This article is authorized to be reproduced from Chuxingyike (WeChat ID: carcaijing) and created by the transportation industry group of Caijing Magazine. The authors are Yang Xiuhong and Qu Maomao, and the editors are Lu Ling and Shi Zhiliang.
Currently, Didi’s market valuation is over $70 billion. According to previous market expectations, if Didi raises $10 billion this time, it will be the largest IPO in the US by a Chinese company since Alibaba raised $25 billion in 2014.
Another unicorn company from China is expected to be listed in the US.
On Thursday, June 10, Beijing time, Chinese ride-hailing company Didi officially submitted its IPO filing to the US Securities and Exchange Commission (SEC). The company plans to be listed on the New York Stock Exchange or Nasdaq with the stock code “DIDI,” and its underwriters are Goldman Sachs, Morgan Stanley, JPMorgan Chase and CICC.
According to the prospectus, Didi’s annual revenue has exceeded 100 billion yuan. In the latest prospectus submitted by the company, a major focus of attention is that Didi’s management team holds more than 50% of voting rights and that SoftBank, one of its shareholders, will withdraw from the board of directors.
Why would SoftBank choose to withdraw from Didi’s board? “There is unlikely to be any internal shareholder conflict behind this. It may be the result of negotiation between the two parties,” said Zhang Xiaorong, Dean of the Institute of Deep Technology, in an interview with Caijing.
Another major focus of attention in the prospectus is Didi’s current business situation. From the perspective of the company’s fundraising use and business layout, the company plans to focus on developing overseas markets and enhancing technology with the funds raised, while also laying out in the fields of autonomous driving and electric vehicles to reduce the overall operating costs of vehicles.
Currently, Didi’s market valuation is over $70 billion. According to previous market expectations, if Didi raises $10 billion this time, it will be the largest IPO in the US by a Chinese company since Alibaba raised $25 billion in 2014.
Management team has over 50% of voting rights, valuation may exceed $70 billion
There have been many rumors in the market about Didi’s planned IPO financing, and on June 11, the first day of trading, Didi officially submitted its IPO prospectus to the SEC.
According to the prospectus, Didi’s annual revenue exceeds 100 billion yuan. The company’s revenue for 2018, 2019, and 2020 was 135.3 billion yuan, 154.8 billion yuan, and 141.7 billion yuan, respectively. As of March 31, 2021, the company’s revenue for the first quarter of this year was 42.2 billion yuan.Currently, Didi’s business mainly includes three parts: Chinese mobility, international mobility, and other businesses. Chinese mobility includes ride-hailing, taxi, chauffeur, and Hitch services, while international mobility includes overseas ride-hailing and food delivery services. Other businesses include bike-sharing and e-bike sharing, auto-related services, freight, autonomous driving, and financial services.
Chinese mobility accounts for more than 90% of Didi’s total revenue. In 2020, the revenue for Chinese mobility, international mobility, and other businesses were CNY 133.6 billion, CNY 2.3 billion, and CNY 5.8 billion, respectively.
In terms of profitability, the overall platform still had a loss in the first quarter due to overseas and other businesses. However, Didi’s largest business, Chinese mobility, has been profitable since 2019, with an adjusted EBIT of CNY 3.84 billion in 2019, CNY 3.96 billion in 2020, and CNY 3.62 billion in the first quarter of 2021.
“Although the competition is intense, we became the world’s largest mobility platform in early 2018, serving over 20 million trips a day,” said Didi’s founder Cheng Wei in the company’s prospectus.
As of March 2021, Didi operates in over 4,000 cities and towns in 15 countries, providing services such as ride-hailing, taxi, Hitch, bike-sharing, e-bike sharing, chauffeur, auto-related services, freight, financial, and autonomous driving.
In the 12 months ending March 31, 2021, Didi had 493 million annual active users and 15 million annual active drivers globally. During the same period, Didi had 377 million annual active users and 13 million annual active drivers in China.
Didi also disclosed the shareholding information of its executives and directors in its prospectus, with the management holding more than 50% of the voting rights.
According to the prospectus, Didi’s CEO Cheng Wei holds a 7.0% stake, while Didi’s co-founder and President Jean Liu holds a 1.7% stake.
Unlike their lower shareholding ratios, the management has much higher voting rights. Under the usual arrangement for Chinese ADRs, Cheng Wei and Jean Liu together hold over 48% of the voting rights, and the management team, including them, holds over 50% of the voting rights.
It is noted that several Chinese internet companies, including JD.com, Xiaomi, and Pinduoduo, have adopted a dual-class share structure, and their founders, such as Liu Qiangdong, Lei Jun, and Huang Zheng, have more voting rights through such structure while holding fewer shares.Currently, many internet companies adopt the same stock with different voting rights structure. “For the company,” Zhang Xiaorong told reporters at Caixin, “the benefits of this structure are twofold: first, it can maintain control of the founding team over the company, improving decision-making efficiency; second, it can finance as much as possible, which helps the company grow quickly.”
He further explained that in the traditional equity structure, if the company’s shareholders want to ensure control, they must hold at least 51% of the shares, which means that only 49% of the shares can be used for financing. However, in the same stock with different voting rights structure, company management can give up more shares for financing while still maintaining control.
Looking at the major shareholders of the company with currently high ownership, there are SoftBank, Uber, and Tencent. SoftBank’s Vision Fund holds more than 242 million ordinary shares, accounting for 21.5%; Uber holds nearly 144 million ordinary shares, accounting for 12.8%; and Tencent holds more than 77 million ordinary shares, accounting for 6.8%.
However, as the largest shareholder of Didi, SoftBank will exit the board of directors. The company revealed in its prospectus that SoftBank-appointed director Kentaro Matsui will resign from the board of directors when Didi goes public, meaning that SoftBank will exit the company’s board of directors after its IPO.
It was learned from Caixin that SoftBank participated in two rounds of investment in May 2017 and December 2017.
What is the valuation of Didi, whose revenue exceeded 100 billion? According to a report in the Wall Street Journal on June 10th, Didi’s valuation could exceed 70 billion U.S. dollars, and this valuation may be even higher as investors’ appetite for newly listed high-growth companies grows. Bloomberg previously reported that Didi’s market value had already reached 95 billion U.S. dollars in the private markets.
As for the possible listing process, insiders from the investment banks also pointed out that this needs to be judged according to the company’s own situation and it is difficult to estimate at present.
The profit margin of online car-hailing is only 3.1% and more profitable sectors need to be expanded.
Concerning travel, Didi is constantly expanding its business boundaries.
In its prospectus, Didi summarizes its established business forms into “three major businesses,” “four core strategic segments,” and “double flywheels.” The three represent Didi’s current main revenue composition, future strategic planning, and focus on business models, respectively.
“Three major businesses” refers to China’s travel services, international business, and other businesses. China’s travel services and international business have an average annual compound growth rate of 36% from 2018 to 2020, showing a gradual growth trend.
The development of the “three major businesses” has made Didi a leading company in the online car-hailing industry. The “four core strategic segments” defined by Didi indicate Didi’s business layout for new travel in the future.The “Four Core Strategic Segments” include the shared mobility platform, the vehicle service network, electric vehicles, and autonomous driving. “New travel modes are expected to significantly increase the already huge mobile market opportunities.” According to the prospectus, in 2020, the global travel market size was 6.7 trillion US dollars, but the global penetration rates of shared mobility and electric vehicles were only 2% and 1%, respectively. According to CICC’s estimation, the global travel market will reach 16.4 trillion US dollars by 2040, and the penetration rates of shared mobility and electric vehicles will increase to 23.6% and 29.3%, respectively.
According to the prospectus, in 2020, the pre-tax profit margin of China’s online ride-hailing business was only 3.1%, with thin profits. Didi hopes to expand more profitable segments while consolidating its existing online ride-hailing business.
“The operating costs, driver subsidies, and initial investments of online ride-hailing services are relatively high. The domestic market is already saturated, and new competitors keep emerging. Didi needs to find new sources of profit.” An industry insider in the travel sector told reporters of “Caijing”. However, it is difficult for new businesses such as autonomous driving to generate quick profits, so Didi still needs to rely on the online ride-hailing market.
From the use of funds in this prospectus, we can also see the direction of Didi’s business layout. Didi plans to use 30% of the raised funds to expand its international market business and 30% to enhance the technology of shared mobility, electric vehicles and autonomous driving. Approximately 20% is for the promotion and expansion of new products to improve the user experience, and the remaining may be used for operational capital requirements and potential strategic investments.
It is worth noting that autonomous driving is becoming an important part of Didi’s business strategies. Within Didi, autonomous driving has also become a business focus. Currently, Didi’s autonomous driving team has a scale of more than 500 people, covering all technical systems such as perception, prediction, planning, control, and high-precision maps.
During the 2019 World Artificial Intelligence Conference, Didi’s autonomous driving CEO Zhang Bo stated that to achieve technological landing, autonomous driving must collect the support of shared mobility networks, driverless technology, automakers and Tier1 (first-tier suppliers in the automotive industry) as well as sufficient capital support – the “Four Aces”. In May of this year, Didi and GAC Aion jointly developed a new energy autonomous driving vehicle that can be put into large-scale application, completing the layout of autonomous driving technology and considered to have collected the “Four Aces”.
Compared with autonomous driving companies such as Pony.ai and Baidu Apollo, Didi’s advantage is to use its existing online ride-hailing network to achieve mixed dispatch and help promote autonomous driving technology to commercialization as soon as possible. At the same time, the operational experience and real data accumulated by Didi in the online ride-hailing scenario also play a key role in improving autonomous driving technology and solving long tail technical problems.Currently, Didi’s autonomous driving business is still in the “blood transfusion” phase, and the commercialization of autonomous driving still needs time. Therefore, Didi’s autonomous driving has also undergone multiple rounds of financing. In the prospectus, Didi disclosed the A-round financing of autonomous driving that has been completed. Softbank and joint investors including Didi invested $525 million in Didi’s autonomous driving. After the A-round financing was completed, the valuation of Didi’s autonomous driving reached US$3.4 billion. Overall, Didi still holds a 70.4% stake in the autonomous driving company and still has absolute autonomy.
Didi is also expanding its electric vehicle business. Data shows that as of December 31, 2020, over 1 million electric vehicles, including new energy vehicles and hybrid vehicles, were registered on Didi’s platform. During the same period, electric vehicles providing shared mobility services on the Didi platform accounted for about 38% of China’s total electric vehicle mileage. In the technology company’s car-making boom, Didi teamed up with BYD to create the D1 in November 2020, and even spread rumors of its involvement in car-making. Didi cooperated with GAC to create a fully unmanned new energy vehicle model, which was another customized joint venture after the launch of the D1.
Once these new businesses are developed on a large scale, they will also reduce the operating costs of Didi’s ride-hailing network. Didi believes that the operating cost of electric vehicles is lower, and as the scale expands, the operation of electric vehicles will offset the higher upfront costs compared to internal combustion engines. Autonomous driving technology can reshape the cost structure of mobility, which will significantly reduce the overall operating costs of vehicles.
Didi’s expansion is still accelerating. In addition to individuals and transportation tools, Didi has also extended its tentacles to daily life needs. Concentrating on community group buying and investing heavily, Chengxin Youxuan is one of the new businesses that Didi has fostered. However, it has been split off at the end of March 2021 and is no longer included in the consolidated financial statements. Didi’s freight business, shared bicycles, and electric bikes have already undergone split and multiple rounds of financing before going public on Didi, and by introducing external capital, they have cultivated the development of many new businesses.
“The core gene of Didi is travel, and now it is more like a comprehensive travel operation group.” Industry insiders in the travel field mentioned that there are not many links between many of Didi’s businesses. By splitting them into independent sections, it is easier to attract external capital, and these sections can go public separately in the future, providing more room for imagination.
This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.