Chinese ride-hailing giant Didi (NYSE: DIDI) has denied a Wall Street Journal report Thursday morning that said the recently public company was considering a privatization plan to satisfy Chinese regulators.
Citing “people familiar with the matter,” the WSJ said the company was exploring the privatization option as a way to placate Chinese authorities that are investigating the company for antitrust violations and to satisfy investors that have lost money on the stock since the company went public on June 30.
Didi stock gained nearly 10% in midmorning trading Thursday. Didi went public at $14 per share, raising nearly $4.4 billion in the initial public offering.
“The company affirms that the above information is not true. The company is fully cooperating with the relevant government authorities in China in the cybersecurity review of the company,” Didi said in a statement.
According to the WSJ, an effort to take Didi private could involve a tender offer for its publicly traded shares.
In the eyes of regulators
Didi is one of several Chinese companies that have caught the eye of regulations in the country over cybersecurity concerns. On July 4, China announced that it was banning the Didi app from its app stores as the country’s regulators continue to explore the company’s business. China said its app “has serious violations of laws and regulations in collecting and using personal information.” The country said current users of the Didi app could continue to utilize the service, but no new downloads of the app could take place. The ban is indefinite while the probe goes on.
The following day, China’s Cyberspace Administration announced probes into several other companies, including Full Truck Alliance (NYSE:YMM), a digital freight-matching platform that also went public in the U.S. less than two weeks ago.
Numerous law firms have announced investigations on behalf of investors.
Didi Global operates in 16 countries, but 90% of its revenues come from China. In 2020, the ride-hailing giant saw its business plummet due to lockdowns related to COVID-19 and lost $1.6 billion on $21.6 billion in revenue, a 10% decline from 2019. In its initial public offering paperwork, Didi said it had 493 million active users in Q1 2021 and 15 million active drivers. In the SEC filing, Didi said it had 5.2 million bikes, 2 million electric bikes and 1 million-plus electric vehicles operating in China.
The cybersecurity probe is not the only investigation Didi is facing in China. Reuters reported China regulators were investigating Didi for antitrust violations. According to the Reuters report, the country’s State Administration for Market Regulation is reviewing whether Didi has engaged in any practices that forced smaller rivals from the market and also whether its pricing mechanism is transparent enough.
In its documents filed with the Securities and Exchange Commission prior to its IPO, Didi said it had been asked to evaluate its business and correct any violations, but it warned that regulators may not be satisfied with the changes.
Investors had concerns
Even before the latest development, investors had concerns about Didi’s future. In March, Didi was reported to be seeking a $100 billion public offering, and despite turning a profit of $837 million in Q1 2021, that valuation doesn’t seem to be materializing, even as its business begins to return to more normal levels. Several analysts have questioned the value of the stock, with David Trainer, founder and CEO of investment research firm New Constructs, writing in a Forbes opinion piece that Didi is a $34 billion company at best.
“Despite holding an estimated 90% of the ride-sharing market in China, Didi’s business model is just as unprofitable as Uber and Lyft,” he wrote.
Trainer noted that Uber and Lyft “have shown investors that ride sharing is not a profitable business because of intense competition, low margins and a lack of differentiation between services.” In addition, he expressed concerns about what actions Chinese regulators may take and the fact that Didi is not profitable despite owning 90% of the Chinese market.
“Losses accelerated in 2020 during the COVID-19 pandemic. Revenue grew 5% compounded annually from 2018-2020 while core earnings fell from -$1.7 billion in 2018 to -$1.9 billion in 2020. The company’s return on invested capital remains negative and has fallen from -12.4% in 2018 to -12.6% TTM,” he wrote.
For comparison, Uber went public in 2019 with an offering of 180 million shares at $45 per share, valuing the company at $75 billion. Lyft went public at $72 per share in 2019.
A Seeking Alpha IPO analysis, published on June 17, when rumors of a $100 billion valuation were still rampant, noted growth potential for Didi but also questioned the valuation.
“The company is still having significant losses with a further deteriorating margin. Its rumored IPO valuation of $100 billion would imply a much richer multiple than the peer, Lyft, which we find difficult to justify,” the report said.
The Seeking Alpha report noted concerns about Didi’s profit margin continuing to deteriorate.