Didi wants to upgrade from a mobility giant to an internet giant. Amid persistent rumors of a US listing in July, reports also emerged that Chengxin Youxuan, its top-priority community group buying project, would pursue an independent IPO. US tech media The Information reported that Chengxin Youxuan will be spun off from Didi and prepared for an independent listing in 2022 or 2023. Additionally, the investment terms for Chengxin Youxuan's new round of venture capital explicitly include a condition: if Chengxin Youxuan does not IPO within five years, investors' shares will convert into Didi Chuxing equity. As one of the well-known means to boost Didi's valuation for its listing, the rumor of Chengxin Youxuan's independent IPO is not surprising. Didi, whose main business is ride-hailing, has long faced the problem of limited imagination due to business singularity. This is not a problem with the ride-hailing business model, but rather that Didi, as an internet company, does not want people to think it only has a ride-hailing business. Just as it tested food delivery and recently announced entry into car manufacturing, it must both raise valuation and explore new businesses; it must grasp both and make both strong. Moreover, Didi's app has a large number of high-quality, frequently used users daily, but the value of its high open rate for traffic is not deeply utilized—users open the app only to hail a ride. Developing secondary commercial scenarios for this traffic and the quality users behind it is a natural reflection of Didi as an internet company with traffic incubation capabilities. Combined with backlash from public opinion, policy guidance from relevant authorities, and insufficient optimization of Chengxin Youxuan's own business processes, as well as declining platform order volumes, community group buying is no longer as attractive to Didi as it was last year. The commercial necessity for Didi to continue injecting capital to sustain Chengxin Youxuan cannot last much longer. Chengxin Youxuan must prove its independence in all elements—business closed loop, user scenarios, commercial returns—until it develops stable and mature profitability. Spinning off the community group buying business and continuing to invest in it is beneficial and necessary for parent company Didi in the long run. More importantly, once listed, Didi and Chengxin Youxuan will undergo financial separation. As the parent company, Didi will be unable to continue the previous 'unlimited investment' subsidy model for Chengxin Youxuan, as it would otherwise erode the listed company's financial health. If Chengxin Youxuan wants to remain at the community group buying table and continue to receive capital injections, it must introduce external capital to maintain the necessary funding for daily operations and business expansion. This leads to the special situation of both Didi and Chengxin Youxuan going public simultaneously. Didi needs Chengxin Youxuan to 'walk independently' as soon as possible. However, this is not an easy task.

-01- Increasing external investor confidence

According to a research report on community group buying by China Merchants Securities, due to most participants' inability to sustain long-term losses, the industry is expected to form an oligopoly within the next 1-2 years, eventually leaving 2-3 national platforms. The report estimates that in 2021, the average loss in the community group buying industry will exceed 20 billion RMB. If Chengxin Youxuan wants to be one of the remaining players in the community group buying track, it needs to maintain sufficient capital investment for the next 2-3 years. Currently, besides Didi, the main players at the table are Meituan Youxuan, Duoduo Maicai, Ali MMC, JD Jingxi (including Xingsheng Youxuan), and Shihuituan. These major players have the ability to sustain long-term funding. In comparison, the reasons mentioned above put Didi at a disadvantage in terms of capital in the community group buying track. In fact, Chengxin Youxuan has recently shown signs of capital strain in its business operations. Since the beginning of this year, Chengxin Youxuan has begun to shrink order volumes to reduce subsidy spending. First, it narrowed subsidies for grid warehouses. According to a grid warehouse operator in Hunan, platform order volumes have dropped sharply this year and subsidies have disappeared, making it impossible for single-warehouse revenue to cover sorting and logistics costs. If logistics costs such as labor and vehicles are reduced, leading to poor delivery timeliness or product damage, the headquarters deducts from grid warehouse revenue. Some grid warehouses have been directly shut down, with goods shipped directly from central warehouses. Suppliers have similar feedback. A supplier in Henan said that since this year, Chengxin Youxuan's payment terms have significantly lengthened, from the previous T+3 to more than 10 days, sometimes even half a month without starting the review process. Moreover, this change in payment terms is not automatically generated by the system but is the result of manual intervention by the platform. Additionally, Chengxin Youxuan has become more frequent in fining suppliers, and order volumes have continued to decline, almost halving from previous levels. Previously, Chengxin Youxuan's main source of funds was its parent company Didi. The news of Chengxin Youxuan's independent IPO at this time is intended to increase external investors' confidence and boost the amount raised in this round. But currently, the fundraising amount is not very satisfactory. At present, Chengxin Youxuan's external related capital includes $100 million from Wumart, and $1.2 billion from Citic Private Equity and angel investor Wang Gang. This amount was achieved under the premise that Didi purchased $3 billion in convertible bonds of Chengxin Youxuan and promised an IPO within five years. It is clear that external capital remains cautious about betting on Chengxin Youxuan. Not to mention compared with veteran players like Xingsheng Youxuan and Shihuituan that survived the 'group buying war', or internet giants with strong consumer fundamentals like Duoduo Maicai and Meituan Youxuan, Chengxin Youxuan is not on the same level in terms of supply chain layout such as warehousing. Due to a lack of supply chain accumulation, Chengxin Youxuan has adopted a lighter approach to national warehousing and distribution. Projects such as processing warehouses and collaborative warehouses are outsourced to third-party companies with national capabilities, which means Chengxin Youxuan cannot fully control the front-end fulfillment process. At the same time, unlike Xingsheng Youxuan, Chengxin Youxuan has not accumulated a group of highly sticky community leaders. The lack of education and training for community leaders is a common problem for internet platforms. But for Meituan Youxuan and Duoduo Maicai, community group buying is not a completely separate new business from their main operations; rather, it is a supplement to their main business scenarios and an extension of their main capabilities. Duoduo Maicai is essentially Pinduoduo's best fulfillment model for exploring group-buying e-commerce in fresh food community scenarios. Its essence remains group-buying e-commerce, and Pinduoduo's massive e-commerce traffic has played a huge role. In comparison, Chengxin Youxuan needs to start from scratch to build a complete and standard community group buying system. The shortcomings in warehousing and distribution, as well as the lack of community leader operations, have prevented Chengxin Youxuan from building any substantive business moat so far. Therefore, external venture capital is not very optimistic about an independent Chengxin Youxuan. If the capital chain breaks, Chengxin Youxuan's only competitive advantage will be hard to maintain. Overall, whether the amount raised in this round before Didi's listing can support burning cash until sufficient economies of scale are achieved is key to Chengxin Youxuan's future development.

-02- Mining traffic value

Since its establishment, Didi has conducted a total of 21 rounds of internal financing, amounting to nearly $25 billion. Through heavy capital investment and aggressive expansion, Didi has captured nearly 90% of the ride-hailing market. As of October 2020, Didi had 400 million active users, and the growth of daily ride-hailing traffic and actual demand in Chinese cities has basically peaked. But to this day, Didi continues to suffer huge losses. By the end of 2019, Didi's total losses exceeded 50 billion RMB. It was not until May 2020 that Didi's ride-hailing business alone began to turn a profit. Didi's current valuation has reached $100 billion. In comparison, as of May 7, Uber's market value was only $88 billion, and Uber's same-city delivery business is one of its key growth points. It is clear that Didi's unprofitable ride-hailing business is not enough to support its market valuation. New retail businesses represented by Chengxin Youxuan may become Didi's future profit pillar. In addition to the online community group buying business, Chengxin Youxuan also announced in December 2020 the launch of 'Chengxin Youxuan Small Stores', similar to Tmall Xiaodian and JD Convenience Stores. By upgrading storefronts, empowering operations, and providing wholesale supply, it transforms mom-and-pop stores. It can even be said that the B2B wholesale supply to small stores often generates order volumes not lower than many community group buying orders. Chengxin Youxuan Small Stores cooperate with its existing community leaders. Chengxin Youxuan says that sales at pilot stores can increase by an average of 3-5 times. It is reported that this offline business has also become one of Chengxin Youxuan's important expansion businesses. In essence, the purpose of this approach is still to increase the valuation chips of the community group buying business. On one hand, these additional B2B wholesale volumes are included in Chengxin Youxuan's group buying shipment figures, which will be reflected in its IPO statements in the future. On the other hand, it is also a means to increase the stickiness between community leaders and the platform. The online community group buying business can supplement the product offerings of community leaders' stores, while Chengxin Small Stores supplement the operational capabilities of community leaders. Apart from Chengxin Youxuan, Didi is also trying to convert traffic from its main business to other businesses as much as possible. In April this year, Didi's self-operated e-commerce business 'Today's Hot Deals' was launched in the homepage menu of the Didi app. Unlike community group buying, products are not available for self-pickup but are shipped directly from manufacturers to homes, similar to Meituan's 'Tuanhaohuo'. After community group buying, Didi quickly laid out e-commerce, attempting to establish its own relationship chain with upstream and downstream retail industries. The aforementioned Chengxin Small Stores increase connections with front-end stores, while the e-commerce business provides new order growth entry points for existing supplier resources. Expanding diversified business scenarios and converting its huge user base and user activity into retail business assets is a normal and reasonable transformation for tool-type apps like Didi. The reason Didi chose community group buying as the first step in traffic conversion is that compared with other businesses, it has the lowest barrier to entry and is the track where Didi is most likely to achieve successful transformation. Whether Chengxin Youxuan can successfully IPO represents the first real test of Didi's ability to innovate in incubating new businesses as it upgrades from a leading mobility brand to a comprehensive internet company. Source: Future Consumer APP (ID: lslb168) Tips will be paid 400-2000 yuan upon adoption.