Water droplets start again, reduce costs and reduce losses

The online insurer's third-quarter spending decreased 26.4% month-on-month and will continue to work hard to throttle in the future

focus:

Waterdrop's third-quarter net loss was $477 million, down 27.3% sequentially.

The stock price has fallen by about 90% so far, and the valuation is still not cheap

This article is written by Pei Zilong

For your future, you must cherish "water source", which in addition to being applied to the lives of ordinary people, because "water" also has the meaning of "money" in the understanding of Chinese, so it can also be applied to the water drop company (WDH. US)。

Waterdrop, an Internet insurance brokerage platform founded by Shen Peng, co-founder of Meituan (3690.HK), had a net loss of 477 million yuan (about US$76.6 million) in the third quarter of September this year, a decrease of 27.3% from the previous quarter; the main reason was to effectively control costs and implement the development strategy of "from quantity to quality".

88% evaporation of stock prices

The stock only went public at $12 a share in May, and if you hold it so far, it's embarrassing, you've lost nearly 88% in half a year. The market remained unconfident after the results were announced, with the stock falling about 5 percent in the immediate trading day before falling another 2.1 percent the next day, closing at a record low of $1.4 last Thursday.

The main reason for this may be the decrease in core income. Due to the decline in insurance-related income, Waterdrop's third-quarter net revenue was 780 million yuan, a decrease of 9.7% year-on-year; although the net loss decreased sequentially, it still increased by 2.4 times year-on-year, and the adjusted net loss expanded nearly 5 times to 450 million yuan from last year.

In its last performance report, Waterdrop attributed the loss to a sharp rise in operating costs and expenses, with the company's operating costs and expenses reaching $1.75 billion in the second quarter, mainly due to spending huge sums of money to acquire new users and promote brands through third-party channels.

Three months later, Waterdrop's cumulative insurance customers increased by 5.9% from 102 million in the second quarter to 108 million in the third quarter, and the cumulative paid insurance customers increased by 9.2% from 24.9 million in the second quarter to 27.2 million in the third quarter; and the first-year premium of a single customer in the third quarter was $1,292, a slight increase of about 2% year-on-year.

The effect of sprinkling money to obtain new customers is not great, but Shen Peng understands that continuing to "burn money" is not the way, and the company must always reduce costs if it wants to make a profit. As a result, Waterdrop's costs and expenses in the third quarter were compressed by 26.4% month-on-month to $1.29 billion, and it is expected to continue to reduce operating costs in the fourth quarter, with the goal of returning to the track of making money.

Shen Peng, who founded Waterdrop in 2016, started as a crowdfunding platform to provide mutual assistance to patients who want to raise expensive medical expenses, and his plan is to obtain traffic through the platform and guide to the realization of insurance brokerage business, but Chinese regulators believe that such companies are essentially commercial insurance suppliers and require official operating licenses. Shen Peng smelled that the momentum was not right, and closed the "Water Drop Mutual Aid" in March this year, which also meant giving up one of the sources of new insurance business promotion, so he urgently looked for new channels after listing, hoping to find expensive third-party channels.

In the first half of this year, China's technology stocks such as japan, water droplets topped the "first share of China's insurance technology" to the United States to list, shareholders including Tencent (0700.HK), Meituan (3690.HK), Boyu Capital and other big names, the listed market value of nearly 30 billion yuan.

With the Chinese government's successive measures to rectify technology companies, it is difficult for Waterdrop to stand alone, and its stock price has fallen and fallen. At this time, the company proposed to buy back, Shen Peng made it clear that from November this year, the next 18 months will not sell shares, two good news but can not stop the stock price fell, even if the first three quarters of this year through the droplet insurance market generated the first annual premium (FYP) increased by 37.5% year-on-year to 14.464 billion yuan, which did not help the stock price.

Break even after two years

Shi Kangping, Chief Financial Officer of Waterdrop, said: "We have successfully reduced our dependence on third-party traffic through a more refined operating model, and will achieve service quality improvement and improved profitability in the future." His words heralded that the water droplets had planned to start again and embark on the road to stop losses.

Investment banks are optimistic about the prospects for water drops. Goldman Sachs believes that water droplets effectively compress costs, and expects to achieve a mature business break-even by 2023, maintaining a "buy" rating with a target price of $9.5; Morgan Stanley also gave an "overweight" rating, believing that management "shifts from quantity to quality" and focuses on improving customer experience, coupled with cost optimization measures, it believes that profit margins will continue to improve.

Some analysts who are familiar with the industry have been very anti-faceted, believing that the business model of water drops is basically to burn money, traffic realization, secondary conversion, secondary realization, and the original listing at a high valuation was because the market was optimistic about the flow of water drops. The analyst, who did not want to be named, said: "For example, water drop chips, water drop mutual aid, can quickly increase traffic, and then use different methods to realize; in fact, the investment market is not optimistic about the company's insurance brokerage business, if you want to invest in insurance business, it is better to buy insurance companies, when the incremental stall, the market will be revalued! 〞

Compared with other profitable peers, Waterdrop still recorded losses, so it cannot be compared with the price-to-sales ratio, but its price to sales ratio is about 3.39 times, which is a significant premium over the peers. Reference "Insurance E-commerce First Stock" Huizing (HUIZ. US) forecast a price-to-earnings ratio of 101.4 times, but the price-to-sales ratio in the last 12 months has fallen to only about 0.25 times; ZhongAn Online (6060.HK), which has achieved profitability from its underwriting business for the first time this year, forecasts a price-to-earnings ratio of 29.39 times and a price-to-sales ratio of 1.5 times; Fanhua Insurance (FANH. US), the stock price has performed relatively steadily this year, hovering between $12 and $15, with a price-to-sales ratio of about 1.2 times.

In contrast, it is difficult to say that the water droplets that make money in the short term are not cheap at valuations. High valuations always require high growth rates, and if growth momentum is lost, money will naturally leave, which is the reality of the investment market.