Mainland China

Didi Global (DIDIY US)

China's leading ride hailing platform at 8.4x 2029e P/E with a HK listing catalyst

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Didi Global (DIDIY US — US$23 billion) is China’s largest ride-hailing company.

You can think of Didi as the “Uber of China.” Open the app and specify a destination, and Didi will then match you with a driver to take you there. Payment is done seamlessly via the app.

Didi has been an incredible success story. It has almost 700 million users in China and beyond, with a significant presence in Brazil and Mexico. Supporting these markets are roughly 25 million drivers, many working full time.

The story began in 2012. An Alibaba salesman named Cheng Wei teamed up with a colleague to provide ride-hailing services in Beijing. It took them two years to launch the first version of the app. From 2014 onwards, Cheng Wei and his ex-Goldman Sachs partner Jean Liu raised US$20 billion to consolidate the industry, first acquiring Tencent-backed competitor Kuaidi Dache and then Uber’s business in China.

Then came the government’s crackdown on Chinese tech companies. Didi had managed to IPO on the New York Stock Exchange (NYSE) in 2021, raising US$4.4 billion. However, just days after the IPO, China’s cybersecurity regulator ordered all Chinese app stores to delete Didi’s app. And in the following 18 months, Didi’s market share dropped from 90% to 70%.

The Chinese government also pressured Didi to delist from the NYSE. Today, Didi trades over the counter on the US Pink Sheets market, which means lower reporting requirements. Didi doesn’t offer earnings calls with investors. And it issues press releases instead of quarterly reports.

That said, Didi’s market share has recovered nicely since 2023. It’s doing well against new competitors such as Alibaba’s and Meituan’s aggregator apps. These frequently offer lower prices but a weaker user experience.

Didi’s focus has shifted from gaining market share to monetizing the business. Margins have continued to surprise on the upside in the past few years. Didi sold its EV subsidiary to Xpeng, closed its loss-making food delivery business, and exited several unprofitable ventures overseas. He seems to be doing everything right.

On my numbers, Didi trades at 12x forward EV/EBITDA — a large discount to Uber’s 19x. And there’s plenty of upside to Didi’s margins. With relatively modest assumptions of 6-8% top-line growth and a 6% EBITA margin by 2029, I get to a P/E ratio of 8.4x and a clean balance sheet. My sum-of-the-parts pins the intrinsic value at US$13.5/share, way above the current share price of US$5.0.

I’ve been skeptical of Didi and Grab in the past. They’ve both spent billions of dollars to gain their market positions. And I’ve felt that switching costs for drivers are low. Why can’t drivers simply switch to another app?

But I’ve changed my mind on that point. I still think spending all those billions of dollars was wasteful. But today, it’s clear that Uber’s, Grab’s and Didi’s market positions are stable. Riders continue to use their favorite ride-hailing apps. And drivers also seem to stick with the incumbents. We’re not seeing big market share movements in any of these markets.

So, my base case is for Didi to maintain its market share in Mainland China and gradually reach Uber’s current profit margins. Didi handles 16 billion rides per year, and Uber 11 billion. Yet Didi’s current market cap is only 1/8 that of Uber. That shows you Didi's potential if it ever manages to monetize its platform fully.

Another catalyst will be Didi’s “homecoming” to the Hong Kong Stock Exchange. In late 2024, Didi said it would list in Hong Kong but most likely without raising additional capital.

If Didi gains a Hong Kong listing, it will most likely become part of the Hang Seng Index and probably catch the eye of institutional investors. I also think that sell-side analysts will be compelled to start writing about the name again. We’re still waiting for Didi to receive clearance from China’s cybersecurity regulator. Once it gets that clearance, I believe a Hong Kong listing will happen within six to nine months. We’ll just have to wait and see.

Thank you for reading.
Michael

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