DiDi Global (DIDI -2.14%), the largest ride-hailing company in China, plans to delist its shares from the New York Stock Exchange and pursue a new listing in Hong Kong. The announcement, which comes less than six months after DiDi's initial public offering (IPO), shouldn't surprise investors.
China's regulators had already forced the country's app stores to remove DiDi's apps shortly after its IPO amid vague cybersecurity and data privacy concerns. They've also released new guidelines that will force DiDi and other ride-hailing companies to collect lower commissions, provide better wages and benefits for their drivers, and limit their usage of personal data.
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DiDi probably believes that delisting its U.S. shares and relisting them in Hong Kong will appease China's regulators and enable it to relaunch its apps. But how will this abrupt move affect U.S. investors, many of whom are probably holding shares of a battered stock that has plummeted 50% below its IPO price? Let's compare the three most likely outcomes.
1. Going private at a discount to its IPO price
Over the past few years, many Chinese companies that initially went public in the U.S. took themselves private before going public again on Chinese exchanges at much higher valuations. The deals couldn't be blocked because the management controlled most of the votes, and U.S. investors were often forced to sell their shares at steep discounts.
DiDi's CEO, president, and senior VP hold a combined voting stake of 51.9%. In theory, these three executives could take DiDi private with a lowball bid, cut U.S. investors out of the loop, and start fresh in Hong Kong.
2. Retreating to an OTC exchange
A less painful option would be for DiDi to relist its shares on an over-the-counter (OTC) exchange. That's what Luckin Coffee (LKNC.Y -2.27%) did after it was delisted from the Nasdaq last June. Luckin's stock had dropped below $2 per share at the time after its fabricated sales figures were exposed, but it now trades at about $13.
Therefore, moving to an OTC exchange wouldn't necessarily be a death sentence for DiDi's stock. In addition, other Chinese tech giants, Tencent among them, are still trading their unsponsored American depositary receipts (ADRs) on OTC exchanges.
However, we should recall that when U.S. regulators forced China's top telecom companies to delist their shares amid national security concerns earlier this year, they also forbade them from shifting to OTC exchanges. They also barred U.S. citizens from holding the Hong Kong-based shares.
Since Chinese regulators also believe that national security is an issue for DiDi, they probably won't let it move to an OTC exchange as Luckin did and remain easily accessible to U.S. investors. Instead, they'll probably ask for an exclusive homecoming in Hong Kong before reinstating its apps in China.
3. Swapping ADR shares for HK shares
In its press release, DiDi claims its ADR shares "will be convertible into freely tradable shares" in Hong Kong after it relists the stock.
However, many U.S. brokerages -- including Morgan Stanley's E*Trade and Robinhood Markets -- don't offer any access to Hong Kong's stock exchange. Investors will need to open an account in a brokerage that has access to Hong Kong, transfer over their shares, and then pay for a conversion of their ADRs into Hong Kong shares.
There's also the matter of another government intervention. If China still has national security concerns about DiDi, then China might reject its bid to relist in Hong Kong and force it to relist its shares on a mainland exchange that foreign investors can't access as easily. If that happens, DiDi might backtrack and try to take itself private at a discount -- which would be the worst-case scenario for U.S. investors who bought the stock at its IPO price.
Should investors still hold their shares of DiDi?
DiDi's investors might be reluctant to sell their shares at their current reduced prices, since the stock now trades at less than its estimated revenue this year. However, the stock should remain cheap for a very long time.
Even if DiDi delists its shares from the NYSE and relists them in Hong Kong, it still needs to relaunch its domestic apps, fend off its competitors while facing tighter regulations, and brace for a big antitrust fine.
If DiDi withstands all those challenges, its stock might recover. However, I'm still not optimistic about DiDi's future, and there are plenty of better tech stocks to buy in this wobbly, inflation-stricken market.
