China’s ride-sharing giant Didi Chuxing files to go public
June 18 2021 - Research@stockal
While on the one hand the American government is threatening to ban “Corporate China” from the U.S. stock markets and is delisting Chinese companies, on the other hand, it is welcoming a flock of Chinese firms to go public on its stock exchange. One such IPO coming in now is Didi Chuxing, the Chinese ride-hailing company which recently filed to go public through an IPO in the U.S., which could be one of the largest listings of 2021.
Listing in the U.S. is still the most favorable option
The U.S. remains a magnet for the IPOs of Chinese companies, despite rising political, trade, and regulatory tensions between the two largest economies. The U.S. stock market is still by far the largest in terms of market capitalisation in the world and remains home to many of the biggest tech companies. As a result, listing in the U.S. market is likely to give Didi Chuxing a better chance of raising capital in a more favourable condition. As per Reuters estimates, Didi Chuxing is likely to raise around $10bn in fresh capital.
Exhibit 1: How China’s markets breakdown by sector in the past few years
Data as of 2020| Source: Schroders Analysis
Why do Chinese companies look to Wallstreet for listings?
The U.S. remains the preferred destination for a majority of cross-listings especially by Chinese firms or straightaway through an IPO on Wall Street. Stronger financial regulation in the U.S. also boosts increased valuation of foreign companies as investors gain trust and companies gain value by listing in the U.S. markets, popularly known as the New York Premium.
Additionally, the Chinese exchange operators suffer from a higher cost of doing business in a less reliable legal and political environment. (Exhibit 2)
Exhibit 2: Cost of capital for Major Exchange Operators
Data as of Aug 2020|Source: Forbes.com
DiDi Chuxing’s Listing and the financial Highlights
- The Beijing-based company says it will list under the symbol DiDi on either Nasdaq or the New York Stock Exchange (NYSE).
- The company is currently valued at $62 billion, making it the world’s fourth most valuable unicorn (a startup with a valuation of $1 billion or more).
- The company hasn’t specified a timeline or the amount it plans to raise but is widely reported to be targeting a valuation of up to $100 billion in its public debut.
- DiDi boasts 493 million annual active users coming from 15 countries, as of March 31st, 2021, and 41 million average daily transactions for the same period. However, over 90% of the revenues are still generated in China.
- After a challenging 2020, which led to a decline in revenues by 8.5% to $21.6 billion, the company has rebounded strongly in the first quarter of 2021.
- In the first 3-months of 2021, revenue has more than doubled to $6.4 billion and shows a profit of $30 million compared to losses over the previous 3 years.
The proceeds of this IPO will be used in the following proportions:
- 1/3rd to investing in technology capabilities including shared mobility
- 1/3rd to increase presence in international markets outside of China
- 1/3rd to introduce new products and expand existing offerings
Softbank Vision Fund is the largest Shareholder of the company with a 21.5% stake
Founded in 2012 by former Alibaba executive Cheng Wei, DiDi is known for having pushed Uber out of China in 2016, when the American ride-sharing firm agreed to sell its China operations to DiDi in exchange for a 12.8% stake in the company. Cheng Wei owns 7% of DiDi while Softbank Vision Fund is the largest shareholder with a 21.5% stake. (Exhibit 3)
Exhibit 3: Top holdings in the company as of Quarter ended March 31, 2021
Source: Figures sourced from the Company Prospectus
China Mobility segment accounts for over 90% of the revenues
The company first started its mobility business in China nine years ago and is now the largest mobility technology platform and the go-to brand for mobility services in China (Exhibit 4). China Mobility segment which consists of Ride-Hailing, Taxi Hailing, Chauffeur, and Hitch sub-segments constitutes over 90% of the total revenues of the company. The other two revenue segments for the company are its International segment and revenues from other Initiatives.
Exhibit 4: DiDi’s service offerings in China and International markets
Source: Company Prospectus
Operating and Financial costs involved for a Ride-hailing Company
The company’s core platform GTV (Gross Transaction Value), which is the GTV of the China Mobility segment, accounted for RMB189 million in 2020. GTV is the completed transactions on the platform without any adjustments for consumer incentives or incentives paid to drivers for mobility services. The graph below shows the typical operating and financial costs involved for a Ride-hailing company like DiDi which implies the significant driver earnings and incentives which are captured in the costs before the adjusted EBITDA of the company. (Exhibit 5)
Exhibit 5: The company’s Operating and Financial Model (in RMB billion)
Source: Company Prospectus
Annual Revenues of Uber, Lyft, and DiDi
The company’s filings reveal 2020 revenues of almost Rmb142bn, which is equivalent to $21.6bn (Figure 4) amounting to almost twice of what Uber pulled in the same period and roughly about 9x the revenues of Lyft, which is America’s second-largest ride-hailing app. This gives us an insight into just how big the “Uber of China” really is.
Exhibit 6: Annual Revenues of Uber, Lyft and DiDi
Source: Data is sourced from the company financials
Improved revenue and net income growth for the Q1 2021
After a challenging 2020, when the pandemic-induced lockdown led to a decline in revenues to $21.6bn in 2020, the first quarter of 2021 saw a revenue increase to $6.4 billion which is over 2x as that of Uber and almost 6x of revenues of Lyft in the same period. (Exhibit 7)
Exhibit 7: Net income (loss) for Uber, Lyft, and DiDi
Source: Datasourced from the company financials
Challenges faced by the Company
In 2018, the company faced its “biggest challenge” when two female passengers were murdered while using its car-pooling service “Hitch” after which the company suspended the services for more than a year to upgrade its safety measures.
Apart from safety, the company in its Prospectus also cited other risks to the business by way of:
- The company’s business and operations have been adversely affected by the Covid-19 pandemic and may continue to.
- Escalating tensions between China and U.S.
- Stronger enforcement of China’s anti-monopoly laws could lead to fines or investigations
- Increased competition in the ride-hailing business