Chinese cybersecurity regulators have told the top brass at ride-hailing market leader Didi Global (DIDI) to prepare plans to delist from the New York Stock Exchange, according to media reports. Such a move, prompted by concerns over data security, would raise questions about the viability of any U.S. listing for a Chinese company that holds personal data on customers.
With Didi shares trading 42% below their listing price on June 30, a departure from the NYSE could offer a way for investors to get their full money back.
Shares in Softbank Group (T:9984 and SFTBY) fell 5.2% in Tokyo trading on Friday, suggesting a tumble in the half day of over-the-counter U.S. trading here on Friday. Softbank Vision Fund, the world's largest tech-focused venture capital fund, owns 20.1% of Didi.
Two options are reportedly on the table: a privatization, which would come at a price equal to or above the US$14 listing price, to avert shareholder lawsuits; or a relisting in Hong Kong and a delisting in New York, with investors likely to receive shares equal to or at a discount to the current U.S. price.
Didi shares flopped days after its initial public offering, the largest in the United States by a Chinese company since the then-world record IPO of Alibaba Group Holding (BABA) in 2014. They closed on Wednesday at US$8.11.
Besides Softbank, Uber is the second-largest outside shareholder, with an 11.9% holding. Chinese video game maker and WeChat app operator Tencent Holdings (TCTZF) owns 6.4%.
Regulators exert their authority
Expectant shareholders have been sorely disappointed. Days after the IPO, China launched an investigation into data security at Didi Global, as I outlined, and blocked it from signing up new customers, with its app pulled from Chinese app stores. China's little-known Cyberspace Review Office, created to oversee a review mechanism that went into effect on June 1, 2020, has been charged with reviewing the overseas listing of any company that holds personal information on more than 1 million customers.
Those rules, however, were only released after the Didi offering. Didi followed the tried and true method of listing abroad that satisfied Chinese securities regulators for years. It had not appeased cybersecurity regulators, who had no review system in place but "suggested" the company delay its offering, an option it felt was unpalatable given the prep work and investor expectations surrounding the offering.
Now, the Cyberspace Administration of China is actively supervising what Chinese tech companies are up to, and it is particularly concerned about the potential for data leakage when foreign investors hold large stakes in a Chinese technology operator. All foreign tech listings with 1 million or more customers must receive formal approval after a cybersecurity review.
Besides Didi, the cyberspace administration also blocked two other newly U.S.-listed Chinese companies from signing up new customers, as I outlined then. Didi, the online recruitment site operator Kanzhun (BZ) and the freight consolidator app Full Truck Alliance (YMM) were all blocked to new users.
Full Truck shares are down 40% since the company's June listing. Kanzhun has been spared the worst, its shares down only 8.8% since their IPO in early June. It is not clear if the two also will be forced to drop their U.S. listings.
It is the Cyberspace Administration of China that has told Didi to plan a delisting, according to a Bloomberg report, which cites "people familiar with the matter" who are not identified due to the sensitivity of the matter. The administration has told Didi executives to sort out the details, which would be subject to government approval.
The regulators could still backtrack on their intentions, the sources said. But to me, it sounds like exactly the kind of plan that will go ahead.
Didi is preparing to relaunch its ride-hailing app and other products in China by the end of the year, according to Reuters, in anticipation that the cybersecurity investigation will be concluded by then. The cyberspace administration is likely to lay down any penalties in December, three sources said. Didi, which means "beep beep" in Chinese, has set aside US$1.6 billion for possible fines.
Didi shares popped as a result. You'd expect another surge if it's confirmed shareholders will be getting their full US$14 back. To me, any re-listing in Hong Kong would also need to come at a value equal to the IPO if the company is going to ward off class-action suits, which are already in process.
The municipal government in Beijing, where Didi is based, has reportedly proposed taking a stake in the company that would give state-owned entities control. The investment could deliver the proceeds necessary to complete the delisting.
Co-founders "Will" Cheng Wei (35.4% stake) and "Jean" Qing Liu (22.7% stake) together control Didi.
Chinese securities regulators have shown concern over alienating U.S. investors and have pointedly pressed China's beleaguered property developers to sustain bond payments to overseas holders, thus avoiding default. But they are equally keen to promote Hong Kong as a close-to-home listing venue, accessible to international investors without restriction, unlike the stock markets in Shanghai, Shenzhen and Beijing.
Alibaba, JD.com (JD) , Baidu (BIDU) and NetEase (NTES) are among the growing list of Chinese tech companies that have listed first in the United States, then offered shares in Hong Kong. None has yet to delist in the U.S., although the three major Chinese mobile phone companies were forced to delist in New York by U.S. authorities.
The Chinese Communist Party allowed Chinese tech companies to grow with little restriction and almost no foreign competition in the early days of the Internet. But the party has grown newly concerned about the power of Big Data, as well as the rising wealth and influence of tech entrepreneurs, who were feted as the figureheads living the "Chinese dream."
Chinese President Xi Jinping appears personally to have decided to take them down a notch. Xi has called leading tech entrepreneurs for private Beijing meetings at which he reinforced the paramount leadership of the Communist Party. So, whatever decision the cyberspace and securities regulators reach in China, goes.