Losing 1.2 billion in three years, is the water drop worth it?

Blessings and controversy followed one after another.

On April 17, Water Drop Company (hereinafter referred to as Water Drop) submitted a prospectus to the U.S. SEC and plans to list on the New York Stock Exchange under the stock code "WDH". Underwriters include Goldman Sachs, Morgan Stanley, Bank of America Merrill Lynch, and ABC and China Merchants Securities. , CITIC and other Chinese securities firms.

Waterdrop, who is less than five years old, is expected to become the first insurtech platform for China's concept stocks to land on the NYSE.

Controversy also followed. According to the prospectus, although Waterdrop's revenue has soared, in the past three years, the revenue was 238 million yuan, 1.511 billion yuan, and 3.028 billion yuan, but the net loss was also rising, respectively. 209 million yuan, 322 million yuan, and 664 million yuan. Based on this calculation, the accumulated losses in the three years have reached 1.2 billion yuan.

Just like the precedents of Pinduoduo, Station B, and Kuaishou, losses have caused controversy. Under the pressure of losses, "burning money" in exchange for growth, is the water drop worth it? When will the break-even threshold come?

All questions will eventually have to return to the water drop prospectus and industry fundamentals to find answers.

High revenue growth, 1.2 billion loss attracts attention

The prospectus shows that in the past three years, Waterdrop's performance has been in a high-growth channel.

Revenue in 2019 reached RMB 1.511 billion, an increase of 534.6% compared with RMB 238.1 million in 2018; revenue in 2020 reached RMB 3.0279 million, a further increase of 100.4% year-on-year.

In its income structure, commission income from insurance business accounts for the absolute majority. In 2020, the revenue is 2.695 billion yuan, accounting for 89.1%, technical service revenue is 194 million yuan, accounting for 6.4%, management fee income is 110 million yuan, accounting for 3.4%, and other income is 28.67 million yuan, accounting for 0.9%

The water drop business is divided into two distinct parts:

Among them, Didiqian is the pioneer of domestic personal network seeking help, and a tool for free fundraising for patients with serious illnesses. As of December 31, 2020, more than 340 million people have donated a total of more than RMB 37 billion to more than 1.7 million patients through the "Water Drop Company" platform. Although from the perspective of the fundraising scale in 2020, DipChip ranks first among many domestic fundraising platforms for serious illnesses, but it does not generate revenue by itself, and provides more user drainage and insurance education.

And Bighead Waterdrop Insurance is the main business of Waterdrop Company, and its revenue has also experienced "exponential growth" during the three years of its launch.

According to the waterdrop prospectus, as of December 31, 2018, December 31, 2019, and December 31, 2020, the cumulative paid insurance consumers were approximately 1.7 million, 8.8 million, and 19.2 million, respectively. As of December 31, 2020, the cumulative number of paid insurance policies reached 30.7 million.

Correspondingly, in 2018, 2019 and 2020, the first-year premiums generated through the “Drop Protection” platform were RMB 973 million, RMB 6.668 billion and RMB 14.426 billion, respectively.

Under the high growth, controversy also followed-the loss of the water drop business in the past three years has been rising. In 2018, 2019 and 2020, the net loss of Water drop was 209.2 million yuan, 321.5 million yuan and 321.5 million yuan respectively. RMB 663.9 million (approximately US$101.7 million).

Looking through the prospectus of Waterdrop, we can find that its main expenditure items are sales and marketing expenses.

From 2018 to 2020, the sales and marketing expenses of Waterdrop will be 185 million yuan, 1.056 billion yuan and 2.131 billion yuan respectively, including customer acquisition and brand marketing, salaries and related expenses for employees engaged in sales and marketing, equipment leasing and depreciation expenses, The cost of additional services such as free insurance, green channel for medical treatment, and free physical examination provided to users.

Can the "high growth" based on losses be sustainable? Is the water droplet worth 1.2 billion in three years? After the announcement of the water drop prospectus, these issues became the focus of attention.

In fat, it is not uncommon for water droplets to use marketing methods to occupy the market.

In 2018, Pinduoduo went public with a huge loss, and criticisms about its "bleeding listing" continued. In the year of listing, Pinduoduo even ranked first in the loss list of China's Internet listed companies with a net loss of 10.217 billion yuan. Now the market value of Pinduoduo has been More than hundreds of billions of dollars.

After Amazon went public for 20 consecutive years of losses, the stock god Buffett passed him by. Buffett later regretted it. He reflected that he had blinded his eyes because of Amazon's losses, and "missed a good opportunity that was originally at his fingertips."

In fact, Bezos also stated in an internal letter that only by expanding the scale and quickly occupying the market and users' minds can we maximize the reduction of marginal costs, move toward economies of scale and make profits faster.

Back to the water droplet, can the high growth under its losses be sustained?

"Burning money" in exchange for growth, is the loss worth it?

It is almost the norm for Internet companies to go public in the U.S. stock market at a loss. According to statistics in early 2019, as many as 81% of the 182 Chinese concept companies listed in the U.S. were listed at a loss, such as iQiyi, B Station, Pinduoduo, NIO, etc.

As for why the U.S. capital market is willing to pay for losses, Paul Condela, chief analyst of emerging technologies at startup research company PitchBook, said: "The increase in unprofitable IPOs reflects the general preference for growth rather than profitability in public and private markets."

Moreover, in most cases, the company’s failure to report profits does not mean that it cannot be profitable. “Many companies, if they cut R&D and recruitment expenses, they may be profitable. But venture capital and public market investors will also say, “We want To grow, do not want to focus on short-term profits.

Of course, among the 182 loss-making companies listed above, there are both potential stocks with outstanding value such as Pinduoduo, and many bubble stocks such as Eggshell and Ruixing.

How to consider the subtle relationship between loss and burn, growth and risk? Was the loss of Waterdrop blindly burning money, or was it the cost of growth?

First, it depends on whether the loss is controllable.

In the past three years, although the net loss of Waterdrop has been increasing, the loss rate has continued to decline. The adjusted EBITDA losses were 140 million yuan, 159 million yuan, and 247 million yuan, respectively, and the three-year loss rates were 58.93%, 10.52%, and 8.17%, respectively.

From the perspective of the cost composition of Water Drop, although the sales and marketing expenses, which account for the bulk of the increase, are still at a controllable level. In 2019 and 2020, the proportion of Water Drop’s sales and marketing expenses to the company’s total revenue is controlled. It is about 70% (69.92%, 70.36%).

And one piece of information worth paying attention to is that profiting from water droplets may be a trade-off rather than ability. Its prospectus shows that in the second and third quarters of 2019 and the second quarter of 2020, Waterdrop's operating profit has turned positive. But then Waterdrop has further increased its sales and marketing expenses, which shows that Waterdrop is not incapable of achieving profitability, but to maintain a leading position in the fierce competition, continue to expand its business scale, and spend money online to acquire customers. And brand promotion.

Second, although the overall sales and marketing expenses have risen sharply, the individual customer acquisition cost of Waterdrop is still lower than the industry level, still occupying a low cost and high efficiency ground.

The prospectus shows that the marketing expenses of Water Drop Company for customer acquisition and brand promotion in 2018-2020 are 86.299 million yuan, 793 million yuan and 1.743 billion yuan respectively. As of the end of 2018, the end of 2019 and the end of 2020, the paid insurance of Water Drop Insurance The number of users were 1.7 million, 8.8 million, and 19.2 million respectively.

May wish to simply calculate the customer acquisition cost, based on the newly added 7.1 million and 10.4 million paying users in 2019 and 2020, the customer acquisition cost of a single paying user of Water Insurance is 111.75 yuan and 167.60 yuan.

There have been industry media reports that the customer acquisition cost of a single insurance user of Internet insurance is between 300-400 yuan, and the customer acquisition cost of traditional insurance companies is as high as thousands of yuan. It can be seen that the online customer acquisition cost of Waterdrop Insurance The cost is relatively low and it is in a depression in the industry.

The above marketing and sales expenses not only converted tens of millions of paying users in a short period of time, but also converted many potential users who are expected to contribute to revenue and profits in the future. In addition to paying users, Drip Bao will also add new ones in 2019 and 2020. 14 million and 51.2 million donated insurance users.

Third, the quality of users gained by marketing also has an upward trend.

In the insurance business, long-term insurance users continue to pay and the overall premium amount is higher, which can generate stable cash flow, which is the future development trend of the Internet insurance industry.

According to the water drop prospectus, the long-term insurance business of Water Drop Insurance has grown substantially in the past three years. Long-term insurance commission income increased from 1.51 million yuan in 2018 to 173 million yuan in 2019, and to 650 million yuan in 2020, accounting for the company's revenue. The proportion increased from 0.6% to 21.5%.

At the same time, the first-year premium of a single user of Waterdrop Insurance has increased from 590.1 yuan in 2018 to 1143.2 yuan in 2020, and the first-year premium of a single policy has increased from 442.6 yuan in 2018 to 819.1 yuan in 2020.

Not only that, the user conversion rate and retention rate of Water Drop are also increasing.

In 2018, 85.1% of the first-year premium of Waterdrop Insurance came from traffic conversion through waterdrop chips and waterdrop mutual assistance, 13% came from organic traffic and repurchases from old users, and 1.9% came from third-party traffic channels. By 2020, the proportion of traffic conversions through water drop chips and water drop mutual assistance has dropped to 16.6%, 44.9% are from third-party traffic channels, and the proportion of organic traffic and repurchase by old users has risen to 38.5%. If the proportion continues to increase, Waterdrop's dependence on third-party traffic will gradually decline, and sales and marketing expenses are expected to decline.

Of course, although Water Drop’s losses are still manageable at present, it does not mean that it can sit back and relax. In the future, whether it can continue to reduce costs and increase efficiency is still a test that it must face in the next few years.

What is the critical point for turning a loss into a profit?

After five years of continuous losses, when will the critical point when the net profit and cash flow be positive in the future for Waterdrop to turn from loss to profit? In our opinion, it depends on the following key factors.

First, to test whether Waterdrop can maintain its customer acquisition level continuously below the industry level, as long as Waterdrop's ability to attract customers is always above the industry level, more and more insurance companies will pay to acquire customers for Waterdrop.

According to the prospectus, there are currently 62 insurance companies cooperating with Waterdrop, and Waterdrop's revenue structure is becoming more diversified. At the same time, the traditional insurance giants have closer cooperation with Waterdrop. China Taiping is the largest partner of Water Insurance with a revenue share of 24.9%, and Hongkang Life Insurance has a revenue share of 11.1%.

Second, in the next few years, Internet insurance will still be in a high-growth channel, and the proportion of online customers in the insurance industry will continue to increase, supporting the upward growth of Waterdrop's insurance business income.

At present, the online life insurance and health insurance markets where Waterdrop is located still have a lot of room for development in the future. The iResearch report shows that from 2015 to 2019, China's life insurance and health insurance market has grown from 1.6 trillion yuan to 3.1 trillion yuan, and is expected to increase to 6.1 trillion yuan in 2024. Among them, online life insurance and health insurance are expected to reach 592 billion yuan in 2024, compared with 186 billion yuan in 2019, with an average annual compound growth rate of 26.1%.

The "Analysis Report on the Operation of the Internet Life Insurance Market in 2020" issued by the Insurance Industry Association of China also shows that in 2020, Internet insurance is in a trend of high growth. Among them, the cost-reimbursable medical insurance achieved a total of 22.92 billion yuan in scale premiums, an increase of 58.3% year-on-year, accounting for 61.1% of the total scale of Internet health insurance premiums; critical illness insurance achieved a scale of 8.75 billion yuan in premiums, an increase of 60.6% year-on-year, accounting for 23.3 %. In addition, nursing care insurance and cancer prevention insurance increased significantly, with a year-on-year increase of 257.9% and 138.9% respectively.

Therefore, overall, for Waterdrop, scale growth is more important than short-term profitability. Whether it is an Internet-based insurance institution, or a traditional insurance company, insurance broker or agency, all online life insurance and health insurance markets are racing. If Waterdrop chooses to achieve profit as soon as possible and reduce investment, the gains will not be worth the loss in the long run.

Third, Waterdrop has faced two shoulders and started to cut into "health services", a sector with greater prospects than insurance protection. In the future, the value realization potential of individual users will be enlarged, which will promote the contribution of individual users' revenue and the increase of overall revenue.

It may be compared to UnitedHealth, which is regarded as a benchmark by Water Drop, which is ranked 15th on the 2020 Fortune 500 list.

The United Health business is currently divided into two major segments, one is the income of the health insurance business system (analogous to Water Drop Insurance), and the other is the health service system (analogous to the "good medicine payment" that Water Drop has just incubated, the Critical Disease Research Center, etc.). Although the former still contributes the bulk of its revenue and profit at present, the latter's health service business, the proportion of revenue and profit, and the growth rate of revenue are all higher than the former. In 2019, the revenue contribution of the health service system The proportion has reached 37%, an increase of 11.5% year-on-year, which is higher than 5.6% of the insurance sector.

In the future, Water Drop has the opportunity to replicate the growth path of health services-it is worth mentioning that the H in Water Drop’s stock code "WDH" should point to the health business.

Of course, the controversies and doubts that Water Drop faces today will still be eliminated by growth and profitability in the future. The doubts and pressures encountered by Pinduoduo, B Station, and Amazon are also inevitable.

For example, Pinduoduo had a net loss of tens of billions in the year of its listing. However, in 2019, its net loss and loss rate have simultaneously narrowed, and the net loss has dropped to 6.968 billion. By 2020, the day of Pinduoduo The number of active users surpassed Taobao at one time, and the stock price has risen by nearly ten times since its listing.

However, despite the Pinduoduo pearls and jade in front, the story of the water drop has to be told by yourself, and the pressure has to be carried by yourself. In the next three to five years, the doubts and disputes about the water drop will most likely not disappear in smoke unless you wait for it. After realizing a steady profit.

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