Braking point

Call it ‘China speed’. Luckin Coffee was founded in October 2017 as a challenger to Starbucks. By the time it went public in New York less than two years later, it had expanded into a chain of 3,600 stores, with a valuation of nearly $4 billion.

But Luckin’s troubles were brewing quicker than its coffee. By June 2020 the Chinese firm had been kicked off the Nasdaq following the uncovering of a $310 million accounting fraud. In departing so dramatically Luckin earned the ignominious title of the Chinese company with the shortest lifespan – just 13 months – as a US-listed firm.

However, that inglorious honour is now set to be awarded to another Chinese firm – this one a ride-hailing platform inspired by New York-listed Uber.

Didi Global confirmed this week that it will be leaving the New York Stock Exchange (NYSE). The departure comes less than six months after a hastily-arranged IPO in June that triggered a furious response by the Chinese government (ostensibly on data security concerns).

What might investors glean from Didi’s dramatic U-turn? And does the change in direction signal that the ride-hailing giant’s next stop is going to be a new listing in Hong Kong?

What’s behind Didi’s decision?

On December 2 the company’s board said it had decided to “undertake the necessary procedures” for the delisting of Didi’s American Depository Shares from the NYSE but promised that shareholders would have their stakes “convertible into freely tradable shares of the company on another internationally recognised stock exchange”.

Didi will now hold a shareholder vote on the matter, including an option to pursue a listing on the main board of Hong Kong of its “class A ordinary shares” (stock with fewer voting rights in a dual shareholding structure).

Didi has been trying to lay low for several months but its exit means that it will not even have the opportunity to publish an annual report as a US-listed company. Shareholders have to go back to July to find the last circular that it filed with the SEC – a rebuff to market speculation that Didi was considering going private. However, the ride-hailing firm is yet to give a timetable for its next move, which is likely to see a share sale in Hong Kong before a departure from New York. As such, existing shareholders could swap their American stock for Hong Kong shares – just as investors did in China Mobile this year after the telco giant was ejected from US bourses by former president Donald Trump.

Why was Didi’s IPO in New York such a disaster?

The Chinese firm is facing class action lawsuits in the United States for inadequate disclosures prior to its New York IPO. A move to depart the bourse could bring more legal challenges too.

Nine year-old Didi was one of China’s most valuable unicorns (see WiC530 for our ranking of the top 50 unicorns from earlier this year, where Didi then came third with a valuation of $62 billion). In less confrontational times it was seen as an example of US-China collaboration in commercial terms. It set up an AI (artificial intelligence) research headquarters in California and it still counts Uber as one of its largest shareholders (along with Softbank, the pair own a combined 21% of its shares). In 2016 Didi even caused a stir by appointing a West Point graduate and former US army officer as an independent director.

However, Didi and other ‘China concept stocks’ have been caught in the crossfire as Beijing and Washington continue to clash over a range of contentious issues in trade, tech and geopolitics.

Washington has been pushing for more oversight of Chinese firms trading on US bourses. In fact, just 24 hours before Didi announced its relocation plan, the SEC finalised rules that allow it to delist foreign companies in cases in which the Public Company Accounting Oversight Board (PCAOB) is denied access to audit information (the new regulations also require listed firms to declare foreign government shareholdings).

The law was first passed in 2020 after Chinese regulators repeatedly denied requests from the PCAOB to inspect data – including operational information – from Chinese firms. The row intensified as Wall Street started to become more aware of the Luckin scandal. But Didi has found it almost impossible to comply with the new rules as Chinese regulators take the opposite position, even arguing that national security could be compromised if companies like Didi give up access to sensitive data.

In the months before Didi went public, according to media reports from both China and the US, the Chinese authorities had advised that it delay its New York IPO and conduct a fuller review of data security. But Didi still pushed ahead with the share sale (there have been suggestions that its financial backers such as Softbank were keen to divest, while others think Didi thought it could force through the process in a ‘fait accompli’ that Beijing couldn’t reverse).

It filed its IPO prospectus with the SEC on June 11 – a day after Chinese lawmakers had passed the Data Security Law – and raced through an accelerated roadshow over a few days, before going public on the NYSE on June 30.

There were suggestions that its trading debut was craftily timed too, during a period when China was fixated on the celebrations for the centenary of the Chinese Communist Party on July 1.

The $4 billion fundraising was conducted in a relatively low-key manner and the typical bell-striking ceremony on debut day in New York was dropped. No champagne was popped back at head office either (because the listing was “not the end, but the beginning of a new journey,” the company explained to staff at the time).

Nevertheless Didi’s debut in New York had not escaped attention in Beijing. Once the July 1 celebration had concluded, the government machine moved quickly into gear, led by the Cyberspace Administration of China (CAC), which announced an investigation into concerns about Didi’s data security. In moves that sent shockwaves through its share price, Didi was barred from registering new users for its services in China. Most of its apps were also banned from local app stores, strangling its growth.

These punitive responses gathered pace in mid-July, when seven central authorities including the CAC, the Ministry of State Security and the increasingly powerful antitrust watchdog the State Administration for Market Regulation (SAMR) dispatched a joint inspection team to Didi. The investigation is still going on.

What price has Didi paid for its disobedience?

What would have been the world’s biggest IPO – Ant Group’s $34 billion dual listing in Shanghai and Hong Kong– was cancelled at the eleventh hour a year ago by Chinese regulators concerned with the systemic risks posed by Ant’s fintech-driven loan business.

Ant and its sister firm Alibaba were later slapped with a record Rmb18.2 billion ($2.85 billion) fine by the SAMR on antitrust concerns.

Reuters reported last month that Didi is expecting similar treatment and that it has already set aside Rmb10 billion for potential fines.

Some commentators expect Didi to receive a heavier penalty than Alibaba and Ant. Nor can Didi expect an easy ride out of New York, where it will need to settle associated lawsuits at substantial cost before departure. Luckin has been through a similar process, reaching a $175 million settlement in October over claims that it had fraudulently inflated its revenues. In 2019 Alibaba also paid $250 million to settle a lawsuit alleging the e-commerce firm had concealed warnings from Chinese authorities against sales of counterfeit goods before its New York listing in 2014.

How will Didi be revalued?

Didi is trading at about $7.20 a share this week, or nearly 50% down from its $14 offering price. It has to come up with a delisting offer and relisting plan that are appealing to investors who valued Didi at nearly $70 billion in July. But a Hong Kong share sale is unlikely to return the company to the $70 billion valuation achieved in early July. The city’s benchmark index is approaching a two-year low after a 15% slump over the past six months. Tech stocks are particular underperformers, because of the Chinese government’s various crackdowns on the sector. Alibaba shares have fallen more than 40% during the period, for instance, reaching lows not seen since it completed a secondary listing in Hong Kong in late 2019.

Before pursuing a Hong Kong IPO, Didi will also need to improve its relationship with regulators in its key market in China, as well as revamp its reputation with local investors, some of whom have regarded its behaviour as disloyal and unpatriotic. The task could prove trickier for the company’s co-founder and president Jean Liu, daughter of Lenovo founder Liu Chuanzhi. Discussion of Liu senior as a ‘comprador’ for foreign interests once again went viral after the computer maker was barred from going public on Shanghai’s STAR Market this year (one of the accusations levelled against him is that Lenovo’s ties with Microsoft have blocked the development of a Chinese computer operating system; see WiC560). Similar sentiment about the loyalties of his family has fuelled speculation that Liu junior could resign from her roles with Didi.

The better news, 21CN Business suggests, is that Didi is likely to have received some kind of assurance from the Chinese government before announcing its delisting plan. Perhaps that means the regulatory storm that has surrounded the ride-hailing app for the last six months may be about to subside too.

Didi controlled at least 80% of China’s ride-hailing market before it ran into political strife but it is now facing stiffer competition from rival operators keen to capitalise on its misfortunes. While Didi’s expansion plans have been delayed by the data security probe, competitors have taken the opportunity to eat into Didi’s market share in some cities. One of the fastest growing challengers is T3 Chuxing. Backed by three of the leading state-owned carmarkers (Dongfeng, FAW and Chang’an), it started out in 2019 as a regional player focused on the city of Nanjing. But T3 has been accelerating a plan to create a national network, aided by a Rmb7.7 investment from a consortium comprising Citic, Tencent and Alibaba.

Alibaba’s first bet in the ride-sharing market was Kuaidi Dache, which merged with Tencent-backed Didi Dache to become today’s Didi Global. Alibaba then exited but losing out to Didi back then does not seem to have extinguished its ambitions in the sector. In November the internet giant invested nearly Rmb2 billion in two other ride-hailing apps Hellobike and LetzGo. In fact, there were as many as 248 licenced ride-hailing firms operating in China as of September (including Didi). These platforms racked up nearly 650 million rides in that same month, according to the Ministry of Transport. Didi accounted for 75% of journeys during the period.

What about other ‘China concept stocks’ in the US?

Didi is hardly the first firm to delist from the US and go public again in Hong Kong or Shanghai. Previous ‘returnees’ were either kicked out of US bourses after government intervention (such as semiconductor maker SMIC and state telco China Mobile) or left because they felt unloved by US investors (like news portal Sina).

Didi is different, however, as the first to part ways with the US stock market due to regulatory pressure from the Chinese government. Some financial bloggers have gone as far as saying Didi’s decision to call it quits in New York amounts to “a declaration of political allegiance” to Beijing as well.

Either way, Didi is unlikely to be the last to exit the US market. According to financial data platform Wind, there are still nearly 250 Chinese firms trading on American exchanges. Many of these ‘China concept stocks’ have slumped since the Didi debacle, although they still aggregate to a significant market value of more than $1.5 trillion. Bosses of these firms may still be reluctant to take their US-listed shares private, however. Assuming that half of the shares are held by foreign investors, at least $750 billion is going to be needed to purchase their stock and fully sever ties with US equity markets…

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