In the late evening on Thursday, Dec. 2, Didi Global (NYSE:DIDI) announced that it would delist in New York. This is a massive blow for DIDI stock and investors holding Chinese stocks as well as relations between the U.S. and China.
This delisting happened barely six months after the company went public. The initial public offering (IPO) started on very rough terms, as the Chinese government indicated that Didi did not get its blessing.
DIDI Stock in Freefall
Didi lost 22.18% of its value on Dec. 3 after the ride-hailing firm said it would delist from the New York Stock Exchange (NYSE). Bloomberg initially reported on the rumors a week previously.
The article said the Cyberspace Administration of China “asked” Didi to have a plan for the NYSE delisting. For months, the Administration voiced concerns about data security in the country. It banned new Didi app downloads shortly after the stock’s NYSE IPO.
Didi sold its stock for $14 per share and raised $4.4 billion during its IPO, setting an impressive $67 billion market capitalization. After last week’s plunge, the market capitalization fell to $29.74 billion.
Investors who paid $14 or as much as the $18.01 intra-day high will not get their money back. The delisting from the NYSE and listing on the Hong Kong exchange will force some investors to liquidate the holding.
Not all brokerages offer support for clients holding international stock. This will lead to strong selling pressure ahead of the delisting.
Limited Trading Strategy
Existing shareholders could keep the stock to the very end, hoping for speculative buying ahead of the listing change. Those who hold the stock after its Hang Seng Stock Exchange listing could benefit.
Didi is flush with cash from the $4.4 billion IPO. Furthermore, the Chinese government may ease its crackdown on Didi after it delists.
DIDI stock does not automatically qualify for a Hang Seng listing and must submit an application first. Investors should assume Didi needs to post year-end financials. After that, it could apply for a Hong Kong listing in 2022.
The time gap will cause further uncertainties for investors. After this year’s bull market, shareholders may sell the stock now to book the capital gains losses. They could offset gains booked from other holdings this year to lower their taxes owed.
Chinese Companies Risk Delisting
For months, the U.S. Securities and Exchange Commission (SEC) developed rules for allowing it to delist foreign stocks. After China’s government forced Didi to delist, the SEC may have more government and judicial support.
The SEC wants the Public Company Accounting Oversight Board (PCAOB) to have the right to audit companies for three consecutive years. Since China regulators refuse to allow the U.S. to audit, over 200 companies may face removal from U.S. exchanges.
Alibaba (NYSE:BABA) is the most widely-followed Chinese firm. Investors used to compare its cheap valuation to that of Amazon (NASDAQ:AMZN). Both have a dominant e-commerce firm and run a strong cloud solution offering web services.
Alibaba’s Jack Ma angered the Chinese government and created a company-specific problem. Still, it has a variable interest entity structure. Investors do not have ownership of the underlying Chinese company.
BABA stock closed at a new low last week on higher selling volume after the Didi news. Additionally, Bilibili (NASDAQ:BILI) and Pinduoduo (NASDAQ:PDD) closed at 52-week lows. They are notable for their cheap valuations.
Opportunities in DIDI Stock
Speculators who bought Luckin Coffee (OTCMKTS:LKNCY) after the company’s accounting fraud scandal could have done well. The stock bottomed at $3.60 and traded as high as $17.79. Didi stock could rebound next year on its Hang Seng listing.
Investors may assume that in the future, Didi will satisfy China’s privacy concerns. It will also have plenty of cash on hand thanks to its IPO. This will give the company the chance to acquire other firms, invest in the business and grow without the distraction of the U.S. listing.
Didi stock could fall further for the rest of the month as shareholders book losses. By the start of next year, Didi will re-list on the overseas market. Investors who want the Uber (NYSE:UBER) or Lyft (NASDAQ:LYFT) of Asia will not hesitate to buy DIDI stock.
Didi needs to survive the next few weeks. Shareholders might try to sue it to get back the $14 IPO price will little success. Lawyers will take most of the settlement funds (if any.) Didi could also settle out of court at a fraction of the money raised. Either way, DIDI stock is in a stronger position to stage an eventual recovery.
On the date of publication, Chris Lau 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.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.