Fintech Qudian’s Profits Boom, Loans Shrink as It Bets on Direct Lending Model

Company posts fourth consecutive quarterly profit, but its shares remain significantly undervalued compared with peers

Key points:

• Former fintech star Qudian has given investors cause for cheer with its fourth consecutive quarterly profit
• Microlender must demonstrate it can resume expansion of its core lending business following years-long regulatory crackdown

By Ben Livesey

Qudian Inc. (NYSE: QD), once the darling of the Chinese fintech industry, has provided some respite for long-suffering investors in its first-quarter results, with confident comments on its loan quality and optimism that implies it may be seeing the light at the end of the tunnel. The most positive sign saw the company roar back to profitability during the quarter on a huge drop in its bad-loan provisions.

The online cash credit provider’s stock is up 12% since June 15, the day it reported its latest results. Qudian also disclosed its fourth consecutive quarterly profit and said its bad debts were under control.

That was soothing music to the ears of those who have stayed faithful to Qudian since the heady days of its $900 million IPO in 2017 and the subsequent, tortuous, downward journey for its stock. The company’s public listing came shortly before Beijing began cracking down on a new generation of private online microlenders serving up easy credit to consumers and small businesses that typically had difficulty getting such funds.

That years-long cleanup, including a healthy dose of new regulation, forced many private microlenders to change their business models from direct lenders to loan facilitators, and many simply shut down completely.

For Qudian’s investors the overhaul spelled disaster. Since the beginning of 2018, when the crackdown got into full swing, Qudian’s stock has fallen 79%. Its shares are down an even steeper 92% from its October 2017 IPO price, giving it a current market cap of $678 million.

Qudian burst on the scene in 2014 as a microlender, targeting college students and young office workers with financing to buy consumer goods like laptops and smartphones. It relied heavily on introductions of new borrowers from Ant Group’s Alipay, which owned a stake in Qudian and also provided it with credit scoring services.

That business model made Qudian one of China’s first fintechs out of the gate with its IPO, as a tide of others microlenders quickly followed. As Qudian began to struggle with China’s regulatory barrage in 2018 and onward, Ant Group ended its Alipay partnership and sold off its stake in the lender in 2019. 

Unlike many of its peers during this time, Qudian opted to remain a lender with loans on its books and to comply with the tough new regulations China was planning to introduce. By comparison, rivals including FinVolution and Yiren Digital focused on becoming loan arrangers, facilitating the supply of credit from traditional lenders like banks to borrowers.

Qudian has spent the last few years trying to get its house in order, shoring up capital buffers, capping its lending rates and weeding out bad loans. Its revenues and profit have become erratic in that process, increasing at some times and decreasing at others. The pandemic has added to Qudian’s woes, with its lending and revenue shrinking at an alarming clip in recent quarters.

To be fair to Qudian is not alone in its struggles to adjust to the new post-crackdown climate, with many of its peers posting similarly mixed results. U.S.-listed Lufax, for example, is establishing itself as a loan facilitator and its stock has slipped 2.6% since its $2.4 billion IPO last October. FinVolution, another peer-to-peer lender turned loan arranger, has gained 29% since the start of 2018, mainly due to the success of its loan arranging platform which has won over customers and investors.

LexinFintech and 360 Digitech, both U.S.-listed loan arranging platforms, have seen diverging paths for their stocks. LexinFintech is down 19% since the start of 2018, while 360 Digitech has more than doubled since it listed in December 2018. Yiren Digital is down 86% since the beginning of 2018. 

Valuation Laggard

In terms of valuation, Qudian trades at a price-to-earnings (PE) ratio of 4.4, or less than half the 9.4 ratio for the broader industry. It lags nearly all its major peers, including FinVolution at 8.7, Lufax at 13.8, and even LexinFintech at 7.6 times earnings and 360 Digitech at 9 times.

Qudian, whose name means “fun store,” provided investors with at least some smiles in the first three months of the year by posting a net profit of 478.4 million yuan ($74 million), marking a big turnaround from a loss of 486.5 million yuan a year earlier. Much of the profit gains owed to a huge drop in its bad loan provisions as it clears out bad loans from its portfolio.

But its revenue fell by nearly half to 515.7 million yuan year-on-year, and its loan balance fell 15% to 4.1 billion yuan from the end of last year. Its number of borrowers also fell. In a worrying trend for investors, Qudian’s loan book and revenue have shrunk for six consecutive quarters.

Qudian cited its “conservative and prudent strategy” as the reason for its shrinking loans, and said its delinquency rate had dropped to a “normal level” of less than 5%. Its shrinking loan portfolio contrasted with the growth seen at most of its peers.

Lufax reported a 15% increase in its balance of outstanding loans arranged in the first quarter, and also a revenue increase. 360 Digitech reported a 40% increase in institutional originated loans and LexinFintech and Yiren also reported increases in their loan book platforms and revenues. FinVolution said loan originations on its platform more than doubled in the first quarter.

Qudian is a far cry from the $7.9 billion rampaging microlender of 2017. If you believe China’s financial crackdown has passed its peak, the company may start making headway in not only getting its loan book in order but actually returning it to growth.

But as loan arrangers continue to flourish and attract new borrowers, it’s valid to ask if Qudian’s business model as a lender rather than loan facilitator is appropriate in the current environment. For the short-term consumer finance market, do the advantages of being a fully-fledged lender really justify going through the burdensome requirements of regulatory compliance?

Qudian’s stock could be at a turning point, leaving investors to figure out which way it will go. The optimists may believe the stock’s discount to its peers represents an investment opportunity. But pessimists may merely see a company stuck in an unworkable business model with little prospect of generating enough new borrowers to take the business forward in a meaningful way.

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