Monday, January 1, 2018

Analysis of Qudian

The article has been fixed as at 10.40 PM Malaysia time on 1 January 2018. If you read the article before 10.40 PM Malaysia time, please disregard what you read as I spotted an error in my analysis.


Please read the disclaimer here: Enjoy the article, bitches!

Hey, value investing fam. How did 2017 treat y'all? So, I recently purchased 150 shares at USD13 per share in Chinese online microlender, Qudian. The company provides small short-term loans at very healthy interest rates for people to buy phones, sneaker or whatever the fuck people buy these days. “Average credit size per transaction was approximately RMB920 (US$139) for cash credit and RMB1,390 (US$209) for merchandize credit for the third quarter of 2017. Average credit term was 2.4 months for cash credit and 8.7 months for merchandize credit for the third quarter of 2017” (source: Qudian’s 3Q17 quarterly report). 

Update on the Greedy Dragon portfolio: Other than investing in Qudian, I recently sold all of the portfolio’s 716 shares in Banco Santander at USD6.64 per share and added 300 shares of Oasis Petroleum at USD8.00 per share.

The stock has been sold down recently as the Chinese government seems intent on cracking down on online microlenders. And if y’all know anything about me, it’s that I love investing in stocks that Mr. Market hates. I just can’t help myself, just like how I can’t help myself around chicken masala at an Indian banana leaf restaurant.

However, I am worried about the potential ramifications of increased government intervention in the sector. Especially when I read stuff about how China plans to shakeup the microlending industry, with only large state-owned companies and the biggest internet firms surviving (source: Bloomberg). Also, Chinese regulators and police are investigating a potential leak of data from more than a million students who are clients of Qudian (source: Bloomberg). “Violations of protecting personal information carries possible penalties including shutdown of websites or cancellation of business licenses under China’s Cybersecurity Law (source: Bloomberg).” Needless to say, I only committed a small percentage of my portfolio to the stock. Insomnia is doing a fine fucking job as it is, I don’t need anything else keeping me awake at night.

Apart from the potential for increased government regulations, Qudian’s margins will be impacted by Alipay’s decision to cap the all-in interest rate at 24% annualized for loans marketed on its consumer interface; currently, the majority of total credit drawdowns for Qudian were made through Alipay (source: PR Newswire). The Chinese government caps the all-in interest rate at 36% annualized. 

Despite the challenges faced by Qudian, I think that it has some good things going for it. Growth for one has been fantastic. The Group generated revenue and net profit of RMB3.3 billion and RMB1.6 billion respectively in just the nine months ended 30 September 2017 compared to revenue of RMB235.0 million and net loss of RMB233.2 million in 2015. Short-term loan principal and financing service fee receivables, the Group’s pork dumplings and oolong tea (bread and butter for the Chinese, in my imagination anyway), stood at RMB10.7 billion as at 30 September 2017 up 416.9% from RMB2.1 billion as at 31 December 2015.

The Group generated annualized return on assets of 3.6% (9M17 net profit was annualized), which is respectable for a finance company. It would be more professional to calculate the trailing twelve months return on average assets but it would take up a few minutes which can be used to stare aimlessly at the ceiling of my apartment, and obviously apartment ceiling wins. I couldn’t calculate the return on equity as shareholders’ equity was negative as at 30 September 2017.   

The Group also doesn’t seem to have trouble collecting on its loans; “M1+ Delinquency Rate by Vintage for the first and second quarter of 2017 remained at less than 0.5%, through September 30, 2017” (source: Qudian’s 3Q17 quarterly report). M1+ probably means one month plus (may seem obvious to you, but it wasn’t to me the first time around). However, rising delinquency rates is certainly a potential risk that investors should factor in when evaluating Qudian. 

Considering the Group’s strong growth, I think I paid a reasonable price for the stock (I thought I paid a reasonable price for the stock but I realized minutes after publishing the article that one of my main assumptions was wrong, so fuck me). We will assume 1) financing income is based on the Group charging a 24% interest rate on its loans 2) income will be taxed at China’s corporate tax rate of 25%. We will also annualize 3Q17 operating costs, sales commission fee and loan facilitation income. Here is the math:

Back envelope estimation of annual net profit
Figures in RMB
Revenue Components:

Financing Income
Sales Commission Fee
Loan Facilitation Income and Others
Total Revenue
Operating costs
Income Tax Expense
Net profit

The next step is simply dividing the Group’s net profit of RMB832.8 million or USD128.0 million (based on Bloomberg’s USD to RMB exchange rate of 6.5068 at 29 December 2017) with the weighted average shares outstanding on a diluted basis for 3Q17 which stood at 296.0 million shares. This will give me earnings per shares (EPS) of USD0.43, which will in turn result in a P/E ratio of 30.1x at USD13 a share (the price I paid for my shares). I will reduce the estimated EPS by 30% to account for errors in my assumptions (as well as to adjust for the fact that I calculated financing income as simply 24% of short-term and long-term loan principal and financing service fee receivables, instead of trying to figure out how to estimate the loan principal component). This will give me EPS of USD0.30 and a P/E ratio of  42.9x, which I think is a little pricey but still kinda ok.

Some may have a problem with microlending morally. But as long as the lender shoot straight about the rates charged and the terms of the loan, and the transaction is voluntary, then I don’t see any problems with it. Is borrowing money to buy more stuff a shining example of financial discipline? Probably not. But people are gonna do what they’re gonna do, and I much rather they get their funding from legal microlenders than from asshole loan sharks. That’s just where I’m at on this issue.

Now that I’ve done fucking the puta that was 2017, I’m looking forward to step to 2018. Happy new year y’all! Before I go I want to give my prediction for stocks and cryptocurrencies in 2018; they will most definitely either go up, go down, trade sideways, or do a combination of the three. In other words, I don’t fucking know what will happen in 2018 or even tomorrow for the matter. Take care and stay rational.

Sunday, November 12, 2017

It’s the capital structure,stupid!

Whaddup, it’s your boy, the Greedy Dragon, back up in this motherfucker! It has been almost 8 months since I started working a 9-to-6, and I realize that some of the premises I once held were just fucking stupid. Like when the time I thought that you could even come close to retiring on 300k Ringgit and a fully paid-up house. Shit happens and will continue to happen. Few hundred bucks to fix this, few hundred bucks to fix that; at the end of the month you realize that you fucking outspent your paycheck, again. Maybe my lifestyle is a tad too baller for my income bracket, maybe I just had a string of bad luck. Whatever it is, I sure am fuck glad that I already have some capital to work with as I don’t think I have the right temperament these days to scrimp and save like regular folk. Anyway, let’s take a look at how a bad capital structure can keep an otherwise decent business down.

Update on the Greedy Dragon portfolio: Since my last article,  I sold 4,000 shares in Hua Yang at RM0.81 per share and 500 shares in Maybank at RM9.26 per share for liquidity purposes.

Say you invested in a car wash in Albuquerque that’s really a front to launder meth money, and it makes $80 million in EBIT a year. The car wash’s capital structure consists of $400 million in term loans with a 4% interest rate and $100 million in common equity; there are 50 million shares outstanding. To keep things from getting overly complicated, we’ll assume the corporate tax rate is 0% which will give the car wash a net profit of $64 million or $1.28 per share. All of a sudden cocaine starts taking a bite out of meth’s market share, and EBIT at the car wash falls 50% to $40 million.  

It’s just gonna suck for a while, right? After all the meth behind the car wash is 99.1% pure, customers will come back. Ain’t no thing, right? That may very well be the case, however, the term loans will mature in less than two years, and the banks that lent the car wash money don’t want to rollover the loan. Some time passes, and the car wash starts to get desperate and seeks alternative sources of funding. It eventually takes a $400 million loan with a 9% interest rate from a private equity firm. The car wash also has to give the PE firm warrants to purchase 20 million common shares at a really low exercise price as a sweetener.

Now I don’t blame PE firms for making huge profits to supply capital to companies in a bind. In fact, I think it’s beautiful. First off, it’s a voluntary transaction. There are higher risks involved in lending to distressed companies. The new injection of capital also gives struggling companies a lifeline to turn things around instead of just waiting around to die. Don’t hate the player, hate the game. In fact don’t even hate the game, the game is fucking intoxicating. It rewards intelligence, discipline, and guts, and no leftist pussy will ever convince me that this is a bad thing.

Anyway, the car wash will suddenly see its interest expense rise to $36 million from $16 million, and net profit will fall to $4 million. Let’s say that the meth business does eventually turn around and starts making $80 million again, the share price recovers somewhat, and all the warrants get exercised. The car wash will now be making $44 million in net profit. With the larger number of shares outstanding, earnings per share will clock in at $0.63; approximately half of what it used to be at the beginning of our story, and that’s assuming profits recover fully.

You might have noticed that I didn’t talk about the share price at all. Well, it's because it is not fucking important; what’s important is the profits that each share is entitled to (unless the share price is higher than what you paid for it, which is doubtful due to the significantly lower earnings per share).   

Here are some things to look out for when evaluating a company’s capital structure:

1)      Obviously a low debt-to-equity ratio is a good thing, but what is considered low depends on the industry, and even then what is conventionally considered a safe ratio may not hold up when the shit hits the fan. But a high component of equity just might put some sort of a floor on the price of the stock, which will give the company more options in terms of funding sources.

2)     When conducting your stress test, make sure to include a 6-8% increase in the cost of debt (this is just based on my own experience, you can do your own research on what would be a more appropriate increase) to whatever other negative things you are factoring in to your model.

3)      How far into the future are the company’s debt maturities? Will it be able to recover its earnings power by then to convince the financial markets to let it refinance its debts?

4)      Is the company generating enough cash flow to fund its CAPEX program without having to take on additional debt?

5)      Does the company have any contractual obligations that require significant cash outlays that can’t be paid for through cash on hand and cash flow?

The list is by no means extensive, as I’m still learning about the investment game. I know I’m still a long way off from becoming the Heisenberg of capital allocation. Anyway, thank you for staying with me on my journey to build my empire, even though I rarely post no more (because I’m a lazy puta). Take care and stay rational.

Saturday, September 2, 2017

Not Dead Yet...

Sup y'all, just wanted to drop by to say hi and that I'm still alive. I would like to say that I stopped blogging this past 6 month because I wanted to give my full to attention to my new job. But to be real, I just wasn't feeling it. The well of ideas went dry. Anyway, here's a little update on my life, and what I've been up to with regards to the Greedy Dragon Portfolio.

So, on the 20th of March I started working at an investor relations firm. I won't mention the name of the firm as I don't think they want to be associated with some puta cabron that calls himself the Greedy Dragon. Overall, the job is a job. People are generally nice, so I guess I should be grateful for that. I do miss waking up whenever the fuck I want, taking my time to enjoy a meal without glancing at the time every 30 seconds, or playing video games at 3 in the morning. But I guess that's what it means to "adult" as some mofos like to say. Can't say I'm a fan of some of the menial stuff I got to do, but everyone got to start somewhere. I'm not that delusional to think that I would be the capo di tutti capi of the investment world day on day 1.

When it comes to my portfolio, it reached a record high early in the year when people were optimistic that Trump would be good for business. The optimism started fade as the Trump administration displayed their incompetence time and time again. And no I'm not a fucking leftist SJW, I still think Trump is a better president than Obama, but that's setting the bar way too fucking low. I wish Margaret Thatcher could be president by communicating through a ouija board, she was really good for business (and yes, I know she is British). Anyway, since I took up my job, my stock holdings just kept sliding down like a motherfucker, and I've been catching some falling knives. Here are the positions I took since my last post:

Disclaimer: Please do your own research, I might not know what I'm doing. For all I know, I might be committing financial suicide.

Bought 400 shares in Cloud Peak Energy at USD4.05, sold 500 shares in Kerry Properties at HKD29.70, bought 700 shares in Northern Oil & Gas at USD2.45, sold 1k shares in Maybank at RM9.39, bought 250 shares in Oasis Petroleum at USD7.55, and bought 1200 shares in Northern Oil & Gas at USD 1.20.
I hope I will have more things to blog about in the future. Till then, I hope y'all keep on hustling for that paper. Thank you for reading. Take care and stay rational.