Didi is vying for China’s worst US IPO this year as the besieged ride hailing company’s stock has lost more than half its value.
Compared to the market open price on the day of its IPO, Didi has crashed as much as 52.1% on Friday. The company’s IPO listing price was $14, but the stock opened at $16.65 on its first day of trading. It now sits around $8, having fallen 31% this week alone.
That was the second-worst US listing for a Chinese company so far this year, of which there have been 37, according to Bloomberg. Didi edged out Full Truck Alliance, the so-called Uber for trucks that went public a week before Didi, which has lost 50.5% since its market open.
Both companies have been casualties of China’s rapidly enveloping cybersecurity probe. They have been barred from registering new users as the cyber ministry digs into alleged data-privacy risks for Chinese users.
Still, Didi has been spared the title of worst IPO this year by RLX Technology, a vaping company that has been buffeted by planned regulations to rein in China’s exploding e-cigarette usage. RLX has collapsed nearly 78% and is trading at less than $5 after debuting at $22 in February and peaking at $30.
Didi was trading at $8.04 as of 1:54 p.m. ET, down 21.2% so far on Friday.
Investment banks are scrambling to divert Chinese IPOs away from the US market and into Hong Kong as the government’s crackdown on foreign listings spreads, according to a Financial Times report.
Regulators’ harsh response to China’s last major foreign IPO, that of Didi Chuxing, has forced the 20 or so Chinese companies that had plans to go public in New York to re-evaluate.
Bankers who spoke with the FT said clients are exploring moving listings to Hong Kong but are also wary of the hurdles. Hong Kong-specific regulatory requirements and the inherent uncertainty of going first were among the leading concerns.
“We’re speaking to everyone about it,” one Hong Kong-based investment banker told the FT. “If you want to do a deal this year, at best you’ll be delayed until 2022 and at worst you won’t be able to do it.”
The move toward Hong Kong is an abrupt shift for corporate China. 34 Chinese firms raised $12.4 billion in New York capital markets in the first half of this year, according to Dealogic data previously reported by the FT.
In the wake of Didi’s NYSE debut, China’s cybersecurity ministry alleged the company had violated privacy laws and launched an investigation into its data practices. The action took Didi’s stock price down sharply the day of the announcement.
Data-oriented companies have been most eager to plan for Hong Kong listings, in large part because the mainland government’s crackdown has centered around data privacy. Moving to Hong Kong could abate some of that scrutiny, two bankers told the FT.
The KraneShares CSI China Internet ETF, worth some $5 billion, saw two days of record inflows this week, according to a new Bloomberg report. This week, more than $631 million has come into the fund, even as others worry China’s regulatory crackdown on ride-hail firm Didi Chuxing could presage future troubles for Chinese tech companies.
“Maybe Cathie Wood’s getting out was the final [contrarian] sentiment indicator those investors needed,” Susquehanna’s Chris Murphy told Bloomberg.
One reason could be that pessimism about China’s regulatory environment is already priced into the country’s tech stocks. All the while, investors have dove headfirst into US tech, leading certain investors to fret that they are overvalued.
“Right now, the momentum-chasing trade has been in the large-cap U.S. tech names. But if it shifts to China tech, watch out,” said Murphy.
The KraneShares ETF’s number one holding, Tencent, has taken a beating recently, falling over 16% in the past six months. Likewise for Alibaba, its number two, down 15% over the same period.
Wood’s Disruptive Innovation ETF has sold one million shares of Tencent since February.
On Tuesday, Wood told investors, “From a valuation point of view, these stocks have come down and again from a valuation point of view, probably will remain down.”
“I do think there’s a valuation reset,” she added.
Shares of Didi dropped Friday after reports that police in China went to the offices of the ride-hailing company as part of a cybersecurity review that was launched just after Didi raised $4.4 billion in an initial public offering in New York.
A task force of seven ministries including the national security and public security ministries and the Cyberspace Administration of China entered Didi’s offices on Friday to conduct what is China’s first cybersecurity review, according to the South China Morning Post.
NYSE-listed shares of Didi fell 3% during the regular session after losing as much as 8.6% in premarket trade.
The on-site visit is part of what Chinese officials have said are efforts to prevent national data security risks and to maintain national security. The Cyberspace Administration of China, the country’s internet regulator, last week ordered online stores to pull Didi’s apps after determining the apps used data that was collected illegally by Didi.
Didi said two weeks ago when the probe was launched that it would cooperate. The review triggered a selloff, and the stock through Thursday had dropped by more than 12% since its June 30 IPO. Didi was worth as much as $68 billion following its trading debut, making it one of the biggest IPOs in the US in the last 10 years.
It was only a matter of time before Beijing’s heightened nationalism came to Wall Street.
This week, Chinese authorities punished Didi, a ride sharing company, for its June 30 public debut on the New York Stock Exchange. Shortly after the Didi crackdown, Beijing announced new measures that could restrict Chinese companies going public abroad.
What all this is telling us is that Beijing is no longer going to tolerate its tech stars making foreigners rich on foreign exchanges. And it is further evidence that China is closing its society and economy to the West.
Bring it all back home
In order to more freely list on foreign stock exchanges, Chinese companies create something called a “variable interest entity.” In such an arrangement, a Chinese company creates another company in a tax haven like the Cayman Islands where foreigners can invest. The Chinese company then signs an agreement that gives control and profits to the Cayman entity, from which money is distributed to shareholders and the company back in China. For years, Beijing generally looked the other way when it came to VIEs.
Now, according to Bloomberg, Beijing’s new regulations are designed to limit the ability of Chinese companies to set up these entities. The proposed rules would govern what data can and can’t be shared abroad, target “illegal securities activities,” and set up extra-national laws Chinese companies would have to follow regardless of where they are listed.
Didi shares are down around 20% since it’s IPO, in part because Beijing announced these measures, and in part because it has become a target for authorities at home. On July 2, the Cyberspace Administration of China announced it was investigating Didi. Two days later China’s app stores were ordered to stop allowing users to download Didi. The CAC claims that Didi was illegally collecting user data.
And perhaps that’s true. But it’s also likely that this is a signal that “wolf warrior” aggression – a kind of Chinese diplomacy named after a hyper-nationalistic film- has come to financial markets. Two other Chinese tech companies listed in the US – Kanzhun and Full Truck Alliance – also had their downloads halted by Chinese regulators. The almost 250 Chinese companies worth $2 trillion in market cap listed on major US exchanges should all be watching their backs.
China is closing
There are two main reasons for this seemingly sudden crackdown – one is China’s increasing antagonism with the West, and the other is the Chinese Communist Party’s own desire for power and self-preservation. Together they amount to the reality that China is once again closing its doors to the world, reversing the opening that began in the 1970s.
As part of a larger crackdown on civil society, the Chinese Communist Party has been tightening its control over any sources of power that might challenge it at home. That includes tech billionaires like Alibaba founder Jack Ma, who has recently been publicly brought to heel by Beijing. And it includes tech companies, like Tencent and Pinduoduo, another e-commerce giant.
Targeting tech companies that list abroad also puts pressure on Chinese companies to consider an IPO to list in Shanghai or Hong Kong instead. It is no secret that China’s encroachment into Hong Kong prompted an exodus of financial firms from the city. Making it the new landing place for Chinese tech companies to go public could help it maintain its status as a global financial center.
It is also no secret that the US and China are at risk of what some call “decoupling”– essentially breaking ties and creating a world with separate US or China-centric technologies and financial centers. In some ways, because the two powers have become so antagonistic, this is already happening. Domestically, Beijing has been investing in technological advancements with the hopes making the country a techno-superpower by 2025. Now it’s calling its companies home.
What’s doubly important is that none of the above is primarily about making China rich. It’s all about hoarding power for the CCP. Under President Xi Jiinping that has become Beijing’s motivation above all else, and we should all expect it to act accordingly – even when it means hurting its own domestic companies.
A chilling effect
Last year Congress passed the Holding Foreign Companies Accountable Act, which requires foreign companies listed on US stock exchanges to be audited by the Public Company Accounting Oversight Board’s. If they refuse for three years in a row they can be delisted. Last month, the Senate passed a law that would shorten the time frame to two years in a row.
The problem with this is that so far, Chinese regulators will have absolutely none of it.
This is a stare down. If Chinese companies listed here in the US do not comply they will be delisted. If they do comply Beijing could come down hard on these companies at home. In the meantime recriminations are flying. GOP Sen. Marco Rubio of Florida called the Didi IPO “reckless and irresponsible” weeks before Beijing clamped down on the company, arguing that Didi is a black box.
Rubio and Democratic Sen. Senator Bob Casey of Pennsylvania introduced a bill in May that would prohibit companies from going public on US exchanges if they do not comply with US regulators and submit to an audit from the Public Company Accounting Oversight Board.
All of this pressure from Beijing and Washington will, without a doubt, have a chilling effect on Chinese companies listing here in the United States. So yes, this is another form of decoupling – and it’s coming from both sides of the Pacific.
Shares in Didi Chuxing rose more than 7% on Friday days after a surprise probe by China’s cybersecurity regulator sent the stock tumbling.
The stock closed at $12.03, up 7.3% on the day.
The company’s US debut on June 30 saw shares peak as high as $18. But the weekend announcement from authorities that Didi had violated Chinese privacy laws crashed the stock as soon as markets opened. It bottomed out at $11 before regaining some lost ground.
But the bad news hasn’t let up for Didi. Chinese regulators on Friday moved to shutter dozens of apps run by Didi, as well as cracking down on third-party websites giving access to its services. The company’s main app had been removed over the weekend as the cybersecurity review was launched.
Some members of Congress have blasted China’s Didi move, calling for an SEC investigation into whether American investors were misled. Didi raised $4.4 billion in its IPO.
“When did Didi know that it was exposed to regulatory risk? And even if Didi didn’t know for certain at the time of the IPO that its app would be banned, why didn’t it disclose that risk in its prospectus?” former SEC commissioner Joseph Grundfest told the Financial Times.
Sen. Marco Rubio slammed the “reckless and irresponsible” decision to allow Chinese ride-hailing app maker Didi to list its shares on the New York Stock Exchange, speaking in a statement reported by the Financial Times Wednesday.
Rubio, one of the US government’s most vocal China critics, described Didi as an “unaccountable Chinese company,” and said Beijing’s regulatory crackdown on the tech provider, which sent the stock lower, highlights the risks for US investors.
Didi’s share price plunged more than 19% on Tuesday, after Chinese authorities at the weekend ordered app stores to remove its app from their platforms. The country’s internet regulator earlier launched a review of its data security, and ordered it to stop registering new users.
“Even if the stock rebounds, American investors still have no insight into the company’s financial strength because the Chinese Communist party blocks US regulators from reviewing the books,” Rubio told the FT. “That puts the investments of American retirees at risk and funnels desperately needed US dollars into Beijing.”
The type of business structure used by Didi “deprives foreign investors of vital legal protections they would otherwise enjoy through equity ownership,” the Council of Institutional Investors said in a 2017 paper.
The Republican senator’s comments suggest that Didi’s IPO saga could fuel new efforts by US lawmakers to place tougher hurdles in the way of Chinese companies seeking listings in the US.
The “Holding Foreign Companies Accountable Act” applies to companies from any country, but the sponsors of the law are seen as targeting it at Chinese companies listed in the US, such as Jack Ma’s Alibaba, tech firm Pinduoduo, and oil giant PetroChina.
Didi’s stock was last trading 4% lower in the pre-market session on Wednesday around 6.30 a.m. ET at $11.97 per share.
The Cyberspace Administration of China said Sunday on its website that the investigation found the Didi app “has serious violations of laws and regulations” in both collecting and using personal information. App stores were notified to remove Didi and “strictly follow the legal requirements.” The statement did not say what kind of information was allegedly being unlawfully collected or used.
Didi said in a statement posted on Weibo that it would comply and make necessary changes. Registration of new users has been suspended and the app “will be removed from the shelves for rectification in strict accordance with the requirements of the relevant departments,” the statement said.
Users who have downloaded the Didi App can use it normally, and passengers’ travel and driver’s orders will not be affected, the statement said.
Didi is the second-largest ride-hailing app by market value in the world with a valuation of about $86 billion. Uber currently has a valuation of about $93 billion, while Lyft trades at a $20 billion valuation.
Shares of Didi soared as much as 28% in its IPO debut in New York on Wednesday. The company’s debut was the second-largest among Chinese companies after e-commerce giant Alibaba’s initial public offering in 2014.
Didi sports a number of high-profile investors, including Apple, which invested $1 billion in the ride-hailing company in 2016. Meanwhile, the SoftBank Vision Fund holds a 21.5% stake in Didi, while Uber and Tencent own a 12.8% and 6.8% stake in the company, respectively, according to Bloomberg.
The bank argued that Uber’s 2016 investment in Didi is now worth almost $10 billion. Uber owns about 12% of Didi, which touched a valuation of nearly $80 billion in its first day of trading on Wednesday. Uber had most recently pegged the value of its Didi stake at $5.9 billion, meaning there is upside to Uber’s assigned asset value that could help boost the stock price.
“Based on 1.9 billion shares outstanding for Uber, we estimate that translates to an incremental ~$2 per share in equity value for Uber,” BofA explained.
The bank rates Uber at a “Buy” and has a $71 price target, representing potential upside of 40% from Thursday’s close. And there’s even further room higher based on a sum-of-the-parts valuation, in which the BofA assigns a $90 per share value for Uber. A move to $90 would represent potential upside of 78%.
Despite BofA’s bullish outlook for Uber, the stock has considerably underperformed its peers like Lyft and DoorDash year-to-date. Shares of Uber are down 1% year-to-date, while Lyft and DoorDash are up about 27% and 26%, respectively.
The bank highlighted four overhangs the stock is currently facing, including a large seller of Uber stock in June that may have impacted supply and demand dynamics, Uber’s guidance suggesting bigger driver incentives, Uber’s international exposure, and a larger-than-expected UK driver settlement amount.
“While it’s hard to say if any one of these issues is the core drive for Uber’s relative underperformance, we reiterate our Buy rating as we think some of the overhang could clear in 3Q with further reopening and vaccination progress,” BofA said.
The bank expects Uber to reach breakeven profitability by the end of the year.
Chinese ride-hailing company Didi has already become a retail-trader favorite in its first day on the public markets, Bloomberg first reported.
According to data from Fidelity, Didi shares ranked number one among retail traders Wednesday, while Exela Technologies, which has seen heightened interest from Reddit investors this week, was second, and well-known meme-stock AMC Entertainment was third.
Didi had more than 32,000 buy orders as of 3:15 p.m. in New York, compared to Exela and AMC, which each had about a third of that, the data showed.
Didi’s debut is the second largest among Chinese companies, after e-commerce giant Alibaba’s initial public offering in 2014. The shares soared as much as 28% in their first day of trading, giving Didi an approximate $86 billion valuation, Markets Insider reported.
The valuation makes Didi the second largest ride-hailing app in the world after Uber, which is valued at $93 billion.
Rumors about a potential IPO spread for several years before the company eventually filed its prospectus earlier this month, Fortune reported. Among Didi’s largest shareholders are investment firm SoftBank, which has a 21.5% stake, Uber, which has a 12.8% stake, and Tencent, which has a 6.8% stake, Fortune said.