Alibaba: Taxi War Heating Up

| About: Alibaba Group (BABA)

Summary

Uber China's recent capital raise could potentially be a negative to Didi Kuaidi due to increased competitive pressure.

Didi Kuaidi still enjoys dominant scale and support from BABA and Tencent. Uber's partnership with BIDU is sound on paper but execution is questionable.

Remain bullish on BABA and Tencent. Cautious on BIDU.

Wall Street Journal reported that Uber is raising a fresh new round for its China unit that will value it at $7b. Given the importance of ride hailing app has on mobile payment and O2O services, and the size of China's ride hailing market, this sector is growing increasingly important to Uber and large internet companies such as Alibaba (NYSE:BABA), Tencent (OTCPK:TCEHY) and Baidu (NASDAQ:BIDU). I remind investors that Uber China is backed by BIDU, which is looking to leverage Uber's technology and service to break into the fast growing ride hailing market in China given that it has fallen behind both BABA and Tencent in this space. The recent capital raise of Uber China allows the unit to make additional investment on marketing and customer/driver retention, which could potentially prolong the highly competitive landscape in China's loss-making ride-hailing market. Despite the growing competition from Uber, I continue to like BABA and Tencent from a growth perspective and market position. I remain cautious on BIDU as its existing O2O investment may be understated if BABA and Tencent decide to inject additional capital to compete against Uber and its China expansion.

China is a market Uber cannot ignore and the company has certainly been clear on this fact judging by its partnership with BIDU and aggressive marketing to draw drivers onto its platform. On paper, Uber's partnership with BIDU is sound in that BIDU's resources in autonomous driving aligns with Uber's vision of autonomous vehicle and BIDU's focus on O2O is consistent with what Uber is trying to replicate in North America with UberEATS. However, BIDU lags behind rival BABA and Tencent in both ride hailing and O2O, presenting a challenge for Uber to fully penetrate into the Chinese market. Regulatory risk is another concern. Although the government never banned Uber as we have witnessed in some countries, the recent taxi regulation is clearly a negative to Uber given that all drivers should be regulated and that no drivers can be on the competing platform at the same time. Recent capital raise by Uber attracted local investors including Guangzhou Automotive (which I have extensively followed), China Life Insurance and HNA is a positive for Uber, but worth noting that the new investors are of lower quality in that they were late to the ride hailing wave in the early days and now investing in Uber because Didi Kuaidi is heavily invested with a premium multiple. That said, this round is certainly a positive for Uber to receive fresh capital to compete but unclear on whether it could be a long-term positive to Uber's investors.

Finally, investors should also be aware of the scale between the competing apps. Uber booked 1b rides globally since its founding in 2009, but last year Didi Kuaidi booked 1.43b rides alone. Although some may argue that Didi Kuaidi count all the taxis and drivers on its network, making it less of a proper comparable, my argument is that a driver on Didi Kuaidi network is no different from the driver on Uber with the exception that Uber is unable to attract majority of the driver base in China. With 87% of China's car hailing market, I would argue that BABA and Tencent are well positioned relative to BIDU and Uber.

Conclusion, remain long on BABA and Tencent. Cautious on BIDU.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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