The biggest IPO of the year prices tonight, but how much are investors are willing to pay up for access to the elusive Chinese consumer?
Chinese delivery service ZTO Express (ZTO) prices Wednesday for trading Thursday at the NYSE, seeking to raise 72.1 million shares at $16.50 to $18.50 or roughly $1.3 billion.
It's not just the biggest IPO of the year, it' s the biggest IPO by a Chinese company in the U.S. since Alibaba in 2014.
"Our mission is to bring happiness to more people through our services." — ZTO Express
You know you're dealing with a slightly different mindset than Western companies when Chinese delivery service ZTO Express says right at the top of its F-1 registration statement that their mission is to "bring happiness to more people."
Bring happiness. Wouldn't that be great if that was a line item on a corporate income statement? Somewhere after "interest expense" but before "earnings before income taxes"?
They go on to state several other goals,including "to provide timely and reliable express delivery services to consumers" and concluding by saying what they want is to "ultimately help ordinary people accomplish their goals."
That would be another great line item. Maybe right after "discontinued operations", but before "net earnings."
Interest is strong, and with good reason:
- China is the world's largest market for delivery services, with total parcel volume of 20.7 billion in 2015, approximately 1.5 times the total parcel volume of the United States;
- Much of the business is derived from e-commerce, which is still under-penetrated in China. Gross merchandise volume (GMV) has reached $609 billion in 2015 and is expected to increase to $1.465 trillion in 2020;
- ZTO is the second biggest delivery provider with 14 percent of the market;
- The company is profitable, with strong operating cash flow, a projected $1.5 billion in sales by the end of 2016, according to Renaissance Capital;
- Several well regarded investors are backing them, including Sequoia Capital and Warburg Pincus.
Still, there's plenty of reasons to be cautious before bidding the stock up on its first day of trading:
- 75 percent of their volume comes from Alibaba. "We have experienced, and may continue to experience, significant reliance on the Alibaba ecosystem," the company states. "Although we plan to expand and diversify our customer base, we still expect to be reliant on the Alibaba ecosystem for the foreseeable future." The company also notes that Alibaba has invested in competitors and as a result "may encourage merchants on its platforms to choose their investees' services over ours." Even worse, "Alibaba may also build in-house delivery network to serve its e-commerce platforms in the future."
- Competition is fierce. They have had to cut prices, and "may face downward pricing pressure again." They also acknowledge it may be difficult to control costs.
- While growth metrics have been strong recently, that may not last. Their growth, for the moment, is highly dependent on the growth of the e-commerce industry in China, and "e-commerce spending tends to decline during recessionary periods." While they are seeking to diversify their service offerings and expand their customer base, they make it clear these initiatives may or may not succeed.
Regardless, interest in the stock is high. There's talk it may price above its range.
Why? The company represents the intersection of two powerful trends.
"There are very few stocks that allow access to the Chinese consumer, and this is one of them," Cindi Profaca at IPOfinancial.com told me. "And industry trends in e-commerce are all pointing upward, at least for the moment."
There are the two magic phrases: Chinese consumer and e-commerce.
The two are a strong combination.