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ZTO’s New York IPO is the biggest for a Chinese firm since Alibaba’s in 2014

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Ganging up: founders and senior management of courier firms that originated in Tonglu

Wells Fargo was founded as a banking and delivery firm during the California gold rush in the 1850s: buying and delivering gold and other valuable goods. Imperial China’s banks started with a similar business model. At a similar time Shanxi’s Pingyao was a trading hub on the Silk Road but travelling with large amounts of cash, in the form of silver, was a dangerous undertaking. Shanxi’s merchants offered courier services (with armed guards) and then money exchanges that made it possible to remit funds. Known as piaohao, these ‘draft banks’ caught on in Pingyao. The bankers were a tight-knit community, turning the tiny county into the Wall Street of Qing Dynasty China. Terry Gou, the boss of Taiwanese electronic giant Foxconn, is a descendant of one of the wealthiest Pingyao banking clans and his first investment in film production was the 2009 movie Empire of Silver, which dramatised the rise and fall of Shanxi’s biggest piaohao.

More recently another important business faction has emerged from an unheralded Chinese county. Situated in Zhejiang province, Tonglu has no more than 400,000 people but it is home to China’s leading courier firms. Just like the Shanxi bankers before them, Tonglu’s couriers provide a network that keeps commerce flowing. Without them, e-commerce giants such as Alibaba would probably be paralysed. But having crowded out much of the local competition, the “Tonglu gang” is now herding into the capital markets to raise funds. Their expansion plans, analysts suggest, might have a profound impact in reshaping the logistics sector.

Which couriers are going public?

The firm making most of the headlines is ZTO Express, which raised $1.4 billion in a New York listing this week. Founded by Tonglu native Lai Meisong in 2002, it delivered about 14.3% of the parcels in China last year according to iRearch, second only to a 14.7% market share of its cross-town rival YTO Express, which last week completed a multibillion backdoor listing in Shanghai.

The regional rivalry among Chinese firms has been visible during the listing process of ZTO, which started trading in the New York Stock Exchange on Thursday. “Is ZTO the best?” boss Lai shouted after ringing the NYSE’s opening bell. “Yes, we are the best,” nearly a dozen of Lai’s senior managers answered loudly in unison.

There was little left to cheer in the rest of the day, mind you, as ZTO ended the trading debut 15% lower than its offering price. The dismal performance, Reuters suggests, showed that “underwriters may have overestimated investors’ enthusiasm for the largest IPO by a Chinese company since the $25 billion IPO of e-commerce giant Alibaba”, ZTO’s biggest client.

In fact, ZTO priced its IPO above the indicated range. At the offer price, ZTO had a market valuation of $14 billion, or a hefty 70 times over its 2015 net profit. In comparison, UPS and FedEx are respectively trading at 19 times and 25 times over past earnings.

Perhaps ZTO is trying too hard to win the local derby with YTO. As of this week, YTO’s market capitalisation stands at Rmb95 billion, or $14 billion, which is exactly the valuation ZTO sought with its IPO price.

WiC readers should be familiar with YTO’s rise. It was founded in 2000 by Yu Weijiao, whose reputation for ignoring industry norms made him the alpha male of Tonglu’s delivery men (see WiC327 for Yu’s profile). YTO’s backdoor listing vehicle might also be familiar – Dayang Trands made Warren Buffett’s favourite suits (see WiC32).

With a 51% stake in YTO, Yu is worth Rmb62 billion and is now “the richest man in the Tonglu gang,” says ThePaper.cn.

STO Express, HTO Express, Yunda Express – three other Tonglu firms – have all outlined plans to float (see WiC327), as has SF Express, which is based in Shenzhen, so a rare exception to the Tonglu gang.

“This could be a herd instinct for Chinese couriers to go public in a spurt,” Southern Weekend suggests. “But most of them need funds to expand or risk being knocked out of the market. Chinese couriers have reached a critical stage of development where they need to upgrade.”

Where is Tonglu?

On the banks of the Fuchun River, Tonglu has a reputation as one of the more beautiful counties in China. About 90 minutes’ drive from Alibaba’s headquarters in Hangzhou, there were 2,500 express delivery firms established or managed by Tonglu businessmen by the end of last year, accounting for a 60% market share nationwide.

STO was the first Tonglu firm. It was set up in 1993 (the same year that SF was founded in Shenzhen) by Nie Tengfei and his wife Chen Xiaoying. The couple’s success saw friends and relatives become couriers, spawning a whole industry.

After Nie was killed in a car accident in 1998, his brother founded Yunda Express. Zhang Xiaojuan, the wife of Yu Weijiao at YTO, was working in STO’s accounting department before the couple founded YTO. Zhang also “grew up” with ZTO’s chairman Lai Meisong, according to 21CN Business Herald.

The quartet of major couriers – YTO, ZTO, STO and Yunda – is known as the “three tongs, one da” (tong means express and da means arrive) and it employs nearly 800,000 delivery staff across the country.

According to Southern Weekend, the four Tonglu firms not only come from the same county but also tend to make “the same business decisions at around the same time and same place”. For instance, all the companies moved their headquarters to Shanghai’s Qingpu district in 2010. And now they are all trying to woo investors with their listing plans.

How about their relationship with Alibaba?

While SF Express has grabbed the leading market share in the higher margin area of business-to-business deliveries, the “three tongs and one da” have been dubbed as “the men behind Jack Ma” because they have built their empires on customer orders from e-commerce giants such as Alibaba and JD.com.

Most of the Tonglu firms were lossmaking until 2003, when the e-commerce sector started to surge with the rise of Alibaba’s Taobao marketplace. Since then business volumes have boomed, with Alibaba’s online stores accounting for about 77% of ZTO’s business last year, according to the company’s IPO prospectus.

Jack Ma himself is a Zhejiang native, which may help to explain some of Alibaba’s working relationship with the Tonglu bosses. The clans work closely with Alibaba and its customers, especially on their busiest day of the year: November 11, also known as Singles’ Day. The festival for singledom has been transformed into an annual shopping frenzy by Alibaba’s Taobao and Tmall sites. In fact, more than a billion parcels are forecast to be delivered on that day this time round (which is just a fortnight away). To put that scale into perspective: YTO delivered three billion parcels in the whole of last year.

In May last year, Alibaba entered into a strategic agreement with YTO, with the National Business Daily reporting that the e-commerce giant had invested Rmb2.5 billion for a 20% stake (now worth nearly Rmb20 billion). Following the deal Alibaba can appoint two representatives to YTO’s board and the Tonglu firms were also among the founding shareholders when Alibaba set up its own logistics network Cainiao (which means ‘rookie’) in 2013.

Observers have suggested that Cainiao has been designed to reduce Alibaba’s dependence on third party providers but YTO’s Yu says the concerns are overblown because it is primarily an information platform aimed at collecting and monetising industry data.

“Chinese couriers deliver 80 million parcels a day… Can Jack Ma do it alone?” Yu told ThePaper.cn in an interview last week. “Jack Ma’s job is easy. Pony Ma’s [the chairman of Tencent] job is easy. They rely on technology and information. We make money by doing the hard donkey work.”

How is the sector changing?

The e-commerce industry is a proving ground for the government’s ambitions to restructure China’s manufacturing and export-driven economy to one skewed more towards consumption and services.

Improved logistics is an important part of the plan and the central government sees a more professional delivery sector as a way of boosting margins and generating growth (though road tolls are a hindrance, see page 7).

The huge army of “foot soldiers” hired by the couriers, the Financial Times reports, has been essential in preparing for this transition, and an action plan launched by the State Council last October wants the industry’s revenues to exceed Rmb800 billion by 2020, with 50 billion packages delivered every year.

How big an increase is that? Couriers delivered 13.9 billion parcels in 2014, the first time the volume of deliveries surpassed that of the US. According to Xinhua, a total of 18.3 billion deliveries were made in the first eight months of this year, up 55% year-on-year, with total revenue of Rmb234 billion.

The blessing from the central government, Southern Weekend says, is another major reason for the flurry of IPOs. With the industry on the verge of transformation, its participants need capital for investment in new skills and services. ZTO, for example, will use the proceeds from its New York offering to buy more trucks and expand its processing capacity through the purchase of land, facilities and equipment.

Another bottleneck that the Tonglu firms would like to break is the transport of perishable goods, aka fresh food. Local governments, especially those in more remote rural areas, have been offering incentives for cold chain investment, and a temperature-controlled supply chain would extend the shelf life of many agricultural products, boosting incomes for farmers (another government objective) and reducing waste (an environmental plus).

Of course, each of the Tonglu firms is chasing the same dream, and competition between the group is another factor in the flood of capital raisings. One of the reasons that ZTO opted for its New York debut was the chance to raise money more quickly than waiting in the queue of more than 800 IPO candidates in China. YTO’s Yu also expects that the couriers will compete fiercely to build the more integrated supply chains of the future.

“I believe in the next two or three years, China’s logistic network will be merged with the express delivery industry. We either have to consolidate and restructure, or we will disappear into insignificance,” he predicts.

This sense of competition between the Tonglu firms puts pressure on margins, making consolidation all the more likely over the longer term. None of the firms has a dominant share and the fragmented market keeps prices lower. Thin margins across the sector have kept global competitors out of the same market as well, and neither Fedex nor UPS has shown much interest in competing with the Tonglu clans since Beijing lifted a ban on the US delivery giants two years ago.

Yu says that it would be similarly difficult for the Chinese couriers to get a foothold in the US. And he claims not to be too bothered by the competitive threat from the international firms in his home market. Instead, he goes back to his community roots in issuing a challenge. “We are Tonglu natives. We stick together as a unit when competing with foreign rivals,” he tells ThePaper.cn.


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