Didi Cautiously Turns to Large New York IPO

Chinese ride-hailing app Didi will debut on the New York Stock Exchange Beat Uber And dominate the streets of major cities across the country, but worries about growth and regulation are coming.

In the name of its holding company Xiaoju KuaizhiDidi’s goal is to raise US$3.9 billion in one of the largest overseas IPOs since Alibaba went public in 2014, with a valuation of US$64.7 billion, which is in the middle of its price range.

This target is similar to the $65 billion valuation that private investors bought the company in 2018 financing, which may reflect the weakening of investor interest in online ride-hailing after competitor Uber’s disappointing 2019 IPO .

Unlike Uber when it went public, Didi has been able to boast about the profitability of its core ride-hailing business based on adjusted EBITDA since 2019. This core business accounts for 94% of Didi’s 2020 revenue of 142 billion yuan ($22 billion).

This is much higher than the revenue share of Uber or Grab, which depend on fast-growing but loss-making food delivery, respectively, which account for 35% and 49% of revenue, respectively. In China, Didi was excluded from the food delivery market by powerful rivals Meituan and Ele.

However, although Didi’s main business is profitable, its profit margin per booking is much lower than its international competitors, about 3%, compared with Uber’s 20%.

The coronavirus lockdown caused Didi’s bookings to drop by a third in the first quarter of last year, but China strictly and basically successfully contained the virus, which means that its ride-hailing business grew year-on-year in the second half of 2020, only a decline. 4.8%. year.

In the first quarter of 2021, Didi achieved positive overall net profit for the first time, mainly due to the split of its group-buying business, Chengxin Technology, which brought in revenue of RMB 9.1 billion (US$1.4 billion).

But analysts question whether Didi will reach saturation in China’s largest cities such as Beijing and Shanghai, which account for half of its bookings, and whether it can establish new businesses to promote growth.

Bernstein analysts wrote in a recent report: “The main question for Didi is whether its core China Mobile travel can generate enough financial powder to fund its emerging autonomous driving business.”

The head of capital markets at a U.S. bank in Hong Kong said that due to the limitations of the Didi market, the initial valuation of $100 billion for an IPO target “never was a reasonable starting point.” “The big problem for them is that they will not expand beyond the ride-hailing service as easily as Uber. In China, the equivalent of Uber Eats and logistics companies are already crowded with established companies with deep pockets,” the person said.

Overseas, Didi has expanded to large developing economies such as Brazil, but its non-Chinese business only accounts for less than 2% of its revenue.

Segment’s contribution to the group’s total sales (%) histogram shows Didi’s revenue breakdown

However, its dominance in China is unquestionable. Since acquiring Uber in 2016, Didi has grown to 90% of all online car reservations in 2020, with about two-thirds coming from the top 30 cities.

It does have some competition in smaller towns, with more than 200 competitors across the country. Competitor T3, backed by Alibaba, Tencent and three Chinese automakers, has successfully established market shares in Nanjing and Chongqing with its low prices and its own fleet.

Bernstein analyst Cherry Leung said: “Currently profits are large, but as competition in small cities intensifies, they will have to lower prices.”

But Didi’s supporters believe that its profitability is scalable because its competitors are unlikely to engage in a tripartite price war between Didi, its domestic competitor, Kuaidi, and Uber, and Didi’s chairman Cheng Wei said. It won in 2016.

Flow chart showing the Chinese mobile market

Cheng He Jean LiuThe former Goldman Sachs banker who became the president of Didi in 2015 has so far avoided having to pay more expensive subsidies to fend off competitors.

“This is a very simple question: If you want to do something like Didi, would you be willing to burn $20 billion in attracting users?” said Kevin Wang, founding partner of Ameba Capital and early investor in Kuaidi Dache . merge Cooperated with Didi in 2015.

After acknowledging the loss to Didi, Uber retained a considerable stake, which is now about 12.8%. Other major investors include SoftBank’s Vision Fund, which accounted for 21.5%, and Tencent, which accounted for 6.8%.

A more pressing issue than competition is whether Didi can smoothly respond to increasingly stringent regulatory scrutiny during Beijing’s full-scale crackdown on technology conglomerates that are considered to have become too powerful and too fast.

The company failed to ensure Passenger safety Concerns about unfair competition and low salaries for drivers.

Earlier this month, a financial publication under the official Xinhua News Agency stated that the antitrust investigation was an “unresolved sword” for IPOs, citing concerns about price manipulation and an investigation into Didi’s acquisition of Uber’s China business. Few details have ever been released.

In May of this year, after complaining that Didi cut some fares by 30%, Didi executives and more than 30 other ride-hailing companies were summoned by the Ministry of Transportation for concerns about driver compensation.

The company stated that the breakdown only applies to less than 3% of cases and vowed to do better to ensure fair compensation for drivers.

Even so, the company received a clear warning from the authorities: “If Didi does not immediately correct its actions, regulatory actions may be further escalated,” said Zhang Anqi, a Chinese antitrust law scholar at the University of Hong Kong. .

In the future, Didi still sees the prospect of autonomous driving, hoping to reduce the cost of paying drivers, which accounts for 50% of the company’s costs.

But it has taken a more cautious approach than rivals such as Baidu and Alibaba-backed startup AutoX, which has begun to remove safety drivers from vehicles. Last year, it obtained a permit to carry passengers on self-driving cars in Shanghai, but it said little about its trials.

China’s independent auto analyst Zhang Xiang said that Didi’s investment in autonomous driving is a way to differentiate it from Uber after American companies. abandoned Autonomous driving at the end of 2020, and it is possible to obtain a high valuation for its autonomous driving business.

An early investor in Didi said: “It’s meaningless to launch a purely automated robotic taxi service.” “It must be a hybrid based on Didi’s travel business, which has taken years to build. End technology platform.”

Additional reporting by Emma Zhou in Beijing

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