Drop of Water and Fanhua as COVID Storm Rises, Each Eyeing Different Paths for New Growth – Fanhua (NASDAQ: FANH), Drop of Water (NYSE: WDH)

key takeaways:

  • Waterdrop returned to profitability in the fourth quarter last year, while Fanhua’s operating profit increased despite a decline in revenue, both due to cost reductions
  • While the end of Beijing’s “zero Covid” policy brightens the outlook for insurers, many uncertainties remain as China’s economy remains fragile

by Warren Yang

Like clouds hovering over Chinese insurance brokers Waterdrop Inc. WDH And Fanhua Inc. Funh Much of the past year is finally picking up, although the storm is certainly not over yet as China’s economy remains in flux. That means the ability to control costs will be key to keeping both companies profitable in the short term — a common theme in corporate China these days as the days of heady growth past are stalled.

At the same time, China’s two largest publicly listed insurance brokers are laying their own separate foundations for a return to growth in 2023, with Waterdrop building out some innovative new services as Fanhua looks for acquisitions.

Waterdrop returned to the black in the fourth quarter last year with a net profit of 126 million yuan ($18.3 million), a sharp improvement from a loss of 71.2 million yuan a year earlier, according to the online insurance broker. latest result Released last Friday. Such a huge swing is quite remarkable, considering that the company’s revenue grew a less impressive 12.5% ​​year-over-year to 772 million yuan.

The cost reduction has been recovered due to the waterdrop. While the company’s operating costs grew more quickly than its revenue, it managed to reduce sales and marketing expenses by 43% and general administrative expenses by 20%. Its R&D costs also decreased by 21%, reducing its total operating costs and expenses by about 11%. That may not sound like a lot, but a cut of that magnitude is no small thing for a company like this with thin operating margins.

Fanhua’s top line revenue was shakier in the October-December period, falling 4.4% year-on-year to 767 million yuan. its consequences Released earlier this month. But it cut its expenses significantly to see a 3% gain in its operating income. The company’s net income grew more than sixfold, mainly due to a one-time impairment charge in the year-ago period.

Both sets of results show that both companies have weathered the last three months of China’s “zero Covid” era relatively well after adjusting to slower sales growth on lower consumer spending during frequent and unexpected disruptions under strict epidemic-control policies. tolerated from

Waterdrop’s revenue growth accelerated in the fourth quarter compared to the previous three months, while Fanhua’s rate of decline slowed. Still, the former’s revenue fell nearly 13% for the year to last 2021, while the latter’s revenue fell 15%, showing how tough the year was for the pair.

The two brokers, which only distribute third-party products, were hardly alone in weathering the Covid storm, which also hit more traditional insurers who develop and sell their own policies. In such times, life can become even more difficult for traditional insurance companies as they have to navigate volatile markets to earn returns on the investments made with premiums. By comparison, companies like Waterdrop and Fanhua make most of their money from simple service fees.

Sector Bellwesters Prefer china life Insurance (2628.HK) hasn’t been spared from the downturn, and less experienced names such as ZhongAn Online P&C Insurance (6060.HK) has been hit even harder. The latter, a pioneer of digital insurance, warned last month That it turned a net loss last year as the declining values ​​of its stock and bond investments eroded its investment gains.

cost cutting drive

Waterdrop launched a drive to aggressively cut costs in late 2021 as revenue growth becomes more difficult, laying off staff and reducing the use of third-party channels to lure traffic in the final quarter of the year .

It also branched out into new businesses, including one that provides crowdfunding services for patients with large medical bills by connecting them to “caring hearts” through its platform. That business generated 41 million yuan in new service fees that did not exist in the fourth quarter a year ago.

Another new Waterdrop service also matches drug makers with suitable patients for clinical trials. Service fees from this business were also a major new growth area, rising to 23 million yuan in the fourth quarter from an almost negligible 600,000 yuan a year earlier.

Those figures may sound small, but combined they equate to more than 8% of the company’s total revenue for the fourth quarter — and could continue to grow strongly. Expansion into such ancillary services related to Waterdrop’s core business looks smart by diversifying its revenue streams to provide some protection against the inevitable sector downturn.

Fanhua, China’s first listed insurance broker established in 1998, is not strategically focused on cutting costs. In fact, the company is planning to increase spending to enhance its digital capabilities and accelerate acquisitions, which can effectively help fuel growth. Fanhua thinks it can do just that, aiming to grow its life insurance sales, first-year premiums and operating income by at least 50% this year.

China’s economy is on course to bounce back after abandoning most of its Covid-19 measures late last year. But Fanhua’s goal seems ambitious enough — it may be setting itself up to fail given the fragile state of China’s economy. Unless, of course, the company plans to reach that goal through acquisitions.

In fact, just last month signed an agreement 51% to buy Jilin Zhongji Xian Insurance for undisclosed terms. Zhongjie is the largest insurance agent in northeast China’s Jilin province, with more than 100 million yuan in gross premiums last year.

Shares of Waterdrop declined following its earnings announcement, while Fanhua barely moved ahead, indicating that investors weren’t inspired by either company’s performance. Waterdrop trades at a price-to-earnings (P/E) ratio of over 12, and Fanhua at over 70. But such high multiples, especially for Fanhua, are probably a function of their low profit bases, rather than reflecting abundant optimism among investors. about their prospects. Relative to revenue, their valuations look more reasonable, with Waterdrop’s price-to-sales (P/S) ratio at 2.9 and Fanhua’s at around 1.

As it stands now, the difference between the P/S ratios of the two could reflect Waterdrop’s superior ability to shore up its bottom line through cost-cutting. Investors may also like Waterdrop’s ability to diversify its revenue base through innovative related products.

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