Annulment or Divorce? The Choice Is Didi’s
(Bloomberg Opinion) -- Don’t you hate it when you wake up to find you’ve gotten married after a night on the town? The immediate question is whether you can get an annulment — as if nothing happened — or have to go through a messy and expensive divorce. It’s the kind of morning-after that a lot of investors are now experiencing as they peek into their portfolios and stare at what were once the most attractive of stocks: U.S.-listed Chinese tech companies.
You can imagine the elation when the Wall Street Journal reported that Didi Global Inc was considering taking itself private in part to placate investors who bought into its initial public offering — and then saw the China’s cybersecurity regulators take a sledgehammer against the company. Since the late June IPO, the ride-hailing giant has lost over one-third of its market cap, or $25 billion. But that would have been like having a marriage annulled. Too easy.
Indeed, Didi immediately came out denying the report. Still, people shouldn’t have been surprised to find take-private speculation is rampant. It would be a simple way for investors to be made whole (or close to) after the debacle. The other option is embodied in the numerous securities class action lawsuits from U.S. law firms representing Didi’s shareholders. Very hard.
Still, something has to happen. Didi’s business model has fundamentally changed and, by necessity, analysts have to revise their earnings projections. As part of the China crackdown, regulators told the company to remove its apps from mobile stores and to desist from racking up new users. This move cuts off Didi’s drive to expand into China’s smaller cities — its main source of future sales growth in the country. Furthermore, Didi’s earnings before interest, taxes, depreciation and amortization for the China market was only 3.1% of its gross transaction value. It is not a cash cow.
So what were we all buying into exactly with Didi? Were we buying China’s equivalent of Uber Technologies Inc. and its broad range of innovations? Or is Didi more like China Mobile Ltd. — a so-called “dumb pipe” that’s merely a conduit for services. China Mobile’s objective is the greater socialist good of mobility for the masses. It trades at only 7.4 times earnings.
This harsh perspective for assessing business models by no means singles out Didi. A week ago, we found out that popular Chinese for-profit education providers, such as New Oriental Education & Technology Group Inc. and TAL Education Group, won’t be allowed to make money from after-school K-12 curriculum programs. They weren’t even pipes. Investors fled; the companies’ shares are now trading at the net cash level.
These companies might as well go private again. It’s happened before. When China’s stock market was going through the roof in 2015, many companies were more than happy to pay off their investors in New York, de-list there and go public in China again. For instance, Qihoo 360 Technology Co., a mobile security provider, was taken private in a $10 billion management-led buyout deal. It was re-listed two years later in Shanghai.
The rationale is much different this time. Still, it’s better the regulation-battered companies are not in the public eye while they try to figure out a sustainable business model in a society that focuses more on social equality than capital gains.
Now, going private raises the question of price: Will investors get a fair deal for the shares they hold? There is a lot of wiggle-out room. The education companies, for example, can argue that their value is now nil since they are no longer allowed to make profit in China. Foreign investors also have to be careful about assuming they can claw back cash just because it appears on a company’s balance sheets. A lot of money raised offshore is likely to have been transmitted to mainland China already — and getting U.S. dollars out of the country is an onerous proposition.
This is why Didi is an important test case of the basic decency of Chinese companies. It can certainly argue that it suffered from China’s unpredictable regulatory environment. But Didi was also the nation’s second largest unicorn and had top-tier investors like SoftBank Group Corp. It was just a month ago that it raised $4.4 billion. Shouldn’t it return that money?
Despite witnessing the worst sell-off since 2008, China’s regulators still say that the country’s tech unicorns can continue to go public in the U.S. That’s somewhat assuring as a way to calm panic sellers. U.S. investors also want some assurance that they won’t lose everything overnight — and that Chinese stocks aren’t untrustworthy or “uninvestable.” So, Didi, do the right thing and make your investors whole. It’s better than a divorce.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.
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