The confusion of Qudian: Is it inclusive finance, or usury that walks on the edge of morality?

On October 20, Qudian Group (QD.NYSE), which had just been listed on the New York Stock Exchange for two days, suddenly issued a statement saying that at the time of its listing, some WeChat public accounts spread false remarks, causing adverse effects on its reputation. It has now preserved the relevant data and will initiate legal measures to protect its rights.

Qudian, which started out as a campus loan company, was founded in April 2014. Its predecessor was "Qufenqi", and its operating company is Beijing Happy Times Technology Development Co., Ltd. Its main business is "cash loans" and consumer installment loans. Cash loans are a type of small cash loan in Internet finance, with fast loan approval and disbursement, short term and high interest rate. The people covered are mainly those who are not reached by traditional financial institutions such as banks.

After Qudian went public on October 18, its market value quickly exceeded US$11 billion (approximately RMB 72 billion), and its founder and CEO Luo Min also joined the ranks of billionaires because of his 21.6% stake. Doubts followed, as Qudian was believed to have lent high-interest loans to low-income groups whose consumption levels exceeded their consumption capacity. At the same time, the risks of Qudian's later supervision and its "black history" as a campus loan were also hotly debated by the public. On the evening of October 18, Eastern Time, Luo Min issued an open letter stating that he would personally donate 5.2 million Qudian ADS shares (approximately RMB 1 billion at closing market value) to establish a charitable fund.

The "moral hazard" of cash loans: charging "head interest" and violent debt collection

Cash loans are also considered a subprime loan by banks. In order to avoid legal risks, many cash loan platforms disguise high interest rates as handling fees and service fees, and even charge "head interest", that is, the actual loan amount is less than the agreed loan amount, and the difference is used to pay interest in advance, thereby increasing the actual interest rate.

Due to the requirements for loan disbursement speed, many cash loans also lack risk control measures and use high interest rates to cover high risks. For a period of time, some users can "use loans to support loans" on different platforms, but after multiple loans default, these users are blacklisted by the platform and can no longer cover up the debt black hole, so the platform will face the risk of high bad debts.

Another common point of attack on cash loans is violent debt collection. From last year to this year, many cash loan platforms employed or outsourced debt collectors to frequently call the family, classmates, and friends of overdue debtors, and even posted "big-character posters" on the social networks of college classmates, and went to the door to intimidate debtors, causing serious negative social impact. Some platforms also set high penalty interest for overdue debtors, which can be said to be "adding insult to injury."

There are currently thousands of unlicensed cash loan platforms in China, and not all platforms are in violation of regulations.

Judging from the "Laifenqi" service under Qudian, there is a phenomenon of excessively high interest rates.

Previously, some media questioned that the handling fee for installment loans was higher than the 36% annual interest rate limit stipulated by the state. In the prospectus, Qudian admitted that in 2016, the annualized rate of return of about 59.5% of the transactions exceeded the upper limit. If the 36% upper limit is strictly followed, the company's revenue will be reduced by about 307 million yuan, which is almost 21% of the total revenue in 2016.

Some cash loan companies also defended to The Paper that extending the short-term loan interest rate to an annualized interest rate is unfair to cash loan companies: "If you borrow 1,000 yuan for one month and charge a handling fee of 50 yuan, the annualized interest rate is 60%, but this handling fee standard does not create a heavy burden for ordinary people."

Backed by Ant Financial: Valuation increased 8 times in one year, and profits in the first half of this year ranked 195th among A-share companies

As of the close of October 19, Qudian’s market value had reached US$11.5 billion (approximately RMB 76 billion) after its stock price surged 21.58% and 19.60% respectively in two trading days.

For reference, on October 25, 2016, Qudian's shareholder Guosheng Financial Holdings (002670) disclosed in an announcement that its subsidiary purchased 5% of Qudian's equity for 375 million yuan, and disclosed that the transaction price was 90.46% of the valuation. Based on this, Qudian's valuation is 8.29 billion yuan. In other words, Qudian's valuation has increased 8 times in one year.

Can Qudian’s profitability support such a valuation?

From the perspective of profitability, Qudian has achieved a surprising leap from last year to this year. Qudian suffered a net loss of 41 million yuan and 233 million yuan in 2014 and 2015 respectively, but turned losses into profits in 2016, with a net profit of 577 million yuan for the whole year. In the first half of 2017, Qudian's total revenue reached 1.833 billion yuan, a 393% increase compared to 372 million yuan in the same period last year, nearly four times; Qudian achieved a net profit of 974 million yuan, a 698% increase compared to 122 million yuan in the same period last year, nearly seven times, and the net profit achieved in the first half of 2017 has far exceeded the level of the whole year last year.

How high is this net profit level? According to Wind Information statistics, a total of 194 listed companies in the Shanghai and Shenzhen stock markets had profits of more than 947 million yuan in the first half of this year. If Qudian were listed on the A-share market, it would rank 195th, after Dahua Technology (002236.SZ) and before Kingenta (002470.SZ).

It stands to reason that Qudian, which started out as a campus installment shopping platform, should have had difficulty in expanding its business after the strict regulation of campus loans last year. However, Qudian has achieved a qualitative leap thanks to the traffic portal provided by its shareholder Ant Financial. In September 2015, Ant Financial made a strategic investment in Qufenqi. It was from that time that Qufenqi reached a cooperation with Alipay under Ant Financial and independent third-party credit reporting agency Sesame Credit to complete the payment system and credit reporting.

"Qudian is highly dependent on its cooperation with Alipay, and the risk of maintaining its high valuation lies in the stability of the cooperation," Zhang Yexia, senior analyst at Yingcan Consulting, told The Paper.

Qudian also revealed in its prospectus that Alipay recently began charging for display placement of a third-party service, which also means that Qudian's customer acquisition costs will increase in the future.

Cash loan rectification is still in progress

Cash loans are now facing strict supervision. On April 10 this year, the China Banking Regulatory Commission issued the "Guiding Opinions on Risk Prevention and Control in the Banking Industry", in which Article 29 clearly mentioned: do a good job in cleaning up and rectifying "cash loan" business activities.

Local governments have also begun to crack down on cash loans. According to a previous report by The Paper, the district and county financial offices in eastern municipalities where Internet finance companies are concentrated have summoned Internet finance companies to rectify their loan businesses with annual interest rates exceeding 36%.

In addition, Qudian's prospectus stated that the company's overdue rate was always below 0.5% until mid-2017, calculated based on one month of overdue payments. However, Zhang Yexia told The Paper that in the cash loan industry, the bad debt rate usually increases to a certain extent as the operating time increases.

"Going public to cash out when supervision has not been completely tightened and bad debts have not yet appeared on a large scale, coupled with the recent good performance of U.S. stocks, this is a rare window period," an online lending industry insider told The Paper.

It can be seen that two shareholders of Qudian have successfully cashed out before the listing. Kunlun Wanwei and Guosheng Financial Holdings sold part of their shares in Qudian at the issue price of US$24, earning RMB 345 million and US$5.57 million respectively.

On the evening of October 18th, Eastern Time, Qudian CEO Luo Min issued an open letter, saying that he would personally donate 5.2 million Qudian ADS shares to establish a charitable fund based on the closing market value of approximately RMB 1 billion.

It remains to be seen whether campus loans and cash loans can be “whitewashed” through charity in the storm of public opinion.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.