ZTO spurns huge China valuations for
benefits of U.S. listing
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[October 21, 2016]
By Elzio Barreto and Julie Zhu
HONG KONG (Reuters) - Chinese logistics
company ZTO Express is turning up the chance of a much more lucrative
share listing at home in favor of an overseas IPO that lets its founder
retain control and its investors cash out more easily.
To steal a march on its rivals in the world's largest express delivery
market, it is taking the quicker U.S. route to raise $1.3 billion for
new warehouses and long-haul trucks to ride breakneck growth fueled by
China's e-commerce boom.
Its competitors SF Express, YTO Express, STO Express and Yunda Express
all unveiled plans several months ago for backdoor listings in Shenzhen
and Shanghai, but ZTO's head start could prove crucial, analysts and
investors said.
"ZTO will have a clear, certain route to raise additional capital via
U.S. markets, which their competitors, assuming they all end up quoted
in China, will not," said Peter Fuhrman, CEO of China-focused investment
bank China First Capital.
With a backlog of about 800 companies waiting for approval to go public
in China and frequent changes to the listing rules by regulators, a New
York listing is generally a quicker and more predictable way of raising
funds and taps a broader mix of investors, bankers and investors said.
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"ZTO will have a built-in long-term competitive advantage - more
reliable access to equity capital," Fuhrman added.
U.S. rules that allow founder Meisong Lai to retain control over the
company and make it easier for ZTO's private equity investors to sell
their shares were some of the main reasons to go for an overseas
listing, according to four people close to the company. U.S. markets
allow a dual-class share structure that will give Lai 80 percent voting
power in the company, even though he will only hold 28 percent of the
stock after the IPO.
Most of Lai's shares are Class B ordinary shares carrying 10 votes,
while Class A shares, including the new U.S. shares, have one vote.
China's markets do not allow shares with different voting power.
ZTO's existing shareholders, including private equity firms Warburg
Pincus, Hillhouse Capital and venture capital firm Sequoia Capital will
also get much more leeway and flexibility to exit their investment under
U.S. market rules. In China, they would be locked in for one to three
years after the IPO.
As concerns grow about a weakening Chinese currency, the New York IPO
also gives it more stable dollar-denominated shares it can use for
international acquisitions, the people close to the company said.
IN DEMAND
Demand for the IPO, the biggest by a Chinese company in the United
States since e-commerce giant Alibaba Group's $25 billion record in
2014, already exceeds the shares on offer multiple times, two of the
people said.
That underscores the appeal of the fast-growing company to global
investors, despite a valuation that places it above household names
United Parcel Service Inc and FedEx Corp.
The shares will be priced on Oct. 26 and start trading the following
day.
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![](../images/102116pics/news_o27.jpg)
Workers listen to their line manager, at a sorting centre of
Zhongtong (ZTO) Express, Chaoyang District, Beijing, November 8,
2015. REUTERS/Jason Lee/File Photo
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ZTO is selling 72.1 million new American Depositary Shares (ADS),
equivalent to about 10 percent of its outstanding stock, in the
range $16.50 to $18.50 each. The range is equal to 23.4-26.3 times
its expected 2017 earnings per share, according to people familiar
with the matter.
By comparison, Chinese rivals SF Express, YTO Express, STO Express
and Yunda shares trade between 43 and 106 times earnings, according
to Haitong Securities estimates.
UPS and FedEx, which are growing at a much slower pace, trade at
multiples of 17.8 and 13.4 times.
"The A-share market (in China) does give you a higher valuation, but
the U.S. market can help improve your transparency and corporate
governance," said one of the people close to ZTO. "Becoming a New
York-listed company will also benefit the company in the long-term
if it plans to conduct M&A overseas and seek more capital from the
international market."
China's express delivery firms handled 20.7 billion parcels in 2015,
shifting 1.5 times the volume in the United States, according to
consulting firm iResearch data cited in the ZTO prospectus.
The market will grow an average 23.7 percent a year through 2020 and
reach 60 billion parcels, iResearch forecasts.
Domestic rivals STO Express and YTO Express have unveiled plans to
go public with reverse takeovers worth $2.5 billion and $2.6
billion, while the country's biggest player, SF Express, is working
on a $6.4 billion deal and Yunda Express on a $2.7 billion listing.
![](http://archives.lincolndailynews.com/2016/Oct/21/images/ads/current/Webster_SDA_HI_2016.png)
ZTO plans to use $720 million of the IPO proceeds to purchase land
and invest in new facilities to expand its packaged sorting
capacity, according to the listing prospectus.
The rest will be used to expand its truck fleet, invest in new
technology and for potential acquisitions.
"It's a competitive industry and you do need fresh capital for your
expansion, in particular when all your rivals are doing so or plan
to do so," said one of the people close to the company.
(Reporting by Elzio Barreto and Julie Zhu; Editing by Will Waterman)
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