DiDi's Delisting Plan Just the Start of a Tough Road Ahead

Key Takeaways:

• DiDi shareholders are likely to approve a plan to delist the company from New York since major investors who hold more than 45% of its shares are likely to vote in favor
• After an exit, the company must still find ways to comply with China’s Cybersecurity Law and find a way to become profitable to survive over the long term

By Ken Lo

It wasn’t exactly what DiDi Global Inc. DIDI had in mind when its shares debuted on the New York Stock Exchange last year. But one year later, a hasty exit from New York looks almost inevitable for China’s answer to Uber. No matter what route it takes – including a possible new listing somewhere else – the road ahead for the former high-tech superstar will be pockmarked with challenges.

DiDi revealed the first part of its bumpy roadmap forward in a statement last Saturday, saying it will hold an extraordinary shareholder meeting on May 23 to vote on officially abandoning its New York listing with a privatization. It said it was taking the step to comply with China’s latest internet security rules. It added it wouldn’t seek a listing on any other exchange before the exit is concluded, shooting down talk that it might go public in Hong Kong first before withdrawing from New York.

If shareholders approve the decision, Didi would become the shortest-lived U.S.-listed Chinese stock of all time. The company rushed to complete its IPO last June 30, one day shy of the 100th birthday of China Communist Party. Its price soared from $14 to as much as $18.01 on its debut, though the euphoria was short-lived. On 4 July, China’s cyber security regulator accused the company of illegally collecting personal information, touching off a prolonged run-in with regulators that has weighed heavily on its shares ever since.

The stock was already down to $2.46, more than 80% lower than its IPO price, by the end of last week. After announcing its plans to convene the shareholder meeting, the stock slumped further still to close at $1.71 on Thursday. Compared with its IPO valuation of $73 billion, its market cap has contracted nearly 90% to the latest $8.2 billion.

The reality is that China’s new Cybersecurity Law, which sealed DiDi’s fate, will have much more impact on U.S.-listed Chinese stocks than U.S. disclosure concerns that have also made recent headlines, wreaking havoc on Chinese shares this year.

The law mandates companies that possess personal information on more than 1 million users must undergo internet security reviews if they plan to go public overseas. Internet platforms with hundreds of millions of users like Didi, Alibaba BABA, Tencent (700.HK), Meituan (3690.HK) and the not-yet-publicly-listed ByteDance will almost certainly be subject to such reviews at some point.

Lack of transparency in the new law’s implementation has made it very difficult for internet companies to cope with the new dynamics, said Kenny Wen, a commentator at Everbright Sun Hung Kai Co. Ltd. He pointed out that DiDi was especially hard hit because it possessed a big trove of sensitive data, including the whereabouts of government officials and locations of sensitive institutions.

“DiDi was put on the spot as a result of not knowing what exactly were the legal and illegal ways of using data, Wen said. “Maybe exiting the U.S. was the only way it knew to get out of the regulatory quagmire.”

Shareholder approval likely

Wen added that shareholders were likely to green-light the exit plan. Major investors that account for more than 40% of the company’s voting shares are likely to vote in favor, even though small and institutional investors who have lost big sums on the stock may vote against. Anyone who refuses to surrender their DiDi shares once the exit is complete will only be able to trade over-the-counter, boding poorly for the price due to lack of liquidity. As a result, small investors may scramble to get out while they can.

The latest information shows that DiDi’s top four investors are Softbank with 20.08% of its shares, Uber with 11.93%, Tencent with 6.54% and the company’s president and CEO Cheng Wei with 6.5%. With 45.1% of the company’s shares between them and all in favor of a U.S. withdrawal, an exit is highly likely.

But rather than end its troubles, an exit would only mark the beginning of a cascade of new challenges. DiDi would still need to find ways to meet regulatory demands for its safe handling of sensitive data. At the same time, it will need to keep investing in its business operations to fend off competition at home and abroad, meaning its longer-term sustainability could be at stake.

And even if it can re-list in Hong Kong, the company is likely to fetch a far lower valuation than it initially got in New York. So, the exit is really just a first step to solve its immediate predicament. Additional challenges down the road could include shareholder lawsuits from small investors for failing to reprivatize at a premium, though the company has yet to announce a price for any buyout offer.

Battered valuation

DiDi’s latest financial statement released last week showed it generated revenue of 173.8 billion yuan ($27 billion) last year, up 22.6% from 2020. But its losses grew far faster from 10.6 billion yuan in 2020 to 49.3 billion yuan last year. Regulatory shocks in the latter half of last year caused the company to log a net investment loss of 20.8 billion yuan in the third quarter, resulting in a 30.6 billion yuan loss for the period. That loss narrowed considerably to 171 million yuan in the fourth quarter, in a rare bit of good news for the company.

By the end of last year, the company’s cash and cash equivalents totaled 43.4 billion yuan, up by 24 billion yuan in a single year, mainly due to the addition of 28 billion yuan in new funds from its IPO. Its negative cash flow from operations for the year totaled 13.4 billion yuan. At that rate of spending, the company has enough money to hold out for just two to three years. So, finding a road to breakeven and profitability is a top priority for its survival.

DiDi’s many China-specific woes might make comparisons with global peers somewhat moot. But to provide some perspective, we can compare its price-to-sales (P/S) ratio with Uber UBER and Grab GRAB, two other top-tier ride-hailing services. In that regard, Didi’s P/S of 0.36 times a tiny fraction of Uber’s 11.2 times and Grab’s 16.7 times. 

The bottom line is that Didi will face many more uphill roads if and when it delists from the U.S., led by the challenges of compliance with China’s cybersecurity regulations and strengthening its business operations to become profitable. How it meets those challenges could well determine whether it can embark on a new and lucrative journey ahead, or whether its road might come to an abrupt dead end.