DiDi (NYSE:DIDI), China’s market leading ride-sharing app, saw a well received initial public offering (IPO) on the New York Stock Exchange a week ago. But it is already in trouble.
DiDi in trouble
Chinese regulators have clamped down on the company saying that it has illegally collected user data. It has been asked to stop signing up new users. App stores have been asked to remove the app as well. Its shares plunged more than 11% from the offer price on the news.
These measures do not affect either its existing users or its international market, but I would not take the probe lightly. Late last year, the Chinese digital payments platform Ant Group also ran into regulatory troubles with Chinese authorities right before its massive dual listing on the Hong Kong and New York exchanges. Following this, its IPO was suspended. It could go public by later this year, but only after a fair bit of work, as well as with reduced valuations.
DiDi’s case is slightly different in that it is already listed. But an ongoing probe can keep its share price see-sawing.
US-China friction still exists
Also, I would stay aware of the fact that this is happening with US-China friction in the backdrop. This is easy to overlook right now, with all the focus on the pandemic. But it is still very much in play.
Recently, the US authorities put new regulations in place according to which companies have to comply with the country’s auditing standards. Failing to do so can get them delisted. US companies in China have felt the heat too. Electric vehicle darling Tesla, for instance, came under the scanner in China recently on security concerns regarding cameras in its cars.
DiDi is a Chinese company listed in the US, which is already under Chinese regulatory scrutiny. With ongoing stresses between the US and China, I think potential regulatory risks are even higher for it.
Promising market
These risks make the stock far less attractive than it would be otherwise. It provides an important and convenient service, whose popularity will only increase overtime as internet usage on mobile phones becomes even more ubiquitous than it already is.
Its revenue growth has been inconsistent, but then we only have two years’ growth numbers. And one of these was 2020, the year of the pandemic. DiDi is also loss-making for all the full years for which data is available, though that is often the case with companies in growing markets.
What I would do
If I buy the stock, it is based on potential and not actuality. It would be nice if I had a few years of solid sales growth data, at least. Added to this are massive regulatory risks.
I would like to get behind DiDi, but I think it is too early to do so. Especially now, when the probe is likely to throw its share price into a funk. At the very least, I would wait for an update on performance before making an assessment on whether my potential rewards outweigh the risks.
