China cracks down on Didi days after IPO

DiDi is a Chinese Ride Hailing app that raised $4.4bn in its listing on the New York Stock exchange this Wednesday.  This was the biggest Chinese listing in the US since Alibaba listed seven years ago.

The stock initially rallied, then two days later news broke that the Chinese regulators are investigating the company.  They say they are doing this  “in order to maintain national security and protect the public interest.” The stock fell 5.3 per cent on Friday to $15.52 on this announcement.

The Cyberspace Administration of China then went on to announce today that Didi’s app had “problems of seriously violating laws on collecting and using personal information”. They ordered that Didi be taken down from Chinese app stores.  These actions are all based on China’s new cyber security review system, which is about a year old.

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Transcript

Welcome back.  Just a quick video today to discuss the goings on this weekend with the Chinese ride hailing company DiDi.  For those of you who don’t know, DiDi is a Chinese version of uber that raised $4.4bn in its listing on the New York Stock exchange this Wednesday.  This was the biggest Chinese listing in the US since Alibaba listed seven years ago. 
So, Didi went public at $14 on Wednesday, the stock rallied sharply, then two days later on Friday news broke that the Chinese regulators are investigating the company.  They say they are doing this  “in order to maintain national security and protect the public interest.” The stock fell 5.3 per cent on Friday to $15.52 on this announcement. The IPO investors who got in at $14 were still up at that point.
The Cyberspace Administration of China then went on to announce today - Sunday evening - that Didi’s app had “problems of seriously violating laws on collecting and using personal information”. And they ordered that Didi be taken off Chinese app stores. The decision to publicize this review and the timing are fairly surprising – to say the least. These actions are all based on China’s new cyber security review system, which is about a year old.
So, the US markets are closed this Monday to observe the fourth of July holiday (happy birthday America), but it will be interesting to see how Didi trades when markets open on Tuesday. I’d probably bet on a bit of a down open.
I made a video about a year ago when The US Senate approved new legislation that could lead to Chinese companies possibly being delisted from U.S. stock exchanges – in order to protect US investors.  The new law requires foreign companies listed on US exchanges to be audited by the Public Company Accounting Oversight Board, and to declare they are not owned or controlled by any foreign government.
This law was passed after a number of scandals raised questions about the state of Chinese accounting practices, and whether US stock exchanges are doing enough to protect investors from fraud and scandal.
Since that law was passed, it might surprise you that Chinese companies have been in a massive rush to list on US exchanges as quickly as possible. The goal being to get in before the US government implements these new requirements. How it works is that foreign firms that are already listed get three years to comply with the new legislation.
As an investor, it is really worthwhile understanding how securities regulation works before investing in stocks like this.
Didi is a big company, it has more than 377m users – making it about four times the size of Uber in terms of customers.  It employs 13m drivers – Basically it employs more people than the entire population of Belgium. The company collects a huge amount of data, from the addresses that its users frequent, to their phone contacts and even audio recordings of car rides, which it started taking after passenger murders in 2018.
Didi has not filed any new reports with the SEC relating to this issue at the time of this recording, but they have issued a press statement thanking the competent authorities for guiding them to investigate their risks and saying that they will “resolutely implement” authorities’ demands, and will remove the app from stores “for rectification”. 
It is worth noting that investors were warned of this type of risk in the IPO prospectus, and if you invest in IPO’s it is usually worthwhile reading the prospectus.  This action will obviously leave a bad taste in the mouths of US investors.  From a cynical point of view, it could be argued that the Chinese Government was willing to allow Didi to take billions of dollars from US investors and leave them holding an unattractive bag by announcing this investigation and removal from the app store days later.
Didi have said that users who have already downloaded the app can continue to use it for now.
This is of course part of a larger story of the Chinese government cracking down on its Tech Sector. Other fallouts from this government campaign include the silencing of Jack Ma and the cancellation of the Ant IPO.
China isn’t the only country grappling with its tech sector; India has had a lot to say about the behavior of tech firms within its borders. And of course, the U.S. Congress has been making efforts to cap Big Tech’s scale and power. Of the three, the United States appears the least likely to do real damage to technology companies’ right now.
See you guys later, I have a longer video coming out in a few days, so subscribe and hit the bell icon if you want to be notified of its release.
Have a great weekend.