Chinese express delivery firm Best Logistics will look to avoid the pitfalls that befell one of its main rivals as it launches an initial public offering on Thursday, targeting as much as $931.5 million in what is set to be the third US listing of a Chinese company this year.
Indicative terms show Best will offer 62.1 million American Depositary Shares at a price range of $13 to $15 each. They include 53.6 million new shares and 8.5 million existing shares offered by a group of pre-IPO investors including China Development Bank, International Finance Corporation, Goldman Sachs and company chairman Johnny Chou.
If Best manages to list successfully, it will be the biggest US IPO of a Chinese firm since its local competitor ZTO Express completed its $1.4 billion listing in October last year.
However, senior management at Best will clearly want to avoid repeating the experience of its peer when it comes to executing an IPO.
ZTO Express was a prime example of how an IPO can go wrong without proper execution. Investment bankers said ZTO, one of China’s five biggest express delivery firms, received demand of over 15 times the offering size across the price range of $16.5 to $18.5 at the end of the bookbuild.
On the back of such robust demand, ZTO's senior management decided to act against bookrunners advice and fix the final price above the price guidance at $19.5 per share.
That move helped the company raise an additional $70 million, but bankers said the result was that a lot of good quality investors were forced out of the order book, overturning the positive momentum that had been generated since the IPO kicked off.
As a result of the mispricing, ZTO shares fell 15% on its debut in one of the worst aftermarket performances of a US IPO last year. The shares have slid still further since and now trade 28% below the IPO level.
In addition, ZTO is being sued by a US pension fund over claims of untrue financial statements that exaggerated profit margins.
Value proposition
One banker familiar with the situation said ZTO’s underperformance put Best in a difficult position because ZTO is the only US-listed Chinese courier firm, and hence the only reference for potential investors in Best’s IPO.
But while the two companies compete head-to-head in the highly-competitive logistics sector, they operate a vastly distinct business models. Best runs an asset-light model and relies on third parties for storage and transportation, while ZTO owns most of its logistics and transport facilities.
The banker said Best’s advanced technology in supply chain management differentiated it from traditional delivery companies. In particular, the Hangzhou-based company runs Best Cloud, a proprietary platform that utilises big data analytics, machine learning and artificial intelligence to track and trace deliveries and execute complex supply chain solutions.
Another selling point for Best is its connection with Alibaba, operator of China’s largest e-commerce platform Taobao, and its logistics platform Cainiao Network. Alibaba started investing in Best in 2009 and is now the third largest shareholder with a 27.4% stake.
Alibaba is the biggest customer for China’s delivery companies. According to Best’s regulatory filing, express deliveries generated from merchants on Alibaba platforms accounted for 70% of the firm’s total in the first three months of the year. ZTO said last year 77% of its revenue came from deliveries through Alibaba’s marketplaces.
There is no clear advantage for Best at the moment. Alibaba chairman Jack Ma has said his company will ensure fair competition among delivery firms. Taobao allows users to choose from over 10 delivery firms for their purchase.
But that is tipped to change after the e-commerce giant ran into a nasty dispute with SF Express, China’s largest delivery firm, in June over mutual sharing of customer information. Although he spat was resolved three days after the news broke out with the intervention of the state post bureau, it was a sign that Alibaba may not adhere to its commitment of equal treatment for all delivery firms.
Yet profitability remains the biggest concern. Best has not been profitable during the track record period, with net losses expanding from $110 million in 2014 to $201 million in 2016.
Syndicate analysts expect the company to return to profitability by 2019, and are guiding investors with a market valuation equivalent to 17.7 times to 20.4 times earnings that year on a consensus basis, according to a second banker familiar with the situation.
This puts it at a premium to ZTO, which was trading at 12.9 times its consensus P/E based on Thursday's 13.91 close.
Best kicked off an extensive global roadshow on Thursday that will cover Hong Kong, New York, Boston, Chicago, Kansas City, San Francisco, Los Angeles and Mid-Atlantic until September 19.
Trading is expected to start September 20.
Joint underwriters of the IPO are Citi, Credit Suisse, Goldman Sachs, JP Morgan and Deutsche Bank.
