US investors blindsided by inadequate disclosures by Chinese ride hailing firm’s US IPO

U.S. investors were shocked to hear an announcement by Chinese regulators of an investigation into Chinese ride-hailing firm Didi, which just two days ago made its US debut with a $4.4 billion IPO on the New York stock exchange.

Although in its IPO prospectus Didi had mention some regulatory risks to its operations, there was no indication that the Cyberspace Administration of China (CAC) was on the verge of investigating the company and would ban it from accepting new users during the probe.

US investors feel cheated. In a statement Didi said it was not aware of the probe which was announced by the CAC on July 2; following the announcement of the probe, Didi’s shares plummeted by 10% and closed down by 5.3%.

The CAC followed up on its probe by ordering Didi’s app to be removed from app stores in China citing the company’s illegal collection of personal data of its clients.

“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,” said Didi in a statement.

News of this order, to remove Didi’s apps from China’s app stores, caught six fund investors who had attended Didi’s IPO roadshow, including two of whom were allocated stock in the deal, off guard.

According to a source from a hedge fund, who spoke on the condition of anonymity, the CAC news was bizarre and unexpected given it came so soon after the IPO.

While the CAC maintains that its action are aimed at protecting national security and are in the public interest, the timing of the probe cast doubts of Chinese companies trying to fleece US investors.

“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”.

Didi has admitted that the order to remove its app from stores in China is likely to impact its revenues.

“It caught everyone by surprise, but occasional antitrust action is what we could expect from tech names,” said Edison Pun, senior market analyst at Saxo Markets, 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”.

Incidentally, the Chinese company is also being investigated by China’s State Administration of Market Regulation (SAMR) antitrust watchdog over whether it used anti-competitive practices to drive out smaller rivals

Before its US listing, Didi did not disclosed regulatory issues beyond what it mentioned in its prospectus.

In its IPO prospectus Didi had mention that China’s new Data Security Law, scheduled to take effect in September, may require adjustments to its business practices.

According to Jonas Short, head of the Beijing office at Everbright Sun Hung Kai, CAC’s probe 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,” said Short.

Categories: Creativity, Economy & Finance, Entrepreneurship, HR & Organization, Regulations & Legal, Strategy

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