Didi yields to valuation qualms

IFR Asia 1193 - 26 Jun 2021 - 02 Jul 2021
4 min read
Americas, Asia
Fiona Lau

Chinese ride-hailing giant Didi Global has opened books for a smaller-than-expected US$4bn NYSE IPO, which could still be the biggest in the US this year, after investors pushed back on valuation.

The sale of 288m primary ADSs, or about 6% of the enlarged capital, is being marketed at US$13–$14 per share for a US$62.4bn–$67bn valuation.

This is slightly above the US$62bn valuation Didi achieved in a US$4.8bn private round in 2018, but below bankers' recent expectations.

Bankers close to the deal had said the float could raise up to US$10bn at a US$80bn–$100bn valuation, depending on market conditions.

During the two weeks of pre-marketing, Didi had been pushing for an US$80bn valuation but investors showed strong resistance and think US$60bn–$70bn is a fairer level, said people with knowledge of the matter.

“Didi is no doubt a good company but we are concerned whether it can sustain its high growth rate with increasing competition from big rivals such as Meituan,” said a Hong Kong-based fund manager.

Didi had revenue of Rmb141.7bn (US$22.2bn) in 2020, down 8.5% from 2019 due to the impact of the Covid-19 pandemic. Its loss was Rmb10.6bn, compared with Rmb9.7bn a year earlier.

With businesses reopening in China, Didi’s revenue reached Rmb42.2bn in the first quarter, more than doubling from Rmb20.5bn a year earlier. It also turned profitable in the first quarter with a Rmb5.5bn profit, compared with a Rmb4bn loss.

“China’s crackdown on big techs with its anti-monopoly campaign may also affect Didi’s future growth. The company needs to offer a reasonable valuation to factor in this potential risk,” said the fund manager.

According to Didi’s IPO filing, the State Administration for Market Regulation and the Cyberspace Administration and the State Administration of Taxation held a meeting in April with more than 30 major internet companies in China, including Didi.

The companies were told to conduct a self-inspection to identify and correct possible violations of anti-monopoly, competition and tax laws and regulations.

Didi said it completed the self-inspection and relevant authorities conducted onsite inspections, but it cannot be sure they will be satisfied with the results or that it will not be subject to a penalty.

Good demand

The Didi deal was quickly covered a few hours after launch on Friday. Bankers on the deal expect the offering to generate hot demand, fuelled by the competitive valuation, small float and indications of support by big investors.

Morgan Stanley Investment Management has indicated interest for up to US$750m of the deal and Temasek Holdings US$500m.

Didi's aftermarket performance will set the tone for the long line of Chinese companies looking to list in the US this year, especially after the disappointing debut of Chinese freight-as-a-service provider Full Truck Alliance. Twenty-nine Chinese companies have raised a combined US$7.6bn so far this year, four times the US$1.9bn raised over the same period in 2020, according to Refinitiv data.

Full Truck Alliance's shares closed up 13% at US$21.50 on their first day of trading on the NYSE on Tuesday, after the company raised US$1.57bn from its IPO priced at US$19. “Full Truck Alliance was up but not as much as expected. We need Didi to trade well,” said an ECM banker.

Didi, which operates in nearly 4,000 cities across 15 countries, provided services to over 493 million annual active users and powered 41 million average daily transactions for the 12 months ended March 31.

SoftBank, through its Vision Equity fund, is the company’s largest shareholder with a 21.5% stake, followed by Uber Technologies and Tencent on 12.8% and 6.8%. Didi chairman and CEO Will Wei Cheng owns a 7% stake.

The deal will price on June 29 after the US market closes.

Goldman Sachs, Morgan Stanley and JP Morgan are leading the transaction with Bank of America, Barclays, China Renaissance, Citigroup, HSBC and UBS.