Didi cyber security probe blindsides shareholders – Security

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 just two days after its US$4.4 billion (A$5.8 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.

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 percent lower, before its IPO.

The stock closed down 5.3 percent and will not trade Monday due to the US 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.

“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 US$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.

“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 US market, and that will need time to allow the investors to adjust to valuation,” Pun added.

‘New journey’

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.

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 US$67.5 billion, down from as much as US$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.

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