Squeezing profits, can Didi rejuvenate?

The leading ride-hailing company $DiDi(DIDIY.US) announced its second financial report for 2025 before the U.S. stock market opened on the evening of August 28. The overall performance this quarter was satisfactory, with domestic business order volume slightly exceeding expectations and net monetization rate continuing to rise, leading to revenue slightly surpassing expectations, and profit performance being even more impressive. Specifically:

1. Acceleration in domestic ride volume: This quarter, the year-on-year growth rate of domestic GTV slightly accelerated to 12.3%, slightly higher than Bloomberg's consensus estimate. Compared to the industry data released by the Ministry of Transport, Didi's self-operated business (excluding Huaxiaozhu and aggregation business) performed similarly to the overall industry order volume growth trend.

Breaking down price and volume, Didi disclosed that domestic ride orders increased by 12.4% year-on-year, while the average order price slightly declined by 0.1%, indicating that this quarter's acceleration was driven by order volume, with the downward trend in average order price continuing, but the decline was significantly narrowed.

2. Rising domestic monetization rate: Based on the 12% growth rate of domestic business GTV, domestic business revenue (GTV excluding passenger subsidies, taxes, and other income deductions) increased by 10% year-on-year, underperforming; while platform revenue (GTV minus driver commissions and other operational costs) increased by about 24% year-on-year, outperforming.

This indicates that the subsidy rate for consumers this quarter is still increasing year-on-year, but the extent is narrowing. However, the platform's net monetization rate is rising, calculated as platform sales/GTV, increasing by 2.1 percentage points year-on-year, boosting the profitability of domestic business.

3. Domestic profitability improved significantly better than expected: Thanks to the significant rise in monetization rate, Didi's adjusted EBITA profit for domestic business this quarter was 3.62 billion, with profit accounting for 4.4% of GTV, up 0.4 percentage points quarter-on-quarter, significantly better than the sell-side expectation of 3.3 billion.

4. Overseas maintains high growth while reducing losses: Overseas business continues to grow steadily at a high rate, with order volume increasing by 24.9% year-on-year, consistent with the previous quarter. The GTV growth rate seems to significantly lag behind order volume growth, but after excluding exchange rate factors, the constant currency GTV growth rate reached 27.8%.

However, overseas platform sales only increased by 16.4% year-on-year, slightly underperforming the GTV growth rate. According to the company, this is due to increased subsidies to users overseas, likely influenced by Didi's resumption of its food delivery business in Brazil. Due to increased subsidies and investments, overseas business losses this quarter significantly expanded to 750 million, but the market had already anticipated this, and the actual loss was in line with Bloomberg's expectations.

5. Overall performance, Didi's total revenue this quarter was about 56.4 billion, up 10.9% year-on-year, outperforming the market expectation of 55.1 billion, mainly driven by the domestic business's better-than-expected GTV growth. On the profit side, due to the domestic segment's better-than-expected profitability improvement, and the international business's expected loss expansion, the overall adjusted EBITA was 2.88 billion, outperforming the market expectation by nearly 11%.

6. From the perspective of costs and expenses, Didi's gross margin this quarter was 19.6%, showing a significant improvement both year-on-year and quarter-on-quarter. The rise in gross margin reflects the increase in platform net monetization rate.

In terms of expenses, this quarter management expenses included about 5.3 billion in one-time expenses due to previous shareholder litigation, leading to a negative GAAP profit this quarter. However, excluding this impact, management expenses actually only increased by 4% year-on-year. R&D and operational support expenses also only grew in single digits.

Only marketing expenses showed a relatively significant increase, up 15% year-on-year, reflecting increased subsidies and marketing investments in domestic and overseas businesses. Therefore, behind the better-than-expected profit this quarter, it is mainly due to the high monetization rate, with cost control optimization also contributing.

Dolphin Research's View:

The above analysis shows that the core domestic ride-hailing segment may have seen an increase in growth rate this quarter following the overall industry recovery, but the central growth rate remains around 10%, which will not change significantly. The highlight is still the continuous rise in the domestic business's net monetization rate, which is partly due to the improvement in the company's operational efficiency and the cost reduction brought by vehicle electrification, and partly due to a likely decrease in external sharing.

Stimulated by Meituan's announcement of entering Brazil, Didi should also feel the potential competitive pressure, and its development in international business may enter a period of acceleration. Just as the domestic market is in a profit release period, it can also support overseas expansion. It is worth paying attention to Didi's subsequent trade-off between overseas business growth and turning losses into profits.

Didi's main logic has been repeatedly verified recently: since the core domestic ride-hailing industry is already mature, the growth space is limited, and the current environment does not support the product upgrade logic of increasing average order prices.

In the absence of a growth narrative domestically, Didi, as a platform, has the operational space to adjust the distribution of the entire ride-hailing industry value chain among drivers, passengers, and the platform, and the current macro environment is also conducive to Didi making such adjustments.

Moreover, other platform companies not caught in the current food delivery war have generally benefited from a window of reduced competitive pressure. In the capital market, compared to the "three foolish" food delivery companies' profit plummets, their performance is generally much better.

From a valuation perspective, based on the domestic business profit of over 3 billion in this single quarter and the short-to-medium-term dividend period, the company's original guidance of achieving 12 billion in adjusted EBITA for the domestic business in fiscal year 2025 should not be a problem and can be further raised. We estimate an adjusted EBITA profit of 15 billion for the full year 2025, deducting about 2 billion in stock-based compensation and taxes, resulting in an after-tax operating profit of about 11 billion, corresponding to a market value of $23.3 billion at a 15x PE, or $5 per share. This corresponds to a growth central rate of about 10% for the company's core business, which is a relatively neutral valuation.

However, the above estimate does not include Didi's nearly 40 billion RMB in net cash, corresponding to about $1.17 per share. Additionally, the valuation of overseas business, based on an annual transaction volume of RMB 120 billion, since this segment is not yet profitable, is valued at 0.2x P/GTV, corresponding to an incremental market value space of about $0.73 per share.

Therefore, under a slightly optimistic sentiment, Didi's price is expected to reach around $6~$7 per share. However, before the overseas business's scale and profit size can substantially approach the domestic business, bringing truly considerable market value growth space, Dolphin believes that the current narrative of Didi focusing on squeezing domestic business profits will not have much elasticity.

Below are key performance charts and comments:

I. Growth: Domestic stable with slight increase, overseas maintains high growth

1. Domestic business: In terms of core operational data, Didi's domestic business achieved a GTV of 82.5 billion this quarter, with a year-on-year growth rate slightly accelerating to 12.3%, slightly higher than Bloomberg's consensus estimate. Compared to the ride-hailing industry data re-released by the Ministry of Transport since April, Didi's self-operated business (excluding Huaxiaozhu and aggregation business) in Q2 performed similarly to the overall industry order volume growth rate.

Breaking down price and volume, Didi disclosed that domestic ride orders (including ride-hailing, carpooling, and chauffeur services) increased by 12.4% year-on-year, indicating that this quarter's GTV acceleration was driven by order volume, while the average order price slightly declined by 0.1%, the downward trend in average order price continues, but the decline was significantly narrowed.

2. Overseas business maintains steady high growth, with order volume increasing by 24.9% year-on-year, consistent with the previous quarter. However, market expectations were higher, possibly anticipating some increment from Didi's recent resumption of its food delivery business in Brazil. The GTV growth rate seems to significantly lag behind order volume growth, but it is still affected by exchange rates. After excluding exchange rate factors, the constant currency GTV growth rate reached 27.8%, outperforming order volume growth.

II. Domestic net monetization rate continues to rise, overseas subsidies increase

1. Domestic business: In terms of revenue, Didi's domestic ride-hailing segment revenue this quarter was 50.3 billion, up about 10% year-on-year, also slightly accelerating quarter-on-quarter and slightly better than expected, but slightly underperforming this quarter's domestic GTV growth rate. Based on Didi's domestic ride-hailing business revenue recognition as "revenue = GTV – consumer incentives – taxes, etc.", Didi's consumer subsidy intensity this quarter is still increasing year-on-year.

Conversely, Didi's domestic platform sales (more reflective of platform retained earnings) increased by 24.3% year-on-year this quarter, without accelerating compared to the previous quarter, but still significantly outperforming GTV and revenue growth. According to the calculation method of "platform sales = GTV – driver commissions/incentives - taxes, etc.", the platform's retained net monetization rate continues to rise.

According to the company's disclosed platform sales/GTV calculation, the overall monetization rate of the domestic business platform increased by 2.1 percentage points year-on-year this quarter, but the increase was slightly lower than the previous quarter.

Similar to the previous quarter, the company's operational efficiency may be further improving, reducing the costs that need to be allocated to other parties. In addition, in an unfavorable economic environment, Didi is still in a time window for increasing monetization, improving efficiency, and releasing profits.

2. Overseas business: This quarter's revenue increased by 28% year-on-year to about 3.4 billion, with a slight slowdown in growth, but still outperforming platform sales growth of about 16%. The platform sales growth rate is lower than revenue, mainly because revenue also includes financial business and other data not reflected in GTV and platform sales. Didi's financial income growth overseas should still be quite strong.

As for the overseas platform sales slightly underperforming the GTV growth rate, the company explained that it was due to recent increases in subsidies to users overseas.

Overall, summarizing the above businesses plus other innovative businesses, Didi's total revenue this quarter was about 56.4 billion, up 10.9% year-on-year, outperforming the market expectation of 55.1 billion.

III. Domestic profitability reaches a new high, overseas investment increases losses

As seen above, domestic business platform sales outperform, net monetization rate rises, while overseas business due to increased subsidies, platform sales underperform GTV, already indicating the trend of profit margin changes in the two segments.

Didi's adjusted EBITA profit for domestic business was 3.62 billion, with profit accounting for 4.4% of GTV, up 0.4 percentage points quarter-on-quarter, significantly better than the sell-side expectation of 3.3 billion. As mentioned above, the significant acceleration in profit margin is mainly due to the significant rise in monetization rate.

Overseas business, as expected by the market, saw a significant expansion in losses, reaching 750 million this quarter. As mentioned earlier, this quarter's increase in consumer subsidies led to a decline in platform retained monetization rate, and the resumption of the Brazilian food delivery business to preemptively address competition from Keeta undoubtedly also led to increased investment and losses.

IV. Monetization gross profit continues to improve, cost control remains excellent

From the perspective of costs and expenses, Didi's gross margin this quarter was 19.6%, showing a significant improvement both year-on-year and quarter-on-quarter. Since a large part of Didi's costs is external sharing, the rise in platform retained earnings rate naturally leads to an increase in gross margin. Therefore, gross profit was 11.1 billion, up nearly 17% year-on-year, higher than the market expectation of 10.7 billion.

In terms of expenses, there was a special impact this quarter, management expenses included about 5.3 billion in one-time expenses due to previous shareholder litigation, leading to a negative GAAP profit this quarter. However, this one-time impact should be ignored, excluding this impact, management expenses actually only increased by 4% year-on-year.

However, marketing expenses showed a relatively significant increase, up 15% year-on-year, which is a relatively large increase, reflecting increased subsidies and marketing investments in domestic and overseas businesses. As for R&D and operational support expenses, they only grew in single digits. Therefore, excluding the one-time expense provision, total operating expenses this quarter only increased by 8% year-on-year, lower than revenue and gross profit growth.

Therefore, behind the better-than-expected profit this quarter, it is mainly due to the rise in monetization rate driving the increase in gross margin, while expenses remain cautious, jointly causing this.