Qudian: The Auto Finance Business Won’t Save The Sinking Ship

Investment Thesis

Qudian, Inc. (QD) is a sinking ship. Investors should get off if you still have long position in it.

2018Q1 Result Summary

In my post about a month ago on QD vs. LX, I expressed my concerns on QD’s lending business and Auto Finance business. Their 2018 Q1 results (released on May 21, 2018) confirmed my concerns:

  • Although total revenue for Q1 2018 increased by 17.5% (QoQ) to RMB1,716.6 million (US$273.7 million), total operating cost and expenses increased by 48% (QoQ) to RMB1,395.7 million (US$222.5 million), leading to a 41.7% drop in net income, to RMB315.8 million (US$50.3 million).
  • Number of active borrowers was 4.1 million during the first quarter of 2018, down 13.9% (YoY) from 4.8 million during the first quarter of 2017 (down -40.6% QoQ). Number of credit drawdowns was 10.9 million during the first quarter of 2018, down 44.6% (YoY) from 19.7 million during the first quarter of 2017.
  • Cumulative number of leased cars by Q1 2018 was 6,608, which is not as promising considering the company’s 100,000 target for the whole year.

The investors were obviously not happy with the results. QD’s stock price dropped more than 16% on May 21st after the earnings release and has been wandering down since then:

QD’s stock price in past 2 weeks

An In-depth Look Into Dabai Auto’s Numbers

Starting from QD’s Q4 2017 earnings call, the CEO has been focusing on their new Auto Finance business: Dabai Auto. This time, QD released the operating numbers for Dabai the first time:

  • As of March 31, 2018, Dabai had leased over 6,600 cars (6,608 to be accurate) to consumers with zero late payments over 30 days past due.
  • Revenue from sales-type leases was RMB546.0 million (US$87.1 million), coming from auto leasing revenue generation since launching Dabai Auto.

There are several interesting things to notice here:

First, with the total number of cars leased (6,608) and total revenue from sales-type leases (RMB546.0 million), we can get the average revenue for each car lease is RMB 82,000. Keep in mind that QD is focusing their business in Tier 2-5 cities in China, and their targeted price range for cars is around RMB 100,000. The result here means that QD has realized most of (if not 100%) the value in auto leases at the time of signing the contract. I can’t say whether this is right or wrong since I am not an accounting expert, but I believe this treatment in revenue realization typically happens to auto dealers instead of auto financing companies.

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Second, I tried some simple calculation to get the profitability of their Auto Finance business. Since QD just reported a total cost of revenue and sales and marketing expense without breaking into business lines, my calculation goes like this:

For 2017 Q4, the total revenue (from Financing income, Sales commission fees, and Loan facilitation income and others) was RMB 1,461MM, with cost of revenue and sales and marketing expenses totaling at RMB 399.8MM, representing a 27.4% of total revenues.

If we apply this percentage to 2018Q1, we get cost of revenue and sales and marketing expenses from traditional businesses totaling about RMB 319MM, leaving a remaining RMB 490MM in cost of revenue and sales and marketing expenses for the Auto Finance business. This represents a nearly 90% of the total revenues from sales-type leases. If we add general and administrative expenses, R&D costs, the total costs and expenses can easily eat up all the revenues, making the Auto Finance business far from profitable at this stage.

Of course, it’s possible that the revenues they reported on the auto leases were not the whole revenues that the leases can produce, and substantial income could be expected from the current leases. But since there are not enough details for us to make the projection, I have to rely on the data that is available now.

A Comparative Study: Yixin Group

To better assess the auto financing business from Dabai, I also tried to find another benchmark, as the analysis and results on profitability make me feel something could have gone wrong.

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Yixin Group Limited (2858.HK) which is said to be the largest Internet-based Auto Dealer in China, went public in HKSE in December 2017. Yixin focused on selling cars through their internet platform, which also can provide financing and leasing options to the buyers. According to its IPO document, Yixin’s major revenue (about 80%) came from the leasing and financing business, while the remaining 20% was contributed by the commission in selling cars.

Many have regarded Yixin as one of the main competitors for Dabai in the Auto Finance business, since:

  • They all focus on leasing and financing to generate revenue.
  • They all describe themselves as “internet-based” auto dealership with huge customer base. The difference is that Yixin built their customer base from its leading shareholder Bitauto (BITA), while Dabai’s customer base was from QD’s previous lending customers.

Although they both reported similar range of customer base (QD for registered users at about 65 MM, and Yixin at about 51 MM), I think Yixin’s number is more promising for the auto financing business, as these are users who registered for auto-related topics/purposes. For QD, although the CEO has been advocating the huge potential demand from their customer base as they are in the transitioning life stage to purchase their first car, I am a little skeptical how much actual volume they can get out of this group.

Yixin’s stock price, however, has been declining since IPO, from HKD 10 to below HKD 4 as of May 30. In fact, the company has experienced growing net losses in recent three years, despite their rapid expansion in business volume. This has also led to my concern on the Auto Financing business itself.

Yixin’s stock price since IPO

Cashing Out From Major Shareholders

I have also summarized some large shares-selling from QD’s major shareholders (as the major shareholders I am quoting below are all Chinese companies, I could not find English version of the announcements. I have chosen the stock exchanges official announcements as reference to guarantee the authenticity):

  • Guosheng Financial Holding Inc (SHE: 002670) released a public notice on May 30th, 2018 that it will sell its holding on QD “in a proper time”. According to the public notice, Guosheng holds 14.16 million shares of QD at the time of this notice.
  • Koram Games limited (a subsidiary of Beijing Kunlun Tech Co., SHE: 300418) released a public notice on May 23rd, 2018, that it will sell its holding on QD “in a proper time” to improve its liquidity. According to the public notice, Koram holds close to 58 million shares of QD at the time of its IPO (October 2017), and about 55.6 million shares at the time of this notice;
  • Hangzhou Liaison Intrctv Infm Tch Co. Ltd. (SHE: 002280) released a public notice on April 24th, 2018, that it will sell its holding on QD “in a proper time”. According to the public notice, Liaison holds 12.58 million shares of QD at the time of this notice.
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Needless to say, major shareholders cashing out their positions can’t be a good sign for the stock price.

Conclusion And Risk Factors

The 2018 Q1 results proved that QD is a sinking ship. The major shareholders have been cashing out their positions, and so should you. Investors should not be lured by the low valuation with a P/E at around 8.

There is almost no possibility that QD’s stock price will come back strongly prior to next earnings release. The company does have some cash (about RMB 5.7 Billion) but is unlikely to be able to buy back shares.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.


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