One day ahead of this week's blockbuster DIDI IPO in which the Chinese Uber sold at the top of its $13-14 range, broke for trading at $16.75 then tumbled only to rebound on Thursday, we warned readers that this is one they want to stay away from as a result of Beijing's aggressive intervention in publicly traded tech giants, to wit:
China’s regulatory crackdown on its internet giants is likely having a ripple effect on the IPO, given the uncertainty around outcomes. Didi was among 34 internet firms ordered by regulators in April to correct excesses, and it has warned in U.S. filings that it couldn’t assure investors that government officials would be satisfied with its efforts or that it would escape penalties.
It then took just 3 days since this warning (and 2 days since Didi's IPO) for this prediction to come true, because on Friday morning, Didi shares tumbled more than 10%, plunging from $17 to as low as $15, after a report that China had launched an investigation into Didi Chuxing. According to a statement from Cyberspace Administration of China, Didi Chuxing will halt registration of new users during the review. The move is to prevent data security risks, safeguard national security and protect public interest, according to statement.
That was just the start of Beijing's campaign to put the latest Chinese IPO - which disrespectfully dared to go public on the 100th anniversary of the communist party - and just two days later, on Sunday, China's cyberspace administrator ordered Chinese app-store operators to remove the Didi ride-hailing app, saying it has serious problems involving illegal collection of personal data.
The Cyberspace Administration of China also ordered Didi Chuxing, the company’s China business, to address the issues according to relevant Chinese standards and to ensure the safety of the personal information of users.As noted above, while the CAC didn’t specify on Friday what it will look into, the timing of the announcements was significant, coming not just on the heels of Didi’s IPO but also the Communist Party’s 100th anniversary celebrations in Beijing.
The crackdown requires the largest app stores in China, operated by the likes of Apple, Huawei and Xiaomi to remove Didi from their offerings. But the current half-billion or so users can continue to order up rides and other services so long as they downloaded the app before Sunday’s order.
“We sincerely thank the responsible departments for guiding Didi to look into the risks,” Didi said in a statement posted on Weibo, a Twitter -like platform. Didi also promised to “conscientiously rectify” the issues. The company also said on its official social media account that it had already halted new user registrations as of July 3 and was now working to rectify its app in accordance with regulatory requirements. Didi’s IPO was led by Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. In all, the ride-hailing firm appointed 20 advisers to manage the float.
As Bloomberg notes, "the surprise probe and rapid decision by China’s powerful internet regulator piles on the scrutiny of Didi over issues ranging from antitrust to data security." The company has been grappling with a broad antitrust probe into Chinese internet firms with uncertain outcomes for Didi and peers like major backer Tencent Holdings Ltd. It lost as much as 11% of its market value at one point on Friday, after the watchdog revealed its investigation.
But what's really behind the recent crackdown on China's powerful gigacap companies is that Beijing has been aggressively curbing the growing influence of the country's largest internet corporations, widening an effort to tighten the ownership and handling of troves of information that online powerhouses from Alibaba to Tencent and Didi scoop up daily from hundreds of millions of users. The crackdowns come as Beijing has been aggressively rolling out its digital currency, whose reception so far has been catastrophic, and which assures even more aggressive crackdowns on local tech companies as long as the local population refuses to adopt China's laughable "digital currency."
Didi, one of the single largest investments of habitual bubble blower Masa Son's SoftBank Group, defeated Uber in China in 2016 before embarking on an ambitious international expansion. However, as as result of Beijing's recent crusade against tech companies, Didi had to settle on going public at a far lower market value than previously targeted. It IPOed at a valuation of $67 billion, barely up from its last round of funding in 2019, and far short of the most bullish expectations for $100 billion -- a reflection of the regulatory scrutiny that’s hounded it ever since a pair of murders in 2018 that founder Cheng Wei has called its “darkest days.”
The latest escalation against Didi underscores the uncertainty surrounding the Chinese government’s crackdown on the internet sector. Earlier this year, the State Administration for Market Regulation announced it was looking into alleged abuses, including forced merchant exclusivity arrangements, at Meituan, also days after China’s third-largest internet company raised $9.98 billion from a record share placement and convertible bonds sale.
That too was an escalating personal vendetta of China's despotic ruler against potential threats to his power: in May, Meituan CEO Wang Xing lost $2.5 billion of his wealth over two days after he posted verses from a millennium-old poem about the misguided attempts of China’s first emperor to quash dissent. Wang, a usually plain-speaking engineer who enjoys literary classics, later scrubbed his post and explained he was really calling out the short-sightedness of his own industry, trying to clarify there was no implied criticism of the government. But the damage was done: Meituan shed $26 billion over two days.
In any case, with Beijing now clearly seeking to make a political statement in the capital markets, it is unclear who, if anyone, will be there to invest in China's next mega public offering in the US.
“This is deeply unfair to investors,” Brock Silvers, chief investment officer at Hong Kong-based private equity firm Kaiyuan Capital, said on Friday. “And as a crucial matter of market integrity, China’s regulators should cease allowing companies to list while under investigation.”