Take Didi Private

This post was originally published on Interconnected.blog on March 27, 2022.

If Disney builds a new rollercoaster using Didi’s stock chart from the last four week, it will surely be one of its most head-spinning, vomit-inducing rides yet. With so much volatility around all Chinese stocks, but Didi’s in particular, it is impossible to take a pause from the moving ticker and think through what Didi is really worth as a business.

An ever-moving stock price can be the biggest distraction to a company, especially one that does not quite have all its shit together – that’s Didi. But taking such a company private so it can focus on its business operations and comply with regulators can be a profitable opportunity for bold investors and a blessing for the company – that’s also Didi.

Let’s lay out the case for why taking Didi private may not be such a bad idea.

Don't Air Your Dirty Laundry Publicly

Didi’s core problem is that by going public in the US, it violated one of the oldest Chinese sayings: “家丑不可外扬”. (English adaptation: “Don't Air Your Dirty Laundry Publicly”) By storing extremely sensitive data (personal transportation histories and patterns of hundreds of millions of people) and having very poor data security practices (not acceptable, but quite common in many high-growth consumer tech companies), Didi has many people’s “dirty laundry”. Didi also has its own “dirty laundries”, most notably a terrible track record of rider safety, resulting in death and sexual harassment of female users.

Whether it is other people’s “dirty laundry” or your own, airing and cleaning them in the public eye almost never works well. But with a stock ticker on the NYSE for all to see, that is what Didi is going through right now. In all fairness to Didi, listing on the NYSE was not much of a choice. The Hong Kong Stock Exchange was off limits because it was not a profitable business (and still off limits because it has not met the data security requirements of Chinese regulators). Raising more private capital was also not an option because its pre-IPO valuation was already high and existing large investors like Softbank and Uber likely needed a liquidity event.

Speaking of Uber, it also had a similar issue with its own “dirty laundry” – sexual harassment and discrimation in the workplace; “greyballing” local law enforcement officials from Philadelphia to Australia; getting sued for stealing self-driving technology secrets; and using its “God view” mode to track reporters who write negative stories about the company.

Even though these issues were all heavily reported by the media, Uber got lucky in one respect – it wasn’t a public company yet and had no stock ticker to reflect all the negative headlines on a day to day basis. While still a private company, Uber managed to fire its founding CEO and many senior execs, hire a new CEO, cleaned house somewhat, formed an independent committee to keep itself in check, and settled its self-driving lawsuit, before eventually going public in May 2019. Since then, Uber has had a relatively drama-free tenure as a public company.

Being drama-free and without the distraction of daily stock pricing may just be what Didi needs to air all its “dirty laundry” privately. Didi’s issues – fixing data security, making amends with regulators, improving user safety, while still growing the business – are all difficult but not impossible challenges. But the company needs leadership focus and the ability to attract and retain capable operators to do the fixing, which is quite impossible when your stock price swings wildly on every news headline that mentions your company’s name.

With its share price now down around 80% from its IPO price, Didi is no longer too expensive for private capital. The question becomes: is Didi still a good enough business to attract private capital to catalyze and profit from a turnaround?

The answer is definitely a “yes”.

Still A Pretty Good (Global) Business

I’d argue that Didi’s price is cheap enough now that if taken private, the probability of making a healthy return on the investment is better than 50%. Why? Because Didi’s product is still sticky in China, and its international market share outside of China is growing, especially in the fast-growing Latin American markets.

In China, Didi was ubiquitous until regulators forced its app off of all app stores last June to address its data security issues. Before June 2021, its market share was 90%. After June 2021, it has been losing ground to domestic competitors, like CaoCao and T3, but still commands around 70%. For comparison, Uber and Lyft split the US market 70% to 30%, respectively.

Let this sink in. Didi has so far been able to maintain a 70% market share in China, while no one was allowed to install its app for nine months and counting. Anecdotally, many users in China have avoided getting new phones, so they can keep using their Didi app. The competitors’ gain is also not because they have a different superior ridesharing model to Didi – it’s all the same – nor that they have better data security practices. They are simply too small for regulators to care. When (not if) the Cyberspace Administration of China and Didi come to terms, CaoCao, T3, and other copycat services will simply fall in line.

Furthermore, Didi’s stickiness and dominance is more apparent in 7th and 8th-tier cities in China where the only competitors are illegal, black taxis. These are places that most 1st or 2nd-tier city dwellers won’t even visit, let alone foreigners, so information about them is scant. This article, which articulates a rare and balanced view of Didi, cites an anecdote of a salesperson, who travels to one of these 7th/8th-tier cities often for work, and he swears by his Didi app because it addresses a huge pain point of finding trustworthy drivers to give him rides. The alternative would have been rolling the dice on a black taxi and crossing his fingers that he won’t get robbed (or worse).

Having been the dominant ridesharing player in China for so long, Didi’s mapping, routing, optimization, and recommendation algorithms powered by data collected from cities of all tiers is extremely difficult to replicate by a competitor. The same data, seen as “dirty laundry” by regulators, is also Didi’s moat.

Internationally, Didi has been investing in markets outside of China since it took out Uber China in 2016. Most of these overseas market expansions are money-burning machines, where the sole purpose is to gain market share at all cost. Didi’s most successful expansion region so far has been Latin America, which began in 2018 with the acquisition of Brazilian ridesharing app, 99. Late last year, Didi’s president, Jean Liu, revealed that Didi’s market share in top-tier Latin American markets (think Mexico City) is close to 50%.

When I traveled to Mexico early last year, I witnessed Didi’s activities first-hand, where local drivers formed long lines outside its office to drive for Didi and take advantage of its bonuses and discounts.

I took this picture outside Didi's main office in Mexico City in January 2021

Didi now covers most Latin American countries and also operates in Japan, Egypt, South Africa, Australia, New Zealand, and even Russia. (Didi announced an exit out of Russia due to its invasion of Ukraine, only to backtrack five days later.)

To be clear, Didi’s international business, while growing, is nowhere near profitability; neither is its China business. Its service is usually in 2nd or 3rd place in overseas markets. But at the end of the day, Didi is still a sizable business with a sticky core market and growing global reach, not a worthless penny stock, as its price often suggests.

What is a Fair Price?

Even with the rosiest of glasses, Didi is in a tough spot and the company knows this. It is cutting 20% of its staff and reducing investment in many of its non-core businesses, like community group buying, to get lean for the tough years ahead. (Didi still plans to make its own car though.) Instituting more operational discipline and better product focus is never a bad thing, even though the process is always painful and real people’s lives (and livelihood) are impacted.

If you are a Blackstone, KKR, Vista, or TPG, taking Didi private at this moment and giving it 2-3 years to clean up, then taking it public again, could be a career-defining, fund-returning investment. (Softbank would have been the most obvious source of more capital, but the failed Nvidia-Arm acquisition makes its ability to fund another huge investment murky.)

But what would a fair price be for Didi?

Here’s my back of the envelope math, using Uber and Lyft as comps. (Please take my calculation with a giant grain of salt as my investment focus is mostly in cloud, SaaS, infrastructure software, and DevOps, not in ridesharing consumer tech companies.)

As of Friday, March 25, 2022, these are the market caps and share prices of Uber, Didi, and Lyft, respectively:

• Uber – market cap: $66.6 billion; share price: $34.06
• Didi – market cap: $15.8 billion; share price: $3.27
• Lyft – market cap: $13.1 billion; share price: $37.51

Didi should be worth less than Uber, but much more than Lyft (Lyft has no service outside of the US and a few cities in Canada). A fair market value for Didi should be around the midpoint between Uber and Lyft. Based on last Friday’s price, this heuristic would give Didi a $42.7 billion market cap and a share price of $8.83.

If a hypothetical group of investors takes Didi private at $4.90, paying a healthy 50% premium above its current price, and can exit the position at $8.83 in 2-3 years, this investment would net a 80% return. It’s likely that the “Taking Didi Private” price could be lower, making the investment return more attractive.

Not bad if you ask me. Fortune favors the bold.