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Now that China’s snit fit over Didi Global has–for the moment–died down, it is time to assess whether Didi will recover and become an attractive growth stock. After all, Alibaba was also subjected to a regulatory attack in China shortly after it listed, and that did not stop gains of 212% since IPO. Why should that not be true of Didi?
Taxi in Beijing
PHOTO BY Unsplash (UNSPLASH.COM/@CSQXIV)
Briefly, the two are fundamentally different beasts. Didi is a taxi company that has decided to call itself a “mobility technology platform.” Alibaba is essentially a merchant bank. Alibaba has become the premier financier for the private sector and as such, has enjoyed extremely accommodative policy, especially since the 2009 Global Financial Crisis. The vats of money that China poured into the economy enabled Alibaba long ago to leave behind the chaotic online bazaar that had once been its business model.
Didi will not pull off the same growth as Alibaba. But it is hardly a humble company tending to its knitting. Didi is typical of Chinese growth plays in that it has attracted capital the way Velcro attracts lint, and it has used that capital to fuel big losses. The company’s accumulated deficit is $13 billion.
Those losses are unlikely ever to reverse. Granted, in the most recent quarter, Didi posted a profit. That came from world-class shameless accounting manipulation: Didi derived 100% of its profit from writing up by $1.8 billion the value of investments. The biggest write-up was for a newly deconsolidated subsidiary called Chengxin. Just three months ago, Chengxin as a whole was valued at $1.7 billion. Didi’s “profit” is achieved by declaring that its 34% of Chengxin was UNDERVALUED by $1.4 billion.
Additionally, the company accrued a lot of expenses in the quarter, which juiced the cash flow.
Didi can’t help it: the company is not built for profit.
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Didi started out in 2012 as a way to bribe taxi drivers by paying them a bonus to pick you up. Chinese cities have been very slow to raise taxi fares, because the consumer price index, against which officials are rated, is very sensitive to taxi fares. Consequently, most Chinese cities are chronically short of cabs. In the rain or snow in Shanghai, for example, forget about hailing a cab.
Didi provided a hailing service that came, importantly, with the ability to add JPY10 or JPY20 ($1.50-$3) to the fare to induce the cabbie to come. Later, the company added private car service, usually by a driver who has purchased a car on credit from Didi. There is also bike sharing, freight services, and group buying. Didi finances a lot of companies that buy cars and lease them to drivers locally. So the cars are off balance sheet, and the bikes, which depreciate really fast, are on. Driver expense is by far the biggest cost component for China, accounting for 89% of revenue in 2020. And yet Didi drivers complain bitterly that they cannot earn a decent living from driving, suggesting that the model cannot work without substantial fare increases.
Beijing taxis are among the cheapest in the world, despite the rising cost of living in China. Taxi fares from the international airport downtown in a major city are a good measure of social inequality: the lower the fare, the more oppressed the labor force. By this measure, China is above only India on the inequality scale. And Didi is already paying rock-bottom prices to drivers, with revenue capped by China’s low-price reality.
Average prices per kilometer from capital airports to city centers by taxi, 2021
Source: city taxi administrations
Like Alibaba, Didi treats its executives to massive share compensation–about $600 million a year. What’s new? The winners in this IPO are Didi management.
