Didi’s Brief U.S. Foray Is Ending. What Happens Next?

(Bloomberg) -- Didi Global Inc. is preparing to delist from the New York Stock Exchange, after its initial public offering there last year drew the wrath of Beijing. The Chinese ride-hailing giant said it plans to list in Hong Kong instead, allowing existing shareholders to convert their holdings in the company. There are challenges ahead -- for Didi, its shareholders and other Chinese companies looking to go public. Meanwhile, the government’s ongoing investigation and new regulatory measures have hit Didi’s bottom line.

1. Why is Didi going to delist?

Chinese regulators opposed the U.S. listing, saying it could expose Didi’s vast troves of data to foreign powers. The firm pressed ahead with the June 2021 IPO anyway, in a move that Beijing saw as a challenge to its authority. Days after the listing, the government announced a cybersecurity probe into the firm and forced its services off domestic app stores. Later the Cyberspace Administration of China, the agency responsible for data security, was said to have asked Didi’s top executives to devise a plan to delist because of concerns about leakage of sensitive data.

2. How will it work?

Didi has said it aims to list on the Hong Kong Stock Exchange and ensure that its American depositary shares can be swapped for “freely tradable shares of the Company on another internationally recognized stock exchange.” However, in April it said it won’t apply for a listing on another exchange until after the U.S. delisting is finished, and it also set a shareholder vote for May 23. The firm was already said to have suspended preparations for a Hong Kong listing after being informed by regulators that its proposals to prevent security and data leaks had fallen short. (Didi had put forward several ideas, including ceding management of its data to an outside party in China.) When the filing finally comes -- assuming it does -- the entire process could still take months from that point.

3. What are the challenges?

Prior to its U.S. IPO, Didi had weighed a potential Hong Kong listing but abandoned the effort after the city’s exchange questioned its compliance with Chinese regulations, such as having licenses in all the cities where it operated. (The Hong Kong exchange makes far more stringent demands on companies seeking a listing than its New York peers.) In preparation for its new listing, the company is said to be planning to reduce its headcount by as much as 20%, not including drivers. Didi in December disclosed a $4.7 billion loss in the September quarter after revenue slid 13% from the previous three months. Even if Didi pulls off a listing in Hong Kong, some investors may choose to sell rather than swap their U.S. shares, which have fallen drastically. Technically speaking, swapping them for stock in Hong Kong should be relatively straightforward for most institutional shareholders. But the new securities may trade with a valuation discount: Hong Kong has long been home to some of the world’s lowest price-to-earnings ratios. 

4. Why is this such a big deal?  

Didi’s blockbuster IPO was the second-biggest in the U.S. by a company based in China (Alibaba Group Holding Ltd.’s was bigger) and gave Didi a market value of about $68 billion. The listing, which was shepherded by a who’s who of Wall Street banks, appeared to be a model for how international investors could tap into China’s red-hot tech sector. Didi’s largest shareholder was Japan’s SoftBank Group Corp., with more than 20%. 

5. Will China force other companies to change listings?

Didi’s exit is unlikely to be the last. The Chinese internet regulator began probing two more U.S.-listed companies, Full Truck Alliance Co. and Kanzhun Ltd., soon after launching the review into Didi. In December the government unveiled tighter regulations for Chinese companies seeking to go public abroad using the so-called variable interest entity (VIE) structure, as Didi did. Meanwhile, the U.S. is moving to implement a new law that mandates foreign companies open their books to U.S. regulators or face delisting starting in 2024. The U.S. Securities and Exchange Commission says that only two jurisdictions historically have not allowed the required inspections, China and Hong Kong.

6. Will this end Didi’s troubles? 

Unlikely. The cybersecurity probe into Didi is ongoing, and regulators may still impose an array of punishments such as a fine, suspension of certain operations or the introduction of a state-owned investor. The municipal government of Beijing, where Didi is based, was said to have proposed that the Shouqi Group -- part of the influential Beijing Tourism Group -- and others acquire a stake in Didi, which would give control to state-run firms. Media including the South China Morning Post have reported that regulators may force Didi to reshuffle its top management. President Xi Jinping’s campaign to achieve “common prosperity” has heaped pressure on platform companies like Didi to offer better wages and benefits to its army of drivers. More fundamentally, the Chinese government is expected to maintain strict curbs on and scrutiny over big tech enterprises that amass sensitive data.

The Reference Shelf

• A QuickTake on why the U.S. and China are clashing over stock listings.
• A digest of Bloomberg Opinion’s writing on the Didi debacle, and Shuli Ren looks at what the SEC chief’s tough talk signifies.
• Bloomberg Intelligence examines the new threat to Didi’s domestic monopoly.
• A Businessweek story on how China is now charting a new course on tech.

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