Qudian Inc.
Q1 2021 Earnings Call Transcript

Published: 15 Jun 2021

[Operator:]

Hello, ladies and gentlemen, thanks for standing by for Qudian’s Incorporated First Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference call is being recorded. I will now turn the call over to our host from Qudian. Please go ahead.

[Unidentified Company Representative:]

Hello, everyone, and welcome to Qudian’s first quarter 2021 earnings conference call. The company’s results were issued via Newswire services earlier today and were posted online. You can download the earnings press release and sign up for the company’s distribution list by visiting our website at ir.qudian.com. Mr. Min Luo, our Founder, Chairman, and Chief Executive Officer; and Mr. Sissi Zhu, our VP of Investor Relations will start the call with prepared remarks and then we will open the call to Q&A.

[Min Luo:]

Hello, everyone. I would like to thank you all for joining us on today’s call. We kicked off 2021 with a solid first quarter. We greatly improved the quality of our assets while maintaining prudent operations of our cash credit business in light of the ongoing shift in online lending regulations. Notably, we recorded a net profit of RMB478 million for the first quarter, compared to a loss in the first quarter last year. Our net assets increased to RMB12.4 billion and we had approximately RMB7.3 billion of cash and the cash equivalent and short-term investments at the end of the first quarter. Our strong balance sheet allows us enough funding to invest in new business initiatives which we believe will increase long-term shareholder value. We are very excited about the meaningful progress we have made with our early childhood education business Wanlimu Kids. In January, we launched our very first Wanlimu Kids center in Xiamen where our company is headquartered. This center also has approximately 4,600 square meters. Early feedback has been positive and we are going ahead with our plans to expand our in China’s large and underserved early childhood extra-curricular enrichment market. Our mission for is to help Chinese kids grow up happy and healthy.

[Sissi Zhu:]

Thank you, Min and good morning and good evening everyone. As Min mentioned, in order to navigate evolving market dynamics, we maintained our conservative approach to operate our loan business by rigorously assessing credit risks of new transactions. Consequently, we experienced an 8.4% decrease in transaction volume for our loan book business for the first quarter of 2021, compared with the previous quarter. Our strict credit approval standards continued to pay off during the first quarter with a further sequential decrease in our delinquencies. In particular, our D1 delinquency rate for loan book business fell to less than 5% at the end of the first quarter of 2021, a normal level in our operating history. Moreover, our balance sheet remains strong and healthy enabling us to safeguard the interest of our shareholders. Additionally, more than 98% of our outstanding loans were funded by our own balance sheet loan transactions and our M1 plus delinquency coverage ratio remained at 2.7 times. Echoing Min on our early childhood quality education business, we are actively progressing towards our goal of becoming a comprehensive one-stop service provider for early childhood extra-curricular enrichment program. Our Wanlimu Kids project offers numerous top quality sports, arts, music enrichment programs for children from ages 0 to 9 such as swimming, basketball, football, and dancing etcetera. Following the effective opening and operation of the Xiamen activity center, our first endeavor in the early childhood education market, we are designing more than 80 additional activity centers to replicate its success. Boasting solid financial strength and the superior team of education industry veterans, we plan to broaden our early childhood education services across the country with a mission to help Chinese children grow up happy and healthy. The incremental spending in our Wanlimu Kids business may put pressure on our profitability in the near-term, but we believe we are well equipped to tap into the opportunities in the fast growing extra-curricular enrichment market in China. Following the completion of loss-making ramp-up period, we anticipate that the unit economics or UE for the Wanlimu Kids Club business will be very attractive. The UE will be superior to that of many other offline businesses because number one, being large long-term traffic generating tenants, we can enjoy lower rents, compared with smaller institutions; number two, we can enjoy lower user acquisition costs due to the variety of activities being offered and because of strong word of mouth referrals as evidenced by the fact that over 50% of our traffic for the first center were from referrals and natural walk-ins.

[Operator:]

Thank you. Yes, thank you. First question is from the line of Jacky Zuo, China Renaissance. Your line is open. Please go ahead.

[Jacky Zuo:]

So let me translate my questions. So, thanks for taking my questions and congrats for the solid results. I have two questions. Number one is about our credit business. We observed that our risk level continue to decrease year to date. So, just want to check what is our loan balance outlook for this year? And in terms of the credit business model, my understanding is we continue to use the interested lending models for our on balance sheet loans. Do you see any regulatory pressure for this type of model? Are we planning to switch to let's say licensed lending, for example, using the micro loan license? And second question is about our new business, one of the new . So, just trying to understand the for this new business, can give us some details of breakdown? And also we mentioned, we will increase the spending for this new business in terms of the nationwide expansion. So, what will be the investment, skill, and pace going forwards? Thank you.

[Sissi Zhu:]

Thank you, Jacky. I’m happy to see you on the call. So, let me answer your questions one by one. Regarding our credit business, as we also observed that our D1 delinquency rates, as well as our vintage charge have been improving over the past quarters, but in the long-term future, we believe, although the demand for more credit will always exist. However, in China, such demand in the long-term, we believe will be highly likely served by large financial institutions, as opposed to non-government backed technology companies like us.

[Jacky Zuo:]

Thank you, Sissi. That’s clear.

[Operator:]

Thank you. Our next question is from the line of Steve Chan of Haitong International. Please go ahead. Your line is open.

[Steve Chan:]

Let me translate it into English. I have two questions. First of all, I think Sissi just mentioned about the long balance of the credit business will likely to be revealed in Q2. And we will maintain a conservative approach in the credit business. So, does that imply that in the medium-term, likely gradually transform from a loan facilitation or credit lending business to you was more like an education – early education company? That's the first question. And secondly, could you give us some – secondly, two sub questions. One from the accounting point of view, where did you put the revenue and expenses of one in new kids in the P&L account? And do you have any target revenue or target return for this versus say in three years time? Thanks.

[Sissi Zhu:]

Thank you, Steven. over the line again. So, let me address your questions one by one. First of all, our balance and rate. So, as a matter of fact, promise of our credit business is still very profitable in overcharge at 36% and your interest rate, and our delinquency or our annualized delinquency default rates is less than 10%. So, this business is still very lucrative. So, as long as we're making profit on this business, we will keep a similar level of loan volume and similar level of risk assessment procedures. In the mid-to-long term, if from an investment point of view as we assume today the investor who invest in both credit business and Wanlimu Kids business, if the payoff from Wanlimu Kids business is better than our cash credit business, we will allocate more resources into Wanlimu Kids business for sure. So – and from a regulatory standpoint, we believe the Wanlimu Kids quality education business is more safer from the regulatory point of view. Although it is still – there is more at the stage, we only have a full quarter of one school, one center only in the first center. So, relating back to your second question, in accounting terms, our revenues and costs for the first Wanlimu center is quite minimal, and it is inside the self income, as well as the cost of goods sold. In two to three years, the return on Wanlimu expense we expect that the unit economics of this business after the ramp up period will be very attractive. If we look at the offline catering business, the unit economics of net profits will be around 10% net profit margin, and for some other offline education business, the UE for net profit will be around 10% to 20%. So, as we have experimented our strategy in our first and second school, we anticipate the UE of our kids business will be superior to that of the offline catering and offline and in traditional offline education business. Hope that answers the question. Thank you, Steven.

[Steve Chan:]

Very clear. Thanks Sissi.

[Operator:]

Thank you. Thank you. There are no further questions. Now, I’d like to turn the call back over to the company for closing remarks. Please continue.

[Sissi Zhu:]

So thank you all once again for joining today's conference call. We warmly invite investors to visit us in Xiamen and in other major cities in China as well. As a company in person, you see this is our . I'm sure you'll be impressed by the new species of children's that we are developing. And if you have any further questions, please don't hesitate to contact our IR team and visit our IRF site. So thank you once again very much.

[Operator:]

Thank you. This concludes the conference call. You may now disconnect your line. Thank you.