DiDi’s Regulatory Troubles Provide an Excellent if Risky Entry Point

DiDi’s (NYSE:DIDI) rapid growth has come to a screeching halt, as it is subject to intense regulatory scrutiny. It is now one of the worst-performing major listings of a Chinese company on a U.S. exchange. Since making its public debut on the New York Stock Exchange on June 30 at $14 a share, DIDI stock has plummeted 66%.

DiDi logo on smartphone

Source: Piotr Swat / Shutterstock.com

You can’t pin the stock’s poor performance on Didi’s management or operations. Rather, shares got whacked by a regulatory crackdown, as the Chinese government sought to tighten its oversight of data security and companies listed overseas.

Didi raised $4.4 billion in its initial public offering after selling 317 million American depositary shares at the IPO price, larger than any Chinese company since Alibaba Group (NYSE:BABA).

In early December, just five months after its U.S. IPO, DiDi announced it would file for delisting from the NYSE and pursue a listing in Hong Kong. That’s a tough pill to swallow, and many investors chose to cash out, sending DIDI stock down 22% on the day.

Recently, shares fell to another low after Didi’s 180-day lockup period expired. Management does not want the stock to fall any further. So, it’s restricting current and former employees from selling shares in the hopes of shoring up the share price.

Nevertheless, despite the negative external factors, it is hard not to be impressed by DiDi Global’s growth prospects. As China’s middle class continues to expand, so do opportunities for DiDi Global. So, the long-term tailwinds are positive. If you are an investor willing to take a bit of risk, there are several ways to play this stock for short-term and long-term gains.

Regulatory Issues Thump Didi Stock

Over the last year, Beijing has come down hard on Chinese tech stocks. President Xi Jinping’s administration touts data privacy as the reason to curb the once-freewheeling sector. However, several prominent names are feeling the brunt. For DiDi Global, it looked like the sky was the limit when it made its debut on the NYSE. However, now things are looking a bit fuzzier.

DiDi’s board has greenlighted the delisting from the NYSE and is pursuing an IPO in Hong Kong. According to the company, DIDI stock will be “convertible into freely tradable shares of the company on another internationally recognized stock exchange at the election of ADS holders.”

Bloomberg reported that the company is currently looking to register its IPO in Hong Kong around March, citing people privy to the matter. According to the report, we might see shares trading on the exchange by the summer.

There are three options investors are facing. The first is to sell their shares and wipe their hands of the investment. The second option is to wait for the conversion to the Hong Kong exchange. You have to confirm that your brokerage account provides access to international stock exchanges if that option suits your investment needs. The third option is to wait and see if the company decides to go private.

In July, The Wall Street Journal reported DiDi was considering taking the company private to appease the Chinese government. At the time, DiDi denied the report, but let’s consider the possibility for a moment. If the ride-hailing giant was taken private, it is highly likely to be at a premium over shares’ current levels.

Whichever way you slice it, shares are trading at an enticing discount for all these possibilities.

International Expansion

With the ever-growing middle class in China, major cities face taxicab shortages. Ride-hailing provides a solution to this problem and an income opportunity for thousands of drivers all over those areas. Didi Chuxing is the most popular ride-hailing service in China, with around 90% market share.

Looking ahead, DIDI is focusing on international expansion to become a truly global player in the ride-hailing industry. It previously planned for their operations in Europe and Britain but halted these plans after privacy concerns arose from local law regulations regarding data protection.

A major part of maintaining high revenue growth rates is expanding into new markets like Africa. The continent’s middle class is a major catalyst for economic growth in the region. And it will continue to fuel urbanization. With an increasing number of people living on upper-tier incomes level or higher, there are more opportunities than ever for companies like DiDi.

Overall, according to a report by Precedence Research, the ride-sharing market is expected to grow at a compound annual rate of 16.7% through 2030, reaching $344.4 billion.

That growth does not even include the autonomous driving market, which is the biggest potential moneyspinner for the company. Removing drivers from behind the steering wheels would allow a company like DiDi to eliminate one of its major expenses that eat into profit margins. The bottom-line impact will be astronomical.

DiDi Is Investing in the Future

DiDi is pouring massive capital into electric vehicles and autonomous driving technology. With its “robotaxi” unit that offers rides via mobile robots (think: driverless taxis), they’re one of few companies that have managed not only to provide these services but also create them. Didi Chuxing has announced that it plans to operate more than one million such vehicles by 2030.

It already has 100 autonomous vehicles on the roads. And it is hoping to deploy shared, electric ones in China’s cities soon. Didi has a dedicated subsidiary for its autonomous driving ventures. With funding of $800 million, this startup is now by SoftBank Vision Fund, among others.

Didi Chuxing is also active in financial services. The product suite includes car insurance products, personal loans, and crowdfunded medical coverage. In addition, the transportation segment includes food and grocery delivery. They have a community group buying platform called Tuán Gòu. It allows you to buy items in bulk from other members through your app at discount prices. The ride-hailing giant uses its vast trove of user data to deduce what people earn from where they spend most of their time.

Didi directly competes with more established players such as Alibaba’s Ant Financial and Tencent’s (OTCMKTS:TCEHY) WeSure platform. Meanwhile, the Chinese government is extending its pressure on fintech beyond Jack Ma’s Ant Group, with Tencent and ByteDance among the latest companies to be summoned by authorities.

However, you cannot fault DiDi for diversifying its revenue base.

The Bottom Line on DIDI Stock

There’s no denying DIDI stock is deep in the red as confusion abounds ahead of the company’s planned U.S. delisting. Nevertheless, there are bright spots that bulls can exploit for quick gains.

The company controls an estimated 90% share of the ride-sharing market in China and is still growing despite the pressure being applied by regulatory agencies. The Chinese ride-hailing giant is also active in several areas with tremendous growth potential.

Hence, there are more than enough positive tailwinds for an investor who’s willing to take on a bit of risk and has the ability to potentially access shares overseas. It is just about navigating choppy waters. On the flip side, DIDI stock also makes sense as a short-term investment, considering the near-term catalysts.

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.

Article printed from InvestorPlace Media, https://investorplace.com/2022/01/didis-regulatory-troubles-provide-an-excellent-if-risky-entry-point/.

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