In the run up to its June 30th listing on the New York Stock Exchange, DiDi Global (NYSE: DIDI) was expected to be one of the year’s biggest IPOs. But with heightened oversight by Chinese regulators having kept the stock down since it came to market, investors who were initially attracted to the major growth prospects of what is viewed as “China’s Uber” are wondering if they wouldn’t be better off simply investing in Uber Technologies itself (NYSE: UBER) -at least for the near-term.
The near-term growth prospects of the stock, however, rapidly ground to a halt the following day when the Cyberspace Administration of China, citing data security risks and national security concerns, imposed restrictions on DiDi’s data collection methods and forced the removal of the company’s app from China’s app stores.
Though DiDi’s global presence includes 15 countries in roughly 4,000 cities and regions, the bulk of its profits stem from its ride-hailing offerings in China and the company was forced to publicly acknowledge that the suspension of its ability to register new users could have a significant impact on its profitability.
DiDi now under increasing scrutiny from investors
Since then, as information has come to light that DiDi’s management ignored warnings from Chinese regulators before ever even submitting its application for a U.S. listing, and questions arise about whether the company was forthcoming enough about the regulatory risks disclosed in its offering prospectus, scrutiny of its business practices has only increased.
The company has also been hit with two class action lawsuits filed on behalf of investors, both in New York and California, which both allege that the company made false and misleading statements to investors and failed to disclose important information that would have indicated the risks of investing in the stock.
“The Registration Statement emphasized that DiDi purportedly ‘follow[ed] strict procedures in collecting, transmitting, storing and using user data pursuant to [its] data security and privacy policies.’ In fact, the Registration Statement claimed that DiDi ‘collect[s] personal information and other data from [its] users and use such data in the course of [its] operations only with their prior consent,” said a statement released by Pennsylvania-based Kessler Topaz Meltzer & Check, one of the two law firms that have filed suits. “The truth began to emerge on July 2, 2021 when the Cyberspace Administration of China (“CAC”) stated that it had launched an investigation into DiDi to protect national security and the public interest. Following this news, DiDi’s share price fell $0.87, or approximately 5.3%, to close at $15.53 per share on July 2, 2021.”
Data collection is an increasing worry
At the heart of regulatory concerns, both among Chinese as well as U.S. regulators who have previously taken their own steps to enhance oversight of Chinese companies listing in the U.S., is the mammoth amount of data collected and housed by companies today and what could happen if such data were compromised.
U.S. regulators also have significant concerns that Chinese companies listed on American stock exchanges could open investors up to potential fraud, or that the lack of transparency available on some of these companies could indicate ownership or control by the Chinese government. As such, the Securities and Exchange Commission recently adopted the Holding Foreign Companies Accountable Act, which requires Chinese companies to submit to extensive financial reviews and to identify board members who are part of China’s Communist party, among other measures.
China listing pipeline is ruptured
While it remains unclear how all of this will play out for DiDi over the long term, the situation has already brought the pipeline of Chinese companies looking to list on U.S. exchanges to a halt over ongoing regulatory uncertainty. One such company is ByteDance Ltd., the owner of social media giant TikTok, which has postponed its planned U.S. IPO over China’s data security concerns.
“China is not acting in a way that is responsible. It knew that DiDi was listing, and yet it just turned around just two days later and went after the company hard, which of course turned into significant losses for American investors. It is an abuse of China’s regulatory powers,” said China expert Gordon Chang. “China shouldn’t’ have done this after the IPO. If it wanted to go after DiDi, the responsible time would have been before the offering.”
Now, with DiDi essentially stuck in a sort of limbo until Chinese regulators allow its app back in the country’s app stores, investing in DiDi means gambling and betting that things will ultimately play out in the company’s favor. “I’m not saying you can’t make money on DiDi, but you’re trying to guess something that’s totally beyond your control, which is the attitude of Chinese regulators. It’s just pure politics. It’s like playing roulette,” said Chang.
For now, it doesn’t look like too many investors are taking that bet. Since news broke of Chinese regulators’ actions, the company’s stock has fallen to as low as $11.00 per share, on July 7th and has yet to regain it offering price, let alone its first day gains. The stock closed its more recent day of trading at $11.97 on July 16th.