Photographer: Qilai Shen/Bloomberg

ZTO Sued Over ‘Untrue Statements’ in Biggest U.S. IPO in 2016

  • Lawsuit was filed by retirement plan for Birmingham, Alabama
  • City says ZTO inflated margins by omitting some business

ZTO Express Inc., the Chinese delivery service that had the biggest U.S. initial public offering in 2016, and its underwriters were sued for allegedly inflating profit margins to exceed industry peers and lure investors.

Morgan Stanley and Goldman Sachs Group Inc., which led the Oct. 26 offering that raised $1.4 billion, were named in the class-action suit filed in Alabama state court by the city of Birmingham’s pension fund. The investment banks failed to uncover ZTO’s allegedly bogus numbers, the fund said.

A worker handles a sack of packages at a ZTO sorting facility in Shanghai.

Photographer: Qilai Shen/Bloomberg

Shanghai-based ZTO, which gets most of its business from the Chinese e-commerce firm Alibaba Holding Group Ltd., uses a system of “network partners” to handle lower-margin pickup and delivery services, keeping less-profitable business off its books, according to the pension fund.

The practice omits the "crucial realities" of the industry, the fund said in the complaint. "By keeping the ‘network partners’ businesses off its own books, the company was able to exaggerate its profit margins to investors."

ZTO’s American depositary shares are down about 20 percent from its IPO price of $19.50.

‘Untrue Statement’

Sophie Li, an investor relations employee of ZTO in Shanghai, rejected the allegations. “We believe the claims are without merit and intend to defend ourselves vigorously,” she said in an email.

Smaller underwriters of ZTO’s IPO -- China Renaissance Securities (Hong Kong) Ltd., Credit Suisse Group AG, Citigroup Inc. and JPMorgan Chase & Co. -- were also named in the complaint.

Morgan Stanley and Citigroup declined to comment on the lawsuit. Messages left at the other banks weren’t returned.

"The underwriter defendants were negligent in not knowing of the company’s undisclosed existing problems and plans and the materially untrue statements and omissions contained in the registration statement," the pension fund claims.

A ZTO courier makes a delivery in Shanghai.

Photographer: Qilai Shen/Bloomberg

The complaint quotes what the retirement plan says is a false statement from ZTO’s registration filing with the U.S. Securities and Exchange Commission:

"We have achieved superior profitability along with our rapid growth. Our operating margin, which is the ratio of our income from operations to revenues, in 2015 was 25.1%, which was one of the highest among the major publicly listed logistics companies globally."

The retirement plan said it relied on that statement and others by ZTO to make its investment, only to see the share price fall.

Individual defendants include ZTO Chief Executive Officer Meisong Lai, Chief Financial Officer Jianmin "James" Guo, and members of the board.

The suit, filed in May, was previously unreported. The retirement plan’s lawyer, Greg Davis of Montgomery, Alabama, didn’t immediately return a call for comment.

The case is City of Birmingham Retirement and Relief System v. ZTO Express (Cayman) Inc., 01-cv-2017-902004.00, Circuit Court of Jefferson County, Alabama (Birmingham).

— With assistance by Alex Barinka

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