Didi – Blood in the water.

Sharks gather to capitalise on Didi’s woes.

• The brutal suspension of Didi’s app has left the door wide open for all of Didi’s previously crushed rivals to emerge and have another go at taking pieces of Didi’s business and its assets (drivers).
• This is far more dangerous than it sounds because in network-based businesses such as these, once dominance has been lost it is very difficult and very expensive to get it back.
• Until last week, Didi had 90% market share of the Chinese ride-hailing market but the other 10% is split between over two hundred other offerings, all of whom are keen to gain market share.
• The fact that the Didi app has been withdrawn from the app stores means that no new users can be added and those that change their phones will have a tricky time getting the app onto their new devices.
• Unsurprisingly, Didi’s previously subdued rivals are all jumping at the chance to get back into the market now that new users, Didi’s existing users, and its drivers will be much easier to convert.
• A number of the local OEMs have reinvigorated their efforts and Didi’s chief rival (now that Uber has been expelled) Meituan has relaunched the ride-hailing platform that it abandoned in 2019.
• The key to this is time.
• Didi has 90% market share and most of its users already have the app meaning that it will take a very long time and a lot of marketing in order to make a real dent in Didi’s position.
• Furthermore, Didi will be defending its position with everything it has as it is in a fight for both its market position and its market capitalisation.
• The ride-hailing platforms are essentially marketplaces where sellers (drivers) and buyers (riders) gather to transact business.
• This means that the economics of this industry are very much winner-takes-all and a fight for dominance in the market.
• RFM’s rule of thumb which was established in 2015 states that to make money a network-based business needs to have 60% market share or be double the size of its nearest competitor.
• This is because a company in this hallowed position then becomes the “go-to” place for the service in question meaning that buyers will pay a little more to transact there and sellers will pay a little more to sell there.
• The platform is the main beneficiary of these price improvements.
• Alibaba is probably the best Chinese example of this effect as its complete dominance of 3^rd part e-commerce has enabled years of very rapid growth at fantastic profitability.
• With Didi now on pause until further notice, the competitive dynamic has substantially shifted in favour of the competition as Didi is unable to compete for new users.
• China is still a growth market for this sector and the longer the regulator keeps Didi pinned down, the more damage it will inflict on Didi’s long-term outlook.
• Prior to this the market was pretty much assuming that Didi would have the Chinese market to itself and was pricing the shares accordingly.
• Now there is no knowing what is going to happen although I think it unlikely that Didi’s share will dip below the all-important 60% threshold simply because of how long it would take to lose 30%+ points of share.
• This means that it is unlikely to lose its dominant position but the longer the blockade continues, the more likely this becomes.
• The net result is that the outlook for Didi in terms of its fair value is now very uncertain.
• At $58bn (12/07/21 close), Didi is trading at a significant discount to Uber, but until there is visibility on where Didi’s share is going to end up in the long term, there is no way to put a bottom on the share price.
• This combined with the growing risk of regulatory oversight directed against the US-listed names makes Didi un-investable in my view.
• The only company I would own in this sphere at the moment is Alibaba where the regulatory threat is known and has been quantified.
• Hence, one can consider its outlook with a reasonable degree of confidence and on that basis, it is a cheap stock with a good growth outlook and effectively has little competition.
• The biggest risk is that Alibaba closes its US-listing and shifts everything to Hong Kong.
• This would most likely trigger some US and international funds to sell their positions but there could be some mechanism whereby US shares are swapped for Hong Kong shares which would minimise the technical disruption.
• Either way, should this risk occur, I think it would be short-term in nature and would probably increase the opportunity in the shares for those that don’t hold them or for others to average down.
• This is why I hold the Hong Kong listing and I am not selling my position.