The Cash Loan IPO Story, performed by Qudian, produced by Alibaba (Ant Finance)

Written by Felix Yang || 12 Oct 2017

Qudian lnc, the Chinese micro lending company, has filed for a U.S. IPO at the NYSE earlier last month. It plans to raise up to USD $750 million in capital to spend on strategic acquisitions, marketing and borrower engagement. In only a few years, Qudian has become an eye catching internet lending company with a valuation of over $6.9 billion USD. Qudian’s remarkable success in such a short period of time, shows how profitable the cash loan market can be, as well as the incredible opportunities for transformation that can arise when collaborating with internet giants like Alibaba. 

A short time ago, Qudian was originally registered as QuFenQi in 2014, an offline campus financing company focusing only on university students. Its strategy was to expand its market share through price wars and thereby dominate the student borrowing market in the shortest time possible. Although the company was already valued at one billion USD during that time, as a consequence of its rapid expansion strategy, it made millions of dollars in losses. Since 2016, due to a series of scrutinising cases, the Chinese government installed strict regulations on the campus loan industry and any such business was banned earlier this year. QuFenQi stopped its campus lending business last year and changed its name to Qudian. As planned, its major business shifted to E-commerce. Interestingly, it was the cash loan business that had made Qudian profitable. Before the IPO filing, the lending business had contributed to over 83% of Qudian’s profit. 

With Alipay’s help from 2016 until today, Qudian’s business has expanded dramatically in only one and a half years’ time. The numbers don’t lie, with the company having registered a revenue of USD$222 million in 2016, an remarkable 500% increase from the year before. What is even more impressive, in the first half of 2017, Qudian’s profit has already increased to 170% of the previous year’s number.  One reason for this could be the booming internet small loan and consumer finance business in China. Major first tier consumer finance companies, most of which are backed by state owned banks and listed companies, have all reported significant revenue and profit growth in 2016. But Qudian’s development is distinguishable due to the faster pace of its growth.
More importantly, it is by virtue of Alibaba’s help that Qudian has stood out from the competition in the consumer finance industry.

Ant finance, Alibaba’s finance arm, has invested in Qudian since 2015 and now holds 12.8% equity in Qudian’s. This synergy enabled Alipay’s users to find a cash loan promotion for Qudian, on Alipay’s main App page. This would explain how Qudian’s MAU (monthly active user) and borrowing customers increased significantly last year. In addition to this, Alipay and Qudian signed an agreement, declining to charge any fees for the number of customers introduced through Alipay. 

In addition to this, Qudian primarily bases its lending decisions on Sesame Credit Score, the individual credit scoring system developed by Ant Finance. By the end of June this year, its NPL rate was only 0.5%, much lower than the average industry rate. In other words, Alipay introduced millions of good credit customers to Qudian at a very low cost.

What does the future hold for Qudian?
One big concern is its dependence on Alipay. This raises questions on whether this business model is sustainable in the future, considering Alibaba has its own internet small loan business? Qudian may have developed its own customer base with the help of Alipay, however, its new customer growth rate has dropped over 50% since Alipay adjusted the customer introducing channel for Qudian after their former contract expired. Qudian also remains vulnerable to the fact that all of its lending information is controlled by Ant Finance, especially its risk control methods. In addition to this, Sesame Credit controls all the credit scoring development and therefore only transfers the scoring results to Qudian. Therefore, by using Ant Finance’s products, Qudian propelled itself above its competitors in the short term, whilst leaving itself potentially dependant and vulnerable in the long term.

An additional concern for Qudian’s future is regulation. The interest rate, that Qudian charges for most of its cash loan products in 2016, was over the limit capped by Chinese government last year. Qudian has cut the rate according to the allowed range, but it will undoubtedly affect its future margins.

Finally, the micro-lending business is in a high risk industry. It may bring in big profits whilst China’s economy is still increasing at a fairly high rate. People consume more and are confident that they have the abilities to repay the debts when their income keeps increasing. However, if the economic environment takes a down turn in China, there will be concerns over Qudian, as well as the whole consumer finance industry.

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