Before diving into this further, it's helpful to have a better understanding these businesses. We'll primarily focus on QD since it is getting hit the hardest and it is the market leader. PPDAI (PPDF) and Jianpu Technology (JT) are virtually the same as QD anyways, offering loans to consumers mainly through their online platforms.
Based in Beijing, QD is the largest online provider of small cash credit products in China. Putting this into context, the company facilitated RMB38.2 billion in transactions to seven million active borrowers through the first six months of 2017.
The company provides small credit to unserved or underserved consumers, who are often young and mobile-active, but with limited access to traditional financial products due to a lack of traditional credit data. The company believes its big data analytics capability allows an alternate way of estimating the creditworthiness of its customers. The company’s system allows for an immediate approval of applications and delivery of funds in digital form and merchandise credit products.
QD receives financing income from cash credit products and financing income & sales commission fees from merchandise credit products. Loans provided to customers typically have short durations, which allows the company to quickly establish a credit profile for its borrowers. During the first half of 2017, an average active borrower accessed credit six times and borrowers with outstanding credit had utilized roughly 51.3% of their limits.
Given QD's operations, it is easy to see why a major crackdown on microlending would be a significant cause for concern. Circling back to this morning's news, it has been reported that some of these micro-lenders are charging upwards of 1,000% on these loans. Furthermore, there are concerns that these companies are preying on students and individuals with little or no regular income. These consumers, not surprisingly, are typically repeat customers with over a third of them applying for micro-loans on two to five occasions.
Given the meteoric interest rates and repeat business, it's easy to see why micro-lenders would be popping up all across the China. As noted above, there have been three such IPOs in just the past month. While charging such a high rate, these companies can easily absorb a higher default rate. But, according to QD, it's delinquency rate for 1Q17 was less than 0.5%. That said, it is possible that some consumers are simply taking out additional loans in order to pay off interest rates on existing loans. A scenario that would not end well for QD, PPDF, or JT.
As news of this crackdown hits the wires, there are also reports of class action suits being filed against Qudian (QD), which is not surprising given the stock has tanked by 40% since November 13. As these lawsuits pile up, QD's reputation might further be tainted.
To conclude, a substantial crackdown in micro-lending undoubtedly would be a blow to these three stocks. Put another way, this steep downward reaction in these stocks does seem justified.