- The leading Chinese ride-hailing vendor, Didi Chuxing, is reportedly planning a 2017 IPO.
- With an absolute dominance in China, an extensive global network, and strong local ties, Didi is the biggest threat to Uber.
- Even with a stretched valuation and significant premium, Didi’s IPO is one to be part of.
The Chinese ride-sharing service Didi Chuxing (formerly Didi Kuaidi) became a globally well-known brand after the significant $1B cash injection from Apple (NSDQ:AAPL) which seeks to increase its footprint in China and the auto industry. Apple has very good reasons to choose Didi for a massive move into the Chinese ride-hailing market. The company was formed by a merger of the Tencent (OTC:TCEHY) Didi Dache and Alibaba (NYSE:BABA) backed Kuaidi Dache to compete with Uber’s penetration into China. Alibaba and Tencent are two of the biggest technology groups in China and control most digital markets in the country. These two giants joined forces to form Didi and quickly initiated a worldwide alliance of non-Uber ride-hailing services that includes the U.S.-based Lyft, India-based Ola, and Southeast Asia-based Grab to pressure Uber in all the main markets.
In a relatively short period, Didi became a significant power in the global ride-hailing industry and offered a real alternative to Uber worldwide. Didi grew rapidly and offered an alternative to Uber as a lucrative investment that attracted leading investment firms like Softbank (OTC:SFTBY), Tiger Global Management, China Investment Corp, CITIC Capital, and more, alongside leading technology companies like Apple, Alibaba, and Tencent. As shown in the chart below, since the merger, Didi has raised $4.6B and reached an amazing valuation of $25B. This is still way below Uber’s whopping valuation of $62.5B; however, taking into consideration that the merged company has been operating only a little more than one year, this is an extraordinary achievement.
In China, Didi dominates the ride-hailing market with almost 90% share, while the Baidu-backed Uber China controls most of the remaining share. Unlike Uber, Didi offers China a comprehensive transportation system that includes ride-hailing/sharing services, hitchhiking services, and buses. Beyond the substantial investment in transportation services, Didi plans to expand its business into technology innovation that could later be adopted by the autonomous cars industry. Innovations like machine learning, data mining, and artificial intelligence are expected to be the primary focus of the company’s R&D center, established earlier this year.
Autonomous cars are projected to gain market share in the upcoming years, allowing tech behemoths like Apple, Google, and Baidu to penetrate the closed and conservative auto industry. The rise of the autonomous cars brings a great demand for new technology, and Didi plans to be one of the vendors for that industry. Didi’s partner, Lyft, will work with General Motors (NYSE:GM) to test self-driving electric taxis in an effort that could be very helpful to Didi’s attempts in this market. Even though Didi Chuxing and Lyft are two different independent companies, the unique relationship between the two will create a mutually beneficial process.
As the hype around the ride-hailing industry reaches its peak, Didi plans to ride that wave, file for IPO to go public in New York as early as 2017 and probably precede Uber on that front. The rationale behind the move is to maximize the potential return and IPO as the market is hot and benefit from a high demand for shares from investors who could not participate in the private funding rounds before. As Uber and Didi (with its extensive worldwide network) seem on par to investors, the first company to go public will benefit the most and collect all the funds that could not have been invested earlier.
As Didi’s revenues are kept confidential, we can only estimate Didi’s annual revenues. Assuming that the company completes 11 million rides every day in China with an average modest ride cost of $5 (price subsidies reduce the average assumed ride cost) brings Didi’s gross annual revenues to $20B. Assuming that Didi keeps only 20% of the gross revenues, it leaves the company with $4B in net revenues a year, which reflects a P/S ratio of 6.25 for Didi compared with an 8.5 ratio for Uber.
Taking into account that Didi could offer its share at a 20% premium, valuation will surge to $30B, and P/S will grow to 7.5—still lower than Uber’s. However, Both Uber and Didi are ultra-growth companies at the peak of the market’s hype. Didi could stretch its IPO valuation to 35 (reflecting an 8.5 P/S ratio) and add a 20% premium that values the company at $42 with a 10.5 P/S ratio assuming the daily rides number remains flat. Even with the stretched P/S ratio, Didi is an attractive investment that could yield an impressive upside in the future as the company expands in China and grows its R&D business. Investors should keep Didi’s IPO on their radar and be alert to any development in this area.
Another way to benefit from Didi’s IPO is a proxy investment in Alibaba, Tencent, or Apple that could react to the Didi IPO before the debut on that particular day; however, after the company goes public, I believe the impact of Didi’s performance will drop because these tech giants have many other businesses that impact their stock prices, and they will probably sell some of their shares with the public on the IPO.