Gun Woo: «Listed in the U.S. – But Headwinds at Home

The listing of the Chinese ride-hailing company Didi in the U.S. started well until, just two days after the IPO, news came out that the firm was under scrutiny from the Chinese government. In an article on finews.first, Gun Woo takes a closer look at what happened.

This article is published on finews.first, a forum for authors specialized in economic and financial topics.

Didi, often dubbed the Chinese Uber, was recently listed in the U.S. Didi is a ride-hailing app, which works exactly as Uber does. The valuation of the firm at IPO was around $68 billion, representing a discount to Uber’s $100 billion market cap.

The companies are still very comparable in size with Gross Transaction Values (GTV) for ride-hailing services of roughly $27 billion in 2020 for both although Didi has a stronger revenue and profit profile. Didi’s net loss was $1.3 billion in 2020, whereas Uber booked $4.8bn of net losses. So, why was Didi priced at a discount to Uber?

«Uber has successfully diversified in food delivery services Uber Eats»

There are two elements that can explain it. First is the regional diversification element. Within Uber’s revenue, only 60 percent is generated in the U.S. while 98 percent of Didi’s revenue is generated in China. Uber is the leader by market share not only in the U.S., but also in Europe, Latin America, Australia, and India while overseas expansion has so far been limited for Didi.

The second element is business diversification. Uber has successfully diversified in food delivery services Uber Eats. In 2020, 35 percent of Uber’s revenue was generated by the delivery business. Although the GTV from ride-hailing of both companies is at similar levels, the total GTV of Uber is about $58 billion while Didi’s is only $31 billion.

The food delivery opportunity in China is already dominated by Meituan and Alibaba’s Ele.me, leaving limited space for Didi to expand in that space. Didi is now rather pursuing the grocery delivery market instead.

«This led to some share price weakness which will likely carry on in the near future»

The listing of the Chinese ride-hailing company started well until, just two days after the IPO, news came out that Didi was under scrutiny from the Chinese government with regards to its data collection and security practices. Two days later the Cyberspace Administration of China (CAC) announced that Didi had committed serious violations in the collection and usage of personal information and ordered the app to be pulled from Chinese app stores until it is remedied (which means Didi cannot add more users or drivers, existing ones, however, can still use the app).

No details were shared as to what precisely the investigation centers on, when or where the alleged violations occurred or whether there will be more penalties to come. This led to some share price weakness which will likely carry on in the near future. Many commentators were quick to theorize that this was all too conveniently scheduled and that the Chinese administration deliberately waited for the listing to make an example of Didi for other companies to refrain from their desires for a U.S listing.

«This is an unfortunate hiccup»

But it has since come out that warnings of the administration to Didi had already been published in May and people close to the matter revealed the Chinese cybersecurity watchdog suggested the Chinese ride-hailing giant delay its initial public offering and urged it to conduct a thorough self-examination of its network security. It appears that Didi chose to ignore the warning, perhaps under pressure from its shareholders to get the listing done.

This is an unfortunate hiccup, and I believe Didi will likely make the necessary amendments soon and resume full operations. What we think is more interesting in the long term is the question of who will take the lead in the autonomous driving market?

«Whoever succeeds will likely determine the future of ride-hailing companies such as Didi»

It is clear that this is the market both Didi and Uber want to get. With no drivers involved the GTV could easily translate fully into revenue (currently, only 20 percent translates into revenue). More cars could provide Didi service during the idle time, there would be no bottleneck of ride supply.

At this nascent stage, it is still unclear who, of the manufacturers or of the ride-hailing companies, will take the lead. Didi, Uber, Geely, Tesla, Baidu, Huawei, Google, Apple and many others are in the starting blocks. Whoever succeeds will likely determine the future of ride-hailing companies such as Didi.

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