We wrote about Qudian (QD) back in January of this year when we stated that shares looked attractive from the long-side. The reason we were bullish on the set-up was due to the company’s projected earnings, its increasing equity as well as its rising volume at the time. However, we were wrong in our timing and exited quickly our small position when shares lost support. This trade again showed that one cannot rely on any given set of fundamental or technical indicators when trading or investing. Shares now are actually down 68%+ since we penned that piece and are currently trading around the $1.40 mark.
Obviously, a lot has changed over the past 10+ months in Qudian from a fundamental basis. However, the question now remains whether the deterioration in the share price is justified from a fundamental standpoint. In the latest second quarter, Qudian reported that its loan book business declined by almost 6%. Sales for the quarter came in at $165.2 million and net income came in at $25.4 million. Obviously, due to a much different market compared to the same quarter of 12 months prior, present top- and bottom-line numbers look ugly on the income statement.
However, the carnage (at least with respect to the share price) has been subsiding. Shares since that Q2 report back in the beginning of September are down about 4% and currently remain well above their late September lows. Furthermore, as we can see from the RSI momentum indicator, downside pressure seems to be weakening although shares currently are undergoing a downtrend which has resulted in shares trading below their 200-week moving average ($1.42) once more.
10 months later, we continue to tilt towards a bullish stance. Here are some points to back up our pretence.
- On the recent second quarter earnings call, the CEO addressed the recent implications of the lowering of the private lending rate by China’s Supreme Court. Although the CEO stated that the move by the Supreme Court would not affect Qudian’s operations directly, it was stated that this new policy may have ramifications on the firm as it gets rolled out. Obviously, the rate cut would adversely affect Qudian’s profitability if it was applicable to Qudian. If Qudian evades the policy due to being a financial institution, we can at least expect the firm to come under pressure to reduce its rates as the policy gets rolled out. The is one of the reasons why implied volatility has remained well above 100% over the past few months as plenty of “fear” exists in this underlying. We though can take advantage of this fear especially if there is sufficient liquidity in Qudian’s options market.
- When we couple the potential lower rates along with the much lower credit transactions due to higher delinquencies, it can be understood why some believe this stock will continue to trade lower. However, the balance sheet paints a different picture. At the end of the second quarter, Qudian reported $966 million of receivables and $474 million of cash and short-term investments. What investors need to understand here is that even if many of these loans are essentially written down or written off, Qudian’s cash position is almost $120 million higher than the present market cap of the company ($355 million). At the end of Q2, equity in the company surpassed $1.5 billion. Even if, again, this number is meaningfully whittled down in due course, we still are dealing with a significantly undervalued company here. In this sector, the average price to book multiple revolves around the 1 mark. This gives some idea of how cheap Qudian’s assets are at this present moment in time.
- As long as the company remains profitable, it has the wherewithal to turn things around. Operating income came in at $17 million in Q2 on the back of gross profit of $37.1 million. Whether we discuss the company’s ROA of 6.34% or its EBIT margin of 35% over the past four quarters, Qudian remains well ahead of the sector as a whole. Again, profitability metrics may have dropped significantly over the past few years but nothing compared to the carnage the share price has experienced.
Therefore, to sum up, the risk/reward setup continues to look compelling in this stock. We took a stab earlier in the year on the long-side but were wrong on our timing. Upcoming Q3 earnings may very well confirm that this stock has bottomed for good.
Elevation Code’s blueprint is simple. To relentlessly be on the hunt for attractive setups through value plays, swing plays or volatility plays. Trading a wide range of strategies gives us massive diversification, which is key. We started with $100k. The portfolio will not stop until it reaches $1 million.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in QD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.