The Chinese government announced an enormous fine of $1.2 billion on Didi but did not explain the methodologies behind the calculation

Key Takeaways:

  • China’s cybersecurity regulator imposed a big fine of $1.2 billion on Didi after closing a year-long investigation into the company, but how it arrived at the amount has raised concern in the market
  • Analysts believe that the company needs to use internal resources and pay off the fine first before it can move on with its IPO plan in Hong Kong

By Ken Lo

Paying 8 billion yuan ($1.2 billion) to get rid of a nightmare: is it too much?

On 21 July, the Cyberspace Administration of China released a decision on administrative penalties on Didi Global Inc. (DIDIY.US), following a cybersecurity review into the company, and fined the company 8.026 billion yuan.

According to the authority, conclusive evidence and clear facts have shown the company’s egregious and malicious violations of laws and regulations including China’s Cybersecurity Law, Data Security Law as well as the Personal Information Protection Law. And the chairman and CEO of the company Cheng Wei and President Liu Qing were both fined 1 million yuan personally.

The fine amounted to 4.6% of the company’s total operating revenue of 173.8 billion yuan in 2021 and is the biggest since last year’s fine of 18.228 billion yuan imposed on Alibaba (BABA.US, 9988.HK) for its violation of China’s Anti-Monopoly Law.

Businesses found in violation of the Anti-Monopoly Law can be fined up to the equivalent of 10% of their fiscal earnings in the previous year. The fines dished out under the Cybersecurity Law are not linked with companies’ earnings but are often one to 10 times the illicit financial gains made through the violations. Didi’s has been the biggest single fine imposed so far among all cybersecurity cases. Due to the lack of disclosure by the authority of Didi’s earnings related to the violations, we do not know how the amount was determined.

Able to attract new users again

The authority explained that the company failed to comply with its obligations under the Cybersecurity Law, Data Security Law as well as Personal Information Protection Law in flagrant disregard of national cybersecurity and data security interests. Its illegal conduct dated back to June 2015 and had lasted seven years. The longstanding and egregious nature of the offenses warrants severe punishment, according to the authority.

The company’s decision to go public in the U.S. one day before the 70th anniversary of the Communist Party of China struck a nerve, especially in terms of national security, thus the Internet Security and Information Office launched a year-long cybersecurity review into the company and ordered an overhaul of its business operation. The fine is part of the investigative results. But the authority has also agreed to reinstate the functions of Didi’s apps including lifting restrictions on attracting new users, thus clearing the biggest hurdle on its path toward a Hong Kong IPO.

Soon after the company went public in the U.S., the authority ordered the company to pull 26 of its apps from app stores by alleging its malpractice of illegally collecting personal information. It had a devastating impact on the company’s new business and its stock went into a downward spiral.

In mid-May, its stock plunged to a new low of $1.37, down 90% from the IPO price of $14 last year. The company convinced stockholders that the only way to get the strangling cybersecurity review off its back was to exit the New York Stock Exchange, and finally the motion passed at an extraordinary general meeting on 23 May, marking the end of its brief yet tortured stint in the U.S. stock market with its shares moved to over-the-counter trading.

With the rumblings in the market that the authority intended to go easy on Didi and had decided on the fines, investors regained their confidence in the company’s prospects of returning to the capital market. Its stock price rose by 177% from the low in May, reaching $3.80 last Thursday.

Francis Lun, CEO of GEO Securities, believes that Didi needs to use some of its resources to pay off the fine before moving forward with the IPO proceedings in Hong Kong.

“Given the draconian regulatory pressure Didi’s new business is under and the ongoing travel restrictions due to the pandemic, the ride-hailing sector is not exactly trending well and the company might not be able to pay the fine even with a successful round of fundraising in Hong Kong,” Lun said.

According to Didi’s financials, its cash and cash equivalents totaled around 44 billion yuan by the end of last year, but the operational cashflow was a negative 13.41 billion yuan. At this rate, the company might only have enough in its coffers to keep things going for another two to three years, not to mention that it has 8 billion yuan to pay in fines and potentially faces the need to compensate U.S. investors for delisting.

A valuation pariah

The company might be willing to pay the fine in order to get on with things. The withering scrutiny from the Chinese government on tech giants as well as intense competition facing it are threatening its market dominance.

According to QuestMobile, last year Didi’s monthly active users (MAU) totaled 80.7 million, down by 20% year-on-year, while another two ride-hailing service companies Caocao Mobility and T3 go registered 65% and 125% in monthly active user growth, which shows that Didi is losing market share.

In terms of valuations, Didi’s latest price-to-sales (P/S) ratio is just 0.3 times, much lower than the 1.9 times of the global gaint Uber (UBER.US), and the figure is even further from Gogox Holdings (2246.HK) and Grab Holdings (GRAB.US) at 5.9 times and 13.9 times, respectively. So, due to the strict regulatory policies and tight pandemic controls, investors are rather conservative about the company’s prospects.

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