IPOs: Toncheng Goes Slow, ZTO Express Hits Doubters

Bottom line: Tongcheng’s lack of hurry to make an IPO reflects confidence about its cash position due to new backing from Wanda, while ZTO’s high profitability looks unusual amid huge losses reported by most of its rivals.

Tongcheng in no hurry to IPO

A couple of IPO stories are in the headlines as the new week begins, led by word that online travel site Tongcheng  is in no hurry to make a listing, following its link-up last week with the cash-rich Wanda Group. At the same time, delivery company ZTO Express, which is in a bigger hurry to list, is raising some doubts among observers who say the fat profits announced in its IPO prospectus are at huge contrast with peers in China’s highly competitive parcel delivery sector.

Each  of these stories has some backstory that’s quite relevant here, and these IPO plans are an important part of the bigger story. Tongcheng is  one of the few remaining independent players in the online travel space, as it fights for a place in the market against the increasingly dominant Ctrip (Nasdaq: CTRP).

But the company received a huge lifeline last week, when it announced it would merge with the much smaller travel unit of the hugely cash-rich Wanda. (previous post) That means Tongcheng should suddenly have access to plenty of money to fund its operations and potential expansion into the foreseeable future, and therefore won’t need to raise more money anytime soon.

That view seems to be reinforced in a new interview with Tongcheng’s CEO Wu Zhixiang, who says his company is still working out the details for its merger with Wanda’s travel arm, and will probably make an IPO in about 3 years. (Chinese article) Three years is almost an eternity when you’re talking about an IPO, since things can rapidly change in any fast-moving Internet sector. Thus when someone talks about an IPO  in that time frame, it basically means the company won’t need new funding anytime soon.

I was also surprised to read that Tongcheng is quite healthy financially, with its core website set to post a profit of more than 100 million yuan ($15 million) this year, and more than 1 billion yuan in 3 years, according to Wu. I would have expected the company is losing money right now, since it’s relatively small and has to compete with the much larger Ctrip, which is closely allied with other big players like Qunar (Nasdaq: QUNR) and eLong.

ZTO’s Big Profits

That leads  nicely into the second IPO story, which has industry observers expressing doubts about the huge profits reported by ZTO Express in its recently filed prospectus for a New York IPO to raise up to $1.5 billion. I expressed my own doubts on that matter when  the prospectus was first revealed last week. In that prospectus ZTO said it earned profits of 1.3 billion yuan and 770 million yuan in 2015 and the first half of this year, respectively. (previous post)

My  doubts weren’t based on any particular insider knowledge, but instead simply on the fact that ZTO’s rivals are all losing big money due to stiff competition in China’s parcel delivery market. The cutthroat competition has left those rivals in big need of cash, and most have made backdoor listings in China in a bid to get more funds to continue their operations.

By comparison, ZTO is one of the few players making an offshore IPO, which is undoubtedly pressuring it to show stronger financials to attract investors. Against that backdrop, other industry observers are now coming out and also expressing surprise at ZTO’s huge profitability. (Chinese article)

A news article on the subject appears to have been prompted by a reporter’s own doubts, and there’s no real specific evidence that ZTO has inflated its numbers to draw interest to the IPO. ZTO declined to comment on the matter, saying it’s in a quiet period. It’s quite possible the company’s profits are real.  But as a longtime watcher of offshore Chinese IPOs, I would also say there’s a possibility the company is using accounting tricks to make its financial report more attractive to boost interest towards its offering.

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