Is DiDi Done?

DiDi Global Inc. (

DIDI, Financial) is a China-based mobility technology platform Its services include ride-hailing, taxi-hailing, chauffeur, hitch and other forms of shared mobility. It’s also has a presence in Mexico and Brazil and hopes to expand globally even though most of its current business is in China.

Revenue for the quarter ended Sept. 30 was $6.6 billion, down from $7.6 billion in the second quarter. U.S.-listed shares of DiDi closed the year at $4.98, down 65% from its inauspicious opening at $14.14 on June 29.

The Chinese government’s crackdown has forced ride-hailing giant DiDi to delist from the New York Stock Exchange just months after going public. At the end of June, the company raised $4.4 billion in one of the biggest initial public offerings of the year. Soon after the DiDi IPO, Chinese authorities announced they had launched a probe into the company for allegedly violating the country’s data privacy and national security laws.

Chinese government agencies raided the company’s offices for a cybersecurity review a few weeks later and ordered the Didi app be removed from the Apple and Android stores for new users (existing users can still use the installed app). DiDi will be pursuing a listing in Hong Kong under a so-called listing by introduction, which doesn’t involve any fundraising and would allow U.S. investors to swap their shares for the new stock. The delisting and relisting is expected to happen in the spring of 2022. Now that early investors have lost two-third of their investment in a hurry, should we stragglers step up and grab this falling knife?

DiDi is billed as the Uber (

UBER, Financial) of China. The company is even bigger than Uber and, after a brutal battle for market supremacy in China, the latter threw in the towel and sold the business to DiDi in exchange for a stake.

The comparison with Uber is interesting. Even though DiDi’s revenue is nearly twice that of Uber’s, its market cap is a third. The price-sales ratio is also a fraction of Uber’s. While this is a rough and ready comparison, it does show how frightened investors are of the current situation with DiDi in comparison to Uber.

Both companies are currently unprofitable and are in the building out phase of their network. However, their total addressable market is huge and global in scale. It is a great example of the network effect. The larger the network (number of users and drivers and geographical reach), the more valuable the network becomes. Therefore, the first-mover advantage is critical here.

Now that DiDi has decided to delist from the U.S. and relist in Hong Kong, I expect the stock will eventually recover. This is what happened to China Mobile (

HKSE:00941, Financial) when its stock was delisted from the U.S. last year. DiDi is also a variable interest entity, so investors own a shell company in the Cayman Islands (DiDi Global) and not the actual business in China. There is a contractual arrangement between DiDi Global and the onshore China-based business. China has taken some steps to legalize the VIE structure, but its still not equity, so investors should and will discount it.

Chances are good that Didi has received some reassurance that the Chinese government will take its boot off its throat sooner rather than later. It is difficult to imagine that the Chinese government will want to destroy one of its national champion businesses. I think they wanted to send a message to the entrepreneurs that the government remains in control of the commanding heights of the economy and will not tolerate dissent. To do this, as per a Chinese saying, once in a while they have to kill a chicken to scare the monkeys. The monkeys have duly received the message and will behave.

Conclusion

Based on a comparison with Uber, I think DiDi is a good opportunity as long as you are prepared for delisting and exchanging the shares for Hong Kong shares and expectations are kept in check. DiDi is the leading ride-hailing company in the vast Chinese market. However, one cannot forget that it remains at the mercy of the Chinese government. The lack of clear rule of law in China and the uncertainty of the VIE structure will compel investors to discount DiDi as compared to Uber and other international competitors.