China's dominant ride-sharing company, Didi Chuxing, is preparing what likely will be the largest initial public offering in the United States this year. It has been hotly anticipated and goes ahead despite increasing pressure on U.S.-listed Chinese companies.
Didi Chuxing filed on Thursday for an offering that may raise US$10 billion and value the company at US$100 billion. You can find that filing here. It also would be the largest IPO for a Chinese company in the United States since Alibaba Group Holding (BABA) and its US$25 billion listing in 2014.
Didi Chuxing has not yet priced the shares for the offering or set the size of the IPO, which is likely to take place on Nasdaq or New York Stock Exchange next month. The proposed ticker symbol is DIDI.
Didi is backed by the Softbank (SFTBY) Vision Fund, the largest tech-focused venture capital fund in the world, as well as by Uber Technologies (UBER) and Tencent Holdings (TCEHY).
Its listing follows the move in April by Southeast Asia's largest ride-sharing company, Grab (GRAB), to prepare to go public in the United States via a backdoor listing with a special purpose acquisition company (SPAC). Grab this week filed a statement that it would delay that move by a quarter into the fourth quarter while it deals with the U.S. Securities and Exchange Commission on the accounting paperwork.
Didi, the equivalent of "beep beep" in Chinese, currently has 493 million annual users, a number that its founder says it aims to boost to 800 million users globally. They're served by 15 million drivers.
Its underwriters are China Renaissance (HK:1911), Goldman Sachs (GS) , J.P. Morgan (JPM) and Morgan Stanley (MS) .
Riding in the Red
The thing that should concern investors is not how popular it is, but whether it can turn a profit. It consistently has posted losses, including C¥10.6 billion (US$1.7 billion) on C¥141.7 billion (US$22.2 billion) in revenue in 2020. After that pandemic-hit year, when revenue fell 8.5% as much of China locked down for part of the year, the company turned a C¥5.5 billion (US$860 million) net profit for the first quarter of 2021. That's its first time in the green.
As is normal in China, once one company hits on a successful strategy, copycats quickly rush in. Competitors such as longer-ride specialist Dida Chuxing, bike- and car-sharing company Hello Chuxing, and company-and-individual car-sharing service Caocao Chuxing offer similar or cheaper rates. But there has also been a significant first-mover advantage, with Didi Chuxing 10 times the size of its nearest rival in terms of users.
Another serious concern applies to the vast majority of Chinese tech companies listing overseas: Investors don't actually own the company. Instead, they buy shares in an offshore entity that receives the "economic benefits" of a Variable Interest Entity, or VIE, that holds the Chinese onshore business. The structure, in Didi's case with an offshore Cayman Islands company holding the Chinese rights, skirts rules about foreign ownership and the licensing of sensitive industries such as Internet companies in China.
It also creates a disconnect between management, the owners of the Chinese company and the international shareholders. All is well ... as long as everything goes well. If shareholders try to put pressure on management, however, things can turn nasty.
Didi is run by the "Didi Partnership," which has the right to appoint executive directors to the board. That means control of the company is out of the hands of shareholders.
When the Taiwanese, Nasdaq-listed online gaming company GigaMedia (GIGM) decided to remove its founder from his position, he refused to step down and seized control of the company seals, chops and registration certificates. The company therefore couldn't even register the shareholder resolutions necessary to remove him. A court case failed, and the company had to split out his holdings and take extensive writedowns.
The VIE structure also gives tech founders voting control of their companies. The personal involvement can be problematic. The IPO of China's equivalent of YouTube, Youku Tudou (YOKU), was delayed for six months while the founder and CEO settled a divorce that wrapped up his VIE equity. Market conditions deteriorated in the meantime, which the Hong Kong law society's journal, in its handy primer on the VIE structure, says led to a "significant reduction" in the valuation of the company at its IPO.
Less Than 10 Years Old
Didi Chuxing's founders, Will Cheng (Cheng Wei in Chinese) and Jean Liu (Liu Qing in Chinese), say in a letter of introduction that they were inspired to start the company in 2012 due to problems moving around Beijing, where it is hard to register a car and many people do not have a driver's license. Cheng, now CEO, previously worked for Alibaba and its payments app Alipay, while Liu, Didi's president, is a Harvard-educated former Goldman Sachs banker.
Cheng still holds a 15.4% voting interest in the company's shares, while Liu has 6.7% control. The Softbank fund is the largest shareholder, with a 21.5% stake, while Uber owns 12.8% as a result of its merger and Tencent has a 6.8% holding.
The company's darkest days came in 2018, when it suspended its Hitch carpooling and hitchhiking service after two female users were murdered by their drivers, events the company calls "tragic safety incidents." It relaunched the service in late 2019 with improved safety protocols, background checks and an 8 p.m. curfew for female riders or 11 p.m. for males. The Chinese transportation department said after the murders that the company had "lost control" of its drivers, with multiple lapses that had led to criminal cases.
Didi bought rival Kuaidi in 2015 and then the Chinese operations of Uber in 2016. The company is now expanding its use of electric vehicles and self-driving cars. Those cost savings and greater ride efficiency should help ride sharing expand from 2% of the US$6.7 trillion "mobility market" now to 24% within 20 years, of a total market valued at US$16.4 trillion.
Didi operates in 14 countries outside China, mainly emerging nations, with 60 million of its 493 million users in those international markets. But it is rapidly urbanizing China that holds the most promise.
Urbanization Favors Ride-Sharing
Almost two-thirds (64%) of China's 1.4 billion population now lives in cities, whereas in 2000 two-thirds lived in the countryside. That's an incredibly rapid shift, creating huge demand and putting an intense strain on infrastructure. Before COVID, four Chinese cities -- Beijing, Chongqing, Guangzhou and Zhuhai -- ranked among the 10 worst in Asia for congestion, although the situation eased during the pandemic.
Didi cites research showing that ride sharing should command 35.9% of the China market by 2040, at which point mobility would be valued at US$3.9 trillion in China.
There is mounting pressure on Chinese companies listed in the United States. The Holding Foreign Companies Accountable Act became law in December, requiring foreign-company U.S. listings to file accounts that can be inspected by the Public Company Accounting Oversight Board, the SEC's accounting arm. Foreign companies would face delisting in the United States if they don't allow PCAOB oversight for three straight years.
It's a positive change that shouldn't be hard for large companies managed by international accounting and best-practices standards to clear. Didi would fall in that camp.
However, China has not allowed Chinese accounting companies to share the accounts of Chinese companies with overseas accountants, claiming the risk is too great of sharing national secrets. Many Chinese companies are partly state-owned, and even private ones have a Communist Party cell within them.
China is also considering tightening its own rules on Chinese companies that launch international listings. The changes may make it almost impossible for such companies to comply with both Chinese and U.S. law. One mooted Chinese rule makes it a securities violation to share official secrets, which would conflict with the U.S. law.
The China Securities Regulatory Commission, the stock watchdog, is also mulling a proposal to demand that overseas Chinese listings submit listing documents to Chinese authorities as well, according to Bloomberg. That would force them to ensure they comply with Chinese securities law even if not listing at home.
Didi is therefore launching into a challenging regulatory environment, one that is encouraging many U.S.-listed Chinese companies to complete secondary listings nearer home in Hong Kong. It is also an environment that is likely to be welcoming for a high-profile Chinese tech company with a strong brand. Expect very strong demand for the U.S. shares if and when the offering goes ahead.
