Analysis of Qudian

The article has been fixed as at 10.40 PM Malaysia time on 1 January 2018. If you read the article before 10.40 PM Malaysia time, please disregard what you read as I spotted an error in my analysis.


Please read the disclaimer here: Enjoy the article, bitches!

Hey, value investing fam. How did 2017 treat y’all? So, I recently purchased 150 shares at USD13 per share in Chinese online microlender, Qudian. The company provides small short-term loans at very healthy interest rates for people to buy phones, sneaker or whatever the fuck people buy these days. “Average credit size per transaction was approximately RMB920 (US$139) for cash credit and RMB1,390 (US$209) for merchandize credit for the third quarter of 2017. Average credit term was 2.4 months for cash credit and 8.7 months for merchandize credit for the third quarter of 2017” (source: Qudian’s 3Q17 quarterly report). 

Update on the Greedy Dragon portfolio: Other than investing in Qudian, I recently sold all of the portfolio’s 716 shares in Banco Santander at USD6.64 per share and added 300 shares of Oasis Petroleum at USD8.00 per share.

The stock has been sold down recently as the Chinese government seems intent on cracking down on online microlenders. And if y’all know anything about me, it’s that I love investing in stocks that Mr. Market hates. I just can’t help myself, just like how I can’t help myself around chicken masala at an Indian banana leaf restaurant.

However, I am worried about the potential ramifications of increased government intervention in the sector. Especially when I read stuff about how China plans to shakeup the microlending industry, with only large state-owned companies and the biggest internet firms surviving (source: Bloomberg). Also, Chinese regulators and police are investigating a potential leak of data from more than a million students who are clients of Qudian (source: Bloomberg). “Violations of protecting personal information carries possible penalties including shutdown of websites or cancellation of business licenses under China’s Cybersecurity Law (source: Bloomberg).” Needless to say, I only committed a small percentage of my portfolio to the stock. Insomnia is doing a fine fucking job as it is, I don’t need anything else keeping me awake at night.

Apart from the potential for increased government regulations, Qudian’s margins will be impacted by Alipay’s decision to cap the all-in interest rate at 24% annualized for loans marketed on its consumer interface; currently, the majority of total credit drawdowns for Qudian were made through Alipay (source: PR Newswire). The Chinese government caps the all-in interest rate at 36% annualized. 

Despite the challenges faced by Qudian, I think that it has some good things going for it. Growth for one has been fantastic. The Group generated revenue and net profit of RMB3.3 billion and RMB1.6 billion respectively in just the nine months ended 30 September 2017 compared to revenue of RMB235.0 million and net loss of RMB233.2 million in 2015. Short-term loan principal and financing service fee receivables, the Group’s pork dumplings and oolong tea (bread and butter for the Chinese, in my imagination anyway), stood at RMB10.7 billion as at 30 September 2017 up 416.9% from RMB2.1 billion as at 31 December 2015.

The Group generated annualized return on assets of 3.6% (9M17 net profit was annualized), which is respectable for a finance company. It would be more professional to calculate the trailing twelve months return on average assets but it would take up a few minutes which can be used to stare aimlessly at the ceiling of my apartment, and obviously apartment ceiling wins. I couldn’t calculate the return on equity as shareholders’ equity was negative as at 30 September 2017.   

The Group also doesn’t seem to have trouble collecting on its loans; “M1+ Delinquency Rate by Vintage for the first and second quarter of 2017 remained at less than 0.5%, through September 30, 2017” (source: Qudian’s 3Q17 quarterly report). M1+ probably means one month plus (may seem obvious to you, but it wasn’t to me the first time around). However, rising delinquency rates is certainly a potential risk that investors should factor in when evaluating Qudian. 

Considering the Group’s strong growth, I think I paid a reasonable price for the stock (I thought I paid a reasonable price for the stock but I realized minutes after publishing the article that one of my main assumptions was wrong, so fuck me). We will assume 1) financing income is based on the Group charging a 24% interest rate on its loans 2) income will be taxed at China’s corporate tax rate of 25%. We will also annualize 3Q17 operating costs, sales commission fee and loan facilitation income. Here is the math:

Back envelope estimation of annual net profit
Figures in RMB
Revenue Components:

Financing Income
Sales Commission Fee
Loan Facilitation Income and Others
Total Revenue
Operating costs


Income Tax Expense
Net profit

The next step is simply dividing the Group’s net profit of RMB832.8 million or USD128.0 million (based on Bloomberg’s USD to RMB exchange rate of 6.5068 at 29 December 2017) with the weighted average shares outstanding on a diluted basis for 3Q17 which stood at 296.0 million shares. This will give me earnings per shares (EPS) of USD0.43, which will in turn result in a P/E ratio of 30.1x at USD13 a share (the price I paid for my shares). I will reduce the estimated EPS by 30% to account for errors in my assumptions (as well as to adjust for the fact that I calculated financing income as simply 24% of short-term and long-term loan principal and financing service fee receivables, instead of trying to figure out how to estimate the loan principal component). This will give me EPS of USD0.30 and a P/E ratio of  42.9x, which I think is a little pricey but still kinda ok.

Some may have a problem with microlending morally. But as long as the lender shoot straight about the rates charged and the terms of the loan, and the transaction is voluntary, then I don’t see any problems with it. Is borrowing money to buy more stuff a shining example of financial discipline? Probably not. But people are gonna do what they’re gonna do, and I much rather they get their funding from legal microlenders than from asshole loan sharks. That’s just where I’m at on this issue.

Now that I’ve done fucking the puta that was 2017, I’m looking forward to step to 2018. Happy new year y’all! Before I go I want to give my prediction for stocks and cryptocurrencies in 2018; they will most definitely either go up, go down, trade sideways, or do a combination of the three. In other words, I don’t fucking know what will happen in 2018 or even tomorrow for the matter. Take care and stay rational.