Qudian Finds New Business Model in Buying Back Shares

Key Takeaways:

• Qudian has announced a $200 million share buyback plan, extending a recent series of buying of its own stock
• Aggressive share purchasing comes as Qudian dramatically scales back its original consumer lending business and searches for a new business model

By Doug Young

It seems that Qudian Inc. QD, the former fintech pioneer that is now considering dumping its original consumer lending business, has finally found a new business model. That’s not a reference to the company’s WLM Kids after-school tutoring business launched last year. Nor is it referring to the company’s newer ready-to-eat meals service launched early this year.

Instead, the company appears determined to move into the “business” of buying back its own stock. Of course, we’re being just a bit facetious with our interpretation. But investors were quite serious about just such a business model, bidding up Qudian’s shares by as much as 60% on Tuesday after the company announced a plan to buy back up to $200 million worth of its American depositary shares (ADSs).

This kind of plan is quite common, especially for Chinese companies in the current environment. While western markets have recently fallen into bear territory from their highs at the start of the year, U.S.-listed Chinese stocks have been in “bear-plus” territory for far longer, with many losing half their value or more since the middle of last year due to regulatory concerns on both sides of the Pacific.

Many of those companies have plenty of cash, and have tried putting it to work to prop up their shares during all the regulatory turbulence. But such moves rarely have much effect, perhaps pushing up the stock for a day or two before the shares sink to new lows. Of course, it’s quite possible that Qudian’s shares will follow a similar pattern once the latest euphoria wears off.

In fact, the stock fell 11% a day earlier after the company announced its latest quarterly results that showed its original lending business continued to rapidly shrink. We’ll discuss those results in more detail shortly, as well as the company’s latest initiatives into education and ready-to-eat foods.

But first we should point out that the $200 million repurchase continues an aggressive spending campaign over the last year to buy back the company’s stock. The $200 million would represent more than half of the company’s current cash, which stood at $354 million at the end of March.

In its latest results, Qudian also pointed out it had recently bought back $297.5 million worth of its own convertible notes, adding it has cumulatively purchased $581.2 million worth of its ADSs over an unspecified period. What’s more, company founder and Chairman Luo Min announced last December he would use his personal funds to buy up to $10 million worth of Qudian stock.

Adding those figures together, the company has purchased nearly $800 million worth of its stock, assuming it exercises the full $200 million of the latest purchasing plan. That’s quite a lot when one considers the company only has a current market value of $300 million. Also significantly, the Tuesday rally pushed Qudian shares back above the critical $1 mark, before they closed up 37% at $0.99 on Tuesday. That means the company is just shy of the $1 mark below which it could be delisted from the New York Stock Exchange, a threat that gets triggered when the stock trades at less than $1 for an extended period.

Signs of hope?

Honestly speaking, there are very few positive signs from Qudian’s latest report other than the fact it’s willing to spend aggressively to support its shares.

The company is just one of many former Chinese peer-to-peer (P2P) lenders that rose to prominence seven or eight years ago by providing loans to consumers and small businesses. Beijing regulators allowed that to happen, ending a near-monopoly on lending previously held by state-owned banks, because those same banks typically neglected consumers and small private businesses that have become an important part of China’s economy.

But around five years ago Beijing began to grow alarmed that companies like Qudian were becoming too aggressive and could get into trouble due to their inexperience at managing risk. Such concerns seem well-founded in the current wobbly economic environment, with Qudian rivals 360 DigitTech QFIN, FinVolutionFINV and LexinFintech LX all reporting sharp rises in their delinquent loan ratios in their first-quarter results over the last two weeks.

In that regard, Qudian’s delinquent loan ratio appears to be even higher than its peers at about 5% at the end of May, though the company said that figure has been relatively stable lately. By comparison, the other three companies reported delinquency rates in the 1.6% to 2.4% range.

Qudian’s business shrunk rapidly during the quarter, continuing a trend seen for all of last year as the company wound down several businesses and also sharply scaled back its core lending business. Its first-quarter revenue fell 61% year-on-year to 201.8 million yuan ($30 million), with all of its major metrics also down by similar high double-digit percentage amounts.

Notably, the value of the company’s lending book stood at 1.5 billion yuan at the end of March, down 41% from just a quarter earlier. The number of transactions for its loan business also fell 30% quarter-on-quarter. Lastly, the company’s average loan tenure also dropped to 2.3 months at the end of March from 3.9 months at the end of last year, suggesting it is getting stricter with its lending.

The massive downsizing pushed Qudian into the red, with the company reporting a 142.8 million yuan loss for the first quarter, versus a 478.4 million yuan profit a year earlier.

The company launched its WLM Kids tutoring business at the start of last year with much fanfare, only to see that initiative take a major blow from China’s crackdown on providers of K-12 after-school tutoring services last fall. In the latest report Qudian said it was in the process of downsizing WLM Kids, though it stopped short of saying it would close that business.

The company is also holding out hopes for its QD Food business launched earlier this year, which sells pre-packaged cooked meals. Never mind that Qudian has no experience in this area, and will also face stiff competition from far more capable rivals like Walmart WMT and Yum China YUMC.