DiDi IPO makes Uber look cheap

DiDi is a Chinese ridesharing platform similar to Uber that was founded in 2012. It is really an app that connects drivers with a car to consumer in need of a car ride. The comparison to Uber is fitting, given that DiDi purchased the Chinese operations of its US rival back in 2016. Uber is still a major shareholder and owns 143.9 million shares of DiDi (or 12.8% pre-IPO).

It is noticeable how DiDi’s listing was accelerated. The earlier plan was to list ‘early July’ but that has moved to the last day of June. The company cited strong demand, also in pricing, as the American Depository Shares (ADS) was priced to IPO at $14, the top of its previously communicated price range. Despite the investor enthusiasm, we still think that Uber is a more attractively priced long-term investment and that investors could figure this out in the next couple of weeks.

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DiDi IPO basics

DiDi’s growth has been amazing over the years, but in this phase it still needs cash, which is why it listed ADS (that represent a quarter of an ordinary share) on the New York Stock Exchange (NYSE). The fully diluted market cap as of yesterday’s close is around $73 billion. DiDi raised $4.4 billion with this deal.

Revenue development at DiDi vs peers

It seems that DiDi performed much better than Uber or Lyft in 2020. This makes sense as China saw a quick recovery from Covid-19 by mid-2020, partially due to its effective closure of its borders and harsh stay at home orders for the population early on.

A noticeable part of the DiDi investment case is that the company looks like it makes more revenue than Uber. This is actually misleading because the companies use a different way of calculating revenue. DiDi detailed this difference in the prospectus using the table shown below. Long story short: DiDi adds driver pay to revenue, while Uber does not.

We would rather look at gross transaction value (GTV), to get a fair comparison between the different ride hailing businesses.

For DiDi, China Mobility is its most important segment. Not only is it responsible for well over 90% of revenue, it is also well fenced-off from serious outside competition and will remain the most important growth engine for years to come.

To get a sense of realised recent growth figures, we think it makes most sense to use the annual growth of 2019. The year 2020 was distorted due to the pandemic and will mostly be a reflection of geographic presence, rather than what the revenue can bounce back to in 2021/2022. GTV growth in 2019 and 2020 of DiDi and two peers are listed below. We found it striking that DiDi actually saw a decline of GTV in 2019.

The company doesn’t offer an explanation for the pullback and largely ignores it in its F-1 filing with the US Securities and Exchange Commission (SEC).

The formal revenue did increase in 2019 and our suspicion is that DiDi must’ve scaled back consumer incentives. It puts DiDi in stark contrast with Lyft, which grew at a clip of almost 50%. Though it must be said that Uber is busy outside of its home market (the US), where Lyft has been gaining share aggressively by surrendering margin.

DiDi’s profitability vs Uber and Lyft

Due to the different ways of reporting, it is somewhat tough to get one good figure to compare the profitability of these businesses with each other. All three companies reported adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) though. We looked at the most important segment, Mobility:

The story for platform businesses like these is that a good profitability is only attainable for the market leader. Economies of scales are crucial in this model because a greater use of the platform improves the value of that platform for other users. Also, consumers don’t like to switch between different apps a lot and are most likely to stay with the one they already use. So market share can also save on future marketing spend.

Uber is clearly ahead of DiDi when it comes to margins, while Uber also has better prospects in our view. DiDi is still practically nowhere in the global arena outside of China, where Uber rules. We think there is still a lot to gain there for Uber, which already has a very strong market position outside of the US and China.

Was Didi’s IPO overvalued?

The valuation of DiDi is best put in the context of Uber and Lyft. Our preferred valuation multiple is EV/GTV. Within the Mobility segment we like to look at the GTV of 2019, as we believe the fallback in 2020 was a temporary phenomenon. For Uber, we also subtracted the value of DiDi from the EV.

The result is shown in the graph below. The valuations seem to be quite close together. Uber is more expensive than its peers, which seems to make sense, given its early leadership position in the global market.

This overview still excluded Uber Eats, however. And that changes everything. It is tough to get to one multiple for the whole company because rides are valued differently from food delivery.

For meal delivery we will use 2020 figures, because the impact from Covid-19 was quite similar across markets. Now the multiple. We are not sure what the best multiple is for Uber Eats, so we take the average of two cheap names in the sector: Deliveroo and Just Eat. The first is at 1.25x, the latter at 0.8x revenue. Let’s say Uber Eats should be valued at around once revenue if 2020: $31 billion. We then subtract this $31 billion from the EV and arrive at the following.

Now it looks like Uber is the cheapest player out of three. Does Lyft deserve a higher valuation than Uber because of its fast growth? Probably not, as surrendering margin for growth is a strategy that can be quite easily replicated but it doesn’t point to a strong or sustainable business model.

One thing is clear: at $14 (or yesterday’s close) per ADS, DiDi is not cheap compared to Uber or Lyft. It also leaves us with the matter of whether Chinese companies should trade at a discount. They probably should, given the higher risks associated with a business climate where the Chinese communist party has absolute power over the economy. Corporate governance is also much better in the US than in China.

Outlook for the Didi share price

The high valuation of DiDi points to a high growth potential in China and outside China. This can be justified, but recent history shows that the path has not been that smooth. Our exercise mostly pointed out the relative value to be found in Uber. Perhaps investors will start to see the same over the next couple of weeks.