China’s property market continues to weigh down the sentiment of the broader markets. However, the biggest casualties are Chinese companies listed on U.S. exchanges. Due to the regulatory pressure on both sides, stockholders are taking profits and looking to pour their capital elsewhere. Against this backdrop, it makes sense that DiDi (NYSE:DIDI), which owns China’s largest ride-hailing platform, is struggling. But these factors are only acutely affecting DIDI stock.
Shares of DiDi started trading at $16.65 per share on June 30, up about 19% from the offering price of $14 a pop. It finished the trading day at $14.14, for a market cap of $67.8 billion. It was a very strong debut and bucked the pattern of ride-hailing titans such as Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) who both closed in the red on their first trading day.
On its debut, the value of DIDI stock shot up thanks in part to increased demand for ride-hailing services and falling Covid-19 cases. It is also important to remember that the company operates in the most populous country in the world, China. A country whose middle class is still growing by leaps and bounds. Thus, DiDi should have an ever expanding potential customer base.
However, while there was a lot of hoopla surrounding DIDI stock, it got cut short when Chinese regulators upped the pressure on ride-hailing firms. In July, the Cyberspace Administration of China (CAC) said representatives of seven departments sent on-site teams to perform a cybersecurity review of the ride-hailing giant. More recently, the Chinese Ministry of Transport summoned and interviewed 11 ride-hailing firms in connection with non-compliant behavior.
All of this is justifiable cause for panicking. However, bear in mind that Chinese regulators will eventually loosen the noose. DiDi is too successful for them not to do so.
Chinese Stocks Will Eventually Bounce Back
The Evergrande (OTCMKTS:EGRNF) liquidity crisis and increasing regulatory pressure contribute to a strained environment for Chinese stocks. Many notable names are in the red. Understandably, any company on the wrong side of Chinese regulators will face the ire of investors. Hence, DiDi quickly became one of the worst IPOs of this year.
As Chinese regulators increase their focus on the company, the stock has crumbled. It has found support around $7. But there is very little else to cheer about.
As previously mentioned, Chinese state regulators recently brought in 11 ride-hailing firms for interviews, including DiDi, regarding “illegal behavior.” Specifically, the alleged onboarding of unapproved drivers and vehicles. But perhaps the larger concern of Chinese regulators and officials is the issue of data sovereignty. Hence DiDi’s aforementioned cybersecurity review by CAC.
Unfortunately, this regulatory scrutiny is negatively affecting ridesharing space companies in China. DiDi, which holds an approximately 90% market share in China, was forced to stop new user signups in July. It could not come at a worse occasion for the ride-hailing giant.
DiDi was loss-making for years. In Q1 2021, after reporting strong growth and increased revenue, it had finally made its first operating profit ($30 million) since Q1 of 2018. And with people slowly returning to normal routines, ride-hailing companies were set to benefit massively.
But all this has been cut short.
Light at the End of the Tunnel
Although most stock analysts paint a gloomy picture about DIDI stock, there are certain silver linings.
Regulators slapped a $2.8 billion fine on Alibaba (NYSE:BABA) earlier this year after an extensive probe determined that the company had abused its market position. In response, the markets popped.
This might seem strange, but it makes a peculiar kind of sense.
Analysts and investors thought that the fine and repercussions would be much tougher. More importantly, it indicates regulators understand the effects their actions will have on the markets. Incidentally, that is also why the Evergrande crisis is not in any danger of becoming another Lehman Brothers.
Any potential regulatory activity will not try to damage DiDi to the extent it will close down. And at some point, once the company has complied with the data regulations, the ban on new signups will lift. My colleague Will Ashworth makes a great point that this will be an excellent catalyst for DIDI stock.
In fact, it is exactly the kind of catalyst bulls are waiting for.
DIDI Stock Is Trading at a Great Discount
Chinese companies operate in a unique regulatory environment where government agencies have an outsized role in the markets. However, there is no indication that these regulators want to limit or curb lucrative enterprises. And at the moment, both Beijing and Washington are proceeding with the trade war in a nuanced fashion.
Unfortunately, that is leading to difficulties for Chinese companies listed on U.S. stock exchanges. America is asking these companies to disclose the risk of the Chinese government interfering in their businesses. This in turn has prevented American tech companies from doing business with some Chinese firms.
Meanwhile, China vows to crack down on domestic companies that go public on U.S. exchanges, leading to a windfall for Hong Kong. Once the dust settles, though, U.S.-traded Chinese stocks like DIDI will make a comeback. However, at the moment, DIDI stock is trading at a tremendous discount to future earnings.
On the publication date, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.