Why Did Shares Of Chinese Internet Microlender Qudian Plunge Friday?

Qudian Inc – ADR QD shares are on a secular decline for about nine sessions now, with the selling accelerating since Wednesday.

From $25.47 on Nov. 9, the stock moved downhill and breached the $20 level to the downside on Nov. 21. Qudian slumped about 20 percent Nov. 22 and plunged by an incremental 24.33 percent to $12.22 Friday.

The company IPO-ed in mid-October, with the stock clocking a gain of 22 percent on its debut on Wall Street. The sell-off seen since Nov. 10 led to the stock dropping below the $24 offer price on Nov. 16.

Incidentally, sell-side firms had given glowing reviews concerning the buyability of the shares. Seeing a potentially massive opportunity, Stifel analyst John Davis initiated coverage of the stock with a Buy rating and a $35 price target last week. 

Immediately after, Citigroup analyst Daphne Poon initiated coverage of Qudian at Buy with a DCF-based target price of $38.79, reasoning that the company will benefit from its tie-up with Alibaba Group Holding Ltd BABA's Ant Financial.

So, what's changed in the interim?

Government Crackdown, Interest Rate Cap

The Chinese government recently announced that it intends to clamp down on online microlenders and has asked the provincial governments to stop granting regulatory approval for new companies in the space, according to a Nov. 21 Reuters report.

A follow-up report released  Nov. 22 said a Chinese menswear firm and a leading maker of POS terminals has shelved plans to set up microloan units.

See also: Qudian, The Latest Chinese IPO, Wins By Addressing The Underserved

The rapid increase in so-called payday loans poses an alarmingly large amount of hidden risk, the Reuters report said, citing a commentary carried by the People's Daily, the official newspaper of the Chinese Communist Party.

"With the bar for borrowing low and advertising exaggerated, some people are likely to 'blindly borrow' from those platforms, resulting in a large number of subprime loans, according to the commentary," the report said.

"Young borrowers and financially illiterate people with low incomes were particularly vulnerable."

Reacting to the Chinese government's move, internet payment platform Alipay, an affiliate of Alibaba Group BABA, announced it will enforce a 24-percent cap on interest rates charged by lenders on its sites beginning Nov. 30.

The action followed the revelation that some lenders are charging rates exceeding the legal limits and using inappropriate methods to collect debt, according to Alipay. 

Qudian responded by stating it will comply with this policy by the stipulated deadline, although it did suggest it will continue to charge 36 percent less for transactions made through its mobile applications.

The specter of facing the wrath of the Chinese government is apparently weighing down on the stock. Given the massive potential seen by some on the sell-side, the question will be whether the company can weather a regulatory storm.  

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