How to mint a billionaire and keep your friends close
JACK MA is minting a new billionaire. Min Luo, founder and chief executive officer of Qudian Inc, will be worth at least US$1.2bil, according to the Bloomberg Billionaires Index, after the online loan provider goes public in the US this month.
To see where Ma fits into this equation – beyond the 12.8% pre-initial public offering (IPO) stake Alibaba Group Holding Ltd’s banking affiliate Ant Financial holds in Min’s venture – you have to drill a little deeper into the 41 million transactions on the Qudian app, adding up to 38 billion yuan (US$5.8bil) in credit, in the first half.
That’s an average ticket size of less than US$150 for short-term loans to about 5.5 million mostly young Chinese people, for impulse purchases on their mobile phones.
The only way to make a go of a mass lending business like that is to have a very low cost of acquiring new borrowers; a highly efficient system for managing credit risk; and the ability to charge high interest rates without giving customers sticker shock. Qudian’s return on equity of 55% shows that it’s been able to do all three.
In large part, thanks for that success must go to Alibaba. Qudian gets its customers – and their credit scores – from being a part of the Alipay app universe, which currently charges the lender roughly 9% of its financing income. Half of that fee goes on customer acquisition, with the remainder split between processing and settlement charges and fees for credit-scoring services provided by Ma’s Sesame Credit.
Ke Yan, a Singapore-based IPO analyst for research provider Smartkarma, noted that reliance on Ant Financial gives Qudian an “unparalleled” advantage, but it’s also a “key risk,” especially as Ant Credit competes directly with Min Luo’s service.
Those dependencies didn’t bother investors in the recent Hong Kong IPO of ZhongAn Online P&C Insurance Co, which got almost half its premiums last year via shipping return insurance on Alibaba’s e-commerce platforms.
ZhongAn shares are up almost 46% in less than two weeks of trading, though as my colleagues Nisha Gopalan and Shuli Ren say, it’s not clear if Ma will still be willing to back ZhongAn when he gets his own insurance licence.
While times are good, expect investors to give short shrift to other risks, such as a 2015 decision by the Supreme People’s Court to cap annual interest rates on private loans at 36%. Almost 60% of the transactions Qudian facilitated in 2016 had “annualised fee rates” exceeding that limit, the company said in its IPO prospectus.
Treating these fees as interest, and lowering them to the legal maximum, would have wiped out 21% of last year’s revenue. Now that Qudian’s going public, it’s making sure credit contracts are judicially enforceable.
Will that crimp shareholder returns? Not necessarily – not if Alipay can pump up user growth on the app. As Ma has decided to anoint Min Luo a billionaire, he’ll be one.