They say all good things come to an end, but what about bad things? More often than not, all bad things also come to an end. The shareholders of DiDi Global Inc. (OTCPK: DIDIY) have long been waiting for good news since the company became a prime target for Chinese regulators after going public in the United States in June 2021. The regulatory review had a lot to do with DiDi’s 77% drop in market value since its IPO, and it would be fair to say that many retail investors have already given up hope of a stock price rally amid regulatory challenges and macroeconomic headwinds facing the Chinese economy. Amid these daunting prospects for DiDi, the Wall Street Journal reported yesterday that Chinese authorities are preparing to fine DiDi more than $1 billion to settle their investigation into the company’s data protection practices. DIDIY stock jumped yesterday in premarket trading in response to the news, and the stock ended the day up more than 13%. This positive market reaction suggests that the market consensus expects this fine to end the regulatory investigation into DiDi, which would be great news for the company and its shareholders. As investors, however, it makes sense to wonder if we are missing something here. In this article, I will discuss DiDi’s prospects in a changing regulatory environment.
The silver lining appears
They say every dark cloud has a silver lining, but that’s not entirely true when it comes to investing in the stock market. For DiDi, however, a silver lining certainly seems to be showing. Assuming the expectations set out in the WSJ report materialize, DiDi will soon be able to restore its mobile apps to local app stores and begin adding new users to its platform. The company will also be allowed to pursue a listing in Hong Kong, which had previously been banned by Chinese regulators in light of the company’s apparent failure to protect sensitive consumer data. DiDi is also no longer listed on the New York Stock Exchange following its decision to delist under pressure from Chinese authorities, and this adds to my belief that DiDi’s regulatory outlook will soon improve.
This is however not the end of the story. An improving regulatory outlook can certainly be seen as a catalyst that could lift the share price in the near term, but investors should look beyond this near-term development to gauge what the future holds for DiDi. from a fundamental point of view. .
China’s tech sector is too big to fail
I hope many of our readers have watched too big to fail, a 2011 biopic that deals with the events of the 2008 global financial crisis through the eyes of Henry Paulson, the Treasury Secretary from 2006 to 2009. Since the biopic’s release, investors have associated the concept of being too big to fail with big banks. The illustration below illustrates the meaning of this concept very well.
Source: Financial watch
Not just the banks, but there are also other companies that have become too big to fail, because the failure of these companies will cripple the entire economy of a country and probably the global economy as well. Many Chinese tech companies fall into this category, in my opinion. Investors are forced to believe today that the Chinese government is not supporting the growth of its technology sector, which is not even true. The report presented by Chinese President Xi Jinping at the 19th National Congress of the Communist Party in October 2017 (the 20th Congress will be held this year) had many references to the country’s technology sector and this report then suggested the new look China’s economy will focus mainly on the growth of the technological sector and innovation. Here are some of the remarks made by Xi Jinping.
We must increase total factor productivity and accelerate the construction of an industrial system that promotes the coordinated development of the real economy with technological innovation, modern finance and human resources.
We must aim for the frontiers of science and technology, strengthen basic research, and make major breakthroughs in pioneering basic research and groundbreaking, original innovations.
We will improve our national innovation system and strengthen our strategic science and technology strength.
We will foster a culture of innovation and strengthen the creation, protection and enforcement of intellectual property.
These are just a few of the references to the importance of the technology sector and innovation, and the list goes on. China has become an economic powerhouse today, not only because of cheap and quality labor, but also because of its technology sector which has made great efforts to make China a leading nation. innovation load. If the tech sector is allowed to fail through economic reforms or regulatory intervention, China would be shooting itself in the foot, and I don’t think that’s a very likely scenario.
In the long term, I believe Chinese regulators will continue to promote healthy growth in the tech sector as long as the tech giants strike a balance between increasing shareholder wealth while safeguarding the nation’s interests.
DiDi enjoys significant competitive advantages in a growing market
To put it very simply, DiDi has a long growth track. DiDi dominates the carpooling industry in China, and its closest peers aren’t even close to taking DiDi’s crown.
Exhibit 1: VTC market share in China in September 2021
DiDi is also not going to settle for the huge growth opportunity in China. The company expanded to South Africa, Egypt and Kazakhstan last year and the company also has a presence in Mexico, Australia, Brazil, Colombia and Taiwan. By strengthening its position in the market only in China, the company would, in my opinion, be able to achieve a nice profit growth in the coming years. Markets and Markets projects China’s carpooling market is expected to grow at a CAGR of 16.6% through 2026, and this has a lot to do with the growing internet penetration in the country and the growing popularity of carpooling as a way to reduce carbon emissions .
China, in case you didn’t know, has over a billion internet users, which is by far the highest number of users of any country.
Exhibit 2: Countries with the largest digital population
With regulators stepping back, I believe DiDi will soon be able to refocus on growing its business while mitigating the threat of competition in the domestic market.
DiDi Global is not just about carpooling with cars and passenger vehicles. The company is expanding into other business areas in an effort to diversify its revenue streams while making the most of the growth opportunities available in these fast-growing markets.
Exhibit 3: DiDi Global marks
Source: Daxue Consulting
DiDi is well positioned for long-term growth amid favorable macroeconomic developments for China’s ridesharing industry, but the company is not out of the woods yet, so investors may want to be a bit more patient before going all-in.
With regulatory pressures likely to ease, DiDi may be given the green light to move forward with the planned Hong Kong listing. I think investing in DiDi in Hong Kong would be the safest choice for investors as it will help them negate the risks arising from the China-US tensions. DiDi stock might also appeal to traders who are willing to bet on regulatory improvement, but as a long-term oriented investor, I’m willing to wait patiently for a Hong Kong listing.