FAW may signal the end of the worst.
- Didi is in real trouble but the addition of a large, state-backed vehicle maker as a shareholder could help the company mend its fences with the state which still remains incentivised to see Didi go out of business.
- Didi’s shareholders have voted to delist the company from NYSE and with no immediate move to Hong Kong on the cards leaves smaller shareholders in limbo.
- However, China FAW Group appears to be considering taking a significant stake in the company which could be a major factor in beginning a turnaround.
- This is because
- First, Government: Didi’s relationship with the Chinese state is at rock bottom.
- Following its refusal to postpone its NYSE IPO following a sudden series of data concerns (spurious in my opinion), the regulator has had Didi in the penalty box and punches it at every opportunity.
- Its app is suspended, and the state has invested vast sums in one of its rivals creating the incentive for the state to force Didi out of business.
- This was recently on show when the regulator flat refused to accept a series of proposed punishments for Didi meaning that its app would stay suspended, and its business would continue to deteriorate.
- China FAW Group is one of China’s biggest carmakers and is majority-owned by the Chinese government.
- Hence, if it were to become a major shareholder, I think that this would represent the best chance for Didi to get back into the regulator’s good books or at least get off the hit list.
- Second, Hong Kong: With no Hong Kong listing, Didi’s shares will be in limbo making life for shareholders and the company difficult.
- FAW as a large state-owned enterprise will add some weight to Didi’s attempts to solve the data security problem that is blocking its ability to relist in Hong Kong as originally planned.
- All Chinese companies who list overseas now have to pass a data security test to ensure no sensitive data is being exported outside of China.
- Given that all of Didi’s servers are in China and its overseas listing is through a variable interest entity, the notion that this would cause data leakage is absurd.
- This is just another way that the regulator can ensure that corporations don’t get too big for their boots (as Jack Ma did) and always remember who really is in charge in China.
- Hence, I suspect that a large state-owned enterprise as important as FAW would be able to offer some help if it were to become a large Didi shareholder.
- This transaction may signal the beginning of a recovery for Didi but there are still way too many unknowns for this to constitute a buying opportunity in my view.
- The shares are down 86% from their IPO price of $14 but a recapitalisation at these levels would be highly dilutive for existing holders.
- Furthermore, there is no guarantee that its troubles are over as there is no way of knowing when its app will be allowed to add new users once again.
- Consequently, I think that the risks are unquantifiable and so I have no interest in bottom fishing this one.
- There are signs that sentiment on Chinese technology is beginning to turn and here Alibaba (which I still hold) looks to have the best risk-reward balance.
- However, I think that the real recovery is when China admits that Covid zero is impossible and starts living with the virus just like everyone else.
- I am hopeful that this may occur in Q3 this year meaning that investors have time to think about Chinese technology before taking the plunge.
