Didi cybersecurity probe blindsides shareholders days after debut

Sun Hung Kai Properties

05/07/2021 15:59

By Julie Zhu, Kane Wu and Scott Murdoch
    HONG KONG, July 5 (Reuters) - Chinese regulators have gained
a reputation for aggressive action, but even hardened investors
were shocked by the announcement of a probe into ride-hailing
firm Didi  DIDI.N  just two days after its $4.4 billion New York
stock market debut.
    While Didi's initial public offering (IPO) prospectus did
mention some of the regulatory risks to its operations, there
was no indication that the Cyberspace Administration of China
(CAC) would begin investigating the company and ban it from
accepting new users during the review.  urn:newsml:reuters.com:*:nL2N2OE0QZ
    Didi said on Monday it was not aware of the probe announced
by the CAC on July 2, which sent its shares as much as 10%
lower, before its IPO. The stock closed down 5.3% and will not
trade Monday due to the U.S. holiday.
    The CAC followed up two days later with an order for Didi's
app to be removed from app stores in China, saying the company
had illegally collected users' personal data.  urn:newsml:reuters.com:*:nL2N2OH00S
    "Prior to the IPO, Didi had no knowledge of the CAC's
decisions, announced on July 2 and July 4, 2021, with respect to
the cybersecurity review and suspension of new user
registrations in China, and the removal of the Didi Chuxing app
from the app stores in China, respectively," Didi said in a
statement sent to Reuters.
    News that the order to remove the apps from sale caught six
fund investors who had attended Didi's IPO roadshow, including
two of whom were allocated stock in the deal, off guard.
    One hedge fund source, who could not be named as he was not
permitted to speak to the media, said the CAC news was bizarre
and unexpected given it came so soon after the IPO.
    The CAC said its action was to protect national security and
the public interest, but spooked investors said the timing would
cast a shadow over plans by other Chinese tech companies to list
in the United States or raise funds in global markets.
    The move was interpreted as a ratcheting up of pressure on
Chinese tech companies, which started with the scuttling of a
$37 billion listing planned by Alibaba fintech affiliate Ant
Group late last year.       
    "The (Chinese Communist) Party had previously targeted Ant
Group, which was planning an IPO and was forced to cancel," said
Ryan Fedasiuk, research analyst at Georgetown's Centre for
Security and Emerging Technology. 
    "But this step is an escalation because it is retroactive,
effectively punishing investors that participated in a completed
IPO. The CAC commenced review and suspended Didi's presence on
Chinese app stores just days after its public debut," he added.
    On Monday, Didi said the order to remove its app from stores
in China could hurt revenue.  urn:newsml:reuters.com:*:nL2N2OG087
    "It caught everyone by surprise, but occasional antitrust
action is what we could expect from tech names," Edison Pun,
senior market analyst at Saxo Markets, said of the move.
    "The suspension (of Didi's app download) will definitely
hurt investment confidence as it's just listed in the U.S.
market, and that will need time to allow the investors to adjust
to valuation," Pun added.
    
    'NEW JOURNEY' FOR DIDI    
    Didi is also being probed by China's State Administration of
Market Regulation (SAMR) antitrust watchdog over whether it used
anti-competitive practices to drive out smaller rivals unfairly,
Reuters reported last month.
    The SAMR probe is also looking into whether the pricing
mechanism of its ride-hailing business is transparent enough.
    Didi, which dominates China's ride-hailing market, said at
the time it would not comment on speculation. urn:newsml:reuters.com:*:nL2N2NZ06E
    Didi listed in New York on June 30, after roadshows and
pre-deal investor education meetings and calls from June 11. The
IPO valued it at $67.5 billion, down from as much as $100
billion Didi had hoped for earlier this year, after investors
baulked at the pace and profitability of its expansion.
    Most of Didi's roadshows were fronted by Didi co-founder
Jean Liu, senior vice president Stephen Zhu and head of capital
markets David Xu and they mostly talked about its operations and
business growth, people who attended the briefings said. 
    There was little information about regulatory issues offered
at the briefings, beyond what was disclosed in Didi's
prospectus, they added.
    Didi did mention China's new Data Security Law in its IPO
prospectus, which is due to take effect in September, saying
this may require adjustments to its business practices. 
    Unusually for a Chinese firm, Didi made its debut with
little fanfare.
    "We did not ring the bell or celebrate (the listing)
conspicuously, because the listing is not the end, but the
beginning of a new journey," a letter sent by founder Will Cheng
and Liu to Didi staff on Wednesday said.
    "That means that we need to be more open and transparent,
and we need to shoulder more social responsibilities and
expectations," a copy of the letter seen by Reuters, showed.
    Didi did not respond to a request for comment on the letter.
    For Jonas Short, head of the Beijing office at Everbright
Sun Hung Kai, the CAC action raises concerns of more to come.
    "The fallout from the SAMR investigation that Didi mentioned
in its prospectus has yet to be borne out. The prospect of fines
from the SAMR side still looms," Short said.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
TIMELINE-Didi U.S. debut overshadowed by China cybersecurity
probe     urn:newsml:reuters.com:*:nL2N2OH102
Didi says app takedown may hit revenue, other U.S.-listed
Chinese firms probed     urn:newsml:reuters.com:*:nL2N2OH00S
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Julie Zhu, Kane Wu and Scott Murdoch in Hong
Kong; Editing by Sumeet Chatterjee and Alexander Smith)
 ((Scott.Murdoch@thomsonreuters.com;))