Asset allocation for new age investing: The key to reaching a higher financial altitude

by Sandeep Kumar | May 21, 2021

Perhaps you keep telling yourself that you’ll invest when you have more money or that you’ll do it “someday.” Or perhaps you’re concerned that the markets are now fragile, so you’re sitting on the side-lines, waiting for a “better time” to invest. Alternatively, you may believe that you must become a hard-core specialist before you can accomplish anything with your money that approaches investing.

But here’s the thing: delaying it may cost you more than you realise. Experts estimate that 40% of people have lost money due to procrastination. If you wait to invest, you may miss out on some extremely significant financial advantages. In the long term, the sooner you put your money to work, the better off you’ll be.

Long-term economic growth forecasts are crucial for global investors. Equity prices are based on forecasts of future earnings, which are in turn based on forecasts of future economic activity. This dynamic implies that the same variables that drive economic growth will also boost equity values in the long run. Similarly, the predicted long-run real income growth rate is a crucial predictor of the economy’s average real interest rate level, and thus the level of real returns in general. The link between actual and prospective growth (i.e., the degree of slack in the economy) is a fundamental driver of fixed-income returns in the short run.

Asset Allocation: An inevitable step for successful investments

The asset allocation that is appropriate for you at any particular stage in your life is mostly determined by your time horizon and risk tolerance.

  • Risk ToleranceRisk tolerance refers to your readiness to risk losing some or all of your initial investment in exchange for higher prospective returns. An aggressive investor, or one who is willing to take on a high level of risk, is more inclined to risk losing money in order to achieve greater outcomes. A cautious investor, or one who has a limited risk tolerance, prefers investments that will allow him or her to keep their original investment. Conservative investors preserve a “bird in the hand,” while adventurous investors pursue “two in the bush,” as the classic phrase goes.
  • Time Horizon – Your time horizon refers to how many months, years, or decades you intend to invest to reach a specific financial goal. Because he or she can wait out slow economic cycles and the inevitable ups and downs of our markets, an investor with a longer time horizon may feel more comfortable taking on a riskier, or more volatile, investment. Because he or she has a shorter time horizon, an investor saving for a teenager’s college education will likely take on less risk.

Letting go of traditional investments

Traditional investments like FDs already have seen starving interest rates. It will not be unrealistic to assume that soon there will be a time when instead of the bank paying interest on FDs the investors will have to pay the bank to keep their FD being in negative interest rates. Similarly, Mutual funds in maximum cases fail to give a hefty return, the way it is presumed. If we talk about stocks majority of the investors tend to lose money as the act of investing in stocks, bonds, etc. is driven by human psychology and not by numbers. Often investors tend to ignore macroeconomic factors like GDP, Unemployment, etc. We profoundly find investors to have an attitude of going with the flow resulting in over-valuation of a stock and at the end when the bubble bursts there are only tears.

Let’s say if you did run the numbers very carefully but the hardest fact to digest is that the stock market prices don’t only depend on the company’s performance. As we have discussed a number of times that macroeconomic factors are not in the control of any individual investor.  Let us take a glance at the returns that the traditional asset classes have generated through a graph.

Traditional investments were the investors’ favourite since they appeared to provide security and comfort. However, they have a significant and generally noticed secondary effect: a tiny increase in wealth. The rate at which prices rise is referred to as inflation. According to the most recent estimates, India’s inflation rate is around 5% – 6%. This indicates that money loses 5% – 6% of its worth each year. After accounting for inflation, a 4.5% after-tax return on traditional assets will result in negative real returns.The falling interest regime that on for the last few years, drove quite a few of these investors towards Mutual Funds which still fails to provide an optimum return for investors.Following the recent market downturns, interest rate reduction, and the resulting impact on fixed deposit rates, many investors are now questioning if traditional investments are still a smart investment option.

Alternative asset classes for investments an opportunistic future

Alternative assets are less traditional and more unexpected investment options. Alternative asset classes include commodities, real estate, NFT (Digital Art), venture capital, private equity.

  1. Alternative Investments
  • Venture Funds: It is money put into start-ups and small enterprises that have the potential to grow over time. It is a high-risk, high-reward investment that is often made by relatively wealthy people. Even more intriguing is the fact that most traditional venture capital funds are limited partnerships. This means that the money can only be invested once by the fund managers. They must refund the principle and gains to the venture capital fund’s investors if they make an investment and leave for a 3 to 4x return.
  • Private Equity Funds: It is made up of investments made privately and not publicly traded. These investments are made directly into private enterprises by investors. Typically, this funding is raised to fund innovative technology or acquisitions. Success in the private equity markets necessitates a high level of risk tolerance and the capacity to deal with significant illiquidity.
  • Unicorns: Unicorns were formerly depicted by ancient Greeks and Romans as being very quick and light on their hooves, with a horn treasured by merchants and investors. It’s a description that may also be used to today’s unicorn businesses. Investing in unicorns makes sense given low interest rates, continuous technological advancements, and new regulatory benefits. However, there is a contradiction to investing in unicorns: the availability of private equity makes them less likely to go public, yet their aversion to public markets makes their shares difficult to come by.

We have the expertise you need and the service that you deserve at Torre Capital, a VC-funded Singapore-based Financial Technology company. We are creating a fully digital Wealthtech to connect family offices and HNI investors with global opportunities, including alternative assets like Private Equity, Venture Capital, Real Estate Funds, and Hedge Funds.The table below consists of some of the PE/VC Funds with their IRR and Fund size.

  1. Real Estate

Commercial and residential properties, as well as REITs, are all examples of real estate. Real estate consists of land and anything permanently attached to it. REITs, or real estate investment trusts, are businesses that own and operate income-producing real properties. REITs provide investors with the chance to invest in real estate as a kind of financial stability. Transacting in REITs is substantially less expensive and time-consuming than transacting on properties. REITs make a lot more sense as an investing vehicle. Second, it provides investors with a new asset class outside of traditional stock, debt, cash, and gold, so helping to diversify risk. The returns generated by REITs are depicted in the graph below.

Collectibles / NFTs

NFTs are digital works of art that exist on the blockchain network and can take a variety of forms. Memes, video clips, images, music, and even tweets are some of the most popular forms of digital art. When you buy these tokens, just like any other investment, there’s always the possibility of your money growing in value. These digital treasures are non-fungible, which means they can’t be replaced. At the moment, blockchain technology is generating a lot of buzz. Some predict the technology will have the same impact on consumer behaviour as the Internet did. Now let us come to the prime question that is how much to invest in NFTs?

Honestly answering these NFTs (especially Digital Art) revolves around the concept that beauty lies in the eyes of the beholder. Hence when you buy something unique and the other person sees the same value in it and the demand increases the prices also shoot up. It will be wise to say that an investor can always explore this option with extra wealth.

 

  1. Cryptocurrencies

In the last five years (ending 31 December 2020), the S&P 500 index of large-cap US equities has compounded at an annualized growth rate of 14.5% (in USD, net dividends reinvested); over the same time period, the price of bitcoin in USD has compounded at an annualized growth rate of 131.5%. Now if we consider Etherium it also has given a hefty return of 500% in 1 Year. If this still feels normal, then let’s talk about some astronomical figures like in the case of Dogecoin or Meme coin as it was named earlier has given a return of around 20000% in a year.

Apologies if you felt a minor heart attack after seeing these return figures.

It is also very important to note that the market is highly volatile and very unprecedented due to a lack of regulation. We are not unaware of the current scenario of Bitcoin and the way Elon Musk is affecting the market sentiments and indirectly controlling the prices, even the astronomical values that Dogecoin gave was also due to the SNL tweet by Elon Musk. You might still be wondering if you should invest in cryptocurrency or not!If we consider simple lottery tickets where nearly 1 lac people buy the tickets and the probability of winning the competition is 1/100000. Now If I ask you do you put all your savings to buy lottery tickets? The obvious answer is No. The reason it is has no backing and the uncertainty is infinite. We just intend to justify the psychology behind the investment by bringing in the example of a lottery. You should invest your money in crypto according to your risk appetite. The graph below shows the returns generated by Bitcoin and Ethereum.

  1. Digital Gold

Buying physical gold certainly has its downsides. There are issues of identifying its legitimacy and purity, then there are problems of safekeeping and storage. One more issue is that we are in the midst of a pandemic. It is not quite ideal to go out to gold dealers or jewellery stores. Digital gold, on the other hand, can be bought online and is stored in insured vaults by the seller on behalf of the customer. All you require is Internet/mobile banking and you can invest in gold digitally anytime, anywhere. You can take physical delivery of the gold at your doorstep. You can invest an amount as low as Re.1. Digital Gold can be used as collateral for online loans. Digital Gold is genuine and the purity is 24K, 99.5% for SafeGold and 999.9 in the case of MMTC PAMP purchases.

Your purchase is stored safely and is also 100% insured. You can exchange digital gold for physical jewellery or gold coins and bullion.Trading volumes of digital gold in India totalled four to five tonnes last year in India and have proved to be a new way of investing in gold. Let us take a glance at the returns that the gold market has generated through a graph.

The magic wand of diversification to minimize risk

Diversification is the process of dispersing money among several investments in order to lessen risk. You may be able to limit your losses and lessen investment return variations by selecting the correct set of investments without losing too much potential gain.

Furthermore, asset allocation is critical since it has a significant impact on whether you will reach your financial objectives. Your investments may not produce a significant enough return to fulfil your goal if you don’t include enough risk in your portfolio. For example, most financial experts believe that if you’re saving for a long-term goal like retirement or college, you’ll need to incorporate at least some stock or stock mutual funds in your portfolio. However, if you take on too much risk in your portfolio, the money you need to achieve your goal may not be available when you need it. For a short-term aim, such as saving for a family’s summer vacation, a portfolio strongly weighted in stocks or stock mutual funds would be improper. You may feel comfortable building your asset allocation model if you know your time horizon and risk tolerance, as well as if you have some investment expertise.

The art of rebalancing

Rebalancing is the process of returning your portfolio to its original asset allocation balance. This is crucial since some of your investments may drift away from your investment objectives over time. Some of your investments will increase at a higher rate than others. Rebalancing your portfolio ensures that one or more asset categories are not overemphasised, and it returns your portfolio to a reasonable level of risk. Let’s say you’ve determined that alternative investments account for 70% of your portfolio. Alternative investments, on the other hand, now account for 90% of your portfolio, thanks to a recent spike in returns. To re-establish your original asset allocation mix, you’ll need to sell some of your stock assets or buy investments from an under-weighted asset category.

Your portfolio can be rebalanced based on the calendar or your investments. Investors should rebalance their portfolios on a regular basis, such as every six or twelve months, according to several financial gurus. The advantage of this strategy is that it uses a calendar to notify you when it’s time to rebalance.

Others advise rebalancing only when an asset class’s relative weight grows or lowers by more than a particular percentage that you’ve determined ahead of time. The benefit of this approach is that your investments will alert you when it’s time to rebalance. Rebalancing, in either instance, works best when done on a somewhat occasional basis.

Never put all your eggs in one basket

Many people are hesitant to invest because they are afraid of losing money. A novice investor’s first question is frequently, “What if I lose everything?” While all investing has some risk, the fear of losing “everything” is unfounded if you choose wisely where to invest your “eggs.” A well-diversified portfolio should have two degrees of diversification: between asset categories and within asset categories. You’ll need to spread out your assets within each asset group, in addition to arranging your investments across stocks, bonds, cash equivalents, and maybe additional asset categories. Naturally, when you add more investments to your portfolio, you’ll incur higher fees and expenses, lowering your investment returns. As a result, while considering how to diversify your portfolio, you’ll need to factor in these fees.The idea is to find investments in parts of each asset class that may perform differently depending on market conditions. So Happy Investing!

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This article has been co-authored by Sayan Mitra and Ayush Dugar, who is in the Research and Insights team of Torre Capital.

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“All that glitters is not gold” — Growing valuation bubble of Indian start-ups

by Sandeep Kumar

 The valuation game

The Venture Capital valuation is a simple game, but never an easy one. While there is little to learn, to play it perfectly takes years, if not decades of experience under the belt.

So how do the VCs arrive at that valuation figure? Market Opportunity? Product Market Fit? Strong Founder Team? Disruptive Product Offering? Extensive Network Economics?

Nah.

Capital invested divided by the stake diluted. That’s it!

The VC chooses the amount of capital he is ready to deploy and the stake he wants to have in the company. Of course, the wish is to part with the least capital for the most stake. Now coming up with these two numbers, the capital chunk to invest and the amount of stake to buy, this is where experience comes in.

The winning bet in your portfolio

Most VCs have personal favorite ranges which they are comfortable with. Some VCs may like to hold only a few concentrated bets while others may want to deploy small amounts into numerous startups. The premise is the same. Each VC wishes to hold at least one winner in its portfolio, the winning bet that ‘returns the fund’.

This gets us to staging. The valuations do nothing to the VC portfolio, except increase the unrealized returns section, which, as the name suggests, are ‘unrealized’ and don’t mean anything unless the company makes an exit from that valuation.

But what if the company is not yet ready for an IPO or a buyout?

The VCs of course know this. Hence when they get together to finance a startup at some stage, let’s say series A, they are offering just enough money to take the startup to the next funding stage. This continues until the IPO or buyout.

Nowhere do the VCs use the DCF or any other model to find a fair value of the shares of the startup. Startup valuation is not a valuation game, it’s a pricing game. It is not about finding a startup trading at a lower than its fair value price and hoping the market corrects itself, the game is about finding another buyer who will be ready to pay higher. All this has nothing to do with cash flows generated from the assets held by the startup, adjusted for the underlying risks of all sorts (DCF basically). All these valuations are nothing more than exhaust fumes as suggested by Fred Wilson, an NYC based VC:

“Early-stage valuations aren’t valuations. They are the exhaust fumes of negotiation about two things — the amount raised and the amount of dilution.”

The information asymmetry

Now let’s take a look at what we have: You are a VC that is trying to get a stake in some startup. What do you do to get an idea of how much you should pay? You don’t have DCF or any other model to help. So, you look at what similar companies have been valued at. With new business models operating in diverse geographies, you realize that it is hard to say how you can define a similar company. Let’s say you came up with food delivery as one category. Despite the difference in the business models, one can hardly cobble together a list of 4–5 startups in the Indian space.

So, the VC game is plagued with opaque, inconsistent deal information. While the figures the VC arrives at are most probably wrong and have nothing to do with reality, they have nothing to worry about as long as they are able to find someone who’s ready to buy at a higher price from them.

The Indian startups in numbers

The past few years have been a gala time for the Indian startups who have managed to secure funding unabated despite the pandemic and its blues.

Startups in India managed to raise $7.8 Bn until April itself. This is a significant number almost 70% of the total $12.1 Bn raised in 2020 and more than 50% of $14.2 billion raised in 2019.

The average funding size has increased to $25.21 Mn, up from $14.94 Mn in 2020. There have been 402 funding rounds until April itself, against 1,114 deals in 2020 and 1,036 in 2019.

Overvaluation and the global landscape

The push towards absurd overvaluations has been a result of the negative interest rate environment. Post the GFC, there was heavy lending and even more borrowing. So much so that people had to pay up money just so that they could lend money. Of course, this led people to look for alternative avenues to park their money and generate juicy returns. The baseless optimism and hollow belief in spotting the next Bezos, Zuck, or Musk have led to an audacious amount of money flowing in, creating completely senseless valuations, having no roots in reality.

Tesla, more than $13 Bn in debt at the end of last year, recently had a market capitalization of $160 Bn, greater than General Motors and Ford combined. At the IPO price, Square was valued at close to $3 Bn, which is 50% below the $6 Bn valuations for which it had raised money from private investors a year before. Uber which in accounting terms stands at around 5x times its revenues, is also grossly overvalued as it is nowhere close to being the leader in the driverless car’s space. WeWork tried to go for a $47 Bn listing but ended up getting corrected to $8 Bn.

The WeWork fiasco was dubbed as a wake-up call in a Morgan Stanley report stating that the days of ‘’ were over.

Unicorns were considered rare. Today, however, the United States has a herd of more than 100 of them, with 100 more outside the US. Each worth a billion dollars or more.

Will history repeat itself?

Let’s talk about the Indian scenario and the startups which we believe are overvalued and most likely to come back to their intrinsic value as and when the markets correct themselves.

1. Byju’s: World’s most valuable Ed-Tech Company

Byju’s operates an online learning platform. It also creates a mobile app for pupils that offers a variety of learning activities. Exam preparation classes are also available. Original material, watch-and-learn movies, rich animations, and interactive simulations are all available to users on the site. The firm is having an EV/Revenue multiple of 17x.

It is the only major player in the Ed-Tech space in India, which has led the company to raise multiple rounds of funding and leading to an enormous increase in valuation. Knowledge in today’s world is free, however, Byju’s creates unique content with animation and the product often seems to be overpriced. In recent times there were a number of instances on various social media platforms where people questioned the pressure on the sales team and how Byju’s is so concerned about their sales when they try to push their offering in the market.

In the long run, the expected return from Byju’s is questionable. Below is the chart of the revenue and valuation of Byju’s over the last five years.

2. Cred — The borrower’s messiah

Losses in billions of dollars are nothing new for hyper-funded companies, especially when they’re chasing size and consumers at any cost. CRED’s metrics tell a tale in and of itself. CRED has made a profit of $71,000 in its second year of operation. CRED hasn’t been able to monetize its user base in FY20, despite acquiring a large customer base with a high propensity to spend and consume.

While the two-year-old company’s sales remained low, its total expenditure increased by more than 5.9 times to $52 Mn in FY20, compared to $9 Mn in FY19. The greatest cost center for the financial firm was advertisement and marketing, which accounted for 47.6% of total expenditure. From $3 Mn in FY19, such costs increased by 9.3 times to$25 Mn. During the fiscal year that ended in March 2020, CRED spent Rs 726.7 to earn a single rupee of operating revenue. CRED’s yearly loss in FY20 was INR 360.3 Crore, up 5.9 times from the $8 Mn it lost in FY19. The current cash burn is difficult to sustain, with an appalling EBITDA margin of -1979.5% in FY20, and the company will have to focus on its collections.

Despite registering astronomical losses it has attained a unicorn status by raising its valuation to $2.2 Bn in 2021. It is worth noting that the company is founded and led by Kunal Shah who is a known name in the start-up world for founding and leading numerous companies which may be an explanation behind the astronomical valuation of Cred. The graph below shows the valuation and losses of Cred over the years.

3. CarDekho — India’s leading car search venture

CarDekho helps users buy cars along with expert reviews, detailed specs, and prices, comparisons as well as videos and pictures of all car brands and models available in India. It has recently acquired an auto marketplace, Carmudi (Philippines) in late 2019 to expand business in Southeast Asia. GirnarSoft, the parent company of Jaipur-based automobile-related services behemoth CarDekho, has seen its losses increase by 155% to $45 Mn in FY2020. This comes after the company’s losses had already increased by 39% in the previous year.

Despite that CarDekho has managed to raise its valuation. Last year, Cars24, a CarDekho competitor, increased its consolidated revenue to $418 Mn and achieved unicorn valuation, and has a much lower EV/Revenue multiple. Let us now see the EV/Revenue Multiple of the peers in this game through the table below.

As per the last reported revenue and valuation figures.

We can infer from the table that CarDekho has a huge EV/Revenue multiple which signifies that the valuation of the firm is increasing at a much faster rate with respect to the revenue that the company generates, leading to overvaluation of the company. The graph below shows the valuation and revenue of CarDekho.

4. Unacademy

Unacademy is a Bangalore-based educational technology startup in India. Unacademy lessons are available in the form of Live Classes, which are both free and available on a subscription basis. Unacademy earned $12 Mn in revenue but spent $53 Mn, resulting in a loss of INR 300 crore. Employee benefits accounted for 23.7% of the edtech start-up’s costs, while other expenses accounted for 75%.

While 2020 brought plenty of development, the corporation would need to significantly increase its expenditures to reverse the losses it had in the fiscal year 2020, which ends on March 31, 2020. Unacademy’s revenue in FY21 is estimated to be over $55 Mn. It’s worth $3 Bn or approximately 35 times the expected income. The graph shows the valuation and loss of BharatPe.

5. BharatPe

When we talk about e-commerce giants, PayTm, Amazon, and Flipkart all wanted payments to take place within their own closed networks. BharatPe’s goal was to achieve what all the large brands were afraid to do: simplify things for retailers by adopting a standardized interoperable QR code. It allowed shops, street food vendors, and tea vendors to accept payments using any UPI app (PhonePe, Google Pay, PayTM, and so on) without having to download the apps. It was a simple and cost-effective approach with an added layer of security. The payment system’s complexity was reduced by a factor of ten by combining multiple UPI apps into a single sticker.

BharatPe was able to achieve early success by keeping things simple. BharatPe’s product strategy is based on making things simple for merchants, and the company uses P2M transactions as a springboard for future services. Because BharatPe does not charge merchants a setup or transaction fee, its fundamental feature money collection using QR codes is essentially a loss-maker for the company. It must spend a large amount of money to manage the servers that process millions of transactions every day. However, this provides BharatPe access to merchants who are passionate about their products and eagerly accept their offers. Despite having no visible revenue stream and without even earning a penny, the valuation of the company is increasing, and currently, it stands at $900 Mn, very close to the unicorn status. The graph shows the valuation and revenue of BharatPe.

The apprehensive loop of growing valuations

The indications are all too familiar. With large markets, illustrious founders, rapid growth, and top early-stage VCs on your side, you have a good chance of raising the next big round, even if you don’t yet have unicorn status (the desired billion-dollar value). And when major acquisitions are made for unproven companies, and valuations double or triple in a matter of months, it begs the question: are we in a bubble? This is always a challenge because most people only realize they were in an economic bubble after it has burst in the past.

Rich valuation multiples have also spread from the typical suspects — consumer internet companies — to enterprise software providers. This is a first. SoftBank, for example, invested in Mindtickle last year, valuing it at $500 Mn based on estimated revenue of $20 Mn — $25 Mn. Even SaaS companies in the United States, including Slack, Zoom, Snowflake, and Cloudflare, have gone public in recent years with great success. Sentiment in India often comes straight from the United States, particularly in related industries and from funds that invest in both nations, including several of India’s leading venture capital firms. Startup valuations are also affected by how publicly traded firms trade if retail investors are ready to pay high prices for loss-making companies, whether banks financing a share issue can find enough at a given price, and so on. There isn’t a single bubble across the board. Because of the vast quantity of money available in the market, investors are willing to pay a premium for good business. But that should be done judiciously.

Investors beware

For the first time in years, it’s possible to claim that private markets are more logical than public markets. If stock markets are the yardstick, select pricey companies may not be overvalued. A closer examination of what constitutes a bubble, as well as what Indian entrepreneurs are doing, reveals a more complete picture. Growth investing has been positive in industries that have recovered quickly from the epidemic, and there has been a lot of interest in a few market leaders. At such levels, one would expect some amount of rationalization. Investors must evaluate the prospects and the future road map of a company before investing. As more investments flow into a company without a proper business model or less revenue, it results in overvaluation creating a bubble. Investors can lose a colossal sum by not choosing the right company.

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This article has been co-authored by Sayan Mitra and  , who is in the Research and Insights team of Torre Capital.

Startup investing 101: The HNI’s guide to investments beyond the conventional asset class

by Sandeep Kumar

Why invest in startups?

Investing in a startup is a high-risk, high reward game

Deciding the right opportunity and best practices for investing in a startup

Ways to invest in startups

Delaying the IPO comes with certain advantages for Startups

How startup investing really works

When can you expect a return or are you locked in forever?

Source: Pitchbook and CBInsights

Exits are what investors care about, but many founders dream of becoming a unicorn and avoid using the word “exit” until it’s too late. Despite this, M&As accounted for 97% of departures in 2020. And the majority of them occurred prior to Series B.

Exit or no exit: A fatal call

DiDi Chuxing IPO: The race to dominate the global ride-hailing pool besides stiff competition

by Sandeep Kumar

DiDi Chuxing is a Chinese ride-hailing company headquartered in Beijing that was founded in 2012 by Cheng Wei. DiDi is China’s largest ride-hailing provider, with nearly 600 Mn riders and tens of millions of drivers. Didi Chuxing has the advantage of being a domestic player who is familiar with China and its clients. In China, the company’s app allows users to request trips from automobiles and taxis, as well as chauffeur services, minibusses, and ride-sharing services. If the IPO is successful, the company’s valuation could range between $70 Bn and $100 Bn. DiDi Chuxing, which is backed by SoftBank, plans to raise $1.5 Bn in debt financing through a revolving loan facility prior to its IPO. At a time when the Chinese government is cracking down on technology companies, Uber’s Chinese counterpart DiDi Chuxing may have filed for an IPO under the radar. Goldman Sachs and Morgan Stanley have been chosen to lead the company’s initial public offering (IPO).

Snapshot

  • Headquarters: Beijing, China
  • Founded: 2012
  • Notable Investors: SoftBank, Alibaba Capital Partners, and Ant Group.
  • Capital Raised: $24.9 Bn
  • Latest Valuation: $62 Bn
  • Exchange: NYSE
  • Ticker Symbol: DIDI
  • Founder: Cheng Wei

Cementing the position with its industry-leading services

DiDi-Chuxing allocates calls from customers within 3 kilometers, though this boundary is being widened now. However, DiDi-Chuxing recently added a destination basic allocation system in which DiDi drivers can announce a destination and escaping location. The DiDi-Chuxing allocating systems have two modes: selection mode, which began in July 2018, allows the DiDi driver to choose the destination, including long-distance; and allocation mode, which allocates calls to DiDi drivers nearby.

DiDi-Chuxing usually assigns DiDi-X to veterans and DiDi-pool to new drivers. Customers of DiDi use payment methods such as Wechat-Pay, AliPay, DiDi-Pay, and others. When paying for any DiDi-Chuxing usage, DiDi customers can change their payment methods. When a customer sends a DiDi-Chuxing car-sharing fee, the fee is transferred from the customer to DiDi. If the customer did not pay, he must pay the fee before using DiDi-Chuxing again. In the case of long-distance driving in Beijing, the DiDi system raises the fee by up to 30% to compensate the DiDi driver for financial loss.

In the case of DiDi-Premier, there are discrepancies between the announced payment amount in advance and the actual payment amount after driving. These two amounts, however, differed by only a few cents. Even though the customer’s money is directly allocated to the driver’s bank account, the money may be paid a little late after driving. Actual payment takes place two days after the customer’s payment, or one-time weekly payment is made.

Currently, DiDi-Premier is charged a distance fee, a low-speed fee, and a long-distance fee. DiDi-Luxury also receives a long-distance basic fee and a fast call allocation fee. Because of weak government regulations and medium-level public transportation conditions, DiDi-Chuxing has a 3 km base call allocation system, with a trend toward increasing the allocation distance from more than 3 km up to 10 km in the case of DiDi-Luxury.

Ride-Hailing App’s concentrated Revenue Model

The majority of the company’s revenue comes from its private ride-hailing app. DiDi-X drivers received 80% of the revenue paid to DiDi-Chuxing by the customer. DiDi drivers can drive the DiDi car for 12 hours per day, which is calculated based on the DiDi operating time.

DiDi-Premier drivers earn 74% of the revenue. DiDi-Premier fees are 20% higher than DiDi-X fees, and DiDi-Premier drivers earn 20% more than DiDi-X drivers. DiDi-Luxury is five times more expensive than DiDi-X and three times more expensive than DiDi-Premier. DiDi-Chuxing pays DiDi-owned luxury car drivers 10,000 yuan per month in one-time and weekly payments. The fee for DiDi-Pool is 10% less than the fee for DiDi-X. If customers pay with Alipay, Alipay provides a small incentive to the drivers as part of an Alipay promotion in DiDi-Chuxing. If a DiDi driver cancels the allocation more than four times, the driver must pay DiDi-Chuxing a fee.

What is important is that the revenue of DiDi drivers is more than twice the minimum salary of university-graduated manpower under the weakness of China’s taxi industry and the automotive industry with the support of the Chinese government with limited regulatory power. The Chinese government regards DiDi-Chuxing as a kind of revenue-increasing engine for the people.

DiDi’s Business Timeline

 

A dominant strategic player in the Chinese Market with uncertain longevity

DiDi Chuxing has risen to the top of the online car-hailing market after merging with and acquiring Uber China. After driving Uber out of China in 2016, DiDi Chuxing quickly dominated the country’s massive ride-sharing market – but its position is far from secure, as more powerful rivals emerge to challenge its dominance. According to PwC, China’s shared travel market will reach $564 Bn by 2030, with a 32% annual growth rate. Many businesses have been drawn in by the massive shared travel dividend. China’s online car-hailing market exhibits a high level of market competition. Many players are still active, in addition to the dominant DiDi Chuxing. There is still room for a taxi-hailing market worth $100 Bn. The national average ride-hailing success rate is around 75%, and 25% of online ride-hailing demand remains unmet. This provides a lot of incentive for new entrants like Gaode Taxi, Meituan Taxi, Ruqi Travel, and other public online ride-hailing platforms.

DiDi Chuxing has approximately 554.7 Million orders, while the order volume of more than ten travel platforms such as T3 Travel, Cao Cao Travel, Wanshun Car-hailing, Xiangdao Travel, and Meituan Travel is less than 90 Mn, according to the calculation of the internal parameters of online car-hailing. As can be seen, DiDi Chuxing’s order volume far outnumbers that of other ride-hailing platforms. DiDi Chuxing, on the other hand, cannot sit back and relax. The company’s continued loss of market share has also planted a slew of hidden dangers for it. DiDi Chuxing’s market share accounted for 95% of the scale of online ride-hailing around 2016. Later, due to security incidents, DiDi Chuxing’s ride-hailing business was forced to go offline in the second half of 2018, and its market share also fell to 90%; according to calculations, DiDi Chuxing’s market share is only about 85% today.

How does DiDi fair over different regions and their market leaders?

 Source: PitchBook 

 Chinese Ride-Sharing Giant on the way to profitability 

DiDi Chuxing is dubbed “China’s Uber,” yet it really outperforms Uber and other competitors in the Chinese market. DiDi Chuxing, or DiDi, is a Chinese ride-hailing startup that has amassed over 550 Mn users and 31 Mn drivers since its launch nine years ago. DiDi claims to have a 99% market share in China’s taxi-hailing business and an 87% market share in private auto hailing, according to its own data. In comparison to Uber China’s 45 cities, it has a presence in over 400 cities across the country.

The company’s primary ride-hailing business is lucrative, and it has rebounded since the coronavirus outbreak in China, its home market. The corporation has 14 international markets, including Australia, Japan, Latin America, and Mexico, in addition to China. The business is more than just automobiles and cabs. DiDi also includes bus services and a chauffeur booking option, which might be beneficial if you’ve had too much to drink and need a designated driver to take both the car and the driver home.

DiDi’s financial performance is difficult to quantify because it is a privately held firm. In 2018, Chinese news outlets claimed losses of $1.6 Bn. While its primary ride-hailing company charged an average of 19% in commissions, overall expenses, which included tax payments and driver bonuses, were 21%, implying a 2% loss each journey. This pattern may be traced all the way back to the beginning.

Concerns Regarding the company

  • Massive expansion and competitive pressure: DiDi’s rapid expansion in China was fuelled by its fierce competition with Uber and lax government rules regarding ride-hailing services. DiDi created an army of drivers, which it bolstered with massive driver subsidies, allowing it to outrun Uber’s operations.
  • Regulation which limits driver’s work regions: China, unlike the United States, has rules that limit where residents can work. DiDi drivers from rural areas, in particular, are not allowed to work in larger cities unless they live there. Residency licenses come in a variety of levels, and cities vary in how aggressively they enforce them. However, many are tightening their belts. Many large cities are experiencing a driver shortage as a result of this, as many drivers do not want to risk paying fines for working where they do not live. It has also compelled DiDi to delete a large number of its drivers from its own app.
  • DiDi’s predicament is hardly exceptional: Regardless of size, all ride-sharing companies must choose between responsible expansion and safety. The murders that were reported exposed significant flaws in the DiDi app and its protocols. One major flaw was the company’s decision to outsource its passenger assistance system, which was chastised for failing to act on a previous complaint against one of the alleged murderers. Keeping an in-house customer support team would definitely strengthen the entire safety system, but it is a step that would have a negative influence on the company’s bottom line, which is already far from profitable.

Valuation analysis of the company

 Source: PitchBook 

Market sentiments surrounding the IPO

DiDi Chuxing is planning an initial public offering, with a capitalization of $60 Bn. Although no official date has been set, the company anticipates going public in the first half of 2021. When it comes to ride-hailing, you may only be familiar with Uber Technologies Inc. and Lyft Inc. DiDi, on the other hand, is one of the most well-known ride-hailing companies in the world. Even yet, the recent failures of ride-hailing IPOs are worth noting. Following their IPOs, both Uber and Lyft saw their stock prices plummet, trading as low as 70% below their IPO prices. DiDi, on the other hand, may have something the other businesses don’t.

DiDi has a 17.5% ownership in Uber, and DiDi has invested $1 Bn in Uber, so DiDi is essentially the Chinese Uber. But there’s a lot more to it. DiDi joined Kuaidi in 2015 to build a smartphone-based transportation services behemoth. Taxis, privately owned cars, carpooling, and buses would be summoned by users. This is in stark contrast to the Uber and Lyft models, which rely solely on scooters.

According to the sources, DiDi Chuxing chose New York because of a more predictable listing pace, the existence of comparable peers such as Uber Technologies Inc. and Lyft Inc., and a larger capital pool. The decision comes as the US Securities and Exchange Commission pushes forward with a plan to delist international companies from US stock exchanges if they fail to meet US auditing criteria.

But even if DiDi was restricted to China alone, there would still be a case for the company. It serves a nation of 2 Billion people and has plenty of institutional backing. Tech investment giant and Uber-backer SoftBank Group Corp backs DiDi. Alibaba Group Holding Ltd. and Tencent Holdings ADR also back the company. Before its IPO, DiDi still expects to have another funding round to boost the valuation. Some of its shares are still trading below its 2017 peak valuation of $56 Bn.

Extensive product expansion and the road ahead

DiDi Chuxing, a Chinese app-based ride-hailing business, has unveiled a new three-year strategy for steady and sustainable growth. DiDi’s three-year plan, dubbed “0188,” moves away from its “all-in-safety” approach and toward longer-term safety capacity building and user value creation. The number 0 represents safety as a top concern, while the other three numbers represent DiDi’s strategy aims.

As of the beginning of 2020, DiDi has completed over 1 Bn international journeys. DiDi prioritizes its platform for integrated four-wheeler (ride-hailing, taxi, designated driving, and hitch) and two-wheeler (bike and e-bike) and public transportation solutions, as well as it’s subsidiary Xiaoju Automobile Solutions, autonomous driving, fintech services, and smart transportation businesses.

A customer-centric car leasing business has been unveiled by DiDi and its long-time partner BAIC, as well as a consortium of automotive industry enterprises and Chinese state-owned institutions. “In the next three years, the companies hope to have a fleet of 100,000 cars available for lease,” according to the agreement.

Should you invest?

The majority of initial public offerings (IPOs) are volatile at first. You have a large influx of early investors who buy into the hoopla and then fade away. As a result, many IPOs experience a drop in the period following the IPO. We’ve already listed Uber and Lyft, but we can think of a few more. JFrog Ltd. (NASDAQ: FROG) has dropped 33% since its first public offering in October. Snowflake Inc. (NYSE: SNOW), the largest software IPO in history, dropped 40% after rising 61% in the months afterward. This is how most initial public offerings (IPOs) go, which is why we constantly advise against investing in them immediately. You might want to get in as quickly as possible in some circumstances. But, in most cases, it’s better to wait for the euphoria to settle down and see whether the stock can return to a stable state i.e. the actual value. You should also be wary of the company’s particular industry.

It’s difficult to be positive about a ride-hailing service, using Uber and Lyft as examples. But, as we already stated, DiDi’s case may be different. As both Uber and Lyft have been embroiled in a price war across the United States, which has caused their stock prices to plummet.

DiDi has the advantage of having China almost entirely to themselves, as well as having infiltrated overseas markets. A user base seven times that of what many consider the industry’s biggest brand (Uber) might have a significant impact on DiDi’s stock performance following its IPO. As a result, the stock is more likely to be a buy than Uber or Lyft. However, because Uber is a shareholder, DiDi’s success might put money in Uber’s pocket, giving Uber an even bigger advantage in its struggle with Lyft. If you want to purchase Didi stock, it is advisable to get it at the right price

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This article has been co-authored by Sayan Mitra and Yogesh Lakhotia, who is in the Research and Insights team of Torre Capital.

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