Transcript

Hi, this is Viram from Vested, and today we are going to take a deep dive into DiDi, China’s leading ride-hailing business that now operates across 15 countries. The company IPO-ed recently on the New York Stock Exchange in what was the second-largest US IPO by a Chinese company.

So how did DiDi start and what strategies did they implement to grow into this massive business despite other large players in the market is what we are going to look at today.

Let’s dive in!

In 2012, Cheng Wei, a former Deputy General Manager of Alipay, founded Beijing Orange Technology Co. and launched DiDi Dache out of the desire to fix the enormous traffic congestion and transportation problems in Beijing. Fun fact: DiDi Dache, the original name actually means “Beep Beep Call a Taxi”.

The company started off as a software service that connected taxi drivers with passengers. It then evolved into a ride-hailing service after Cheng met with Garret Camp, the co-founder of Uber, who at the time was visiting China, as Uber was looking to expand into the country.

Over the years, DiDi fought highly competitive battles on multiple fronts. It competed against Uber and Kuadi Dache (another local player).

The battle spread over multiple years, burning hundreds of millions of dollars to gain market share. On the urging of their investors, DiDi eventually merged with Kuaidi to form DiDi Chuxing.

In 2016, Uber decided to exit China and sold its Chinese operations to DiDi Chuxing for a significant stake in the company. This final consolidation eventually made DiDi the largest mobility app in China, with more than 90% market share. It took two major merges to get there.

Now, let’s look at four different pieces around DiDi’s business that you should know about as you consider whether or not to invest in the stock.

First, what exactly is it that exactly DiDi does?

DiDi is a super app for mobility. They provide a variety of services in the mobility verticals ranging from ride-hailing to e-bike sharing to motor insurance. Typically super apps start with a service that is used multiple times a day and form a habit to use the app. These apps also have embedded network effects.

What are network effects? Basically, every new customer that joins the platform actually makes it a little bit better for the existing customers. Apps like Facebook and Airbnb also benefit from such network effects.

So, coming back to super apps, basically they start with one frequent service and then start offering a gamut of different offerings across verticals. DiDi however could not do different verticals because China already has the likes of Alibaba and Tencent that are super apps. Which is why DiDi became a super app only for mobility and went deep into the mobility ecosystem in China and now across the world.

The second factor to look at is that is DiDi’s business model profitable?

Well, it’s not really. In fact, there are wild swings in losses from the seasonality of the business and from the need to drive incentives and other marketing expenses. Over the past nine quarters, the company has only enjoyed three-quarters of positive net income, and for these three quarters, profits actually came from non-recurring selling of investments. However, even if you look across the world there are actually no profitable ride-sharing companies.

DiDi is not even focused on profitability yet. If you look at the prospectus of the company, they have mentioned that they intend to use the proceeds from the IPO to:

  1. Expand internationally into more markets
  2. Invest in electric vehicles and self driving technology
  3. Expand into new products

So, profitability not even a focus.

Third, now let’s look at Didi’s valuation.

In terms of Didi’s immediate comparables for DiDi, we could look at Grab. Grab also started as a ride-hailing company and is now a super app across Southeast Asia.

Grab is also going public soon by merging with a SPAC at a valuation of $40 billion. On the other hand, DiDi ended its first-day post IPO at a valuation of $68 billion. In terms of revenue, Grab’s revenue is actually 13 times lesser than DiDi’s however for every dollar of revenue, Grab is getting a much higher valuation. Why is that? It’s difficult to say but it could be because Grab is actually growing at a much faster rate compared to both DiDi and Uber which is another comparable. And that is why investors could be giving it a premium.

Finally, let’s look at how was DiDi’s IPO received by wall street:

DiDi raised 4.4 billion from investors in one of the past decade’s biggest IPOs. It ended it’s first day on the New York Stock Exchange with a market cap of about 75 billion making it nearly is four times more valuable than Lyft and almost as big as Uber which has a 95 billion market cap.

However, just days after the IPO, The Cyberspace Administration of China ordered Chinese app stores to actually remove DiDi from their platforms. This was after they found that the company severely violated regulations around the collection of personal data. DiDi was requested to ensure protection of the data of its 490 billion users before it could be listed again.

However, DiDi is not alone in this. Chinese regulators have been known to crack down on the nation’s biggest technology leaders including the likes of Alibaba and Tencent with new actions aimed at curbing risks and unfair labour and data protection policies. Because of this, US listed companies of China Technology giants have struggled.

Like for example the shares of JD.com, another large technology company in China plunged nearly 12% in 2021 because of these rules.

All right! So those were the four pieces we wanted to cover on Didi’s business as it now becomes available to invest in as a public company.

Stay tuned for more!

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Our team members at Vested may own investments in some of the aforementioned companies/assets. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for an investor’s portfolio. Note that past performance is not indicative of future returns. Investing in the stock market carries risk; the value of your investment can go up, or down, returning less than your original investment. Tax laws are subject to change and may vary depending on your circumstances.

This article is meant to be informative and not to be taken as an investment advice, and may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success or lack of success of particular investments (and may include such words as “crash” or “collapse”). All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results.

This video is meant to be informative and not to be taken as an investment advice and may contain certain “forward-looking statements” which may be identified by the use of such words as “believe”, “expect”, “anticipate”, “should”, “planned”, “estimated”, “potential” and other similar terms. Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success of or lack of success of particular investments (and may include such words as “crash” or “collapse”.) All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results.