Didi raises at least $ 4 billion for New York IPO


Chinese ridesharing app Didi Chuxing will debut on the New York Stock Exchange after defeating Uber and becoming dominant on the streets of major cities across the country, but with growth and regulatory concerns on the horizon.

Under the name of his holding company Xiaoju Kuaizhi, Didi raised at least $ 4 billion in one of the largest initial foreign public offerings since Alibaba’s listing in 2014, after valuing the shares at the top of its marketed lineup. Didi sold shares for $ 14 apiece, according to people with knowledge of the deal, giving him a market cap of at least $ 67 billion. The company declined to comment.

Didi’s market value is said to be slightly higher than the $ 65 billion valuation that private investors bought the company at in a 2018 fundraiser, perhaps reflecting just how much investor interest in it. carpooling has declined following a disappointing 2019 IPO for U.S. rival Uber.

Unlike Uber’s entry into the market, Didi can boast of the profitability of its core amusement ride business since 2019, on an adjusted earnings before interest, taxes, depreciation and amortization basis. This main activity represents 94% of Didi’s revenues of 142 billion Rmb (22 billion dollars) in 2020.

This is a much larger revenue share than Uber or Grab, which relies on fast-growing but loss-making food deliveries for 35% and 49% of revenue, respectively. In China, Didi is shut out of the delivery business by its huge rivals Meituan and Ele.me.

But while Didi’s core business is profitable, its margin on each trip it books is much lower than that of its international competitors, at around 3%, compared to Uber’s 20%.

Coronavirus closures saw Didi’s bookings drop by a third in the first quarter of last year, but China’s tight and largely successful containment of the virus has caused its rides business to increase by a year on the other in the second half of 2020 and fell only 4.8% for the year.

In the first quarter of 2021, Didi achieved an overall positive net result for the first time, largely thanks to the deconsolidation of its group purchasing activity, Chengxin Technology, which brought in 9.1 billion Rmb (1.4 billion of dollars).

But analysts wondered if Didi could reach saturation in China’s biggest cities, like Beijing and Shanghai, which account for half of its bookings, and if he could launch new businesses to boost growth.

“The main question for Didi is whether his core mobility in China can generate enough financial dry powder to fund his new emerging businesses, such as autonomous driving,” Bernstein analysts wrote in a recent memo.

The head of capital markets for a US bank in Hong Kong said an initial IPO target of $ 100 billion was “never a reasonable starting point” because of Didi’s market limitations . “Their big problem is that they won’t easily expand outside of carpooling like Uber did. The equivalent of Uber Eats and logistics is already full of incumbents with deep pockets in China,” he said. declared the person.

Overseas, Didi has spread to large developing economies, such as Brazil, but its activities outside of China represent only less than 2% of its revenue.

Sector Contributions to Total Group Revenue (%) column chart showing Didi revenue breakdown

Its dominance in China, however, is unquestionable. Since the takeover of Uber in 2016, Didi has grown to represent 90% of all online car bookings in 2020, of which around two-thirds come from the top 30 cities.

It has some competition in smaller towns and villages, with over 200 rivals operating across the country. T3, a rival backed by Alibaba, Tencent and three Chinese automakers, has managed to gain market share in Nanjing and Chongqing due to its low prices and its own fleet.

“Right now the benefits are significant, but as competition intensifies in small towns, they will have to drive prices down,” said Cherry Leung, analyst at Bernstein.

But supporters of Didi have argued that its profitability is scalable as its competitors are unlikely to engage in a three-way price war between Didi, its national rival Kuaidi Dache, and Uber, including Cheng Wei, the chairman of Didi. , emerged victorious in 2016.

A flow chart showing the mobility market in China

Cheng and Jean Liu, a former Goldman Sachs banker who became chairman of Didi in 2015, have so far avoided having to shell out expensive new grants to fend off rivals.

“It’s a very simple question: if you want to be like Didi, are you willing to spend $ 20 billion to attract users? Said Kevin Wang, founding partner of Ameba Capital and an early investor in Kuaidi Dache, which merged with Didi in 2015.

After conceding defeat to Didi, Uber retained a large stake, now around 12.8%. Other large investors include SoftBank’s Vision Fund at 21.5% and Tencent at 6.8%.

More urgent than the competition is the question of whether Didi can handle tighter regulatory control during Beijing’s sweeping crackdown on tech groups deemed to have grown too powerful, too quickly.

The company has been criticized for a whole host of issues, from inability to keep passengers safe to concerns of unfair competition and low wages for drivers.

Earlier this month, a financial publication from the state-run Xinhua News Agency said antitrust investigations were a “hanging sword” over the IPO, citing pricing concerns and an investigation into the IPO. Didi’s agreement to take over Uber’s business in China, few details of which have ever been released.

In May, Didi executives, along with more than 30 other ridesharing companies, were summoned by the transport ministry over concerns about driver pay, after complaints that Didi was slashing some fares by 30%.

The company said the breakdown only applied to less than 3% of cases and pledged to do better to ensure fair pay for drivers.

Despite this, the company received a clear warning from authorities: “If Didi does not rectify his behavior immediately, there could be a further escalation of regulatory measures,” said Angela Zhang, a Chinese antitrust specialist at the University of Hong Kong. .

Going forward, Didi still sees promise in autonomous driving, hoping to remove the need to pay drivers, who account 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 startup, which have started removing safety drivers from vehicles. It got a license to carry passengers in self-driving cars in Shanghai last year, but has said little about its testing.

Zhang Xiang, an independent auto analyst based in China, said Didi’s investment in autonomous driving is a way to set itself apart from Uber after the US company ditched autonomous driving in late 2020 and potentially get a boost. high valuation for its independent business.

“It doesn’t make sense to launch as a purely stand-alone robotaxi service,” said one of Didi’s early investors. “It will have to be hybrid, built on the mobility business of Didi, which has had many years to build a back-end technology platform. ”

Additional reporting by Tabby Kinder in Hong Kong and Emma Zhou in Beijing

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