Olivier Le Moal/iStock via Getty Images
Investment Thesis
Qudian (NYSE:QD), which was initially a consumer-finance business, has recently transformed into the last-mile delivery segment. It has recently reported decent growth in its new operations and I believe it can sustain this performance in the future as it has increased its investment to support its expansions.
About QD
QD was initially known for offering credit solutions to customers in China. The business has been continuously exploring business opportunities. Historically it managed a loan book business that mainly provided small credit products. However, it ceased new offerings in September 2022 as it was unable to conduct its operations due to the strengthening of regulations. Previously, it was also dealing in auto financing products which comprised sales-type finance leases and the sale of vehicles. Later on, it added multiple business lines which included Transaction Services, and Childhood Education which were closed recently. In addition, the company currently has an E-commerce and QD Food business, which has decided to wind down slowly. The firm has explored a new line of operations in December 2022. It introduced last-mile delivery services which consist of logistics operations initially focused in New Zealand, Australia, and the U.S.A. It operates under the name: Fast Horse. This new business gained a decent scale in the second quarter in Australia. The wind-down of the lending business has led to a significant cash position with the company which is utilized significantly to expand its footprint in the other three countries.
Financials
The company has changed its business lines which has led to significant growth opportunities. In December 2022, it started the operations for last-mile delivery in Australia. It is also steadily progressing towards New Zealand and the United States. The e-commerce industry is booming rapidly worldwide, However, the competition from large size companies is immense and they have a larger market share which makes it difficult for the new entrants to survive. Observing this the company has targeted small markets in Australia and New Zealand which I think is a strategically wise decision. The e-commerce industry in Australia is estimated to reach $32.3 billion by 2024. This indicates a huge addressable demand. In addition, New Zealand is also experiencing significant growth and is expected to increase up to $10.12 billion by 2027. Though the industry has positive long-term upside indicators, technology is an important factor in addressing this growing need. This results in heavy initial capex for the new entrants. As the company has significant cash positions from winding its previous operations, it has planned to utilize it to expand its last-mile business. This transformative step towards capex highly aligns with its growth strategy. I believe as the company broadens its presence in Australia, New Zealand, and the United States, by increasing its investment, it can be strongly positioned to cater to the growing demand as it can significantly improve its innovative logistics capabilities. Though initially, the firm might experience high costs and operational losses, it can create a strong position in the competitive market by leveraging its strong capex to build its last-mile delivery service portfolio which can help it to recover from the losses and increase its profitability. It started the business on a trial basis in December, however, it picked up the pace in the second quarter of 2023. It has observed decent revenue in the third quarter, which indicates the steady progress of its new business.
It has recently reported its quarterly results. It reported a revenue of RMB29.59 million, (US$4.15 million), down 73.13% compared to RMB110.15 million (US$15.44 million). This change mainly resulted from the winding up of previous businesses and the starting of new operations in Australia. Net loss declined by 72.03% YoY from RMB647.95 million (US$90.84 million) to RMB181.22 million ($25.41 million) or $0.84 per share. Operating operations accounted for RMB151.2 million (US$21.20 million) of the net cash outflow in Q3. This was driven by the acquisition of operating assets and the funds for labor-related costs and expenses. QD reported RMB7.22 billion (US$1.01 billion) in liquidity and loss from operations stood at RMB100.80 million ($14.13 million).
The company has managed to generate decent revenues in its new business in a short time. I think the coming quarters might be challenging due to increased capex, however, it can be able to surpass its previous growth levels by leveraging its innovative logistics capabilities which might make it strongly positioned to cater to the growing demand in wide geographic areas. The management also has a positive outlook.
Mr. Min Luo, Founder, Chairman, and Chief Executive Officer of Qudian, expressed a positive outlook about the potential of the global e-commerce market. He mentioned that, aligned with the company’s strategic vision, there is a dedicated effort to expand investments in this sector. He also stated that there could be possible additional operational losses while pursuing growth but emphasized the company’s steadfast commitment to executing its business transition. He also highlighted the importance of maintaining prudent cash management to safeguard the balance sheet during its expansion.
What is the Main Risk Faced by QD?
The company has been exploring new business lines and might invest significantly if it experiences initial growth. It is in the process of closing its operations of QD Food and focusing on the last-mile delivery sector. This logistics business can require significant capital expenditure to expand its footprint in three countries. Though the firm has managed to earn decent revenue from these lines it has also announced that it may incur increased capital expenditure in the coming quarters. It has also stated that it can face operational losses initially which can hamper its growth. However, I think as the demand is experiencing a robust demand, the company can make the most of this opportunity and can scale its business which can mitigate this risk to a large extent.
Valuation
The e-commerce industry is booming rapidly all over the world. The company entered into a new business line of last-mile delivery and mainly targeted the markets of Australia, New Zealand, and, the United States. The company is constantly focused on expanding its business by making additional investments. I believe this can initially lead to large capex, however, it can grow its profitability in the future by leveraging its innovative logistics capabilities which can help to address a huge demand. After considering all these factors, I am estimating EPS of $0.04 for FY2024 which gives a forward P/E ratio of 51.75x (share price: $2.07). After comparing this with the sector median of 10.47x, we can conclude that the company is overvalued. Though the company is overvalued, I believe it can further gain momentum in its revenues and profitability as it has made investments in its last-mile delivery business which can make it strongly positioned to cater to the increasing demand by adding innovative logistics capabilities to its portfolios.
Conclusion
The company has experienced decent growth in its new business line of last-mile delivery. I believe it can further grow and capture additional market share in Australia as well as New Zealand and the United States as it has recently announced high investments in expanding its operations. It will be adding more to its logistics capabilities by making capital expenditures in coming times which can make it strongly positioned to cater to growing demand. However, a large portion will be dedicated to capex and other operating expenses to grow its business, which might contract its profit margins for a shorter period. It might experience operational losses initially but it has positive long-term potential due to industrial tailwinds and it can grow steadily as it is adding more to its logistic capabilities. QD is currently overvalued however it can maintain its ongoing growth trajectory by penetrating Australian and other small markets. After considering all the above factors, I assign a hold rating to QD.
