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• DiDi Global’s Q3 2024 results show slower volume growth in China but improved profitability, with record-high operating profits and increased monetization rates.
• The change from U.S. GAAP to IFRS suggests a potential Hong Kong listing.
• DiDi’s balance sheet remains robust, with significant cash reserves and strong operating cash flow, enabling substantial share repurchases.
• DiDi’s improved margins and financial projections indicate a 25% upside, justifying a continued “buy” rating for DIDIY.

DiDi Global (OTCPK:DIDIY) released its Q3 2024 results on November 29th. The results are consistent with the recent quarterly trend of slower volume growth in China but improved profitability across all three segments. Overall, I think DiDi had a good quarter. The slower volume growth in China is entirely expected, while DiDi’s monetization rate increased, which resulted in faster revenue growth and record-high operating profits. During the quarter, DiDi changed its accounting standard from U.S. GAAP to IFRS, which could be a signal of a Hong Kong listing. Meanwhile, DIDIY is still trading below my fair value estimate. Therefore, I am maintaining my “buy” rating for DIDIY.

DiDi‘s Q3 Earnings Results Highlights

According to DiDi’s Q3 results earnings release, highlights of the quarter include:

• Core Platform Transactions increased 15.1% year-over-year.
• Core Platform Gross Transaction Value (“GTV”) increased 13.1% year-over-year on a constant currency basis.
• Platform Sales increased 22.7% year-over-year.
• Adjusted EBITA (Non-IFRS) for Q3 2024 was a gain of RMB1.7 billion, compared to a loss of 0.3 billion in Q2 of 2023.

Overall, DiDi’s Q3 results are consistent with my expectations. While volume growth and transaction value growth have declined, DiDi was able to grow its sales much faster than transaction volume and value as DiDi continued to improve its monetization rate in the China market.

Segment Results

In Q3 of 2024, the average daily transaction volume for DiDi’s China’s Mobility segment reached a record high of 34.6 million, which grew 10.5% from 31.3 million in Q3 of 2023. GTV for the China mobility segment only rose 7.8%, indicating a lower ARPU during the quarter. However, total platform sales from the China Mobility segment for Q3 grew by 23.7% year-over-year. The higher growth rate for platform sales is driven mainly by the increase in DiDi’s monetization rate (total platform sales/gross transaction value), which has reached 20.6% in China for Q3 of 2024. The Adjusted EBITA of the China Mobility segment was a gain of RMB2.5 billion, which increased 69% from Q3 of 2023.

The operation and financial performance of DiDi’s international segment is the exact opposite of that of China. Total transactions from the International segment for Q3 increased 33.4% year-over-year. GTV from the international segment also grew by 33.4% on a constant currency basis. However, the platform sales growth for the international segment was only 16.5%. DiDi’s monetization rate (total platform sales/gross transaction value) for the international segment is only 10.6%, significantly lower than 20.6% for the domestic Chinese market. It’s clear DiDi is still competing aggressively for market share in the international market, especially in Latin America. The Adjusted EBITA loss of the International segment narrowed to only RMB 0.3 billion from a loss of RMB 0.8 billion in Q3 of 2023.

The Adjusted EBITA loss for the Other Initiatives segment was RMB 0.44 billion for Q3 of 2024, which narrowed from a loss of RMB 1 billion in Q3 of 2023. DiDi explained that the decrease in loss was “primarily attributable to the decrease of investments for the smart auto business as the sale of certain smart auto business to XPeng was completed during the fourth quarter of 2023.”

On a corporate level, R&D expense decreased by 6.4% during Q3, and the cost of revenue is flat year-over-year. Both sales and marketing expenses and general and administrative expenses increased 8.5% year-over-year, which is much slower than the growth rate of platform sales. DiDi continues to make great progress in improving operating efficiency.

Accounting Standard Change

A major event for the third quarter of 2024 is the change of accounting standards from U.S. GAAP to IFRS. DiDi stated in the earnings release that “the Company has adopted IFRS from the third quarter of 2024, and the date of transition to IFRS was January 1, 2022“. This change in accounting standards raises speculation that DiDi is ready to issue shares in Hong Kong as IFRS is the required reporting standard for the Hong Kong Exchange. As I’ve stated before, I think a re-listing in Hong Kong for DiDi is a matter of time. However, it’s not clear what will happen to DiDi’s U.S. ADSs, which trade over the counter.

Balance Sheet and Share Repurchases

DiDi’s balance sheet remains very strong. At the end of Q3, DiDi had RMB 47.9 billion of cash and cash equivalents on the balance sheet. DiDi also generated RMB 1.9 billion in operating cash flow during the quarter, which is very strong. DiDi used the strong cash flow to repurchase shares. As a recap, DiDi announced the $1 billion share repurchase program in November 2023. During the past year, DiDi has spent $627 million to repurchase 151.3 million ADSs at an average price of $4.14 per share. Per DiDi’s Q3 earnings release, between August 1 and November 27, DiDi spent $253 million to repurchase 61.1 million ADSs, with an average repurchase price of $4.14 per ADS. The company can still repurchase $373 million of shares under the existing share repurchase program.

Financial Projections and Valuation

I have updated my financial projections and valuation work for DiDi to incorporate DiDi’s Q3 2024 actual results. Specifically, I’ve revised my adjusted EBITA margin for both 2024 and 2025 as DiDi’s margin continued to improve.

In terms of valuation, I’ve applied a TTM EV/Sales multiple of 0.72 times, which is a 66% discount to the sector median of 2.1 times. This discount reflects the China risk and liquidity risk. At today’s valuation, DIDIY is still undervalued, as the stock has about a 25% upside from my 2025 fair value estimate.

Conclusion

DiDi’s Q3 FY2024 results continue to validate my investment thesis for DIDIY. I think by now, there shouldn’t be much doubt on DiDi’s turnaround. DiDi’s change in accounting standards sends a signal that a potential Hong Kong listing could be sooner than the investor’s expectation. Meanwhile, the stock is still trading at a discount to my conservative fair value estimate. Therefore, I am maintaining my “buy” rating for DIDIY.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of DIDIY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• When DiDi Global debuted on the NYSE in 2021, I found the company dominating the fast-growing Chinese ridesharing industry with a market share close to 95%.
• During the period in which DiDi’s mobile apps were removed from app stores, a few aggregator platforms aggressively took market share from DiDi.
• These aggregator platforms, mostly owned by large-scale tech companies, have leveled the playing field in China’s ridesharing sector, limiting DiDi’s growth potential.
• DiDi will remain relevant in the foreseeable future, but there is reason to believe that growth will come under pressure.

When I am looking for investment opportunities, there is nothing more attractive than a company that dominates a fast-growing market segment. More often than not, these companies continue to hold on to their market share in the long run, rewarding long-term shareholders handsomely in the process. DiDi Global Inc. (OTCPK:DIDIY), when it debuted on the NYSE in 2021, was the market leader in China’s booming ridesharing sector, accounting for almost 95% of total ridesharing revenue in the 12 months leading up to the IPO. I was immediately attracted to the company as DiDi’s market leadership promised to steer the company in the direction of sustainable long-term profits. Unfortunately, though, DiDi found itself in a whirlwind of regulatory scrutiny soon after the IPO, alongside other Chinese tech giants such as Alibaba Group Holding Limited (BABA).

Unlike Alibaba, which, I believe, is one of the best bargains in the market today, DiDi may never achieve its former glory as increased regulatory scrutiny has paved the way for a dramatic shift in the competitive landscape, giving birth to aggregator platforms that threaten to eat into DiDi’s market share. Although I acknowledge DiDi’s efforts to turn the company profitable despite decelerating growth and the possibility of a jump in stock price resulting from a potential Hong Kong listing, as a growth investor, I no longer find DiDi attractive.

The Rise Of Aggregator Platforms Has Permanently Impaired DiDi’s Growth Potential

The rising competition in China’s ridesharing industry has already had an impact on DiDi’s growth. DiDi’s market share has slipped to around 70% from a high of close to 95% four years ago, with the primary threat coming from the rise of aggregator platforms. There are a few notable aggregator platforms in China today.

1. Amap, owned by Alibaba.
2. Baidu Map.
3. MeiTuan Dache.

In addition to these aggregator platforms, ridehailing and ride-pooling platforms such as Dida Chuxing, Cao Cao Mobility, and T3 Go also pose a threat to DiDi. However, the rise of aggregator platforms marks a fundamental shift in the way Chinese consumers book rideshares.

China’s ridesharing market is massive. As of 2023, there were 528 million ridehailing users in China. To add some context, the total U.S. population stands at 345 million today. To cater to this massive market, a plethora of ridesharing companies have popped up in recent years. According to data from China Internet Watch, there were 337 registered ridesharing companies in the nation as of 2023. DiDi, not surprisingly, is the most popular ridesharing platform in China today.

Exhibit 1: Ridesharing usage by brand in China

Historically, the vast majority of ridesharing platforms in China have failed to gain traction due to their financial inability to develop high-quality mobile applications to compete with DiDi. However, the rise of aggregator platforms – intermediaries that connect drivers with riders – has removed this major barrier as smaller companies can now use these platforms to reach a massive audience.

According to data from China’s Ministry of Transportation, aggregating platforms handled 232 million rides in April 2024, accounting for 26% of total orders. For comparison, in April 2023, aggregator platforms accounted for 18% of total orders. This stellar growth highlights the growing importance of aggregator platforms, and I believe this marks the beginning of a new era in China’s ridesharing sector where users feel more comfortable with familiar aggregator apps owned by big tech companies.

DiDi has already identified the threat posed by aggregator platforms. The company is now offering similar aggregator solutions by allowing competing ridesharing companies to offer their services within the DiDi mobile app. However, in Beijing, DiDi still offers only four options for riders compared to more than 60 for Alibaba-owned Amap.

Exhibit 2: Ridesharing interface of Amap

When we dig deeper, we find that DiDi’s massive early success was driven in large part by its aggressive acquisition strategy. A key deal was the Uber China acquisition in 2016 for approximately $35 billion. One way to thwart the threat of increasing competition from aggregator apps is to acquire second-tier ridesharing companies. However, given the regulatory scrutiny faced by DiDi, the company is highly unlikely to be allowed to consolidate its market share through acquisitions in the foreseeable future.

With little possibility of regulatory approval for a deal to acquire a second-tier ridesharing platform, DiDi is left with no option but to compete with rising aggregator platforms on its own. Making matters worse, a notable increase in competitive threats is likely in the coming years when aggregator platforms address common concerns raised by ridesharing customers such as low vehicle compliance rates and safety hazards. Although I do not believe DiDi faces an existential threat, I am convinced that aggregator platforms will limit DiDi’s long-term growth potential.

DiDi Will Remain Relevant

As the largest and most popular ridesharing platform in China, DiDi will continue to remain relevant and will likely see steady revenue growth. As illustrated below, growth has decelerated in recent quarters, which, I believe, is a result of increased competitive threats and the maturing ridesharing market in China.

Exhibit 3: DiDi quarterly revenue growth

DiDi, since January 2023 when its mobile apps were allowed on popular app stores, has seen a dramatic improvement in financial performance. The company broke through to profitability on an adjusted basis in 2023 with its operating margins turning a corner coinciding with stellar revenue growth last year.

Although I believe DiDi will continue to enjoy a meaningful share of China’s ridesharing market, this alone is not a good enough reason for me to invest in the company given my expectations for a prolonged period of single-digit revenue growth due to competitive pressures and market saturation.

Takeaway

DiDi Global, the leading ridesharing company in China, is under pressure from aggregator platforms that offer users a seamless, efficient way of booking taxis and hailing rides from dozens of service providers. DiDi’s market share has meaningfully declined in the last few years, and I believe the company will continue to lose market share in the next five years. Although DiDi may be attractively valued compared to global ridesharing leader Uber Technologies, Inc. (UBER), I believe growth investors should avoid DiDi stock given the growth challenges the company may soon face.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of BABA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am long UBER.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Macquarie’s Equity Research on Tuesday initiated coverage on ride-hailing platform DiDi (OTCPK:DIDIY) at ‘outperform’, stating that the company is in a “unique position” to capture share in the $1.1tn mobility market amid favourable policy and digital adoption.

The brokerage expects DiDi’s market positioning and “superior execution quality” to continue drive improved economies of scale, thus supporting sustained margin expansion. And with DiDi Global (OTCPK:DIDIY) trading at a ~75% discount to Uber (UBER) despite its higher earnings CAGR, Macquarie believes rising LatAM adoption could emerge as positive optionality.

Didi vs UBER YTD price comparison:

The company’s shares, up 2.5% YTD, was up about 3% premarket.

Furthermore, while regulatory uncertainty is admittedly the largest risk, “despite a bumpy listing path, we believe the company is now finally out of the woods and entering a new phase of normalisation on an easing regulatory environment for the broader Internet sector.”

In terms of catalysts, the brokerage says, DiDi (OTCPK:DIDIY) is currently trading in the OTC market with valuation 72% below its NYSE IPO level, but with a 20% larger scale and a significant earnings turnaround. “Potential HK IPO could be the next key catalyst.”

In other news, DiDi Global (OTCPK:DIDIY) was reportedly in discussions to sell its smart driving and cockpit assets to AutoAi. The move is part of DIDIY’s plans to focus more on its core business.

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DiDi Global (OTCPK:DIDIY) was reportedly in discussions to sell its smart driving and cockpit assets to AutoAi.

The move is part of DIDIY’s plans to focus more on its core business, Reuters said citing sources.

AutoAi is a unit of smart mobility services firm NavInfo.

The company was in plans to sell the assets in exchange for a stake in AutoAi, the report said, adding the deal could be worth close to 500M yuan.

Last year, the firm had sold its smart car arm to XPeng (XPEV) for $744M.

The ride-hailing firm, is also looking to invest more than 200M yuan in AutoAi, the Reuters report said.

DiDi’s reported decision to sell the assets, could be seen as a strategy to exit the electric vehicle business, as companies have to battle regulatory concerns and heightened competition.

Last week, China expressed strong opposition to the European Commission’s draft proposal to impose tariffs on electric vehicles imported from China, labeling it as a significant threat to its automotive sector.

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• DiDi Global announced positive Q2 earnings with record high transactions and GTV, but domestic transaction volume growth has slowed.
• DiDi’s profitability and operational efficiency continue to improve, with strong performance in the China Mobility segment and international volume growth.
• Despite short-term headwinds, DiDi’s turnaround is progressing well, with the undervalued stock offering over 55% upside potential from fair value estimate.

DiDi Global (OTCPK:DIDIY) announced its Q2 2024 results on August 21^st. The results are mostly positive with some short-term headwinds on the volume side. DiDi achieved consecutive quarters of positive profitability with both transactions and GTV reaching record high. On the other hand, the growth rate of domestic transaction volume has slowed down sequentially from Q1 of 2024. Overall, I think DiDi’s turnaround is still progressing well as evidenced by the continuing improvement of profitability and operational efficiency. While the stock has recovered a little from the sell-off caused by fears over Baidu’s robotaxi progress, it is still trading well below my fair value estimate. Therefore, I am maintaining my long-term “buy” rating for DIDIY.

Q2 earnings results highlights

According to DiDi’s Q2 results earnings release, highlights of the quarter includes:

• Core Platform Transactions increased 17.4% year-over-year.
• Gross Transaction Value (“GTV”) increased 14.7% year-over-year.
• Platform Sales increased 22.4% year-over-year.
• Adjusted EBITA for Q2 2024 was a gain of RMB1.3 billion, compared to a loss of 0.1 billion in Q2 of 2023.

DiDi’s Q2 results are in-line with my expectations. The growth rate for both transaction volumes and transaction value have come down sequentially from Q1 of 2024. As a recap, in Q1 of 2024, “DiDi’s Core Platform Transactions grew 30.3%, and Core Platform Gross Transaction Value grew 26.9%”. However, DiDi was able to grow platform sales at a much faster pace than both transaction volume and value, indicating DiDi’s improved pricing power in the domestic market. DiDi’s profitability improvement was also impressive, especially with the China Mobility segment.

Segment results

Total platform sales from the China Mobility segment for Q2 grew 22.2% year-over-year. However, the GTV growth rate was much lower at only 8.7% year-over-year. Average daily transactions volume was a record high of 33 million, which is a slight increase of 32.5 million in Q1 of 2024. The faster revenue growth compared to volume growth indicates that DiDi paid less earnings and incentives to drivers. The Adjusted EBITA of the China Mobility segment was “a gain of RMB2.4 billion”, which increased 64.6% from Q2 of 2023.

Total platform sales from the International segment for Q2 increased grew 23.7% year-over-year. GTV from the International segment grew 39.3%. Contrast to the domestic segment, the revenue growth for the international segment was slower than GTV growth, indicating DiDi ramped up driver incentives in the international market. The Adjusted EBITA loss of the International segment unexpectedly widened to RMB 0.53 billion from a loss of RMB 0.24 billion in Q2 of 2023. DiDi explained in the earnings release that the increase of loss was “primarily attributable to relatively lower marketing expenses and incentives for the second quarter of 2023.”

The Adjusted EBITA loss for the Other Initiatives segment was RMB 0.56 billion for Q2 of 2024, which narrowed from a loss of RMB 1.2 billion in Q2 of 2023. DiDi explained that the decrease in loss was “primarily attributable to the decrease of investments for the smart auto business as the sale of certain smart auto business to XPeng was completed during the fourth quarter of 2023.”

I think for DiDi’s investors, the most important metrics to monitor are domestic transaction volumes, domestic profitability trend, and international transaction volumes. During Q2, DiDi’s profitability trend for the China Mobility segment continued to move in the right direction as adjusted EBITA margin (calculated as adjusted EBITA/GTV) reached 3.2%, compared to 3.0% in Q1 of 2024 and 2.1% in Q2 of 2023. Furthermore, DiDi’s international volume maintained very strong growth momentum. However, the growth rate of domestic transaction volume has come down significantly. DiDi did not explain the factors behind the slowdown. My assumption is that it was caused by China’s macroeconomic challenges and abnormal weather during the quarter.

On a corporate level, R&D expense decreased year-over-year, and cost of revenue “remained flat year-over-year.” And both sales and marketing expenses and general and administrative expenses increased at a slower rate than the growth rate of platform revenue. It’s clear that management’s efforts in improving operational efficiency is making good progress.

Balance sheet and share repurchases

DiDi’s balance sheet remained very healthy. At the end of Q2, DiDi has “RMB 53.7 billion of cash and cash equivalents, restricted cash and treasury investments”, compared to RMB 53.8 billion at the end of Q1 of 2024. DiDi’s cash flow is very strong as “net cash provided by operating activities was RMB 3.4 billion for Q2 of 2024”.

The strong operating cash flow enabled DiDi to keep repurchasing shares. DiDi disclosed in the earnings press release that the company “repurchased a total of approximately 53.1 million ADSs for approximately US$221.6 million between May 28, 2024 and July 31, 2024”. DiDi can still repurchase roughly $636 million of shares under the current share repurchase authorization.

Financial projections and valuation

I have updated my financial projections and valuation work for DiDi to account for the Q2 2024 actual results. The most important change was the downward adjustment of growth rate for the China Mobility segment.

In terms of valuation, I’ve applied a TTM EV/Sales multiple of 0.73 times, which is still a 50% discount to the sector median of 1.46 times. This discount reflects the China risk and pink-sheet risk.

At today’s price, DIDIY is still undervalued as the stock has more than 55% upside from my 2025 fair value estimate.

Risk discussion

As I have mentioned in my previous articles, the biggest risks for DiDi are regulatory risk and ADR risk, which I will not repeat here. Recently there were some concerns over the potential adverse impact of robotaxi on DiDi’s business. I’ve addressed this risk in my previous article. There’s also a report which says “the Commerce Department is expected to propose a rule barring Chinese software in vehicles with Level 3 automation and above in the U.S. and effectively ban testing of Chinese-made self-driving vehicles on U.S. roads.” As DiDi has very limited operation in the U.S and its autonomous driving operation is almost entirely based in China, this potential ban in U.S has no impact on DiDi’s business whatsoever.

Conclusion

DiDi reported very satisfactory Q2 FY2024 results, which confirmed my investment thesis for DIDIY. I think DiDi is on track to achieve healthy growth and continue to improve profitability for the rest of 2024. Meanwhile, the stock is still trading at a large discount to fair value estimate. Therefore, I am maintaining my “buy” rating for DiDi.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of DIDIY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• DiDi Global’s stock dropped over 6% for two days due to concerns over the impact of Robotaxi on its China business.
• DiDi has been investing in autonomous driving technology since 2016 and is prepared for the potential widespread adoption of Robotaxi in China.
• DiDi’s muted reaction to Baidu’s early success with Robotaxi in Wuhan is strategic, as it aims to avoid creating more trouble with the Chinese government.

Recently DiDi Global (OTCPK:DIDIY)’s stock has been under tremendous pressure as it was down more than 6% for two consecutive days on July 10^th and July 11^th. The heavy selling is most likely due to concerns over the long term impact of Robotaxi on DiDi’s China business. Specifically, on July 10th, there’s a report that the “Chinese government introduced draft guidelines that support the introduction of Robotaxis in ride hailing and car rental fleets in Beijing”. One day later, CNBC reported that “Baidu’s Robotaxi unit Apollo Go became one of the top 10 trending hashtags on social media platform Weibo on Wednesday amid reports of rapid user adoption in Wuhan city, where the company began operating fully staffless vehicles in certain districts 24/7 in March.” I believe the Robotaxi fear is overblown as DiDi is actually very prepared for the potential wide-spread adoption of Robotaxi in China.

DiDi’s autonomous driving capabilities

Although Baidu has been capturing all the attention on Robotaxi, DiDi is not far behind on the technology at all. According to DiDi’s website,

“DiDi’s autonomous driving unit was set up in 2016 and was committed to delivering world’s leading Level 4 autonomous driving (“AD”) technologies, aiming to make transportation safer and more efficient. In August 2019, this unit was upgraded to an independent company, DiDi Autonomous Driving, focusing on advanced AD technology research and development, product application and other expanded businesses. Up to now, DiDi Autonomous Driving have acquired public road testing licences in Beijing, Shanghai, Suzhou, Hefei, Guangzhou and California, along with one of the first Intelligent Connected Vehicle Demonstration Application License in China that issued by Shanghai. DiDi’s advanced technologies, massive data, rich experience along with complete ecosystem in the mobility field will equip DiDi Autonomous Driving to build and operate world’s leading autonomous fleets.”

In fact, according to DiDi’s news press, DiDi has launched the on-demand Robotaxi service with a fleet of more than 200 Robotaxis in Shanghai in 2020. In March 2021, DiDi “announced a strategic partnership with the Huadu District of Guangzhou to invest in R&D in self-driving technology and commercial applications in the District. In March 2023, DiDi Autonomous Driving started its commercial operation in Huadu District of Guangzhou by accepting fee-based orders.”

In April of 2023, DiDi held an Autonomous Driving Day event in Shanghai. During the event, DiDi announced that DiDi “plans to introduce its first mass-produced Robotaxi to DiDi’s ride-hailing platform by 2025″. DiDi also announced the debut of its brand new autonomous trucking business Kargobot during the event.

Fast forward to April of 2024, DiDi achieved another milestone in its Robotaxis business when DiDi announced that “DiDi Autonomous Driving’s JV with GAC Aion will mass produce crossover SUV Robotaxi in 2025”.

From the above information, it is clear that DiDi has been planning the robotaxi business for many years , and its current technological capability is definitely in the first-tier.

DiDi’s muted reaction to the enthusiasm for the early success of Baidu’s Robotaxi

DiDi has not publicly reacted to the nation-wide attention to the early success of Baidu’s Robotaxi business in Wuhan. I believe this can partially explain why the stock dropped almost 13% in two days. However, the absence of DiDi’s public reaction is very understandable.

As DiDi has already angered the Chinese government with its rushed IPO back in 2021, the last thing DiDi want to do is to create more trouble for the Chinese government. As promising as Robotaxi’s technological advance, it can also create massive social unrest. For instance, CNBC reported that Baidu’s Robotaxi push in Wuhan has “sparked concerns about job security for taxi drivers and ride-hailing drivers, as China had more than 7 million registered ride-hailing drivers as of the end of May, roughly twice as many versus the 3.51 million drivers reported for July 2021, according to the Ministry of Transport.”

Therefore, DiDi’s best strategy is not being the first large-scale commercial operator of Robotaxis. I think DiDi should take a wait-and-see approach for now and let Baidu takes the public controversy as taxi drivers and ride-hailing drivers are already venting their frustration for Baidu on all major social media platforms. It is very likely that the Chinese government will continue to push for the mass-adoption of Robotaxi across the country and one way or another, the taxi drivers and ride-hailing drivers will have to accept the reality. Once the period of the mass protest from taxi drivers is over, DiDi can be more aggressive in pushing for its own Robotaxi business.

Long-term impact of Robotaxi

In the long-term, Robotaxi will have some impact on DiDi’s business, but the extent of the impact is too early to tell. However, there are at least two trends that are clear.

First of all, Robotaxi will not totally replace human taxi and ride-hailing drivers as they are complementary and therefore, will co-exist. The shortcomings of Robotaxi are very clear. For instance, currently Robotaxi works best in near-perfect road conditions. It is super slow even in mild traffic jams because it has to wait for the clear signal that the drivers behind it will yield when switching lanes.

Secondly, there’s an argument that DiDi will not command a dominant position as it has in the ride-hailing business. I think this argument is legitimate as the Robotaxi model is a two-way (platform and passenger) network business model compared to the three-way (platform, passenger and driver) network model of the traditional ride-hailing business. Whether DiDi can be dominant the market will depend heavily on management’s competency and strategic vision.

Conclusion

In the short-term, Robotaxi has very limited impact on DiDi’s business. In the long-term, the potential mass-adoption of Robotaxi presents both a challenge and opportunity for DiDi. Regardless, I believe the recent sell-off of DiDi’s stock is overdone. Investors are better off focusing on DiDi’s fundamentals in the next few quarters.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of DIDIY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• DiDi Global reported strong Q1 FY2024 results.
• Transactions volume hit record both domestically and internationally.
• DiDi’s stock is still undervalued after recent rally.

I first wrote about my investment thesis for DiDi Global (OTCPK:DIDIY) in early March. Since then, the stock has rallied more than 20% on strong earnings and business momentum. I also analyzed DiDi’s FY 2023 Q4’s results in a previous article. On May 29^th, DiDi announced its Q1 FY2024 quarterly results on its website. For Q1 FY2024, DiDi maintained its growth momentum and continued to improve operating efficiency. DiDi achieved historical quarterly highs in transactions volume both domestically and internationally. Furthermore, the Company continued to repurchase shares at attractive prices. While DiDi’s stock has risen a bit, I believe investors are not fully appreciating DiDi’s improving fundamentals as the stock is still trading significantly below its peers. Therefore, I am maintaining my “strong buy” rating for DiDi.

FY 2024 Q1 results

Highlights of DiDi’s Q1 results are:

• Total revenue for the first quarter of 2024 grew 14.9% year-over-year.
• Adjusted net income for the first quarter of 2024 was RMB1.4 billion.
• Adjusted EBITDA for the first quarter of 2024 was a gain of RMB1.6 billion. Adjusted EBITA for the first quarter of 2024 was a gain of RMB0.9 billion.
• Core Platform Transactions for the first quarter of 2024 reached 3,746 million, an increase of 30.3% from the first quarter of 2023.
• Core Platform Gross Transaction Value (GTV) for the first quarter of 2024 reached RMB92.2 billion, an increase of 26.9% from the first quarter of 2023.

Overall, DiDi’s Q1 FY2024 results are in line with my expectations with almost 15% of revenue growth and very good profitability improvement. The revenue growth rate is sequentially lower than Q4 of 2023. However, Q4’s growth rate was abnormally high. As a recap, DiDi grew its revenue by 55.4% and GTV by 65.8% in Q4 of 2023 due to an easy comparison from Q4 of 2022 and the reinstatement of DiDi’s app on major China’s app store.

In terms of profitability, DiDi’s GAAP net loss in the first quarter was RMB1.1 billion, this was mainly due to the market price change of DiDi’s equity stake in XPeng’s ordinary shares. Adjusting for this investment loss, DiDi‘s net income for the quarter was RMB1.4 billion.

On a corporate level, both R&D expense and SG&A expenses decreased year-over-year, indicating management commitment to improving efficiency.

Overall, on a group lever, DiDi’s revenue grew steadily and the Company has continued to improve profitability.

Segment results

• Total revenues from the China Mobility segment for the first quarter of 2024 grew 14.1% year-over-year. Average daily transactions volume reached 32.5 million, a record high for DiDi. GTV from the China Mobility segment for the first quarter of 2024 reached RMB71.4 billion, an increase of 21.1% from the first quarter of 2023. The Adjusted EBITA of the China Mobility segment was a gain of RMB2.1 billion in the first quarter of 2024,which increased by RMB1.1 billion year-over-year.
• Total revenues from the International segment for the first quarter of 2024 grew 43.9% year-over-year, primarily driven by the increase in the number of transactions. GTV from the International segment for the first quarter of 2024 reached RMB20.8 billion, an increase of 51.4% from the first quarter of 2023. The Adjusted EBITA loss of the International segment was RMB0.3 billion in the first quarter of 2024, which increased RMB 0.2 billion from the first quarter of 2023.
• The Adjusted EBITA loss of the Other Initiatives segment was RMB0.88 billion in the first quarter of 2024, which narrowed from a loss of RMB1.43 billion the first quarter of 2023.

On a segment basis, the International segment maintained its impressive growth momentum for Q1 FY2024 mostly because of DiDi’s strong performance in Brazil and Mexico. Revenues from the China Mobility segment increased steadily year-over-year. The revenue growth rate was lower than GTV growth rate as DiDi ramped up spending on consumer incentives. Most importantly, DiDi’s profitability for the domestic business continued to improve and the Company continued to cut losses in the Other Initiatives segment.

Balance sheet and share repurchases

As of March 31, 2024, DiDi has RMB53.8 billion of cash and cash equivalents, restricted cash and treasury investments as of, compared to RMB55.6 billion as of December 31, 2023. Net cash provided by operating activities was RMB1.8 billion for Q1 of 2024.

In terms of share repurchases, according to the earnings release, “as of May 24, 2024, the Company had repurchased a total of approximately 37.1 million ADSs for approximately US$152.4 million under this share repurchase program, including approximately 22.2 million ADSs that were repurchased for approximately US$98.0 million between March 1, 2024 and May 24, 2024. ”

Financial projections and valuation

I have updated my financial projections and valuation model for DiDi to reflect Q1 FY2024 results. I’ve kept my 2024 and 2025 financial projections because DiDi‘s fundamentals are in line with my expectations.

At today’s valuation, DiDi is still undervalued as the stock has more than 90% upside from my 2025 fair value estimate.

Risks to consider

As I have mentioned in my previous articles, the biggest risk for DiDi is regulatory risk. Howerver, the Company has taken significant steps such as communicating more with the regulatory bodies to mitigate this risk.

Another potential short-term risk is related to the supply of drivers. If China’s economy improves dramatically, the amount of drivers on Did’s platform will likely to decrease, which will impact DiDi’s bargaining power for drivers.

Finally, there’s great risk of liquidity and volatility for DiDi’s stock as DiDi still trades on the pink sheet and it is a Chinese ADR.

Conclusion

DiDi reported very good Q1 FY2024 results, which again validated my investment thesis for the company. In the next few years, I think DiDi will continue to grow its revenue and profits. However, DiDi’s stock is still trading at a significant discount to my estimated fair value with considerable upside. Therefore, I am maintaining my “strong buy” rating for DiDi.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of DIDIY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The busy period for robotaxi development continues, with General Motors’ (NYSE:GM) Cruise unit saying that it is preparing to resume testing its robotaxis with safety drivers in Phoenix, Arizona. An official announcement is expected to be made later on Tuesday, according to Bloomberg.

While Cruise has reportedly been in talks with officials in 20 different cities about self-driving tests, the autonomous driving company is returning to Phoenix, where it already has vehicles in place.

GM’s Cruise business had to suspend operations after an incident in California led to the temporary loss of its license in the state. Former CEO Kyle Vogt dismissed nine top executives and laid off workers as GM reset expectations for the future robotaxi business. Cruise has run self-driving tests in San Francisco, Austin, and Phoenix. Other cities where Cruise is expected to be considering a launch include Atlanta, Seattle, Miami, Raleigh, and several locations in Texas.

Last week, Tesla (TSLA) announced a robotaxi event for August 8, while on Monday, Chinese ride-hailing app Didi Global (OTCPK:DIDIY) and Guangzhou Automobile Group’s (OTCPK:GNZUF) electric vehicle unit set plans to mass produce robotaxis in 2025.

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