Didi Chuxing – State of play pt. II

Best of a difficult bunch.

• Didi Chuxing has filed its documents to go public which reveals a company with brighter prospects than most of its rivals and a Chinese economy that has fared far better than its Western rivals.
• Didi has filed under the name of its holding company Xiaoju Kuaizhi and the F-1 filing can be found here.
• In 2020 revenues fell by 8.4% to $21.6bn with EBIT coming in at a loss of $2.1bn which is considerably better than Uber which had half as much revenue but lost more than twice as much money.
• Furthermore, in Q1 2021 revenues bounced back by 106% to $6.4bn with losses shrinking very materially to $1.0bn.
• Q1 2020 was the worst quarter for China as its pandemic outbreak occurred well in advance of the rest of the world.
• Hence the right quarter to compare this to in the USA is Q2 2020.
• Here Uber’s revenues fell by 40% but it managed to keep losses flat thanks to the sudden and very rapid shift to food delivery.
• Hence, one would expect a much stronger bounce back when looking back to 2020 but instead Uber is performing in line with Didi rather than ahead.
• I think that this performance is indicative of 2 factors:
  • First, competition. Ride-hailing is usually a bloodbath of cut-throat competition because the barriers to entry are so low.
  • However, in China Didi’s main rival, Uber China, was removed from the market some time ago leaving Didi as the overwhelming market leader.
  • This means that Didi does not really experience the crushing race to the bottom that is experienced by every other market where there is more than one player that has a foothold in the market.
  • Hence, I think in the medium term, the outlook for Didi to make a higher margin on ride-hailing is much better than it is for almost all of the others except perhaps Yandex Taxi.
  • (Uber has also been unceremoniously dumped from the Russian market leaving Yandex Taxi on top (see here)).
  • However, it is worth remembering that there is always outsized political risk in China as the CCP can pretty much do whatever it wants to any company as the Ant Group disaster clearly demonstrated.
  • Second, economy: China’s economy is faring much better than almost all of its rivals.
  • Its draconian lockdown which was rigidly enforced allowed China to contain the SARS-Cov2 virus better than most meaning that it has been able to open its economy much more quickly.
  • The result has been that its manufacturing sector came back online much faster than anywhere else which has translated into a better recovery for Didi than its international peers.
  • I continue to remain more positive on the Chinese economy in the short term while everyone else continues to struggle with flare-ups and new variants.
• Didi is aiming to list in the US at a valuation somewhat above the $65bn at which it raised money in 2018.
• Given that Uber is valued at $93bn, I estimate that Didi will be aiming for something around $100bn.
• Based on Q1 2021 revenues, Didi should generate somewhere between $25bn and $30bn in revenues putting the company on a 2021 EV / Sales of 3-4x.
• Uber is currently on 5.7x while Lyft is in 5.2x meaning that Didi does not look very expensive by comparison although it does carry higher political risk.
• If I take this in conjunction with the much better outlook for profitability in the medium to long-term, I think I would prefer this over all of the others.
• I am far from convinced that I want to own ride-hailing at all in this environment but if I had to have one, I think it would be this one as Yandex Taxi is not available as a pure-play.