Paying 8 billion yuan ($1.2 billion) to get rid of a nightmare: is it too much?
On July 21, the Cyberspace Administration of China issued a decision on administrative penalties against DiDi Global Inc. (OTCPK:DIYY), following a corporate cybersecurity review, and fined the company 8.026 billion yuan.
According to the authority, conclusive evidence and clear facts have shown the company’s gross and malicious violations of laws and regulations, including China’s Cyber Security Law, Data Security Law as well as Data Privacy Law. personal information. And the company’s CEO Cheng Wei and Chairman Liu Qing were personally fined 1 million yuan.
The fine amounted to 4.6% of the company’s total operating revenue of 173.8 billion yuan in 2021 and is the largest since the 18.228 billion yuan fine imposed last year. at Ali Baba (BABA, 9988.HK) for violating China’s anti-monopoly law.
Companies that violate the anti-monopoly law can be fined up to the equivalent of 10% of their tax revenue for the previous year. Fines imposed under cybersecurity law are not tied to company revenue, but are often one to 10 times the illicit financial gains made from breaches. DiDi was the largest fine imposed in any cybersecurity case to date. Due to the authority’s failure to disclose DiDi’s revenue related to the violations, we don’t know how the amount was determined.
Able to attract new users again
The authority explained that the company failed to comply with its obligations under the Cybersecurity Law, the Data Security Law as well as the Personal Information Protection Law in flagrant disregard of national interests. in terms of cybersecurity and data security. His illegal behavior dated back to June 2015 and lasted seven years. The old and egregious nature of the offenses warrants a severe sentence, according to the authority.
The company’s decision to go public in the United States a day before the 70th anniversary of the Chinese Communist Party has touched a nerve, especially in terms of national security, which is why the Office of Security and Internet Information has launched a year-long cybersecurity review at the company and ordered an overhaul of its business operations. The fine is part of the results of the investigation. But the authority also agreed to restore functions to DiDi’s apps, including lifting restrictions to attract new users, removing the biggest hurdle on its way to an IPO in Hong Kong.
Shortly after the company went public in the United States, the authority ordered the company to remove 26 of its apps from app stores alleging malpractice for illegally collecting personal information. This had a devastating impact on the company’s new business and its stock entered a downward spiral.
In mid-May, its stock plunged to a new low of $1.37, down 90% from last year’s IPO price of $14. The company convinced shareholders that the only way to get rid of strangling cybersecurity scrutiny was to get off the New York Stock Exchange, and finally, the motion past at an extraordinary general meeting on May 23, marking the end of its brief but tortured stint on the American stock market with the transfer of its shares over the counter.
With market rumors that the authority intended to spare DiDi and decided on fines, investors regained confidence in the company’s prospects for a return to the capital market. Its stock price is up 177% from the May low, hitting $3.80 last Thursday.
Francis Lun, CEO of GEO Securities, believes that DiDi must use some of its resources to pay the fine before proceeding with the Hong Kong IPO process.
“Given the draconian regulatory pressure that DiDi’s new venture is under and the ongoing travel restrictions due to the pandemic, the ridesharing industry is not trending exactly the right way and the company may not be able to to pay the fine even with a successful round of fundraising in Hong Kong,” said Lun.
According to DiDi finance, its cash and cash equivalents totaled about 44 billion yuan at the end of last year, but operating cash flow was negative 13.41 billion yuan. At this rate, the company may only have enough money in its coffers to keep things going for another two to three years, not to mention that it has 8 billion yuan to pay in fines and it potentially faces the need to compensate US investors for their delisting.
An evaluation pariah
The company might be willing to pay the fine in order to continue. The Chinese government’s scrutiny of tech giants as well as the intense competition it faces threatens its market dominance.
According to QuestMobile, DiDi’s monthly active users (MAUs) totaled 80.7 million last year, down 20% year-on-year, while two other ride-sharing service companies caocao Mobility and T3 go saw monthly active user growth of 65% and 125%, showing that DiDi is losing market share.
In terms of valuations, DiDi’s latest price-to-sales (P/S) ratio is only 0.3x, well below the 1.9x of the global gain. Uber (UBER), and the figure is even further from Gogox Holdings (2246.HK) and Seize assets (GRAB) at 5.9 times and 13.9 times, respectively. So, due to strict regulatory policies and tight pandemic controls, investors are rather cautious about the company’s outlook.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.