Didi’s brief US foray is ending. What happens next?

Didi Global said on Thursday (Dec 2) that it plans to delist from the New York Stock Exchange (NYSE), barely five months after its initial public offering drew the wrath of Beijing.

The Chinese ride-hailing giant said it plans to list in Hong Kong instead, allowing existing shareholders to convert their holdings in the company. But the announcement was scarce on details, leaving investors - already nursing roughly US$40 billion of losses - with many unanswered questions. 

Why is Didi going to delist?

Chinese regulators have opposed the US listing as they are concerned it could expose Didi’s vast troves of data to foreign powers.

The firm pressed ahead with the June IPO anyway, in a move that Beijing saw as a challenge to its authority. Days after the listing, the government announced a cybersecurity probe into the firm and forced its services off domestic app stores.

Last week, people with knowledge of the matter said officials had directed Didi management to come up with a plan to withdraw from the NYSE.

Didi’s exit is unlikely to be the last, with the government said to be drafting regulations to effectively ban Chinese companies from going public on foreign markets using the so-called variable interest entity (VIE) structure. The Chinese internet regulator began probing two more US-listed companies, Full Truck Alliance and Kanzhun, soon after launching the review into Didi.

Proposed US legislation threatens to raise another potential obstacle to local listings by Chinese companies as it would mandate foreign companies to open their books to US scrutiny or risk being kicked off the NYSE and Nasdaq within three years. 

How will it work?

Didi said it aims to list on the Hong Kong Stock Exchange and ensure that its American depositary shares can be swapped for “freely tradable shares of the Company on another internationally recognised stock exchange,” according to a statement.

The firm is planning to file for the Hong Kong listing around March, people with knowledge of the matter told Bloomberg News on Friday, asking not to be identified as the plans haven’t been made public. The entire process could take three to six months, First Shanghai Securities analyst Linus Yip said.

However, it’s unclear whether Didi can pull off the manoeuvre. Prior to its US IPO, the company had weighed a potential Hong Kong listing but abandoned the effort after the city’s exchange, which makes far more stringent demands on companies seeking a listing than its New York peers, questioned Didi’s compliance with Chinese regulations.

It didn’t have licenses to operate in certain cities and many of its drivers lacked a household registration, or hukou, for the cities where they lived, part of municipal requirements for providing on-demand ride-hailing services there, people with knowledge of the matter said in July.

Will investors swap their stock for Hong Kong shares?

It depends. Didi has dropped 52 per cent from its post-IPO peak, wiping out about US$42 billion of market value.

Japan’s SoftBank Group, the largest minority shareholder in Didi, last month reported a record loss at its Vision Fund unit, in part because of the stock’s plunge.

Some shareholders may use the delisting as an excuse to exit, and certain retail investors may not be in a position to hold Hong Kong shares. Technically speaking, swapping the US shares for stock in Hong Kong should be relatively straightforward for most institutional shareholders.

But the new securities may trade with a valuation discount: Hong Kong has long been home to some of the world’s lowest price-to-earnings ratios. A gauge of tech shares in the city briefly touched a record low on Friday. 

Why is this such a big deal?  

Didi’s blockbuster IPO was the second-biggest in the US by a company based in China after Alibaba Group Holding, and gave Didi a market value of about US$68 billion.

The listing appeared to be a model for how international investors could tap into China’s red-hot tech sector. The company has dominated ride hailing in the country since it bought the Chinese business of US rival Uber Technologies in 2016 following a costly price war.

Didi accounted for 88 per cent of trips in the fourth quarter of 2020.

The US IPO was shepherded by a who’s who of Wall Street banks. Its largest shareholder is SoftBank with more than 20 per cent, and others include Chinese social networking colossus Tencent Holdings and Uber.

Due to Didi’s ownership structure, Chief Executive Officer Cheng Wei and President Jean Liu have controlled more than 50 per cent of the voting power. It’s now unclear whether the top managers will emerge unscathed from the listing debacle.

Media including the South China Morning Post have reported that regulators may force Didi to reshuffle its top management as punishment for defying Beijing. 

Does the US withdrawal end Didi’s troubles? 

Unlikely. The cybersecurity probe into Didi is still ongoing, and regulators may still impose an array of punishments ranging from a fine to a suspension of certain operations or the introduction of a state-owned investor, Bloomberg News has reported.

The municipal government of Beijing, where Didi is based, had previously proposed that Shouqi Group - part of the influential Beijing Tourism Group - and others based in the capital would acquire a stake in Didi, giving state-run firms control of the company.

Didi has put forth several proposals to appease the powerful Cybersecurity Administration of China, including ceding management of its data to a private third party.

It’s uncertain how such an arrangement would impact Didi’s access to the data, which allows it to oversee 25 million rides a day involving some 400 million riders and drivers.

Even if those issues are addressed, the months-long probe has likely already taken a toll on the business.

With Didi’s platforms barred from Chinese app stores since July, customers and drivers who have upgraded their mobile phones no longer have access to its services, handing an advantage to Didi’s competitors.

Finally, President Xi Jinping’s campaign to achieve “common prosperity” has heaped pressure on platform companies like Didi to offer better wages and benefits to its army of drivers.