Si Kang”), subsidiary of the Group, was regarded
as a software company and thus exempted from PRC Income Tax for two years starting from its first profit-making year, followed
by a 50% reduction for the next three years. For Ying Si Kang, year 2014 was the first profit-making year and accordingly
it has made a 12.5% tax provision for its profits for the years ended December 31, 2016, 2017 and 2018.
Pursuant
to the Circular on Issues Regarding Tax-related Preferential Policies for Further Implementation of Western Development Strategy
jointly issued by the State Ministry of Finance, General Administration of Customs, China and State Administration for Taxation,
enterprises located in the western China regions that fall into the encouraged industries are entitled to 15% EIT preferential
tax treatment from January 1, 2011 to December 31, 2020. In September 2018, Fanhua Lianxing Insurance Sales Co., Ltd. (“Lianxing”),
the Group’s wholly-owned subsidiary, which is the holding vehicle of our life insurance operations, was relocated to Tianfu New
Area, Sichuan province. Lianxing was entitled to a preferential tax rate of 15% from September 1, 2018 to December 31, 2020 as
it was classified as encouraged enterprises in the western region in an industry sector encouraged by the PRC government.
The Group’s subsidiaries
that are the PRC tax resident are required to withhold the PRC withholding tax of 10% on dividend payment to their non-PRC resident
immediate holding company, unless such dividend payment is qualified for the 5% reduced tax rate under the Arrangement between
Mainland China and Hong Kong for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on
Income (the “PRC-HK DTA”).
One of the Group’s
wholly owned subsidiaries, CNinsure Holdings Limited, was determined by Hong Kong Taxation Bureau to be a Hong Kong resident enterprise
in July 2018 and completed the application and filing process for enjoying the tax treaty in PRC Taxation Bureau. The Hong
Kong resident certificate was valid for 3 years ended December 31, 2020, which was issued by the Hong Kong Inland Revenue Department.
CNinsure Holdings Limited enjoys a reduced tax rate under Bulletin [2018] No. 9 (e.g. beneficial ownership, shareholding percentage
and holding period) and qualified a Hong Kong resident certificate and was entitled to enjoy 5% reduced tax rate for the dividends
paid by PRC subsidiaries for the year ended December 31, 2018.
The
Group accounts for uncertain income tax positions by prescribing a minimum recognition threshold in the financial statements.
The
movements of unrecognized tax benefits are as follows:
|
|
RMB
|
|
Balance as of January 1, 2016
|
|
|
70,354
|
|
Change in unrecognized tax benefits
|
|
|
—
|
|
Gross increase in tax positions
|
|
|
2,424
|
|
Balance as of December 31, 2016
|
|
|
72,778
|
|
Change in unrecognized tax benefits
|
|
|
—
|
|
Gross increase in tax positions
|
|
|
(2,428
|
)
|
Balance as of December 31, 2017
|
|
|
70,350
|
|
Change in unrecognized tax benefits
|
|
|
—
|
|
Gross decrease in tax positions
|
|
|
—
|
|
Balance as of December 31, 2018
|
|
|
70,350
|
|
The
uncertain tax positions are related to tax years that remain subject to examination by the relevant tax authorities. Based on
the outcome of any future examinations, or as a result of the expiration of statute of limitations for specific jurisdictions,
it is reasonably possible that the related unrecognized tax benefits for tax positions taken regarding previously filed tax returns,
might materially change from those recorded as liabilities for uncertain tax positions in the Group’s consolidated financial
statements as of December 31, 2017 and 2018. In addition, the outcome of these examinations may impact the valuation of certain
deferred tax assets (such as net operating losses) in future periods. The Group’s policy is to recognize interest and penalties
accrued on any unrecognized tax benefits, if any, as a component of income tax expense. The Company does not anticipate any significant
increases or decreases to its liability for unrecognized tax benefit within the next twelve months.
According
to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of income taxes
is due to computational errors made by the taxpayer. The statute of limitations will be extended to five years under special circumstances,
which are not clearly defined, but an underpayment of income tax liability exceeding RMB100 is specifically listed as a special
circumstance. In the case of a transfer pricing related adjustment, the statute of limitations is ten years. There is no statute
of limitations in the case of tax evasion.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
Income
tax expenses are comprised of the following:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Current tax expense
|
|
|
41,985
|
|
|
|
158,291
|
|
|
|
243,330
|
|
Deferred tax (income) expense
|
|
|
(14,736
|
)
|
|
|
9,512
|
|
|
|
(18,744
|
)
|
Income tax expense
|
|
|
27,249
|
|
|
|
167,803
|
|
|
|
224,586
|
|
The
principal components of the deferred income tax assets and liabilities are as follows:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
|
Operating loss carryforward
|
|
|
28,003
|
|
|
|
35,686
|
|
Intangible assets, net
|
|
|
—
|
|
|
|
6,129
|
|
Less: valuation allowances
|
|
|
(25,912
|
)
|
|
|
(32,495
|
)
|
Total
|
|
|
2,091
|
|
|
|
9,320
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
339
|
|
|
|
122
|
|
Dividend withholding taxes
|
|
|
16,800
|
|
|
|
5,502
|
|
Total
|
|
|
17,139
|
|
|
|
5,624
|
|
The
Group considers positive and negative evidence to determine whether some portion or all of the deferred tax assets will more likely
than not be realized. This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts
of future profitability, the duration of statutory carry forward periods, the Group’s experience with tax attributes expiring
unused and tax planning alternatives. Valuation allowances have been established for deferred tax assets based on a more-likely-than-not
threshold. The Group’s ability to realize deferred tax assets depends on its ability to generate sufficient taxable income
within the carry forward periods provided for in the tax law. The Group has provided RMB25,912 and RMB32,495 valuation allowance
for the years ended December 31, 2017 and 2018, respectively.
The
Group had total operating loss carry-forwards of RMB112,011 and RMB142,745 as of December 31, 2017 and 2018, respectively. As
of December 31, 2018, the operating loss carry-forwards of RMB14,199, RMB12,571, RMB18,258, RMB41,710 and RMB56,007, are to expire
during the years ending December 31, 2019, 2020, 2021, 2022 and 2023, respectively. During the years ended December 31, 2016,
2017 and 2018, RMB29,431, RMB13,284 and RMB16,288, respectively, of tax loss carried forward has been expired and canceled.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
Reconciliation
between the provision for income taxes computed by applying the PRC enterprise income rate of 25% to net income before income
taxes and income of affiliates, and the actual provision for income taxes is as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Income from continuing operations before income taxes, share of income of affiliates and discontinued operations
|
|
|
124,051
|
|
|
|
505,095
|
|
|
|
667,213
|
|
PRC statutory tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
Income tax at statutory tax rate
|
|
|
31,013
|
|
|
|
126,274
|
|
|
|
166,803
|
|
Expenses not deductible for tax purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment
|
|
|
973
|
|
|
|
1,411
|
|
|
|
1,358
|
|
Effect of tax holidays on concessionary rates granted to PRC subsidiaries
|
|
|
(2,750
|
)
|
|
|
(826
|
)
|
|
|
(8,307
|
)
|
Other
|
|
|
6,441
|
|
|
|
19,689
|
|
|
|
1,079
|
|
Tax exemption and tax relief:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(1,332
|
)
|
|
|
578
|
|
|
|
6,583
|
|
Uncertain tax provisions
|
|
|
2,424
|
|
|
|
(2,428
|
)
|
|
|
—
|
|
Effect of utilization of deductible temporary difference previously unrecognized
|
|
|
(12,872
|
)
|
|
|
—
|
|
|
|
—
|
|
Deferred income tax for dividend distribution
|
|
|
—
|
|
|
|
16,800
|
|
|
|
53,702
|
|
Other
|
|
|
3,352
|
|
|
|
6,305
|
|
|
|
3,368
|
|
Income tax expense
|
|
|
27,249
|
|
|
|
167,803
|
|
|
|
224,586
|
|
Additional PRC income
taxes that would have been payable without the tax exemption amounted to approximately RMB4,089, RMB826 and RMB8,307 for the years
ended December 31, 2016, 2017 and 2018, respectively. Without such exemption, the Group’s basic net profit per share for
the years ended December 31, 2016, 2017 and 2018 would have been decreased by RMB0.00, RMB0.00 and RMB0.01, and diluted net profit
per share for the years ended December 31, 2016, 2017 and 2018 would have been decreased by RMB0.00, RMB0.00 and RMB0.01.
If
the entities were to be non-resident for PRC tax purposes, dividends paid to it out of profits earned after January 1, 2008 would
be subject to a withholding tax. In the case of dividends paid by PRC subsidiaries, the withholding tax would be 10%, whereas
in the case of dividends paid by PRC subsidiaries which are 25% or more directly owned by tax residents in the Hong Kong Special
Administrative Region, the withholding tax would be 5%. The Group’s subsidiary, CNinsure Holdings Limited, enjoys a reduced
tax rate under Bulletin [2018] No. 9 (e.g. beneficial ownership, shareholding percentage and holding period) and qualified as
Hong Kong resident certificate and entitled to enjoy 5% reduced tax rate for the year ended December 31, 2018.
Aggregate
undistributed earnings of the Group’s subsidiaries and VIEs in the PRC that are available for distribution to the Group
of approximately RMB2,209,904 and RMB1,441,628 as of December 31, 2017 and 2018 respectively, are considered to be indefinitely
reinvested. If those earnings were to be distributed or they were determined to be no longer permanently reinvested, the Group
would have to record a deferred tax liability in respect of those undistributed earnings of approximately RMB220,990 and RMB66,580,
respectively.
As
of December 31, 2018, the Group has provided RMB5,502 deferred income tax for the declared dividend distribution based on a 5%
withholding tax rate.
Under
applicable accounting principles, a deferred tax liability should be recorded for taxable temporary differences attributable to
the excess of financial reporting over tax basis, including those differences attributable to a more-than-50-percent-owned domestic
subsidiary. However, recognition is not required in situations where the tax law provides a means by which the reported amount
of that investment can be recovered tax-free and the enterprise expects that it will ultimately use that means.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
As
described in note 8, the Company repurchased 1,423,774 ADS (equivalent of 28,475,480 ordinary shares) on the open market
and 7.5 million ADS (equivalent of 150,000,000 shares) from Master Trend Limited to execute the 521 Plan in 2018, for an
accumulated cash consideration of RMB1,716,343, representing 2.19% and 11.52% of the total shares outstanding as of December
31, 2018 respectively. Master Trend Limited is an investment vehicle company beneficially owned by Mr. Qiuping Lai,
co-founder and former president of the Group who has retired from the Company in March 2016.
During
2018, the Company issued 1,760,000 new shares for the exercise of options, representing 0.16% of the total shares outstanding
as of December 31, 2018.
During
2017, the Company issued 69,118,158 new shares for the exercise of options, representing 5.32% of the total shares outstanding
as of December 31, 2017.
On
April 6, 2017, the Company announced that it entered into a share purchase agreement with Fosun Industrial Holdings Limited (“Fosun”),
a wholly-owned subsidiary of Fosun International Limited (00656.HK) for a private placement of 66,000,000 ordinary shares (equivalent
to 3,300,000 ADS) of the Company, at purchase price of US$0.44 per ordinary share equivalent to US$8.84 per ADS), for a total
investment of US$29,162. The purchase price represents the average closing price of the past 20 trading days prior to the signing
of the share purchase agreement between Fosun and the Company on March 29, 2017. Fosun holds 5.08% of the total shares outstanding
as of December 31, 2017 and its purchased shares are subject to a contractual one-year lock-up.
During
2016, the Company issued 2,597,400 new shares for the exercise of options, representing 0.22% of the total shares outstanding
as of December 31, 2016.
During
2016, the Company issued 7,416,000 new shares for acquisition of additional interest in a subsidiary, representing 0.64% of total
shares outstanding as of December 31, 2016.
FANHUA INC.
Notes to the Consolidated Financial
Statements
(In thousands, except for shares
and per share data)
|
(13)
|
Net Income per Share
|
The computation of
basic and diluted net income per ordinary share is as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
145,095
|
|
|
|
446,236
|
|
|
|
617,095
|
|
Net income from discontinued operations
|
|
|
22,543
|
|
|
|
5,480
|
|
|
|
—
|
|
Net income
|
|
|
167,638
|
|
|
|
451,716
|
|
|
|
617,095
|
|
Less: Net income attributable
to the noncontrolling interests
|
|
|
10,591
|
|
|
|
2,488
|
|
|
|
7,180
|
|
Net income attributable to the
Company’s shareholders
|
|
|
157,047
|
|
|
|
449,228
|
|
|
|
609,915
|
|
Weighted average number of ordinary shares outstanding
|
|
|
1,160,592,325
|
|
|
|
1,231,698,725
|
|
|
|
1,239,264,464
|
|
Basic net income from continuing operations per ordinary
share
|
|
|
0.12
|
|
|
|
0.36
|
|
|
|
0.49
|
|
Basic net income from discontinued operations per
ordinary share
|
|
|
0.02
|
|
|
|
0.00
|
|
|
|
0.00
|
|
Basic net income per ordinary share
|
|
|
0.14
|
|
|
|
0.36
|
|
|
|
0.49
|
|
Basic net income from continuing operations per ADS
|
|
|
2.32
|
|
|
|
7.20
|
|
|
|
9.84
|
|
Basic net income from discontinued operations per
ADS
|
|
|
0.39
|
|
|
|
0.09
|
|
|
|
0.00
|
|
Basic net income per ADS
|
|
|
2.71
|
|
|
|
7.29
|
|
|
|
9.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
145,095
|
|
|
|
446,236
|
|
|
|
617,095
|
|
Net income from discontinued operations
|
|
|
22,543
|
|
|
|
5,480
|
|
|
|
—
|
|
Net income
|
|
|
167,638
|
|
|
|
451,716
|
|
|
|
617,095
|
|
Less: Net income attributable
to the noncontrolling interests
|
|
|
10,591
|
|
|
|
2,488
|
|
|
|
7,180
|
|
Net income attributable to the
Company’s shareholders
|
|
|
157,047
|
|
|
|
449,228
|
|
|
|
609,915
|
|
Weighted average number of ordinary shares outstanding
|
|
|
1,160,592,325
|
|
|
|
1,231,698,725
|
|
|
|
1,239,264,464
|
|
Weighted average number of dilutive potential
ordinary shares from share options
|
|
|
48,229,471
|
|
|
|
29,524,324
|
|
|
|
1,589,570
|
|
Total
|
|
|
1,208,821,796
|
|
|
|
1,261,223,049
|
|
|
|
1,240,854,034
|
|
Diluted net income from continuing operations per
ordinary share
|
|
|
0.11
|
|
|
|
0.36
|
|
|
|
0.49
|
|
Diluted net income from discontinued operations per
ordinary share
|
|
|
0.02
|
|
|
|
0.00
|
|
|
|
0.00
|
|
Diluted net income per ordinary share
|
|
|
0.13
|
|
|
|
0.36
|
|
|
|
0.49
|
|
Diluted net income from continuing operations per
ADS
|
|
|
2.23
|
|
|
|
7.20
|
|
|
|
9.83
|
|
Diluted net income from discontinued operations per
ADS
|
|
|
0.37
|
|
|
|
0.09
|
|
|
|
0.00
|
|
Diluted net income per ADS
|
|
|
2.60
|
|
|
|
7.29
|
|
|
|
9.83
|
|
The
shares subscribed by the Participants under the 521 Plan is excluded from the computation of basic and diluted income per ordinary
share during the year ended December 31, 2018. Further, the contingently issuable shares subject to the 521 Plan will be excluded
from basic income per ordinary share until the shares are fully vested upon the achievement of performance conditions under the
521 Plan by the Participants.
|
(14)
|
Distribution
of Profits
|
As stipulated by the
relevant PRC laws and regulations applicable to China’s foreign investment enterprise, the Group’s subsidiaries and
VIEs in the PRC are required to maintain non-distributable reserves which include a statutory surplus reserve as of December 31,
2017 and 2018. Appropriations to the statutory surplus reserve are required to be made at not less than 10% of individual company’s
net profit as reported in the PRC statutory financial statements of the Company’s subsidiaries and VIEs. The appropriations
to statutory surplus reserve are required until the balance reaches 50% of the registered capital of respective subsidiaries and
VIEs.
The statutory surplus
reserve is used to offset future losses. These reserves represent appropriations of retained earnings determined according to
PRC law and may not be distributed. There are no appropriations to reserves by the
Company other than
the Group’s subsidiaries and VIEs in the PRC during the periods presented. The accumulated amounts contributed to the statutory
reserves were RMB311,038 and RMB480,881 as of December 31, 2017 and 2018, respectively.
FANHUA INC.
Notes to the Consolidated Financial
Statements
(In thousands, except for shares
and per share data)
|
(15)
|
Related
Party Balances and Transactions
|
The principal related
party balances as of December 31, 2017 and 2018, and transactions for the years ended December 31, 2016, 2017 and 2018 are as
follows:
|
a)
|
Amounts due from related parties:
|
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
Subscription receivables (Note 2(m))
|
|
|
248,717
|
|
|
|
—
|
|
|
b)
|
The
Group advanced a short-term loan with a principal amount of RMB50,000 to Shenzhen Baoying Factoring Co., Ltd. (“Shenzhen
Baoying”) in August 2018, which was controlled by Puyi, the Group’s affiliate. The amounts is unsecured, bearing interest
at 8.5% per annum and are repayable after 6 months from the date of the agreement. The principal and
interest of the loan have been received on November 2018. Interest income from loan receivable from Shenzhen Baoying for 2018
is RMB989.
|
The Group charged
CNFinance interest income of nil, RMB8,714, and nil for loans receivable for the years ended December 31, 2016, 2017, and 2018,
respectively. The Group invested in senior units of structure fund issued by CNFinance and received investment income of RMB610
during the year 2018.
In 2018, one of the Group’s
subsidiaries purchased certain wealth management products offered by an online peer-to-peer (“P2P”) lending platform
which is considered to be a related party as the legal representative of the company which operates the P2P platform is a relative
to Mr. Yinan Hu, the Group’s co-founder and director. The wealth management products purchased on the platform by the subsidiary
bear interests at 7.3% with terms of 90 days. Principal and interests are payable upon maturity of those products. As of December
31, 2018, the value of the outstanding wealth management products was RMB15,000 and no investment income has been recognized before
maturity.
|
c)
|
During
2018, a total of 7.5 million ADS (equivalent of 150,000,000 ordinary shares) has been purchased from Master Trend at USD29 per
ADS (equivalent to USD1.45 per ordinary share), representing the average closing price of the 30 trading days prior to
the Group’s Board approval on June 14, 2018. In form of loan to the 521 plan’s participants, the Group had
paid RMB1,318,611 as 90% of shares purchase consideration to Master Trend during 2018. The remaining 10% in the amount of
RMB146,512 was paid by the 521 Plan’s Participants directly to Master Trend, representing a non-cash transaction in
2018.
|
Master Trend is beneficially
owned by Mr. Qiuping Lai and Master Trend is a related party because it is a principal owners of the Group at the time of the
repurchase. Master Trend still hold 4.3% ordinary shares of the Group as of October 10, 2018, upon the Group’s completion of
its repurchase transactions of 7.5 million ADS.
|
(16)
|
Commitments and Contingencies
|
(i) The Group has
several non-cancelable operating leases, primarily for office premises.
Future minimum lease
payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum
operating lease payments as of December 31, 2018 are:
|
|
Minimum Lease
Payment
|
|
|
|
RMB
|
|
Year ending December 31:
|
|
|
|
2019
|
|
|
71,812
|
|
2020
|
|
|
57,253
|
|
2021
|
|
|
34,499
|
|
2022
|
|
|
19,048
|
|
2023
|
|
|
10,571
|
|
Thereafter
|
|
|
7,306
|
|
Total
|
|
|
200,489
|
|
FANHUA INC.
Notes to the Consolidated Financial
Statements
(In thousands, except for shares
and per share data)
(ii) Rental expenses
incurred under operating leases for the years ended December 31, 2016, 2017 and 2018 amounted to RMB40,394, RMB50,837 and RMB62,840,
respectively.
(iii) These administrative
proceedings have resulted in administrative sanctions, including fines in the range from RMB8 to RMB150 in 2018, which have
not been material to the Group. Fines incurred under General and administrative expenses for the years ended December 31, 2017
and 2018 amounted to RMB77 and RMB652, respectively.
(iv) On September 7,
2018, Miao Long, individually and on behalf of an alleged class of similarly situated holders of the Group’s ADSs, filed
a class action lawsuit in the United States District Court for the Southern District of New York against the Group and two of
their executive officers. The complaint alleges that the Group made false and misleading statements regarding the Group’s
business, operational and compliance policies. The complaint principally alleges that they engaged in improper business practices
including irregular accounting, which were intended to benefit the Group’s insiders and overstated their financial assets
and performance metrics. The complaint asserts claims under Section 10(b) of the Security Exchange Act of 1934, or the Exchange
Act, and Rule 10b-5 thereunder and under Section 20(a) of the Exchange Act.
In
an order dated December 13, 2018, the Court appointed Miao Long as lead plaintiff and approved the selection of Pomerantz LLP
as lead counsel.
On
January 2, 2019, the United States District Court for the Southern District of New York ordered a briefing schedule,
providing that after the court’s entry of an order appointing a lead plaintiff under the Private Securities Litigation
Reform Act, the lead plaintiff must either file a consolidated complaint or give notice of its intent not to do so (and
therefore proceed on its initial complaint) by February 20, 2019. The Group’s response to the operative complaint was
due by April 1, 2019; the lead plaintiff’s opposition is due by May 1, 2019; and the Group’s reply is due by May
15, 2019.
On
February 20, 2019, the lead plaintiff filed an amended complaint. The Group, which is the only defendant that has been served so
far, filed a motion to dismiss the amended compliant on April 1, 2019.
The outcome of the
above class action cannot be reliably estimated with reasonable certainty at this stage and no provision has thus been made as
of December 31, 2018.
|
(17)
|
Concentrations
of Credit Risk
|
Concentration risks
Details of the customers
accounting for 10% or more of total net revenues are as follows:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
% of sales
|
|
|
2017
|
|
|
% of sales
|
|
|
2018
|
|
|
% of sales
|
|
|
|
RMB
|
|
|
|
|
|
RMB
|
|
|
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Huaxia Life Insurance Company Limited (“Huaxia”)
|
|
|
517,759
|
|
|
|
12.7
|
%
|
|
|
990,865
|
|
|
|
24.2
|
%
|
|
|
1,100,027
|
|
|
|
31.7
|
%
|
Tianan Life Insurance Company Limited (“Tianan”)
|
|
|
*
|
|
|
|
*
|
|
|
|
913,456
|
|
|
|
22.3
|
%
|
|
|
704,933
|
|
|
|
20.3
|
%
|
AEON Life Insurance Company, Ltd (“AEON”).
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
453,120
|
|
|
|
13.1
|
%
|
PICC Property and Casualty Company Limited
|
|
|
878,249
|
|
|
|
21.5
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
China Pacific Property Insurance Co., Ltd.
|
|
|
439,749
|
|
|
|
10.8
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
1,835,757
|
|
|
|
45.0
|
%
|
|
|
1,904,321
|
|
|
|
46.5
|
%
|
|
|
2,258,080
|
|
|
|
65.1
|
%
|
|
*
|
represented less than 10% of total net revenues as of the
year.
|
Details of the customers
which accounted for 10% or more of accounts receivable are as follows:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
%
|
|
|
2018
|
|
|
%
|
|
|
|
RMB
|
|
|
|
|
|
RMB
|
|
|
|
|
Huaxia
|
|
|
229,444
|
|
|
|
44.5
|
%
|
|
|
161,908
|
|
|
|
31.8
|
%
|
Tianan
|
|
|
92,988
|
|
|
|
18.0
|
%
|
|
|
75,777
|
|
|
|
14.9
|
%
|
AEON
|
|
|
*
|
|
|
|
*
|
|
|
|
74,538
|
|
|
|
14.7
|
%
|
|
|
|
322,432
|
|
|
|
62.5
|
%
|
|
|
312,223
|
|
|
|
61.4
|
%
|
|
*
|
represented less than 10% of account receivables as of
the year end.
|
The Group performs
ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable.
The Group places its
cash and cash equivalents and short investments with financial institutions with high-credit ratings and quality.
FANHUA INC.
Notes to the Consolidated Financial
Statements
(In thousands, except for shares
and per share data)
Currency risk
The proceeds from
the initial public offering and the follow-on offering of the Group were in USD, substantially all of the revenue-generating operations
of the Group are transacted in RMB, which is not freely convertible into foreign currencies. On January 1, 1994, the PRC government
abolished the dual rate system and introduced a single rate of exchange as quoted by the People’s Bank of China. However,
the unification of the exchange rate does not imply convertibility of RMB into USD or other foreign currencies. All foreign exchange
transactions must take place either through the People’s Bank of China or other institutions authorized to buy and sell
foreign exchange or at a swap center. Approval of foreign currency payments by the People’s Bank of China or other institutions
requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.
|
(18)
|
Share-based Compensation
|
On March 12, 2012,
the Company granted options (“2012 Options G”) to its directors and employees to purchase up to 92,845,000 ordinary
shares of the Company. Pursuant to the option agreements entered into between the Company and the option grantees, the options
shall vest over a five-year service period from 2012 to 2016. The expiration date of the 2012 Options is March 12, 2022. The 2012
Options G had an exercise price of US$0.30 (RMB1.90) and an intrinsic value of US$0.04 (RMB0.26) per ordinary share, except for
the 3,200,000 options granted to the two independent directors which had an exercise price of US$0.31 (RMB1.98) and an intrinsic
value of US$0.03(RMB0.17) per ordinary share. The exercise price for Option G was later modified to US$0.001 (RMB0.006) and the
number of shares are reduced by half with no incremental cost as a result of such option modification. The fair value of the options
was determined by using the Black-Scholes option pricing model.
For the years ended
December 31, 2016, 2017 and 2018, share-based compensation expenses of RMB4,367, nil and nil were recognized in connection with
the 2012 Options G, respectively. During the year ended December 31, 2018, 1,760,000 shares of 2012 Options G had been exercised.
During the years ended December 31, 2016, 2017 and 2018, 10 shares, 400,000 shares and nil shares of 2012 Options G, respectively,
were forfeited due to employee resignations. No share-based compensation expense related to the forfeited options was recognized.
FANHUA INC.
Notes to the Consolidated Financial
Statements
(In thousands, except for shares
and per share data)
On March 12, 2012,
the Company granted options (“2012 Options H”) to its entrepreneurial agents and captains (non-employees) to purchase
3,800,000 ordinary shares of the Company, of which 3,000,000 and 800,000 options were granted to agents and captains respectively.
Pursuant to the option agreements entered into between the Company and the option grantees, 40% (“Option H1”), 40%
(“Option H2”) and 20% (“Option H3”) of the 3,000,000 award options granted to agents shall vest in May
31, 2014, 2015 and 2016 of each year respectively; and 40% (“Option H4”), 40% (“Option H5”) and 20% (“Option
H6”) of the 800,000 award options granted to captains shall vest in May 31, 2013, 2014 and 2015 of each year respectively.
The expiration date of the 2012 Options H is March 12, 2022. The 2012 Options H had an exercise price of US$0.30 (RMB1.90), which
was later modified to US$0.001 (RMB0.006) and an intrinsic value of US$0.04 (RMB0.26) per ordinary share as of the date of grant.
The fair value of the options was determined by using the Black-Scholes option pricing model and revaluated every balance sheet
date until the options was vested.
For the years ended
December 31, 2016, 2017 and 2018, share-based compensation expenses of RMB570, nil and nil were recognized in connection with
the 2012 Options H, respectively. By the year ended December 31, 2017, the remaining outstanding of 2012 Option H has been fully
exercised. During the year ended December 31, 2018, nil of 2012 Options H had been exercised. During the years ended December
31, 2016, 2017 and 2018, 141,789 shares, nil share and nil share shares of 2012 Options H, respectively, were forfeited due to
termination of agency contracts. No share-based compensation expense related to the forfeited options was recognized.
Prior
to 2012 Option, the company granted options its employees under 2009 options and 2008 options (collectively the “Options”).
The Options shall vest over a four-year period subject to the continuous employment of the option grantees and their key performance
indicators (“KPI”) results for the year 2009. The expiration date of the Options is March 31, 2015, which was later
modified to December 31, 2017 with an incremental compensation cost of RMB6,700 charged for the period in which the modification
occurred in December 2013. During the year ended December 31, 2018, nil shares and nil shares had been exercised for 2009 options
and 2008 options respectively. No share-based compensation expense was recognized for the years ended December 31, 2016, 2017
and 2018.
For each of the three
years ended December 31, 2016, 2017 and 2018, changes in the status of total outstanding options under 2012 Options, 2009 Options
and 2008 Options, were as follows:
|
|
Number of options
|
|
|
Weighted average exercise
price in
RMB
|
|
|
Aggregate Intrinsic Value
RMB
|
|
Outstanding as of January 1, 2016
|
|
|
75,063,552
|
|
|
|
0.90
|
|
|
|
148,348
|
|
Exercised
|
|
|
(2,597,400
|
)
|
|
|
0.45
|
|
|
|
|
|
Forfeited
|
|
|
(147,994
|
)
|
|
|
0.01
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
|
72,318,158
|
|
|
|
0.92
|
|
|
|
141,274
|
|
Exercised
|
|
|
(69,118,158
|
)
|
|
|
0.96
|
|
|
|
|
|
Forfeited
|
|
|
(400,000
|
)
|
|
|
0.01
|
|
|
|
|
|
Outstanding as of December 31, 2017
|
|
|
2,800,000
|
|
|
|
1.17
|
|
|
|
16,422
|
|
Exercised
|
|
|
(1,760,000
|
)
|
|
|
0.01
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
|
|
1,040,000
|
|
|
|
0.01
|
|
|
|
7,841
|
|
Exercisable as of December 31, 2018
|
|
|
1,040,000
|
|
|
|
0.01
|
|
|
|
7,841
|
|
As of December 31,
2018, all of the above options were fully vested.
The following table
summarizes information about the Company’s share option plans for the years ended December 31, 2016, 2017 and 2018:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Weighted-average grant-date fair value per share of options granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total intrinsic value of options exercised
|
|
|
6,406
|
|
|
|
270,419
|
|
|
|
16,884
|
|
Total fair value of share options vested
|
|
|
13,631
|
|
|
|
—
|
|
|
|
—
|
|
FANHUA INC.
Notes to the Consolidated Financial
Statements
(In thousands, except for shares
and per share data)
The following table
summarizes information about the Company’s stock option plans as of December 31, 2018:
|
|
Options outstanding
|
|
|
Weighted average remaining
contractual life (Years)
|
|
|
Weighted average exercise
price in RMB
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 Options G
|
|
|
1,040,000
|
|
|
|
4.25
|
|
|
|
0.01
|
|
|
|
1,040,000
|
|
In substance recourse loans and option grants
As disclosed in note
8, the 521 Plan was designed to incentivize the Participants, 90% of the subscription price of the shares under the 521 Plan shall
be settled by the Group through in-substance nonrecourse loans with interest at a rate of 8% to the Participants. While the remaining
10% is contributed by the Participants. The loan is repayable by the Participants upon the earlier of the expiry date of the 521
Plan, termination of employment or the agency contract or within five years.
Given the consideration
received from the employee consists of an in-substance nonrecourse loans, the award is, accounted for as an option until the note
is repaid. The underlying shares which are collaterals to the loans, the Group also has legal recourse to the Participants’
personal assets until the loans and interests are paid in full. However, the Group considers these loans to be in-substance nonrecourse
loans due to the uncertainty of the Group’s ability to recover sufficient assets from the Participants to justify the recourse
nature of the loan. In accordance of ASC 718, the rights and obligations embodied in a transfer of equity shares to Participants
for loans that provides no recourse to other assets of the employee (that is, other than the shares) are substantially the same
as those embodied in a grant of share options. Accordingly, the 521 Plan is accounted for as grant of share options. The principal
and interest are included as part of the exercise price of the “option” (therefore, no interest income is recognized).
Substantively, each share under the 521 Plan is an option to purchase a fixed number of share at a strike price per ADS equal
to the subscription price (i.e., the exercise price) of US$27.38 per ADS increasing over time as interest accrues on the loan,
offset by any dividends declared on the share. Further, because the shares sold on a nonrecourse basis are accounted for as options,
the note and the shares are not recorded. Rather, compensation cost is recognized over any requisite service period, with an offsetting
credit to additional paid-in capital (“APIC”). Periodic principal and interest payments, if any, are treated as deposits.
Refundable share right deposits are recorded
as a liability until the note is paid off, at which time the deposit balance is transferred to APIC. Nonrefundable deposits are
immediately recorded as a credit to APIC as payments are received.
Vesting conditions:
Vesting, Forfeiture, and Settlement Terms
:
The
Participants’ rights to ownership benefits of the shares are subject to the Participants’ achievement of service
and performance vesting conditions. Each award agreement contains a condition for service from January 1, 2019 through
December 31, 2023 (which coincides with loan maturity date) as well as individually determined performance conditions based
on cumulative sales over the service period. Participants must achieve both the service and performance conditions to fully
vest in the shares
at the end of the loan
maturity date
, otherwise the share appreciation profits at the end of the vesting period, if any after principals and
accrued interests of the loans are fully repaid to the Group, will be either fully retained or partially retained by the
Group.
Under these vesting and profit distribution
arrangements, the Group can be required to settle the option or similar instrument by transferring cash, representing a noncontingent
cash settlement feature which requires the 521 awards to be liability classified.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and
per share data)
The Company used the
Black-Scholes valuation model in determining the fair value of 521 plan’s ordinary shares granted, which requires the input
of highly subjective assumptions, including the expected life of the stock option, stock price volatility, dividend rate and risk-free
interest rate. The assumption used in determining the fair value of the 521 plan’s ordinary shares on the grant date were
as follows:
Assumptions
|
|
December 31,
2018
|
|
|
|
|
|
Expected dividend yield (Note i)
|
|
|
2.64
|
%
|
Risk-free interest rate (Note ii)
|
|
|
2.51
|
%
|
Expected volatility (Note iii)
|
|
|
55.5
|
%
|
Expected life (Note iv)
|
|
|
5 years
|
|
Fair value per ordinary share on grant date
|
|
|
USD0.37
|
|
|
(i)
|
Expected dividend yield:
|
The expected dividend yield
was estimated by the Company based on its historical dividend policy.
|
(ii)
|
Risk-free interest rate:
|
Risk-free interest
rate was estimated based on the 5-year US Government Bond yield as of the valuation date.
|
(iii)
|
Expected volatility:
|
The volatility of the underlying
ordinary shares was estimated based on the annualized standard deviation of the continuously compounded rate of return on the
daily average adjusted share price of the Group as of the Valuation Date.
The expected life was the contractual life of the
521 plan.
As of December 31,
2018, the Group had reserved 280,000,000 ordinary shares available to be granted as share-based awards under the 521 Plan. The
521 Plan is generally scheduled to be vested over five years. 150,000,000 ordinary shares were granted on December 31, 2018 and
the rest has been granted on January 10, 2019 subsequently. The Group estimate the forfeiture rate for both independent agents
and employees will be nil and nil for 2018 respectively.
For
the years ended December 31, 2018, changes in the status of total outstanding options under 521 Plan, was as follows:
|
|
Number of options
|
|
|
Weighted average exercise
price in USD
|
|
|
Weighted average remaining
contractual life (Years)
|
|
|
Aggregate Intrinsic Value
RMB
|
|
Outstanding as of January 1, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Granted
|
|
|
150,000,000
|
|
|
|
1.5
|
|
|
|
5.00
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
|
|
150,000,000
|
|
|
|
1.5
|
|
|
|
5.00
|
|
|
|
—
|
|
FANHUA
INC.
Notes
to the Consolidated Financial Statements
(In
thousands, except for shares and per share data)
No
share-based compensation expense related to the 521 plan was recognized for the year ended December 31, 2018. As the 521 plan
was initially recognised as a liability award, the unrecognised share base compensation expense related to 521 plan is variable
based on the change of the fair value at each reporting date. Compensation cost for each period until settlement shall be based
on the change (or a portion of the change, depending on the percentage of the requisite service that has been rendered at the
reporting date) in the fair value of the instrument for each reporting period. As of December 31, 2018, there was RMB7,368 unrecognized
share-based compensation expense related to unvested share options granted to the 521 plan’s participants.
During
the year ended December 31, 2018, a total of 178,475,480 ordinary shares, comprising 28,475,480 ordinary shares repurchased
from the open market and 150,000,000 ordinary shares purchased from Master Trend, a related party of the Group at the time of
the transaction. The shares are repurchased from Master Trend at US$29 per ADS, representing the average closing price of the
30 trading days prior to the Board approval date of June 14, 2018
.
The Company accounts for repurchased ordinary shares under the cost method and includes such treasury stock as a component
of the shareholders’ equity. The ordinary shares subject to the 521 Plan are considered contingently issuable. Refer to
Note 8 for details of the 521 Plan.
There
was no repurchase of ordinary shares by the Group during the years ended December 31, 2016 and 2017.
|
(20)
|
Restricted
Net Assets
|
Relevant
PRC statutory laws and regulations permit payments of dividends by the Group’s PRC subsidiaries only out of their retained
earnings, if any, as determined in accordance with PRC accounting standards and regulations. As a result of these PRC laws and
regulations, the Group’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets either
in the form of dividends, loans or advances. As of December 31, 2017, and 2018, the Company had restricted net assets of RMB2,245,077
and RMB2,977,988 (including nil and nil restricted share capital and statutory reserves of the VIEs), respectively, which were
not eligible to be distributed. These amounts were comprised of the registered capital of the Company’s PRC subsidiaries
and the statutory reserves disclosed in Note 14.
As
of December 31, 2018, the Group operated two segments: (1) the insurance agency segment, which mainly consists of providing agency
services for P&C insurance products and life insurance products to individual clients, and (2) the claims adjusting segment,
which consists of providing pre-underwriting survey services, claim adjusting services, disposal of residual value services, loading
and unloading supervision services, and consulting services. Operating segments are defined as components of an enterprise about
which separate financial information is available and evaluated regularly by the Group’s chief operating decision maker
in deciding how to allocate resources and in assessing performance.
FANHUA INC.
Notes to the Consolidated Financial
Statements
(In thousands, except for shares
and per share data)
The following table
shows the Group’s operations by business segment for the years ended December 31, 2016, 2017 and 2018. Other includes revenue
and expenses that are not allocated to reportable segments and corporate related items.
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
3,746,471
|
|
|
|
3,780,217
|
|
|
|
3,143,873
|
|
|
|
457,257
|
|
Claims Adjusting
|
|
|
336,413
|
|
|
|
308,256
|
|
|
|
327,390
|
|
|
|
47,617
|
|
Total net
revenues
|
|
|
4,082,884
|
|
|
|
4,088,473
|
|
|
|
3,471,263
|
|
|
|
504,874
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
(3,667,004
|
)
|
|
|
(3,408,499
|
)
|
|
|
(2,614,593
|
)
|
|
|
(380,276
|
)
|
Claims Adjusting
|
|
|
(306,804
|
)
|
|
|
(308,321
|
)
|
|
|
(316,899
|
)
|
|
|
(46,091
|
)
|
Other
|
|
|
(117,542
|
)
|
|
|
(98,517
|
)
|
|
|
(114,028
|
)
|
|
|
(16,585
|
)
|
Total operating
costs and expenses
|
|
|
(4,091,350
|
)
|
|
|
(3,815,337
|
)
|
|
|
(3,045,520
|
)
|
|
|
(442,952
|
)
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
79,467
|
|
|
|
371,718
|
|
|
|
529,280
|
|
|
|
76,981
|
|
Claims Adjusting
|
|
|
29,609
|
|
|
|
(65
|
)
|
|
|
10,491
|
|
|
|
1,526
|
|
Other
|
|
|
(117,542
|
)
|
|
|
(98,517
|
)
|
|
|
(114,028
|
)
|
|
|
(16,585
|
)
|
Income (loss)
from operations
|
|
|
(8,466
|
)
|
|
|
273,136
|
|
|
|
425,743
|
|
|
|
61,922
|
|
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Segment assets
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
680,602
|
|
|
|
816,596
|
|
|
|
118,770
|
|
Claims Adjusting
|
|
|
271,616
|
|
|
|
266,077
|
|
|
|
38,699
|
|
Other
|
|
|
3,785,524
|
|
|
|
2,783,938
|
|
|
|
404,908
|
|
Total assets
|
|
|
4,737,742
|
|
|
|
3,866,611
|
|
|
|
562,377
|
|
Substantially all
of the Group’s revenues for the three years ended December 31, 2016, 2017 and 2018 were generated from the PRC. A substantial
portion of the identifiable assets of the Group is located in the PRC. Accordingly, no geographical segments are presented.
FANHUA INC.
Notes to the Consolidated Financial
Statements
(In thousands, except for shares
and per share data)
On January
10, 2019, the Company had granted an additional 6.5 million ADS (equivalent of 130,000,000 ordinary shares) to the
Participants. On January 24, 2019, the Group announced the completion of its expanded share repurchase program under the 521
Plan previously authorized by its board of directors (the “Board”). Pursuant to Board approval previously
announced in August 2018, on January 24, 2019, the Company resold the 1,423,774 ADS (equivalent of 28,475,480 ordinary shares)
which were held in treasury to Employee Companies established on behalf of 521 plan’s Participants, at USD25.6 per ADS (equivalent of USD1.28 per
ordinary share). In the meantime, the Company was approved by the Board to newly issue and sell 101,524,520 ordinary shares to
521 Plan Employee Companies established on behalf of 521 plan’s Participants at the same price. There was RMB35,304
unrecognized share-based compensation expense related to unvested share options granted to the 521 plan’s participants
as of January 10, 2019. Pursuant to the Company’s 521 Plan, 280,000,000 ordinary shares had been purchased by 521 Plan
Employee Companies at the weighted average price of USD1.37 per ordinary share.
On March 11, 2019, the Group’s Board
of Directors declared a quarterly dividend of US$0.0125 per ordinary share, or US$0.25 per ADS, amounting to a total of US$17,498.
The dividend will be paid to shareholders of record on March 21, 2019.
On March 11, 2019, the Group announced
that its board of directors has approved its management’s proposal to increase its annual aggregate dividend by 20% from
US$1.0 per American Depository Share (“ADS”) in 2018 to US$1.2 per ADS, or US$0.06 per ordinary share in 2019. The
dividend will be paid on a quarterly basis, with US$0.3 per ADS, or US$0.015 per ordinary share, payable in each of the next four
quarters.
FANHUA INC.
SCHEDULE 1—CONDENSED FINANCIAL
STATEMENTS OF THE COMPANY
Statements of Financial Position
(
In thousands, except for shares
and per share data
)
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
169,413
|
|
|
|
366,862
|
|
|
|
53,358
|
|
Other receivables and amounts due from subsidiaries and affiliates
|
|
|
1,641,554
|
|
|
|
1,119,686
|
|
|
|
162,852
|
|
Total current assets
|
|
|
1,810,967
|
|
|
|
1,486,548
|
|
|
|
216,210
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
2,126,599
|
|
|
|
2,638,621
|
|
|
|
383,772
|
|
Investment in an affiliate
|
|
|
—
|
|
|
|
11,350
|
|
|
|
1,650
|
|
Total
assets
|
|
|
3,937,566
|
|
|
|
4,136,519
|
|
|
|
601,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other payables and accrued expenses
|
|
|
2,415
|
|
|
|
1,337,039
|
|
|
|
194,464
|
|
Amounts due to subsidiaries
|
|
|
58,100
|
|
|
|
27,969
|
|
|
|
4,068
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Non-current liabilities
|
|
|
—
|
|
|
|
138,328
|
|
|
|
20,119
|
|
Total liabilities
|
|
|
60,515
|
|
|
|
1,503,336
|
|
|
|
218,651
|
|
Ordinary shares (Authorized shares:10,000,000,000 at US$0.001 each; issued and outstanding shares: 1,300,191,084 and 1,301,951,084 as of December 31, 2017 and 2018, respectively)
|
|
|
9,571
|
|
|
|
9,583
|
|
|
|
1,394
|
|
Treasury stock
|
|
|
—
|
|
|
|
(1,156
|
)
|
|
|
(168
|
)
|
Additional paid-in capital
|
|
|
2,429,559
|
|
|
|
437,176
|
|
|
|
63,584
|
|
Retained earnings
|
|
|
1,779,746
|
|
|
|
2,280,870
|
|
|
|
331,739
|
|
Accumulated other comprehensive loss
|
|
|
(93,108
|
)
|
|
|
(93,290
|
)
|
|
|
(13,568
|
)
|
Subscription receivables
|
|
|
(248,717
|
)
|
|
|
—
|
|
|
|
—
|
|
Total equity
|
|
|
3,877,051
|
|
|
|
2,633,183
|
|
|
|
382,981
|
|
Total liabilities and shareholders’ equity
|
|
|
3,937,566
|
|
|
|
4,136,519
|
|
|
|
601,632
|
|
FANHUA INC.
SCHEDULE
1—CONDENSED FINANCIAL STATEMENTS OF THE COMPANY
— (Continued)
Statements of Income and Comprehensive
Income
(
In thousands
)
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
General and administrative expenses
|
|
|
(9,938
|
)
|
|
|
(4,435
|
)
|
|
|
(6,973
|
)
|
|
|
(1,014
|
)
|
Interest income
|
|
|
8,271
|
|
|
|
2,229
|
|
|
|
10,624
|
|
|
|
1,545
|
|
Equity in earnings of subsidiaries and an affiliate
|
|
|
158,714
|
|
|
|
451,434
|
|
|
|
606,264
|
|
|
|
88,177
|
|
Net Income attributable to the Company’s shareholders
|
|
|
157,047
|
|
|
|
449,228
|
|
|
|
609,915
|
|
|
|
88,708
|
|
Other comprehensive (loss) income: Foreign currency translation adjustments
|
|
|
2,177
|
|
|
|
(10,664
|
)
|
|
|
(10,194)
|
|
|
|
(1,483)
|
|
Changes in fair value of short term investments
|
|
|
632
|
|
|
|
(632
|
)
|
|
|
-
|
|
|
|
-
|
|
Share of other comprehensive gain (loss) of affiliates
|
|
|
(37,911
|
)
|
|
|
1,263
|
|
|
|
(1,763)
|
|
|
|
(256)
|
|
Comprehensive income attributable to the Company’s shareholders
|
|
|
121,945
|
|
|
|
439,195
|
|
|
|
597,958
|
|
|
|
86,969
|
|
FANHUA INC.
SCHEDULE
1—CONDENSED FINANCIAL STATEMENTS OF THE COMPANY
— (Continued)
Statements of Shareholders’ Equity
(
In thousands, except for shares)
|
|
Share
Capital
|
|
|
Additional
|
|
|
Treasury
Stock
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
|
|
|
Number
of
Share
|
|
|
Amounts
|
|
|
Paid-in
Capital
|
|
|
Number
of
Share
|
|
|
Amounts
|
|
|
Retained
Earnings
|
|
|
Comprehensive
Loss
|
|
|
Subscription
Receivables
|
|
|
Total
|
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Balance as of January 1, 2016
|
|
|
1,155,059,526
|
|
|
|
8,592
|
|
|
|
2,454,244
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,173,471
|
|
|
|
(50,048
|
)
|
|
|
(268,829
|
)
|
|
|
3,317,430
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
157,047
|
|
|
|
—
|
|
|
|
—
|
|
|
|
157,047
|
|
Foreign
currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,483
|
|
|
|
(19,306
|
)
|
|
|
2,177
|
|
Exercise of share options
|
|
|
2,597,400
|
|
|
|
17
|
|
|
|
1,127
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,144
|
|
Share-based
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
4,937
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,937
|
|
Acquisition
of additional interests in a subsidiary
|
|
|
7,416,000
|
|
|
|
49
|
|
|
|
(174,779
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(174,730
|
)
|
Disposal of subsidiaries
|
|
|
—
|
|
|
|
—
|
|
|
|
16,126
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,126
|
|
Changes
in fair value of short term investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
632
|
|
|
|
—
|
|
|
|
632
|
|
Share
of other comprehensive income in affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(37,911
|
)
|
|
|
—
|
|
|
|
(37,911
|
)
|
Balance
as of December 31, 2016
|
|
|
1,165,072,926
|
|
|
|
8,658
|
|
|
|
2,301,655
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,330,518
|
|
|
|
(65,844
|
)
|
|
|
(288,135
|
)
|
|
|
3,286,852
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
449,228
|
|
|
|
—
|
|
|
|
—
|
|
|
|
449,228
|
|
Foreign
currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(27,895
|
)
|
|
|
17,231
|
|
|
|
(10,664
|
)
|
Exercise of share options
|
|
|
69,118,158
|
|
|
|
458
|
|
|
|
64,488
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
64,946
|
|
Share-based
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Private
placement
|
|
|
66,000,000
|
|
|
|
455
|
|
|
|
200,632
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
201,087
|
|
Subscription
receipt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22,187
|
|
|
|
22,187
|
|
Distribution of dividend
|
|
|
—
|
|
|
|
—
|
|
|
|
(137,216
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(137,216
|
)
|
Changes
in fair value of short term investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(632
|
)
|
|
|
—
|
|
|
|
(632
|
)
|
Share
of other comprehensive loss in affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,263
|
|
|
|
—
|
|
|
|
1,263
|
|
Balance
as of December 31, 2017
|
|
|
1,300,191,084
|
|
|
|
9,571
|
|
|
|
2,429,559
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,779,746
|
|
|
|
(93,108
|
)
|
|
|
(248,717
|
)
|
|
|
3,877,051
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
609,915
|
|
|
|
—
|
|
|
|
—
|
|
|
|
609,915
|
|
Foreign
currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,581
|
|
|
|
(11,775
|
)
|
|
|
(10,194
|
)
|
Exercise of share options
|
|
|
1,760,000
|
|
|
|
12
|
|
|
|
3,274
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,286
|
|
Repurchase
of ordinary shares from shareholder
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,464,163
|
)
|
|
|
150,000,000
|
|
|
|
(960
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,465,123
|
)
|
Repurchase
of ordinary shares from open market
|
|
|
—
|
|
|
|
—
|
|
|
|
(251,024
|
)
|
|
|
28,475,480
|
|
|
|
(
196
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(251,220
|
)
|
Private
placement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subscription
receipt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
260,492
|
|
|
|
260,492
|
|
Distribution of dividend
|
|
|
—
|
|
|
|
—
|
|
|
|
(280,470
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(108,791
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(389,261
|
)
|
Changes
in fair value of short term investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Share
of other comprehensive income of affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,763
|
)
|
|
|
—
|
|
|
|
(1,763
|
)
|
Balance
as of December 31, 2018
|
|
|
1,301,951,084
|
|
|
|
9,583
|
|
|
|
437,176
|
|
|
|
178,475,480
|
|
|
|
(
1,156
|
)
|
|
|
2,280,870
|
|
|
|
(93,290
|
)
|
|
|
—
|
|
|
|
2,633,183
|
|
Balance
as of December 31, 2018 in US$
|
|
|
—
|
|
|
|
1,394
|
|
|
|
63,584
|
|
|
|
—
|
|
|
|
(168
|
)
|
|
|
331,739
|
|
|
|
(13,568
|
)
|
|
|
—
|
|
|
|
382,981
|
|
FANHUA INC.
SCHEDULE
1—CONDENSED FINANCIAL STATEMENTS OF THE COMPANY
— (Continued)
Statements
of Cash Flows
(
In thousands
)
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
157,047
|
|
|
|
449,228
|
|
|
|
609,915
|
|
|
|
88,708
|
|
Adjustments to reconcile net income
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries and an affiliate
|
|
|
(158,714
|
)
|
|
|
(451,434
|
)
|
|
|
(606,264
|
)
|
|
|
(88,176
|
)
|
Compensation expenses associated with stock options
|
|
|
4,937
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
(9,290
|
)
|
|
|
(6,489
|
)
|
|
|
10,644
|
|
|
|
1,548
|
|
Other payables
|
|
|
3,506
|
|
|
|
(5,693
|
)
|
|
|
1,326,440
|
|
|
|
192,923
|
|
Net cash
used in operating activities
|
|
|
(2,514
|
)
|
|
|
(14,388
|
)
|
|
|
1,340,735
|
|
|
|
195,003
|
|
Cash flows (used in) generated
from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in investment in subsidiaries and an affiliate
|
|
|
127,475
|
|
|
|
98,399
|
|
|
|
81,129
|
|
|
|
11,799
|
|
Advances to subsidiaries and affiliates
|
|
|
(122,885
|
)
|
|
|
(38,609
|
)
|
|
|
467,995
|
|
|
|
68,066
|
|
Decrease in advances to subsidiaries
and affiliates
|
|
|
—
|
|
|
|
174,012
|
|
|
|
—
|
|
|
|
—
|
|
Net cash
generated from investing activities
|
|
|
4,590
|
|
|
|
233,802
|
|
|
|
549,124
|
|
|
|
79,865
|
|
Cash flows generated from (used
in ) financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds on exercise of stock options
|
|
|
1,144
|
|
|
|
64,946
|
|
|
|
3,286
|
|
|
|
478
|
|
Proceeds of employee subscriptions
|
|
|
—
|
|
|
|
22,187
|
|
|
|
211,054
|
|
|
|
30,697
|
|
Dividends paid
|
|
|
—
|
|
|
|
(137,216
|
)
|
|
|
(326,725
|
)
|
|
|
(47,520
|
)
|
Repurchase ordinary shares from open market
|
|
|
—
|
|
|
|
—
|
|
|
|
(251,220
|
)
|
|
|
(36,538
|
)
|
Repurchase ordinary shares
from shareholder
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,318,611
|
)
|
|
|
(191,784
|
)
|
Net cash
generated from (used in) financing activities
|
|
|
1,144
|
|
|
|
(50,083
|
)
|
|
|
(1,682,216
|
)
|
|
|
(244,667
|
)
|
Net increase in cash and cash
equivalents
|
|
|
3,220
|
|
|
|
169,331
|
|
|
|
207,643
|
|
|
|
30,201
|
|
Cash and cash equivalents and
restricted cash at beginning of year
|
|
|
5,349
|
|
|
|
10,746
|
|
|
|
169,413
|
|
|
|
24,640
|
|
Effect of exchange rate changes
on cash and cash equivalents
|
|
|
2,177
|
|
|
|
(10,664
|
)
|
|
|
(10,194
|
)
|
|
|
(1,483
|
)
|
Cash and
cash equivalents and restricted cash at end of year
|
|
|
10,746
|
|
|
|
169,413
|
|
|
|
366,862
|
|
|
|
53,358
|
|
FANHUA INC.
Note to Schedule 1
(
In thousands, except for shares
)
Schedule 1 has been provided pursuant
to the requirements of Rule 12-04(a), 5-04(c) and 4-08(e)(3) of Regulation S-X, which require condensed financial statements as
to the financial position, changes in financial position and results of operations of a parent company as of the same dates and
for the same periods for which audited consolidated financial statements have been presented when the restricted net assets of
the consolidated and unconsolidated subsidiaries (including variable interest entities) together exceed 25 percent of consolidated
net assets as of the end of the most recently completed fiscal year. As of December 31, 2018, RMB2,977,988 of the restricted capital
and reserves are not available for distribution, and as such, the condensed financial statements of the Company have been presented
for the years ended December 31, 2016, 2017 and 2018.
F-55