Qudian Inc. (QD)

Executive Summary / Key Takeaways

• Qudian Inc. is undergoing a significant strategic transformation, pivoting from its historical reliance on consumer credit solutions towards the promising early childhood extracurricular enrichment market in China, exemplified by its WLM KIDS initiative.
• The company's core cash credit business, while still profitable, faces increasing regulatory headwinds and is being prudently managed with decreasing transaction volumes and loan balances, reflecting a long-term shift in resource allocation.
• WLM KIDS represents Qudian's primary growth driver, leveraging a differentiated value proposition, first-mover advantages in prime locations, and a strong partnership model, despite initial ramp-up challenges due to COVID-19.
• Qudian maintains a robust balance sheet with substantial cash and short-term investments, providing ample funding for its new business ventures and supporting its long-term shareholder value creation strategy.
• Investors should monitor the successful scaling and unit economics of WLM KIDS, as well as the evolving regulatory landscape for both the credit and education sectors, as these will be critical determinants of Qudian's future profitability and market positioning.

The Evolving Landscape of Qudian: A Strategic Pivot

Qudian Inc., once a prominent player in China's consumer credit sector, is actively reshaping its identity. Founded in 2014, the company historically focused on providing credit solutions to consumers, building a technology-driven platform for financial services. However, a dynamic and increasingly stringent regulatory environment in online lending has prompted a strategic reorientation. Qudian is now channeling its technological capabilities and substantial capital towards innovative business opportunities, most notably in the early childhood extracurricular enrichment market through its WLM KIDS initiative. This pivot is not merely a diversification but a fundamental shift, aiming to build a more sustainable and regulatorily resilient business model.

The company's foundational strength lies in its technological prowess, initially developed for sophisticated credit assessment and risk management. This core technology, while now applied to a different sector, underpins Qudian's operational efficiency and strategic adaptability. In its credit business, this technology enabled rigorous credit approvals and maintained asset quality, as evidenced by a D1 delinquency rate consistently below 5% in 2021. The ability to accurately assess risk and manage a loan book with high coverage ratios (M1+ delinquency coverage ratio remained high at 2.3x to 2.7x in 2021) demonstrates a robust technological infrastructure. For WLM KIDS, this technological foundation translates into streamlined operational management, from customer acquisition to facility management, aiming for superior unit economics. While specific quantitative metrics on technology's direct impact on WLM KIDS are still emerging, the strategic intent is to leverage these capabilities for efficient scaling and differentiated service delivery.

Financial Performance Reflects a Business in Transition

Qudian's recent financial performance clearly illustrates the ongoing strategic transformation and the challenges associated with winding down legacy businesses while investing in new growth areas. For the third quarter of 2021, total revenues were RMB347.4 million, a significant decrease of 59.1% from RMB849.4 million in the third quarter of 2020. This decline was largely driven by a 41.4% decrease in financing income to RMB285.5 million, a direct consequence of a shrinking average on-balance sheet loan balance. Loan facilitation income and other related income also plummeted by 95% to RMB8.8 million, reflecting a substantial reduction in off-balance sheet loan transaction volume. These figures underscore the company's deliberate de-emphasis on its traditional lending operations in response to regulatory pressures.

The winding down of the Wanlimu e-commerce platform further impacted sales income, which decreased to RMB7.3 million in Q3 2021 from RMB139 million in Q3 2020. Concurrently, Qudian reported a net loss attributable to shareholders of RMB94.2 million for Q3 2021, compared to net income in prior periods. This shift to a net loss is indicative of increased operational expenses associated with the ramp-up of the WLM KIDS business. General and administrative expenses, for instance, surged by 170.4% to RMB157.7 million in Q3 2021, primarily due to higher staff salaries for WLM KIDS. Similarly, the cost of revenues increased due to the hiring of teachers and instructors for the new education centers.

Despite these near-term pressures, the company's balance sheet remains robust. As of the end of Q1 2021, Qudian reported net assets of RMB12.4 billion and approximately RMB7.3 billion in cash, cash equivalents, and short-term investments. This strong liquidity position provides critical funding for the WLM KIDS expansion and allows the company to navigate its strategic pivot without undue financial strain.

The TTM Net Profit Margin of 386.30% and EBITDA Margin of 108.15% suggest that while revenue is contracting, the underlying profitability of remaining core operations, coupled with reversals of provisions for receivables, has been strong, though the recent quarterly net loss indicates the cost of transition.

WLM KIDS: The New Growth Horizon

The WLM KIDS initiative is central to Qudian's future. Launched in January 2021 with its first 4,600-square-meter center in Xiamen, the business aims to provide comprehensive extracurricular enrichment programs for children aged 0-9, covering sports, arts, and music. This venture aligns with China's new regulatory framework promoting holistic student development, positioning WLM KIDS as a "safer from the regulatory point of view" business compared to online lending.

Qudian's competitive strategy for WLM KIDS is built on several differentiators. The company guarantees a "happy experience" without the non-refundable lump sum prepayments common among other institutions. It offers a "one-stop" solution with diverse programs at "optimal pricing," saving parents time and money. Furthermore, Qudian emphasizes well-trained instructors, standardized teaching procedures, a centralized R&D team, and state-of-the-art facilities. The company believes it has established "first-mover advantages" and "strong entry barriers" by securing prime locations in urban residential areas and attracting over 50 experienced education entrepreneurs as equity partners. These entrepreneurs, with annual revenues exceeding RMB100 million in their prior ventures, bring invaluable operational expertise and market insight.

The expansion of WLM KIDS has been aggressive, with two new centers opened in Q2 2021 (Fuzhou and Xiamen), bringing the total to three, and leases signed for an additional 37 centers, with 24 under renovation. By December 2021, seven centers were operational across major cities like Xiamen, Fuzhou, Shanghai, and Shenzhen. While the ramp-up has been "slower than expected due to COVID-19 resurgence," leading to temporary closures and recovery periods, management's immediate goal is to bring existing centers to breakeven points before further expansion. The first center in Xiamen already passed internal tests for monthly break-even points, excluding trial programs, outperforming initial expectations. Management anticipates "very attractive" unit economics for WLM KIDS post-ramp-up, potentially superior to traditional education and offline catering businesses due to lower rents and user acquisition costs, with over 50% of traffic for the first center coming from referrals and walk-ins.

Competitive Landscape and Strategic Positioning

Qudian operates in a highly competitive environment across its various business segments. In consumer credit, it contends with giants like Ant Group (BABA), Tencent Financial (TCEHY), Ping An's Lufax (PNGAY), and JD Digits (JD). These competitors leverage vast ecosystems, advanced AI-driven risk assessment, and extensive user bases, giving them significant scale and technological advantages. For instance, Ant Group's integration with Alibaba (BABA)'s e-commerce platform provides unparalleled customer reach and data insights, while Tencent Financial benefits from the massive network effects of WeChat Pay. Lufax, backed by Ping An, emphasizes insurance-linked lending and robust risk management. JD Digits, tied to JD.com (JD), excels in supply chain finance and e-commerce-linked lending.

Qudian's competitive edge in its legacy credit business stemmed from its targeted focus on working-class consumers and efficient processing of small loans. However, against the backdrop of tightening regulations and the sheer scale of its rivals, Qudian has strategically opted to de-emphasitize growth in this segment. The transition to a "licensed chart" model for its on-balance sheet loans mitigates regulatory risks associated with its previous "interested loan model".

In the nascent early childhood education market, WLM KIDS faces a fragmented landscape of smaller, often localized, institutions. Qudian aims to differentiate itself through its comprehensive offerings, standardized operations, and state-of-the-art facilities. Its "first-mover advantage" in securing prime locations and its partnership model with experienced education entrepreneurs create significant entry barriers for potential competitors. While direct quantitative comparisons with these smaller, often private, education providers are challenging to ascertain, Qudian's scale and financial backing provide a distinct advantage in facility investment and talent acquisition. The company's strategy is to build a national platform, a feat that smaller, regional players would struggle to replicate.

Risks and Outlook

The investment thesis for Qudian is not without risks. The primary challenge for WLM KIDS remains the successful execution of its expansion strategy and achieving profitability. The "slower than expected" ramp-up due to COVID-19 resurgences highlights operational vulnerabilities, as centers being shut down for extended periods directly impacts revenue generation and profitability. The incremental spending on staff salaries, sales and marketing, and rental expenses for new centers will continue to pressure near-term profitability. Furthermore, the supplemental learning industry in China is subject to government regulatory changes, which Qudian has committed to strictly complying with.

For the cash credit business, the ongoing regulatory tightening, including potential interest rate caps, poses a significant threat to profitability. While Qudian currently charges less than 36% interest, a 24% cap, if enforced on its proprietary lending activities, would negatively affect its margins. The company's decision to not boost growth in this segment until regulations become more favorable reflects this inherent risk.

Looking ahead, Qudian's outlook hinges on the successful scaling and profitability of WLM KIDS. Management's immediate goal is to bring existing centers to breakeven points, with over 10 centers in the pipeline for the next year. The company anticipates "very attractive" unit economics for WLM KIDS, potentially achieving net profit margins of 10% to 20% in two to three years, comparable to or superior to offline catering and traditional education businesses. This projection is based on assumptions of lower rents and user acquisition costs due to its unique model. Qudian's strong balance sheet, with substantial cash reserves, provides the necessary capital for this ambitious expansion, with management explicitly stating a willingness to allocate more resources to WLM KIDS if its payoff surpasses that of the cash credit business.

Conclusion

Qudian Inc. is at a pivotal juncture, actively transforming from a consumer credit provider facing regulatory headwinds to a growth-oriented player in China's early childhood education market. The strategic pivot towards WLM KIDS, underpinned by Qudian's technological capabilities and robust financial position, presents a compelling narrative for long-term investors. While the legacy credit business is being prudently managed with declining volumes, the potential for WLM KIDS to capture a significant share of China's underserved extracurricular enrichment market is substantial.

The success of this transformation will depend on Qudian's ability to efficiently scale WLM KIDS, achieve its targeted unit economics, and navigate both operational challenges like COVID-19 disruptions and the evolving regulatory landscape. The company's differentiated value proposition, first-mover advantages, and strategic partnerships position it favorably against fragmented competition in the education sector. Investors should closely monitor the ramp-up and profitability milestones of WLM KIDS, as these will be the primary indicators of Qudian's ability to deliver sustainable long-term value and solidify its new strategic direction.