Didi Global Inc.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

A Chinese mobility technology platform offering a range of services, primarily ride-hailing, as well as other related services in the Chinese market and some other countries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Didi Global Inc., also known as Didi Chuxing, is a prominent technology platform specializing in ride-hailing services in China, as well as services related to energy and vehicles and other international initiatives. As of December 31, 2022, it had a total of 20,170 full time employees.

Business Overview

Revenue Distribution:

  • China Mobility: This segment is the largest contributor to Didi’s revenue, encompassing ride-hailing, taxi services, and carpooling. This segment is heavily influenced by user demand and ride-hailing rules in each city and region in China.
  • International: Includes operations of its ride-hailing business in some select international markets.
  • Other Initiatives: While still small compared to core ride-hailing operations, this segments has shown steady growth.

The vast majority of revenues generated comes from core operations in China. International and Other Initiatives segments are a small portion of its overall revenue.

Trends in the Industry:

The ride-hailing and mobility market is dynamic, facing constant changes in:

  • Regulatory environment: China’s regulatory environment significantly impacts Didi, and regulations concerning data security, driver and vehicle certification, price setting, and fees can change quickly and dramatically, directly impacting its operations.
  • Competition: While Didi is the dominant player in China, many other smaller players are also fiercely competing for market share.
  • Technology: The pace of innovation is rapid, with new technologies like self-driving vehicles and advanced electric vehicle technologies potentially reshaping the transportation sector.
  • Consumer behavior: New trends in customer demand, specifically, demand for electric and energy services, change the nature of the business, and increase competition.
  • Economic conditions General economic conditions in China and other countries where the business operates affect the travel and expenditure patterns of customers, ultimately impacting the usage of the platform.

Margins:

  • Didi’s margin depends on factors such as the cost of incentives given to drivers, government regulatory changes that affect prices, and the amount of discounts that need to be offered to users.
  • As competition becomes more intense and prices are pressured downwards, margins come under pressure.

Competitive Landscape:

  • Didi, while a market leader in China, faces increasing competition from smaller players. The market is relatively fragmented.
  • In international markets, the company faces heavy competition from players who are more established in those areas.
  • New technologies could enable smaller, more innovative companies to gain market share.

While Didi is the dominant player in China, it operates in an increasingly complex and competitive market.

What Makes Didi Different?

  • Large-scale market share in China.
  • A wide service portfolio including ride-hailing, delivery, financial services, and other mobility-related services.
  • A huge user and driver network across China, with significant experience in that market.

Financials

Overall performance:

  • Didi has generated billions of dollars in revenues but profitability has been an issue.
  • While the company is now beginning to be profitable, the large amount of debt and liabilities might remain a concern.
  • The company’s stock price has been extremely volatile since its IPO, with much of it due to concerns related to management’s inability to navigate various risks.

Revenue:

  • Didi’s revenue is primarily generated by China Mobility, and other segments are still relatively small. The revenues are affected by factors such as competition, changes in pricing, and the intensity of its user incentives program.
  • The company’s revenue numbers were down in 2022 compared to 2021 as the company was under regulatory scrutiny and was removed from app stores for 18 months, affecting its revenue substantially.

Margins:

  • Profitability has been a major issue. While revenues were high, the operating income in the past has been quite volatile and often in the negative territory.
  • The path to profitability includes managing incentives and balancing user and driver preferences while optimizing capital allocation.
  • The main drivers of margins for Didi is cost of incentives and promotions and other fixed costs associated with running a large scale, operationally intense company.

Balance sheet:

  • The company’s debt levels are high, reflecting the costs incurred by its international expansion strategy.
  • It is also investing in new technologies and R&D, further increasing its expenses, that increase the risk.
  • While current assets are large and can sustain the company for some time, a large number of liabilities may threaten its long-term growth.

Although Didi has made steps to become a more profitable company, its balance sheet is still burdened with high debt and liabilities.

Recent Concerns/Controversies:

  • Regulatory Issues in China: Didi has faced considerable regulatory pressure from the Chinese government. Regulations about data collection, price setting, fair treatment of drivers, and national security concerns have affected Didi.
  • Delisting from the NYSE: Following a regulatory crackdown and its delisting from the New York Stock Exchange, the company faces a limited number of avenues for raising capital and investors may be less willing to invest in the company.
  • Employee Layoffs: Didi had layoffs in 2022 to further streamline operations.
  • Uncertain path to profit: While some progress was made in profitability, it was noted by analysts that the company’s path to profitability is still uncertain and could take longer than anticipated. The company continues to be exposed to a high amount of market volatility due to geopolitical and economic factors.
  • Foreign IPO Concerns: Many investors are reluctant to invest in overseas companies listed in U.S. exchanges as uncertainty in Chinese regulations remains.
  • Impact of Covid on Operations: Despite COVID restrictions being eased, the effects of the pandemic continue to affect the mobility and travel industries and that affects DiDi directly.

Moat Rating

Rating: 2 / 5

  • Network Effect: Didi benefits from the network effect; the more drivers on the platform, the more riders will find it convenient, and vice versa. However, given the competition in the industry, this effect may not be as strong as it might be, and that effect can erode over time with other companies providing good and stable services.
  • Switching Costs: For some daily riders or drivers, there is some switching costs as they are used to using a particular platform. However, these switching costs are not high for all riders and drivers as they can switch to another app with ease.
  • Scale advantages: With a large amount of data, geographic reach, and knowledge of customers, Didi does benefit from economies of scale. However, due to its large employee base, Didi needs large revenue to generate profit. Also, due to the nature of its business, some of these economies can be easily replicated.
  • Intangibles: Didi does not have significant proprietary patents and brand as its services are fairly similar to other players in its domain, so has limited pricing power.

The Moat is quite narrow because of the intense competition and low switching costs, the strong regulatory headwinds, and its lack of strong intangibles. It does not show any ability to build strong recurring revenues and defensible long term profit.

Legitimate Moat Risks

  • Regulatory risks: The Chinese government can impose more restrictions on data collection, pricing, driver conditions, and more, limiting Didi’s ability to operate effectively.
  • Disruptive competitors: New competitors, especially those with innovative technology or unique business models, could emerge and diminish Didi’s market share.
  • Technology innovation: New innovations, especially in areas like autonomous driving, may completely disrupt the current market structure.
  • Operational risks: High operating costs, especially related to incentives and marketing, combined with increased competition, may negatively affect the company’s profits.

Business Resilience

Didi has shown decent resilience during challenging times, including surviving a regulatory crackdown, and still shows significant long-term growth potential in ride-hailing and other services. However, it faces many challenges ahead and can be susceptible to sudden changes in market conditions. Didi’s brand power and reach in China provide some measure of resilience, but its dependence on short term measures and lack of long term revenue streams makes it risky in the long run.

Understandability Rating

Rating: 4 / 5

  • The company operates a mobility platform in China and other selected countries. Didi also provides financial services and other related operations.
  • The nature of the company is a complex set of logistics operations and services, which is hard to understand from an outside perspective.
  • Its main revenue driver is the ride hailing operations in the Chinese market, which can be impacted by regulatory and economic conditions in that region.
  • The overall business structure, including its various subsidiaries and operating segments are also hard to comprehend fully from outside.
  • While a company that connects drivers with riders is not that complex to understand, the whole system of services that Didi provides can be hard to comprehend.

Balance Sheet Health

Rating: 3 / 5

  • While Didi has enough assets to operate for the short term, it still carries a large amount of debt and liabilities that may become problematic for its long term survival if the company is unable to turn a profit consistently.
  • The company may also face challenges with increasing its equity value.
  • Didi’s financial reports are not easy to understand or dissect, making analysis a complex endeavor.
  • The company has to make significant changes in business practices in order to maintain its license to operate.
  • Didi’s management has a history of using complex accounting techniques, which does not bode well for transparency and shareholder value.
  • The debt to equity level, if not addressed, could have serious consequences for the company in a downturn.