QC Holdings

Ticker: QCCO
Date of Report 15/06/2010 52-Week Range 3.38-7.15
Market Cap, mlns 65 Current Price 3.65
Tangible Book Value, 1Q2010 mlns 51.4 Dividend yield 4.00%
Price/ Tangible Book Value 1.27 Insider Holdings 55.3%
FY 2009 (as reported, mlns) 19.8 Institutional Holdings (Top 10) 22.67%
PCurrent/ EFY2009 1.1
FY 2010 (forecasted, mlns) 16.5-15
PCurrent/ EFY2010F 4-4.3 Holding period 12 months
Industry Payday lending Target share price 5.10

QC holding business
QC Holding is specializing in payday lending (71% of
Top 5 companies in industry
revenue generated in 1Q2010) as well as other
Company Name # of centres Ticker
consumer financing products, largest being auto Advance America 2,553 AEA
ACE Cash 1,800 private
sales (10%) and instalment loans (9%). With 533 Check ’n Go 1,000 private
Check into Cash 1,000 private
branches in operation and 24-old history the QC Holding 533 QCCO
Company is one the largest and oldest players in a $42.1 bln 1 industry.
As a result of cheap credit availability and favourable consumer trends the industry has grown
rapidly over the past decade (and registered healthy profit margins of 9% along the way). In recent
years however the industry is undergoing structural changes due to market saturation and impeding
legislative changes. For example Arizona has banned payday lending in June 2010 and Mississippi is
expected to follow the suite in 2012.

Investment thesis
Despite:
1. ongoing industry challenges stemming from legislative changes
2. resultant permanent shut down of some regional markets
3. and further declines in revenue and profits in the near future
I believe that:
1. the Company’s current market capitalization of $63 million, trading at all-time low;
2. ca. $ 21 million in cash being available for distribution to shareholders, or 37% of current
market cap;
3. and its 2009 net income of $19.8 million, implying a P/E of just 3.3
offers a 40% upside potential, given that my assertions are correct.

1, 3
The cost of providing Payday Loans in a US Multiline Operator Environment, by E&Y, Sep 2009
I have derived the intrinsic value based on a combination of liquidation, comparative and multiples
based valuation, which would be presented below.

Valuation
Multiples based valuation:
Even after factoring in Arizona ban on payday Multiples Valuation (over 5 year period)
lending and assuming no offset from other business Company QCCO AEA EZPW
P/OE, median 3.83 2.81 6.95
lines the net income for 2010 is anticipated in
P/E, median 9.24 12.29 11.99
$16.5-15.1 mln. range and operating earnings (OE)2
of ca.$34 mln, implying a leading P/E of 4-4.3 and P/OE, avrg. 6.92 3.39 6.97
P/E, avrg. 15.57 10.70 13.03
P/OE of 1.9 , well below median and average
multiples. Assigning a median P/E of 9.24 and P/OE of 3.8 yields a stock value between $ 129-145
mln.
Comparative based valuation:
Although superficially simplistic a comparative valuation was modelled after ACE Cash acquisition by
JLL Partners in Oct. 2006 yielding an implied value of $154 mln at high end of multiples valuation.
Value in liquidation:
Assuming that the Company will stay solvent in 2010, but would be forced to liquidate at some point
in time in 2011 due to hypothetical state wide ban on payday lending then a floor value in
liquidation would be between $63 mln and $50 mln with midpoint estimate of 56.5 mln.
Derived probabilities
Thus a probability of failure implied in the current market valuation is ca 88% on undiscounted cash
flow basis. Although I do believe that the possibility of bankruptcy and a distressed sale in which the
Company is far and remote, being conservative I claim no informational advantage but merely assert
(and base my payoff expectations) on a possibility of the mean reversion. More unbiased 50/50
probability of success or failure yields an intrinsic business value of $92.8 mln.

2
Operating earnings are defined for the purpose of this presentation as branch gross profit less corporate
overheads, but excluding the depreciation and interest expense as well as P/L flow-through adjustments.
Principal risks
Dependence on management integrity in serving minority shareholders
With 55.3% stake in the Company the founding members are controlling all operational and strategic
decisions.
Strategic uncertainty
The buy here, pay here segment represents significant opportunity highly dependent on market
positioning. At the moment it is unclear whether the Company intends to be active operator in the
market or attempts to establish presence to purchase loans from existing players. The latter
positioning will permanently lower Company’s ROIC, while the former will most likely increase
Company’s profitability level.
Failing to execute transition strategy
The Company is addressing industry change by entering new market segment. The success of such
transition is highly dependent on strategy execution path (as above) and integration efforts.
Unanticipated legislative change
The unanticipated legislative change will almost certainly have negative impact on industry
profitability and overall market size, thereby increasing possibility of intra industry wars.
A number of restrictive bills are currently in the works. They range from increasing responsible
lending standards to interest rate caps. The Payday Lending Limitation Act of 2010 (please see
S.3245.IS 111th Congress for details) is currently going through Senate hearings.

Potential catalysts
Multiples expansion: Due to industry’ structural change and company’s vaguely articulated strategy
the Company is trading at the low end of P/E and P/OE multiples. I believe that despite current
uncertainty the industry will remain profitable due to stable underpinning demand and peculiar
entrance barriers that larger financial institutions are facing. Thus with new competitive equilibrium
reached the Company should enjoy multiple expansion to reflect reduced level of uncertainty (even
after taking into account reduction in overall market size and profitability levels).
Successful strategy execution: The Company is threading waters in buy here, pay here market. If the
Company builds its strategy after Nicholas Finance (ticker: NICK) business model it might be able to
maintain profitability through better asset utilization and dial in top line growth. Such development
would likely to be reflected in higher valuations.