Didi heads cautiously to New York’s immense IPO

The China Didi app will make its debut on the New York Stock Exchange later defeated Uber and become dominant on the streets of the country’s major cities, but with concerns for growth and regulation on the horizon.

Under the name of his holding company Xiaoju Kuaizhi, Didi aims to raise $ 3.9 billion in one of the largest foreign IPOs since Alibaba’s 2014 offering, at a valuation of $ 64.7 billion amid its price range.

The target is similar to the $ 65 billion valuation that private investors bought into the company in a 2018 fundraiser, perhaps reflecting how investor interest in ride-hailing has declined. after a disappointing 2019 IPO for rival Uber.

Unlike when Uber came to market, Didi can boast a profitability in its core rides business from 2019, on an adapted ebitda basis. That core business will account for 94 per cent of Dmb’s revenues of Rmb142bn ($ 22bn) by 2020.

This is a much higher share of revenue than Uber or Grab, which is based on fast-growing but losing food deliveries by 35 percent and 49 percent of revenue respectively. In China, Didi is closed off from the delivery sector by huge rivals Meituan and Ele.me.

But while Didi’s core business is profitable, its margin for each trip it reserves is much lower than that of international rivals, at about 3 percent, compared to 20 percent for Uber.

Coronavirus closures have seen Didi’s bookings drop by a third in the first quarter of last year, but China’s tight and largely successful contingency of the virus has meant its riding activity has grown year-on-year. per annum in the second half of 2020 and is down just 4.8 percent for the year.

In the first quarter of 2021, Didi achieved an overall positive net income for the first time, largely due to the deconsolidation of its group purchasing business, Chengxin Technology, which brought in Rmb9.1bn (1, $ 4bn).

But analysts have questioned whether Didi could reach saturation in China’s larger cities, such as Beijing and Shanghai, which account for half of its bookings, and whether it can develop new businesses to increase its growth.

“The main question for Didi is whether his core mobility to China can generate enough financially dry dust to fund his new emerging business, such as self-employment,” Bernstein analysts wrote in a recent note.

The head of capital markets at a US bank in Hong Kong said an initial IPO target valuation of $ 100 billion was “never a reasonable starting point” due to the limitations of the Didi market. . “Their big problem is that they won’t expand as easily out of the way as Uber did. The equivalent of Uber Eats and logistics are already crowded with deep-pocket holders in China,” the person said.

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

Sector contribution column to the group's total sales (%) showing the distribution of Didi's revenues

Its dominance in China, however, is indisputable. Since buying Uber in 2016, Didi has grown to account for 90 percent of all online car bookings in 2020, about two-thirds of which come from the top 30 cities.

It has some competition in smaller cities, with more than 200 rivals operating across the country. T3, a rival backed by Alibaba, Tencent and three Chinese carmakers, has managed to build a market share in Nanjing and Chongqing because of its low prices and autonomous fleet.

“Right now the profit is big, but when the competition heats up in smaller cities they have to lower prices,” said Cherry Leung, Bernstein’s analyst.

But Didi supporters argue that its profitability is scalable because its competitors are unlikely to engage in a three-way price war fought between Didi, domestic rival Kuaidi Dache and Uber, from which Cheng Wei, the chairman of Didi, came out victorious in 2016.

A flow chart showing China’s mobility market

Cheng is Jean Liu, a former Goldman Sachs banker who became president of Didi in 2015, have so far avoided having to spend other costly subsidies to defend rivals.

“It’s a very simple question: if you want to do the same thing as Didi, are you willing to spend $ 20 billion to attract users?” said Kevin Wang, a founding partner of Ameba Capital and a first investor in Kuaidi Dache, who united with Didi in 2015.

After conceding the defeat to Didi, Uber retained a significant shareholding, now about 12.8 percent. Other major investors include SoftBank’s Vision Fund, with 21.5 percent, and Tencent, with 6.8 percent.

More urgent than competition is the question of whether Didi can navigate a rigorous regulatory scrutiny during Beijing’s vast crackdown on technology groups that have grown too powerful, too soon.

The company has been under fire for a series of issues for failing to secure the passenger safety to the concerns of unfair competition and low pay for drivers.

Earlier this month, a financial publication under the Xinhua news agency said antitrust investigations were a “hanging sword” over the IPO, citing concerns about price hikes and an investigation into the Didi’s agreement to resume business in China from Uber, few of which have ever been released.

In May, Didi’s executives, along with more than 30 other riding companies, were summoned by the Ministry of Transport over concerns regarding the pay of drivers, following complaints that Didi had taken a 30% reduction. of some rates.

The company said the allocation applied only to less than 3 percent of cases and promised to do better to ensure fair pay for drivers.

Despite this, the company was sent a clear warning by the authorities: “If Didi does not immediately rectify his behavior, there could be a further escalation of regulatory actions,” said Angela Zhang, a researcher at Chinese antitrust law at the University of Hong Kong. .

In the future, Didi will still see promise in self-driving, hoping to cut the need to pay drivers, which accounts for 50% of the company’s costs.

But it has taken a more cautious approach than rivals such as Baidu and AutoX, an Alibaba-backed start-up, which have begun removing security drivers from vehicles. He secured a license to transport passengers in autonomous vehicles in Shanghai last year, but said little about his tests.

Zhang Xiang, a China-based independent industry analyst, said Didi’s autonomous driving investment is a way to differentiate itself from Uber after the American company. abandoned self-driving by the end of 2020 and to potentially ensure a high rating for their autonomous activity.

“It makes zero sense to launch as a pure autonomous robotaxi service,” said one of Didi’s first investors. “It will have to be hybrid built on Didi’s mobility business, which took several years to build a back-end technology platform.”

More information from Emma Zhou in Beijing

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