The Root Problem Fully Exposed, is "Aging" Didi Just Biding its Time?

On March 24th, DiDi Chuxing released its fourth-quarter financial report. Overall, the performance this time reflects a slight loss of market share in domestic business while the profit margin also slightly declined. Additionally, the losses in overseas and new businesses have significantly expanded, sending some negative signals, making this performance somewhat "cloudy".

1. Domestic travel volume growth slightly lags behind, losing market share again? Essentially, in the fourth quarter, the domestic travel Gross Transaction Value (GTV) fell slightly by 1.1% to 71.7 billion. However, the slight decline in GTV from the fourth quarter is in line with normal seasonal changes, which is not a big issue. Looking at the factors of price and volume, the main reason for the decline in GTV is that the average price per customer in China decreased by about 2.8%, dragging down GTV. However, although the daily average order volume for DiDi's domestic travel (including ride-hailing, carpooling, and other services) increased by 1.9% compared to the previous quarter, it actually lags behind the overall daily average order volume growth of the ride-hailing industry disclosed by the Ministry of Transport, which is about 3.7%. Considering that the two may not be consistent in terms of calculation, if both are based on the Ministry of Transport's criteria, DiDi's ride-hailing order volume growth this quarter is 0.9%, further falling behind. If the data is accurate, it indicates that DiDi's market share in domestic ride-hailing may have slightly declined in the fourth quarter, which is the first "not so good" signal.

2. Despite increasing passenger incentives and reducing driver commissions, the average profit per order still slightly decreased after offsetting: From a revenue perspective, DiDi's domestic travel segment's revenue this quarter was 44.9 billion, a decrease of 3.8% compared to the previous quarter, greater than the 1.1% decrease in transaction volume. According to the financial report's criteria of "revenue = GTV - consumer incentives - taxes, etc.", the lower revenue growth compared to GTV indicates an increase in incentives given to consumers this quarter. On the other hand, DiDi's platform sales (equal to GTV - driver commissions/incentives - taxes) increased by 3.8% compared to the previous quarter, indicating a decrease in the proportion of commissions given to drivers. Based on our calculations, this quarter, the proportion of subsidies to users as a percentage of GTV increased by about 2 percentage points, while the commissions to drivers decreased by roughly 1.4 percentage points. After offsetting these two factors, the profit level of DiDi's domestic travel business in the fourth quarter slightly decreased, with the adjusted EBITA profit margin as a percentage of GTV dropping from 2% to 1.9%. This is the second "not so good" signal.

3. The losses in overseas and new businesses have significantly expanded: The growth of overseas business this quarter is still impressive, with a 44% year-on-year increase in order volume and a 46% increase in order amount (GTV). Although the GTV growth rate has slightly declined from the previous quarter's 52%, mainly due to the narrowing growth in average price per customer, the bad news is that the EBITA losses in overseas business have significantly expanded to 1.1 billion this quarter, with the loss rate also increasing from 4.2% to 5.1%. According to management, the significant increase in losses in the second half of 23 was mainly due to the new product launch and investment phase in overseas markets**

Moreover, the EBITA loss of the innovative business this quarter has also increased from about 1 billion to 1.5 billion. It is explained that the expansion of losses is related to the sale of the smart car business, and therefore will no longer have any impact.

However, regardless, the combined losses of new business and international business this quarter have significantly increased to about 2.6 billion, nearly double the profit from the domestic travel business. This is clearly not a good sign.

Dolphin Research's Viewpoint:

Overall, although Didi's performance in the fourth quarter of this time generally continues the trend of the previous quarter, the above negative signals make us still somewhat negative about Didi's future prospects.

1. On one hand, despite the favorable supply of ride-hailing drivers, the company's increase in user subsidies is leading to a slight decrease in profit margins, and on the other hand, according to statistics bureau data, Didi's market share continues to decline slightly. It seems to reflect that Didi, facing competition, has increased investment but failed to even maintain its existing market share, showing a trend of slowly eroding its leading position.

2. In the current environment, continuously losing new businesses is generally a problem criticized by the market (similar to Meituan), and this quarter Didi's overseas + innovative business losses have not decreased but have increased significantly. If this triggers some investors to abandon the SOTP valuation system and value the company based on overall PE valuation, it is also a significant risk.

However, currently, the market's assessment of Didi's value and market capitalization mainly depends on the judgment of the company's mid-term profit margin in the domestic travel business. Currently, the adjusted EBITA (including stock incentives and amortization) for the domestic travel sector in 2023 is roughly 5.3 billion, and the company's guidance for next year is around 8 billion. However, even if the adjusted EBITA reaches 10 billion, ignoring the losses of other businesses, based on GAAP, Didi's current market value of about 135 billion corresponds to a PE valuation of roughly 20x. This is obviously not a low valuation.

In other words, Didi must significantly increase its ability to release profits in order to match its current market value in the future. The key lies in whether Didi can stabilize its market share while significantly reducing user subsidies. And from the current trend, Didi's barriers seem not high enough.

Below are key performance charts and comments:

I. The growth rate of domestic ride-hailing slightly lags behind the market, with a slight decline in market share?

As usual, let's first look at the most critical operational data. Following the third quarter when Didi's domestic Gross Transaction Value (GTV) successfully rebounded to a historical high after overcoming the impact of the epidemic and delisting, in the fourth quarter, domestic travel GTV fell slightly by 1.1% to 71.7 billion, which, combined with historical data, a slight decline from 3Q to 4Q is a common seasonal fluctuation. Due to the huge fluctuations in the base number last year, the year-on-year growth rate's reference significance is not significant.

On a split basis of price and volume, from the perspective of order volume, Didi's daily average order volume for domestic travel (including ride-hailing, Hitch, and other services) increased by approximately 1.9% compared to the previous period, falling behind the industry's disclosed growth of approximately 3.7% in daily average ride-hailing orders (It is important to note that the order volume metrics disclosed by the Ministry of Transport and Didi themselves may not necessarily be consistent). If we use the Ministry of Transport's data for Didi's domestic ride-hailing orders, the daily average order volume increased by 0.9%, still lagging behind. If the data is accurate, it indicates that Didi's market share in domestic ride-hailing in the fourth quarter has slightly declined.

Meanwhile, Didi's domestic average order value decreased by approximately 2.8% compared to the previous period, leading to a slight decline in GTV despite the increase in order volume. However, looking at it year-on-year, the price fluctuations align with seasonal changes and are reasonable.

Regarding its overseas business, it generally continued the growth trend from the previous quarter: 1) a 44% year-on-year increase in order volume, similar to the previous quarter's 43%; 2) a 46% year-on-year increase in transaction amount, slightly lower than the previous quarter's 52%; 3) mainly, the year-on-year growth rate of average order value decreased from 7% to 2%, affecting GTV growth.

Secondly, passenger incentives increased while driver revenue sharing decreased, with the former being the main source of profit elasticity.

From a revenue perspective, Didi's domestic travel sector's revenue for this quarter was 44.9 billion RMB, a 3.8% decrease compared to the previous period, greater than the 1.1% decrease in domestic transaction volume.

As Didi's revenue = GTV - consumer incentives - taxes, etc., with revenue decreasing significantly more than GTV, and revenue growth lagging behind transaction volume, it can be inferred that Didi once again increased consumer subsidies compared to the previous period.

As the industry gradually enters a stage of stock growth, if Didi wants to gradually regain lost market share, it may be unavoidable to engage in a price war on user subsidy levels in the short to medium termOn the other hand, Didi's platform sales (equal to GTV - driver revenue sharing/incentives - taxes, etc.) increased by 3.8% month-on-month, indicating that the platform's revenue sharing ratio to drivers continues to decrease. Combining recent news and a similar trend in Meituan's delivery costs, the trend of decreasing revenue sharing ratios due to oversupply of ride-hailing services is continuing.

According to Dolphin Research's calculations, this quarter, Didi's domestic ride-hailing business has seen a 2% increase in incentives to users as a percentage of GTV, roughly in the range of 15% to 20%. Meanwhile, the revenue sharing ratio to drivers has decreased by approximately 1.4%. In other words, the company's actual monetization rate may have decreased by about 0.6%.

It can be seen that close to 1/5 of Didi's domestic ride-hailing average order value is used to subsidize users in order to compete for users and market share. This is currently the single most significant factor affecting profits compared to when Didi just went public. Whether Didi can reduce user subsidies while maintaining market share in the future may be the biggest area of elasticity affecting the company's profit margins in the medium term (before the implementation of autonomous driving).

Therefore, after largely offsetting the decrease in driver revenue sharing and the growth in passenger incentives, the profitability level of Didi's domestic travel business in the fourth quarter has slightly decreased month-on-month, with the adjusted EBITA profit margin as a percentage of GTV decreasing from 2% to 1.9%. The absolute amount has decreased from 1.47 billion to 1.36 billion, without surprises.

At the same time, the losses from overseas and emerging businesses have significantly widened this quarter, with the EBITA loss from overseas operations continuing to expand to 1.1 billion. The EBITA loss from other innovative businesses has also expanded to 1.53 billion. The combined losses from these two areas are close to twice the profit from the core domestic travel business, which is truly alarming.

According to the company's explanation, the losses from overseas operations are mainly for driving growth. A new product was launched at the beginning of 2023, with significant investment in the second half of the year, leading to losses increasing from around 200 million in the first half of the year to around 1 billion per quarter. The losses from innovative businesses are influenced by the smart car/driving business, but since this business has been sold, the impact on profits will be reduced in the future.3. Overseas & New Business Losses Significantly Expanded, Dragging Down Overall Company Profits

Above, we analyzed the operation, revenue, and profit situation of domestic travel and overseas business by segment. Now let's look at the changes in costs and expenses for this quarter.

Firstly, in terms of gross profit, as the cost of the domestic ride-hailing business, which accounts for about 90% of the revenue, is mainly composed of driver commissions, the gross profit indicator mainly reflects the changes in the driver commission rate. Therefore, this quarter's gross profit margin increased slightly from the previous quarter's 15.6% to 15.7% on a quarter-on-quarter basis, indicating a probable decrease in driver commissions.

On the expense side, operating support and management expenses remained relatively stable on a quarter-on-quarter basis. Marketing expenses increased by one billion compared to the previous quarter, although the absolute amount did not change much, the increase in marketing expenses while GTV scale decreased still reflects Didi's efforts in customer acquisition and promotion. In addition, Didi's research and development expenses also increased by 3 billion to 24 billion on a quarter-on-quarter basis, but the company did not explain the reason.

Overall, due to the slight decrease in GTV, revenue, and gross profit this quarter, but with expenses increasing by nearly 4 billion on a quarter-on-quarter basis, Didi's operating loss for this quarter has expanded from 12 billion to 18 billion. As seen from the previous text, this is mainly due to the drag from overseas and innovative businesses.

Dolphin Research's Previous [Didi] Research

Financial Report Reviews

November 13, 2023 Financial Report Review "[Didi: Shedding the Wolf Nature, Can't Go Back to the 'Good Old Days'?"(https://longportapp.cn/zh-CN/topics/10474240)"

September 11, 2023 Financial Report Review "[Didi: The Golden Age That Can't Be Returned to?"(https://longportapp.cn/zh-CN/topics/9796253)"

July 11, 2023 Financial Report Review "[Up 10%, Has Didi Really Turned the Tide?"(https://longportapp.cn/zh-CN/topics/8055581)"

May 8, 2023 Financial Report Review "Didi: Flattening and Rolling Over, Finally Coming Alive Again"April 17, 2022 "Didi: "A Cry of Pain" Ends the Farce"

In-depth Research

December 30, 2021 "Didi's Price is Too Heavy, Unfortunately There is No Regret Medicine"

July 1, 2021 "Didi at 70 Billion: Worth it or Not?"

June 24, 2021 "Unveiling Didi's Ride-Hailing "Utopia" | Dolphin Research"

Risk disclosure and statement of this article: Dolphin Research Disclaimer and General Disclosure