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The Didi SEC IPO probe: five things you need to know

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Didi Chuxing Technology Co (NYSE:DIDI) was meant to be the poster boy IPO for a Chinese company on the New York Stock Exchange. The $4.4bn IPO in June last year was somewhat overshadowed by the announcement that the Chinese authorities were opening an investigation into the ride hailing app. That pushed the share price off a cliff and investors have seen 85% wiped off the stock in almost a year.

Here are five key developments that investors should be aware of:

#1. Didi plans to abandon its US listing

Didi said back in December that it would be delisting its American Depositary Shares (ADRs) from the NYSE and would be pushing for a Hong Kong listing. Shareholders are due to vote on this measure on 23 May. We expect they will vote in favour, and Didi will beat a retreat back to Asia. The affair also has implications for other Chinese tech companies that are looking to tap Western capital markets. Buying foreign companies is one thing, listing on a foreign exchange is obviously something entirely different. One broker we spoke to recently voiced optimism that this might bring the London market back into focus for China listings.

#2. SEC has opened a probe into the IPO

The SEC has begun an investigation in the last week, something that Didi itself confirmed in the annual report it issued to investors in the past few days. Details of the nature of the investigation have yet to be revealed. However the news has had a further depressive effect on the Didi stock price. This includes its shares in Frankfurt. Our experience with the SEC is that it will never discuss an ongoing investigation. We anticipate that when it does – if it does – publish its findings, Didi will be long gone from the NYSE (see above).

#3. Collateral damage to other China Internet stocks

Didi’s woes are having a negative effect on other China tech stocks, as confidence drains out of the sector. Selling has hit other names like Meituan (HK:3690) and JD.com (HK:9618). This is not just about Didi of course, but much of the selling is coming off the back of news that bigger investors like Sequoia China are exiting key strategic investments. None of this was helped by JPMorgan calling the entire Chinese Internet sector ‘uninvestable’ in an alert published in March which it has since rescinded. This call, by analyst Alex Yao, was never meant to go out, according to the US bank. But the fact remains it did, and investors took notice.

#4. The Liu clan is playing defense

In China it’s all about family. The president of Didi is Jean Liu, who is closely followed by investors in China on social media and is taking plenty of flak for her decision to push for a listing in the US. She is the daughter of Liu Chanzhi, who founded Lenovo. He is now the target of nationalists in China who love having a go at prominent figures they see as not being fully on board with the great project. This seems to have played a role in postponing a projected domestic listing for Lenovo in China.

#5. It’s all about the politics

We suspect that the high profile company may have crossed something of a ‘grey’ line with Chinese authorities when it went ahead with the listing in the US. Didi has a very domestically focused customer base. Not long after its original IPO, the Chinese cyberspace watchdog ordered Didi to remove 25 mobile apps and stop registering new users. Chinese regulators have cited data security concerns. Our feeling here is that Didi is being coerced back into the fold. This will be good news for anyone who holds its domestic stocks, as we would anticipate many of the Chinese regulatory issues will disappear once that Hong Kong listing occurs.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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