Tech

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Jack Ma is minting a new billionaire.

Min Luo, founder and chief executive officer of Qudian Inc., will be worth at least $1.2 billion, according to the Bloomberg Billionaires Index, after the online loan provider goes public in the U.S. this month.

To see where Ma fits into this equation -- beyond the 12.8 percent pre-IPO stake Alibaba Group Holding Ltd.'s banking affiliate Ant Financial holds in Min's venture -- you have to drill a little deeper into the 41 million transactions on the Qudian app, adding up to 38 billion yuan ($5.8 billion) in credit, in the first half.

Buy Now, Pay Later
Qudian saw 38 billion yuan in consumer credit transactions on its app in the first half, continuing a pattern of growth made easy by being a part of the Alipay network
Source: IPO filing

That's an average ticket size of less than $150 for short-term loans to about 5.5 million mostly young Chinese people, for impulse purchases on their mobile phones. The only way to make a go of a mass lending business like that is to have a very low cost of acquiring new borrowers; a highly efficient system for managing credit risk; and the ability to charge high interest rates without giving customers sticker shock. Qudian's return on equity of 55 percent shows that it's been able to do all three.

In large part, thanks for that success must go to Alibaba.

Qudian gets its customers -- and their credit scores -- from being a part of the Alipay app universe, which currently charges the lender roughly 9 percent of its financing income. Half of that fee goes on customer acquisition, with the remainder split between processing and settlement charges and fees for credit-scoring services provided by Ma's Sesame Credit. Ke Yan, a Singapore-based IPO analyst for research provider Smartkarma, notes that reliance on Ant Financial gives Qudian an "unparalleled" advantage, but it's also a "key risk," especially as Ant Credit competes directly with Min Luo's service.

With Ma's Blessings
This online insurer, which sourced almost half its premiums last year from shipping return cover for goods sold on Jack Ma's Alibaba platforms, has surged since its Hong Kong IPO
Source: Bloomberg

Those dependencies didn't bother investors in the recent Hong Kong IPO of ZhongAn Online P&C Insurance Co., which got almost half its premiums last year via shipping return insurance on Alibaba's e-commerce platforms. ZhongAn shares are up almost 46 percent in less than two weeks of trading, though as my colleagues Nisha Gopalan and Shuli Ren say, it's not clear if Ma will still be willing to back ZhongAn when he gets his own insurance license.

While times are good, expect investors to give short shrift to other risks, such as a 2015 decision by the Supreme People's Court to cap annual interest rates on private loans at 36 percent. Almost 60 percent of the transactions Qudian facilitated in 2016 had "annualized fee rates" exceeding that limit, the company says in its IPO prospectus. Treating these fees as interest, and lowering them to the legal maximum, would have wiped out 21 percent of last year's revenue. Now that Qudian's going public, it's making sure credit contracts are judicially enforceable.

Will that crimp shareholder returns? Not necessarily -- not if Alipay can pump up user growth on the app. As Ma has decided to anoint Min Luo a billionaire, he'll be one.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Hong Kong at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net