Puzzle of ZTO Express Filing with U.S.Regulators for IPO

ZTO is planning to fundraise 1-2 billion US dollars as the only way to survive the vicious circle and change the current franchising business models.

Just when Chine Concepts Stocks are seceding from the U.S. stock market and returning to China， ZTO Express instead prefers to gain their IPO market in U.S. Insiders from ZTO expresses that， ZTO has passed their first-round interview and will probably start their U.S. road show within one or two months at the earliest.

Some experts express that， impacted by the negative effect from China Concepts Stocks leaving the U.S. market， ZTO`s share prices will be undervalued by the American market even it could successfully go public at NASDAQ. The current situation is that， leading logistics companies are all preparing for their IPO and seize the first private enterprise shares. From the perspective of industry insiders， logistics companies do this because they want to upgrade their industry and realize their desire of capital， but service experience reduction and internal management chaos caused by low profitability， high costs of infrastructure construction， high operating costs， and franchising are the pains that they need the urgency to solve.

In order to make sure of the rumour of ZTO going public in the American market， journalists contacted its CEO Lai Haisong， but he replied in short message that the silent period allowed no interviews.

This deal would involve the largest amount of capital for a Chinese company to go public in U.S. since Alibaba fundraised 25 billion US dollars in 2014. One insider from ZTO disclosed that， he got to know the company`s IPO plan at the end of last year， and it had handed in relevant materials to NASDAQ and had passed the first round interview. He added that， the company would probably start road show within one or two months.

Although SEC doesn`t disclose any document relation to ZTO`s application， IFR under Thomson Reuters reports that ZTO is planning to fundraise 1-2 billion US dollars. IFR says， ZTO is expected to start IPO advertisement in Sept at the earliest. The news about ZTO`s going public in New York was released in March and ZTO is one partner of logistics company CaiNiao Network under Alibaba Group.

IRF reports that CitiGroup， Credit Suisse， China Renaissance， Golden Sachs， JP Morgan and Morgan Stanley are arranging issues of selling shares. ZTO CEO once said， “ZTO has been having the plan of going public and is preparing for this. But it`s not certain where and when. We won` t change our tempo because of other Expresses` accelerated pace.”endprint

Public materials show， ZTO was established on 8th May of 2002 and is headquarter in Shanghai with founder and CEO Lai Haisong. ZTO official website introduces that it has over 25，000 staff， 72 transmit centers， over 10，000 service branches， and over 40，000 vehicles for transportation. ZTO provides “Door to Door” services and time-flexibility services （arrival within the order day， at the following day， in the morning of the following day， etc.）. At the same time， it develops value-added services like e-commerce delivery， cash on delivery， sign bill return， etc. in May of 2013， Sequoia Capital injected 30 million US dollars into the company.

One former ZTO employee commented that， “It is hard for private enterprise to provide three-year financial statements. Financial habits and operating modes of logistics companies don`t conform with standards much and many orders are finalized without invoices and therefore couldn`t be checked. Also， material costs and motor transportation costs take up around 60% of the entire company`s operating costs； it is also very difficult to neaten these statements.”

Impacted by China Concept Stocks seceding from the U.S. market by selling at prices lower than their IPO， American stock markets dont trust China Concept Stocks and will undervalue ZTO. China E-commerce Research Center Dean Mr Cao Lei pointed that， ZTO`s choice might be relevant to its capital structure， equity structure， and corporate structure. In China， to be listed in Ashares markets， one needs to have three straight years` profitability； but America is a different story where companies are allowed to go public despite of some losses， which raises the possibility of ZTO going public.

For private logistics companies， they at least need four years to go public successfully without back-door listing strategy and the reason lies in low profitability and high costs within the industry. But if ZTO chooses to go public with the back-door listing way， there are certain risks for ZTO or the shell company.

Actually， low profitability is the common failing among private logistics companies. According to 2015 Logistics Market Monitoring Report， the average price was 13.4 yuan in 2015， 8.8% lower than 2014， and operating cost has kept increasing.

Prosperous developments of the logistics industry in China are the main reason that ZTO could step into the capital market， as it gains great supports from Alibaba and Jingdong. However， recent Chinese economy slowdown has downgraded Alibaba and Jingdong`s share prices， which makes ZTO`s story not that attractive.endprint

According to the forecast from State Post Bureau， the turnover in the Chinese logistics industry is going to reach 27.5 billion packages this year. Although the Y-o-Y increase is 34%， it is still lower than 2015`s figure of 48%， which means the termination of four consecutive years` records of over 50% annual increase.

At the beginning， the successful back-door listing of STO Express caused a series of chain reaction， YT Express， SF Express and Yunda Express successively followed its suit. Despite the fact that all the main logistics companies have to go public in the way like this， the case of STO Express has caused Chinese logistics industry to go public in advance and the industry has taken a large step. But ZTO Express is going to tell a new story.

Up to now， among six leading logistics companies， four are listed in the Ashares market with SF Express on the top of valuation of 43.3 billion yuan，and the remaining two are listed in American market. One senior manager said that， the growth in the industry has slowed down， low profitability and fierce competition have raised the urgency of further upgrading structure which requires a lot of capital. Whoever gets huge amount of capital first has the opportunity to go ahead of competitors.

In particular， getting huge amount of capital means the company is likely to survive the vicious circle and change the current franchising business models. In the logistics market， SF Express is the only company that adopts directsales model and the rest all use franchising model， which makes the former gain better service experience and internal management.

Observed from leading logistics companies` IPO pre-arranged planning， their main task is to enhance their channel construction and upgrading. STO Express`s pre-arranged planning shows that， its equipped fundraising of 2 billion yuan will be firstly spent on its shell company IDC and the remaining amount will be mainly spent on its projects of transit warehouse and delivery integration， transporting vehicle purchases， technical reform and facility purchase， information integration， etc.endprint