Didi Chuxing – State of play.

Didi is a play on the whim of the state.

• The Coronavirus may lead the Chinese state to give Didi a bit of breathing space while the economy gets back on its feet, but this space could be short-lived.
• The main issue facing China now is not containment but getting its economy back on its feet without triggering a further spread of the contagion.
• Didi Chuxing has an enviable 90% market share in the world’s populous nation and 2^nd largest economy but its depredations on the taxi industry caused the government to rein it in.
• The first step taken by the government was to implement a policy called local cars, local drivers in Beijing and Shanghai.
• This meant that ride-hailing companies could only use drivers who had locally registered vehicles and could prove residence in the city.
• This may not sound like a big deal until one looks at the demographics of the urbanised workforce in China.
• Around 40% of the workforce of both of these cities reside outside of the city and in the younger part of the workforce, that number is much higher.
• For example, prior to the enactment of this regulation, less than 3% of Didi’s Shanghai drivers had the necessary residential registration to qualify as drivers.
• This had the immediate effect of making Didi’s service less reliable meaning that users increasingly sought other forms of transport.
• This problem still persists today as only around 2m of Didi’s 11m drivers appear to have been able to obtain a licence to operate.
• This leaves Didi with enormous regulatory risk as the government can crush 80% of its existing supply with no warning whatsoever.
• It is just a question of when or if the government decides to enforce its policies.
• At the moment the government has bigger issues to deal with and I suspect that it will look the other way and may even relax some of the regulations that have strangled Didi’s growth.
• Comparing Didi to Uber, it very quickly becomes clear how badly Didi has been hampered by the government.
• Didi has 90% market share in a market with 1.3bn people and yet it only has around 16m daily active users which I estimate translates into about 45 MaU.
• Uber, by contrast, reported 111m MaU in Q4 2019 despite the fact its operations are spread across many more markets which together have a lower population than China.
• Furthermore, Uber faces stiff competition in almost all of its markets and Didi, despite a few upstarts, faces virtually none.
• Uber’s market capitalisation is currently $55bn which raises very serious questions with regard to what Didi’s valuation should be.
• This valuation peaked at $56bn when Didi raised $4bn, but I suspect that the current valuation is well below that level.
• This is mainly due to the stranglehold that the state has placed on Didi’s ability to grow.
• The good news that this could be easily alleviated, and in the push to get the economy moving once again, this grip could weaken temporarily.
• However, once the country is back on its feet, I expect that regulatory oversight of Didi will resume.
• The valuation of Didi is a series of trade-offs.
• On the positive side, there is the lack of competition, the deep penetration of digital smartphone services across Chinese society and the gargantuan size of the market that it has all to itself.
• On the negative side is the fact that Didi is still utterly at the mercy of the Chinese state and has already suffered massively at its hands.
• One only has to look at its user base which is around half the size of Uber’s for evidence of this effect.
• Consequently, I think Didi is worth less than Uber; quite a lot less.
• According to the FT, shares are trading hands in the private markets at a valuation of between $30bn – $40bn.
• I could just about get comfortable at the bottom end of this range but given the size of the unquantifiable risk that hangs over this company, I would prefer a bigger cushion.
• Around $25bn is where I would expect to find fair value given the current oversight but betting on the whims of the Chinese state is not what I would call rational investing.