Chinese technology firms’ shares are experiencing increasing headwinds, ranging from lofty valuations, rising discount rates, US-China tensions and increased regulatory scrutiny. The sharp decline in Waterdrop’s shares since its NYSE IPO last week embodies these concerns. Looking ahead, we think the best days for Chinese fintech investors may be over, due to rising regulatory oversight and a normalising growth rate as the market matures. We believe investors could generate better returns in other fast-growing emerging markets; for example, Vietnam, the Philippines, Mexico and Egypt scan well on our financial inclusion scorecard.
Waterdrop's share price collapse encapsulates investor unease
Waterdrop, a Tencent and Meituan-backed Chinese digital insurance and medical expense crowdfunding platform, debuted on the New York Stock Exchange on 7 May. The issue price was US$12, at the top of the US$10-12 indicative range, raising US$360mn fresh money and valuing the firm at US$3.8bn. However, the shares have subsequently lost two-fifths of their value. Broader macro concerns, such as rising global inflation, have not helped, but we think sector and stock-specific matters have been more important. Broadly, we would group these under two headings: regulatory issues and financial concerns.
Chinese regulators have indicated that they will place greater scrutiny on foreign-listed corporations. This links back to broader US-China trade tensions, with the Hong Kong and Shanghai exchanges looking to close the gap on the two largest global exchanges, NYSE and Nasdaq.
Regulators are also paying more attention to domestic technology conglomerates such as Alibaba and Tencent, to ensure subsidiary and associate companies are not benefitting unfairly, for example by underpricing products to gain market share. Alibaba was recently fined US$2.8bn in anti-monopoly investigations. Meituan, another e-commerce platform, has also come under the radar, with regulators opening an antitrust probe last month; its share price has dropped c20% from its April peak.
Platform-style financial services models, where the distributor has limited interest or influence over the post-sale performance of the product, are also increasingly in regulators’ sights. Waterdrop’s main business is providing a distribution platform to third-party insurers. One of the main reasons for Ant Group’s IPO suspension last year related to regulatory concerns relating to its third-party lending business.
Regulations governing online insurance in China have tightened since February 2021, when revised ‘Rules on Internet Insurance Business’ were issued. This was to provide regulatory clarity to the industry amid strong growth and a surge in companies seeking to join the online insurance sector. The new regulations aim to strictly define permitted activities for online insurance business models and to prohibit non-licenced institutions.
Another broad area of investor concern could relate to Waterdrop’s financial performance. The firm's losses have increased from US$34mn in 2018 to US$102mn in 2020. The company’s CEO recently commented that profits are not the immediate priority; users and revenue growth are more important in the short term. To this end, it is worth noting that revenues have increased from US$35mn in 2018 to US$464mn in 2020.
Note that the losses are largely related to the firm’s high sales and marketing expenditure (US$427mn in 2020), which is often required for fintechs to establish their market presence. Bottom line profits can therefore take several years to appear. For example. Waterdrop’s close listed peer, ZhongAn Insurance, was established in 2013 (against Waterdrop’s 2016 launch) and only meaningfully moved into profit in 2020.
Waterdrop, founded in 2016, has grown quickly to become China’s largest independent third-party life and health insurance platform, based on first-year premiums (source: iResearch). The company operates two business segments, Insurance Marketplace and Medical Crowdfunding. There was previously a Mutual Aid platform, but management decided to close this in March 2021 (possibly with a view to the regulatory climate). The company generated revenues of US$464mn in 2020 (+100% yoy) with a loss of US$102mn (+107%). Waterdrop’s listing prospectus can be accessed here.
Insurance Marketplace. Waterdrop provides health and life insurance services to 19.2mn customers. The company has collaborated with 62 insurance carriers to offer 200 health and life insurance products. In 2020, Waterdrop Insurance Marketplace generated over RMB14.4bn of first-year premiums.
Medical Crowdfunding. This platform enables individuals facing high medical bills to seek help from donors. As of end-2020, more than 340 million people have donated in excess of RMB37bn to assist over 1.7 million patients. According to iResearch, Waterdrop was the largest medical crowdfunding platform in China in 2020 (based on the value of funds raised).