When is the best time for Didi's IPO?

Aug 25, 2020 Transportation DiDi


1. The incident has made Didi's reputation and market share tumbling, a group of competitors to take advantage of the weakness.

2. In the era of capacity-centric ride-hailing service 2.0, Didi must quickly make up for the shrinking capacity.

3. Didi's target valuation of $80 billion has been questioned due to weak growth in the main business and a less innovative business than expected.


Recently, a number of media reports said, Didi Chuxing (Didi) is preparing for Hong Kong stock listing, with the target valuation of more than 600 billion Hong Kong dollars (about 80 billion U.S. dollars). It may surpass Uber (according to the U.S. Eastern time on July 17 closing share price, market value of $56.4 billion) to become the world's largest Internet travel listed company.

Informed sources said, there are more than 50 billion yuan of cash on the books, the reason for Didi's listing is not a lack of money, but some investors have exit demand.

With 21 rounds of financing, $80 billion valuation, more than 90% of the market share, 8-year-old Didi suffers a lot.


2018, a turning point of Didi

Back to 2018, this is the beginning of Didi's descent, at least in terms of market share.

At this time, Didi sits on more than 90% of the ride-hailing market share. According to Aurora Mobile, in the second half of 2017, the average DAU of Didi app reached 13.126 million.

There were also media reports at the time that Didi would go public in Hong Kong as soon as the second half of 2018, with an estimated market capitalization of $70-80 billion. Meanwhile, Uber was valued at around $72 billion at the time.

But in May and August 2018, two cases of hitchhiker killings made Didi's business came to an abrupt end.

As the only model in the ride hailing business that fits the connotation of the sharing economy, ride hailing has the advantages of low drawdown ratio and low mileage prices, which is encouraged by the management department and preferred by drivers and passengers.

It is also widely believed in the industry that ride-hailing service is the most profitable business for Didi. Sources in the know revealed that in 2017, the total turnover of Didi's ride-hailing was close to 20 billion yuan, and the revenue was 2 billion yuan, of which the net profit was close to 900 million yuan.

Although Didi officially denied this data, it is an indisputable fact that losses have increased sharply after the ride-hailing business was stopped. According to the data, in 2017, Didi lost 2.5 billion yuan, and in 2018 this figure rose steeply to 10.9 billion yuan, an increase of 336% year-on-year.

In order to save reputation and market share, Didi proposed its "all-in-safety" perspective. On July 18, 2019, Didi held a media open day for the first time after 325 days offline, and announced three major initiatives for rectification, including how to ensure a truly smooth journey, how to conduct real identity verification, and how to do full safety and security and so on.

A survey at the end of 2019 showed that more than 70% of the users and more than 80% of the drivers believe that the safety of the platform has been improved after the rectification.

But in the year-long absence of Didi, various forces have flocked to divide the market, such as Cao Cao, Amap, Geely, ect.

Trustdata data shows that in 2019, the size of its users further declined, with the average annual DAU down more than 40% compared to 2018. Although its leading position is still in, but the competition of waist players is gradually heating up, and the market competition pattern of "one super many strong" has been formed.


The competition comes to the second half

Before 2018, the market size of ride hailing had a compound annual growth rate of over 80%. However, in recent years, the growth rate has gradually slowed down due to factors such as stricter regulation, corporate losses and immature business models.

Lv Xinjie, an analyst at the Institute of Industry and Planning of the China Academy of Information and Communication Research, believes that the sharing economy represented by ride hailing has the characteristics of a "bilateral market", where supply and demand sides conduct transactions through a platform, and the two groups attract and promote each other. The more cars and drivers there are, the more convenient it will be for passengers to access services; the more passengers there are, the easier it will be for drivers to take orders and make money.

For now, the growth of demand-side users hasn't touched the ceiling. Although the growth rate of the ride hailing market has gradually slowed down in recent years, it is still able to maintain a double-digit compound annual growth rate given China's large population base and low per capita vehicle ownership.

According to the data, as of September 2019, the penetration rate of the ride hailing industry has rebounded, reaching 20.4%. However, the main battleground of each platform is still in first- and second-tier cities, with user penetration rates of around 40% and less than 20%, and cities in the third- and fourth-tier and below still have a lot of room for development.

In contrast, however, the supply-side capacity (including vehicles, drivers and business license qualifications) is becoming a scarce resource in the ride hailing market.

A series of new policies on ride hailing issued in 2016 set high thresholds for drivers and vehicles to operate ride hailing. And compliance is the trend. For Didi, it must find a way to make up for the lack of capacity. Looking at competitors in the market today, there are two models to consider.

One is to switch to an aggregator platform, like Amap and Meituan. Didi can partner with third-party car rental companies or taxi companies to provide a taxi portal for multiple carriers with their traffic advantages. Back in 2015, the then technical director of Didi, Li Tianyi, had proposed this idea.

Another way is to go to the heavy assets model, controlling the capacity by their own. At present, Didi is also promoting joint ventures with BYD, FAW, Volkswagen, BAIC, Toyota, Dongfeng Nissan and other car companies. And it appears that the capacity put in by the partnership is more in favor of new energy vehicles, as they have advantages in terms of car prices, licenses, electricity tariffs and policies, with higher profit margins than traditional fuel vehicles.


The final chance to go public?

According to Lu Xinjie, the cost of migrating users and drivers across platforms is low. Whoever can master the capacity to form scale effects, who will have more orders and occupy more market share.

Zhu Wei pointed out that at present there are many small and medium platforms on the market, which are transformed from the former regional operation of car rental or taxi companies. They can completely stop Didi out of the door by virtue of their recognition in the local market and the support of local governments.

From Trustdata's MAU data for the first quarter and first half of 2020 for the mainstream application of ride hailing, it can be seen that although Didi continues to lead the pack, the gap between Didi and its competitors has been narrowing.

On May 6 this year, Shouqi Limousine & Chauffeur CEO Wei Dong said in an internal letter that after being the first to achieve profitability in Shanghai and Shenzhen in July 2019, the company had achieved an overall positive gross profit in China in April this year, with several cities entering profitability. In a public speech in August, Wei Dong also said that Shouqi Limousine & Chauffeur has achieved positive gross profit growth for four consecutive months from April to July this year.

And the day after Shouqi Limousine & Chauffeur announced its profit (May 7), Liu Qing, president of Didi, revealed in a media interview that "Didi's core business has been profitable or somewhat thinly profitable." This is the first time that Didi has announced a profit, but did not disclose specific figures or which metrics were actually used for the so-called profit.

Didi, which encountered a lot of competitors in the traditional business, has been trying to open up new growth points. In recent years, the company has tried a series of new businesses, such as tourism, e-commerce and even delivery business, but none of the current stand.

Didi's target valuation of $80 billion has been questioned due to weak growth in the main business and a less innovative business than expected.

A number of industry insiders told Yiou (ID: i-yiou), although the ride hailing market size is considerable and still growing in China, but the valuation of Didi should not exceed Uber. Uber's market cap has fallen again and again since its IPO, and is now just $56.4 billion.

In May 2019, Uber, which holds a 15.4% stake in Didi, disclosed in its prospectus that Didi was valued at about $51.6 billion at the end of 2018, roughly a 10% shrinkage from $56 billion at the end of 2017.

In July 2019, a shareholder publicly listed 137,500 shares of Didi on the Shanghai United Property Rights Exchange, with the announcement valuing Didi as a whole at $55 billion. However, the final sale price was based on a valuation of $47.544 billion.

Obviously, for Didi, now it is not a very ideal time to go public. But to a certain extent, this may also be Didi's last chance to do so.

This is an article from WeChat official accounts Yiou (ID: i-yiou), written by Gu Yan, translated by Chris Yuan.