What’s the worst thing that can happen to a stock after IPO? How about the Chinese government launching an investigation and removing its app from app stores? That’s what’s happened to Didi Global (NYSE: DIDI), a Chinese company that launched only last week.
Didi, dubbed the Chinese answer to Uber, is the latest company from China to float in the US. IPO day on the New York Stock Exchange on 30 June saw the shares lose a little.
The price picked up the next day, then fell back on 2 July when the first murmurs of discontent began emerging from Beijing. After the Cyberspace Administration of China (CAC) said it was investigating Didi, the shares lost 5% on the Friday.
Regulators don’t appear to need much time for their, no doubt, careful and in-depth investigations in China. And on Sunday, CAC ordered app stores to remove the Didi app. CAC said: “After checks and verification, the Didi Chuxing app was found to be in serious violation of regulations in its collection and use of personal information.“
US markets were closed Monday after the Independence Day weekend. But all eyes will be on the Didi share price when the market opens Tuesday, with many investors fearing heavy losses.
Didi Global IPO warnings
What would I do as an investor? There are three main fears that generally keep me from investing in IPOs these days. And this one checked all three.
I don’t like IPO investing at the best of times, as they so often lead to early losses. Still, in this case, it’s a New York flotation, and US investors do seem more bullish about flotations. So that fear would be lessened here.
Next up is valuation. Didi Global posted its very first profit, of $30m, in the first quarter of this year. That’s after a $1.6bn loss in 2020, hit by the pandemic. Does this modest profit justify the company’s $74bn price tag? Annualising it to $120m would suggest a P/E multiple of more than 600. That’s perhaps a little misleading at this stage, with serious growth expectations ahead. But I wouldn’t call it cheap.
My third red flag is a literal one, China. I get twitchy about investing in regulated business in the UK, and I’m thinking here of firms like BT and National Grid. But at least UK regulators don’t have arbitrary authority. I don’t think I’d ever invest in companies operating under totalitarian regimes.
It’s the data
Didi Global’s valuation isn’t based solely on its potential taxi revenues. No, it’s partly about data collection, which is increasingly big business. And that’s what’s attracted Beijing’s ire. “An internet giant absolutely cannot have a better command than the state of the super-database that is Chinese people’s personal data,” wrote the state-run Global Times on Monday.
What will happen next? If Didi satisfies Beijing’s requirements and gets its app back in the stores, I see a good chance that it will go on to become a booming success. But if not, maybe the fears of those calling this an existential crisis will come to pass.
I won’t buy. But I’ll be watching today’s market opening in New York.