Didi Chuxing, China’s dominant ride hailing app, has finally started the engine on its long-awaited initial public offering. The bad news is that potential investors must endure a steeper fare if they want to go along for the ride.
After it was valued at around $65bn by private investors in 2018, the Beijing-based group is now reportedly targeting a valuation of up to $100bn.
At first glance, that does not seem too far-fetched. The figure works out to about five times the figure Didi reports as revenues for 2020. Uber and Lyft trade on a multiple of around 8 times.
But this comparison is misleading. What Didi refers to as revenue in its IPO prospectus is actually gross bookings, or total fare from its rides. Uber and Lyft report revenues as gross bookings minus payouts to drivers.
Didi’s equivalent of headline revenue is opaquely labelled “platform sales”. This came out at $5.3bn in 2020. A $100bn valuation would put Didi on nearly 19 times that figure. Talk about price gouging.
Didi has at least endured the pandemic better than both Uber and Lyft. Revenue (aka platform sales) rose in 2020 as China recovered from the global health crisis. That compares to a 14 per cent drop at Uber and the 35 per cent decline at Lyft.
The divergence has continued this year. Didi more than doubled its platform sales during the first quarter and swung into a small profit of $837m. Uber and Lyft both reported losses.
Yet this hardly justifies a $100bn valuation. Ride-hailing remains a cut-throat business in China, even after Didi brought out rivals including the Chinese operations of Uber. Competitors include car manufacturer Geely’s Caocao Chuxing and food delivery platform Meituan.
There are regulatory risks at home and abroad. Didi’s investment in food and parcel delivery as well as in electric vehicles will remain a cash drain for the foreseeable future. To entice investors, Didi needs to lower its targeted valuation.
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