Is Qudian's IPO as Strong as It Looks?
It appears it might be some sort of record - 1278 days from launch to IPO. Why the rush?
Qudian Inc. announced that it filed for an IPO of up to $750 million with the Securities and Exchange Commission (SEC) on September 18, 2017, claiming to be the largest online micro-cash loan platform in China.
The question now is: With more than 2,000 lending companies in China, how does Qudian stand out from the crowd?
In the filing, Qudian said it intends to sell 37.5 million American Depositary Shares (ADSs) at a midpoint price of $20.50 per share for a total IPO of $769 million. That would value the company at approximately $6.8 billion post-IPO, making it the largest Chinese internet finance company trading in the U.S. based on market capitalization. Comparatively, Yirenda Ltd. (NYSE: YRD), Qudian's competitor, has a market cap of $3.1 billion.
"Given Qudian's tremendous growth, strong financial performance and potential for further growth as China's consumers access more debt capital for purchases, the IPO looks to be strong," Donovan Jones from the website Seeking Alpha wrote.
The IPO looks strong, but is it sustainable?
Established just three years ago, Qudian lost money in its first two years of operations. However, the number of new and active borrowers grew exponentially in 2016 and the company recorded RMB577 million ($87 million) net profit in 2016 and recorded RMB973 million ($147 million) net profit in the first six months of 2017.
What happened in 2016 to turn around Qudian's fortunes? In short, Alibaba happened.
Qudian established a strategic partnership with Ant Financial, an affiliate of Alibaba, in 2016. Ant Financial holds 12.6 percent of Qudian's shares and in return gives it exclusive access to its client base. Then, in March 2017, Qudian entered into an agreement with a subsidiary of Ant Financial, which operates the Jiebei consumer credit business, and began to engage borrowers through the Jiebei platform.
However, investors need to be careful. According to its prospectus, Qudian is not sure when the partnership will end. The agreements with Ant Financial can be terminated anytime with 30 days' notice, the filing cautions. Qudian concedes in the document that "If our agreements with Ant Financial were terminated prior to expiration, our business, results of operations and financial condition will be materially and adversely affected."
To make matters worse, Ant Financial may not just end the partnership any time, the filing said, but could also be the competitor of Qudian in terms of its consumer credit business. The company disclosed that "there can be no assurance that potential competition with Ant Financial's consumer credit business will not harm our strategic partnership with Ant Financial or that we will continue to be able to enter into additional collaboration with Ant Financial."
Risk control system in question
According to Sohu news, Minhuan Zhan, Qudian's Chief Risk Officer, left the company just before the IPO. Although Qudian refused to comment on the report, Zhan's name cannot be found in the prospectus.
The loss of the company's CRO was considered important as Zhan, who obtained her doctorate from the University of Kramsson, had previously served as Capital One's senior director of the Big Data Application and Payment Division, the highest-ranking position in Capital One for a Chinese executive.
In her position, Zhan had led the risk control model construction and product launch for Capital One's credit card business. By using big data and machine learning technology, the model optimized the credit limit assignment for 400 million U.S. consumer and SME accounts. At Qudian, Zhan had been hired to lead a similar project, according to the company's announcement last year, before departing just 10 months later. Observers were left wondering why a CRO would leave a company that is about to go public.
In addition, without an experienced CRO, the question being asked is who will now lead Qudian's proprietary credit assessment model and risk management system? There is no doubt that if its system fails to perform effectively, it could have serious implications for the company's operating results.
They don't have enough accounting personnel
Another potentially troubling disclosure was that Qudian also warned in its filing, with more than 1,000 employees, it might not have enough accounting personnel to report accurate numbers in the U.S.
"There is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis," the company said. In particular, it said it lacks a sufficient number of financial reporting personnel with an appropriate level of knowledge and experience to apply U.S. GAAP and SEC rules.
Behind the scenes
It appears it might be some sort of record - 1278 days from launch to IPO. Why the rush? There are rumors that the underlying reason behind this IPO is the pressure from shareholders. Most institutional investors want to collect their return, and they have no return until they cash out.
Perhaps it all has to do with sugar daddy, Alibaba. That giant could back out at any time from its arrangement with Qudian. So it would be no surprise if investors wanted to collect at least some of their return sooner rather than later – and this IPO might be their best exit strategy.