Didi: Unleash the wolf nature, can't go back to the "good old days"?

On November 13th, Didi Chuxing quietly released its third-quarter earnings report. In summary, the company achieved record-high order volume and revenue, but profits fluctuated. Here are the key points:

Domestic travel reached a new high, but the surprise was not significant: The core Chinese travel segment achieved a Gross Transaction Value (GTV) of 72.5 billion RMB this quarter, a 7.2% increase compared to the previous quarter, setting a new record. Although Didi's GTV growth rate of approximately 6.5% fell behind the 9.4% growth rate of the overall ride-hailing market, the company's performance reached a new high due to the peak travel season in the third quarter. However, the competition remains fierce. The average order value in China continued to decline to 25.2 RMB, with a year-on-year growth rate close to zero. As the supply of ride-hailing services increased after the pandemic, the average order value returned to normal, and the price advantage gradually disappeared.

Despite increased passenger incentives and reduced driver commissions, the average profit per order slightly decreased: Based on the intense competition mentioned above, the revenue growth rate (GTV minus consumer incentives and taxes) increased by 4.7%, lower than the 7.2% GTV growth rate. This suggests that Didi increased subsidies to consumers. According to Dolphin Research's calculations, the subsidy intensity (measured as a percentage of GTV) increased by approximately 2 percentage points. This indicates that the "price war" in subsidies is still unavoidable under intense competition. On the other hand, Didi's platform sales (GTV minus driver commissions/incentives and taxes) grew faster than GTV, indicating a decrease in driver commissions. This adjustment aligns with the logic of reducing commissions in an environment where there is an oversupply of ride-hailing drivers. After considering these factors, Didi's domestic business profitability slightly declined, with the adjusted EBITA profit margin decreasing from 2.1% to 2% (as a percentage of GTV).

Overseas business growth is impressive, but losses have expanded: The growth rate of overseas orders increased by nearly 11% compared to the previous quarter, and the average order value increased from 26 to 27 RMB, showing significant growth for three consecutive quarters. The overseas business is in a golden period of both price and volume growth. However, the accelerated growth is mainly due to increased investment in the South American region, including subsidies and user acquisition, which has led to expanded losses. The EBITA loss for the overseas business increased from 240 million RMB to 800 million RMB compared to the previous quarter.

Due to the lack of growth in the domestic business's EBITA and the slight narrowing of losses in other innovative businesses, the group's overall EBITA loss expanded to 320 million RMB, once again moving further away from the breakeven point. 4. Performance may not be impressive, but there are other supports for its value: Firstly, due to Didi's positive operating cash flow and significant reduction in investment expenditure, the net cash inflow for this quarter reached 2.89 billion, close to the sum of the previous two quarters. The total cash and short-term investments of the company also increased to nearly 40.5 billion yuan, accounting for one-third of the current market value of the company, which is one of the valuation supports.

In addition, Didi announced a buyback plan of up to 1 billion US dollars (equivalent to 6% of its market value) within the next 2 years, although the scale is not very large. However, for the OTA market with limited liquidity, a buyback with real money is also a clear positive from the perspective of investor returns.

Dolphin Research's viewpoint:

Overall, Didi's Q2 financial report continues the trend of recovery from the previous quarter. Whether from the perspective of GTV, order volume, or revenue, the performance has reached a new high after the regulatory events. It can be considered a good financial report, but there are still some minor flaws:

Firstly, the MoM growth rate of domestic orders lags behind the industry, user incentive growth, and the decline in average profit per order, all indicating that the domestic ride-hailing industry has returned to normal growth but the competition remains fierce, even more intense. It is not easy for Didi to regain lost market share, and it will probably take some time and sacrifice of profits to invest in market share. As mentioned in the previous comment, the time when Didi almost monopolized the domestic market is probably gone forever.

Although the overseas business is growing rapidly, it is reasonable for the losses during the expansion phase to increase. However, in the current market, Chinese concept stocks are still relatively demanding, and the overall decline in group profits may not be exempt from punishment. At the same time, the more investment, the more losses, which will also make the market doubt/delay the turning point of long-term profitability for the overseas business.

From a valuation perspective, the expected net profit of 5 billion yuan for the domestic business in 2023 after this financial report basically does not need to be changed, and it is difficult to say that the current market value of over 120 billion yuan is significantly undervalued.

The following are key performance charts and comments:

I. Domestic business reaches a new high, but not unexpected, while overseas business grows rapidly

Following the previous quarter when Didi's Gross Transaction Value (GTV) exceeded the pre-regulatory event peak, reclaiming the "lost 2 years", this quarter set a new historical high, officially marking the company's return to a normalized growth trajectory. Due to various reasons such as the pandemic and regulations, Didi's year-on-year base for 2020-2022 mostly deviated from a "reasonable level". Therefore, we believe that to evaluate the true performance of Didi's domestic growth, we should refer to the industry benchmark for MoM growth rate.

In the third quarter, Didi's domestic GTV order volume grew by about 6.5%, while the MoM growth rate of the ride-hailing industry was about 9.4%. Although the two data may not be directly comparable, under the strong demand for travel in the domestic market in the third quarter, Didi's domestic order volume, although reaching a historical high, actually lagged behind industry growth, which is not a surprising result.

At the same time, the average order value in the domestic market continued to decline to 25.2 yuan, with a year-on-year growth rate almost close to zero. As the supply of ride-hailing services has significantly recovered after the pandemic, the average order value is gradually returning to normal, and the price dividend is gradually disappearing. ** 海豚君 **

In terms of overseas business, the growth is indeed impressive, with a nearly 11% increase in order volume MoM and a continued increase in average order value. The company is currently in a phase of simultaneous growth in both volume and price. According to management, the increased investment in the South American region (subsidies, user acquisition, etc.) has driven revenue growth but also led to an expansion of losses.

Secondly, passenger incentives have increased while driver earnings have decreased, resulting in a slight decline in domestic profit margins.

Furthermore, since Didi's revenue calculation is GTV (Gross Transaction Value) minus consumer incentives, taxes, and other fees, the 4.7% MoM revenue growth is lower than the 7.2% GTV growth, indicating an increase in consumer incentives this quarter. According to Dolphin Research's estimation, the intensity of incentives (measured as a percentage of GTV) has increased by approximately 2% MoM.

It is evident that as the industry gradually enters a stage of incremental growth, Didi may not be able to avoid a price war in terms of user subsidies in the short to medium term if it wants to gradually regain lost market share.

On the other hand, Didi's platform sales (equivalent to GTV minus driver earnings/incentives, taxes, etc.) have grown faster than GTV, indicating a decrease in the proportion of earnings given to drivers. Considering recent reports of oversupply of ride-hailing drivers, reducing driver earnings seems to align with commercial logic.

After offsetting the decrease in driver earnings and the increase in passenger incentives, the profitability of Didi's domestic business this quarter has slightly declined. The adjusted EBITA profit margin has decreased from 2.1% MoM to 2% (as a proportion of GTV). In YoY comparison, the EBITA profit has significantly decreased from 1.99 billion to 1.47 billion, but it is important to primarily observe the MoM performance as last year's figures were largely influenced by the one-time VAT benefit provided by the government during the pandemic. With the increase in investment in overseas business and the acceleration of growth, the EBITA loss of the overseas business in this quarter has once again increased from 240 million to 800 million on a MoM basis.

Even though the losses of other innovative businesses have narrowed, the EBITA loss of the group as a whole, adjusted for the drag of international business, has expanded to 320 million, once again moving further away from the breakeven point. Although the expansion of losses is a reasonable result during a period of performance growth, it is ultimately not a good reflection on the performance.

III. Reasonable increase in expenses, smart driving business "sold" to Xiaopeng

In terms of expenses, it can be seen that the company's operating support, marketing expenses, and management expenses have all increased on a MoM basis, but overall they are in line with the growth of the business, and the expense ratio has not changed significantly. In addition, research and development expenses have decreased on a MoM basis, which should be mainly due to Didi's divestment of its smart driving business to Xiaopeng.