Surging by 10%, has DiDi really turned the tide?

On the evening of July 9th, as major companies were eagerly awaiting the results of the second quarter, DiDi quietly released its performance for the first quarter of 2023, marking its first performance report since its relisting in mid-January.

Overall impression from Dolphin: Performance recovery progressing steadily, achieving satisfactory results, and the surge in stock price is mainly due to significant underestimation.

(1) Another company relying on cash to support its stock price? After the relisting, the company's operating cash flow turned positive in the first quarter (over 300 million RMB), indicating that it is no longer a cash-burning company. At the same time, the company's net cash and short-term investments (including short-term government bond investments, excluding interest-bearing liabilities) have started to grow, reaching nearly 5 billion USD by the end of the first quarter, contributing to over 30% of the current market value.

This means that the high-frequency ride-hailing demand built by over 400 million domestic users, which generates a revenue of 28 million RMB per day and 50 cents per ride (earning 1.6 RMB per ride during the peak period in the first quarter of 2021), is valued at just over 10 billion USD, seemingly overlooking DiDi's recovery capability under normal conditions after the rectification.

(2) Improved market share is the key advantage: The transaction volume of China's mobility sector in the first quarter was approximately 45.7 billion RMB, showing a 23% YoY growth on a relatively high base. The order volume and average order value increased by 14% and 7% respectively. Among them, the order volume significantly outperformed the domestic ride-hailing industry's growth rate of 8.4% during the same period. Based on data from the Ministry of Transport, DiDi's market share in the self-operated ride-hailing sector rebounded by about two percentage points to 76% within one quarter.

(3) Average profitability per order has declined: Since the disclosed average order value by DiDi excludes user subsidies, the actual settlement price for users is obtained by deducting the subsidies and incentives provided by DiDi. The majority of the settlement price consists of the commission and incentives given to drivers.

Based on reliable estimates from Dolphin, after the relisting, DiDi significantly increased incentives for both users and drivers in order to regain their loyalty. As a result, the average order value appears to have returned to over 25 RMB, but the average profit per order has not increased compared to the same period last year. It was 50 cents in the first quarter of this year, compared to 90 cents in the first quarter of last year.

The significant reduction in losses in the first quarter of this year is actually due to the inclusion of an 8 billion RMB antitrust fine in the travel business during the same period last year. If we exclude the antitrust fine, the profitability of the domestic travel business in the first quarter would have declined due to the promotion efforts after the relisting.

(4) Temporarily reducing overseas investment: The international business mainly includes ride-hailing and food delivery services in Latin American markets such as Brazil and Mexico. The source of the unexpected profit in the first quarter was the temporary reduction in marketing and incentive expenses in the overseas market. The loss, which used to exceed 1 billion RMB per quarter, was less than 200 million RMB this quarter. However, this reduction in losses is more due to the mismatch in the pace of short-term investment in the international business.

In terms of the business itself, the total transaction volume in the first quarter of 2023 was approximately 13.8 billion USD, with a YoY growth of 31%, maintaining a stable growth rate. However, the growth in 2022 was mainly driven by price increases (inflation in oil and overall services), with only a 6% increase in order volume. **Although the absolute growth rate of the international business declined in the first quarter of this year, the structure became healthier, mainly driven by an increase in order volume (up 24% YoY). Only the text content between the lines will be translated:

The decline in energy prices has dragged down the growth of average customer spending and transaction volume. However, international business revenue in the first quarter increased by 41% YoY to 1.7 billion RMB. The decrease in average customer spending has affected monetization and profitability, and the main reason behind it is the lack of investment in promotional expenses in the first quarter.

(5) Overall Performance: Since 90% of DiDi's revenue comes from domestic travel business, the growth rate of ride-hailing revenue reflects the overall business growth rate. In the first quarter, the revenue growth rate was 19% YoY, with a total revenue of 42.7 billion RMB.

In terms of profit, DiDi's operating loss for this quarter was 1.75 billion RMB, which seems much lower than the 11 billion RMB loss in the same period last year. However, it should be noted that there was an 8 billion RMB antitrust fine in the same period last year. Excluding the abnormal base caused by the fine, the actual reduction in losses YoY was only 1 billion RMB+.

Analyzing the sources of loss reduction: a. A 1 billion RMB reduction in losses due to misallocation of overseas investments, b. A nearly 1 billion RMB reduction in losses due to the contraction of innovative businesses; c. In fact, the core domestic travel business, despite the recall of users and drivers after relaunch, has reduced profits by 1 billion RMB compared to the same period last year.

However, due to the reduction in losses from new businesses and international operations, after excluding non-cash items such as stock incentives and amortization of intangible assets, DiDi's adjusted EBITA loss is only 560 million RMB, approaching profitability.

(6) Dolphin's Overall Viewpoint: DiDi's performance in the first quarter can only be described as slightly above average.

After the relaunch, DiDi's market share in domestic travel has rebounded, but the cost of recalling users and drivers has, to some extent, hindered the profit-making ability of domestic travel, which is DiDi's blood-making and pillar business.
The transaction volume of overseas business is progressing normally, and the reduction in losses is only due to short-term mismatched investment pace.
In Dolphin's judgment, innovation business may continue to be a focus for DiDi in reducing losses, as there is currently no sign of a second curve in the basket of innovative businesses.
Why did DiDi's stock price surge? Dolphin explained at the beginning that it is currently undervalued. For a business that has already achieved positive operating cash flow, the true valuation after deducting cash is only 10 billion USD.

Normally, after DiDi returns to normal, achieving 30 million orders per day for domestic travel at a rate of 1 RMB per order should not be difficult.

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