As a long-term, buy-and-hold investment, Didi (NYSE:DIDI) stock is a highly logical choice. That said, there’s just too much regulatory risk.
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There seems to be mounting evidence that the ridesharing company faces a potential delisting from the New York Stock Exchange.
It is well known that China continues a broad crackdown on its international firms. The country is concerned that data housed in its firms listed in the U.S. pose a national security risk.
That makes recent suggestions by Chinese internet watchdogs crystal clear in their intent.
Hong Kong Listing
Back on Oct. 21, China’s internet watchdog recommended that DiDi explore a listing in Hong Kong. That recommendation was made as a cybersecurity probe into it and two other U.S.-listed firms wrapped up.
The news resulted in a quick but temporary decrease in share prices. That news was essentially noted and then forgotten as prices rebounded a few weeks later.
Tencent (OTCMKTS:TCEHY) President Martin Lau then stated that increasing state scrutiny and regulations are the new normal on Nov. 10. That again sent DiDi prices plunging lower. It should be enough warning to potential investors who believe China may ease up soon.
That’s why we should revisit the import of the earlier recommendation that DiDi list in Hong Kong. It has very clear implications that could ultimately spell DIDI stock running to zero.
In short, DIDI stock could get delisted from the New York Stock Exchange. It seems unlikely after all, given that DiDi came public on June 30. Nevertheless, China has long sought to bring its homegrown, U.S.-listed stocks nearer its shores.
China is concerned that national security is at risk due to the troves of data its tech champions possess. Take them off the NYSE and the Nasdaq and U.S. regulators have far less access to the data contained therein.
Another important consideration is that China desires to have more of the growth in such companies returned to Chinese investors. That’s much more likely to occur if DiDi is listed on a Hong Kong exchange rather than one in the U.S.
DiDi is already listed on the NYSE, but it isn’t inconceivable that it ends up delisted of its own volition or simply as the result of a mandate. Chinese regulators are likely to impose new rules that ban Chinese companies from listing on U.S. exchanges in the near future.
If China decides that it makes sense for DiDi to delist, expect that Beijing can easily make that a reality. Those truths were already publicly known months ago. But investors in DiDi should reconsider their import given recent news from Tencent.
Tencent Reiterates Issue
Tencent has committed to working with the Chinese government as it reshapes policy toward domestic firms operating internationally. Martin Lau, its president, noted that this is the new normal in China.
Unfortunately, its cooperation directly harms its business.
“In July to September, Tencent’s net profit rose 2.5% from the same period a year ago to 39.5 billion yuan, or $6.1 billion, a significant slowdown from earlier this year. Its 13% growth in revenue to 142.4 billion yuan marked the slowest pace since the tech giant went public in 2014.”
The announcement by Tencent sent DiDi shares down, proving how Beijing diktats rule the day.
What to Do
It’s clear that DiDi doesn’t have power over its trajectory on U.S. exchanges at present. It doesn’t appear that Beijing is slowing down. Regulatory risk is the main story affecting all Chinese stocks.
Prices should go down if investors are paying attention. It sounds hyperbolic to suggest that they may run to zero in the future, but that’s entirely possible.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.”