Eltek Ltd: A Company Poised And Ready To Take Advantage Of The Global Supply Chain Shift – Eltek Ltd. (NASDAQ:ELTK)


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Introduction

(Disclosure: I am a 5%+ shareholder of ELTK and an Activist Investor in the Company. All statements not sourced are my opinion only. Full disclosure statement appears at the end of this article.)

Eltek Ltd. (NASDAQ: ELTK) is a high-end global supplier and manufacturer of sophisticated and highly advanced Printed Circuit Boards (PCBS) based in Petah Tikva, Israel. Following Phase 1 of a turnaround plan, the Company delivered an operating profit as well as a net profit for three consecutive quarters. ELTK is a premiere leader in PCBs, in business for 50 years, and its customers include leading companies in the defense, aerospace, and medical industries in Israel, the United States, Europe, and Asia. Additionally, ELTK is benefited from ownership and control by Nistec, a much larger organization.

“The Company is controlled by Nistec Golan Ltd (“Nistec Golan”). Nistec Golan is controlled indirectly by Mr. Yitzhak Nissan.”

-Source: SEC: ELTK INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Getting to Know ELTK

Understanding the Growing High-End PCB Market

The general PCB industry’s expected to grow to “$89.7 billion by 2024 with a CAGR of 4.3% from 2019 to 2024.”

Source: GlobeNewswire, Inc. – market report published by Lucintel

Within this growing PCB market, the high-end Flexible Printed Circuit Boards, “market size expected growth is 11.2% CAGR through 2025.” ELTK is a Recognized Worldwide Leader in this high-end growing tech niche and I believe ELTK will benefit through continued revenue and profit growth.

“The ongoing trend of miniaturization and development of multi-feature electronic devices is pushing PCB manufacturers to produce highly dense and high-speed flexible PCBs. The market is highly consolidated with the top five manufacturers accounting for major share and generally determines the overall trend. Key players operating in the global market include” Eltek Ltd and others.

Source: Printed Electronics NOW

Thomas Publishing Company lists ELTK as number 4 of the Top Global PCB Manufacturing Companies (Source: Thomasnet.com)

Phase 1 Turnaround – How ELTK Became Profitable

Increased margins through a mix of product churning and better order fulfillment selection, in addition to management of their expenses for cash flow, made ELTK profitable. These changes were not short-term cuts at the expense of long-term growth. ELTK continued to maintain GAAP profitability during in both Q2 and Q3 while growing revenue to the highest in years in Q3 and all the while increasing margins.

CEO Eli Yaffe stated during Q1 2019 earnings call:

“We are glad that this quarter results reflect the first stage of our turnaround plan, which we started during the last quarter of 2018. We identified the products that were underpriced and have declined such orders in order to increase profitability. We’re also closely monitoring our personnel expenses with a focus on cash flow.”

“Our revenue in the first quarter of 2019 was $8.7 million as compared to revenue of $8.9 million in the first quarter of 2018.”

Source: Seeking Alpha: ELTK Q1 2019 Results – Earnings Call Transcript

For Q1 2019, ELTK delivered $242,000 net profit, providing net cash from operating activities of $1.6 million compared to net cash used of $859,000 during the first quarter of 2018.

Source: SEC: ELTK Reports 2019 First Quarter Financial Results

Long Term Contracts

Company Press Release, January 9, 2020.

“Eltek Ltd. Received an Additional Order for Up To $1.4 Million From a Governmental Authority. In addition, to enable the execution of the project, the customer shall lend the Company, for no consideration, equipment in a total value of approximately $630,000.”

CEO Eli Yaffe, commented: “The original selection of Eltek by this customer attests to the trust in the Company’s technological capabilities.” (Source: SEC: Company Press Release)

US-China Trade-War, Supply Chain Shift, Coronavirus

Companies are in the process of diversifying and shifting their supply chains out of sole reliance on China. The trade-war and now the coronavirus accelerated this supply chain shift.

Forbes states, “Coronavirus Could Be the End of China as A Global Manufacturing Hub.” (Source: Forbes Mar 1, 2020)

I believe ELTK and Nistec are in a leading position to benefit from this global supply chain shift.

Info Graphic Source: Author’s – Michael McGauley

Many companies, including the largest in the world, are having difficulties locating alternative manufacturing centers. Vietnam and Thailand are two alternative locations sometimes mentioned; however, I believe Israel is another potential beneficiary because its technological capabilities.

Two news articles supporting and detailing the desires and challenges in shifting the manufacturing supply chain are:

“Apple, Microsoft, Google look to move production away from China. That’s not going to be easy.”

-Source: CNBC – MAR 4, 2020

“Tesla delivered cars to customers in China with lower-performance Autopilot hardware than promised. Tesla blamed its decision to use the older version of their hardware in new Model 3s on supply chain disruptions.

-Source: CNBC – MAR 4, 2020

Backwinds from Macro-environment

During the 2019 Q2 conference call, CEO Eli Yaffe said, “The macro-environment and tariffs in the U.S. market for the products imported from China may provide a positive backwind for the segment of military product that Eltek produces.”

(Note: My name is spelled wrong in the earnings call transcript.)

I asked for further clarification about the backwinds, CEO Eli Yaffe answered,

“What I meant when I speak about backwind is tariff that was changed in United States mainly for import from China for military products, not for mobile. And since we are partners and players in the defense market, it’s a backwind for us.”

-Source: Seeking Alpha: ELTK Q2 2019 Results – Earnings Call Transcript

Three months later during the Q3 call earnings call CEO Eli Yaffe again mentioned backwinds.

“We are glad that this quarter results continue to reflect the implementation of our previously announced turnaround plans. Even so, it is still not reflected in our revenue; the macro-environment enters in the U.S product imported from China may provide positive backwind for the segment of the military products that Eltek produce. The increase in our total line reflects a continued market recognition of our high quality and reliable products.”

-Source: Seeking Alpha: ELTK Q3 2019 Results – Earnings Call Transcript

ELTK is a Special Microcap Company with a 50 Year History and Support from Nistec

Founded in Israel in 1970, ELTK’s survived and competed at a world-class level for 50 years. I don’t know any other micro-caps that can make this claim. Additionally, Nistec provides sales channels and other synergistic savings.

As noted by the company,

RELATED PARTY BALANCES AND TRANSACTIONS

PCB purchases by Nistec – Nistec purchases PCBs from the Company solely to provide assembled boards to its customers and not for re-sale.

Soldering and assembly services – The Company may acquire soldering services and/or purchasing services from Nistec.

Insurance expenditures – The Company may share with Nistec costs of insurance consulting and insurance premiums.

Employees social activities – The Company may purchase social activities for the benefit of its employees together with Nistec.

Marketing activities – The Company may purchase services together with Nistec.

-Sources: SEC: ELTK Form 20-F Annual Report

Nistec also granted ELTK loans at very favorable interest rates and terms. (SEC NOTICE OF ANNUAL GENERAL MEETING OF SHAREHOLDERS – Section INTEREST AGREEMENT WITH OUR CONTROLLING SHAREHOLDER)

History of Shareholder Friendly Benefits

Early in 2019 ELTK, was trading around in the mid-$1 range after losing money for several years, going through a 5 to 1 reverse stock split, and needing recapitalization. ELTK’s Board and the executive team chose to offer existing shareholder subscription rights whose terms and conditions were generous and favorable, not to a Wall Street investment firm, but instead to mom-and-pop investors. Investors in ELTK had a first chance opportunity to participate in the recapitalization. Unlike typical micro-cap company’s that continue issuing new shares and diluting to raise capital, this was the first time ELTK ever issued additional shares under Nistec Golan Ltd. ownership.

Details of the Subscription Rights:

“We will distribute to you five (5) subscription rights for every three (3) ordinary shares that you own on the record date. Your rights will be rounded down to the nearest whole number and accordingly, no fractional rights will be issued in the rights offering. Each right entitles the holder to purchase, at a price of $1.464 per share, one ordinary share.”

-Source: SEC: ELTK SUBSCRIPTION RIGHTS TO PURCHASE

Shareholders who purchased these rights potentially made up to about 5x profit when the Company turned profitable in 2019 Q1.

Financial Metrics

P/E Ratio: Sometimes, P/E is a simple, easy way to value a company; however, it does not apply in every situation, and I believe it is misleading when looking at ELTK. For example, finance.yahoo.com showed the P/E ratio of ELTK about 13.91x on March 3, 2020, when the stock was trading for about $3.50.

Source: Yahoo Finance (March 3, 2020)

However, this P/E ratio states it is TTM (Trailing Twelve Months). In the case of ELTK, they did not become profitable until Q1 2019; hence data before the company turnaround is likely negatively impacting the P/E ratio and other financial metrics. I believe its a mistake using those metrics for value decision making without understanding the details. If ELTK continues to maintain profitability for a 4th consecutive quarter, assuming all else is equal, then the PE should be lower.

Other statistics, such as a 52-week range, EPS (TTM), will likewise only be updated to relevant post-turn-around metrics sometime after the 2019 Q4 earnings release.

Price-To-Sales Ratio:

Calculated by using Market Cap / Total Revenue over the past 12 months.

Using the Market Cap of $15.115M as March 3, 2020, and a TTM Revenue of $34.040M, the most recent price-to-sales ratio is a mere 0.44x indicating the Company is severely undervalued. A 0.44x price-to-sales ratio is low for a growth-oriented company in an industry undergoing expansion and favorable macro-economic factors moving into the future.

Source: Yahoo Finance: Eltek Ltd. (ELTK) Income Statement

Historical Background

A Brief Explanation of the Past 1 Year Stock Chart:

Source: Yahoo Finance: Eltek Ltd. (ELTK) Interactive Stock Chart, Analysis and Annotation: Author’s – Michael McGauley

In 2018, ELTK was losing money. A new CEO Eli Yaffe, and CFO Alon Mualem, took over to make the changes needed to make ELTK profitable.

The new executive team put together and executed a successful phase 1 of a turnaround plan detailed below. Since becoming profitable in Q1 2019, ELTK’s continued maintaining its GAAP profitability for all subsequent quarters.

Q1 Price Spike – GAAP Profitable

The market was shocked about the profitability news, and the stock soared 550% in two days. Given the exuberant reaction from the report and the known fundamentals at that time, it is not surprising that the stock had a bit of a pullback. However, the turnaround was real.

“Chief Executive Officer Eli Yaffe said that the Company was delighted that the results are a reflection of the first stage of the implementation of its turnaround plan that commenced in Q4 2018. He added that the Company continues with its effort of enhancing operating efficiencies, improving customer experience, formulating effective sales strategies as well as its continued implementation of the plan to achieve sustained profitability.”

-Source: SmallCap Exclusive

Diagnosing More Recent Trading and Volatility (Q2 2019, Q3 2019, and COVID-19)

Q2 2019 Price Spike

Momentum traders piled into ELTK before the Q2 earnings release in anticipation of an excellent report and given the previous price spike ELTK exhibited following Q1 earnings. For Q2 net cash provided by operating activities was $1.3 million, and ELTK had a $7,000 operating profit as compared to an operating loss of $721,000 in the second quarter of 2018. However, while ELTK was profitable, most of the earnings came from an insurance payment on broken equipment required for manufacturing operations. “Other Income was $871,000 in the second quarter of 2019, mainly attributable to receipt of payment on an insurance claim made.” (Source: SEC: ELTK Reports 2019 Second Quarter Financial Results)

Following the Q2 earnings report, ELTK went back to trading in the mid-three-dollar range.

Q3 2019 Price Spike

ELTK delivered its best quarter in years.

“As Eli mentioned, revenues for the third quarter of 2019 increased to $9.3 million, compared to revenues of $8.5 million during the third quarter of 2018. Gross profit increased from $973,000 or 11.4% of revenues in the third quarter of 2018 to $1.8 million or 18.9% of revenues in the third quarter of 2019.

During the third quarter, we had an operating profit of $568,000 as compared to an operating loss of $307,000 in the third quarter of last year. Net profit was $391,000 or $0.09 per fully diluted share compared to a net loss of $463,000 or $0.23 per fully diluted share in the same quarter last year.”

-Source: Seeking Alpha: Eltek Ltd. (ELTK) CEO Eli Yaffe on Q3 2019 Results – Earnings Call Transcript

Traders drove the shares of ELTK up to a high of $5.55 two days before the earnings release. Many people perceiving a downward series of spikes based upon Q1 and Q2, set their trading strategy to sell the stock before earnings. Examining the trading around the Q3 earnings release in the table below shows this activity. ELTK stock initially spiked on November 15th and 18th; however, the high $5.55 was lower than the spike, which occurred before Q2 earnings. ELTK then started to sell off November 19, the day before earnings on November 20. By the close of trading on December 20, the day of earnings, ELTK was down to $3.96 per share.

ELTK Historical Price Table Q3 Earnings

Day

Fri

Mon

Tue

Wed

Thu

Date

15-Nov-19

18-Nov-19

19-Nov-19

20-Nov-19

21-Nov-19

Open

3.88

4.18

4.82

5.03

3.82

High

4.12

5.55

5.03

5.2

3.89

Low

3.73

4.16

4.33

3.52

3.62

Close*

4.06

4.68

4.54

3.96

3.69

Volume

45,900

1,186,700

364,900

727,000

171,100

Comments

Start of Price Runup

High Price 2 Days before earnings

1 Day Before Earnings First Selloff

Earnings Release Selloff

Back to Trading in the $3 Range

Data Source: Yahoo Finance: Eltek Ltd. (ELTK) Stock Historical Prices & Data

Why the Selloff After Q3 Earnings?

I believe, going into the Q3 earnings release, momentum traders, including short traders, were counting on the stock to go up before the earnings release and go down on “sell-the-news” mentality as per the trend of the prior two quarters. To the shorts’ surprise, the Q3 earnings were ELTK’s best in years. Caught on the wrong side, and facing initial upward momentum from the earnings report, shorts ensued to devalue the stock in the premarket and early trading to rattle the short-term momentum traders looking for a sudden rise in the price. The shorts succeeded in shaking out the upward momentum players and changing the momentum of the stock towards a downtrend.

Looking at short interest report information in the table below, we can see how shorts contributed to the share price fall following Q3 earnings. The short interest in ELTK spiked to an all-time high of 142,662 shares on 12/13/2019. The only previous time ELTK had such a substantial short interest was after the exuberant spike in ELTK stock to $11.56 per share following Q1 earnings.

Short Interest Table

SETTLEMENT DATE

SHORT INTEREST

% Change

COMMENTS

5/15/2019

590

-85.56%

5/31/2019

128,020

21598.31

After Q1 Eltek Popped to $11.56 per share 11/5/2019

6/14/2019

66,727

-47.88

6/28/2019

87,109

30.55

7/15/2019

52,974

-39.19

7/31/2019

46,769

-11.71

8/15/2019

41,498

-11.27

8/30/2019

60,871

46.68

9/13/2019

80,490

32.23

9/30/2019

31,101

-61.36

10/15/2019

31,300

0.64

10/31/2019

27,453

-12.29

11/20/2019

Q3 Earnings Report

11/15/2019

44,309

61.4

11/29/2019

135,734

206.34

First Short Interest Report Following Q3 Earnings

12/13/2019

142,662

5.1

The all-time highest number of short shares

12/31/2019

115,302

-19.18

1/15/2020

123,431

7.05

Shorts increased after a great news release of government contracts.

1/31/2020

20,906

-83.06

2/14/2020

15,681

-24.99

2/28/2020

?

?

Next dissemination date of short interest (3/10/2020)

Data Source: NASDAQ: Eltek Ltd. Ordinary Shares (ELTK) Short Interest

COVID-19 – Coronavirus Impact to Stock Price

Most recently, ELTK stock price fell with the general market coronavirus fears. The stock went from low $4 range to a low of $3.23 on Friday, February 28. However, this fall in stock price occurred on low single-digit % outstanding share volume. See Coronavirus Stock Price Impact Table below.

Coronavirus Stock Price Impact Table

Day

Tuesday

Wednesday

Thursday

Friday

Monday

Date

25-Feb-20

26-Feb-20

27-Feb-20

28-Feb-20

2-Mar-20

Open

4.06

3.89

3.89

3.51

3.53

High

4.06

3.94

3.89

3.52

3.64

Low

3.86

3.82

3.66

3.23

3.36

Close*

3.96

3.88

3.66

3.34

3.5

Volume

21,100

27,700

40,300

58,800

15,200

% of Outstanding Shares Traded

1.64%

2.15%

3.13%

4.56%

1.18%

Rebutting a Potential Short Argument of Additional Shares

Shorts traders may try to make the following false argument: “ELTK filed a registration for additional securities and ELTK stock will collapse upon issuance of $10 million of securities that are 60% of their market cap.”

My research shows this case is unlikely based on constraints within the F-3, specifically preventing any significant dilution.

Those constraints in the SEC F-3 filing state:

“The aggregate maximum offering price of all securities covered by this Registration Statement will not exceed $10,000,000.”

“In no event will we sell securities pursuant to this prospectus with a value of more than one-third of the aggregate market value of our Ordinary Shares held by non-affiliates in any 12-month period, so long as the aggregate market value of our Ordinary Shares held by non-affiliates is less than $75,000,000.”

The aggregate market value of “outstanding Ordinary Shares held by non-affiliates on August 7, 2019“, “was approximately $4.9 million.”

Based on the above, if ELTK had issued securities on August 7, 2019, then the maximum value would have been $1.6 million, or 10.6% of its market cap at that time.

Example Calculation: One-third of $4.9 million is approximately $1.6 million. ELTK traded at a high of $3.41 on August 7, 2019, with a market cap of roughly $15 million (slightly lower than today’s market cap). Given this, $1.6 million is 10.6% of $15 million.

Additionally, as of this time:

The registration filing was on 2019-08-08. It is now March 2020, 7 months after the initial registration, and there is no issuance of additional securities.

CFO Alon Mualem, during the Q3 earnings call, described the filing as a baby shelf prospectus “to provide the company the ability to raise funds, if market condition[s] will support such fundraising.” (Q3 Earnings Call Source: Seeking Alpha: Eltek Ltd. (ELTK) CEO Eli Yaffe on Q3 2019 Results – Earnings Call Transcript)

Lastly, an assumptive question on the Q3 earnings call asked about “future potential offerings to raise capital for the company to continue operations.” CFO Alon Mualem responded it was to “provide the company the ability to raise funds if market condition[s] will support such fundraising.” Subsequently, when asked if, from a cash flow perspective, ELTK is in “financially stable condition leading into 2020 at this point?” CEO Eli Yaffe stated, Our current cash flow is positive.

ELTK does not need the money “to continue operations,” if they were in such dire need cash for operations, they would have issued the securities by now. Speculative productive uses of the potential funds are growth initiatives or paying down debt to shore up the balance sheet. CEO Eli Yaffe said, “we’re all focused on expanding our business.”

For all these reasons, I view the SEC F3 Registration filing for possible additional securities as favorable and within the interest of shareholders.

Why I Invested in ELTK

The market has not yet recognized ELTK is a profitable and robust global leader in the fast-growing high-end PCB manufacturing space and a potential beneficiary to the worldwide supply chain shift.

I believe ELTK is significantly undervalued. Neither the current fundamental value nor the significant longer-term growth potential is recognized yet. Potential new longs are being gifted a low entry point due to market mispricing.

Even though investing in a microcap stock is considered highly risky, this is a particular case microcap. With a 50-year business history, three consecutive quarters of GAAP profitability and revenue growth, favorable macroeconomic conditions, world-leading technology, control, and ownership by Nistec, ELTK is at a real competitive advantage.

After doing months of due diligence, and completing my 5+% purchase of ELTK, I visited ELTK’s factory and toured all of the Nistec facilities. Unlike some activist investors, I fully support ELTK’s management team and look forward to working with Nistec owner Mr. Yitzhak Nissan, CEO Mr. Eli Yaffe, and CFO Alon Mualem in the Company’s evolution.

Eltek is an excellent company with the right tech in the right space at the right time.

Disclosure

I am long ELTK, and I own 5%+ of the Company as filed in Schedule 13D with the SEC. Information presented in this article is my own opinion and is for informational purposes only; it does not intend to make an offer or solicitation for the sale or purchase of any securities, and should not be considered investment advice. Be sure to first consult with a qualified financial adviser and tax professional before implementing any strategy discussed here. Information provided reflects my views as of specific periods; such opinions are subject to change at any point without notice. I will not trade in ELTK during the next 72 hours.

Disclosure: I am/we are long ELTK.





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Northwest Natural Gas Company (NWN) CEO David Anderson on Q4 2019 Results – Earnings Call Transcript


Northwest Natural Gas Company (NYSE:NWN) Q4 2019 Earnings Conference Call March 2, 2020 11:00 AM ET

Company Participants

Nikki Sparley – Director, Investor Relations

David Anderson – President and Chief Executive Officer

Frank Burkhartsmeyer – Senior Vice President and Chief Financial Officer

Justin Palfreyman – Vice President, Business Development

Conference Call Participants

Chris Ellinghaus – Siebert Williams Co.

Aga Zmigrodzka – UBS

Tate Sullivan – Maxim Group

Operator

Good morning and welcome to the NW Natural Holding Company Fourth Quarter Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Nikki Sparley, Director of Investor Relations. Please go ahead.

Nikki Sparley

Thank you, Grant. Good morning everyone and welcome to our fourth quarter 2019 earnings call. As a reminder, some of the things that will be said this morning contain forward-looking statements. They are based on management’s assumptions, which may or may not occur. In addition, some of our comments today reference non-GAAP adjusted measures. For a complete reconciliation of these measures and other cautionary statements, refer to the language and reconciliation at the end of our press release. We expect to file our 10-K later today. As mentioned, this teleconference is being recorded and will be available on our website following the call. Please note these calls are designed for the financial community. If you are an investor and have additional questions after the call, please contact me directly at 503-721-2530. News media may contact Melissa Moore at 503-220-2436.

Speaking this morning are David Anderson, President and Chief Executive Officer and Frank Burkhartsmeyer, Senior Vice President and Chief Financial Officer. David and Frank have prepared remarks and then we will be available, along with other members of our executive team to answer your questions.

With that I will turn it over to David.

David Anderson

Thanks, Nikki and good morning and welcome everybody to our fourth quarter and full year 2019 earnings call. We closed out 2019, our 160th year in business with very strong financial results and significant progress on our long-term strategic objectives. And most importantly, we kept our commitment to customers by providing them with safe and reliable service. Earnings per share from continuing operations was $2.19, but that included a one-time regulatory pension charge of $0.22 per share related to the Oregon commission order we have discussed in previous calls. Excluding that this allowance, on an adjusted non-GAAP basis, earnings per share from continuing operations was $2.41 compared to $2.33 in 2018. These results reflect new rates in Oregon and Washington, gas storage service beginning at North Mist, customer growth and some colder weather and additional fee revenue earlier in the year. Frank will walk through the financial results in detail in a minute.

But in summary, we had a very strong year. This financial growth is a product of multi-year efforts, a keen focus on our long-term plan and a proof that small steps do add up. Three years ago we went through a comprehensive strategic planning effort that explored different views of the future and how best to position our company for continued success. Our management team thoughtfully determined a path to proactively address the evolving needs and priorities of our business. We also validated the guiding pillars of our business strategy that we live by each day. First and foremost, safety is paramount in everything we do. That is followed very closely by providing superior customer service. Our regulatory relationships in providing a constructive approach for all stakeholders, is also essential. In addition, we must continue to maximize returns and enable growth in our natural gas and water utilities.

And finally, environmental stewardship remains a core value. We can and will strive to leverage our modern system, technology and our passion to achieve a low carbon future. Executing on these pillars has culminated in many achievements in 2019 and we will walk through those accomplishments in a moment. As you know, growth is not always linear and in certain years the focus will be on initiatives that set the stage for future growth. 2020 for us is such a year. I’ll end this morning with our plans going forward as we transition to our next stage of growth.

On the operations front in 2019, we continue to make significant safety and reliability investments. Our pipeline system is one of the most modern tightest systems in the nation, and we’re working hard to keep it that way. In 2019, we began several reinforcement projects to support growth in and around the Portland metro area. These projects are expected to be completed in 2020. We’re also planning upgrades to our highly valuable Mist gas storage facility. Colder weather coupled with reduced pipeline capacity from Canada created supply challenges early in 2019. But we were able to maintain service to our customers and other utilities in the region because of the Mist storage field. Our region has been depending on Mist since the 1980s and this past year, we completed the latest expansion North Mist. The expansion provides an innovative no-notice service that supports a local utility as they manage the volatility of the electric grid integrate renewables. Mist delivers energy to our region at the most critical times with only a single pipeline serving our territory. Storage will continue to be essential for ensuring reliable service. And last year, we also advanced multiple efforts to harden our infrastructure and facilities in preparation for natural events like seismic activity. For example, we are currently moving into a new operation center that was built to continue functioning after an earthquake.

We have also made progress on a master plan to upgrade and retrofit our service facilities with the resiliency in mind. Second only to safety is our legacy of service. Our customers are central to our success here at Northwest Natural. I’m thrilled the customers once again gave Northwest Natural the highest score in the nation among large natural gas utilities in the JD Power’s Residential Customer Satisfaction Study. Adding to the good news, business customers ranked us best in the West. I’m proud of all of our employees who make this exceptional service happen every day. We work hard to continue anticipating and meeting our customers’ needs. Having a constructive regulatory agenda and a collaborative approach to balancing stakeholder needs is crucial. After an extended period without rate cases, we knew our strategic goals had to be focused on proactive communications and education with all of our stakeholders.

Due to our robust capital plan as well as cost pressures, we took the necessary step at the end of 2019 and filed an Oregon general rate case. The request includes a revenue increase of $71.4 million based on a 50-50 cap structure, an ROE of 10%, cost of capital of 7.3% and an increase in average rate base of $270 million. The Oregon Commission and stakeholders have 10 months to review the case and we expect new rates to be effective November 1. We continue to see great economic conditions in our service territory. Consequently, low unemployment translated to income gains for workers across Oregon as average earnings rose 4% last year. This was the eighth highest employee earnings growth in the nation. The housing market is remarkably strong even after a peak a few years ago. In the Portland area, single family permits were up 11% in 2019. Multifamily permitting recovered from a slowdown in 2018, rising 15% year-over-year. These factors translated in us connecting nearly 12,500 new customers over the last year, resulting in the growth rate of 1.7% which is one of the fastest among distribution companies in the country.

We continue to grow our natural gas utility but we also know from our strategic planning process that we wanted to add another business with a stable conservative risk profile. We believe the water and wastewater utility sector fits these criteria perfectly. So far, we closed nine water and wastewater transactions in just two years and we have regulatory approval in hand for the T&W transaction in Texas and I expect that to close any day. Cumulatively, we have committed nearly $110 million in this space and we continue to believe in the strong investment potential of this industry as aging infrastructure needs to be replaced. I’m proud of our water development team and the momentum we’ve built that will allow us to execute on the long-term opportunities in this sector. Since 2016, our compound annual growth rate for EPS is 4%. This growth allowed our Board of Directors to increase our dividend for the 64th consecutive year.

Our annual indicated dividend is now $1.91 per share. And we are proud to provide this return to our shareholders and be one of only three companies on the New York Stock Exchange with this long record. Environmental stewardship is a longstanding value here at Northwest Natural. And in 2016, we began pursuing our low carbon pathway, setting a voluntary goal of 30% carbon emission savings by 2005, which requires us to lead and innovate. I am excited to report that we are on track to reach that goal. Although we are starting from a very low level, just 5% of Oregon’s emissions come from our sales customers we know we can do more. That’s why 2019 was a significant year. With the passage of landmark Oregon Senate Bill 98, we now have another path for renewable natural gas to become an increasing part of the state’s energy supply.

Putting renewable natural gas on our system is one of the most effective ways to reduce emissions. In 2019 we also have a team abroad to learn about the innovations and renewable natural gas and renewable hydrogen. Our meetings with governmental entities, utilities and private companies across Europe confirmed that we’re on the right path. It also validated the investments that we’ve already begun making in our own backyard. I look forward to a growing portion of our supply coming from renewables and moving quickly on the opportunities in this market. I’m really proud of all that we’ve accomplished in 2019 in the last several years on our long-term objectives and there is more to come.

But with that, let me turn it over to Frank to cover more details on the financials. Frank?

Frank Burkhartsmeyer

Thank you, David and good morning everyone. I will begin with a summary of our fourth quarter and annual reported results and then discuss our cash flows and guidance for 2020. I will describe earnings drivers on an after-tax basis using the statutory tax rate of 26.5%. Note that our effective rate was 16.2% for 2019 as a result of returning excess deferred income taxes related to tax reform to our Oregon customers. Looking forward, we expect the effective tax rate to be approximately 23% as we continue to provide these benefits to customers. Also note that quarterly and annual earnings per share comparisons were impacted by the issuance of 1.4 million shares in June 2019 as we raised equity to fund investment in our gas utility.

For the fourth quarter, we reported net income from continuing operations of $38.3 million or $1.26 per share compared to net income of $36.8 million or $1.27 per share for the same period in 2018. The $1.6 million increase in net income is a result of a $5.4 million contribution from our natural gas distribution segment, partially offset by a $3.9 million lower contribution from our other businesses. The gas distribution margin increased $5.1 million from customer growth, new customer rates and revenues from the North Mist facility, which began operations in 2019. This higher margin was partially offset by a $2.4 million increase in operations and maintenance expense primarily related to higher payroll and benefit costs. In addition, depreciation expense increased $1.5 million due to higher investments in our system and income tax expense declined $4.5 million dollars as a result of returning tax reform benefits to Oregon customers. Net income from our other businesses declined $3.9 million, primarily due to lower asset management revenues. The prior year results included higher revenues from an October 2018 Canadian pipeline incident.

Turning to full year results, on a consolidated basis, 2019 net income from continuing operations was $65.3 million or $2.19 per share compared to $67.3 million or $2.33 per share in 2018. Excluding the $6.6 million pension disallowance we have discussed previously, net income from continuing operations was $2.41 per share or an increase of $0.08 over 2018. The $0.08 per share increase is the result of a $0.27 increase in the gas distribution segment, partially offset by a $0.19 decline from our other businesses. In the Gas Distribution segment, utility margin increased $28.7 million as higher customer rates, customer growth and revenues from the North Mist expansion added $13.5 million. In addition, colder weather, along with higher fee revenue from interruptible customers contributed an additional $2.7 million. The remaining $12.2 million increase in utility margin is a result of the March 2019 Oregon order related to tax reform and pension expense. With the exception of the first quarter pension disallowance, this order has no impact on net income as offsetting adjustments were recognized through expenses and income taxes, as I’ll describe in a moment. While utility O&M and other expenses increased $26.4 million, the increase in underlying O&M was only $2.2 million. The rest of the increase is associated with accounting for the Oregon order.

There are three drivers of this increase. First is actual pension expense is now collected in customer rates. Pension expense increased $8.4 million. Second, the day one accounting impacts of implementing the March order increased expense by $9.2 million offset by higher revenues and lower taxes. Finally, we recorded the $6.6 million pension disallowance in the first quarter. Over the last two years, we have invested in our gas system at historically high levels. As a result, depreciation expense increased $4.2 million. In addition, interest expense increased $3.3 million dollars from higher long-term debt and commercial paper balances in the first half of 2019. Finally, utility segment tax expense includes a $5.4 million benefit related to implementing the March quarter with no significant effect, resulting effect on net income. Net income from our other businesses declined $5.3 million. Asset management revenues decreased from a combination of less favorable market conditions, and an increase in the portion of these revenues that is shared with customers following the Oregon rate case.

In addition, the water utility business had higher development cost during 2019. As a result of the Oregon general rate case and tax reform, there are lots of moving pieces in the 2019 financials, but the underlying drivers remain straightforward. The gas utility benefited from new rates in Oregon and Washington, solid customer growth, as well as weather and some fee revenue and North Mist came online in 2019. This was partially offset by lower asset management revenues and costs related to growing the water business.

A few notes on cash flow. For 2019, the company generated $185 million in operating cash flow. We invested $304 million into the business with $242 million of gas utility capital expenditures and leasehold improvements as well as $57 million of water acquisitions. Cash provided by financing activities was $115 million as we issued debt and equity in June 2019. Our balance sheet remains strong with ample liquidity. Regarding 2020 financial guidance, gas utility capital expenditures for 2020 are expected to be in the $230 million to $270 million range including significant projects related to system reinforcement, equipment replacements at Mist, resource center renovations across our service territory and technology upgrades. These capital investments coupled with higher forecast expenses from the new Union contract, facilities rent, as well as payroll and technology costs supported our decision to file the Oregon rate case with rates effective in November of this year.

Consistent with these business drivers, the company initiated 2020 earnings guidance today for continuing operations in the range of $2.25 to $2.45 per share. Guidance assumes continued customer growth average weather conditions and no significant changes in prevailing regulatory policies, mechanisms or outcomes or significant laws, legislation or regulation. Finally, this guidance excludes any gain related to the sale of the Gill Ranch storage facility and associated operating results. These items are reported in discontinued operations.

With that, I will turn the call back over to David for his concluding remarks.

David Anderson

Thanks, Frank. Our efforts last year have built momentum for the initiatives we will advance in 2020. As we discussed, we are very pleased to be taking a significant step forward in our energy transition with the passage of Oregon’s groundbreaking renewable natural gas legislation. In 2020, we will also be executing on several other priorities related to our low carbon pathway. Separately and ahead of the legislation, three local renewable natural gas projects are being developed on our system that will interconnect and produce RNG that is roughly equivalent to 2% of our sales volume.

We expect to complete these projects in the coming year. In Washington State, under House Bill 12.57, we are developing our voluntary tariff that would allow us to directly purchase renewable natural gas on behalf of our Washington customers that opt into the program. We are working on a similar tariff in Oregon and are excited to offer renewable options to our customers. We are reaching across our entire value chain to achieve carbon savings. After several years of analysis and preparation, we are using internally produced proprietary first-of-its-kind program to analyze the methane emissions from our upstream providers. Now we can prioritize natural gas purchases to even a greater extent from the most responsible lowest emitting producers, and we can do this without paying more for the gas. I am excited with the progress our renewable team has made and the great strides I know they will take in 2020. We are pleased to help communities take advantage of our modern distribution system in new and exciting ways that pragmatically address climate change.

Another key priority in 2020 will be growth. For the natural gas utility, that means focusing on high quality customer service, including executing on several technology projects that will enhance internal processes and customers’ mobile experience. These investments will help ensure seamless interactions with our customers and support continued growth. Completing our capital projects will be a top priority this year, these are necessary investments to support the safety and reliability of the system and we will be working very closely with Oregon regulators over the coming months to ensure they have the information needed to review the general rate case and put new rates into effect on November 1. And finally, our water utilities and acquisition strategy will continue to be an area of focus.

Our disciplined acquisition approach has worked very well. We will continue to identify targets for roll ups, acquisitions and areas we’ve already established and examine new opportunities across the country. I believe Texas is one of those key growth areas. Its economy, business environment and growth make it an attractive region. The core population centers in Austin, Dallas and Houston continue to post some of the highest population and housing growth rates in the nation. At the same time, our team is working hard to efficiently integrate the water and wastewater utilities, we’ve already purchased and assess the maintenance and investment needs of those businesses I remain very excited by the growth potential of this business.

In summary, we have accomplished a lot since we rolled out our strategic plan three years ago. Our leadership team and employees have worked hard. None of our success could have happened without their dedication. As we enter our 161st year in business we will continue to address challenges and execute on the opportunities ahead of us. It is a truly a very exciting time to be in the energy in the utility business.

Thanks for taking time to join us this morning. And with that Grant, we’ll open it up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Chris Ellinghaus with Siebert Williams Co. Please go ahead.

Chris Ellinghaus

Hey, everybody. How are you?

David Anderson

Good. Good morning.

Chris Ellinghaus

Frank, if you got the 2019 water acquisition cost handy?

Frank Burkhartsmeyer

Yes, but we don’t disclose particular water acquisition cost, Chris.

Chris Ellinghaus

I wasn’t thinking about the individual capital costs. I was thinking about just the transaction costs.

Frank Burkhartsmeyer

We don’t disclose the particular transaction costs, that level of detail.

Chris Ellinghaus

Okay. Have you got a better sense at this point what you think the timeline is for renewable natural gas investments?

David Anderson

Yes, Chris, this is David. We’re going to try to do as much as we possibly can. We’ve now – we basically have two avenues to do that. The Oregon IRP clearly recognizes that we can purchase renewable natural gas through that process. And then again, the Senate Bill 98, which is the most aggressive RNG bill in the country, it gives us another platform to do that. And we’ll continue to make strides in Washington as we look forward. So, kind of hard right now to put a number on it, but if you think about this, we’ve been at this a very short period of time and our first project was with the City of Portland, which ended up in their number one Climate Action ever, project that they’ve ever been part of. And for us, to already be at a point where we can get 2% of our sales throughput with RNG with just a couple of years of work here, I’m very encouraged that you’ll see more coming down the pike.

Chris Ellinghaus

Okay. Have you got any current thoughts on the Gill Ranch sale and how that’s proceeding?

David Anderson

Yes, we’re working really hard, Chris, to close that transaction. The good news is, we’ve received all regulatory approvals. So, now, we’re just working with the buyer and doing the typical the process of these things, getting the T’s crossed and the I’s started to fund. I would expect that to be completed by the end of March.

Chris Ellinghaus

Okay, great. Frank, as far as the guidance goes, can you just sort of give us some color on what headwinds you see for sort of a flat 2020?

Frank Burkhartsmeyer

Sure. Great question, Chris. If you look at 2019, we benefited a little bit from some weather and the incident on the Enbridge pipeline earlier this year. So, I would start by saying the midpoint of our guidance about – in the $2.35ish range is probably our normalized level for this year. Of course, we don’t assume any benefit from weather or anything like that in 2020. On the positive side, for earnings, we continue to expect to have solid customer growth, the full year of North Mist and a little bit of contribution from the water business. But what really drives us into this guidance range is continuation of our capital program we are investing at a higher level. So, depreciation is running. It was up 2019, it will be up a bit more in 2020. We had issued equity last year. So, now we’ve got a full year with those $90 million of shares outstanding. And then quite importantly, there is a number of O&M pressures as we move forward. It’s a big part of why we filed the rate case. In addition, we are investing in more and more technology right now. A lot of that comes with O&M right now we need to add some people around cyber security and some other technology advances we’re putting in place. We’ve got a new Labor Accord with our union employees which is increasing salaries and benefits. We have a tight job market, which also just drives up salary costs in the region. And then, we’ve got some new facilities. We’re moving into a new operation center, which has a lease associated with it. It’s higher than the building that we’re in right now. So, all of those things are driving O&M up, which we will get into – which we’ve got in this rate case, as well as a higher level of depreciation, I’d say, and then, just the typical lag of an accelerated or elevated capital program.

Chris Ellinghaus

Okay, great. Thanks for the details, guys. I appreciate it.

Operator

The next question comes from Aga Zmigrodzka with UBS. Please go ahead.

Aga Zmigrodzka

Good morning.

David Anderson

Good morning.

Aga Zmigrodzka

Could you please provide details, drivers of higher than previously discussed long-term CapEx, and how that is impacting your rate base growth, as well as how do you plan to fund it? Is there a need for equity issuance on ATM?

Frank Burkhartsmeyer

Great. Thanks, Aga. This is Frank. I’ll take that. The main change from our prior program, there’s a couple of significant projects. One is, we will be putting more money to work in our Mist facility. There is some things, there is a large dehy that needs to be replaced and some other equipment up there that has just outlived its life and we’re moving forward on that. In addition, we have a number of large technology investments. We – our ERP system, our customer information system, they’re all getting quite old and we’ve been updating the strategic plan around our IT and we’re starting to move forward on that. And between them, we’re adding, over the 5-year period, about $150 million. There is a few other things that are driving that as well. But as we get better and better line of sight on some of these large infrastructure projects, we’ve decided to put them into our capital forecast. They don’t – we have a band of 4%, 6% on the rate base growth over the period. This doesn’t change that band at all, it’s within that. It’s not that huge of a change. It’s just additional. And regarding financing costs, at the level that we are investing now Aga, we will be in for rate cases more often, we were in 2 years ago, we’re in now because of this – largely, because of this investment cycle. We’ll have to stay pretty close to a 50:50 capital structure over that time. We will have to access the capital markets. We raised equity last year that was a big raise for us, we were looking ahead we know that. And we’re also investing in water company. So, over time, we will have to continue to access the capital markets. We can’t be specific about timing in part, because the timing of some of these investments, we can’t be that specific, but also it’s just not our practice to be super specific about when exactly we will access the markets. But we do need to stay close to that 50:50 capital structure for our utility.

Aga Zmigrodzka

That makes sense. Recently approved ROE in Oregon was 9.4%. What is the risk that based on the lower interest rate environment that ROE would actually be lower and how that would impact the requested revenue?

David Anderson

Yes, Aga, this is David. I mean, you always have that risk as we go through. And I think Oregon, as well as Washington have both been very pragmatic commissions when it comes to ROEs. I will tell you the latest ROE, I think is from Avista in Oregon, and they got 9.4%. So, the most recent data point along that line is 9.4%. So, we would hope for a number not lower than that, but obviously our testimony, actually, supports a number higher than 9.4%, but more to come as we work our way through the rate case.

Aga Zmigrodzka

Thank you. And lastly, in 2019, you formed Renewable Resources Team. What are the opportunities and challenges that the team has experienced so far and see ahead to meet the company’s renewables goals, in particular on renewable natural gas?

David Anderson

Yes, let me let Justin Palfreyman kind of take that one. You want to go ahead and address that question?

Justin Palfreyman

Yes, sure. So, our renewable team is focused on basically getting and securing long-term renewable natural gas supplies to benefit our customers. We formed that team shortly after SB98 passed, which is really the RNG enabling legislation that gives us the opportunity to invest in RNG through the utility. They are focused right now on developing a pipeline of supply opportunities and getting the rulemaking in place with commission staff and our other stakeholders. And we expect that as the year moves on, we will start to see actual results and specific projects that we are identifying to bring onto our system.

Aga Zmigrodzka

Perfect. Thank you for taking my question.

David Anderson

You bet. Thank you.

Operator

The next question comes from Tate Sullivan with Maxim Group. Please go ahead.

Tate Sullivan

Hi, thank you. Good morning. Maybe it’s jumping the gun a little bit, but I think in previous presentations you’ve put in your 5-year strategic plan, including EPS growth of 3% to 5%. Is that under review or do you still have that target for the next 5 years? And if so, what is the base EPS number for that target?

David Anderson

Yes, thank you. This is David. I’ll take that one, Tate. Yes, that is still the plan, and the 5-year plan still exists right now. As always, we tweak. Obviously, a big driver of that underlying EPS growth is the cap – the rate base and the CapEx that Frank just went through. Since 2016, which is kind of the base year that I look at, because that’s when I kind of took over this role, we produced CAGAR of 4%. So, I think we’re right in the band that you’re talking about. And barring some kind of unforeseen situation going forward, it could be anything from recessions to other type items I would suggest that the 3% to 5% is still an appropriate level for us.

Tate Sullivan

Okay, thank you. I have a follow-up. And Frank, I have seen and I think you did it last year too, with your release you disclosed the natural gas distribution EPS number. So, in ‘19 that was $2.26 versus the $2.41 number. I mean, strategically, the 3% to 5% growth is it on the $2.41 or the $2.26?

Frank Burkhartsmeyer

I’d say that would clarify – I don’t remember us giving a specific natural gas distribution from just Northwest Natural Holdings, is how I would describe it as we put out one guidance band. Of course, water has not been a material contributor to that in that period. The way I would look at that 3% to 5% range that we put out was, we were assuming in the midpoint of our 2019 guidance of $2.35-ish, which was the – as I’d say, was the normalized number for 2019, if I were to normalize for weather and some pipeline optimization benefits that we were able to harvest.

Tate Sullivan

Okay, great. And then there was a couple of comments in the press release about maintenance water CapEx. But what are, I mean, have you started regulatory reviews or the process to get approval for growth CapEx or replacement CapEx or where do you stand with that?

David Anderson

Tate, we can – let me get into a little bit of detail. Obviously, when we acquire these things, Justin, who is the President of the Water Company, takes the lead along with Brody Wilson, the CFO of the Water Company, to look at the 5-year plans and put, frankly, 5-year plans in place with these entities. And sometimes, those entities have plans already and sometimes they don’t. And as we go through that and then along that line is when do you need to kind of go into the regulator to get certain reimbursements for that. It’s usually a couple of years after you acquire one of these, and it wouldn’t surprise me at all if you start seeing some of those take place. And of course, our first one was in Idaho and I think you’ll see activities as we play out going forward in that state and other states that we look forward.

Tate Sullivan

Okay. Thank you, David. Alright, thank you.

Operator

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

David Anderson

Right. Grant, thank you. Thank you everybody for joining us on this Monday. Again, as always, if you have follow-up questions, Nikki is your point person and we look forward to talking to you soon. Thank you.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.





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OptimizeRx: A Small Company With Big Potential – OptimizeRx Corporation (NASDAQ:OPRX)


OptimizeRx Corporation (OPRX) is a tiny health care company that provides digital health messaging services with the goal of “closing the communication gap between pharma, payers, physicians, and patients.”

Trading at near 52-week lows, OptimizeRx is the most undervalued company in my digital transformation stock universe.

(Source: Yahoo Finance/MS Paint)

OptimizeRx had total revenue of $24.6 million for 2019, a 16% increase over 2018. This is one of the smallest stocks that I follow and its small customer base makes for a risky investment. For example, in Q3, the company missed on revenue by 30%, primarily due to two events:

First, one of our clients decided to stop supporting one of the brands about 12 months prior to their loss of exclusivity coming up in 2020, which in our experience was earlier than usual. The loss of this brand represented about $2 million in annual revenue or less than 10% of our revenue for the year

Secondly, the merger of 2 of our larger clients, which is now complete, pushed out about $3 million in revenue from the second half of ’19 into 2020.

While OptimizeRx is a risky investment, it may be a smart investment for the turbulent times that we find ourselves in. The company has no debt and is not burning cash. Its free cash flow margin is positive. OptimizeRx is in the process of diversifying its product offerings which should provide some future stability for revenue growth. For these reasons, I am giving this company a bullish rating.

Growth Strategy

OptimizeRx’s management believes that the company’s financial messaging products are mature and competition will start to influence product pricing. Financial messaging has been the primary revenue driver for the company.

For this reason, the company has made moves to expand into three new but related market segments: payers, medical devices and medical associations. In so doing, OptimizeRx launched an integrated platform:

The power of our platform lies in how we close the communication gap between pharma, payers, physicians and patients like no other solution on the market. Closing this gap with digital solutions has become increasingly important, especially with the wave of new specialty medications coming onto the market and the increasing value being placed on the patient journey when it comes to medication adherence. Better communication translates into better outcomes for patients, lower costs to payers, and for pharma a more engaged field of doctors and patients.

(Source: OptimizeRX)

If the new products get some traction and it appears that they will, then OptimizeRX will achieve more stable revenue growth into the future.

Stock Valuation

The following scatter plot of enterprise value/forward sales versus estimated forward Y-o-Y sales growth illustrates OptimizeRx’s stock valuation relative to the 152 stocks in my digital transformation stock universe.

(Source: Portfolio123/private software)

A best-fit line is drawn in red on the scatter plot and represents a typical valuation based on next year’s sales growth. As can be seen from the scatter plot, OptimizeRx is the most undervalued stock in the 152 stock universe based on forward sales multiple.

Free Cash Flow

OptimizeRx has a positive free cash flow margin of 3%.

(NOTE: the following chart is prior to the release of Q4 results on Thursday, Feb. 27, 2019.)

(Source: Portfolio123)

Cash Burn

In order to evaluate cash burn, I look at the SG&A expense margin which includes Sales and Marketing, General Administration expenses, and R&D.

(NOTE: the following chart is prior to the release of Q4 results on Thursday, Feb. 27, 2019.)

(Source: Portfolio123)

OptimizeRX’s SG&A expense margin is 62% which is pretty decent for a small but growing software company.

Investment Risks

Software stock valuations have been high on a historical basis. Uncertainties, such as the rising tension in the Middle East, trade disputes, and recently the coronavirus, could cause a market downturn. In fact, we are currently in the midst of a correction due to the coronavirus. Software stocks tend to get hit hard during any market turbulence.

OptimizeRx is a small company with a limited number of customers. Loss of as little as one customer could significantly impact revenues and profitability.

The company’s financial messaging products are mature. If the company is not successful with its expanded product offerings, then it will result in reduced revenue growth.

A company can be severely undervalued for a significant length of time and there may be an underlying reason that has not been exposed.

Summary and Conclusions

OptimizeRx is a small health care company that provides digital health messaging services. At the end of 2019, the company had revenue of $24.6 million and a market capitalization of $160 million. The company’s objective is to “more effectively address the need for greater patient-provider-pharma-payer collaboration and improvement in medication affordability and adherence.”

OptimizeRx has had strong revenue growth with 53% CAGR from 2011 to 2018.

(Source: OptimizeRx)

But the small number of customers means that growth can be lumpy and there will be times such as in Q3 2019 when revenue growth will be negative. This makes for a risky investment.

This being said, I believe that this company is well-positioned for the future with no significant debts or cash burn. The company has initiated a level of diversification away from financial messaging, but we do not know how that will play out yet. The company is severely undervalued based on its forward sales multiple. Therefore, I am giving OptimizeRx a bullish rating.

Join My Exclusive Service While the Price is Low …

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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SFL Corp.: Excellent Performance From This High-Yielding Ship Company – SFL Corporation Ltd. (NYSE:SFL)


On Tuesday, February 18, 2020, ship leasing firm SFL Corporation (SFL) announced its fourth quarter 2019 earnings results. At first glance, these results appeared to be very disappointing as the company failed to meet the expectations of its analysts on either top-line revenues or bottom-line earnings. A closer look at the actual earnings report, though, does tell something of a different story as there were certainly a few things that investors should appreciate here such as the company adding to its backlog in spite of some of the fears that have been plaguing the industry. Admittedly, though, SFL Corporation has always been somewhat insulated from near-term industry problems. This should also help the company weather the problems that the coronavirus has caused for the industry so far this year. Overall then, investors should be reasonably satisfied with these results and have a lot of reasons to continue to be optimistic in the company.

As my long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company’s earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article as well as serve as a framework for the resultant analysis. Therefore, here are the highlights from SFL Corporation’s fourth quarter 2019 earnings results:

  • SFL Corporation brought in total operating revenues of $119.877 million in the fourth quarter. This represents a 7.49% increase over the $111.527 million that the company brought in during the third quarter.
  • The company reported an operating income of $20.216 million in the most recent quarter. This compares favorably to the $20.181 million that the company reported in the previous quarter.
  • SFL Corporation added $224 million to its charter backlog due to receiving new vessels during the quarter.
  • The company sold $100 million worth of stock that it owned of oil tanker operator Frontline Ltd. (FRO).
  • SFL Corporation reported a net income of $23.642 million in the fourth quarter of 2019. This represents a substantial 518.58% increase over the $3.822 million that the company reported in the third quarter of 2019.

It seems essentially certain that the first thing anyone reviewing these highlights is likely to notice is that every measure of financial performance showed an improvement over the third quarter. With that said, though, at least in terms of revenues, the improvement was relatively small. This was not really unexpected, though, as the primary reason for this is that the company took delivery of two ships that were immediately chartered out to Hunter Group ASA under a five-year contract. I stated that this would be happening in my last report on the company. This does show that at least thus far, shipping companies continue to take delivery of vessels and honor their contracts in spite of the trade tensions between the United States and China. The coronavirus, however, was a non-factor during the fourth quarter, but it might have an impact later this year.

Unfortunately, though, some of the continued difficulties in the offshore drilling industry that we have been discussing in past articles had a negative impact on the company during the quarter. We see this in the fact that the company took a non-cash impairment charge related to five offshore support vessels. This is something that is required by accounting rules whenever a company determines that an asset is actually worth less than what it says on the balance sheet. As the value of a vessel is largely determined by its future earning potential, deterioration of economic fundamentals or dayrates in a sector can cause the value of a ship to decline. In this case, the value of the five offshore support ships went down by $34.1 million compared to the prior-year quarter so the company took a writedown of this size. It is important to note, though, that this was a non-cash charge and the company did not actually see $34.1 million leave its bank account so we can safely ignore the charge. If we do this, then the company’s increase in net income would have been even larger than what we saw.

One thing that is characteristic of SFL and some other companies that either are or once were associated with shipping tycoon John Fredrikssen is that they own stock in other companies. This benefited the company during the quarter as the strength in the market pushed up the value of these securities by $27.9 million. As was the case with the writedown on its ships, accounting rules require that the company record a mark-to-market gain on its income statement. While this does not necessarily represent new cash coming into the firm, it still has the effect of offsetting some of the impairment charge, which is one of the reasons why the company’s net income was not as low as it could have been considering the size of the writedown. With that said though, the company did sell some of these shares during the quarter and realized $13.7 million from this sale. This $13.7 million does represent money coming into the company’s accounts, unlike what the impairment charge represented.

One of the most important things for a company is to be able to maintain its income. This is of course also true for SFL Corporation. The company is fortunately decently well-positioned to accomplish exactly this. We can see this in the company’s charter backlog:

Source: SFL Corporation

The company’s contracted backlog is the total amount of revenue that it will bring in from its fleet going forward based on the contracts that it already has in place with its customers. As this revenue is backed by contracts, it is as close as we can get to guaranteed money in this industry. As we can see above, SFL currently has approximately $3.6 billion in revenue backlog, which represents thirty quarters at the fourth-quarter rate. Thus, the company can operate for roughly this long even if it fails to secure any more business for a while. This is the kind of thing that we like to see from a company that we are invested in.

Naturally though, this backlog will still run out eventually. That is why it was nice to see that SFL added to it during the quarter. I noted this in the highlights. As I stated there, SFL took delivery of two ships during the period and added $224 million to this figure. That is because these ships were already chartered to Hunter Group before it took delivery of the vessels. This is the core of the company’s business model. Basically, it purchases ships and then leases them to shipping companies under long-term contracts. As such, it operates almost like a bank to the shipping industry as opposed to an actual operator like Frontline or Golden Ocean Group (GOGL). This model gives the company an ability to weather problems in the industry that is far superior to other shipping firms. When we consider the problems that the Chinese coronavirus breakout has been causing for other companies, this will likely be appealing.

The company has certainly enjoyed success at executing this business model. As we can see here, the average remaining charter length on the company’s 88-ship fleet well surpasses five years:

Source: SFL Corporation

This positions it well to continue to deliver steady results for a while, despite the struggles in the industry. Thus, it can continue to be a source of income for us.

As is always the case though, we want to ensure that the company can actually afford the dividend that it pays out. This is because we do not want to suffer a dividend cut and the stock price decline that typically accompanies it. The best way to do this is by looking at a company’s free cash flow, which is the money left over from a company’s basic operations after it pays all of its bills and makes any necessary capital expenditures. It is usually calculated by subtracting capital expenditures from operating cash flow. In the fourth quarter, SFL Corporation had an operating cash flow of $58.396 million and had total capital expenditures of $10.287 million, which gives the company a free cash flow of $48.109 million. The company’s dividend only costs the firm $37.669 million based on the current rate and share count though. Thus, SFL Corporation appears to be generating more than enough cash to afford its dividend at present, although it is paying out a sizable portion of its money, which is frequently the case with this company.

In conclusion, this was a reasonably solid quarter for SFL Corporation and shows us the ability of the company to weather any problems in the shipping industry. These problems have unfortunately manifested themselves in a major way with the outbreak of the coronavirus in China that has caused the country to close off its ports and many of its businesses. This will only be a short-term thing, but it is still uncertain when it will end. In the meantime, SFL appears to be a way for investors in the sector to ride out these problems.

At Energy Profits in Dividends, we seek to generate a 7%+ income yield by investing in a portfolio of energy stocks while minimizing our risk of principal loss. By subscribing, you will get access to our best ideas earlier than they are released to the general public (and many of them are not released at all) as well as far more in-depth research than we make available to everybody. We are currently offering a two-week free trial for the service, so check us out!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Ping An Insurance (Group) Company of China, Ltd. (PNGAY) CEO Lu Min on Q4 2019 Results – Earnings Call Transcript


Ping An Insurance (Group) Company of China, Ltd. (OTCPK:PNGAY) Q4 2019 Earnings Conference Call February 21, 2020 7:00 PM ET

Company Participants

Sheng Ruisheng – Joint Company Secretary

Jason Yao – EVP & CFO

Lu Min – Chairman & CEO, Autohome, Inc.

Xie Yonglin – Co-CEO & President

Jessica Tan – Co-CEO, EVP & COO

Ma Mingzhe – Founder, Chairman & CEO

Conference Call Participants

Charles Zhou – Crédit Suisse

Kailesh Mistry – HSBC

Sheng Ruisheng

Okay. We will get started. Good morning. Dear investors, welcome to the Ping An 2019 Annual Results Announcement Meeting. I’m the moderator, board secretary, my name is Sheng Ruisheng. We know we are affected by the disease, and we will have this meeting in video conferencing and telepresence and conference calls. And we have Mr. Ma, the Chairman and CEO of the company; President and co-CEO, Xie Yonglin; and Jessica Tan, co-CEO; and Jason Yao, CFO; and Chief Investment Officer, Mr. Timothy Chan; and also the new — Mr. Lu Min, Chief Insurance Business Officer. And we will start with Mr. Jason Yao to introduce the performance in 2019. And then Mr. Lu, Mr. Xie, and Ms. Tan will go through the different business units, and we will answer the questions afterwards. And I’ll invite Jason Yao.

Jason Yao

Ladies and gentlemen, good morning. Welcome to the Ping An 2019 Annual Results Announcement Meeting. Thank you for your support and trust in Ping An. In 2019, we know it’s the starting year for the second 30th year of Ping An. And the global economy has been slowing down, and China has also transformed from rapid growth to solid growth. And Ping An has the new strategy of finance and technology and finance and ecosystems. So we want to take advantage of those strengths, and we also have enjoyed the solid growth in revenues, profits and many other things and laid a solid foundation for the next step for the group.

And in Page 5, we have seen this before, I believe. That’s our strategy. Next one,is the 2004, since our IPO, this is our strong and consistent track record. Earnings per share, CAGR has been growing by more than 25%. And total ROE average growth has been growing by 17%. Especially for the past 5 years, it’s more than 20%.

Now let’s look at 2019 performance. In 2019, we have been dealing with the complicated environment. So we have enjoyed solid growth. Operating profit growing by 18%, and net profit growing by 39%, dividend per share growing by 19% and operating ROE is close to 22%. On this page, let’s see the customer contribution. And retail accounted for more than 92% of the operating profit. And for retail and corporate and other operating profits, including the offsetting, the corporate growing solidly, and other operating profit has been declining a little bit.

Now let’s look at operating profit in different units. The group operating profit is the most important because it’s related to the dividend payout. In 2019, we have been growing by 18% because we have strong growth in life and health, property and casualty. And technology has been declining in terms of the operating profit because we are investing heavily into technologies. Group ROE is almost 22% in 2019. Under IFRS 9, it’s more than 24%. For life and health, the operating ROE is more than 40%.

Now let’s look at the adjustment process from net profit to operating profit because we have excluded the volatile items which can reflect the performance and also the trend going into the future. In 2019, the net profit is CNY164 billion, operating profit is CNY147 billion. There are three differences. First is we have CNY19.4 billion increase in the investment revenue because of higher — five assumptions. And the other one is deducted for the impact of the discount rate. And in last May, we have commissioned new policies and tax policies. That’s why in 2019, the income tax has been reduced. But in 2019, we believe this is a one-off, in fact. It’s CNY14.5 billion. It’s excluded from the operating revenue. And in 2019, the life and health has been growing by 25%. Because the residual margin has been growing, the release is 74%, accounting — inside the operating profit. And we also have seen some discount rate of CNY910 billion, so that’s contributing to the residual margin.

From this slide, you see, in 2019, the residual margin release 73% are from long-term protection life products. And the release in the opening has been declining to 9.5% because of the new business growing — has been slowing down, and the in-force percentage is growing.

Now let’s look at the dividend and capital situation. For the past 5 years, the dividend is growing. CAGR has been more than 40%. And in 2019, we have a very solid capital adequacy and dividend per share is growing by 19%, is RMB 0.0205, but based on the operating profit, the dividend payout ratio is 28.1%. And in 2019, the general meeting has approved the CNY5 billion to CNY10 billion buyback scheme, and the CNY5 billion has been realized. The rest of the quota will still be effected by the April 28 this year. This is the dividend. And we have used the cash flow to buy back share. And we have also realized the convertible bond and the free cash flow is still very healthy. The adequacy and solvency level of the group, you can look at the group, including subsidiaries, the adequacy is very high and is still growing.

Next slide. So every quarter, we have stress test to make sure we can deal with any challenges with healthy solvency. So in 2 situation. One is the declining of the 30% in fair value of equities asset. The other one is declining of 50 basis points in interest rate. You can still see the solvency level is more than 220%.

Next one is the investment portfolio of insurance funds. In general, the portfolio has been growing. By the end of 2019, it’s CNY3.2 trillion. Nonstandard debt has been declining from 15.8% to 13.4%. And we also have used the IFRS 9 accounting rules. You can see 18.3% of the investment are actually under the category of the fair value of the equity product that’s affecting the volatility in the P&L. That is why we focus very much on operating profit because it’s based on the 5% of assumption of the yield for insurance product found in the investment portfolio.

So in 2019, the ROE is 5.2%, the total return is 6.9%. And in the corporate bond investment and it’s declining from 5.4% and 99% of the rating are AA in Page 26. And for the nonstandard debt asset in Page 27, we are trying to stay away from the high risky industries and make sure we are trying to improve the yield of the total portfolio. The maturity rate of the remaining portfolio is 3.68 years, and we haven’t seen any of the NPLs.

Now sustainability and honors in Page 29. We use the international ESG standard to make sure we are sustainable in our development. We have been focusing on ESG at the group trying to use that rules into our strategy. In 2019, we are the first Chinese company to be affiliated to the principles for responsible investment of UN. That’s the first China company. And we’re also the first DJSI selected insurance company in China. We are also included in Hang Seng CEI ESG Index. Page 30, that’s the honors and the awards. The brand value has been rising, ranking 29th of Fortune 500 and number seven in Forbes Global 2000. These are all the financial performances.

Now let’s invite Lu Min, Chief Insurance Business Officer, to introduce about the retail integrated finance and insurance business.

Sheng Ruisheng

Thank you, Mr. Yao.

Lu Min

Good morning. My name is Lu Min. To just introduce the 2019 retail integrated finance and insurance business performance. To start with the retail integrated finance. Page 33. In 2019, retail operating profit growing by 26% because of the retail customer — operating profit per customer has been growing. And retail customer growing by 11%. Operating profit per customer growing by 13%. Basically, contracts per customer is 2.64. And we had new customers of 36 million, including 14.9 million converted from the five ecosystems of the group. So we provide online service to them and try to sell financial product to them, so we can convert them from users to customers.

In Page 34, that is the increased customers and cross-selling performance. Currently, we have more than 200 million individual customers and more than 500 million Internet users. And 340 million of them haven’t bought any product from Ping An. So that is a huge potential for us to convert them. And we will continue to convert those users. And cross-selling has been enjoying great resource and results. In 2019, the cross-sell penetration ratio has been increasing from 19% to 36%. That is a very important KPI for cross-selling. We know the total customer base has been growing by more than 83%. And at the beginning, they are only buying 1 contract from 1 subsidiary. So this is a great achievement despite all the challenges. Now moving on to the insurance business, Page 36. Life and health in the — with the reform happening in the background, the embedded value growing by 24% CAGR. It’s a very strong growth for the past 5 years.

Next page. In 2019, life and health operating ROEV was 25%. We know our new business is slowing down, but the scale is still big compared to the in-force product and with very high ROEV, we also use the conservative discount of 11%. The embedded value expected return is rather high.

In Page 38. Now please go to Page 38, and it is a new BV by distribution channel. Our life and health insurance NBV rose 5.1% in 2019, aided by the steady growth in agent channel and a strong performance in our bancassurance. Our high protection business accounted for 83% of the agent channel NBV, largely stable on a yearly basis.

Next Page 39. And we are proactively following the regulatory requirement on protection-oriented transformation and accelerated the playbook of the high-value protection business, which was the reason of slight decline of FYP by 3%. Our NBV margin is now 47.3%, up 3.6 pps Y-o-Y, driving up overall NBV growth.

Please go to Page 40. And now let’s take a look at the agent channel, the biggest NBV contributor that accounted for nearly 90% of last year. The agent channel delivered 5.9% of the NBV growth last year, driven by 16% rise in NBV per agent, which was offset by a 9% decline in average number of agents.

Please go to Page 41. And this is about agent productibility. We have proactively conducted business reform to promote the agent productibility growth. Agent income average RMB 6,309 in 2019, slightly improved on a yearly basis. Average new insurance policies per agent per month were 1.38. Agent income from life products remain stable.

Please go to Page 42. That is how technology can empower the life insurance industry. In terms of the data-driven marketing, AI has been used for the interview, and it is 100% interview were AI aided. Ping An Life conducted over 6 million AI-based interviews, which can help us to save 680,000 hours. And we can also use AI to build the agent profiling to provide them the tailor-made training and our smart engine, which has been developed in-house and the AskBob has been used as a smart personal assistant to our agent to help our agents improve our sales conversion ratio, which has already been used to serve 340 million people. Where in terms of the data-driven customer service and — our smart customer service has already reached 50 million times last year and it can shorten their service time to less than 1 minute. And currently, we have already served 18 million policyholders and 96% of the clients have the fast service. At the same time, in terms of the data-driven operations, we also support the anticipated trend, make timely decisions and taking actions ahead of the others.

Please go to Page 43, let’s take a look at the P&C business. In 2019, P&C business is performing very well. Its net profit rose by 86%. The operating ROE was 24.6%, and the three year average ROE reached 20.4%.

And now I would like to draw your attention to Page 44 on the P&C insurance premium income. In 2019, P&C insurance premium income rose 9.5% Y-o-Y, evenly distribution on all channels. The non-auto insurance premium income was up by 17%, and which is improving its ratio and contribution in the total premium. And now please go to Page 45. That is the quality of the P&C product. And in 2019, you can see that our service and combined ratio was up by 0.4%, still better than the industrial average.

And now please go to Page 46. And we are still building technology to empower the P&C insurance business. In terms of the auto insurance, we use AI image to help to provide over 90 million registered users, about 49 million of whom are auto insurance customers of the Ping An Property. And at the same time, it only takes 3 minutes to take care of the — and without the — no back-end menu operation needed. At the same time, you can see that our monthly active user in December is already more than 25 million. While in terms of the P&C insurance, we provide the corporate client with the Know Your Risk service.

And next, I would like to welcome our Co-CEO Xie Yonglin to work you through the corporate financial services and the banking business.

Xie Yonglin

Thanks. Thanks to Mr. Lu. And now please allow me to take a look — work you through the corporate integrated finance. Page 49, we show you the corporate business growth and its performance in 2019. From this page, you will see that we are working on customer building and also works on the technological support in order to provide our service, in terms of the customer service, and we started to build the customer into the big clients and SMEs.

While in terms of the collaboration, we also did some organizational reform. And we also have to — also rebuild our mechanism and organizational structure to support our customer. On one side, we worked on the smart business, where in terms of the data, we also help to improve the information collection from our corporate clients and in order to build more database for our corporate clients to build the customer label and tag to make sure that we can digitalize the whole process of matching the corresponding surveys to our clients.

I also would like to specifically emphasize on our corporate financial service committee. We have 20 members of this committee. According to the nature of their business, we have already built them into the different principles on 4 models, including the simple business, sophisticated investment and financing business, transaction business and embedded business. We hope that by leveraging the vast resources and — we can collaborate over the resources and the synergy. And even from one way to the auto, we can work with each other to form the synergy. After almost the 6 months of operation, the efficiency has been greatly improved.

At the same time, you can see the corporate business is growing sharply, and jointly speaking, that corporate integrated finance premium size was up by 24%, 116% for the corporate channel and 140% for the size of the integrated financing. And these are all the result from the explosive business growth model brought about by the corporate finance service committee.

Where at the same time, on Page 51, you can see with the support from the group, we are consolidating our business of locating the premier investment and assets for the corporate business and the retail business. And at the same time, for the whole year, also underlying asset invested by the insurance fund sourced from the corporate business rose by 101.3%.

Let’s now go to the Page 53. And you can see, we see a growing profitability and 13.6% Y-o-Y increase in the net profit. And the noninterest rate income. And we see that our earnings is on the proper trend. At the same time, it can help us to further consolidate the retail business. And currently, its net profit is already 69%. And it’s also been greatly improved. At the same time, I would like to emphasize the retail business was growing fast, where at the same time, our corporate business and interbanking business are all gaining great momentum for development. That’s why we call it a structural optimization. And our business structure is now more evenly distributed.

Now please go to Page 54 and 55. You can see that for the past 3 years and now we’re going back to the healthy track of development, but we always keep the prudent attitude of the risk control and all the risk-related metrics are in the process of optimization. By following the overdue 69-day — 60 days standard, our overdue loan ratio, the loan coverage ratio are all on the good momentum. And in 2019, you can see the over — decreased the percentage of the loan 90 days overdue. And the loan duration of the overdue 90 days has already been decreased dramatically, which only accounted for 1.58%.

And the overdue deviation rate of the loans 60 days is already below 1, where at the same time, we were also improving the provision. And in the Q4 last year, it was up by 30% and reached 34% Y-o-Y business. That’s why our risk withstand capacity has been greatly improved. And now please go to Page 55 and you can see from the Page 56. And Ping An has already completed conversion of RMB 26 billion worth of the convertible bonds in September 2019, establishing multiple market first. And now currently, our tier 1 capital adequacy ratio and the core tier 1 capital adequacy ratio reached 9.11% and 10.54%, respectively, where at the same time, in the near future, our supplements of the capitals would get into a very healthy track.

Please also go to Page 57. And in order to work for the new development, we’d like to work on the ecos bank, digital bank and the platform bank as three name cards. Our retail, corporate and interbanking, the three business lines are also adopting the 3 + 2 + 1 operation strategies, promoting the bank’s development to a new track.

And now please go to Page 57. We have already divided the development path for each of the business lines based on the established strategy and the new positions. We would like to stick to our principle, especially the 12-character principle. Where at the same time, we would like to define the new positioning during the transformation stage in combination with group’s finance and ecosystem strategy. And we also — each of the business line developed its own 3 + 2 + 1 strategy in accordance with the strategic direction and the new positionings.

And I would like to draw your attention to Page 58. You can see, we have three business lines grow on the clear strategies. And it’s because of the maintaining the edge in the basic retail banking team, especially our retail business, our consumer finance and the private banking, the 3 business are growing momentum. From the basic retail business, the AUM was up by 40%, and the number of the customer was up by 16%, likely to exceed 100 million. Where in terms of the consumer finance, our credit card in circulation is more than 60 million and private banking is also a shining point of us for last year. Our wealth customer number rose 32%. The private banking AUM was up by 60%. Many peers communicate with us. We found out we have 3 advantages: technological driving, professionalism and integrated finance advantages.

And now please go to Page 59. For the past few years, especially in the past three years under the great leadership, we have already supported to build a whole set of the digital transformation platform and system. With these statistics, the operating revenue per capital was increasing by 80%. And the operating revenue per outlet was up by 31%. And in terms of the operating cost, we continue to improve the number of AI customer services, and now it’s already accounted for 90% and it can help us to reduce the handling cost of the credit card and debit card by 30% and 50%, respectively, saving CNY100 million in terms of the size of the outlets and contributing to the net profit by 0.4%. And this disease currently happening, we have been affected a little bit. But because we’ve strong digital and online capabilities, and we — the key business has been recovered by 60%. AUM has been recovered by more than 110%.

Page 60 about the bank and the synergy with the group. The result of the bank is because of we have a group in the background. On one hand, group is redirecting high-quality traffic to the banks and the group customers are of higher quality. And on the other hand, banks are also selling insurance products and contributing more to the group. And last year, the revenue growth has been 13.2%, selling insurance product through our bank channels. And so we have enjoyed higher revenue for the bank, but also contributed to the insurance business of the group.

In addition to the digital achievements, we also took advantage of the accounts, data, customers and products. We have this four channel and one platform engine projects. Got — account, data, product and equities are all connected and creating a unified customer service marketing platform. And for Page 61, for the corporate business is also improving because of higher capital adequacy level. And deposit balance grown by 11%, loan grown by 15%. And also, we have the asset- and capital-light strategies. And corporate noninterest income has been improving. And the strategy is also reducing the risks of the corporate loan, and it’s very sustainable in our business development.

And in Page 62. The bank has been the engine for our 1 + N strategy. And bank sold insurance grew by 327%. And the investment financing project scale has been improving by 138%. In addition to those data, we have also made a lot of progress in terms of business model innovation. We had commercial bank, investment bank and investment tactics to serve our big clients with very good results and which can be replicated in the future. It is not only the driver for corporate business but also for the new business model of the group 1 + N engine strategy.

In Page 63, the interbank business has also been growing very strongly. We have introduced a transaction access from the Wall Street and developed our in-house transaction system. And the transaction business has been grown by 152%, the bond transaction growing by 178%, ranking number three in China in terms of — as the core transaction — traders and interest rate swap ranking number three, standard bond future ranking number one in Q3. And also, the interbank sales team is also gaining ground and growing at 124% in terms of interbank sales business and the Ping An Bank. The net value product scale improved by 152%. And the subsidiary of wealth management has been approved, and we have used the shortest time from submission to approval.

In Page 64, the technology. 11 AI mid-platforms have been in production, including sales enablement, product, service, management and risk control and lay a solid foundation for our digital operation. In addition to the group technology, the bank itself is also focusing on investing into technology capabilities. Now we have more than 7,500 engineers in the Ping An Bank, growing by 34%, leading the industry. So technology innovation is a very key strategy for us. It’s also important for us to improve the efficiency and the efficacy.

That concludes my presentation on corporate finance and banking. Now let’s welcome Jessica Tan, the co-CEO, to introduce the technology business.

Jessica Tan

Thank you, Ms. Xie. Let’s briefly talk about the technology. In Page 66, you can see in 2019, the 11 technology subsidiaries,have been developing in the — at different stages. Lufax, Autohome, in the Phase 4, the profit has been improving. Good Doctor is in the Phase 3. You can see the revenue explosion. And it’s — we are reducing the loss. And OneConnect is also in Phase 2, still investing. So we are investing into new products. 32% of investment has been improved to 41%. In general, the revenue of technology, the revenue represents the sustainability and also the ecosystem enablement. It’s — the revenue reached to CNY82.1 billion, growing by 27%.

In Page 67, it’s about our innovation in technology. So technology is not for the sake of the technology because we are investing into the core applications. So we have 57 labs, 8 institutions, 110,000 engineers and 35,000 R&D employees. So last year — by the end of the last year, we have 21,000 patents, including 96% of them invention patents. And in terms of the fintech and medicine technology, we’re ranked number one and number two, respectively, in the world.

So now next one is about the fundamental technology in Page 68. Last year we have won 47 championships in technologies. Two of them are semantic understanding. So that means we need to read 150,000 articles and answering 50,000 questions, not just the average articles, but also medical, very complicated articles. So we can understand what’s happening in those articles, we have got some championship in the world.

So the value here is at Page 69. The first value is to enable our main business. Like Mr. Lu Min, Mr. Xie have shared with us already, how we use technology to enable insurance and banking business of the group. And last year, we are focusing on 3 things: improving efficiency, reduce cost and reduce the risks. So a few examples to share with you. In terms of the efficiency, the agents for the past 2 years, we can cover 100% of them using AI interview. So it’s mostly happening online and supported by off-line efforts. We interviewed more than 6 million agents, so we can easily identify the high-caliber people and talents.

In terms of cost reduction, last 2 years, we are using cloud robot — bots. So the bots had 850 million contacts with the customers online, reducing the cost by RMB 1.1 billion. In terms of the risk reduction in the bank and inclusive financing, 0 and 1 reminder are using AI bots and manual reminders. The quality is better and 97% reduction in customer compliance.

In Page 70, now let’s look at the performance of all the different sectors in technology. First, starting with the Lufax Holding. Last year, Lufax under the reform, we can still enjoy healthy growth. In terms of customer indicators, we have 44 million customers, growing by 9% year-on-year. And in terms of the business indicators, AUM is not growing. It’s actually declining by 6.1%, but the structure is healthier. For instance, 51% of the AUM are standard products and more than 20% are from our ecosystems and 30% of them are retail.

In terms of the loans, we are constantly improving. The balance is more than CNY460 billion, growing by 23%. And the quality is also improving as we speak. 2 years ago, we disclosed that the overdue of 30-day is — the ratio is 2.3%. But last year, it’s only 1.9% because we are continuing to improve compared with the competitors. It’s normally 5% to 11 — 13%.

Page 71. It’s OneConnect, and we went IPO in December, last December in the U.S. There are 3 improvements. First is customer. The strategy is not only providing service to the 600 banks in China, 99% of the city commercial banks and 52% of the insurers in China, we are also focusing on high-quality customers and growing by 114% to 473 high-quality customers. They have higher quality and high stickiness, and the revenue are sustainable and — 74% of them. And the revenue of OneConnect grew by 65% to CNY2.3 billion. And we are supporting a huge scale in this plague that’s happening. We are investing heavily from 32% to 41%. So we’re still investing heavily. But we have seen some results during this recent period. And in 2 weeks, we are supporting our players in the industry to recover their business and for 21 banks, we can provide online marketing and sign-off process and 19% of — 19 banks have one’s life. And at Ping An Group, we have 1.4 million employees and agents. In the February 3, we can have online office activities. We are still the leader.

And next page is the Doctor — is medicine, Page 72, talking about Ping An Good Doctor. Last year, Good Doctor has been growing strongly, especially during this epidemic. Now we have more than 315 million registered users and DAU 730,000. During the epidemics, the new registration and online consultation has been growing by five, sometimes 10x. And financially, we are also exploding in terms of the financial revenues because it’s in Phase 3. Last year, we grew by 52% in terms of revenue, it’s CNY5 billion — more than CNY5 billion. Thirdly, Good Doctor are constantly working with partners to provide online services and create synergy with offline services. We are working with more than 3,000 hospitals and more than 100 tertiary hospitals. We are working with more than 90,000 drugstores. So patients can enjoy online, offline service at the same time. Last year, our colleagues at Good Doctor has been very busy. And we are working in 56 premises or cities. So sometimes, the — it’s — the patients, it’s not easy to go to the hospitals at these days, and we can provide online consultation. And we’re trying to continue to improve that online, offline consultation services.

Page 73 about Autohome. Last year, we know the auto market has been declining by 8.4% in general, but we have enjoyed great growth. In terms of customers, DAU on our app has been high quality from — improving from 29 million to 36 million. In terms of financials, the revenue has been consistently growing. It’s now CNY8.4 billion, growing by 16.4% and — among which, 18% of the business are actually new business created for the past 3 years, including advertisements, lead. We also have data enablement, transaction enablement and the financing enablement services. So we are covering 90 — more than 90 OEMs. We have 36 data products to help the OEMs to improve their operation. We are working with 27,000 dealers. 17,000 of them are using our data cloud products. We also facilitated CNY24 billion financial — financing services.

Last but not least, and please turn to Page 74, the Smart City business. It’s a company that has been newly established for the past two years. We are now serving 115 cities, including 500,000 companies and 50 million citizens. And let me give you some example of supporting governmental service, promoting business development and improving people’s livelihood.

In terms of the supporting government services, we supported the government of managing the administrative business. And we also help the customers — the government managing the cost, improving the ROI, especially on some key infrastructure business and projects. And we would then suggest government of leveraging the vast resources of investing the money in the most needed area. And in terms of promoting business development, we’ve now served 500,000 companies to optimize our business environment. We’re working with the government of providing enterprises with planning service and regulation to improve the business environment for enterprises.

You can see in Guangdong province, this year on we started to raise Guangdong municipality of providing a service plus financing platform to serve 110,000 companies, especially SMEs in the microeconomic situation, so that they can be served by the banks with feasible financing solution. Well, I also would like to talk about improving people’s livelihood, house, culture and convenience. During the epidemic outbreak stage, we are working with the House Commission of China of providing 15 province epidemic reporting and 8 daily updates. And every day, we have 1 million citizens using our AskBob services and also using our medical consultation to trying to understand the situation of epidemic outbreak. And we say that around 10% of the Chinese doctors are also using the AI-assisted diagnosis provided by Ping An to help to do the quick diagnosis during the epidemic outbreak.

You can say that China is also launching new treatment pathways on a daily basis. So by having those numbers and those information to our doctors, they would work more effectively on the front line. Where yesterday in order to support the epidemic control, Ping An, the Smart City also launched our AI image. By having a CT scan, we can support the image rating to the doctors. Actually, the image rating and the diagnosis is not easy. For the lungs, 1 image takes around 300 different images and nodes, where yesterday were studied by leveraging the AI-based image rating support, and only within 15 seconds it can help to support the image rating for any of the AI-needed area. So that’s what Ping An would like to support the control of the epidemic outbreak in China.

And thank you very much. That’s all for my introduction about the technology business. Where in the appendix, we also provided you the profit table for all business lines, and for your reference if you have any questions and now it’s the QA time. Thank you.

Question-and-Answer Session

A – Sheng Ruisheng

Thank you. Thanks for the management team. And now it’s time for QA. [Operator Instructions].

Unidentified Analyst

Thanks for the management team of providing me the chance for the first question. I have two questions regarding life insurance. As we can see, by the end of last year, you started the life insurance reform committee or task force. Would you like to work us through their work plan? What the priority of their work? And how long it’s going to take to reform the life insurance business of Ping An Group? And the second point is on the revenue and profitability. And you can see the revenue from the life insurance per capital was growing last year, but it’s lower than 6.4%. I’d like to ask the management team what is the fundamental reason? What kind of countermeasures you’re going to take in order to improve agent income for the life insurance business? That’s the 2 questions I have.

Lu Min

Thank you. Let me answer your question. The first question is regarding the goal of the life insurance reform. Why should we do the reform? Let me just give you some explanation in this regard. For Ping An Life Insurance, our reform started from the mid of 2018 in order to respond to the new regulations and we elected to do more protection product in the business. Where now the reforms being done for 1.5 year, in this process, we also helped to identify that in order to transform the product, the whole system and the whole mechanism also need to go through the reform accordingly, where you can see the outbreak of the epidemic also shows us how urgent we need to do the reform of the life insurance. So I think in 2020, we’re going to take this whole year to enhance our reform over the life insurance business to make sure in the following years, we’re going to have a robust yet steady and healthy growth of the life insurance in the near future.

In terms of the goal of the reform, first of all, our NBV would be growing more robust in the following years. And the second goal, the income and the productivity of our agent needed to grow continuously. If we can hit these 2 targets, then we call our reform successful. And that’s the 2 targets we have in our mind, where in the near future, for sure, we’re going to do multiple policies in order to secure the success of the reform.

And for Ping An Life Insurance, we have 3 channels: agent channel, and the bancassurance as well as the on-site insurance. And by leveraging the reform on three channels, we would like to further enhance our momentum for future development, so that we can lay a solid foundation for the future business growth. Well, in terms of the product, we’re going to surely take the customers’ need in our mind and follow what is customer needed. We’d like to leverage the integrated finance advantage of our service. We would like to also work on a systematic product structure optimization so that we can launch more product that really is needed by the customer. Well, in terms of the sales model, I won’t elaborate too much on this question. And that’s my interpretation of the reform. Where I also have saying that is done by Jessica. Where besides of our agent, another reform we’d like to focus on is on leveraging technology. You can say from last year on, we emphasized on online to offline integration, and we also would like to have the outside yet remote service integration. And thirdly is about the data-driven and AI-driven solutions.

So the matter for the smart recruitment I mentioned just now, assisted by AI, the online policy handling and the digital marketing as well as the digital and smart-driven business management, we are going to leverage the cutting-edge technology in order to improve the productivity of our agent. Let me give you two examples. First one on training, where attach is greater importance for the onboarding training for the new agent, especially to provide the customer right training for each of the agent and also agent with different personalities and characters and scheduling would also be provided with tailor-made training. And each week on each day, based upon their study pace, they can help to collect [indiscernible] in order to receive the training more flexibly.

And the second example is on business management and the digital marketing and many of the event management truly depends on the visit of the customer. And the epidemic outbreak is also a good opportunity for us to change our way of visiting the customer and we’d like to leverage the digital marketing of launching more offline yet online integrated customer visit. By leveraging technology, we support our 1 million agents of talking and communicating with the customer online and off-line. For example, we have 30 different categories of the information from updates to education. According to the appetite and the preference of the client, we can then send the corresponding information to the customer, which will make the marketing more emotional and more friendly. So these can truly help to improve the dynamics from the customer acquisition to customer communication, and that’s how we’re going to leverage technology to do that.

Jason Yao

The second question, and you were also asking about the income of the agent for the life insurance business. For sure, last year, we see a growth of agent income of the life insurance business as an analyst has mentioned. The agent income for the life insurance was up by 1.8%. Our NBV was increasing 5.9%, but why the life insurance agent income was only up by 1.8%. And let me explain the reason to you because actually the income of our life insurance agent are included with the first year premium commissions and the persistent policy commissions. It’s being taken as a whole and it’s not only directly related to the first year commission. That’s why you see the numbers are not as high as NBV growth rate.

And another reason is also because last year, the size of the agent team is also being decreased. So that’s why we have last agent income increase for last year and last year for the first year commission fees for the agent. We also launched some long-term protection product and a long-term protection product, it’s first year commission also being adjusted. And that’s why they have some impact over the life insurance agent income. But jointly speaking and the life insurance agent income is still on the uptrend, attaches greater importance to our life insurance agent. They are our front-line workers, and they need to seek for the sustainable and healthy development. Income is a key metric for them. So that’s why, as Mr. Lu mentioned, in the near future, we’re going to optimize the training to our agent. At the same time, we also would like to build the best product mix and the portfolio to take care of the cost and the needs to help to improve the quality, income and the productivity of our life insurance agent.

Operator

Next question, Mr. Zhou from Crédit Suisse.

Charles Zhou

Ladies and gentlemen, my name is Zhou Chen from Crédit Suisse. My first question goes to Mr. Xie Yonglin. And in Q3 and you started to work as a CEO of the group, so is it possible for you to share your prospect of Ping An Group in the next 3 to 5 years, especially you used to work in collaborating of different units and you are responsible for the corporate finance service committee. So could you help us to identify any opportunities and the big prospects in the near future?

And my second question is also regarding the life insurance reform committee. Is it possible for Chairman Ma to share with us whether you’re happy with the life insurance reform work here in this moment of the time? And when can we say that the agent team could be stabilized and their income could be up by a double-digit number?

And another question goes to Jason Yao. And you mentioned 80% of the increase are being driven by P&C insurance business. And I find out for the life insurance, its operating profit before tax is only a single-digit number growth. And so Jason Yao, can I just confirm with you whether my interpretation is right or not? And if you are under pressure, does it mean that in the near future, the profit — the operating profit growth would be kind of slowed down. And is it going to also impact our dividends in the near future?

Sheng Ruisheng

To remind you, for the fairness, no more than two questions, please, in the following questions.

Xie Yonglin

To answer your first question, I think you have addressed the first question to me. The strategy of the group has never changed to become the global leading integrated service — financial service and the life service provider for the retail world. But it has been improved. In recent years, we’ve been focusing on finance technology, technology ecosystem. So we use technology to enable finance service.

So the efficiency of the main business, the quality of the main business in our finance practice will be better to make sure we are sustainable in our development as a global leader. And in recent years, we’ve been using technology to enable ecosystem, trying to build new ecosystem business models. And we also take advantage of ecosystem to contribute back to the traditional finance business. That’s something we’ve been sticking to for the past few years, and it’s not going to change because I am in the office now, and we are continuing to deliver on that. Like Jessica said, technology enablement for life insurance, for instance.

In terms of the recruitment, training of the agents, marketing management and it’s been playing a very important role. Technology is also helping the banking business, especially during this epidemic. You’ve seen that the online digital capabilities we’ve built for the past few years have of gaining grants during the pandemic. Their service is not suspended. It has not stopped their productivity, can be recovered very rapidly. And in addition to that, Ping An Group has been focusing on 1+N service to the customers. One customer, multiple products offerings, one account and one stop service. For retail business, that’s what we are doing.

It also true for the corporate business. Because the tactic might be different between B2B and B2C business, but the vision is the same, technology enablement is the same. We use technology for 2B and 2C business to build our ecosystem. So in the retail financial service committee, we will connect account equity products to establish a consolidated product to serve this platform. We also need to connect to the data. So the corporate committee. It’s also the same thing. We have achieved a few things. And you talked about the corporate finance committee. Last year, if you see the data, the data growth has been very rewarding for us.

In addition to fundamental database, we have customer base, business case — base, we have a product base. We use technology to build effective marketing and sales methodologies. So we analyze the companies in the corporate finance to identify products. For instance, insurance, P&C, auto insurance, welfare, protection scheme, leasing, SME loans. The underwriting approval have been controlled centrally. So the approver, reviewer, we will look at the penetration for 1 customer across different domains to improve efficiency because we can do that with the enablement of technology. We can consolidate the information and profile of 1 customer now. And in the future, at the group level, I think we’ll continue to focus on technology plus finance, technology plus ecosystem and the ecosystem will contribute back to the business. So that’s — nothing going to change there.

And then the second point, we will continue to deepen the 1+N for corporate and retail business to supply, in a way, in our technology. And I also shared something about the corporate finance service committee. I believe we were surprised to do it this year again.

Ma Mingzhe

Let me respond to the second question. I shouldn’t be here speaking because we know we have a very good team here. So since you are trying to understand the reform that’s happening, let’s share with you something. For the life insurance reform, first is why. Ping An Life started in 2004. We’ve been developing for the past 16 years with great achievements. Since last year or maybe 2 years ago, we discovered that the life insurance market has changed fundamentally. The macros has changed. The environment’s changed. The demand or requirements of the consumers have changed.

The traditional way of doing business is hard to meet the requirement of the new world. The dividend of population has gone away. And you see the industries have been developing in a different way. The logistics, for instance, the salary of the logistic industry is higher than before. We know Ping An agent, they have maybe 100% more in their salary compared with the average in the industry, but we don’t think it’s enough for the next 3 to 5 years. The compensation for our agents need to be improved. So for the past 2 to 3 years, we’ve been trying to discuss how to reform our life insurance. That is the why after development of 26 years.

So we need new methodology of doing business. And then the objective of reform because we want to be the leading life insurance company in the world, not in terms — not just in terms of scale but also become a benchmark of the industry, a new business model for life insurer. We want to be the global leader. We are not satisfied with what we have achieved so far. Because to deal with the future challenges, I think we need to think ahead. And we believe the traditional way of life insurance for the past more than 100 years need to be disrupted. There should be a new iteration of the business model for life insurance. That is our objective.

And then how. We are focusing on 2 things in the reform. First is the channels. Mr. Lu clearly indicated that. He has — Mr. Lu has 20 years experience in life insurance. He knows inside out, and he’s been with the company. He worked in the life insurance. He was the Director of the Corporate Strategy Center. And then he also worked at Autohome with very good accomplishments during his time. And he has a vision, he has experience, and he has leadership and he has business acumen. And we know life insurance reform is not done by 1 person, it’s actually done by a much bigger team. And like I said, we are focusing on the channels, agent channel, focusing on quality development, focusing on improving the compensation for agents. From — this is the transition we are trying to make from scale to quality and compensation for the people.

And the other focus is the online Internet insurance. Now we have 30 million offline policies. We are going to use new methodology to reactivate those offline policies. So we can sell them the integrated financial service and use that to boost our online performance because the life insurance awareness is different than 20 years ago. With the Z generation coming up, they need life insurance. Life insurance is now a lifestyle. It’s just a part of their daily consumption. So we can use online as an opportunity. Of course, it’s going to take time. We need to educate the market. It’s not going to happen overnight, but we still need to invest heavily.

And then bancassurance is also important. We believe in value orientation. We don’t want to sell short-term product. We don’t want to sell wealth management bancassurance product. The tactics and methodologies have changed in the new financial world. We need to reform ourselves. And the other point is about the products. In the past, we’ve been trying to sell the product from the corporate perspective — from the Ping An perspective instead of the consumers’ perspective. So we need to reform our product offerings based on the requirements of the consumers, but not only for life insurance, life insurance plus service plus and the scenario-based or contextual-based life insurance products. So based on — they might differ across cities, across agents and across different target groups. So based on the consumer requirements, but not only for life insurance but also integrated finance products. So one customer, one account, one-stop service, multiple contracts to continue to boost our integrated financial offerings.

Like Jessica said earlier, the reform need to take advantage of our technology capabilities, so technology will be immensely important to the reform including our digital recruitment system, online training system, digital marketing tools, data-driven customer service, for instance, and data-driven activity management, smart customer service. So we have seen some result, and the reform is underway. And we believe these reforms are very much leading the way around the world because we have the technology capabilities [indiscernible].

The fourth point is why we will be successful. Because in our road map, we call it 1 plus four road map. One means the first half of the year will be heavily impacted. The traditional life insurance policies are sold face-to-face. And the agent will not make much money recently because they cannot sell face-to-face and many things are happening online. But of course, there are restrictions for your online efforts, but it is actually an opportunity because we have seen very good result recently from Ping An Technology. So Q1, Q2 this year, will be heavily impacted for all the industries, not just us. And for the second half of the year, we believe it will recover soon. And we believe in 2021, we will go back to normal, a sustainable healthy growth, solid growth and based on the reform. That’s the one.

And then let me talk about the four. First of all, we see that we have more than 25 years most experienced management team at Ping An Group, and they have a market experience of more than 25 years with a very good track record and most of the experience. And my second point that we have the best quality agent in the market. Their productivity for the past 2 decades were always — applies above the industrial average. And then thirdly, we also have a very robust and strong integrated finance system to support our agent, to support them to improve their income, to help them to broaden their horizon. We are also to help them with a better career planning. Because for a company, if you really want to recruit the best quality agent to work for you, if you truly want to improve the quality of the agent team, you have to have a robust integrated financial product.

And my fourth point, we also have a strong technology to support us. So that’s why I say that for the life insurance reform, I’m also deeply involved in the reform process. I didn’t involve so deeply on the daily basis work because — but when there’s any resources, a coordination needed, then I will stand up to help to do the coordination work. And I’d say this is not led by me and this is being done by a big team. Lu Min is the chief leader who is taking care of the life insurance reform. The whole group is supporting him. And we have every confidence that the good result from the reform will be shown in H2 of 2020. And in next year, you will see we’re going to go back to a sustainable yet healthy business track.

Operator

[Operator Instructions]. The next question comes from Kailesh with HSBC.

Kailesh Mistry

I’ve got two questions. One on new business value and agency and the other one on the corporate segment. I think on the new business value, can you just provide some color on new business value and agency development in 2020? Specifically, should we expect another year where we see rising new business value per agent, increasing contracts per agent, despite the fall in the number of agents? And is there going to be any shape to that during the year?

The second question is on the corporate segment. I appreciate it’s just short of 10% of group operating profit. But there’s a new section in the customer development chapter, which is quite interesting. Are you increasing your focus on this segment as a source of — another source of growth? Do you have any targets on what contribution to group operating profit that could become in, let’s say, 3 years’ time? And also with respect to the bank, how should we interpret this for net interest income and also normalized credit costs going forward?

Jason Yao

Thank you very much. Because many of the investors are online and speak Mandarin,, then I shall answer in Mandarin. First of all, let’s talk about the growth of the new business value, and I see many people attaches great importance to it. And especially, the previous few questions were all talking about the life insurance reform, the robust yet healthy reform. The healthy growth of the business is highly relevant too in the reform. And I see that Chairman Ma and Mr. Lu and Jessica, they have already provided you many explanation, the clarifications on the life insurance reform, the goals, the targets and time line we made for ourselves for the life insurance reform of the group. I won’t repeat what is being said by them.

Where, in terms of the NBV growth guidance, I say that generally speaking, we don’t provide it to the market. But due to the epidemic outbreak, and Chairman Ma and Mr. Lu have already clarified that the epidemic outbreak in China where I see going to impact the revenue and the sales of our agent because of face-to-face communication and the contract and the customer acquisition would be negatively impacted by the epidemic outbreak and I hope that the epidemic could be well controlled in Q1 and in H1. And then we’re going to see a rebound of the sales of the life insurance product in H2 of this year. And for the healthy and sustainable growth, we hope that we’re going to see it in 2021. And that’s my answer regarding the NBV.

Xie Yonglin

Thank you. Thanks for the second question regarding the corporate finance service committee, I have to say that by 2019, last year, our corporate finance service committee was performing well, but I have one concern in my mind. Majority of you concerned about the corporate finance service committee. [Indiscernible] said, we are of the track of our strategic environment of the group, for Ping An Group, still we would like to become a global leading retail business and financial service solution provider in the world. But this positioning of the group won’t hurt our corporate financial services committee business. And you can see that majority of the bond has been issued by the enterprises in the market.

And the P&C funds were being [indiscernible] into the world economy. So still corporate business is a key part of our business. And on one side, we provide premium quality to the insurance business and the retail business, while at the same time, corporate business is a key for us to build our ecosystem. But for Ping An, our strategy and our way of doing the business, won’t like the traditional financial institution. Majority of the profits are coming from corporate business. That’s not Ping An is going to do. So for Ping An, our way of doing business for corporate finance are having 4 models. As I mentioned in my presentation, the first one is a so-called simple business. For example, P&C insurance, protection business, leasing and micro loans. These are being called as a simple business, where for credit loans and it’s actually easy to perform very well. And it’s — and the leasing service too, it can actually have the light assets yet the light strategy, where the second business I mentioned is a sophisticated investment and financing business.

For China, we have some big SOEs, like the Merchants Groups and the China Electronics. And those big companies they have the financing model, integrating the direct financing to indirect financing or even sometimes, they have to reduce the leverage. So we have to have the investment bank plus commercial bank plus investment strategy to serve those SOE clients. Sometimes — and they even need our private bank to support them for investment. And we think such a request, it won’t be able for us to support a client with single service, we need it as an integrated solution. And also, the financial notes from those SOEs would also become the prime assets for us.

And Ping An would like to build 5 ecosystems including health care, government affairs and auto and financial institutions. We think that 5 ecosystem, B2C business is definitely not enough. We have to have a B2B and a B2C service models at the same time, so that we can build a platform with a good threshold. Where last year in sophisticated investment and financing business, as I mentioned to you, our financing size was up by 153% and you can also clearly see by having commercial bank plus investment bank plus investment model and strategy, we have a dual light model and we have less capital needed, where at the same time, we can work for the client more comprehensively which truly anchors the need of the corporate finance where at the same time, we also have the interbank business.

And at our company, we have many bond traders. We have our [indiscernible] trade, [indiscernible] team working for us for the bond trading and around 70% of our life insurance products, they have a good experience of the bond trading, high-frequency bond trading and allocation bond trading and many of them are truly good at bond trading. So we have to integrate dual capacity together in order to seek for a good, no matter it is for annuities or the interbanking or the bonds or funds, all those capacities need to be shared systematically within the group, even the strategies and the research over each of those business needs to be shared within the group.

Well, in terms of the corporate business, if you really want to make it big in size and high in quality, sometimes you won’t be able to see it from the balance sheet. The key that you have to have a prudent risk appetite. You have to choose the right verticals and the industries to invest in. So we have the vertical-specific, region-specific and product-specific strategy. We would like to leverage technologies to reduce operating cost. We have to be prudent in selecting the verticals and the product to control the costs. And then through the research, we can also well manage the risk so that we can develop the corporate business in a more healthy and robust approach. And that’s my comment over the corporate finance business. And I’d say this year, our corporate business is going to have a good scorecard again.

Sheng Ruisheng

Due to the time reason, we’d like to allow the opportunity for the final one.

Operator

The final question comes from [indiscernible].

Unidentified Analyst

My name is [indiscernible] from Merchant Securities. I have two questions. The first question is about the epidemic outbreak. So all the management members, how are you going to assess the impact of the coronavirus outbreak to company’s operation? For example, when should our agent come back to work? Whether it’s going to impact our new recruitment. And is there going to be any short-term strategies to stabilize our income and our employment during the coronavirus outbreak? Are there any kind of adjustment and countermeasures from the corporate end to hedge the risks? And the second part is about this operating reliance and you can see what are the reason why the surrender rate was upgoing? So what’s your future plan? And what the reason?

Lu Min

Let me answer the first question, please? Well, in terms of the epidemic outbreak, Chairman Ma mentioned, it’s surely going to have some impact over the life insurance business, and the impact won’t be small because we are not allowed to work as a group, we can’t provide a face-to-face training, our agent won’t be able to have the face-to-face visit to the client. They also can’t sign the contract with the client face-to-face. So for sure, the epidemic outbreak will impact our life insurance business.

So what kind of countermeasures did Ping An take? We have a lot of fiscal supporting policies in order to stabilize our agent team to retain them. And a lot of measures are there in that countermeasure package. I won’t to elaborate on each of them. Just to say a few of them. You can see we take care of the special policy in Hubei, the epidemic striking area, and we also have some support over our agent nationwide. And some of the KPI over on their daily work are being loosen in order to stabilize our team during this special duration of the epidemic outbreak.

Second point, as shared by Jessica already, it’s technology empowerment. So going back to office, as you asked, we actually have started office activities online already. But of course, off-line, we have to obey the government policies. For online office and because we have Ping An technology expertise, we currently — the entire process can be done online including operation and business development. For instance, the meeting — all the morning meetings are happening online, 100% of them, using our own system, OA system. So the agents can work from home. And some agents called me today, they’re saying they’re getting busier working at home now having meetings in the morning and trainings. It’s busier than before. So morning meeting online and then training is also 100% online. The training attendance is very high.

And thirdly, the recruitment, we call mini recruit meeting, 100% online as well. And we have seen many attendees on those meetings recently. And fourthly, we — the explanation to the customers are also happening online because we have again the technology. So all the business activities can happen online. And the activity is even busier than before. And then our products can be signed online as well. All the products we sell can be signed online instead of doing it physically. So that is why we stand out from the other providers. And then like I said, we have financial support and we have technology empowerment. And among all the insurers in the world, I believe we are pretty much the most complete online service provider as a life insurer.

Like Mr. Ma said, life insurance product is sophisticated. You still sometimes need to rely on face-to-face, but I told my team online, you have to be diligent, because now you cannot see your customer in person, you have to be diligent online. And eventually, we will still enjoy great results and rewards. Like Ma said, we hope that we can go back to normal in the second half of the year. And then we will continue to reform our system and making sure everything is sustainable and healthy.

Jessica Tan

To add up a few things, [indiscernible] said — talked about the epidemic impact on life insurers. But in general, the financial industry is not that much impacted, but of course, there are impact. Like Mr. Lu said, the impact is mostly happening to life insurance. The other 2 things impacted are credit loans, that’s definitely true, because the reminder, repayment of reminder and defaults will happen especially with the SMEs. But in general, it’s still controllable. You’re seeing some — we have seen something in the first half of the year. And the second thing is the impact on investment, like Mr. Yao said, Jason Yao said, and mostly impacting the tertiary industry because our investment, 70% of the investment are fixed income. We are investing into medicine, health care infrastructures, which is — are not going to be very much impacted by the epidemic.

And then I want to talk about the opportunities for the mid to long term, especially for fintech, medical technology and smart cities. We believe there are huge opportunities. And in addition to health care, we’ve seen many education opportunities, and all the kids are attending class from home. And you also have a training or education for the grown-ups and K-12 trainings are happening online as we speak. And I think it’s improving by at least 50%. So that’s why I say there are opportunities for us for the mid to long term.

Jason Yao

For your second question of the operation variance. Previously, another analyst pointed it out and I want to elaborate on that a little bit. We know life insurance, health insurance, in general, we have seen the analyst — analyzing report, the residual margin release is stable, growing by 19.5%. One of the big variance you have noticed is the operation variance. In 2018, it’s CNY21.7 billion, and this year, it’s CNY10.4 billion. So there are a few reasons to that. Firstly, in 2019, the premium increase has slowed down. So the expense difference compared with previous years are shrinking. So last year, we also invested heavily in technology for our life insurance offerings. For instance, AI, recruitment, training and AI agent management. So that’s why the expenses has happened. And with the growing slowing down, the agent team, the performance, investment expenses are higher. So that’s why the expense difference has reduced.

And second point is the surrender rate. Yes, that’s true. Surrender ratio is a little higher compared with previous years. There are a few reasons to that as well. First is the product mix is being adjusted. In 2019, we sold more long-term protection products and plus saving combination products. And compared with the previous year, the short saving products, the long-PPP product and the 25-month ones, the persistence rate is lower because of the — for the short saving ones, will be only for three years, five years. Savings now product is 10 to 15 years. The persistence rate is going to be a little bit less than the short period product.

And second reason is that on the market, there are, we call it, value chain, some kind of a black market. They’re trying to hoax the customer to surrender the policy. We do see some organizations, especially some ones are targeting on us. So our monitoring team are trying to analyze it. We’re trying to stringent manage it in a better way in the future. Another reason for high surrender is last year, the agent team has been reduced. There are offline policy — the persistence ratio is lower normally. That is why surrender is higher than before. The positive impact is less now for operating variance, but we believe the trend will get better in the future because we have prepared for those situations. And in 2018, the operating variance is more than CNY20 billion. It’s very high in 2018. And in 2017, the operating variance is only CNY10 billion. So 2018 has been high for us. That is why we’ve seen a huge change in this year again.

And for operating variance, looking forward, I am still optimistic. By the end of last year, we had adjusted our assumptions, especially for the risk margin. For the surrender, we added risk margin pad. We added a pad in the future. The assumption is now more conservative. So the positive variance probability will be bigger in the future. So looking at in different ways, the life operating revenue is still based on the residual margin release. The release ratio will slow down because of the product in-force is big, but this growth will still be healthy and then we have new business coming back in the future. We believe we can still look forward to the life insurance profit in a healthy way. Thank you.

Sheng Ruisheng

I just want to thank all of you for attending this meeting. And I believe you have more questions, and our IR team will follow up on that. So we will try to answer your question in the future in different ways through conference call or through e-mail. That concludes today’s announcement meeting. Thank you very much.





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