DiDi Global Inc (fka DIDIY)

[JohnCM]

DiDi Global Inc.: Buying Every Share I Can Get

Jul. 24, 2021 2:42 AM ETDiDi Global Inc. (DIDI)LYFTUBER146
Seeking Alpha

DiDi is the "Uber of China" and it has faced tough regulatory scrutiny after a cybersecurity privacy issue and more importantly - listing on US exchanges and not Chinese ones.

As a result, the company's share price has plummeted, greatly undervaluing the company relative to their closest peers like Uber and Lyft.

I believe the company is undervalued by as much as half and hold a highly bullish stance on the company's long-term share price prospects.

DiDi Global (DIDI), the ride sharing behemoth known as 'The Uber of China," has plummeted after what seemed to be a successful IPO after China's regulatory authorities got frustrated with the company listing in the United States and not in China, as well as some alleged cybersecurity issues with the company supposedly sharing customers' private information. To be fair, these allegations and crackdowns can be significant and serious, but for the time being it seems that a lot of these allegations are used as a way to scrutinize DiDi Global for not listing in China, which is understandable.

One of the main benefits of nurturing free markets, or whatever version of that capitalism China's businesses enjoy, is that the people, or investors, get to enjoy the fruits of that success and with DiDi listing outside of the Peoples Republican of China is that Chinese investors don't get the traditional opportunity of exposure to its growth and success. Therefore, regulators making sure they comply with all the stringent regulations that come with businesses who do list elsewhere and the subsequent crackdown is not a surprise.

But at the end of the day, it's unclear if Chinese regulators will make good on their threats to bar the company from operating in the certain regions of the country and/or put in place such strict regulations where the company's core growth avenues are materially hurt. As of now, I believe, this noise has made DiDi Global an excellent near to long term growth investment opportunity.

What happened to DiDi?

DiDi Global faced a double bang after earlier this year Chinese regulatory agencies accused the company of mishandling the personal information of its customers and sharing them against current regulations. They cracked down on the company's cybersecurity effort and in more recent news have placed regulatory agents in the company's headquarters to follow their efforts to secure the company's data and personal information.

However, some have indicated that these efforts and others are part of a larger issue when the company decided to list in the United States exchanges and not in the Chinese markets, essentially denying Chinese investors the opportunity to invest in the company's growth that they themselves are fueling by using and marketing the company. Chinese regulators have since indicated that they are mulling several retaliatory measures against the company, which may limit its operations, fine them for their behavior or even a forced delisting from the US exchanges.

The sum of all fears

Forcing a company to delist from the US exchanges will be an unprecedented move for China and cause some havoc, being the main risk of investing in DiDi Global for the longer run as their delisting terms can be quite unfair. There are currently no indications of what those terms may be if a delisting is forced, but it's clearly not going to do well by the company.

There are, however, several other options for Chinese regulators other than forcing a delisting, like listing on the Chinese exchanges in conjunction with the existing US one. Even so, investors who don't have a high risk-reward apatite should do an extensive due diligence on this issue.

Putting that risk aside, however, the remaining risks are relatively mild. I don't believe that the Chinese regulatory agencies will limit the company's operations and hurt their own nation's growth given that taxes and other income measures are all in the Peoples Republic of China. Now, with those risks put aside, I discuss what DiDi Global is currently worth relative to their current share price.

Valuing DiDi

Valuing the company is quite easy compared to US-based peers but some precautions should be taken since the markets are different from a regulatory point of view, where China, as mentioned throughout the article, has more say in the growth of the company than does the US on its companies.

The 2 companies worth comparing DiDi to are Uber (UBER) and Lyft (LYFT), which we'll do using revenue projections given that DiDi does not have EPS coverage as of yet. Comparing these companies shows just how undervalued the company really is relative to peers' 4-year sales growth and their corresponding price to sales multiples.

Sales Growth FWD Price/Sales
DiDi Global 15% to 40% 1.2x to 1.6x
Uber 21% to 41% 2.6x to 5.7x
Lyft 18% to 41% 2.9x to 5.8x
While DiDi is expected to grow sales at a slightly lower rate over the 4-year time frame, it's not by that much. At the same time, they are currently trading at roughly half the rate of Uber and Lyft relative to sales projections. It's worth exploring some other factors, just to make sure we're not missing anything too important which will justify a lower overall valuation.

One thing worth looking at is the cash and debt situation the companies are in, to determine if there is any valuation discrepancy, which we see is not the case, even strengthening the case for DiDi Global being undervalued.

Cash + ST Investments Long Term Debt
DiDi Global $3.8 billion + $3.7 billion $290 million
Uber $4.8 billion + $819 million $7.8 billion
Lyft $312 million + $1.9 billion $652 million
Now, it is worth pointing out the obvious - DiDi is not expected to turn a profit in the coming 48 months while both Uber and Lyft are expected to report a profit in 2022, after an extremely tough operating environment due to the COVID-19 pandemic which engulfed the global economies and transportations. In a net income valuation, even though there are currently no projections for DiDi, this may be a contributing factor since we don't yet know when they are expected to generate a profit.

Investment Conclusion

Looking at the numbers and fundamentals I've shared throughout the article, I come to the conclusion that DiDi Global is undervalued by as much as half, meaning that I believe the company is worth slightly over double its current share price. This is separate from the fact that they are expected to grow sales at a low to mid double-digit rate over the next 4 years, which gives them long-term upside value.

I am skeptical that the Chinese regulatory authorities will do such damage as to cause the company material harm to its growth prospects, concluding a highly bullish stance on the company's long-term prospects and indicating a severe undervaluation of the company's share price.