Internet & Tech, Talking Point

Hailing investor interest

The race is on as Didi and Dida hit the accelerator to be the first to IPO

Jean Liu Qing-w

Ready to road test an IPO: Didi’s president Jean Liu Qing formerly worked at Goldman Sachs

There is something about powerplay profits that persuades commentators to invent acronyms for top performing companies.

The Chinese first came up with the concept of the BAT to describe the rise of three of their biggest tech firms – Baidu, Alibaba and Tencent – nearly 20 years ago (although Baidu has dropped off the pace for a while, giving the label a bit less impact).

Then came the rise of the FANG in the United States – a descriptor for how Facebook, Amazon, Netflix and Google were setting the pace in the US market.

The label was introduced by tech analyst Bob Lang in 2013 (although its catching on is sometimes attributed to Jim Cramer’s Mad Money show) and it has since added an extra vowel, morphing into FAANG to make room for Apple.

More recently the same group has come under regulatory scrutiny as Washington and other governments fret about cases of anti-competitive behaviour. The conclusions of the various reviews could create a new set of constraints for the Big Tech sector. And in a similar feedback loop, the Chinese government has been looking closely at the conduct of the biggest of the internet platforms in its own marketplace. That means a similar set of factors may weigh heavily on the prospects of the companies in another favoured acronym – the TMD of Toutiao (a unit of artificial intelligence and content specialist Bytedance); Meituan, the delivery king; and Didi Chuxing, the ride-hailing platform.

Notwithstanding these challenges Didi is seeking to be the first from its sector to IPO – ahead of rivals Dida and Hello.

How have the fortunes of the TMD been shaping up?

Founded in 2012, Didi has some experience of how government intervention can shape a company’s prospects. Its big break came in 2015 when the central government in Beijing overruled the request of a number of local governments – which typically profit from shareholdings in city taxi fleets – by refusing to outlaw ride-hailing apps such as Didi and Uber’s China operation (see WiC267).

But three years later Didi was the first in the group to feel the fuller force of regulatory pressure after two drivers on its platform murdered their female passengers in the space of four months.

The killings rocked confidence in its Hitch carpooling service, forcing a wider rethink in how Didi did business (see WiC422). The refocus saw it slam the brakes on some of its expansion plans, including the launch of a food delivery service to rival Meituan’s. Endless meetings with government officials followed, with Didi’s chairman Cheng Wei and its president Jean Liu Qing (daughter of the founder of tech pioneer Lenovo) both said to have been reduced to tears on several occasions, according to NetEase Tech.

A wholesale revamp ensued, in which hundreds of new or improved features were introduced to Didi’s ride-hailing platform as security measures and quality checks.

It turned out that 2018 was a pivotal year in the growth stories of Meituan and Bytedance too. Bytedance rebranded its portfolio firm as TikTok, growing it into one of the world’s most popular video apps, while Meituan went public in Hong Kong in September of that year too. A six-time spike in its share price saw the 10 year-old firm’s market value soar to $350 billion in February this year.

More recently the fortunes of the TMD trio have diverged again. Meituan now finds itself as a major target of the Chinese government’s antitrust crackdown (more on this later). Bytedance has been more distracted by working out how it should respond to Donald Trump’s executive order last year that it must sell off TikTok’s US operations. While Joe Biden has taken over at the White House, it is not clear whether the forced sale of the Chinese-run app still applies.

Didi seems to have emerged from the shadow of its previous ordeal with Chinese regulators, however. Bloomberg reported last month that the company has filed for an IPO in the United States in a deal that could value it at $100 billion – and that it is also exploring a potential dual listing in Hong Kong.

Is the ‘sharing economy’ still a heady concept for investors?

While Didi was slowing its expansion drive, a number of rivals grabbed the chance to eat into its market share. A leading example is Dida Chuxing, a copycat app founded in 2014 that focuses on carpooling services. When Didi’s Hitch service was suspended for more than a year, Dida responded with an Rmb1 billion ($154.9 million) plan to subsidise journeys for customers on its own platform. By the end of 2019, Dida’s market share in the ride-hitching space had more than tripled to 66.5%, reported (hitching is described as cases in which driver and rider are sharing a similar route, while the much bigger ride-hailing sector is more akin to a taxi service).

According to newspaper CBN, Dida has about 200 million registered users, including more than 10.8 million car owners. It filed for an IPO in Hong Kong in October last year with a reported goal of raising $500 million. However, it was then asked by mainland regulators to “work through some new licencing hurdles”. As a result of this delay it needed to update its IPO application last month (listing candidates in Hong Kong are required to complete their debut within six months of filing a prospectus).

Hello Inc, a rival of Dida’s, is another contender to become the first ride-sharing firm from China to reach IPO. It derives the majority of its revenues from bicycle-sharing but it has also diversified into the carpooling sector. It filed for an IPO in New York last month, reportedly to raise up to $1 billion.

Counting Ant Group as its main shareholder, Hello is one of the survivors among the bike-sharing firms (another is Mobike, which was acquired by Meituan). Brutal competition in the sector forced a number of other players, including Ofo, into bankruptcy.

Despite completing at least nine fundraising rounds for billions of dollars, Ofo will go down in Chinese corporate history as one of the biggest implosions of the tech unicorns. Among other creditors it still owes 16 million of its customers Rmb99 each in prepaid deposits for its service. Photographs on social media of thousands of Ofo bikes dumped in “bicycle graveyards” are another reminder of how parts of the sharing economy have suffered from chronic overheating.

Failures like Ofo’s have seen the trashing of the much-hyped concept by commentators and analysts too. Even Wang Sicong, the princeling heir of property major Wanda Group, joined the chorus on social media two years ago by dismissing the prospects of phone charger-sharing firms (the chargers are typically found in restaurants, allowing diners to pay to power up their handsets). Wang, who loves the limelight, promised he would livestream himself eating excrement if the sector ever produced a profitable business. Last month Energy Monster, the biggest of the powerbank sharing firms, went public on Nasdaq and saw its share price shoot up nearly 20% on its trading debut. So Wang might need to eat his words, at the very least.

Where is ride-sharing headed next?

Didi is one of China’s oldest tech unicorns. Yet it has chewed up cash throughout its history, relying on more than $20 billion in capital raisings in its nine years of operations.

After emerging victorious from its local battle with Uber – it acquired the American firm’s China unit in 2015 – Didi will see the likes of Dida and Hello more as pretenders than contenders to its dominant position.

The company incorporates the most comprehensive suite of transportation services on its platform, including trucking, car rentals and vehicle financing. In its bread-and-butter business of ride-hailing Didi was boasting 54 million monthly active users (MAUs) by May 2020, some 50 million more than the number two player Shouqi, a state-controlled firm under the Beijing municipal government.

The problem is that – despite burning through $20 billion to build up a 90% market share in its core business – Didi is still barely profitable. Liu, its president, told CNBC in an interview last year that its ride-hailing business was showing signs of delivering better margins. Yet Didi has also been expanding into more capital-intensive businesses, including community group-buying, a segment of the e-commerce market that targets bulk purchases of daily necessities by local communities (see WiC521).

Perhaps this explains Didi’s desire to go public and raise further funds. But to get a good price for its shares it needs narratives that help it to sell a growth story. One of the newest contributors is carmaking: Didi announced last November that it was launching its own model of electric vehicle in conjunction with battery supplier and EV maker BYD. According to Jiemian, a news portal, Didi sold 5,000 of its first model, the D1, in the first three months of this year.

New energy vehicles have turned into the holy grail for many of China’s internet and tech firms, with major players from online security specialist 360 to phone maker Xiaomi all unveiling plans to enter the EV market.

Didi joined the fray with claims of a unique advantage: a prized pool of data, drawn from the 550 million passengers and 10 million drivers that have generated more than 10 billion trips on its platform.

Its argument is that its years of operations leave it uniquely placed in a car market that is heading in a driverless direction, with route selections and ride-hailing services benefiting from further advances in Big Data and artificial intelligence.

Didi boss Cheng Wei sees the amalgam of a new era of driverless cars with Didi’s ride-hailing platform as a perfect opportunity for policymakers to address another major concern for the future: too many cars on Chinese roads, especially in the cities.

Cheng addressed exactly this point when he unveiled the new D1 in November, pointing out that the number of cars on Beijing’s streets had risen 9.7 times in the last 20 years, hugely in excess of the 1.9 increase in road capacity over the same period.

Other cities are going through a similar experience, with millions more Chinese set to buy their own cars for the very first time.

In other words, Didi is presenting its fleet of driverless cars as a way of taking the sting out of a new generation of car ownership before a wave of new traffic paralyses the nation’s streets.

Carmakers will take a rather different view, of course, but Didi’s vision could get traction in aligning with President Xi Jinping’s promise to steer the Chinese economy to carbon neutrality by 2060. Taking a pioneering position in a sector that steers the country away from traffic gridlock could curry some favour with policymakers too.

In the meantime can Didi and its peers expect more interest from regulators?

Didi has worked hard to respond to government concerns about safety and security across its ride-sharing platform. But the company may soon feel the attentions of antitrust officials too. According to Phoenix News, Didi’s 90% share in the ride-hailing market is going to be a matter of interest to regulators, who may launch a belated review of its merger with Uber’s China unit six years ago.

At least the scrutiny isn’t as intense as that being felt at Meituan. The State Administration for Market Regulation (SAMR) formally triggered an antitrust investigation into the delivery giant last month (see WiC538) and the company risked worsening its situation this weekend with a controversial social media post by its founder Wang Xing.

The 42 year-old often copies excerpts from Chinese poems onto his social media account. But the mention of a few lines from a Tang Dynasty poem from more than a thousand years ago have rattled the stock market this week. The verse talks about China’s first emperor Qin Shi Huang, who was portrayed by the poet as a tyrant for his brutal punishment of dissent. Netizens soon went into overdrive debating what Wang could possibly mean, before he quickly deleted the post, insisting that there was no hidden message beyond a warning that Meituan must be ready to confront challengers to its business.

In the two trading days after the post, Meituan’s Hong Kong-listed shares dived 10%, extending a 10-day plunge that has wiped out nearly 50% of its market capitalisation from a record high in February.

Perhaps people are reading too much into Wang’s love of ancient verse. But many drew comparison with Jack Ma’s poorly-timed comments at the Bund Forum last year which seemed to have torpedoed Ant’s blockbuster IPO a few days later.

On a more positive note for Ma the Alibaba founder has finally made another public appearance after being incommunicado for months. Ma showed up at a company event in Hangzhou on May 10, although in a break with previous tradition he chose not to make a speech.

Based on photos of the Alibaba founder posted by his staff, the 56 year-old’s hair has noticeably got a lot greyer too…

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