Qudian Is An Unbelievable Bargain – Qudian Inc. (NYSE:QD)

Qudian (QD) is a Chinese fintech micro lender that went public in 2017. Now, when I say ‘Chinese’, ‘fintech’, ‘recent IPO’ and ‘micro lender’, you probably get a bad feeling in your gut. But, wait for a second, thanks to all the negative sentiment surrounding many Chinese stocks, Chinese stocks are where to look for amazing bargains.

The fintech lending sector in China

2018 was an extremely bad year for Chinese fintech lending companies because of the regulatory crackdown on many online P2P lenders. Companies like Hexindai (HX), PPDAI (PPDF), Yirendai (YRD), Jianpu (JT) and QD, all fared terribly with stock prices down between 60% and 90%.

From the 2017 exuberance surrounding the new and exciting business models that cater to the huge unbanked Chinese population of around 430 million people, people that do not have access to a normal banking account, the environment quickly turned into a doom and gloom one.

I don’t think it was a coincidence that most of these fintech companies rushed to go public in 2017, as at the end of 2017, the Chinese government started with its crackdown. The government increased legal requirements for micro lenders, limited the total APR to 36%, and eliminated many lucrative fees. QD’s stock was thrown out with the bathwater as nothing changed fundamentally with its business because QD isn’t a P2P lender, it was backed by Ant Financial that had a stake, the 36% APR cap had been already implemented prior to the new legislature, and QD has been at the forefront of getting all the required operating licenses. But, still, QD’s stock price fell significantly.

QD’s stock price

A strong negative for QD was the fact that Kunlun, a Chinese gaming firm and one of the largest shareholders, was forced to sell its complete stake due to own financial problems. Plus, they were that stupid to announce it publicly in June 2018. I think the announcement was part of a bigger plan, or better to say blackmail attempt, to force QD’s management into a quick buyback. However, the management didn’t budge, waited for the price to fall to below $6, and only in April of 2019, agreed to buy all of the remaining Kunlun shares. That was a move that took guts, but a wonderful move by the management.

qudian stock price

Since then, the stock started to slowly recover, the main seller is out of the picture, but the negative sentiment surrounding the sector still prevails.

The fact that QD repurchased more than 50 million shares (from 320 million down to 270 million – that is a 20% buyback yield) since its IPO doesn’t help in pushing the stock price higher, but we can see it as a positive. When QD gets revalued by the market, things might get explosive.

QD’s stock will always be volatile, as I am writing this, and you can see above, a recent daily change was 8%. Thus, you have to expect volatility. But the fundamentals look stable.

Quick take on Qudian

In short, you have a business that grew net income 57% since last year, has a forward PE ratio of 3.82, (yes, three point eighty two), is doing buybacks, and has 76 million registered users. Guidance for full-year 2019 non-GAAP net income is to exceed RMB 4.5B ($640M), on a market capitalization of $2.2 billion, and there is plenty more.

Let me give you an overview of the company and discuss the main advantages and risks so that you can get a good perspective on the risk and reward of such an investment.

Qudian’s business overview

QD is an online micro lender that makes its money in two ways, one is to actually lend money to customers, while the other is the recently launched open platform that is growing fast and working well.

qudian analysis

Source: QD’s Investor Presentation

The issue but also opportunity is that QD has data on 76 million people, of which only 6.1 million are actual customers. By using the data and referring potential clients to others, QD gets a long-term commission as the referral is not a one-off, the client wishing to deal with the same service provider in the future will again go to QD’s open platform. So, QD gets a commission from 8% to 10% with no risk.qudian business

Source: QD’s Investor Presentation

QD’s micro lending segment has RMB 28 billion in loans outstanding, and with an APR of 36%, you can calculate yourself how much money QD makes. Only 20% of that money is on their balance sheet, so the risks are mitigated. Delinquency rates have been going up as the company is experimenting to achieve maximum return on capitals.

qudian net income

Source: QD’s Investor Presentation

QD has one of the best leverage ratios when compared to peers, so there is still room to grow in a conservative way.

qudian growth

Source: QD’s Investor Presentation

The open platform segment is very interesting. I like the fact that the management is constantly testing ways to scale their user base. They have tried to sell cars at scale and finance the purchases by launching Dabai Auto. It turned out as a flop, but the open platform experiment seems to be working extremely well. The nice thing is that Dabai Auto was not an expensive flop, and thus, it always pays to test new ways of making money as if you lose, you probably lose x, if you win, you make 10x to 100x.

qudian open platform

Source: QD’s Investor Presentation

QD’s open platform is a nice business growing extremely fast. It generated RBM 400 million in revenue during Q2 2019 and is still growing fast. Thus, we can expect more than 2 billion in revenue as the platform scales. Last quarter, there was 1 major partner, and now, there are already 8. I think the open platform will make the bulk of QD’s business in the future at incredible margins. It is nice to finally see QD being able to scale the large user base and data it has.

qudian profit

Source: QD’s Investor Presentation

The thing is that QD should be valued as a growth stock, but the fundamentals have it valued as a value investment bargain. When you put the growth on top of the value, it becomes an unbelievable bargain.

QD’s fundamentals

The numbers look staggering. Just Q2 2019 net income is already 40% of the 2018 net income. Thanks to the open platform, net income was 57% higher than Q2 2018.

qudian financial highlights

Source: QD’s Investor Presentation

57% growth would be something to think about if the PE ratio would be around 40. However, at 4, it is unbelievable. So unbelievable that I can’t stop repeating it.

Can it be that the market is blinded by QD being a micro lender in China and the past negative sentiment, that it can’t recognize value or is there anything intrinsically wrong with QD’s business model?


As the main risk, I see the currency risk. If the Chinese currency loses value in relation to the dollar, you can see the value of QD go down 20% to 30% very quickly. But, then again, in dollar terms, the PE ratio would go from 4 to 6. Still a bargain.

The second risk is a possible economic slowdown in China. This would definitely lower the transaction volumes, but I wonder if it would increase delinquencies significantly. Then again, on a 36% APR, delinquencies can be very high before you start losing money.

The third risk I see is the 36% APR as it seems crazy for me that people borrow at such rates. However, who am I to judge. In any case, at any moment in time, the government might lower the max APR from 36% to 30% or even lower. This would lower QD’s profits, but still keep in profitable. Perhaps even more sustainable over the long term.

The fourth risk could be the management, even if I would characterize their behavior as good since the IPO. They were definitely overly optimistic when promoting their automotive venture Dabai. On the other hand, the main shareholder Min Luo will not take any compensation until QD reaches a market capitalization of $100 billion. That implies a 4,500% return from current levels. I think it is unlikely QD will reach $100 billion in market capitalization, but even if it reaches $10 billion, I would be happy. At a PE ratio of 4, the risk reward ratio seems very positive.

Further, QD is creating value for shareholders. Book value increased from RMB 9.5 billion to RMB 12.2 billion, while the number of shares outstanding decreased 20%.

qudian book value

Source: QD’s Investor Presentation

This means that book value increased from $4.04 per share to the current $6.37. The return on equity for QD has been 25.5% over the past two years. If they continue with the same tempo, that will probably be your long-term return rate from investing in QD.

The company did one other thing that could be considered questionable. It recently issued $300 million in convertible notes at a conversion price $9.41. I personally don’t like convertible notes, but if they buy back stocks at $7.4 and issue them later at $9.41, it is still something that increases shareholder value. Two months after the convertible notes issue, the company announced a $195 million forward share repurchase program with Citibank.

So, you can’t expect stellar stewardship with QD as it is a pretty new company, but compared to many other shenanigans I have seen when analyzing Chinese stocks, QD is one with the highest consideration towards shareholders, relatively speaking.

Investment thesis and valuation

When it comes to valuation, how can one value a company growing net income at 50% with a PE ratio of 4 other than call it an incredible bargain. QD’s growth rates will definitely be volatile in the future, so making an earnings model is futile as who knows what will the company look like in 5 years. However, given their past performance, strategy, and margin of safety, we can estimate probabilities for investment outcomes.

I think a scenario where one loses the complete investment is unlikely because the book value is made of cash, thus it gives a margin of safety. Therefore, I would say the chance for the stock to be down 100% is just 10% and just 15% for it to be down 50% in 5 years.

On the upside, I think the company deserves a higher valuation, at least a PE ratio of 10. Therefore, I think there is a 25% chance for a 200%, 300% and 500% upside over the coming 5 years. When we take those probabilities and calculate QD’s value over 5 years, it mostly likely will be around $20. This should give an annualized return of 21% from the current level.

qudian stock price analysis

Source: Author’s calculations

If QD gets recognized as a quality company, revalued as it deserves given the growth and the earnings, I think it could reach $20 much sooner. This would give you also a higher annualized return. Given the margin of safety in the form of cash; QD is after all a lender and therefore uses money to make money, their transactions have an average duration of 8 months and can be considered as practically cash, the risk of buying QD now is low in relation to the potential reward. The large selling shareholder sold its shares, the government finished with its crackdown and actually created a healthier environment for QD. Thus, it could be really the time for QD to shine like it did in the first few days after the IPO. However, a lot will depend on Wall Street’s sentiment that is always manic depressive when it comes to Chinese stocks, so be ready to accept volatility.

Disclosure: I am/we are long QD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long QD in both my portfolios! Full position in my model portfolio and keeping the profits from selling that stake I bought at $4 in my lump sum portfolio. This is how I could directly benefit from QD’s share appreciation.
I also run a Stock Market Research Platform where I assume some of my clients will be long QD too. This is how I could indirectly benefit from QD’s share appreciation.