2559.HK
Dida wins ride-sharing race to market, but could stay stuck in first gear

The company’s Hong Kong listing application was finally approved on its fifth attempt, paving the way for its IPO

Key Takeaways:

  • Dida has been approved to list in Hong Kong, reporting adjusted net profits in each of the last three years
  • The ride-sharing company recently lost its title as China’s top carpooling platform to HelloRide, even as it relies heavily on the business

 

By Lau Chi Hang

Dida Inc. (2559.HK) has taken pole position in the race to become China’s first publicly traded ride-sharing app, even as leading ride-sharing platform DiDi and other smaller rivals reportedly eye similar listings.

Dida is likely to cross the IPO finish line later this week, after its listing application was approved last week by the Hong Kong Stock Exchange. Having received that key green light, the company now plans to sell about 39 million shares for HK$5 to HK$7 apiece, raising up to HK$270 million ($35 million). The shares are expected to make their trading debut on Friday.

The road to Dida’s listing has been full of twists and turns, to say the least, including four previous attempts that ultimately stalled. With the end now in sight, it will be up to investors to determine the company’s worth.

Dida’s prospectus shows it’s zig-zagged in and out of profitability, reporting a profit of 1.73 billion yuan in 2021, only to swing to a loss of 180 million yuan the next year, and then zoom back to the black with a 300 million yuan profit last year. Part of the volatility owed to big fluctuations in the fair value of its preferred shares. Excluding that factor, it was profitable for each of the last three years, including a 238 million yuan adjusted profit in 2021, falling to 84.7 million yuan in 2022, before rebounding to 226 million yuan last year. 

Small niche in a crowded sea

Leading U.S. peer Uber (UBER.US) and hometown market leader DiDi have only found profits in the last year, making Dida’s ability to record adjusted profits for the last three years all the more impressive. Much of that could owe to its target market, which, until recently, was relatively underserved by big names like DiDi.

China’s ride-sharing market falls into three main categories, namely: taxis; ride-hailing cars that perform one trip for one customer at a time; and carpooling cars that carry multiple passengers at once to different destinations, similar to public buses. While DiDi and former rival Kuaidi fought a bloody battle for the ride-hailing market before their landmark merger nearly a decade ago, Dida Chairman Song Zhongjie set his sights on a less-beaten road by focusing on the carpooling segment when he cofounded his company with four partners in 2014. Staying away from the hotly contest ride-hailing segment quite possibly set Dida on a path that ensured its survival to the present.

Like other ride-sharing apps, Dida benefits from an asset-light operating model, which avoids the high costs associated with owning or renting vehicles. And because it chose a less competitive market segment, the company didn’t need to provide subsidies on the same scale as the bigger players to attract private car owners and taxi drivers. That made it easier for Dida to operate profitably.

With relatively little competition and plenty of space to grow, it’s little wonder that Dida attracted some big-name backers over the years, including IDG, leading online travel agent Trip.com, electric car maker Nio, e-commerce giant JD.com, and even private equity powerhouse Hillhouse, raising more than $288 million in five financing rounds.

Limited potential

While Dida’s market niche has lifted it to comfortable profits faster than many of its peers, that same space also comes with limited growth potential due to its niche status. Third-party data in the prospectus shows that taxis and ride-hailing services accounted for 58.5% and 37.8% of China’s passenger transportation market by gross transaction value in 2022, while carpooling only accounted for 3.7%. Such a small pie may be tasty for a niche company like Dida, but it will never propel it into the big leagues.

Moreover, Dida’s rivals are hardly sitting back to let the company enjoy its slice of the ride-sharing pie. DiDi launched a similar service as early as 2015. But luckily for Dida, its larger rival’s carpooling service hit a major obstacle and was forced to suspend operations in 2018 after one of its carpooling passengers was murdered by a driver. DiDi relaunched the service, called Shunfeng, in 2020, and saw its market share quickly climb from 10.8% to 19.6% in the first year after the relaunch.

Losing its title

DiDi isn’t the only rival posing a threat in the carpooling space. An even newer arrival, HelloRide, backed by the deep-pocketed and resource-rich Alibaba, launched in 2019 and had taken 42.5% of the market just three years later, dethroning Dida as market leader. 

To counter the two-tiered attack from DiDi and HelloRide, Dida has been forced to play the subsidy card that it largely avoided for so long, undermining its profitability. As that happened, Dida’s gross margin for its carpooling platform services fell from 85.4% in 2021 to 79.5% in 2022 and 75.9% last year. While such figures are still impressive, they are on a clear downward trend.

Dida understands that a single service isn’t enough and will hardly power it to the ride-sharing big leagues. In an effort to diversify, it launched a smart taxi service in 2017 targeting the taxi market. But that campaign hasn’t proven too fruitful and has become a drag on Dida’s overall performance. The business only registered 33 million yuan in revenue in 2021, and the figure has fallen steadily since then to just 11 million yuan last year, accounting just 1.4% of its total. That business recorded gross losses of 7.1 million yuan and 5.78 million yuan in 2022 and 2023.

All that shows that targeting new markets is much easier said than actually wringing profits from them in such a competitive sector. Data from consultancy Shangpu shows that in 2022 China’s top four ride-sharing companies controlled 89.4% of the market. In the relatively mature space, it seems unfeasible for Dida to gain share by simply burning money over the long term, making it difficult to see how this David might defeat the market’s other Goliaths.

Its position in a niche market with limited room for growth and growing challenges from well-funded rivals certainly doesn’t look too promising for Dida, especially in light of its inability to break into other market segments. And even if it can reclaim its title as king of the carpooling market, its future growth potential in that space looks quite limited. 

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