Waterdrop returns to the growth track, will investors pay the bill?

The newly established technology service business saw its revenue surge by over 20 times, driving the insurance broker Waterdrop's third-quarter revenue to rise 38.4% year-on-year.

Key Points:

• Waterdrop is expected to return to strong revenue growth this year, ending three consecutive years of decline.
• The company's newly established technology service segment has shown explosive growth, with revenue jumping from nearly zero last year to contributing 23% of the company's revenue in the third quarter of this year.

Yang Ge

“If a tree falls in a forest and no one hears it, does it make a sound?” This English proverb expresses the idea that if something goes unnoticed, does it really happen? This aptly describes the situation following the latest performance announcement of the insurance broker Waterdrop (WDH.US). Despite the company recording impressive growth in a challenging operating environment, its stock price barely moved in the two trading days following the earnings announcement, with only a slight increase on Wednesday, and the next day it not only gave back all its gains but also fell.

Using another saying, “If you can’t stand the heat, stay out of the kitchen,” is equally fitting for Waterdrop's situation. The company's main source of revenue, the insurance brokerage business, is facing increasingly severe operational pressures due to new regulatory measures in China that limit profit margins in related businesses.

In response, Waterdrop has begun to shift towards providing services to insurance companies to help them improve operational efficiency. This type of business appears to be much more profitable than traditional brokerage operations and may also receive support from national policies, or at least face less regulatory intervention, as most large insurance companies in China are state-owned. Currently, many insurance companies are under operational pressure due to the economic slowdown, which may be part of the reason why Chinese authorities are stepping in to “support” industry development and impose restrictions on fees charged to insurance intermediaries like Waterdrop.

Waterdrop's core business focuses on health insurance, and the company is also leveraging its vast database to assist pharmaceutical companies in selecting suitable participants for clinical trials, which is a field less likely to be affected by government regulation. Additionally, the company is actively using AI technology to optimize underwriting, risk analysis, and customer service processes. Chairman Shen Peng stated that the relevant applications “allow us to gain deep insights into users in milliseconds.”

Shen Peng pointed out: “In the third quarter, AI became the core driver of business quality and efficiency improvement, leading to double-digit rapid growth in both revenue and profit.” He continued: “Looking ahead, we will seize the opportunities brought by technology, continue to deepen the integration of AI with various businesses, and promote innovation within the overall business ecosystem to support the company’s sustainable growth.”

Investors may be fatigued by the overwhelming AI narratives in corporate earnings reports, which could explain the market's muted reaction to Waterdrop's impressive performance. The company's quarterly revenue grew 38.4% year-on-year, rising from 704 million yuan last year to 975 million yuan (approximately 138 million USD). In comparison, private insurance leader ZhongAn Online (6060.HK) saw its revenue flat in the first half of this year; another private insurance broker, Shouhui Group (2621.HK), recorded a 21% decline in revenue during the same period Waterdrop itself has also experienced a decline in revenue in the past, with company revenue continuously falling since 2021, dropping from 3.2 billion yuan that year to 2.8 billion yuan in 2024. However, with this year's performance rebounding, the company is almost certain to return to a growth trajectory. Driven by strong performance in the third quarter, the company's cumulative revenue for the first nine months of this year reached 2.57 billion yuan, a 24% increase from 2.08 billion yuan in the same period last year.

Technical Services Drive Growth

Waterdrop currently has two main sources of revenue: the core insurance brokerage business and the smaller medical crowdfunding business, the latter primarily assists individuals who have not purchased formal insurance in sharing high medical expenses. In the quarter, the insurance business remained the company's main revenue pillar, achieving revenue of 869 million yuan in the third quarter, a year-on-year increase of 44.8%, compared to 601 million yuan in the same period last year, accounting for nearly 90% of the company's total revenue.

The core insurance brokerage revenue grew 14% year-on-year in the third quarter, with new policy first-year premium income rising 32.3% compared to the previous quarter. The company stated that this performance was mainly benefited from upgrades to data infrastructure and enhanced real-time customer assessment capabilities, effectively improving underwriting operational efficiency.

However, as mentioned earlier, the real focus is on the technical services business. This business provides insurance companies with a range of tools to enhance operational efficiency, covering areas such as risk assessment, customer relationship management, and complaint management. Revenue from this segment surged nearly 20 times year-on-year in the third quarter, jumping from 10.2 million yuan in the same period last year to 196.4 million yuan, now accounting for 22.6% of the company's total revenue.

Another potential growth highlight is the company's business of assisting pharmaceutical companies in screening clinical trial patients, referred to as "digital clinical trial solutions." This segment achieved revenue of 31.9 million yuan in the latest quarter, a year-on-year increase of 31%, indicating that in China's increasingly crowded drug development market, this business is expected to become a new growth engine by providing patient recruitment services to pharmaceutical companies.

In terms of scale, Waterdrop's crowdfunding business is quite substantial. However, this business contributes limited revenue to the company, partly because obtaining high profits from services aimed at distressed populations does not sit well with societal perceptions. In the third quarter, the crowdfunding business recorded revenue of only 65.7 million yuan, essentially flat compared to 65.8 million yuan in the same period last year.

During the quarter, Waterdrop's operating costs and expenses rose 27.1% year-on-year, a significantly lower increase than the revenue growth rate, thus driving operating profit to surge 330% year-on-year to 114 million yuan. During the same period, the company's net profit also recorded a year-on-year increase of about 60%, rising to 159 million yuan, achieving profitability for the 15th consecutive quarter.

Although the market reacted lukewarmly to the latest financial report, investors have not completely overlooked the improvement in Waterdrop's prospects. Since the beginning of this year, the company's stock price has risen 54%, although most Chinese tech stocks have seen similar increases during the same period. Currently, its price-to-sales ratio (P/S) is 1.52 times, significantly higher than the 0.64 times of Handu Group and 0.59 times of ZhongAn Online, reflecting the market's preference for this stock, as it is relatively less affected by regulatory policies and economic slowdown