Didi: The Irretrievable Golden Age?

On the evening of September 9th, at the end of the second quarter earnings season, Didi Chuxing once again announced its performance. First of all, from the trend of Didi's regular disclosure of performance, this may be a signal that the company intends to return to the main board for listing. As for the performance, the key points are as follows:

Focused on squeezing profits, but the quality is not very high: In terms of overall performance, Didi achieved a total revenue of 48.85 billion yuan in the second quarter, a year-on-year increase of 52.6%, but mainly due to the extremely low base in the same period last year under special circumstances. If compared with the same period in 2021 (when there was no epidemic and Didi was not affected by regulation), the total revenue growth was less than 1%. Optimists see that Didi has completely passed the trough of "epidemic and regulation", while pessimists believe that Didi has wasted two years and its scale growth is almost zero.

In short, the revenue side has recovered well, but the main highlight is still the reduction of losses. In the second quarter, Didi's adjusted EBITDA loss was only 9 million yuan, and it is expected to turn a profit. Let's take a closer look at the sources of loss reduction:

a. The core domestic travel business has increased its EBITDA by about 400 million yuan compared to the previous quarter due to the improvement in economies of scale. However, the profit margin is 3.2%, which is actually lower than the same period in 2022 (with a 3% VAT exemption benefit) and even lower than the same period in 2021. This is inevitable due to the deterioration of Didi's competitive position in China, which has also led to a deterioration in its profit margin.

b. Although the EBITDA loss of overseas business has slightly expanded to 240 million yuan compared to the previous quarter, the absolute value is still only a few hundred million yuan, which has little impact on the overall company and is expected to turn a profit in the future.

c. The innovative business still incurred a loss of 1.21 billion yuan, which is the main drag, but the loss has narrowed by 220 million yuan compared to the previous quarter, showing gradual improvement.

Overall, Didi has reduced its losses by about 500 million yuan this quarter, and the progress of turning losses into profits is steadily advancing. However, the reduction of losses mainly relies on the two burdens of overseas business and innovative business, rather than improving the efficiency of the core domestic business, which is somewhat unsatisfactory.

Domestic travel demand has recovered, but competition remains fierce: The core China travel segment achieved a transaction volume of about 67.6 billion yuan in the second quarter, an increase of about 14.7% compared to the previous quarter. With the overall improvement in the prosperity of the cultural and tourism demand, there has also been a significant recovery in the demand for commuting and travel by taxi within the country in the second quarter. However, if compared with the same period in 2021 without the epidemic and regulation, the growth of Didi's domestic GTV is less than 5%, with a volume increase of about 4% and an increase in average order value of less than 1%. It can be seen that the demand has returned to normal levels, but there is a lack of motivation to increase prices (i.e., increase profits). On an industry level, according to the disclosure from the Ministry of Transportation, the overall growth rate of the ride-hailing industry in the second quarter was 13.4%, which is basically consistent with Didi's growth rate of 13.7%. This means that Didi's market share remained stable in the second quarter. The growth was mainly driven by the overall recovery of the industry, and Didi did not clearly outperform its competitors.

In terms of profitability, according to Dolphin Research's calculations, Didi's actual monetization rate (GTV - user subsidies - driver commissions - taxes) is about 6.4%, which is an increase from the previous quarter's 5%, but still lower than the 8% in the same period last year. After the recovery in industry demand, Didi's order volume has returned to the level of 2021, but it has not regained its absolute competitive advantage and corresponding profitability. According to our calculations, the main reason behind this is that Didi's subsidy rate to users has increased significantly compared to 2021, accounting for a share of GTV from 12% to 16%. This is consistent with the business logic of intensified competition and platforms competing for users through subsidies.

"Three, overseas and innovative businesses forced to cut costs": Due to the permanent downward shift in the profit margin of domestic operations, previously unrestrained international and innovative business investments have been forced to actively scale back.

However, in terms of revenue, the total transaction volume of international business in the second quarter of 2023 was approximately 16.4 billion, a year-on-year increase of 35%, showing a stable and upward growth rate. With the decline in oil prices, the average transaction price of overseas business has shown zero growth compared to the previous year, and the growth is entirely driven by order volume, resulting in a healthier structure. However, the stagnant average transaction price has also led to a slight decline in the profit margin of overseas business compared to the previous quarter.

From the above, it can be seen that the profit margin of Didi's core domestic business has actually declined compared to 2021 and 2022, but it continues to reduce losses. From a business perspective, this is mainly due to the reduction in losses from overseas and innovative businesses. From the perspective of income and expenses, Didi's total operating expenses this quarter were only 8.43 billion, even less than the 8.59 billion spent during a significant reduction in business volume in the same period of 2022. This shows the company's strong cost control efforts, with the exception of increased marketing investment.

Dolphin Research's viewpoint:

Overall, Didi's second-quarter earnings report continued the trend of revenue recovery and a steady narrowing of losses from the previous quarter. With the significant increase in domestic cultural and tourism activities in the second quarter, further improvement was achieved. However, there are both positive and negative aspects. Specifically:

Although the business volume of the domestic segment has fully recovered to the level of the same period in 2021, due to intensified competition, it may take some time for the profit margin of this segment to return to the level of 2021. The total EBITDA of Didi's domestic segment in the first half of 2023 is less than 2.5 billion. After deducting depreciation and related taxes, it would be quite good if the net profit of this segment could reach 5 billion for the whole year.

While the domestic business has only seen repairs without incremental growth from 2021 to 2023, the GTV growth of the international business during the same period has reached nearly 90%, almost doubling. This may be the main source of future incremental growth and the imagination space for valuation growth in the medium to long term. However, due to its relatively small absolute scale and the fact that it has not achieved profitability at the EBITDA level, the market is unlikely to value this part of the business in the short term.

From the perspective of stock price, Didi's current valuation is approximately 124 billion. After deducting net cash of about 33.5 billion, it corresponds to a valuation of 5 billion net profit for the domestic business in 2023, assuming a P/E ratio of 18x. It can be seen that the market has incorporated some profit expectations for the domestic business in the medium to short term.

The following are key performance indicators:

(1) Operational indicators