DiDi Global Inc. Stock Valuation

DIDI GLOBAL INC.

Ticker:                            DIDINature of Business:    Technology ServicesLocation :                                China
Recent Price:           $11.9752-Week High/Low: $18.01/11.00Estimated Fair Value:      $47.25-$69.68
Expected Return:      103.7%Consider Buy:                 Below $58.47Business Risk:                     High
Financial Risk:      MediumEconomic Moat:            WeakCorporate Governance: Average

Company Overview
DiDi Global Inc., formerly Xiaoju Science and Technology Limited, began providing taxi-hailing services through the DiDi Dache app in China in 2012. It acquired Kuaidi in 2015 and Uber (China) Limited in 2016. 99 Taxis, a ride-hailing company in Brazil, was also acquired. Other offerings by DiDi include ride-sharing, bike and e-bike sharing, leasing and freight transport. DIDI platform satisfies the mobility needs of approximately 500 million people across 17 countries.

DIDI continues to spend on Research and Development (R & D) in order to be kept abreast of the latest developments in transportation. It produced D1, an electric vehicle suitable for ride-sharing, in collaboration with an automaker. The company has also been investing extensively in autonomous driving technology and recently signed an agreement with GAC Aion New Energy Automobile to develop fully self-driving new energy vehicles.

The company is headquartered in China where it makes over 90% of its revenue from providing mobility services in that country. The expansion of DIDI into overseas markets began in 2018 when it started operations in Brazil. Presently, it provides ride-sharing and food delivery services in sixteen foreign countries in Africa, Asia-Pacific, Europe and Latin America.

Mr. Will Wei Cheng, the founder, doubles as board chairman and chief executive officer of DIDI. Ms. Jean Qing Liu, a co-founder, is the president of the company. Mr. Bob Bo Zhang, another co-founder, is  DIDI’s chief technology officer and chief executive officer of the autonomous driving business. Mr. Rui Wu, the vice president, is also one of the company’s founders. Messrs Alan Yue Zhuo, Yusuo Wang and Gaofei Wang joined the board as directors in the year 2021.

Investment Thesis
DIDI’s shares were listed on the New York Stock Exchange in the year 2021. Didi Taxi, Didi Hitch, Didi Bike, Didi Luxe, Didi Express and Didi Freight are some of the mobility services provided by the company. DIDI has been transformed into a technology company providing more than mobility services. It now offers financial and cloud computing services. But mobility services remain the major source of the company’s earnings.

DIDI’s earnings come from three segments, namely China Mobility, International and Other Initiatives. It has a considerable market share in shared mobility in China. And over 95% of its total revenue has been derived from its China Mobility business segment in the past three years. The company introduced auto solutions in 2018 to boost the supply on its network and reduce shortages. The auto solutions include leasing, refueling, repair and maintenance.

Revenue is largely concentrated in China; it should have more presence in overseas markets. For instance, a 9.7% drop in China Mobility revenue resulted in an 8.4% fall in total revenue. Revenue from the International business segment accounted for 1.7% of total revenue (2019:1.3%) even though it rose 18.2% within a year. It has increased its presence in South Africa by expanding to Cape Town.  But we expect the company to establish in more African countries in order to bolster revenue from that region of the international market.

DIDI has ventured into electric mobility and autonomous driving in order to ensure it responds quickly to developments in modern transportation. Modern mobility services require a considerable investment and take some time to pay off. Lack of profits may reduce the chances of financing its projects through loans. DIDI raised about US$4 billion from the United States (US) through an Initial Public Offer (IPO) in 2021. Share issues expose existing shareholders to dilution.

We expect demand to pick up in China and elsewhere following the easing of COVID-19 restrictions in many countries.  High costs and competitive pressures have made it difficult to turn the losses into profits. DIDI should aggressively grow its business offshore to increase volume and reduce costs.

Valuation
Our fair value estimate of DIDI’s share ranges from RMB306.11 (US$47.25) to RMB451.48 (US$ 69.68).

Financial Overview
Mobility services in China pulled in 94.3% of total revenue or RMB133.6 billion (US$20.4 billion) in the 2020 financial year.  The International business segment had a year-over-year revenue increase of 18.2% to RMB2.3 billion (US$356.1million).  Revenue from Other Initiatives produced RMB5.8 billion (US$878.8 million) in revenue which was equivalent to 18.2% growth over the previous year’s value. The Other Initiatives business segment includes revenue realised from bike and e-bike sharing, intra-city freight, financial services, community group buying and autonomous driving. Altogether DIDI earned a total revenue of RMB141.7 billion (US$21.6 billion), 8.4% down from the prior year’s RMB154.8 billion.

A 9.9% decrease in the cost of sales resulted in RMB790.7 million or a 5.2% rise in gross profit. Consequently, the gross profit margin added 1.5 percentage points year-over-year to close at 11.2% for the year ended December 31, 2020. Gross profit could not cover operating expenses, thereby leading to another year of operating loss. Net loss for the year under review increased to RMB10.6 billion (US$1.6 billion). The year ended on a disappointing note as ordinary shareholders of DIDI had to bear a total loss of RMB155.65 (US$23.76) per share. Total accumulated losses by the company have risen to over RMB80 billion (US$13 billion) as of the 2020 year-end.

Debts are on the increase with short-term debt forming the bulk of total debts. Borrowings of RMB5.8 billion (US$889.3 million) are due within a year. And short-term interest-bearing liabilities to be settled totalled RMB6.5 billion (US$992.9 million). But liquid assets which stood at RMB56.8 billion (RMB8.7 billion) could provide a cushion. Interest cannot be paid out of profits as the company has been operating at a loss. On the contrary, operating cash flow has covered interest obligations for two years in a row. In fact, net cash from operations could offset interest obligations 8.3 times in 2020 as against 20.5 times in 2019.

Business Risk
The high cost of operations makes it difficult for DIDI to make profits or pay dividends to shareholders. Huge capital expenditure also prevents the company from making free cash flow for the shareholders. Investment in new energy technologies could drain the finances of the company as those technologies are still evolving. Furthermore, DIDI’s earnings are not fully diversified yet as almost all earnings come from China.

Regulations are a big hurdle to cross in 17 different countries; and the company could face litigation for security or data privacy breaches as it amasses a lot of data from the millions of platform users in the countries where it operates. These have financial and reputational implications for the company.

Recommendation: Undervalued

Earnings Chart of DiDi Global Inc.

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