Fanhua Inc. (formerly CNinsure Inc.) — FY2016 Form 20-F
Period and entity: This is an annual report for the fiscal year ended December 31, 2016, not a quarterly filing. The request identifies AIFU Inc. and “2016 Q4,” but the supplied filing is for Fanhua Inc.; the summary below reflects the filing provided. Financial statements are prepared under U.S. GAAP, principally in RMB.
Business context
Fanhua is a China-focused insurance intermediary and claims-services company. It distributes insurance through agency and brokerage channels and provides claims adjusting services. Its revenue is primarily commissions and fees paid by insurance companies. Agency, brokerage and claims adjusting generated 79.7%, 13.1% and 7.2% of FY2016 revenue, respectively.
Key financial metrics
| Metric | FY2015 | FY2016 | Change |
|---|---|---|---|
| Net revenue | RMB2.828bn | RMB4.701bn (US$677.0m) | +66.2% |
| Operating income | RMB78.5m | RMB14.0m | -82.1% |
| Net income | RMB215.5m | RMB167.6m (US$24.1m) | -22.2% |
| Net income attributable to shareholders | RMB210.1m | RMB157.0m (US$22.6m) | -25.2% |
| Operating cash flow | RMB281.3m | RMB87.8m (US$12.7m) | Lower |
| Cash and cash equivalents at year-end | RMB1.115bn | RMB240.2m (US$34.6m) | Lower |
| Short-term investments at year-end | RMB2.026bn | RMB2.798bn (US$403.0m) | Higher |
| Total current assets / current liabilities | RMB3.513bn / RMB488.4m | RMB3.695bn / RMB747.1m | Current ratio about 7.2x / 4.9x |
| Total liabilities | RMB580.9m | RMB834.5m | Higher |
Operating margin fell to about 0.3% from 2.8%; net margin fell to about 3.6% from 7.6%. The company reported no short- or long-term bank borrowings at year-end 2016. Cash-flow figures are for the full year; the filing text does not provide a clear standalone Q4 cash-flow or income statement summary.
Material changes versus FY2015
- Agency revenue rose 73.8%, led by growth in life insurance agency revenue (up 209.6%) and property and casualty agency revenue (up 50.2%). Brokerage revenue rose 67.3%; claims adjusting revenue rose 10.7%.
- Selling expenses jumped 311.0% to RMB588.8m, including RMB299.9m of temporary regional marketing campaign expenses. Total operating costs and expenses rose 70.4%, outpacing revenue growth and sharply reducing operating income.
- Investment income increased 75.7% to RMB115.3m, while interest income declined 87.9% to RMB6.9m. Share of affiliate income rose 79.4% to RMB48.3m.
- Operating cash flow declined to RMB87.8m, with growth-related receivables increasing RMB271.3m; payables and accrued expenses also increased substantially. Investing cash outflow was RMB748.8m, primarily reflecting purchases and maturities of short-term financial products. Financing cash outflow was RMB216.6m, mainly for purchases of noncontrolling interests.
- Year-end cash fell despite short-term investments increasing. Management reported total current assets of RMB3.695bn and current liabilities of RMB747.1m. Much of the company’s liquidity was held in short-term investments, including trust products and asset-management plans.
Outlook, commentary, risks and unusual items
- PICC P&C suspension: On March 1, 2017, local branches verbally notified the company that PICC P&C was temporarily suspending cooperation across agency, brokerage and claims adjusting while certain PICC executives were under government investigation. PICC accounted for 26.5% of FY2016 revenue and 16.8% of year-end receivables. Management expected the suspension to reduce 2017 revenue, could not predict whether or when cooperation would resume, and said it had not recorded an impairment of the PICC receivable at that stage.
- Cost and growth priorities: Management cited life insurance growth, online platforms, expansion of its distribution network and increased outsourcing of claims adjusting as opportunities. It also cautioned that commission rates, agent costs, competition and auto-insurance pricing reform could pressure results.
- Liquidity and capital allocation: Management believed cash and expected operating cash flow would cover working capital and capital expenditures for at least 12 months. It also disclosed no bank borrowings at year-end and RMB69.0m of operating lease commitments. The company had RMB2.798bn of short-term investments; investment products carry credit, interest-rate and other risks.
- Dividend policy: Announced in February 2017, the policy calls for annual cash dividends of at least 30% of the prior year’s shareholder-attributable net income, subject to board discretion and legal and funding constraints. The first dividend was expected after the annual report; this is not a guarantee of payment.
- Other items: Fanhua completed its restructuring to direct ownership of its China operating entities in 2016 and acquired the remaining 34.9% of InsCom for cash and shares. It reported no goodwill impairment in 2016. The filing identifies RMB72.8m of uncertain tax liabilities and states that the settlement timing could not be reliably estimated. Management and the auditor concluded internal control over financial reporting was effective; the financial-statement audit opinion was unqualified.
- Principal risks: High dependence on insurance-company partners, especially PICC; regulatory and foreign-exchange uncertainty in China; competition and agent retention; online-platform execution and cybersecurity; collection of receivables; and limits on moving cash from PRC subsidiaries to the holding company. The filing also states Fanhua believed it was a PFIC for U.S. tax purposes in 2016.
Most important facts for investors to verify
- Whether PICC cooperation resumed, and the subsequent revenue, receivables and collection impact of the suspension.
- Whether the large 2016 marketing outlay was genuinely temporary and whether agency and brokerage profitability recovered after it.
- Composition, maturity, liquidity, counterparties and valuation assumptions for the RMB2.798bn short-term investment portfolio.
- Receivable aging and collection trends, particularly balances due from PICC and other concentrated insurance-company partners.
- Cash conversion, working-capital movements, and whether cash held in China can be remitted or distributed as planned.
- Actual dividend declarations and payments under the announced policy, and any tax or regulatory constraints.
- Potential tax exposure associated with the RMB72.8m uncertain tax liability and the company’s disclosed PFIC status.