Didi – Desperate times pt. III

Didi is a classic value trap

• Didi is undoubtedly one of the cheapest technology companies currently available for investment, but the prospect of being unlisted and untradeable as well as the Chinese state’s apparent war on the company adds too much risk in my opinion.
• Didi’s short history as a public company is a tale of woe from listing on June 30^th 2021 at $14 per share to losing 87% of its value ending up at $1.85 in after-hours trading on Tuesday 3^rd May 2022.
• This began with Didi having a “Jack Ma” moment when it pressed ahead with its IPO despite the last-minute objection of the Chinese regulator with what I think was a spurious concern about data security.
• Its refusal to comply incensed the Chinese regulator which suspended its app from Chinese app stores thereby killing its growth and ceding its opportunity to others (see here).
• Furthermore, the state has also invested $591m in one of its competitors (CaoCao Mobility) and hence is incentivised to see Didi go out of business.
• The pandemic has done Didi a big favour by putting a brake on the expansion of the market meaning that if it can sort itself out before Chinese lockdowns are lifted, it might have a chance of recovery.
• The big question is whether Didi is a bet worth making as even if it returns to half of its IPO price, the return being offered from here is 278%.
• I typically like companies where the share price has cratered for reasons other than fundamentals because this is a much simpler investment case to make as fundamentals will eventually reassert their control over the share price.
• This is not the case with Didi as the roof has fallen in on the company since it went public and now a judgement needs to be made as to whether the fundamentals are being correctly priced or not.
• As of December 31^st 2021, Didi has net cash of $5.5bn and a market capitalisation of $8.9bn (3^rd May 2022, after hours) meaning that its current enterprise value is $3.4bn.
• In Q4 2021, the company reported a revenue decline of 13% YoY which is almost certain to accelerate in 2022 thanks to the lockdowns that are currently sweeping China.
• During 2021 Didi lost $2.1bn in cash from operations but only $162m of which was lost during Q4 2021.
• This implies that Didi is managing the business for cash while it sits and waits for the regulator to publish the results of its investigation.
• At this rate, Didi can hang on for a long time as its gross cash balance is currently $6.8bn.
• However, it could be a long wait as the regulator has once again delayed its findings adding weight to my view that the state would rather see Didi go out of business and other competitors take its place (see here).
• Consensus has revenue in 2022 at a fairly optimistic $27.2bn virtually unchanged in 2021 which puts Didi on 0.1x 2022 EV / Sales.
• This is spectacularly cheap when compared to Uber which is on 2.4x 2022 EV / Revenues and Lyft which is on 2.2x 2022 EV / Revenues.
• If Didi was allowed to operate normally, this would be a no brainer, but the state is showing no sign of taking its boot off Didi’s throat.
• Furthermore, the shares are likely soon to be homeless with a delisting from the NYSE and an inability to list in Hong Kong.
• This will leave investors only being able to trade in the illiquid and opaque over the counter (OTC) market and there will be no requirement for Didi to report its figures publicly leaving investors completely in the dark.
• Buying now probably means having to sit on the shares for many years and many large investors have a requirement for a minimum amount of liquidity.
• Hence, I can’t see any big buyers coming in to buy the shares of this one meaning that there is unlikely to be a big rally before it delists.
• The assets offer spectacular value today, but I think that the state has decided to make an example of Didi, meaning that its long-term market share may end up being far below where it is today.
• Consequently, I think that the risk of precipitous revenue declines is high and, on reflection, the risk/reward balance is tilted too far towards risk to make this attractive.
• This is why I continue to steer clear of this despite the valuation measures being so favourable.