To The Moon

July 10th, $DiDi Global Inc.(DIDIY)$ released its first quarterly report (23Q1) after back to App store. In line with the previous Ant Group fine dicision $Alibaba(BABA)$ , it indicates that the regulation of the internet platform economy in the country has become more mature. More important than financial performance is the formation of regulatory standards, which signifies a reduction in regulatory risks.

Therefore, although DiDi did not achieve profitability in 23Q1, the market still responded positively, with DIDIY's daily increase on the pink sheets exceeding 10%.

Investment highlights

After two years of rectification, the platform's performance recovers and back to growth. By 23Q1, its revenue scale had nearly reached its pre-listing peak. Compared to the previous focus on "high growth rate", the emphasis has shifted to "high quality" after the rectification, making the growth more stable.

Profit margin is the report item most affected by the platform's rectification. The take rate has significantly decreased due to increased allocation to drivers after reducing the level of monopoly. However, with improved operational management, DiDi incurred significantly lower losses in 23Q1. This "reducing costs and increasing efficiency" trend is evident among all Chinese internet companies since 2022. Without data from other quarters in 2022 (only Q1 is available), we can see that expenses such as marketing, research and development, and operational support have all slightly decreased compared to the same period year-over-year.

Q1 Earnings Review

• Rrevenue was 42.7 billion yuan, a year-on-year increase of 19.1%. China mobility revenue was 39 billion yuan, a year-on-year increase of 18.7%; international business revenue was 1.7 billion yuan, a year-on-year increase of 40.7%.

• Net loss was 900 million yuan, with a net loss attributable to common shareholders of 1.2 billion yuan; adjusted non-GAAP EBITDA loss was 600 million yuan. Adjusted EBITDA for China mobility business was a loss of 1 billion yuan; adjusted EBITDA for international business was a loss of 200 million yuan.

• The GTV of the core platform reached 72.71 billion yuan, a year-on-year increase of 24.1%. Among them, GTV of China mobility business reached 58.95 billion yuan, a year-on-year increase of 22.6%; GTV of international business reached 13.75 billion yuan, a year-on-year increase of 30.7%.

• Operating and support expenses were 1.6 billion yuan, a 5.6% decrease from the previous year's 1.7 billion yuan, mainly due to a reduction in personnel-related expenses, including equity compensation.

• Sales and marketing expenses were 2.1 billion yuan, a 16.7% decrease from the previous year's 2.5 billion yuan; research and development expenses were 2.2 billion yuan, a 9.9% decrease from the previous year's 2.5 billion yuan; general and administrative expenses were 2.1 billion yuan, compared to 10.2 billion yuan in the same period last year.

• Investment income was 55 million yuan, while the investment loss in the same period last year was 5.9 billion yuan. The investment loss in the first quarter of 2022 was mainly related to the fair value loss from the investment in $Grab Holdings(GRAB)$.

  

When will DiDi make profit?

Looking at its history, DiDi has been operating at a loss since 2020. Of course, the unsuccessful expansion into overseas markets after 2021 resulted in massive losses and made the financial statements look very unfavorable. In the current environment, as long as DiDi's China mobility business can quickly return to profitability, shareholders will see hope.

The revenue in 23Q1 reached the level of Q1 2021, which is a sign of recovery to some extent. The take rate has decreased, with 22Q1 and 23Q1 ranging between 16% and 17%, lower than $Uber(UBER)$ 's 23% for its mobility business and $Lyft, Inc.(LYFT)$ , Inc.'s 20%.

To achieve profitability sooner, the only option is to reduce other operating expenses and increase the profit margin of EBIT.

Fortunately, the results of reducing costs and increasing efficiency are already apparent. The adjusted EBITA for the China region has turned positive, and the loss mainly comes from other innovative businesses such as shared bicycles. DiDi has significantly scaled back these businesses in 2022.

Therefore, at the current pace, it is highly expected that DiDi will achieve overall positive adjusted EBITA driven by strong growth in its China mobility business in the next two quarters.

Since DiDi is traded on the OTC pink, it is not easily accessible to most institutional investors, and there may be a discount in the secondary market. Nevertheless, DiDi is already the largest stock in the pink sheets market in terms of market capitalization.

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