Talk about hitting the brakes. At the start of the month, China’s internet regulator opened a cybersecurity probe into ride-hailing group Didi only a few days after the company raised more than USD $4 billion in a New York initial public offering (IPO).
Following the announcement, the Cyberspace Administration of China (CAC) suspended all additional app downloads in the country, but allowed the group to continue operating normally.
The latest clampdown extends Beijing’s reach to reign on one of the country’s most affluent technology companies. In less than a year, Ant Group’s $35 billion dual-listed IPO was suspended days before trading, while an anti-monopoly probe fined Alibaba $3 billion for abusing its market dominance. Numerous meetings between Beijing authorities and tech group leaders have occurred, with each one attracting significant media attention.
Despite China’s tightening regulatory environment, deals have continued to head to New York. So far in 2021, more than 30 Chinese groups have listed in the US, raising $13 billion, already matching the amount raised in all of last year.
The capital raised speaks volumes. Even as the world’s two largest economies exchange tit-for-tat geopolitical jabs, neither companies nor investors seem to hesitate in their search for compelling deals. For Chinese tech groups, deeper market liquidity and prospects for higher trading valuations outweigh any potential delisting threats under the Holding Foreign Companies Accountable Act.
At the other end, US investors are searching for dominant Chinese tech innovators. From electric vehicle manufacturers to fintech companies, several new economy Chinese entrepreneurs have managed to keep Wall Street’s interests elevated despite recent scandals, including Luckin Coffee’s fabricated sales incident in 2020.
Shifting into reverse
The Didi probe is different. Given that Didi accounts for 90% of all car bookings in China, the CAC has publicly called for the company to better manage its customer data, discreetly implying that the information protection was a matter of national security. CAC has also requested multiple changes to the apps’ mapping function due to concerns it may reveal sensitive government information.
Lawsuits against Didi and the IPO underwriters are surfacing amid accusations that both parties failed to disclose material information regarding previous communication with the CAC. At the end of 2020, Luckin Coffee agreed to pay almost $200 million in penalties to settle accounting fraud charges.
Should New York become a less viable option, Chinese technology groups still have several choices. Analysts quickly point to Hong Kong. The share price of the Hong Kong Exchange and Clearing rose 8% in the trading days following the Didi probe amid expectations of winning New York-bound deals. On the mainland, Shanghai’s STAR board holds the aspiration to become China’s Nasdaq-like tech bourse.
Some analysts believe this is the most natural fit. Even as Chinese companies continue to list in America, “it has been evident for some time that the Chinese Government would prefer that they not do so” according to a note from 08 July published by Christopher Wood, equity strategist at Jefferies.
The challenge then, is determining whether Didi’s crackdown becomes a regulatory turning point, a false flag, or something bigger. If the regulation moves from anti-trust to data security, all markets and exchanges could feel the impact. The Ant Group IPO suspension, which was planning a Shanghai and Hong Kong listing, demonstrates that choosing a market closer to home does not necessarily lead to any special treatment.
A silver lining exists. While Beijing demonstrates an iron regulatory fist, it has also extended a sympathetic olive branch. After restructuring into a financial holding company, the Ant Group IPO is still expected to take place soon, albeit at a lower enterprise valuation. Alibaba was fined just 4% of sales, less than the 10% which would have represented the maximum amount.
The probe into Didi could be company specific. Though profitable, the ride-sharing app experiences a mixed reputation, as questions surround arbitrary price increases for passengers. With the CAC also opening a cybersecurity review of New York-listed Full Truck Alliance and Boss Zhipin, these actions imply a wider net has been set across Chinese tech companies.
After some adjustments, Didi may fall back in favour with regulators and investors. The ride-sharing app checks numerous thematic boxes while the company is also investing into new technologies like electric and autonomous driving vehicles.
For those brave enough to head to New York, a warm welcome may be unlikely. The ride will not be cheap either, as banks will likely demand higher fees to compensate for new risks while public investors call for cheaper equity valuations to compensate for a more stringent regulatory environment.
