With the Didi Chuxing US IPO set to price tonight at the top of its $13-$14 share range (the IPO was covered multiple times early on the first day of the bookbuild last week and the investor books were closed on Monday, one day ahead of schedule), below we present two observations ahead of what will be the biggest US share sale by a Chinese company since Alibaba raised $25 billion in 2014 in what is already a year of record IPOs.
The first, and more downbeat one, comes from Bloomberg's Julia Fioretti who notes that despite a record year for global initial public offerings, companies are still finding their valuation targets being adjusted downwards by investors.
Take Didi Global Inc. The Chinese ride-hailing giant finally launched a U.S. IPO last week which could raise as much as $4 billion. The Softbank Group Corp.-backed company is looking at a valuation of about $67 billion in the IPO, far below the $100 billion that had been floated earlier. It’s also only a minimal step up from its price tag in 2019.
That probably explains why the offering is smaller than some had anticipated. People familiar with the matter had said Didi could raise as much as $10 billion in its IPO, though the final amount always comes down to valuation.
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.
Investors have also been pushing back against lofty valuations as creeping inflation worries have dented high-growth stocks. Mixed performances from market debutantes have also injected some caution among buyers. Unprecedented liquidity and ultra-low interest rates pushed stock prices up last year, but 2021 has proved a lot more volatile.
For the second, and more cheerful take, we go to DataTrek's Nicholas Colas who has been going through the F-1 and has 3 thoughts about the deal, the company, and what it says about the current state of global disruptive innovation (he is quick to note that he does not advise buying on the IPO, as he remains concerned about the Chinese government’s ongoing local Big Tech crackdown).
#1: Corporate structure.
Back in 1992 I was the lead equity analyst on the IPO of China Brilliance Automotive, the first Chinese IPO in the NYSE’s history. The shares offered were of a Bermuda holding company, which had a stake in a Hong Kong company, which had stakes in Chinese auto assembly plants. That was the “hack” we needed to be able to offer stock in the US, and it was very opaque.
Fast forward almost 30 years, and Didi’s corporate structure is not much better. There are offshore entities in the Cayman Islands, the British Virgin Islands, and Hong Kong. On the mainland, there are 6 entities and some have different ownership percentages.
Takeaway: even after close to 3 decades since the first Chinese US IPO not much has changed with respect to what you actually own when you invest. The technology changes – China Brilliance made minivans, Didi operates the country’s largest ride sharing platform – but not the inevitable governance issues western investors must accept in order to invest.
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#2: The company.
Didi presents very differently from a typical US tech disruptor. Its Founders’ Letter, for example, is humble in tone and focuses on practical issues.
China’s personal vehicle infrastructure is very different from the West. It’s hard to get a permit to own a car in many cities because local governments need to manage congestion and pollution. Ride hailing is a sensible answer, and as the country grows increasingly affluent more people will be able to afford the service.
On top of that, China is having greater success than the West at introducing electrical vehicles. Didi has developed its own, and operating costs are lower than traditional internal combustion engine vehicles. Rolling these out improves drivers’ profits and helps reduce pollution.
Takeaway: the Didi Chuxing story is pretty simple - China has a very large and unique personal mobility market, Didi owns that space and it’s actively developing/promoting next-gen technology. Which is also the problem with the story, because the national government is concerned the ride hailing market is too concentrated. How that plays out is simply unknowable.
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Based on published price talk, Didi’s value is between $62 and $67 billion. Uber’s market cap is $96 bn. But… Didi has substantially higher revenues: $6.4 bn in Q1 2021 versus $2.9 bn for Uber.
So, is Didi really worth less than Uber despite having a lock on a great growth market, +2x the revenue base, at least as strong a management team, and after the deal a currency to make acquisitions (just like Uber)? We’ll find out in the coming weeks as the IPO discount wears off.
Takeaway: Didi versus Uber is shaping up to be another chapter in the ongoing story of US Big Tech enjoying much higher valuations than their Chinese counterparts. Amazon, $1.7 tn; Alibaba, $620 billion. Facebook, $1.0 trillion, Google $1.7 tn; Tencent $740 bn, Baidu $73 bn. Part of this obviously comes from US Big Tech enjoying dominance in more affluent markets (US/Europe), so fair enough. How these differentials change in the next 5-10 years will be an important global equity market story. We’re essentially long US Big Tech and short Chinese Big Tech, and feel very comfortable with that position.