Didi raises at least $ 4 billion to be listed on the New York Stock Exchange

Chinese app Didi Chuxing will make its debut on the New York Stock Exchange later defeating Uber and becoming dominant on the streets of the country’s major cities, but with concerns about growth and regulation on the horizon.

Under the name of its holding company Xiaoju Kuaizhi, Didi raised at least $ 4 billion in one of the largest initial foreign public offerings since the 2014 Alibaba listing, after setting the share price at the top of its marketed range. Didi sold shares at $ 14 a piece, people reported on the deal, which gave him a market capitalization of at least $ 67 billion. The company declined to comment.

Didi’s market value would be slightly above the $ 65 billion valuation in which private investors acquired the company in a 2018 fundraiser, perhaps reflecting how investors ’interest in advertising has declined as a result. of a disappointing 2019 IPO for US rival Uber.

Unlike when Uber hit the market, Didi can boast of profitability in its core attraction business from 2019, adjusted for earnings before interest, taxes, depreciation and amortization. This core business accounts for 94% of Didi’s revenue of $ 14 billion ($ 22 billion) by 2020.

This is a much higher revenue share than Uber or Grab, which are based on fast-growing food deliveries but generate losses of 35 and 49 percent of revenue, respectively. In China, Didi is excluded from the delivery sector by huge rivals Meituan and Ele.me.

But while Didi’s core business is profitable, its margin on every journey it reserves is much lower than that of international rivals, around 3%, compared to Uber’s 20%.

Coronavirus blockages saw Didi’s reserves fall by a third in the first quarter of last year, but China’s strict and widely successful containment of the virus meant its amusement business grew year-on-year in the United States. second half of 2020 and fell by only 4.8% course.

In the first quarter of 2021, Didi made a positive overall net profit for the first time, largely due to the deconsolidation of its group purchasing business, Chengxin Technology, which contributed $ 9 billion ($ 1.4 million). dollars).

But analysts questioned whether Didi could reach saturation in China’s largest cities, such as Beijing and Shanghai, which account for half of its reserves, and whether it can create new companies to boost its growth.

“Didi’s main question is whether his core mobility in China can generate enough dry financial dust to fund his new emerging business, such as self-driving,” Bernstein analysts wrote in a recent note.

The head of capital markets at a U.S. bank in Hong Kong said an initial $ 100 billion stock market valuation target was “never a reasonable starting point” due to market constraints of Didi. “Their big problem is that they won’t expand easily overseas, as Uber did. The equivalent of Uber Eats and logistics are already full of deep-pocket headlines in China,” the person said.

Abroad, Didi has expanded into large developing economies, such as Brazil, but its non-Chinese business only accounts for less than 2% of revenue.

His dominance in China, however, is unquestionable. Since buying Uber in 2016, Didi has grown to account for 90% of all online car bookings in 2020, about two-thirds of which come from the top 30 cities.

It has some competition in smaller cities and towns, with more than 200 rivals operating across the country. T3, a rival backed by Alibaba, Tencent and three Chinese vehicle manufacturers, has been successful in creating market share in Nanjing and Chongqing due to its low prices and autonomous fleet.

“Right now the profit is big, but as competition heats up in smaller cities prices will have to go down,” said Cherry Leung, a Bernstein analyst.

But Didi’s sponsors argued that its profitability is scalable because its competitors are unlikely to engage in a three-way price war. Didi, national rival Kuaidi Dache and Uber, from which Cheng Wei, president of Didi, emerged victorious in 2016.

Cheng i Jean Liu, a former Goldman Sachs banker who became president of Didi in 2015, has so far avoided having to shell out other costly subsidies to defend himself from rivals.

“It’s a very simple question: if you want to do the same as Didi, are you willing to burn $ 20 billion by attracting users?” said Kevin Wang, founding partner of Ameba Capital and first investor of Kuaidi Dache, who merged with Didi in 2015.

After conceding defeat to Didi, Uber has maintained a sizeable stake, which is now 12.8%. Other major investors include SoftBank’s Vision Fund, with 21.5%, and Tencent, with 6.8%.

More urgent than the competition is the question of whether Didi can navigate strict regulatory control during Beijing’s blunt crackdown on technology groups that are believed to have grown too fast.

The company has been on fire for a number of problems as it has not secured the passenger safety to the concerns of unfair competition and low wages of drivers.

Earlier this month, a financial publication from the official Xinhua news agency said antitrust investigations were a “hanging sword” over the IPO, citing pricing concerns and an investigation into the deal. of Didi to take over Uber’s Chinese business. never released.

In May, the Ministry of Transport summoned Didi executives, along with more than 30 transport companies, over concerns about driver compensation, following complaints that Didi was cutting 30% of some fares.

The company has said the breakdown only applied to less than 3% of cases and pledged to do better to ensure fair pay for drivers.

However, the company has received a clear warning from authorities: “If Didi does not rectify his behavior immediately, there could be a further escalation of regulatory actions,” said Angela Zhang, a Chinese antitrust law scholar. the University of Hong Kong. .

In the future, Didi still sees promises in autonomous driving, hoping to eliminate the need to pay drivers, which accounts for 50% of the company’s costs.

But it has taken a more cautious approach than rivals such as Baidu and AutoX, a company driven by Alibaba, which have begun removing safety drivers from vehicles. Last year he obtained a license to transport passengers in cars that automatically drove to Shanghai, but has said little about his tests.

Zhang Xiang, an independent automobile analyst based in China, said Didi’s autonomous driving investment is a way to stand out from Uber after the U.S. company. Abandoned self-employed at the end of 2020 and to potentially ensure a high valuation of their self-employed business.

“It makes no sense to launch itself as a pure autonomous robotaxi service,” said one of Didi’s first investors. “It will have to be hybrid based on Didi’s mobility business, which has had many years to build a bottom-up technology platform.”

Additional reports from Emma Zhou in Beijing