High Templar Tech Ltd annual report, Q4 FY2017

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Filing summary

Filing and period: The supplied filing is Qudian Inc.’s annual report on Form 20-F for the fiscal year ended December 31, 2017, filed April 9, 2018. It is not a quarterly report. The request metadata names High Templar Tech Ltd, which does not match the registrant named in the filing; verify the issuer and filing before relying on this summary. Financial statements are prepared under U.S. GAAP. Amounts below are RMB unless stated otherwise.

Business context and performance

Qudian operates online consumer-credit businesses in China, offering cash and merchandise credit, and launched budget auto-financing leases in November 2017. It reported facilitating RMB88.9 billion of transactions to 11.7 million active borrowers in 2017. Auto-financing activity and revenue were immaterial for the year.

  • Revenue: RMB4.775 billion, up 231.0% from RMB1.443 billion in 2016. Financing income was RMB3.642 billion (76.3% of revenue); sales commissions RMB797.2 million (16.7%); loan-facilitation income and other RMB302.0 million (6.3%); and sales-type lease revenue RMB26.1 million (0.5%).
  • Profit and margins: Operating income was RMB2.421 billion, a 50.7% operating margin, versus RMB713.1 million and 49.4% in 2016. Net income was RMB2.164 billion, a 45.3% net margin, versus RMB576.7 million and 40.0%. Diluted earnings per share were RMB7.09; diluted earnings per ADS were US$1.09. The filing also reports adjusted net income of RMB2.229 billion, excluding share-based compensation; this is a non-GAAP measure.
  • Costs and credit losses: Operating costs and expenses rose 223.1% to RMB2.405 billion. Loan and other receivables provision increased to RMB605.2 million from RMB132.2 million; loss on guarantee liabilities rose to RMB150.2 million from RMB0.9 million. Provision ratio increased to 0.77% from 0.40%.
  • Cash flow: Operating cash flow was RMB3.076 billion, versus RMB794.1 million in 2016. Investing cash outflow was RMB705.6 million and financing cash inflow RMB3.754 billion. Financing cash flow included IPO proceeds and borrowings, partly offset by debt repayments and share repurchases.
  • Liquidity and balance sheet: At year-end, cash and cash equivalents were RMB6.832 billion; restricted cash was RMB2.253 billion and was not available for general liquidity needs. Short-term amounts due from related parties included RMB549.8 million in Alipay accounts, described as unrestricted and available on demand. Total assets were RMB19.380 billion, total liabilities RMB9.840 billion, and shareholders’ equity RMB9.540 billion. Current assets were RMB19.186 billion and current liabilities RMB9.330 billion.
  • Debt and funding exposure: Short- and long-term borrowings and interest payable totaled approximately RMB8.489 billion at year-end, compared with RMB4.259 billion in 2016; weighted-average borrowing cost was 9.40%. On-balance-sheet outstanding principal was RMB9.150 billion, including institutional-partner-funded drawdowns that remained on the balance sheet. Off-balance-sheet transactions had outstanding principal of RMB2.036 billion and related guarantee liabilities of RMB47.0 million.

Material changes versus 2016

  • Revenue and net income more than tripled, driven by transaction growth and increases in financing income, merchandise commissions, and off-balance-sheet facilitation income.
  • Active borrowers increased from 6.1 million to 11.7 million; repeat borrowers were 81.9% of active borrowers in 2017, versus 68.4% in 2016.
  • Credit performance weakened: on-balance-sheet principal more than 30 days past due rose to 4.42% of outstanding principal from 1.29%; allowance rose to RMB519.3 million from RMB105.1 million, and the M1+ delinquency coverage ratio fell to 1.3x from 1.6x. Charge-offs increased to RMB191.0 million from RMB49.4 million.
  • Funding mix shifted: institutional partners funded 53.1% of total transaction volume on balance sheet and 11.8% was off balance sheet; own capital funded 35.1%. Qudian ceased transferring new drawdowns to P2P platforms in April 2017 and temporarily stopped funding through its two online small-credit companies in December 2017 amid regulatory inspections.
  • The October 2017 IPO generated approximately US$799.6 million in net proceeds. By year-end, the company had used US$100 million for Dabai Auto capital and US$63.7 million for ADS repurchases. It repurchased 4.54 million ADSs at an average US$14.00 under a program later increased to US$300 million.

Outlook, risks, contingencies, and unusual items

  • Outlook: Management expected cash from the IPO and operating activities to meet ordinary working-capital and capital-expenditure needs for the next 12 months, while noting that additional financing could be needed. No quantified revenue, earnings, or transaction guidance is provided. Management reported that it reduced credit volumes in December 2017 in response to rising delinquencies and saw initial delinquency stabilize for January 2018 originations.
  • Regulation and pricing: China’s online consumer-credit rules were described as evolving and uncertain. Qudian reduced pricing in April 2017 to keep annualized fee rates at or below 36%; Alipay imposed a 24% cap on leads from its interface effective November 30, 2017. The company disclosed regulatory inspections of its small-credit companies and no final outcome of Beijing rectification efforts. Circular 141 raised uncertainty over bank outsourcing and Qudian’s default-risk guarantees.
  • Credit and guarantees: Qudian generally remained responsible for repaying funding partners when borrowers defaulted. It paid RMB124.8 million under off-balance-sheet guarantees during 2017. The filing gives differing maximum potential guarantee-payment amounts: RMB2.036 billion in one disclosure and RMB2.082 billion in the financial-statement note; reconcile the scope and figures.
  • Partner and structural dependence: The business relies on Ant Financial for borrower access, payments, and credit information, and operates substantially through PRC variable-interest entities (VIEs) controlled by contracts rather than direct ownership. The enforceability of VIE arrangements and future regulatory treatment are uncertain. Founder Min Luo held 70.5% of voting power as of the report date.
  • Controls and litigation: Management and the auditor identified a material weakness in internal control over financial reporting, relating to insufficient personnel with U.S. GAAP and SEC reporting expertise. Management described remediation efforts; an ICFR effectiveness audit was not yet required. Five putative shareholder class actions related to IPO disclosures were pending, and the company could not estimate possible losses.
  • Other matters: The company disclosed no dividend plans for the foreseeable future. It identified significant PFIC risk for U.S. investors for 2017. Its auditor stated that PCAOB inspections in mainland China were unavailable at the time. The filing says Qudian’s own auto-finance business began in November 2017; reported lease revenue and segment operating loss were RMB26.1 million and RMB32.4 million, respectively.

Important facts for investors to verify

  • Confirm that Qudian Inc., rather than High Templar Tech Ltd, is the intended issuer and that the relevant reporting period is FY 2017, not 2017 Q4 alone.
  • Track subsequent delinquency, charge-off, provision, and guarantee-payment data against the sharp 2017 increases and the reported January 2018 stabilization.
  • Reconcile the RMB2.036 billion and RMB2.082 billion maximum guarantee exposure disclosures, and assess actual and potential recourse obligations on both on- and off-balance-sheet funding.
  • Check regulatory outcomes for the small-credit-company inspections, Beijing rectification, bank partnerships, fee caps, and Qudian’s guarantee arrangements.
  • Assess remediation of the material weakness, the status and potential exposure of the five lawsuits, and cash availability after separating restricted cash and funds held within trusts.
  • Review the dependence on Ant Financial and VIE contractual arrangements, related-party funding and balances, and the terms and execution of the remaining share-repurchase authorization.