Deals

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

The delivery company behind the biggest U.S. IPO by a Chinese company since Alibaba's landmark flotation two years ago must be feeling lonely.

ZTO Express, which transports packages for Jack Ma's Internet giant, is aiming to raise $1.3 billion selling shares in New York at a time when most of its major competitors are going public through the back door in Shenzhen.

The sale will test U.S. investor appetite for Chinese companies, which has been dimmed by the country's slowdown. Fortunately, ZTO caters to the one part of the economy that's still growing fast: e-commerce. Besides Alibaba, which accounted for 75 percent of ZTO's parcel volume in the first half of this year, the courier company also counts second-ranked online retailer JD.com among its key customers.

Thanks to the boom in Internet sales, Chinese express delivery revenue has risen at a compound annual rate of more than 50 percent in the past five years, according to Credit Suisse. Growth of that magnitude could be a draw for investors.

Delivering Growth
ZTO's revenue has climbed this year as China's e-commerce boom spurs demand for courier services
Source: ZTO IPO prospectus

A U.S. flotation may yield immediate dividends for backers such as hedge fund Hillhouse and private equity firm Warburg Pincus. Whether it's the best choice for the company is more debatable. ZTO is taking a much more cumbersome route to the public eye than fellow domestic couriers.

The company is one of five that account for 60.1 percent of the total share of parcel volume deliveries, according to iResearch data cited by the courier firm in its IPO prospectus. (China is a fragmented market, unlike the U.S. or Europe, where companies such as DHL and UPS dominate the express package industry.)

Fragmented Market
Five companies, including ZTO, account for about 60 percent of China's express delivery market
Source: iResearch, ZTO prospectus

SF Express got tentative approval last week to list in Shenzhen via a reverse merger that will see the company bought out by a rare earths producer, Caixin reported. YTO Express got the go-ahead from China's securities regulator three months ago.

ZTO's two other closest competitors are still waiting for approval but look sure to get it, if the experience of the first two is any guide.  Yunda Express applied in July to back into Shenzhen-traded electricity firm Xinhai Electric, while STO Express is seeking to take over the listing of  Zhejiang IDC Fluid Control.

By ratifying these deals, the China Securities Regulatory Commission has shown that it has no objection to reverse mergers as long as they aren't arbitrage plays. Early this year, the regulator started making life tougher for a series of Chinese companies that announced plans to delist from the U.S. so they could go public back home where valuations could be three times as high.

ZTO has eschewed the domestic market in favor of an option that the company admits could cause headaches. The reporting rules for U.S.-listed companies tend to be more onerous than those in Shenzhen, and the IPO comes at a time when Chinese companies traded there have been queuing to go in the opposite direction.

In an unusual disclosure, ZTO's prospectus says senior management  "has limited experience managing a public company" and the demands of regulatory compliance "may divert" attention from day-to-day management.

Other risks include rising competition in the delivery industry, a tightening Chinese labor market and a more exceptional challenge -- missing landlords. About 69 percent of the company's offices and sorting hubs haven't given ZTO property ownership certificates, and some leased properties don't have title certificates, "which means the owner or lessor of such property may not have the full right to lease such property," the prospectus states.

At least, as a company with less than $1 billion in revenue, ZTO qualifies for reduced reporting requirements under the so-called JOBS Act.

Still, by choosing the U.S., the company looks to have given itself an extra burden to carry. Even Alibaba's Ma has chafed at the demands of running a public company. In a fiercely competitive industry that depends on being fast-moving and nimble, ZTO may end up wishing it had taken the easier and more direct route.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net