EXAME hears from Maneira Advogados partner about the impact of investigation in China against partner company of Brazilian startup

Report from EXAME addressed the problems involving Didi Chuxing, from China, which owns the Brazilian startup 99, and has been accused of illegally collecting user data. The report assesses how these problems in China could affect 99 in Brazil. Dr. Renata Borges, partner in the Corporate and M&A area at Maneira Advogados, was heard to speak on the subject.

Could Didi Chuxing's problems in China affect 99 in Brazil?

Under investigation for illegally collecting user data, owner of Brazilian startup has already lost market value

By Gabriel Aguiar

Published on: 07/14/2021

Mishaps: As a result of the investigation, Didi Chuxing lost 25 applications in China (Getty Images/Getty Images)

Have you ever heard of Didi Chuxing? Known as the “Chinese Uber”, the owner of the Brazilian startup 99 is in the middle of a controversy: authorities in the country of origin removed 25 applications from the technology giant – decision which can directly affect the company's finances. And this happened weeks after raising $4.4 billion from an IPO in New York.

Security risks and blocked apps

According to investigation by the Cyberspace Administration of China (CAC), Didi Chuxing illegally collected personal data of users. Shortly before the verdict, the regulatory body had already cited risks to the country's cybersecurity and the public interest. Among the platforms blocked in app stores are ride-sharing services and functions for drivers.

“We sincerely accept and resolutely comply with the requirements of competent authorities in accordance with laws and regulations, reference to relevant national standards, in-depth investigation and serious rectification of all existing problems, which effectively protect the security of user data,” the company said in a statement published on the Asian social network Weibo.

Didi Chuxing's market value drop

With a peak of 16.40 dollars per share on July 1st, Didi Chuxing's shares reached the value of 11.16 dollars just eleven days later, the lowest value since it was offered on the North American stock exchange. And today, the 14th, at 12:46 pm, the shares continue the recovery that began two days ago, with shares worth 12.82 dollars. When they were offered to the public for the first time, the shares were worth $14.14.

Is there a risk for the company's investors?

“These investigations are not clear and, supposedly, are at the beginning. So, there are many answers that everyone is still waiting for, because it is not clear. It is a solid company that operates in a trillion-dollar market, which is expected to double in size in the coming years. But there is a lot of dependence on China, where around 95% of operations are located”, says Alan Leite, founder and CEO of startup Farm and Kûara Enterprises.

According to a report published by the North American newspaper “The Wall Street Journal”, the internet regulatory body in China had asked Didi Chuxing to the postponement of the opening of the stock exchange until the investigation was closed and all the issues raised were resolved. However, the company maintained the schedule that was already indicated, with the IPO taking place on June 30th.

“For the Brazilian market, at this moment, the impact is more related to possible changes in investment and growth in our country. This is because, with the ban on downloads of applications in the Chinese market, they should reduce the company's results and, with that, generate a circle of investment retraction”, says Renata Borges, partner in the Corporate and M&A area at Maneira Lawyers.

How does the case affect Brazilian startup 99?

According to the lawyer, Didi Chuxing's shareholding in relation to the Brazilian startup 99 is structured indirectly, through two subsidiaries of the Chinese company, one of which is incorporated in the North American state of Delaware – controlling 99.99% of the stake – and the rest is in the Cayman Islands. This negotiation took place in 2018 for almost 1 billion reais.

“At this moment, there is no direct impact in relation to 99 shares, since the structure in Brazil is operated through a limited company, with no shares and securities traded, which reduces the immediate financial impact. It is important to consider that, even with more impacts abroad, it could be considered by potential investors as a higher risk investment,” says Borges.

When contacted, the Brazilian company 99 says that, last year, more than 150 million reais were invested in the launch of new products, safety features and support for partner drivers – and stated that the sector of activity corresponds to 15 billion reais in the economy, equivalent to 0.21% of the national GDP. He also reiterated that the long-term strategy and commitment remain unchanged here.

“For those who have already invested, my tip is to be very cautious and attentive to the development of the story. If new investigations are opened, it could be a risk for Didi Chuxing, because, without new users, there will certainly be a financial impact. It has not yet reached the break even [balance point between cost and revenue] and operates on leverage. It is not profitable. But it is not yet a moment of despair”, says Leite.

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