TuSimple Looks to Decouple From China. Others to Follow?

Key Takeaways:

• Autonomous truck company TuSimple is reportedly looking to spin off its China business, leaving its more advanced U.S. business as its main asset
• Such a spinoff could provide upside for company’s stock by significantly reducing U.S. national security concerns

By Doug Young

Spring may finally be coming for U.S.-China stocks, following a nearly yearlong winter, with the latest signals that Beijing and Washington securities regulators are moving closer to an agreement that would let Chinese companies keep trading in New York. But the decoupling of U.S. and China technology that began more than a year ago looks set to continue, as reflected by the last reports that autonomous truck company TuSimple Holdings Inc. TSP is looking to spin off its China business from its larger U.S. operation.

We’ll take a closer look shortly at the TuSimple reports, which say the company hopes to fetch around $1 billion for its China unit that is quite a bit smaller and less advanced than its U.S. business. But an equally interesting angle is whether other Chinese companies might follow suit by splitting off their non-China business in similar decouplings.

In that regard, three companies that look like potential candidates to do that are short video giant ByteDance, whose overseas TikTok unit is far better known in the west; DiDi Global DIDI, China’s equivalent of Uber, which also operates businesses in a growing number of countries outside China; and Tuya TUYA, operator of an internet of things (IoT) platform that is based in China and has business there, but actually counts a majority of its customers outside the country.

The big picture is that both China and the U.S. feel uncomfortable letting the other have access to sensitive data on each other’s businesses and consumers. For TuSimple the key concern is its big volumes of data that show how goods are being moved around the country. TuSimple currently operates a fleet of around 100 self-driving trucks, about 75 of those in the U.S. and the remaining 25 in China. And, of course, that number could quickly grow if and when it commercializes its technology, which is expected to start happening as early as next year.

TuSimple made headlines last month when it announced it had reached a deal with the U.S. national security regulator to silo data from its U.S. operations to keep it beyond the reach of its China unit. Now it appears that silo will soon become permanent with the formal separation of the U.S. and China units into two separate companies, according to media reports.

Reuters broke the news, saying TuSimple hopes to sell its China business for about $1 billion. That figure implies TuSimple believes it is worth $4 billion or more, based on the simple 1:3 ratio of China-to-U.S. assets based on its current truck fleet.

That figure is well above TuSimple’s latest market value of $3 billion, implying upside or 30% or more if TuSimple can really sell the China unit for $1 billion. Such a price doesn’t seem like a stretch for a company considered one of the world’s leaders in its space, with backers that include top U.S. courier UPS UPS, chip giant NvidiaNVDA and Navistar.

TuSimple’s shares have rallied more than 50% from an all-time low a week ago, though at their latest close of $13.54 they’re still about two-thirds below their IPO price from last April. Accordingly, if a long-anticipated rebound is finally coming for battered U.S.-listed China stocks, TuSimple could be well-positioned to benefit by splitting its China and U.S. businesses into separate companies to eliminate a major regulatory risk.

Others to follow?

That said, we’ll spend the rest of this space looking at the other three companies we mentioned earlier, including why similar spinoffs might make sense for each.

The 500-pound gorilla in the group is ByteDance, whose market value reached as much as $425 billion last June based on gray market trades, according to media reports at the time. While such a figure is almost certainly inflated, we can still put it in perspective by noting that top-listed internet companies Alibaba BABA 9988.HK)) and Tencent (0700.HK) now have market values of about $290 billion and $470 billion, respectively.

ByteDance’s two most valuable assets are TikTok and its older Chinese equivalent Douyin. Former U.S. President Donald Trump was trying to make ByteDance sell TikTok, or at least sell a major stake to a U.S. partner, though current President Joe Biden is no longer pursuing such a strategy.

Still, ByteDance was already taking steps to silo off TikTok’s global operations from its China operations at the time of Trump’s threat. Making such a clean break really does make sense from a long-term development perspective. Such a move would allow TikTok to list in the U.S. without any interference from Beijing, and probably get a far higher valuation for the company as a standalone entity than it would as an appendage of ByteDance.

Next there’s DiDi Global, which has become the poster child for China’s data security concerns for its U.S.-listed companies. After making a U.S. IPO in the middle of last year, DiDi was forced to do a rapid about-face and is currently hoping to delist from New York and relist its shares in Hong Kong.

The company’s international business is currently relatively limited, with operations in 15 countries outside China, including Mexico and Brazil, according to its IPO prospectus. Presuming DiDi hopes to someday operate in lucrative Western markets, and also considering that countries like Mexico and Brazil might also feel uneasy about allowing China access to their users’ data, it would certainly be logical for DiDi to consider a similar spinoff.

Last but not least there’s Tuya, which was singled out by a several U.S. senators last year for the potential risk it could pose due to the fact that about a third of its business comes from U.S.-based customers. Another third comes from Europe, which could also eventually raise similar data security concerns, while the remaining third comes from China.

Once again, a spinoff of its China business would make sense for a company like Tuya, allowing it to move forward with far less regulatory risk than it now faces for its global business. The China business could then operate as a separate company, perhaps pursuing its own listing in Hong Kong or on a Chinese mainland stock exchange, which would also put Beijing regulators more at ease.

At the end of the day, such spinoffs really do look like a strong possibility going forward for such Chinese companies with global operations, and could even provide some nice upside to the stocks due to the significant reduction of regulatory risk.