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Tencent : Can Didi Justify Its Valuation? -- WSJ

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08/11/2017 | 08:48am CEST
By Li Yuan 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 11, 2017).

While Uber Technologies Inc. is trying to dig out from scandals and curtail losses, its former China rival, Didi Chuxing Technology Co., is spending billions of dollars on other startups around the world.

Didi recently announced investments in three ride-sharing apps in as many weeks: Careem in the Middle East and North Africa, Taxify in Europe and Africa and Grab in Southeast Asia. Early this year, Didi invested in 99, a ride-sharing company in Brazil. It's also put money into Lyft Inc. in the U.S. and Ola in India. Didi has reached beyond car services, investing in Ofo Inc., one of China's top bike-sharing apps, and in Ele.me, a major app-based food delivery service.

To some venture capitalists, Didi seems to be doing what they usually do -- raising money from investors and betting on startups they see as having growth potential. To others, Didi is following the playbook of internet giants Alibaba Group Holding Ltd. and Tencent Holdings Ltd, both of which have invested in a wide range of domestic and foreign startups, including Didi.

In either case, analysts and members of the investment community say Didi isn't behaving like a startup -- even if it is the second most-valuable startup in the world with a $50 billion valuation -- just behind Uber.

"It's not normal for an unprofitable company to do this," says Wang Cong, a finance professor at China Europe International Business School. "Unprofitable startups should use the capital they raise on operations."

In the year since it vanquished Uber after a depleting, subsidy-fueled battle for the China market, Didi is still unprofitable and has become more of an investor in other startups than a cutting-edge disrupter.

It now represents a new kind of startup, a fast-growing phenom that rises to the status of an industry giant due to its scale and capital. Abetting this is a winner-takes-all trend in the internet industry. Investors pile their cash on a small field of mega-startups, hoping to choose the one company that will dominate a particular sector (think Facebook for social media or Alibaba for e-commerce).

In its five years of existence, Didi has raised more than $15 billion in venture funding, private equity and debt financing, including $5.5 billion in April -- the largest round for any tech startup ever. That's more than the $12 billion Uber raised in total in seven years.

"Didi is a fundraising machine," a venture capitalist who isn't a Didi investor told me. "Its biggest competitive advantage is the huge amount of capital it raised, not its technology."

Bulked up with cash and seemingly dominant in its home market, Didi needs to justify its $50 billion valuation more than ever -- even its defenders say so. Uber's recent corporate turmoil and the share-price fall for Snapchat parent Snap Inc. since its market debut show that the fortunes of widely admired startups can change quickly.

In announcing deals, Didi says its investments are strategic and that the company benefits from its relationships with regional winners across the world by sharing technology, product development and operations. The company says it offers 20 millions rides a day in China. "We are glad our investors support us in this strategy and see these choices bear good outcomes," a spokeswoman says.

Didi's victory over Uber last August left the Chinese company in a near monopoly position in its home market. Didi acquired Uber's China operations, while Uber became Didi's largest investor with a stake of about 18%.

Still, it proved to be too early for victory laps. Some of China's largest cities enacted stringent regulations on ride-sharing, decreasing the numbers of eligible drivers -- and hence the number of rides. With Uber out, Didi cut back on subsidies and raised prices for some services, sparking user complaints and criticism from state media. The popularity of bike sharing has also cut into Didi's business, according to mobile data monitoring site Trustdata.

While there's no sizable competitor for Didi, there are more than 130 ride-hailing platforms in the country, according to the transportation ministry. Some taxi companies -- Didi's biggest regulatory headache -- are beefing up their own ride-hailing services and have lodged a complaint about the Didi-Uber China merger with the regulator.

A Commerce Ministry spokesman recently said its antimonopoly department summoned Didi for meetings and is investigating the merger. Didi said it's in communication with authorities.

Looking to the future, Didi is also investing in artificial intelligence technologies, especially driverless cars -- a field that's nearly as crowded as ride-sharing. Even so, investors are still likely to lavish funds on the company because its position as China's biggest taxi service and its sizable war chest make Didi a safer bet.

"The logic of China's venture investing market is that it's not a problem if money can solve it, from talent, technology to market share," an investor in Didi told me. "It's getting really boring."

Write to Li Yuan at [email protected]

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Financials ( CNY)
Sales 2018 339 B
EBIT 2018 107 B
Net income 2018 86 081 M
Finance 2018 89 438 M
Yield 2018 0,29%
P/E ratio 2018 36,21
P/E ratio 2019 28,57
EV / Sales 2018 8,84x
EV / Sales 2019 6,41x
Capitalization 3 090 B
Duration : Period :
Tencent Holdings Ltd Technical Analysis Chart | 0700 | KYG875721634 | 4-Traders
Technical analysis trends TENCENT HOLDINGS LTD
Short TermMid-TermLong Term
Income Statement Evolution
Mean consensus OUTPERFORM
Number of Analysts 41
Average target price 425  CNY
Spread / Average Target 31%
EPS Revisions
Hua Teng Ma Chairman & Chief Executive Officer
Chi Ping Lau President & Executive Director
Yu Xin Ren COO & President-Interactive Entertainment Group
Shek Hon Lo Chief Financial Officer & Senior Vice President
Zhi Dong Zhang Chief Technology Officer
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