7/8 TBC Insider Digest
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Insider Digest 7/8/21: Didi Fiasco & Cross-Border Securities Regulations, Alibaba Reorg & Suning, Full Truck Alliance IPO
Announcement: Well, pretty obvious what the weekly live chat will about … Didi! The events are what they are, but what are the implications? Are you in line with consensus that the market isn’t bottoming out for another few months? See you at FRIDAY 7/9/21 6AM PST / 9AM EST / 9PM Asia Time on Zoom!
7/2/21 Cyberspace Administration of China Investigates Didi
Obviously, the biggest story of the week, with actual longer term implications. The entire post could be worth reading, but I’ve pasted the latest update below which summarizes what we know so far & what probably matters or doesn’t …
This is in fact targeted at Didi for the most part, but not because of a political agenda against the founders (Liu clan) or their backers. It is because of the data security threat that Didi poses. The language used in the announcements is very confusing because the data security law does not come into effect until 9/1. And so the cybersecurity law had to be invoked as justification for the investigation.
As the law is not yet in effect, there was no formal process by which Didi could get officially compliant. In addition, there was every reason to believe they are not compliant. Not only does the company have a terrible track record of basic compliance when it comes to any kind of rules (see licensing risk I raised here that supposedly prevented it from being listed in HK) but the rumor is that the CAC told them they were not compliant, to fix data issues (such as mapping as reported by the FT) and they did not finish doing so before the IPO.
There is also the wrinkle that Didi went ahead with a US listing, and there are ongoing negotiations with the US PCAOB on audit papers and such, which can also be a data security risk in the future.
But mainly, I would summarize that there are multiple concerns around data, exacerbated by a US listing (including the political optics of that in the middle of US-China general tensions), and Didi was ordered to delay the IPO while these things resolved. They were not, as far as I know currently, prohibited from listing in the US. But the timing was uncertain and perhaps the management felt that it would be too far out.
The real lightning rod as currently rumored is that Didi actually agreed to delay the listing, but instead accelerated it from 7/2 to 6/30, and snuck it in under the cover of the 7/1 CCP Centennial celebration, ostensibly hoping they would be able to get away with it. They were wrong. But this about-face is what the government's wrath is over. PS Supposedly Alibaba and Tencent both urged Didi to delay their listing, so I am not expecting too much collateral damage from this incident to the two giants.
Conclusion: Didi's disregard for the government's wishes took place because there was no formal approval arrangement for Chinese companies listing overseas. Now there will be in the form of cross-border securities enforcement. Data security is a new issue that anyone listing overseas will have to comply with, for sure. But we don't yet know what that process entails. Will it be easier for HK listings? Right now, yes, as HK listings are encouraged, but I would find it hard to believe if data security audits are completely absent. I would speculate that approvals may be easier to get for HK listings, but we should expect data security to be a priority for companies going forward as China has signaled strongly in recent months that this is of national importance.
It does not seem that the VIE structure is at risk of being completely dismantled, only that they will be more formally regulated. You can see this as a sort of legitimacy, actually. I do not personally see the VIE structure (or similar) going away any time soon because the RMB markets are not yet capable of the amounts of capital needed to invest in restricted industries like tech. I don't think at this juncture China will starve its tech sector of capital, it really just looks more to be mostly about having more control over the data security, no more, no less than that.
I do think that the cash burning companies who were looking to the US public markets in particular to save them (I'm thinking others like MissFresh & DingDong who were already or hoping to be in queue) are the most screwed, because now they have to go to the private markets with no certainty on exit, and with compressed public comps to boot. I guess Tencent has the most exposure here out of everyone, but can't imagine it having much impact to their share price.
Everyone else, especially those who have already been listed for a long time, will probably just need to buckle up for data security compliance, but should be OK if they comply. Delisting from the US markets seems like a low immediate probability, but much more likely if tensions continue and HKEX improves. Most of the public companies I know don't actually want to be here ... they're constantly frustrated by investors who they feel don't truly understand their story. But this shouldn't affect any of you as HKEX is still very accessible. Long Hong Kong! 😆
7/6/21 Cross Border Securities Enforcement
Right after Didi, the General Office of the CPC Central Committee and the General Office of the State Council issued an Opinion titled "Strict Crackdown on Illegal Activities in Securities According to Law."(in Chinese) Pretty serious stuff, given the offices it came from.
Before Didi burst onto the scene, this was the most discussed story in China tech. I go into detail of what the reorg entails (it’s not that extensive, but sends some signal about Alibaba’s strategy going forward). I also detail Yu Yongfu’s background and his successes and failures inside the company. He’s part of the inner 7 or so people driving Alibaba now, so you might as well get to know him a bit better if you’re serious about investing in or understanding this company!
Alibaba’s other big move this week was to be part of the Suning bailout. It’s unclear where this will lead, but it looks like Alibaba could be finding Suning’s rural franchisees attractive. It would at least fit into Alibaba’s new strategy of taking rural China much more seriously … but who knows if it will work. Suning has not had great success in most of the new initiatives that it’s tried to launch in its 30 year history …
6/23/21 Full Truck Alliance IPO
And I just got reading the $YMM Full Truck Alliance prospectus this week, after they were named by the CAC for data / cybersecurity noncompliance as well! Besides both being in transportation, this company actually shares the same angel investor as Didi. But the similarity ends there, as the revenue sources for YMM are quite varied and the company seems very early on its road to monetization. But it’s true that the TAM is massive. I’m skeptical … but would love to know your thoughts!
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Kevin from Singapore - Chairman of Horangi Cyber Security
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