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Qudian sees food for ready meals growth and eyes exit from core lending business

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

Qudian seems like a company looking for a business model these days.

He started an after-school tutoring business about a year ago, but the former fintech pioneer announced last month that he was downsizing the business significantly. Now he dives into the food market. Qudian launched trial operations for its latest brainchild, QD Food, last month by selling ready-to-cook meal kits through a WeChat mini-app, the company said. in a report last Thursday.

The company is counting on QD Food to become “an important source of revenue” this year, Qudian founder and CEO Luo Min said in the statement. But perhaps the biggest kick in Qudian’s disclosure is that it could shed its declining lending business altogether, as increased regulatory scrutiny makes it difficult for private lenders to thrive.

Qudian will continue to assess online consumer credit market conditions and relevant regulatory developments. Based on this ongoing assessment, the company may terminate its credit activities,” Qudian said in the statement.

Investors were almost certainly caught off guard by Qudian’s pair of announcements, including likely skepticism towards the idea behind QD Food. The company’s battered shares fell more than 10% to just above the $1 mark in two days after the announcement.

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

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

Some of Qudian’s former P2P lending competitors, such as End of Evolution (FINV) and LexinFintech (LX), have morphed into lending intermediaries 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 distributing its own funds to borrowers.

At the same time, Qudian has been one of the most aggressive in seeking other sources of income. First, he set his sights on after-school tutoring, which, like online loans, once flourished in China, fueling fierce competition among students to get into top universities.

Qudian opened its first tutoring center under the WLM KIDS brand early last year. But his timing was about as bad as it gets. Months after the sweeping move, China’s private education sector became another target for regulators, who limited the time after-school tutoring centers could operate and barred for-profit companies from operating. offer such services under a “double discount” policy to reduce the burden of duties. and extracurricular lessons on children.

Qudian, which had six WLM KIDS schools in February, said last month that he will “significantly” cut this business, although he hasn’t said he could fold it.

Declining credit activity

Going back to its core financial business, increased scrutiny of online lending means that Qudian now has to be more careful in selecting borrowers and also set aside more funds as a provision for possible bad loans. This can be good for risk management, but a hindrance to profit growth.

Reflecting these difficulties, the company’s results for the past year were rather dismal. Annual revenue fell for the second consecutive year, down more than 50% to 1.65 billion yuan ($259.6 million) from 2020 as transactions declined. And the net profit for the year fell by almost 39%. Qudian’s revenue and net profit for the past year are both down more than 80% from their 2019 highs.

The adventure of ready-to-cook meals may pay more than the unfortunate transition to education. The convenience of pre-packaged meals just waiting to be reheated may appeal to younger consumers. Plus, they can be a boon for those stuck at home due to pandemic restrictions.

Qudian attempted to talk about its new food venture, saying more than 80,000 people ordered QD Food products on April 13 after it launched in late March. But without a specific sales figure, it’s hard to determine just how important that customer count really is to the business.

Moreover, success is far from guaranteed for Qudian’s latest attempt to revive growth. Major food platforms such as missfresh (MF) and KFC operator yum china (YUMC) (9987.HK) are also aggressively moving into space in their own search for new revenue streams. And the competition is only set to increase, with big, deep-pocketed retailers also joining the fray. Even the American distribution giant walmart (WMT) is trying to get a piece of the pie by collaborating with dozens of major Chinese restaurant chains to offer pre-packaged versions of their popular dishes.

At this point, it’s hard to see what unique advantage Qudian can bring to the table over these other companies. Additionally, it’s unclear how it will repurpose resources intended to provide loans to cook its own meal products or strike deals with restaurants to sell their meals.

At their current level, Qudian’s shares are trading at a modest price-to-earnings (P/E) ratio of around 3, although it is still above 2.7 for FinVolution and 1.4 for Lexin.

Although Qudian may achieve 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 faces greater pressure to raise that price than FinVolution and Lexin, as the stock could be delisted if it remains consistently below the dollar mark. FinVolution and Lexin shares are all beaten but are trading more comfortably above the $1 mark.

While ready-to-chill meals are Qudian’s best bet to revitalize its business and boost its share price, it may need to spice up its QD Food recipe a bit to make it more palatable to investors.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.