Why Didi Shares Are Falling and Why China Is Cracking Down?
(Bloomberg) -- Just days after Didi Global Inc., China’s version of Uber, pulled off a $4.4 billion initial public offering in New York, the Chinese cyberspace regulator effectively ordered it removed from app stores in its home market, citing security risks. The ruling doesn’t stop the company from operating -– its half-billion or so existing users will still be able to order rides for now. Still its shares fell in New York below its IPO price on July 6 as China said it’s increasing supervision and revising rules for overseas listings of Chinese companies -- just the latest example of the country asserting control over Big Tech.
1. What’s Didi?
It’s China’s biggest ride-hailing company. Didi squeezed Uber out of China five years ago, buying out the American company’s operations after an expensive price war. Its blockbuster IPO on June 30 was the second-biggest in the U.S. by a company based in China, after Alibaba Group Holding Ltd, giving Didi a market value of about $68 billion. Accounting for stock options and restricted stock units, the company’s diluted value exceeds $71 billion -- well below estimates of up to $100 billion as recently as a few months ago. The relatively modest showing reflects both investors’ increasing caution over pricey growth stocks, and China’s recent crackdown on its biggest tech players.
2. What is this investigation about?
Two days after the IPO, the Cyberspace Administration of China said it was starting a cybersecurity review of the company to prevent data security risks, safeguard national security and protect the public interest. People familiar with the matter say the regulators had asked Didi as early as three months before to delay the IPO because of security concerns, but Didi went ahead. Two days after the listing, regulators said Didi had committed serious violations in the collection and usage of personal information and ordered the app pulled. Didi said on July 5 that it was unaware of the watchdog’s decision before its listing. There are no details on what precisely the investigation centers on, when or where the alleged violations occurred or whether there will be more penalties to come.
3. Are there any hints?
The Global Times, a Communist Party-backed newspaper, wrote in an editorial that Didi undoubtedly has the most detailed travel information on individuals among large internet firms and appears to have the ability to conduct “big data analysis” of individual behaviors and habits. To protect personal data as well as national security, China must be even stricter in its oversight of Didi’s data security, given that it’s listed in the U.S. and its two largest shareholders are foreign companies, it added. On July 6 China’s cabinet, the State Council, said it will improve regulations and laws regarding data security, cross-border data flow and management of confidential information.
4. Is it just Didi?
No. The Chinese internet regulator has widened its probe to two more U.S.-listed companies, targeting Full Truck Alliance Co. and Kanzhun Ltd. soon after launching the review into Didi.
5. Was this out of the blue?
No. In May, China’s antitrust regulator ordered Didi and nine other leaders in on-demand transport to overhaul practices from arbitrary price hikes to unfair treatment of drivers. More broadly, Beijing is in the process of a sweeping crackdown on the nation’s Big Tech firms designed to curb their growing influence. In November 2020 the authorities derailed the planned IPO of fintech giant Ant Group Co. and in April hit Alibaba with a record $2.8 billion fine after an antitrust probe found it had abused its market dominance.
6. Why does Didi matter?
You can’t really overstate just how dominant Didi is in ride hailing in China, accounting for 88% of total trips in the fourth quarter of 2020. When Didi bought Uber’s Chinese operations in 2016, Uber took a stake in the company that currently stands at 12%. Didi’s U.S. IPO was shepherded by a who’s who of Wall Street banks. Its largest shareholder is Japan’s SoftBank Group Corp. with more than 20%, and others include Chinese social networking colossus Tencent Holdings Ltd. However, due to Didi’s ownership structure, Chief Executive Officer Cheng Wei and President Jean Liu control more than 50% of the voting power.
7. How’s the company doing?
While Didi had a net loss of $1.6 billion on revenue of $21.6 billion last year, according to its filings with the U.S. Securities and Exchange Commission, its diversity cushioned it against the worst of the pandemic downturn. The company reported net income of $837 million in the first quarter of 2021. With growth in its core market beginning to slow, it has expanded rapidly into fields from car repairs to grocery delivery and has pumped hundreds of millions into researching autonomous driving technology. It’s also said to be planning to expand services into Western Europe.
8. What happens now?
On Didi specifically the critical question is what the review regarding user data finds. But analysts are already looking at the likely wider impact. Key issues are whether the action is likely to discourage other Chinese tech firms from embarking on an overseas listing, and whether the action marks a new direction for the regulatory crackdown. Didi itself said in a statement in would fully cooperate with the review. It warned though that the removal of the app for new users may have an adverse affect on revenue.
The Reference Shelf
- QuickTakes on China’s crackdown on tech giants, and why it changed the rules on Ant.
- Bloomberg Opinion’s Shuli Ren explains how Didi’s foreign investors are on the hook, and how China is like the tiger who came to tea.
- Businessweek examines how China crushed Jack Ma and who’s next.
- A preview of the clouds that marred Didi’s IPO ambition.
- The company’s IPO prospectus.
©2021 Bloomberg L.P.