Chinese delivery firm ZTO Express has launched an initial public offering on Monday, targeting $1.33 billion in what could be the largest US listing from a Chinese company in two years.
Indicative terms of ZTO Express’ IPO include 72.1 million American Depositary Shares being pitched at a price range of $16.5 to $18.5 each, with a standard 15% greenshoe option. Assuming the ADRs are listed on the New York Stock Exchange on October 27, ZTO’s IPO will be the biggest deal from a Chinese company there since Alibaba’s $25 billion IPO in September 2014.
And it will be the first of China’s five delivery companies to tap shareholders abroad, giving ZTO some rarity value among global investors, many of which are keen on tapping China’s burgeoning logistics story. The success of Alibaba’s IPO, and the immediate 38% gain in its share price following the deal, is testament to investor appetite for businesses at the heart of China’s burgeoning consumer growth.
Competitors STO Express, YTO Express and Yunda Express are in the process of listing in Shenzhen or Shanghai, via backdoor deals in the hopes of getting around China’s lengthy IPO process and long queue of outstanding applications.
SF Express, China’s biggest express delivery company, announced a backdoor listing in May via a reverse takeover of Shenzhen-listed Maanshan Dingtai Rare Earth and New Material.
ZTO is ranked fourth in size by revenues, reporting Rmb6 billion ($890 million) in topline sales last year.
Morgan Stanley, Goldman Sachs, JP Morgan, China Renaissance, Credit Suisse, and Citigroup are joint bookrunners of ZTO Express’s IPO.
Cash on delivery
Industry observers believe ZTO Express has been somehow forced to expedite its listing process after all its rivals announced plans to go public within less than a year.
STO Express was the first to initiate the listing process in December last year; by July, all of them had announced similar plans except for ZTO, although only YTO Express has so far received all of the necessary regulatory approvals. The others’ reverse takeovers are not yet complete.
One banker familiar with ZTO Express said the company needs to raise cash as quickly as possible before its competitors complete the listing process and move ahead with their expansion plans.
That is part of the reason for ZTO Express to drop the plan to list in Hong Kong, which it had considered since last year.
A US listing is therefore a speedy solution for ZTO Express because it has a dual class share structure, which prohibits itself from listing directly in Hong Kong. The city’s exchange operator has considered removing the ban for companies with such shareholding structures since it lost Alibaba’s mammoth IPO, but the securities regulator has rejected the idea on grounds that it would hurt minority shareholder interests.
Slowing logistics growth
Figures from China’s State Post Bureau show that the logistics industry is still growing at rapid pace. Mainland couriers made 13.25 billion deliveries in the first six months this year, representing a 56.7% from the same period last year. In 2015, total number of deliveries was 20.67 billion, up 48% from 2014.
Despite such strong data, analysts suggest that it remains a matter of time before the industry fails to sustain such explosive growth. In fact, China’s logistics market has grown by 7.8 times since 2011, a figure that it is highly unlikely to replicate for the next five years.
One reason is that the sector’s boom, fuelled by the ubiquity of smartphones and e-commerce, attracted many small players.
Official data shows there are about 1,570 logistics companies in Shanghai alone, while another 700 firms trying to set up. This has led to cut-throat competition on prices, dragging down profit margin to about 5% compared to about 20% eight years ago, according to some analysts.
Bigger firms such as ZTO Express have yet to experience such margin decline. According to its IPO filing, its operating profit margin was 25.1% last year, up from 15.4% in 2014. In the first six months of this year, the figure remains relatively stable at 24.9%.
Some analysts said China’s logistics industry has entered a phase when bigger players need to compete for market share in order to sustain their profitability. And that suggests why ZTO Express is moving swiftly on the listing process, even though it is just several months behind its competitors.
ZTO Express said it will use the IPO proceeds for purchase of land, truckers and equipment, construction of new facilities and for potential strategic acquisitions.
Alibaba-reliance
China’s logistics firms have found it hard to differentiate themselves from other market players because most of their services are tied to Alibaba, the country’s largest e-commerce platform with over 80% market share.
This is the same for bigger players like ZTO Express, which had 77% of its revenue generated from product deliveries sold through Alibaba’s platforms.
Alibaba’s sheer market size gives it great bargaining power. Anger Alibaba and risk being cut from its platform would mean death for many logistics players.
ZTO Express mentioned the possibility of Alibaba building its own delivery network as a major risk to its business, although the e-commerce giant has never disclosed any such plans. Still, it has invested an undisclosed amount in YTO Express last year, suggesting that Alibaba will exert influence directly in the delivery business in the future.
“Although we plan to expand and diversify our customer base, we still expect to be reliant on the Alibaba ecosystem for the foreseeable future,” ZTO Express said in its IPO filing.
