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China’s ZTO Express Raises $1.4 Billion in This Year’s Largest US IPO

| Oct 28, 2016 11:47 PM EDT

Delivery personnel sort out parcels beside a ZTO Express Delivery vehicle in Beijing.

ZTO Express, a Chinese courier company, has raised about $1.4 billion in its initial public offering (IPO) in the U.S. on Thursday, Oct. 27, making it the largest offering in the United States this year, the New York Times reported.

According to market research firm iResearch, ZTO Express is one of China's delivery companies that helped fuel e-commerce revolution in the world's largest delivery market, with nearly 21 billion packages delivered last year, 70 percent of them coming from online transactions.

ZTO's offering was also bigger than the $1.3 billion raised by Japanese messaging company, Line in July, which also made it the largest U.S. debut by a Chinese company since Alibaba's $25 billion stock sale in 2014.

ZTO belongs to four delivery companies known as the Tongda Operators, who share similar names, business model and origins. Its founders all came from Tonglu County, which is only about 50 miles from Alibaba headquarters in Hangzhou in Zhejiang Province.

Being close to Alibaba has its advantages. According to ZTO's IPO prospectus, the online shops of Alibaba have contributed about 77 percent to ZTO's business in 2015.

"To Xinjiang, Beijing, anywhere in China, all the Tongda Operators are about the same price," according to Liu Song, who runs the Sweet Lisa Flagship Store, a seller of women's apparel on Alibaba's Tmall online shopping platform. Liu ships about 3,000 dresses, blouses and skirts each month, for roughly 53 cents a parcel. In 2011, he paid $1.20 a parcel to ship to Beijing.

"Every year the price is going down," Liu said. "I don't think it can go down any more."

Thousands of delivery people delivery the products for ZTO, as the Tongda Operators only do the sorting and the long haul transportation of the goods. The delivery of the goods, which is the most costly part of the chain, was carried by partners who transport the packages from hubs to the recipients' homes.

This system allowed ZTO to maintain its profit as the delivery fees dropped. In the first half of the year, ZTO earned a net income of about $115 million on revenue of $639 million.

"As the market cost leader, we are not afraid of a price war," James Guo, ZTO's chief financial officer, said. He said that the decline in parcel weight and the introduction of digital waybills have contributed to the falling prices. "In the case of the price war, we can actually benefit from that and gain market share."

People who wanted to open a delivery outlet only need to pay a fee and sign a contract with ZTO or its partners. They will be supplied with the logos, three-wheeled carts and delivery personnel. The partners often determine the prices that will be charged to senders and they are the ones affected by the price war.

Competition is tough in the country's delivery market and even with the presence of the Tongda Operators, which are the biggest, the market is fragmented. Data from the China E-commerce Research Center has estimated that there about 8,000 companies in the market.

But no more than 15 percent market share by volume is held by any courier, iResearch said. In 2011, Deutsche Post DHL withdrew from China's delivery market, leaving FedEx and UPS with tiny shares.

For investors, the only way to gain from this is to bet on the growth of China's e-commerce market and consolidation among businesses. Another thing, ZTO's business model is only suited to China where factors, such as its densely populated cities and the online shopping boom, exist.

Hence, ZTO's IPO in the U.S. is considered unusual among China's express delivery companies, the report said.

On the other hand, ZTO's peers, which include YTO Express, STO Express and Yunda Express, as well as the major competitor SF Express, are going public in mainland China through reverse mergers, in which a company merges its operations into an existing company with publicly traded shares.

On Thursday, Oct. 27, ZTO announced the sale of more than 72 million shares at $19.50 each, with its underwriters given a 30-day option to buy an additional 10.8 million. Goldman Sachs, China Renaissance, Morgan Stanley, Citigroup, Credit Suisse and J. P. Morgan led the offering.

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