 Good day fellow investors. Today we're going to discuss a company called Kudian, a Chinese online microlender that we have already mentioned in our video about Chinese IPOs, but I said I need to dig in deeper into the risks and to see really what is the value of the company in relation to its current price. Since then I believe the stock dropped from 25 to 12, so that's a huge drop which makes it a very interesting opportunity also. Stock drops are not always bad. So this is the company, it has 56 million registered users, 23 million approved users and during the last quarter 7.5 million active borrowers in a market of around 400 million potential customers from the Chinese savvy internet users. So that's just a drop in the sea, huge potential there. Staggering growth numbers, 300%, 322% net profit growth, so really amazing growth there. If we look at the quarterly transaction revenue growth, huge growth every quarter, slowing down I expected to slow down further in the future as growing at 200% a year is a bit much, but even if it grows just 20-30% per year it is still a very very interesting proposition. Now what's even more interesting is that Kudian has doubled its revenue from sales commissions. So Kudian offers cash, short-term loans 2-2.5 months, where the average loan is $139, so very very low, really to the underserved community, online community in China and there is merchandise credit which is going to 8-9 months almost. However on the merchandise credit also Kudian has an online platform and they sell merchandise from other sellers and for example they get 40% commission if they sell a watch of a luxury bag on their online platform. So if we go back to the slide here we can see that sales commissions fee grew from 151 million RMB to 295 million RMB over one quarter, so it doubled in just one quarter and that is also a focus of the company to diversify its products, to diversify its revenue stream. As we can see the financing income was not growing that fast over quarter over quarter, we are not talking year over year here. The delinquency ratio is very low and the company expects that the delinquency ratios to grow from 0.5% to 1% so there will be higher costs related to that as they increase the number of users they allow they hope that they will approve 80% of credit requests. If we look at quarterly net income we can see net income in dollars of 0.34 dollars per share. Now we cannot really take these 0.44 dollars as a given for the next four quarters because a lot of things have changed in the Chinese regulatory environment in the last few weeks and that is the main reason for Kudian's stock drop. This is important, financing income over the quarter was 1.54 million RMB. Total revenues 1.4 billion RMB. The net income was 651 million or 44% of the total revenue so that's a very very large net margin. However if I compare it to the short-term loan principle and financing service fee receivable which is at 10.6 billion RMB and I go back to the financing income of 1.05 billion RMB when I put 10.6 billion RMB multiply the quarterly income by 4 to get to get 4.2 billion RMB as a yearly base for the financing income I get to an average interest rate charged by Kudian of 40% which I would call usury. However the government has lowered recently the maximum charged rate to 46% and Kudian which has been showing leading market practices has already lowered the rate to 46% in March 2017. So this data has been already the lowered rate which has been regulated by the government only now so Kudian is really the leader in the sector we can say. So we have the government capping the interest rate at 46% but Alibaba and Alipay has kept from the end of November will be kept at 24% so there is even more pressure on Kudian's margins there as big part of their market is from Alibaba. Nevertheless if I apply a 25% interest rate on my previous calculation I have to deduct 400 million from net income 400 million from the financing income which means that at no growth I get a quarterly net income of 0.1 dollars per share time that by 4 we are at 0.4 which means surprise to earnings ratio now of around 30 so there will be a real pressure on Kudian's net profits and they cannot show the same margins that they have been showing in the past however the situation is not that tragic as the market might think because 0.4 dollars per share is already now a price earnings ratio of 30 which is good for a company that's growing 100 200 300 percent of whatever quarter after after quarter so that's one point to take into consideration if you want to invest into Kudian. Just a look at expenses we can see that as Kudian has been scaling expenses have been dropping these expenses sales and marketing will drop even more as Kudian has switched from a cost per pit paying rate with Alipay to a cost per sale paying rate so the management expects a lower marketing share of costs in the future. So if I just put my calculation of current at market cap interest rates 0.4 dollars per share in a model and we see 20 25% growth in earnings over next year which is really really conservative I get to an earnings per share of 0.6 in 2018 which is just a P ratio of 20 at the current price of 12 12.5 so if Kudian manages to grow at healthy rates and with the lower interest rates it could happen because they could grow even more thanks to lower interest rates which makes them more attractive to customers. There will be raises in the loopholes that's a given however it's still a small market it's really something that's growing especially the consumer market in China we have been discussing online retail in China and how it's a market exploding and the huge potential it offers so if you want to be exposed to such a market through a micro lender of financing that could become something in the future but could also go bust so really no the risk is I will lose everything but the potential is huge if Kudian manages to grow from the 7.5 million customers it has now scale on its base increase the diversified product offering there has been mentioned of auto loans in the conference call so very interesting a lot of potential but investors have been burned on these Chinese growth potential companies a lot in the past that's the risk reward that's simply it with the Chinese recent IPO just look at the IPO and the use of proceeds they will use it for they will use it for marketing strategic acquisitions and general corporate purchases they get their funding for the loans from institutional funds and they will continue to use those for getting money to customers it's a very interesting company a lot of potential a lot of growth potential however the market doesn't like it if we look at what happened to the stock price in the last month since it IPOed at first it was excitement and the stock price increased 50 percent then it dropped almost what 75 percent from the one month ago high the problem is that American investors I think are very very scared of Chinese IPOs and as soon as there is trouble as soon as there is potential of anything bad happening everybody pulls out their money as it's the recent IPO we have no stability we have no confirmation we don't know anything about the company and that's why the stock price is cheap however the pattern is very familiar so to conclude I have no price target from for kudian I hope it goes to five so I don't know whether where the stock will go nobody knows that however if you look at earnings we have even with the worst most conservative net profit margins from the lower interest rate caps we still operate profitably so even with the governmental clamp down profitability is still there so kudian will continue to grow if it grows at the same rates as it has been growing we can see earnings of 60 cents 2018 one two dollars in 2019 2020 who knows so there is huge potential if we see two dollars in 2018 confirmation of the growth price earnings ratio of 40 then you are at 80 that's a potential for a company like this however there is also the potential that there will be losses that it doesn't work out that well so you have to really always see the risk and the reward the risk okay I lose 50 60 percent of my investment the potential is I make five times my investment so that's the story behind kudian and so you have to approach it with a percentage of your portfolio that is for such risk reward investment in investing it is always risk reward remember as always how to start a position in such a company it's a falling knife look at my how to catch a falling knife video think about starting in stages if the drop continues today or yesterday I'm filming this Monday morning so the market is not open so I don't know what will happen today so thank you for watching I hope you like the video I hope you enjoyed the stock I hope you enjoyed how to deal with these companies and I'll see you in the next video