Waterdrop Stalls In Second Quarter, But Reaffirms Annual Growth Forecast

Key Takeaways:

• Waterdrop's (WDH) revenue fell 0.4% in the second quarter, but its profit rose fourfold as it controlled costs in what it described as a market filled with "challenges"
• The company's recent Waterdrop Guardian AI initiative took a step forward with the signing of a new partnership with an unnamed insurance company

By Doug Young

The latest results from online insurance broker Waterdrop Inc. (WDH) contained a steady stream of updates on both the company and its industry, providing a complex mix of both positive and negative developments for investors to drink up.

On the positive side, founder and Chairman Shen Peng seemed to reassure investors that an unexpected decline in second-quarter revenue was an anomaly when he reaffirmed Waterdrop's (WDH) commitment to achieving double-digit revenue growth for the full year. That implies he believes growth will be strong in the second half of the year, since Waterdrop's (WDH) revenue in the first half rose just 7.8% after the second-quarter decline.

Also on the positive side, Waterdrop (WDH) announced a special dividend, albeit a meager one, representing its second after paying a similar dividend last year. And equally important, Shen said on the company's earnings call that Waterdrop (WDH) is committed to paying annual dividends going forward as long as it remains healthy and profitable.

Last but not least on the upside, the company detailed the latest progress for an ongoing AI initiative first disclosed at the end of last year that could become an important new revenue stream down the road.

Now the downside.

In addition to the revenue decline, Shen also warned of "challenges" his industry is facing due to changing government policies. That appears to refer specifically to insurance brokers like Waterdrop (WDH) and not actual insurance underwriters. Those changes look at least partly like a government attempt to help insurers, most of which are big state-owned companies, as they find themselves saddled with a growing number of problematic investments tied to China's struggling property market.

In a Fitch note on China's insurance industry dated Sept. 8, the ratings agency said "(Chinese) regulators are working to reduce the pricing rates for insurance products, to control liability costs, and to mandate comprehensive control over commission payments." It added "Traditional distribution channels, such as individual agents and bancassurance, are undergoing major changes due to economic and technological shifts, forcing companies to adapt their strategies."

That seems to be saying China is limiting how much brokers like Waterdrop (WDH) can receive in commissions for their services, in a regulatory move to lighten the load from such fees for actual insurers.

In another negative development for the company, Waterdrop (WDH) also revealed that revenue from its new business of helping drug companies find patients for their clinical trials contracted in the second quarter, after posting 70% growth last year.

That's a setback because investors were probably hoping this newer, less-regulated business might help to reduce some of the risk of being in the far more regulated business of selling insurance policies. That heavy risk is even leading some companies to abandon the industry completely, including Fanhua (FANH) , a traditional insurance broker whose latest public announcements describe itself as a financial services company serving financial advisors.

The positive elements in its mixed report appeared to trump the negative ones in the eyes of investors, though only slightly. Waterdrop's (WDH) shares rose 5.7% the day of the announcement last Wednesday, and had still maintained most of those gains by the end of the week. The stock is up 5.8% so far this year, though it was up much more at one point during the year. And it has still notably lost about 90% of its value from its IPO price in 2021 when investors were still relatively bullish on China fintech stocks.

Insurance Slowdown

Next, we'll take a closer look at many of these different elements in Waterdrop's (WDH) latest report. At the highest level, the company's revenue dipped 0.4% year-on-year to 676 million yuan ($95 million), as its core insurance related revenue - which accounts for 85% of its total - fell by a larger 4% to 574 million yuan.

Waterdrop (WDH) attributed the insurance-related revenue decline to a drop in first-year premiums for the policies it facilitated, which fell by a sharper 19% during the quarter to 1.78 billion yuan. That drop isn't a huge surprise, since Chinese consumers were never big buyers of insurance due to the newness of the product. Their growing caution in China's current slowing economy is likely making them even less enthusiastic about this product.

Against that backdrop, it's slightly surprising that Shen appeared to forecast a rebound in that part of Waterdrop's (WDH) business in the second half of the year when he pledged that: "This year, the company remains committed to its financial guidance, targeting double-digit revenue growth while maintaining robust profitability."

His confidence in achieving that kind of growth will inevitably rely on at least some rebound in the insurance business, but could also include expectation that the company's other revenue centers might start gaining momentum. Its other big money generator is its crowd-funding service that helps people raise money for medical treatments. That business jumped 55% year-on-year to 69.3 million yuan in the second quarter, though it still only accounts for 10% of Waterdrop's (WDH) total, and Shen noted it is still losing money.

The company's other revenue stream from healthcare-related services, mostly helping drug companies find clinical trial patients, experienced a setback with a 17% year-on-year revenue decline for the quarter to 26.4 million yuan. Since this business is relatively reliant on a small number of clients, it's possible that Waterdrop (WDH) simply experienced a brief drop in business and things will pick up in the second half of the year.

Despite the decline in its core insurance operation, Waterdrop (WDH) was still able to sharply boost the operating margin for that part of its business through costs controls, helping its profit to rise fourfold to 88.3 million yuan from 21.7 million yuan a year earlier. It also swung to a profit on an operating basis from an operating loss a year earlier.

Finally there's the company's large language model (LLM) AI initiative, called Waterdrop Guardian, which the company is piloting to help insurers to improve their efficiency. It said that during the quarter it entered a "strategic cooperation" with an unnamed property and casualty insurer for that program.

The initiative looks intriguing and could have potential as a new revenue generator, which is important as it would be less subject to regulatory risk since it involves simply providing AI services to insurance companies. "This is the first time we export a customized solution of non-life insurance and we look forward to empowering more industry partners with AI solutions," said Chairman Shen.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.