IPOs: Qudian IPO Banks on China Consumer Micro Loans

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Bottom line: Microlender Qudian could raise $500 million or more in an IPO in the first half of next year, most likely in New York, and could get a modestly positive reception as one of the first in a new wave of private Chinese financial firms to list overseas.

Qudian hires CFO, investment bank

Growing signals are emerging that an offshore IPO could be coming soon for Qudian, a financial firm that began its life as a microlender named Qufenqi helping college students to buy things like computers and smartphones. That’s my assessment after learning from one of my sources that Qudian has hired a foreign-trained CFO and also an investment bank, typical developments for a company that wants to make an offshore listing within the next year and often even sooner.

From an investor’s perspective, the company would offer an interesting private play into China’s financial sector, albeit a relatively niche part of that sector. Investors can already buy into numerous Chinese banks and other financial institutions like brokerages and asset managers. But most of those are state-owned and make many of their decisions based on government directives, with the result that their decisions often have a heavy political element that doesn’t always make commercial sense.

By comparison, Qudian is part of a newer generation of private financial sector companies that are taking advantage of Beijing’s recent efforts to invigorate the sector by allowing more private investment. One of the most advanced companies in that space is Ant Financial, the Alibaba-affiliated (NYSE: BABA) operator of the popular Alipay electronic payments service. Another is Lufax, operator of a peer-to-peer (P2P) lending platform that’s reportedly aiming to make an IPO worth up to $5 billion by year end. (previous post)

Like many of the companies vying for attention in the space, Qudian is quite young, just 2 years old in this case. The company was in the headlines just last week, when a filing related to a share sale revealed that it posted a massive loss of 500 million yuan ($75 million) last year. (English article)

Since then, it has shifted to target a broader audience beyond just college students, though its focus remains on the market for tiny consumer loans averaging just 1,000 yuan each. The company now reportedly issues a whopping 100 million yuan worth of loans per day, which translates to roughly the equivalent of $5.5 billion per loans each year.

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Despite it’s relative youth, Qudian has attracted quite a lot of attention from the investment community due to the relative lack of options in the private financial services space. Since its inception the company has already conducted 6 funding rounds, which looks a bit frantic to me, since startups typically try aim for just one round a year.

But that frenetic rate also testifies to how hot financial plays have become in China, as everyone tries to figure out who will become the nation’s next Visa (NYSE: V) or LendingClub (NYSE: LC). One of its highest-profile investors to date is actually Ant Financial, which itself is eyeing a potential IPO in Hong Kong next year that could be similar in size to Lufax’s.

From my perspective, the biggest drawback to Qudian and many of its peers is their relative youth, which could lead them to make questionable decisions in a market that is already fraught with uncertainties. The small size of Qudian’s loans means that a few thousand defaults every few days would have little or no impact, and are probably to be expected.

But Chinese consumers are a relatively unknown group when it comes to this kind of microlending, which is more typically the specialty of credit cards. In China such cards are becoming more common but are still relatively rare compared to more mature western markets, driving many people to try out services like Qudian. There may be good reason why many of those people can’t get credit cards, which could put Qudian at a relatively high level of risk.

At the end of the day, this particular offering won’t get the same level of attention as Ant Financial or Lufax and won’t be nearly as large. Based on a valuation reportedly in the $1-$2 billion during its last funding, the company should easily be able to raise 500 million or more from an IPO. New York looks like the most likely place for such an offering due to the background of the company’s new CFO, and I expect that such a listing could get a modestly positive reception if and when it happens next year.

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