What Didi’s IPO flop means for Grab and GoTo
It had been billed as the “IPO of the year” and the largest China listing in the US since e-commerce giant Alibaba Group Holdings’ debut in 2014. Yet, when the Beijing-based Didi Global, the “world’s largest mobility technology platform”, began wooing investors in a virtual road show two weeks ago, it was clear that there was little enthusiasm for yet another ride-hailing firm, or the “Uber of China”. Even a last-minute attempt to drum up interest by touting Didi’s global ambitions to become the “largest one-stop transportation platform” and the operator of the biggest vehicle networks on earth was not enough to move the needle.
On June 30, after surging 29% in the first few minutes of trading, Didi’s stock closed at US$14.14 ($19), just 1% above its offering price, or 12% more than its last private funding round two years ago. Goldman Sachs, JPMorgan and Morgan Stanley were hard at work to help support Didi’s stock and prevent a fall below the IPO price on its debut day at the New York Stock Exchange.
For ride-hailing investors, it seemed like déjà vu all over again. Uber priced its own IPO at US$45 a share in May 2019 before it plunged 56% ten months later at the start of the pandemic. Uber’s stock has been hovering around US$50 in recent days or 2.5% more than what most venture capital firms paid for its funding round more than six years ago.
There is clearly a ride-hailing and delivery services fatigue on Wall Street. While investors are sold on the disruption that the likes of Uber, Didi, Meituan and DoorDash have unleashed, they are not so sure about the sustainability of the business models or how profitable these companies will eventually be — with or without their much-hyped “platform” status. Investors valued Didi at US$67 billion, compared to Uber which is currently valued at US$94 billion, while the much smaller Lyft has a valuation of just over US$19 billion, 16% less than what it was valued on its IPO day 2½ years ago. US food delivery giant DoorDash has a market capitalisation of US$58 billion, while its far larger Chinese delivery counterpart Meituan currently commands a market capitalisation of US$252 billion.
Didi’s disastrous IPO that raised US$4.4 billion has huge implications for two Southeast Asian ride-hailing firms — Singapore-based Grab and Jakarta-based ride-hailing-to-e-commerce platform GoTo, as well as the valuation of the e-commerce giant Sea, the region’s largest firm which currently has a market capitalisation of US$144 billion. Grab is seeking a listing through a special purpose acquisition company (SPAC) merger with Altimeter Growth Corp, while GoTo, which was formed recently following a merger between Indonesian ride-hailing giant Gojek and e-commerce supremo Tokopedia, is seeking a dual New York and Jakarta listing later this year.
Betting on ride-hailing
Founded in 2012 by Will Wei Cheng, who once worked for a foot massage firm before joining e- commerce giant Alibaba Group Holdings, Didi began as a smartphone-based taxi-hailing service, eventually copying Uber to launch ride-hailing in 2014. By then Cheng had teamed up with Jean Liu, a 12-year veteran of Goldman Sachs and the daughter of Liu Chuanzhi, founder of PC maker Lenovo Group.
In 2016, Didi acquired rival Kuaidi, and a year later it bought out Uber’s China operations. In 2018, it acquired Brazil’s 99 Taxis and expanded in Mexico. It now operates in 14 other countries including Australia and Japan, even though nearly 90% of the 493 million customers who used the service at least once in the past year are in China. It has 493 million active annual users,15 million annual active drivers and processes 41 million transactions every day.
Among its early investors were Japan’s Softbank Group, Chinese Internet giants Alibaba, Tencent Holding and search engine operator Baidu. In 2016, iPhone maker Apple invested US$1 billion in Didi, as did its biggest contract manufacturer, Taiwan-based Foxconn Group’s Hon Hai Precision. The biggest institutional investor in last week’s IPO was Singapore’s Temasek Holdings. After the IPO, SoftBank Group’s stake in Didi has fallen to 20.2%, Uber’s stake is down to 12%, while Tencent now has a 6.4% stake.
Didi reported revenue of US$6.4 billion, more than double the year-earlier period, with net income of US$837 million in January–March first quarter. Didi reported losses of US$2.54 billion on US$21.63 billion in revenue last year. That turned into a slight profit of US$95 million on revenue of US$6.44 billion in the first quarter of 2021.
But here’s the caveat: Part of that “profitability” in Q1 was attributable to gains on investments of US$1.9 billion related to spin-offs and divestments. Without those extraordinary one-off gains, Didi would still be unprofitable. In comparison, Uber lost US$6.77 billion on US$11.14 billion in revenue last year. In the January–March quarter this year, Uber lost US$108 million on revenues of US$2.90 billion.
Despite mounting losses over the last two years, Didi still has nearly US$3 billion in cash. If it succeeds in doing a follow-through 15% greenshoe over-allotment after the IPO, it will end up with over US$8 billion cash on its balance sheet. That’s a lot of money to burn, to burnish its reputation, fine-tune its business model and make a dash towards a semblance of profitability.
Uber’s CEO Dara Khosrowshahi has said he expects the ride-hailing firm could turn a profit in the last quarter of this year or at least break even by then. Both Uber and Lyft have been able to hike prices in recent months amidst a driver shortage as developed economies open up in the aftermath of falling Covid infections and high vaccination rates.
Didi too could turn a profit next year. Xiao Ai, China Internet analyst for Atlantic Equities in London, forecasts that Didi’s revenues will grow from RMB141,736 million ($29,500) last year to RMB201,158 million this year and RMB250,747 million next year. Atlantic sees China’s total shared mobility spending growing 19% annually over the next four years. In a recent report, it forecast 39% y-o-y growth in gross transaction value for Didi this year and 20% annualised growth over the next four years. Xiao forecasts operating loss for Didi to plunge from US$8.3 billion last year to US$1.6 billion this year and turn into a US$10.4 billion operating profit next year. She sees earnings per share of RMB83 or 12.3 US cents next year.
Measuring Didi with Lyft or Uber is comparing apples and oranges. For one thing, Didi is not merely a ride-hailing company. More than 20% of its transportation revenues come from taxi hailing; chauffeur services, where a driver will drive the customer’s car; or Hitch, a peerto-peer carpooling service. Moreover, the nonride-hailing part of the business, which also has better margins, is actually growing faster than the core business.
Challenges ahead
For now, investors in Chinese Internet stocks are focused on regulation. Beijing began an antitrust probe into Didi two months ago just as it was embarking on its listing process. The State Administration for Market Regulation is investigating whether Didi used anti-competitive practices to squeeze out smaller rivals unfairly and examining whether the pricing mechanism used by Didi’s core ride-hailing business is adequately transparent. In April, Chinese Internet companies including Didi, Alibaba, Tencent, Meituan and 30 others met with regulators and were asked to conduct a “self-inspection” and submit compliance commitments. Didi says it has completed its self-inspection and has notified regulators. It is unclear whether Didi, like Alibaba and others, will have to pay a fine or just continue to be monitored and subject to further self-inspection.
Antitrust issues apart, there are other concerns. Didi has gotten a lot of flak for several rape and murder cases linked to its drivers and Beijing wants the ride-hailing firm to vet its drivers and keep a more watchful eye over them. Regulators have also been tightening control, ostensibly in a bid to curb traffic congestion. Drivers are now required to be residents of cities and towns where they work and to be more closely supervised by Didi.
Analyst Xiao does not believe regulatory scrutiny will scare off investors. “Typically, regulations strengthen the power of the incumbent,” she notes. Regulators have been focused on preventing “subsidy wars” in community group buying, an area where Didi is expanding. Any move to limit the use of subsidies would clearly be a positive for Didi as it would reduce competitive intensity and allow it to expand margins by reducing its own subsidies, she notes.
For now, all eyes are on Didi’s stock price. If it stays close to current levels or falls below the IPO price, it could throw a spanner in the works of Grab’s merger with Altimeter. If the market values Didi at US$67 billion or less, is Altimeter’s US$40billion valuation for Grab fair? Initially, the merger was set to close in July. That deadline has been extended to year-end as Grab is currently in the process of finalising its financial audit for fiscal years 2018 through to 2020 in accordance with US Securities and Exchange Commission requirements. Over the next few months, Altimeter shareholders, who will approve Grab’s merger, would be watching Didi stock price for clues. If Didi’s stock remains under pressure, the Grab deal may have to be revised or sweetened.
Grab’s SPAC merger will also weigh on GoTo’s US listing, whether it is a traditional IPO, direct listing or a SPAC merger. Both Grab and Go-To need urgent funding and cannot afford to drag their feet on listing. Go-To’s investment bankers and potential IPO investors will take a cue from both Didi and Grab stock prices.
The stakes are high. SoftBank, which is a major shareholder in both Didi and Grab, has not made much money on its audacious ride-hailing bets. Four years ago, it bet US$12 billion on Didi. That is now worth US$13.7 billion — or a 14% return over 48 months. Meanwhile, the S&P 500 is up 77% since and Nasdaq is up a whopping 150%. It will be a long time before a bet on ride-hailing pays off.