China's top ride-hailing service is scheduled to start trading on the New York Stock Exchange today after Didi Global (DIDI) priced its shares at the top of the range. Investors are expecting great things for the listing of the "Uber of China," which ate Uber in China.
Didi is selling 321 million shares, more than the 288 million it had indicated, according to its registration of additional securities. Didi has priced them at US$14, the highest point of its indicated US$13-US$14 range, in an offering that will raise the company US$4.5 billion before fees.
That would give Didi, which acquired the Chinese business of Uber (UBER) , a market valuation of around US$67 billion. It will likely be the largest Chinese listing in U.S. markets this year.
Didi is backed by a roster of extremely heavy tech-investing hitters, including the SoftBank (SFTBF) Vision Fund, the world's largest tech venture-capital fund, and the Chinese videogame giant and WeChat superapp operator Tencent Holdings (TCTZF) . Apple (AAPL) invested US$1 billion in Didi in 2016, an early indication of its interest in autonomous driving, which Didi is developing for its taxi fleet.
The NYSE on Monday notified Didi Global of its official approval for the listing of Didi's American Deposit Shares, colloquially still known as ADRs. Its Class A ordinary shares are equivalent to four ADRs.
Didi's name is equivalent to "beep beep" in Chinese. It's joined by Chinese grocery app Dingdong (DDL) , which started trading on the NYSE on Tuesday, in launching its U.S. initial public offering this week.
Dingdong shares closed flat on Tuesday after it reduced the size of its offering by almost one-quarter. Having originally looked to raise US$357 million, Dingdong priced its shares at the lower end of its range at US$23.50, raising US$110 million if the underwriters execute the overallotment.
Dingdong is also backed by Softbank, this time by its Vision Fund II. Missfresh (MF) , another Chinese grocery app that this time is backed by Tencent, went public last Friday on Nasdaq. Missfresh raised US$273 million by pricing at US$13, the lowest end of its range, but has seen its shares slide by one-third through Tuesday's US$8.65 close.
Although the Missfresh debut has been a flop so far, the three Chinese IPOs show there's appetite for Chinese companies despite pressure on those listed in the United States. A new law, the The Holding Foreign Companies Accountable Act, passed in December and will require foreign listings to file accounts that can be inspected by the SEC's accounting arm, or face delisting. That's historically been a problem for Chinese companies.
Didi took over Uber China in 2016 after a billion-dollar battle for market share. As part of the deal, Uber received shares in Didi that are now equivalent to 12.0% of its total stock.
Softbank is its biggest outside investor, with a 20.2% stake. Tencent entities hold 6.4% of the company. The directors of the company have 57.3% voting control, although this is achieved through Class B shares that have 10 times the voting power of the Class A stock. On paper, the executive insiders only have a 9.9% equity stake.
Investors should therefore beware that they will have scant control over the management of the company. Another point of concern is that U.S. investors do not actually own the Chinese company at all. They instead hold shares in a Cayman Islands company that has an economic interest via a Variable Interest Entity in the revenues and profits of the Chinese company.
What was originally Didi Dache launched in 2012, founded by former Alibaba Group Holding (BABA) regional managers Will Cheng and Jean Liu, who previously worked as a Goldman Sachs (GS) banker. In 2015 it changed its name to Didi Chuxing, after buying its domestic rival Kuaidi.
The original underlying Chinese legal corporate entity is actually officially Beijing Xiaoju Science and Technology Co. Didi Dache was the original name of the app, and Didi has stuck as a brand.
Didi Global has a "contractual arrangement" in which it receives the economic benefits (and any losses!) of the operating business. There's an additional layer of a Chinese legal entity known as a Wholly Foreign Owned Enterprise or WFOE. Suffice it to say, the international investors do not own the Chinese company, but have the economic rights to benefit from it.
This is all well and good as long as management and international investors see eye to eye. It raises the risk of a contentious legal battle should international investors attempt to remove any of the executive team.
Yahoo and Softbank learned this the hard way in 2011 when Alibaba founder Jack Ma carved out the Alipay e-wallet and digital payments app, used pretty much everywhere in China, and placed Alipay under his own control and ownership, instead of Alibaba.
It took a series of negotiations with the disadvantaged shareholders for Ant Group, Alipay's subsequent parent, to start paying one-third of its profits to Alibaba. The issue finally came full circle in 2019, when Alibaba officially took a 33% stake in Ant. The consternation of international investors as they contended with the Chinese legal shenanigans was not recompensed.
I'm not suggesting anything similar will happen with Didi. Chinese regulators are keen to clamp down on anticompetitive behavior and are watching Chinese Big Tech closely. Despite U.S.-China tensions, Chinese stock market regulators do not want an embarrassing international legal battle on their doorstep.
Didi came out of the pandemic, which saw bookings fall by one-third in Q1 last year, and posted its very first quarterly profit in Q1 2021, at C¥5.5 billion (US$860 million). But that also included a sizeable one-time payment from spinning out a subsidiary.
There's no doubting Didi's scale. It has 493 million annual users, and wants to boost that to 800 million globally. Around 12% of its ridership comes from outside China, where it operates in 14 mainly emerging markets.
Producing sustained profits will be the next step. Chinese companies have a history of burning cash to build business, undercutting competitors with unsustainable discounts. Didi will rely on its first-mover advantage and terrific brand recognition to drive that market share through to the bottom line.
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