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Didi Global Inc., the Chinese Uber, ended its first day of U.S. trading a little over its IPO price. It is now valued at $68.49 billion.
The ride-hailing company was looking to raise $4 billion (which implied a valuation of $60 billion) by an initial public offering on the New York Stock Exchange, offering 288 million shares under the straightforward ticker symbol DIDI.
The company is called the Chinese Uber because it is the largest ride-hailing company in that vast country. But its operations aren’t confined to China. It offers rides elsewhere in Asia, as well as in Russia and Latin America.
Since Didi’s targeted valuation held up it is now the largest international company by valuation to IPO in the United States since 2014 and the advent of Alibaba, which raised $25 billion that way.
Alibaba (NYSE: BABA), also a Chinese firm, (eCommerce and IT) is a very auspicious comparison. It first priced at below $90. It is now close to $225, with a market valuation well above $1 trillion.
A More Modest Target
Didi (DIDI) began trading on Wednesday, June 30. The valuation target of $60 billion was big, but more modest than earlier targets. At one point the company was hoping it could hit an implied valuation of $100 billion. But it ran into skeptical sentiment and backed off.
Reuters quoted an anonymous investor at a Hong Kong based hedge fund who said, “many investors still doubt if Didi can maintain a high growth rate for its core ride-hailing business in China.” After all, this investor said, Didi already may be at a saturation point in the large cities. That means that further growth has to come from lower-tier cities. Yet it faces intense competition there.
Separately, there are concerns about the impact a regulatory crackdown might have on Didi.
Brock Silvers, chief investment officer of Kaiyuan Capital, a Hong Kong based private equity firm, describes China’s regulatory process as both closed-door and unappealable. This makes many investors reluctant, at mere word of a problem, about assuming “significant yet unquantifiable risks.”
Specifically, in April, regulators looking into China’s internet giants ordered 34 such firms to correct their alleged anti-competitive excesses. As an Internet-based ride-hailing company, Didi has made efforts to provide what it understands the government wants, but it has also warned investors that it can’t be sure the officials will be content with Didi’s changes or that it will not be penalized.
The agency involved, the State Administration for Market Regulation, apparently objects that Didi’s price practices have been opaque.
The IPO: Execution and Romance
It is good to remember that the IPO process is risky itself: it is not designed to be friendly to the retail investor. A company’s founders and its PE investors are the ones in the best position to make significant gains. In the first few minutes of trading, the stock often spikes. Even if you, as a retail investor, placed a “buy” order before the start of trading, you’ll miss out on the opening-minutes excitement as your buy is executed at the higher price.
“Excitement” is a key word there. The institution of the IPO has a romance to it that can be dangerous. An investor sees himself “getting in on the ground floor” of something that could be really big, like the Chinese Uber. And he may rue the day.
Usually the best course for most retail investors is to refrain from participation in the IPO at all. Don’t buy. Leave the romance to the side. Wait and see where the stock stands a month down the road. Even that brief track record for a listed stock can provide a good deal more guidance than no track record at all.