Qudian: A $1.4 Billion Cash Cow Looking For A Milk Maid

Key Takeaways:

• Qudian’s revenue plunged nearly 90% to just 21.9 million yuan in the first quarter, as it officially exited its original online lending business
• The company is likely to make one or more major acquisitions in the consumer space in the next year using its $1.4 billion in cash and short-term investments

By Doug Young

Qudian Inc. QD passed a dubious milestone in its latest quarterly results by officially generating no revenue for the first time from the online consumer lending that was its original business when it burst onto the scene about a decade ago. But rather than fade into oblivion, the company’s stock has actually jumped more than 50% over the past month, giving Qudian a market cap of nearly $500 million.

The company’s stock jumped another 5% on Monday after it announced its latest results that showed its revenue tanked by nearly 90% in the first quarter to a negligible amount. But rather than focus on that top line shrinkage, investors were fixated on a huge jump in the company’s profit from investment-related income that left it with a huge pile of cash and short-term investments worth nearly 10 billion yuan ($1.4 billion).

It doesn’t take a rocket scientist to see the company’s current value lies in its big cash position. Now it just needs to find something to do with all that money. Qudian touched on some of the possible ways forward in its latest results, and we’ll explore what the future might hold for the company shortly. But first we’ll briefly recap the bumpy road the company has traveled to the present.

At the time of its founding, Qudian was one of a vibrant field of new Chinese online peer-to-peer (P2P) lenders that sprung up as Beijing briefly welcomed private investment into its financial sector that was then dominated by state-run companies.

But it didn’t take long for Beijing to change its mind and clamp down on the sector, forcing most of the newcomers to either close or look for other business models. While many of the survivors became loan facilitators rather than actual lenders, Qudian took the more radical route of trying its hand first as an educator and later as peddler of packaged meals.

Unfortunately for Qudian, the move into education with its Wanlimu Kids Clubs providing after-school tutoring services was poorly timed. Not long after it launched the service, China banned such after-school tutoring services for K-12 students, similar to how it largely outlawed the P2P business just a few years earlier.

Such clampdowns became common over the last few years in China, as Beijing looked to rein in what it considered unruly practices for a number of newly emerging sectors. Those clampdowns appear to be slowing down recently as China focuses more on the economy, though there’s always the potential for more at any time.

Qudian’s move into packaged meals with its QD Foods was less controversial from a regulatory standpoint. But the foray took it well outside of its core competency into an intensely competitive space populated by more qualified names like leading online grocer Dingdong DDL and Yum China YUMC, operator of KFC and Pizza Hut restaurants in China.

Food Exit

As a result of the stiff competition, Qudian decided to exit the food space. It said in its latest quarterly report that it has “wound down the QD Food business,” though that unit was still producing some of the scant 21.9 million yuan in revenue the company reported in the first quarter. By comparison, revenue from its original financing business officially reached nil for the first time, after contributing about 35 million yuan in the previous quarter.

While Qudian’s revenue tanked in the latest quarter, it continued to incur operating costs of 84 million yuan. That was also down by more than two-thirds from 286 million yuan a year earlier, but was still much higher than its scant revenue. But the company also brought in 241 million yuan from investment income, partly by using its big cash horde to capitalize on high interest rates. It also recorded a 287 million gain on its derivative instruments.

As a result of those two big gains, the company posted a 414 million yuan profit for the quarter, reversing a 143 million yuan loss a year earlier. That helped to boost its cash to the 5 billion yuan, up from 3.5 billion yuan at the end of last year. The company had an even larger total of nearly 10 billion yuan in cash and short-term investments at the end of March, up from about 9 billion yuan three months earlier.

So, this is clearly a company with lots of cash. Now it just needs to find something to do with it.

In many ways Qudian in its current form looks like a special purpose acquisition company (SPAC), which is just a publicly traded empty shell filled with cash. Such companies typically look for real businesses with good potential, then take those businesses public by acquiring them.

Qudian founder and Chairman Luo Min hasn’t said whether such a merger might be his goal, though he gave some hints in the latest results announcement. “Moving forward, we remain focused on navigating market dynamics and capitalizing on new business and investment opportunities, including those overseas, in order to build long-term value for our shareholders,” he said, without providing more specifics.

In the announcement, Qudian described itself as a “consumer-oriented technology company in China” and added it “is exploring innovative consumer products and services to satisfy Chinese consumers’ fundamental and daily needs by leveraging its technology capabilities.”

All that seems to indicate Luo is likely looking for a good acquisition in the consumer space, most likely based in China but also possibly overseas. That makes sense, given Qudian’s origins as a consumer lender. The company’s large cash holdings mean it could probably afford one or more large acquisitions, perhaps worth a total of $1 billion or more, which could come in the next year. If and when that happens, this company could certainly be worth a second look, depending on what it ends up acquiring.