Cheche Group Inc. (CCG) Earnings Call Transcript & Summary

Good day, and welcome to the Cheche Group Third Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Crocker Coulson, Investor Relations for the Cheche Group. Please go ahead.

Thank you, Betsy. Hello, everyone. Thanks for joining us to review Cheche's 2024 third quarter results. This morning, Cheche posted both the earnings release and a related investor presentation to our website, which you can find at ir.chechegroup.com. With us on the call today are Lei Zhang, Cheche's Founder and CEO; and Sandra Ji, Cheche's Chief Financial Officer. After their prepared remarks are concluded, we're going to open up the call for any of your questions. But before we begin, some statements in this conference are forward-looking within the meaning of federal securities laws. Although management believes these statements are reasonable, we can provide no assurance that they will prove to be accurate because they are prospective in nature. Actual results could differ materially from those we discuss today. Therefore, we'd like to encourage you to review the most recent filings with the SEC for risk factors that could materially impact our results. As I mentioned, the earnings results release is available on ir.chechegroup.com. We encourage you to review, in addition, the reconciliations of certain non-GAAP measures contained within that. With those formalities now out of the way, it's my pleasure to turn the call over to Lei Zhang, CEO. Lei, please go ahead.

Thank you, Crocker. Hello, everyone. We are so glad that you have joined us. The third quarter was a notable quarter for us. Cheche's results reached a profitable inflection point, recording net income on both a GAAP and adjusted basis. The company's shift to profitability serves as a concrete proof that our compelling value proposition and focus on effective operations are paying off. Cheche continues to offer the largest auto insurance technology platform in China. We lead the industry by providing customized intelligent software and embedded insurance that gives consumers great choice and convenience. Between 2021 and the third quarter of this year, Cheche has provided quotes for almost 50 million vehicles, placed over USD 9 billion in written premiums and collaborated with 100 insurance carriers. Chinese NEV manufacturers continue to lead the world in the production and sales. Between January and October of this year, Chinese NEV makers sold 1.7 million vehicles, an increase of 34% over prior year. NEV sales overtook conventional ICE autos in July 2024, and they now make up majority of new vehicle sales each month. This change in the market is profound implications for the auto insurance ecosystem. Auto insurance is increasingly sold and renewed through OEM apps and vehicle screens rather than traditional brokers. Cheche currently partners with 14 different NEV manufacturers, including most of the largest industry players. We anticipate that over the next 3 years, premiums generated through OEM channels will exceed RMB 200 billion. According to analysts at BOCOM International, premium for NEV insurance are expected to approach RMB 500 billion by 2030. The top 3 auto insurers realized they need to participate in this market, but they are struggling to make money due to higher accident rate and higher claims ratios of NEV. However, the Chinese government has recently widened the band for different pricing, providing insurers with great latitude to reward positive driver behavior. Cheche's platform offers to capability for more personalized auto insurance pricing. We also enable NEV manufacturers to automate claims management and repair routing to validate claims, manage the cost of repairs and reduce the risk of fraud. At the end of the third quarter, the number of embedded policies sold on Cheche's platform was up to 140% year-over-year to 200,000 policies. NEV gross premiums grew 120% from prior year to USD 126 million over the same period. We launched the customized system for Baidu JI YUE, which offers the variety of products and solutions, both online and off-line. As NEV industry matures and underwriting becomes more precise, the sustainably higher margins of our growing number of NEV policies will become apparent as the revenue mix shifts. Our agreement with Great Wall Motor Company insurance company provided our transaction system to support its direct sales network in more than 20 cities nationwide, with plans to develop additional solutions for traditional automakers within -- in the next 24 months. Partnerships with insurance carriers are other essential component of our strategy while we have maintained long-term relationships with mainstream insurance companies in China. This quarter also marked our first collaboration with the foreign owners insurance carriers as we signed an agreement with Tokio Marine's Chinese subsidiary, enhancing our service capabilities and opportunities to scale. We are also launching new SaaS and data analytics tools to enable medium-sized insurers to compete more effectively in underwriting auto insurance for both NEV and ICE vehicles. Expanding the number of active participants in the market is essential to bring the benefits of the competition to consumers. Looking ahead, our technology road map prioritizes NEV manufacturers and embedding ourselves across the life cycle as Level 2+ to Level 3 self-driving and above become more common on China's roads. OEMs and insurers will increasingly need to determine if the cause of the accident is a result of human error or failure of the autonomous driving system. Cheche will play the role of the trusted third party by embedding this critical data on independent authority platform so that OEMs, insurers and consumers can have higher confidence in the assignment of liability. Our unique perspective and the comprehensive capabilities contribute to thriving digital insurance industry that adds value for our partners. In the longer term, we are working to extend our partnerships with auto manufacturers beyond China and into additional regions such as Southeast Asia and the Middle East. Given our broad experience and success in China, the most substantial NEV market in the world, and inherent data within our platform would provide us with advantage over local insurance companies when underwriting embedded policies in these regions. Having deep confidence in the company, I intend to continue purchasing shares in the open market during available trading windows. Moreover, the company is planning to adopt a share buyback plan once the Board approved it. We are delighted with our accomplishments and look forward to capitalizing on the future opportunities. I will now turn the call over to our CFO, Sandra. Thank you.

Thanks, Lei. I want to begin by touching on our third-quarter operational and financial highlights before taking questions. The total written premiums placed for this quarter increased 4% to RMB 5.9 billion or USD 800 million. The total number of policies issued grew 5% in this quarter to 4.2 million. As Lei mentioned before, 292,000 policies and RMB 884.2 million of corresponding premiums were embedded in NEV deliveries, growing 149.6% and 121.6%, respectively, year-over-year. Currently, the insurance policies on NEVs enjoy lower commission rates than ICEs due to the reduced profitability of insurance carriers. However, we can secure significantly higher margins on these policies. That means we can -- that may have positive implications for our bottom line as the mix shift continues. In terms of our net revenues, we generated RMB 850.5 million or USD 121.2 million in the third quarter, an increase of 3.3% year-over-year. The cost of revenues in the third quarter was RMB 808.1 million or USD 115.2 million, up 3% from the prior-year quarter. We also reported a 53.6% drop in selling and marketing expenses to RMB 18.1 million or USD 2.6 million, primarily due to decreased staff costs and share-based compensation expenses. The general and administrative expenses were also lower this quarter at RMB 20.4 million or USD 2.9 million from RMB 34.8 million in the prior year quarter, mainly due to decreased share-based compensation and professional service fees. Research and development expenses decreased 24.5% to RMB 10.2 million or USD 1.4 million, mainly driven by lower share-based compensation expenses and partially offset by higher staff costs. The total cost and operating expenses decreased by 1.8% to RMB 856.8 million or USD 122.1 million from RMB 872 million in the prior year quarter, mainly due to the decrease in share-based compensation expenses and partially offset by an increase in cost of revenues. Excluding share-based compensation expenses, amortization of intangible assets related to acquisition and the listing-related professional service fees, the total adjusted cost and operating expenses increased 3% from the prior-year quarter. Net income turned positive for the first time in the quarter, resulting in RMB 4.1 million or USD 0.6 million compared to the RMB 55.4 million loss in third quarter of 2023. Adjusted net income for this quarter was also positive, improving to RMB 2.6 million or USD 0.4 million from RMB 0.6 million adjusted net loss in the prior year quarter. Turning to our balance sheet. We reported RMB 194.6 million or USD 27.7 million in cash, cash equivalents and short-term investments. As for guidance, we are affirming our 2024 full-year guidance. The full-year net revenues are expected to range from RMB 3.5 billion to RMB 3.7 billion, representing an increase of 6.1% to 12.1% compared to the full year of 2023. Total written premiums placed are expected to range from RMB 24.5 billion to RMB 26.5 billion, representing an increase of 8.4% to 17.3% compared to the full year of 2023. With that, we'll be happy to address your questions.

[Operator Instructions] The first question today comes from Allen Klee with Maxim.

Congratulations on very strong results and everything you're doing. Your profitability came over 1.5 years earlier than what I was modeling, so quite impressive. My first question has to do with your partnerships. You said you have 14 NEV companies now and you're expanding with insurance companies. How do you think about kind of as you sign these, how they like ramp up and can help translate into revenues?

Okay. Yes. I will answer in Chinese. Thank you. My colleague can translate it to English. [Foreign Language]

[Interpreted] So as, Allen, you just mentioned, right now, we are cooperating with 14 OEMs. We are providing insurance transaction service for them. So we are actually working to extend our scope of partnership with the existing brands. For example, we are currently providing services for 2 vehicle models for BYD, and in the future, we plan to extend to provide more service for their more brands.

That's very positive. You mentioned that for NEVs, the rates are lower since it's less profitable business for the insurers, but your company can get better profitability out of them. Could you just explain how that -- why that is?

Okay. [Foreign Language]

[Interpreted] Okay. So basically, for the NEV insurance, the COR is high and also the claims ratio also high. But for us, we do not take the risk of claiming. We are just a -- we are a platform company. We have the insurance companies and the OEMs to create a win-win situation. So through our platform, we can provide the OEMs to provide a better pricing for their car owners through our models, and we can provide a better and more cheaper insurance prices. So that's why we believe that we're going to have a huge increase in this market, and we're going to have a strong profitability.

With -- you talked about self-driving and how you're employing that technology to give greater confidence of where -- what might have caused a potential claim -- an accident. Can you explain what you're actually providing and where -- how you're thinking about rolling this out?

Okay. [Foreign Language]

[Interpreted] So basically, there are 2 aspects. The first one is we are sharing the data with the OEMs because as we all know, the NEVs, they are embedded with intelligent devices. So our data could help to improve efficiency as well as decrease risk, and that's the first one. The second is the intelligent driving is becoming more and more popular. And as you can see, the Level 2 to Level 3 is becoming more popular in China. So basically, there are around 70% of NEVs are equipped with intelligent driving services. So when accident occurs, when the intelligent driving is working, we can help to decide whether this accident is because of the driver or is because of the equipment going wrong. So that's our capability. And basically, we are leading in this industry. Thank you.

That's great. You talked about potentially expanding in -- within Southeast Asia and the Middle East. Do you think that would -- the way that could potentially happen is creating an online marketplace in other countries? Or would it be something else?

Okay. [Foreign Language]

[Interpreted] So basically, as for our expansion strategy, you mention -- we have just mentioned the Southeast Asia, the Middle East and even some countries in Europe. We're actually doing this following our existing clients such as the 14 NEV makers we just mentioned. When they are going abroad -- when they're going overseas, we follow them to go overseas. We can help these NEV makers to build connections with the local companies just like what we did in China. And we can provide the systems and software and a full-suite operation services as well. Thank you.

Could you talk about how non-auto insurance and your SaaS offerings, how they performed and how you're thinking about those 2 areas strategically to potentially grow them?

[Foreign Language]

[Interpreted] So for the non-auto insurance, we have several lines. And the first one is the insurance products that are related with autos. For example, the liability insurance, basically, they are sold bundled with the auto insurance. And the second one is the property insurance and health insurance. These are all the extensions of our product and service model. Thank you.

The next question comes from Steve Silver with Argus Research.

So looking at the quarter, the growth in revenues outpaced the growth in gross expenses. So it looks like the gross margin continues to be around the 5% range. Just curious as to your thoughts about the expansion of gross margins over time as the platform continues to bring new value-added services onto the platform. And then similarly, on the operating expense line, do you expect the operating expenses to continue to decline as a percentage of revenues moving forward?

Thank you. This is Sandra. I will answer this question. Yes, you're quite right. Actually, we are quite confident with the gross margin, yes. We believe the gross margin of our business will be -- keep increasing along with the mix of our revenues changes. As we mentioned, because we enjoy a way higher margin in NEV insurance market than in ICEs, so that means the more business from NEV insurance, the higher the margin we will have. So that's the logic. And apparently, yes, that will become a reality soon because our total business growth rate is only single digit. But as for the NEV insurance market, the growth rate is over 100%. So that means we will -- that means the insurance -- the NEV insurance revenue will account for more and more percentage from the total picture. That's the logic. And besides that, as Lei mentioned before, we are also planning to launch new SaaS and data analytical tools related to NEV insurance to the market. That will bring more high-margin revenue to our total picture. Yes, so that's another factor, will contribute to our gross margin growing in the future. But in the short term, the gross margin may fluctuate on a quarterly basis due to the different market condition in short term. But definitely, for the long term, the trend -- the growing trend will be not changed. So the gross margin rate will be increasing going forward.

[Operator Instructions] The next question comes from Rui Guo with CICC.

Congrats on the 3Q results. And I have 3 questions. The first is, how much do you believe, in the near future, would NEV insurance account for the total motor insurance market? And secondly, within the NEV insurance market, how much do you believe it comes from NEV manufacturers related or affiliated insurance? [Foreign Language]

[Foreign Language]

[Interpreted] So basically, we can see from the current forecast, the NEV insurance in last year has reached RMB 800 billion. And this year, it's going to -- we -- it is expected to reach RMB 150 billion. So basically, we expect that in the 3 -- in following 3 years, NEV insurance will take around 40% to 50%, basically half of the total insurance market -- auto insurance market.

[Foreign Language]

[Interpreted] So -- and because of the NEV insurance, the market -- or NEV insurance is growing hugely, the OEMs, they are taking highly value of insurance because its entry is important portal for the after-sales services, and the after-sales services can bring important part of revenues to these companies. So that's why they decided to work with us, and we provide a system and SaaS software for them. So basically, we also -- we expect that in the following 3 years, the insurance -- the auto -- NEV insurance controlled by the OEMs, we are going to take at least 1/3 of the market.

This concludes our question-and-answer session. I would like to turn the conference back over to the company for any closing remarks.

We appreciate you taking time to join us on the call today. If you have any follow-up questions, please reach out to Investor Relations. Thank you. Have a wonderful day. Bye-bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]