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Didi Chuxing IPO: is it worth your money?

China, US

Written by:

Zhi Rong Tan

Didi Chuxing, one of the world’s largest ride-hailing company has filed for an IPO on 10 Jun 2021 and is expected to start trading on the New York Stock Exchange under the symbol DIDI, on 30 Jun 2021.

Update: Didi may be delisting from NYSE soon, we share what shareholders of US listed chinese stocks should know here.

While the company did not reveal the size of the offering, based on the US$4.4 billion it has raised, Didi valuation will be about US$73 billion which makes it one of the largest tech IPOs of the year.

Backed by investment giants Tencent and SoftBank, Didi Chuxing is a large company that rivals its counterparts like Uber, Grab and Lyft. Together with the recovery of the travel industry, this company is poised to benefit from the rise in demand for ride-hailing, making this IPO an interesting one.

As such let us deep dive into Didi Chuxing’s business and determine if it is a good investment!

What does Didi Chuxing do?

Didi was founded 9 years ago in 2012 to provide ride-hailing service in China.

Over the years, its business has consolidated as it acquired its competitors such as Alibaba-backed Kuaidi in 2015 and Uber’s Chinese operation.

Apart from China, the company has also expanded overseas starting with Brazil in 2018. To date, it has presence in 14 countries outside China, with a CAGR of 63.5% in terms of annual active users from 23 million to 60 million.

9 years after its inception, Didi is now one of the world’s largest mobility platform which includes ride-sharing, delivery services, electric vehicle charging networks, autonomous driving, and fleet management.

With operation across 15 countries and over 493 million annual active users driving 41 million average daily transactions, it is an amazing feat.

Didi Chuxing’s market share

Didi had a 91% share in the Chinese market back in the 4th quarter of 2018. Fast forward to the present, Didi is still the dominant player with a 90%market share.

That is not to say there is no competition as there are hundreds of ride-hailing platforms of different size operating in China. Competition is expected to grow and Didi cannot loosen up.

Didi Chuxing’s Financial Performance

Revenue

Didi’s revenue decreased by 8.4% from RMB154.8 billion in 2019 to RMB141.7 billion in 2020. This was mainly due to the impact of Covid 19 which reduced the demand for mobility services.

However, its decrease is impressively low, given that Uber’s revenue decreased 21% during the pandemic. That being said, its revenue growth between 2018 to 2019 wasn’t that great either with a growth of just 14.4%.

Didi has three major business segments:

  • China Mobility,
  • International and,
  • Other Initiatives.

The China Mobility segment comprises operations in China which includes ride-hailing, taxi-hailing, chauffeur, and hitch services. Its International segment comprises both ride-hailing and food delivery services in countries outside of China. Lastly, the Other Initiatives segment comprises bike-sharing, auto solutions (primarily charging, refuelling, maintenance and repair, and the leasing business carried out themselves), intra-city freight, community group buying, autonomous driving, and financial services.

As of 2020, Didi’s China operations still makes up the bulk of its revenue (94.3%) as shown below. The revenue from China Mobility decreased by 9.7% from RMB147.9 billion in 2019 to RMB133.6 billion in 2020. On the other hand, its International segment and Other Initiatives segment grew by 18.1% and 18.2% respectively due to the growth of its ride-hailing, food delivery and bike-sharing services.

As Didi tries to maintain its market lead in China while expanding overseas, it has not been profitable for the past 3 years.

Between 2018 to 2019 there were signs of improvement but the pandemic resulted in a bigger loss in 2020 compared to 2019.

Gross Profit Margin

Didi’s gross profit margin has improved since 2018, as its cost of revenue dropped. This is a positive sign that the company has reached economies of scale.

Nonetheless, a 11.2% gross profit margin is low in my opinion.

Balance Sheet

Didi’s cash and cash equivalents have been increasing for the past 3 years which is a positive sign. However, do note that some of this cash is customer deposit which is held by the platform. These are cash in which the customers has not used and thus cannot be recognized as a profit for Didi.

With a cash and cash equivalents of RMB23 billion as of March 21 2021, it barely covers the company’s current liability of RMB23 billion.

Didi’s total assets of RMB158 billion far exceed its liability of RMB27 billion which is reassuring though we should note that close to one-third of the assets are goodwill.

Cashflow

Net cash from operating activities for FY2020 was RMB1.1 billion as compared to a net loss of RMB 10.7 billion.

The huge difference was due to RMB8.1 billion of non-cash or non-operating adjustment and RMB3.6 billion for changes in its working capital accounts. This non-cash or non-operating adjustment consisted primarily of depreciation and amortization expenses of RMB5.3 billion and a Share-based compensation of RMB3.4 billion. 

While it is great that Didi’s cash flow is positive for the past two years, I am concerned about its high depreciation and amortization. Since 2018 till now, its depreciation and amortization came in at RMB 2.8billion, RMB4.0 billion and RMB5.3 billion for 2018, 2019 and 2020 respectively.

Can Didi Chuxing continue to grow?

Owning market dominance in China suggests that Didi would continue to benefit from China’s growth in years to come.

Mobility Market Size

The mobility market is a huge market that accounts for 8% of global GDP in 2020 as consumers spent over US$6.7 trillion. Back at home, China is the world’s largest mobility market today and accounts for 13.1% of global mobility in 2020 with market size of RMB5.7 trillion (US$873 billion).

Moving forward, it is expected to grow at a CAGR of 13.1% to reach RMB10.6 trillion (US$1.6 trillion) by 2025.

Self-driving Technology

Unlike its US counterpart, Uber which had recently sold its self-driving technology business to a start-up, Didi is still heavily invested in self-driving technology which Didi believes, holds the key to the future of mobility.

Indeed, autonomous driving can improve safety by significantly reducing the risk of accidents and also improve vehicle utilization by allowing cars to operate throughout the day. While this part of the business is still in its infant stage, Didi has already obtained a passenger-carrying service license for an autonomous fleet in Shanghai and is currently testing a fleet of over 100 vehicles.

Electric Vehicles

Another more concrete growth is its electric vehicle fleet. Didi currently has the world’s largest network of electric vehicles on its platform according to CIC.

This is supported by its charging network which is the largest in China. With over 30% market share of total public charging volume in the first quarter of 2021, Didi is definitely a dominant player in this electric vehicle field.

Didi’s potential business risks

Majority of its business is in China

A majority of Didi’s operation is in China, which means any changes in China’s economic, or government policies could affect its business. The Chinese economy differs from many countries especially in the degree of government involvement. Although the Chinese government has opened its economy to market forces, it still plays a significant role in regulating industry development.

In recent months, China has stepped up its scrutiny against big names like Alibaba and Tencent over monopolistic behaviour. In April, Alibaba was fined a record US$2.75 billion. As a result of this move by the Chinese government, these companies saw their share price coming down from its all-time high where Alibaba, Tencent and Meituan dropped 32%, 20% and 33% respectively.

Didi was not spared as its community group buying platform Chengxin Youxuan was fined US$200,000 for unfair competition practices back in March. Just as Didi is about to IPO, it is now facing an antitrust probe by China’s market regulator, State Administration for Market Regulation (SAMR). Didi will be investigated regarding any unfair practices to squeeze out its competitors and also on its pricing mechanism.

Will Didi pull out of the IPO last minute? Or will Didi share price drops like that of Alibaba, Tencent and Meituan? This remains to be seen and is one of the key risks for investors.

Complicated listing structure

Didi will be listed on the US exchanges through American Depository Receipts (ADRs) which are certificates that represent the shares of a foreign stock. This means that buying into Didi does not grant you ownership of the company which a common stock typically does.

To complicate things, Didi like many of China’s tech firms, have a complicated legal structure. This is due to the restriction imposed by the Chinese government on foreign ownership of companies. To bypass this, many companies shifted these sensitive assets into special legal entities known as the VIEs which are owned by Chinese individuals (usually the boss).

Till date, the Chinese government has not interfered. However, this is a risk investor should take note of as VIEs can be ruled illegal anytime which could result in force shut down or sell-down of the company.

US China Tensions

In addition, the tension between the US and China has resulted in multiple talks of Chinese stocks listed in the US being delisted.

Under former president Donald Trump, the US securities and exchange commission (SEC) adopted the Holding Foreign Companies Accountable Act. This law would require company publicly listed on US exchanges to declare they are not owned or controlled by any foreign government.

In addition, these companies are required to comply with the Public Company Accounting Oversight Board’s audits or will risk being delisted.

While it shouldn’t be an issue for Didi, it is uncertain what the Chinese government would do which could affect Didi’s listing.

Highly competitive industry

Despite having a near-monopoly in China, Didi remains unprofitable. This is a sign of intense competition and how Didi lacks pricing power.

The company is also expanding overseas to grow its operation. However, this too looks bleak as it faces other competitors like Uber (US), Grab (Southeast Asia), Glove (Europe & Africa), Cabify (South America) and many more.

In the effort to gain market share, we can expect Didi to remain unprofitable for a few more years.

Didi Chuxing’s Valuation – how much is it worth?

The exact valuation has not been disclosed. However, based on reports, Didi valuation is close to US$73 billion. (It was last valued at US$62 billion during a capital raise).

With a valuation of $73 billion, in comparison to its 2020 revenue of US$ 21.6 billion, its P/S ratio is around 3.38. This is comparatively lower than Uber’s P/S of 8.08 and Lyft’s P/S of 9.67, making Didi seem attractive at first glance.

However, this may not be the case as most of Didi’s revenue is reported on a gross basis which is different from Lyft and Uber which reports on a net basis. What this means is that Didi’s revenue is the total amount consumers paid for the service, while for Uber and Lyfe, their total revenue reported excludes driver earnings and incentives. As such, Didi’s revenue is inflated and this should be taken into account for a better comparison.

The table below illustrates the difference between a gross and net basis revenue model.

After reducing Didi’s 2020 revenue by US$18.1 billion which went to drivers earnings and incentives, Didi’s net revenue is around $3.5 billion, which means its P/S is 20.8.

This is very high compared to its competitors Uber and Lyft.

Conclusion

Didi Chuxing is the market leader in China mobility sector and would likely remain so in the foreseeable future. Nonetheless, Didi is in a highly competitive market. To remain competitive and maintain its market share, it has to continue to offer incentives to its drivers and consumers.

Imagine this, if GoJek offers you a cheaper trip, would you still stick with Grab?

The company’s poor margin shows it lacks pricing power and its IPO valuation of US$73 billion is too high of a price in my opinion. For these reasons, I do not have plans to invest in Didi for now.

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