The former fintech pioneer’s stock fell more than 10% after it announced a potential wind down of its original credit business as well as a new foray into ready-made meal kits

Key Takeaways

•      Qudian said it has started trial operations for QD Food, which sells ready-to-cook meal kits through a WeChat mini app

•      The move comes as company says it may wind down its original credit business due to challenging regulatory environment

By Warren Yang

Some China fintech companies seem to know no bounds when it comes to business transformation as regulators make life hard for them. Online lender Qudian Inc. (QD.US) is certainly leading the group in that regard with its unusual new business models. At the same time, the company may have caught many by surprise with its latest announcement suggesting it may exit its original core lending business that once made it an investor darling.

Qudian certainly seems to be a company in search of a business model these days.

It started an after-school tutoring business about a year ago, but the former fintech pioneer announced last month it is sharply scaling back the venture. Now it’s diving into the food market. Qudian started trial operations for its latest brainchild, QD Food, last month selling ready-to-cook meal kits through a WeChat mini app, the company said in a statement last Thursday. 

The company is counting on QD Food to become “an important revenue stream” this year, Qudian founder and CEO Luo Min said in the statement. But perhaps the bigger kicker in Qudian’s disclosure is that it may give up on its shrinking credit business altogether as increasing regulatory scrutiny makes it difficult for private lenders to prosper.

“Qudian will continue to evaluate conditions in the online consumer finance market and relevant regulatory developments. Based on this ongoing assessment, the company may wind down its credit business,” Qudian said in the statement.

Investors were almost certainly caught off guard by Qudian’s pair of announcements, including probable skepticism toward the whole idea behind QD Food. The company’s battered stock fell more than 10% to barely above the $1 mark in two days following the announcement.

Qudian and many other fintech lenders have faced an existential crisis in the past few years, with Beijing stepping up efforts to rein in aggressive lending by internet platforms to prevent waves of defaults that can ensue due to their inexperience at risk management.

In particular, a sweeping crackdown on peer-to-peer (P2P) lenders that peaked in 2018 has forced Qudian and many others to adjust their business models or even quit the once-booming business. Outside the regulatory realm, China’s Supreme People’s Court also slashed the maximum interest rate for private loans protected by law in 2020, further constraining lending activity.

Some of Qudian’s former P2P lending competitors, such as FinVolution (FINV.US) and LexinFintech (LX.US), have transformed into loan middlemen that simply connect banks and borrowers under business models that are much freer from regulatory requirements than direct lending. Yet Qudian has stuck to direct lending by doling out its own funds to borrowers.

At the same time, Qudian has been one of the most aggressive in seeking other revenue sources. First it set its sights on after-school tutoring, which, like online lending, once flourished in China feeding off stiff competition among students to get into top universities.

Qudian opened its first tutoring center under the WLM KIDS brand at the start of last year. But its timing was about as bad as it could be. Within months of the radical move, China’s private education sector became another target for regulators, who limited times after-school tutoring centers could operate and banned for-profit companies from offering such services under a “dual reduction” policy to reduce the burdens of homework and after-school classes on kids.

Qudian, which had six WLM KIDS schools as of February, said last month that it will “significantly” downsize that business, although it stopped short of saying it could fold it.

Shrinking loan business

Back to its core financial business, heightened scrutiny of online lending means that Qudian now has to be more careful in selecting borrowers and also put aside more funds as provisions for potential bad loans. That can be good for risk management, but a hindrance to profit growth.

Reflecting these difficulties, the company’s results for last year were pretty grim all around. Annual revenue dropped for a second straight year, down more than 50% to 1.65 billion yuan ($259.6 million) from 2020 as transactions dwindled. And net income for the year fell nearly 39%. Qudian’s revenue and net profit for last year are both down more than 80% from their peaks in 2019.

The venture into ready-to-cook meals may pay off better than the ill-fated move into education. The convenience of prepackaged meals that only require reheating can appeal to young consumers. Also, they can be a boon for those who are stuck at home because of pandemic-related restrictions.

Qudian tried to talk up its new food business, saying more than 80,000 people ordered QD Food products as of April 13 following its launch in late March. But without a specific sales figure, it’s hard to determine how great this customer tally actually is for the company.

Also, success is far from guaranteed for Qudian’s latest attempt to reignite growth. Large food platforms such as Missfresh (MF.US) and KFC operator Yum China (YUMC.US; 9987.HK) are also moving aggressively into the space in their own search for new revenue streams. And competition looks set to only increase, with deep-pocketed large retailers also joining the fray. Even U.S. retail giant Walmart (WMT.US) is trying to get a piece of the pie, collaborating with dozens of big Chinese restaurant chains to offer prepackaged versions of their popular dishes.

At this point, it’s difficult to see what unique advantage Qudian can bring to the table over these other companies. Moreover, it’s not clear how it will repurpose resources that are geared toward making loans to cooking up its own meal products or striking deals with restaurants to sell their meals.

At their current level, Qudian’s shares trade at a modest price-to-earnings (P/E) ratio of about 3, though that’s still higher than 2.7 for FinVolution and 1.4 for Lexin.

Although Qudian may fetch a better P/E ratio than its two peers, the value of its shares is a fraction of their 2017 IPO price of $24. And with its share price hovering around $1, Qudian is facing greater pressure to boost that price than FinVolution and Lexin because the stock could be delisted if it consistently stays below the dollar mark. FinVolution and Lexin shares are all battered but trade more comfortably above the $1 mark.

If ready-to-cool meals are Qudian’s best bet to revitalize its business and lift its stock price, it may need to spice up its recipe for QD Food a bit to make it more appetizing to investors.

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