Didi secures US$100M: Do Chinese taxi apps deserve so much funding?

3 Jan 2014

Didi secures US$100M: Do Chinese taxi apps deserve so much funding?

By Terence Ng

Despite high money burn rates, Tencent and Citic’s investment of US$100 million in Didi Dache shows that their motivation goes beyond profitability

Right after New Year’s day, Chinese taxi booking app Didi Dache has announced that it has secured Series C funding amounting to US$100 million, comprising mainly US$60 million from Citic and a follow-on investment of US$30 million from Tencent. This follows its successful Series B and Series A funding rounds earlier last year, which saw it raise US$15 million from Tencent and US$3 million from GSR Ventures respectively.On the face, it may seem that Didi Dache is doing well, and that its business fundamentals are strong enough for investors to readily turn a profit. However, a report from Sina shows that both Didi Dache and its competitor, Kuaidi Dache, are ramping up promotion efforts to capture market share, with Kuaidi Dache spending nearly 100 million yuan (US$16.5 million) on lucky draws, cashbacks and loyalty programmes. Previously, Didi and Kuaidi have spent nearly 80 million yuan (US$13 million) and 50 million yuan (US$ 8.3 million) respectively on similar promotions.

Such high burn rates will tend to cause caution among most investors, raising questions about the startup’s profitability. However, in a Chinese-language article published on QQ Tech, correspondent Lei Jianping argues Didi Dache provides a value to investors that go beyond mere profitability, letting them establish yet another foothold in China’s burgeoning tech space.

Lei points out one of the few areas in China still relatively untouched by the Internet is the realm of taxi booking, which stands in contrast to shopping, communication and employment, which have all been transformed by Internet companies big and small. In addition, taxi bookings provide yet another opportunity for Chinese tech firms to market their mobile payment systems, expanding their reach and consumer awareness.

Next, Didi Dache holds considerable clout in China’s online taxi booking market. According to 163.com, Didi’s presence in over 32 Chinese cities and a user base of over 20 million is second only to Kuaidi, which covers 40 cities and has a similar user base. Currently, over 70% of Didi’s bookings come from eight major cities including Beijing, Shanghai and Guangzhou, with the implication that there still remains a potential for growth in the other 24 cities that Didi covers.

Finally, Lei believes that this round of investment provides Didi the necessary funds to continue its promotion efforts, which is essential in capturing market share and generating awareness in the burgeoning Chinese online taxi booking industry. Eventually, though not likely before the end of 2014, there will come a point where customer awareness and market consolidation will allow a healthy profit to be generated.

With this investment, Tencent and Citic have shown that they are playing the long game, trading immediate profitability for a chance at a relatively untapped sector with plenty of room for growth. Only time will tell if their decision turns out to be correct.

Tencent Invests in China Cab Booking App to Tap Mobile Web Users

Tencent Holdings Ltd. (700), Asia’s largest Internet company, invested in Chinese cab reservation app Didi Taxi as part of plans to promote its payment service to users accessing the Web through mobile devices.

Tencent was one of the investors for Didi Taxi’s $100 million fundraising effort, Jerry Huang, a director of investor relations at Tencent in Shenzhen, said in an e-mail today.

Didi Taxi, created by Beijing Xiaoju Keji Didi Dache Co., works with more than 300,000 taxis and operates in 30 cities, including Beijing and Shanghai, according to its app description. Users of Tencent’s instant-messaging app Wechat — known as Weixin in Chinese — in mainland China can pay for Didi Taxi bookings using the Weixin Payment service, Huang said.

“Tencent might see a lot of potential in the taxi booking market,” Yang Yang, a Beijing-based analyst at Internet consulting group IResearch, said by phone. “Tencent’s payment service could become the main tool for taxi payments in the future and this effectively promotes it.”

Tencent is seeking a bigger share of the mobile-services market by adding more games to WeChat. The company bought a stake in Activision Blizzard Inc. (ATVI) in July and invested in Korean messaging-app company Kakao Corp. in April 2012, according to its annual report.

Didi Taxi said in an e-mail that it had 5.2 million users in China as of the end of July.

To contact the reporter on this story: Lulu Yilun Chen in Hong Kong at ychen447@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: