Qudian: Superb Borrower Growth But Credit Risks Increase

About: Qudian Inc. (QD)
by: Himalayas Research

Strong borrower growth numbers.

Non-GAAP net income grew 57% yoy in 2Q19.

Open platform revenue increased 150% qoq.

New borrowers have increased credit risk profiles.

Stock is affected by falling RMB and worsening NPL ratios.

Qudian (QD) reported earnings on August 16, when they beat consensus estimates, but the stock has fallen roughly 20% since. The positives include 2Q non-GAAP net income growing 57% yoy to RMB1.16bn, referral service fee increasing 150% qoq to RMB398mn, contributing to 27% of net revenue and outstanding loan balance surging 91% yoy to RMB28.7bn.

But, the credit trial program which aimed to attract new borrowers also brought worse NPL ratios which could deteriorate quicker as they are shorter term loans.

Along with the expected yet gradual depreciation of the RMB, translation back to USD could be adversely affected as well.

While I think the company is well run by a good team, there are increasingly bigger risks revolving macro which could affect the Chinese economy. Valuation appears to be cheap with P/E but fairly valued in P/B terms. Some investors might have been disappointed that they kept the full year guidance unchanged.

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Fast growing user base

Owing to Qudian raising risk appetite, it has been more aggressive in attracting new users to its platform by offering new borrowers smaller ticket size loans and shorter durations. Here is a summary of borrower statistics:

2Q19 YoY QoQ
New borrowers ('mn') 1.09 73% 109%
New registered users ('mn') 2.70 4% 80%

Outstanding borrowers ('mn')

6.1 20% 13%

Source: Company

Changba partnership was launched in July so the flow of new users didn't have an impact yet and the management expects more partnerships to come which will help drive further traffic.

Source: Company

Source: Company

Open platform, a new major topline driver

Its open platform has become a major revenue driver, generating RMB398.1million in referral service fees for 2Q with little marginal operational cost and zero credit risk, and propelling over RMB4.8 billion in loan balance for its licensed financial institution partners as of the end of 2Q.

Referral service fees accounted for 27% of total net revenues in 2Q, up from 12% in 1Q. This was helped by transaction loan volume growth of 128% qoq to RMB4.1bn. Number of partnered financial institutions sits at 8 (as of report date), up from 4 at the end of 2Q and 1 in 1Q.

Source: Company

The risks: higher NPL ratios

As a result of aggressively attracting new borrowers for their new credit trial program, both M1+ delinquency rate and M6+ charge-off rate increased which are signs of credit deterioration. In addition, while it may seem that the M1+ delinquency coverage ratio improved to 1.3x from 1.2x, the flip side is that the new loans are riskier, hence requiring the company to book a larger provision. Given that the new loans are shorter in duration, NPL will likely show up in 3Q. I believe this could be the reason why the market became cautious.

Source: Company

Source: Company

Source: Company

Valuation: Cheap P/E but P/B shows fair value

If we look at the forward P/E ratios the stock has been trading for the past year, they appear to be at historical lows. It is particularly interesting that a stock with ~19% EPS growth (according to consensus) could be valued so cheaply at 3x earnings.

But given that this company is an online lender, P/B value may be more suitable as this metric is often used for banks. Qudian's P/B is slightly higher than its average at 1.3x while its ROE is around 30% which is quite decent.

However, we also need to factor in potential devaluation of the RMB which will cause a lower translated valuation as the stock is denominated in USD.

Overall, I think Qudian is a long-term buy with excellent growth potential, but the stock has performed well this year and might have been subject to profit taking when the credit numbers weren't perfect and ongoing macro risks.

Source: Bloomberg estimates

Source: Bloomberg

Source: Bloomberg

