DIDIY - DiDi Global: Optimism Shrouded In Risk

2023-04-12 02:15:11 ET

Summary

• DIDIY is focused on shared mobility and offers a variety of mobility services to its customers.
• China accounts for about 90% of the company's sales. China will dominate this analysis.
• The firm has emerged from a difficult period with renewed optimism but faces formidable challenges.

Investment Thesis

DiDi Global Inc. ( OTCPK:DIDIY ) is a company based in China whose main business is running a mobility technology platform. The company is focused on shared mobility and offers a variety of mobility services to its customers.

Although the company operates outside China, more than 90% of its sales come from the country. This is why the focus of this analysis will major on China.

The Cyberspace Administration of China [CAC] immediately suspended new user registrations for all 25 of DiDi's apps just days after the company made its public debut on the New York Stock Exchange. All of DiDi's apps were pulled from Chinese app marketplaces not long after that. The CAC's crackdown on DiDi was driven by vague cyber security, data protection, and national security concerns; nevertheless, existing users could still access their downloaded apps.

After an investigation that led to the ride-hailing leader being delisted from New York less than a year after its IPO, DIDIY was fined $1.2 billion by China's cyber security authorities, and the case was closed. The indefinite prohibition on the company's apps and new user registration proved devastating to its finances, as was the fine imposed. The company, however, has received approval from Chinese Cyber regulators to resume new user registration for its ride-hailing service, which, in my opinion, is a critical milestone in the company's trajectory for long-term sustainable growth.

Despite the optimism this move brings and the strong demand drivers for the company's shared mobility, I am neutral on this stock due to significant challenges.

Lifting Of The Ban: A New Dawn?

Domestic regulators have granted DiDi Global the green light to begin accepting new users for its core ride-hailing services again, marking the completion of a 1.5-year regulatory-driven makeover. Since Didi's regulatory issues began in the middle of 2021, the company has been waiting for authorization to begin new user registrations and downloads of its 25 blocked apps in China. Chinese policymakers are taking this latest step because they are banking on the tech sector to help revive economic activity following the devastating COVID-19 outbreak. Although it wasn't mentioned in the statement, it will require its main ride-hailing and other apps to be available again in local app stores to attract new customers.

Growth Drivers of Demand for Shared Mobility

Shared mobility demand is increasing with very strong demand drivers.

• Urbanization and economic growth: China Internet Network Information Center [CIC] estimates that by 2030, China's urbanization rate will reach 70% , with an extra 200 million people living in urban areas due to ongoing city cluster expansion and continued regional economic growth. More people living in cities means more people working, more people shopping in cities, and a new urban lifestyle favored by on-demand networks. Shared mobility users in China's Tier 3 and below cities accounted for about 7% of the population in the fourth quarter of 2020, compared to 24% in Tier 1 and 2 cities, as reported by CIC. This growth opportunity is tremendous, especially in secondary and tertiary urban centers.
• Improved consumption: The rise in disposable income among Chinese consumers has resulted in a general increase in consumption and a shift in priorities from commodities to experiences. People want better and safer transportation options, which would boost the development of shared transportation.
• Better consumer experience: Regarding cost, ease of usage, and adaptability, shared mobility is the clear winner. Shared mobility reduces the financial burden of transportation in comparison to individual car ownership. According to CIC's projections, the ride-hailing cost for a rider in China in 2020 was RMB2.9 per kilometer. In contrast, the cost of owning and operating a fossil fuel-powered vehicle was RMB4.1 per kilometer.

Planned China Expansion

DIDIY announced its ambitions to increase services and benefits for customers and drivers in China in the wake of the conclusion of a regulatory investigation. The firm plans to expand its services and geographic reach by collaborating with other players in the sector.

Beijing's widespread crackdown on the tech sector began in 2021 and has only recently lessened; the Chinese corporation was among those targeted. From around the middle of 2021 until this January, Didi's app was prohibited by Chinese officials and was unavailable in app stores.

Beijing-based Didi Chuxing, which began operations in 2012 and counts among its backers the likes of Alibaba, Tencent, and SoftBank Group, ran afoul of the powerful Cyberspace Administration of China in 2021 when it proceeded with a stock listing on the New York Stock Exchange despite the agency's objections.

The reopening of China, which I believe has enhanced mobility in the country as economic activities heat up during the new normal, will be capitalized on by the corporation, I think, with this planned expansion. As the company's ban has been lifted, the subsequent demand-driving elements will cause revenues to rise in the new normal error.

Headwinds

Despite the optimism presented thus far, my enthusiasm for DIDIY is dampened by a few main concerns. The company's profitability is terrible; since its IPO, it has incurred net losses. DiDi has lost between $838 million and $3.8 billion in the last four quarters on its operations. The last figure was affected by one-time costs, but this business still loses about a billion dollars every three months.

It also has a negative free levered cash flow. Its levered free cash flow over the past twelve months is -20.034 billion. It reached a five-year high of $0 in December 2018. In 2019, levered free cash flow was unchanged; in 2021, it fell by $4.661 billion. This pattern indicates that the company's levered free cash flow is volatile and vulnerable.

Another headwind facing this company is contradictory policies . Taking steps to limit the overseas listing of Chinese platform companies for reasons of national security seems to be in line with the Chinese Communist Party's [CCP] efforts to stop platform companies from using customer personal data, which could give them too much power in society so that the government can keep track of it. But making it hard to list abroad seems to go against the country's efforts to open up and liberalize its financial markets.

The cyber security threat is the final one to consider. Since the company's platform is data-driven, it is at risk of violating the Cyber security Act, as it has already done, which might lead to prohibitively expensive fines.

Conclusion

DIDIY has just come out of a very tough period. Although lifting the ban and strong demand drivers offers a lot of optimism, I believe the company faces challenges of equivalent magnitude, which makes me indifferent to investing in this company.

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