Pension Fund Sues ZTO Express, US Investment Banks for Overstating Profits in IPO
Xu Wei
/SOURCE : Yicai
Pension Fund Sues ZTO Express, US Investment Banks for Overstating Profits in IPO

(Yicai Global) July 21 -- US pension fund Birmingham Retirement and Relief System (BRRS) filed a lawsuit against Shanghai-based package delivery firm ZTO Express [NYSE:ZTO] and its IPO underwriters Morgan Stanley [NYSE:MS] and Goldman Sachs [NYSE:GS] for exaggerating profit margins in order to entice investors.

The foundation claims the investment banks failed to undertake adequate due diligence for the IPO, which raised USD1.4 billion (CNY9.5 billion) in October 2016, said.

The courier, which derives most of its business from internet monolith Alibaba Group Holding Ltd. [NYSE:BABA], handles low-profit express delivery services through a network partner system.

BRRS said in the lawsuit that the underwriters' conduct neglects "the key reality" of the industry. "By keeping the 'network partners' businesses off its own books, the company was able to exaggerate its profit margins to investors," the lawsuit reads.

The American Depository Share (ADS) price for ZTO Express is around 20 percent lower than its IPO issue price of USD19.50.

"We believe the claims are without merit and intend to defend ourselves vigorously," Sophie Li, ZTO Express Investor Relations Spokesperson said.

The lawsuit also names the IPO's smaller underwriters, including China Reinsurance Group Corp. [HK:1508], Credit Suisse Group AG [NYSE:CS], Citigroup Inc. [NYSE:C] and JPMorgan Chase & Co. (NYSE:JPM).

Morgan Stanley and Citi Group refused to comment on the suit, while the other investment banks did not respond.

"It is negligence if the underwriters did not know of existing problems and plans not disclosed by the company, or of the false statement and omission in its registration declaration," the foundation said.

The foundation quoted one section of the indictment it alleges to be false. "With rapid growth, we have achieved outstanding profitability. In 2015, our operating profit margin was 25.1 percent, and we are a major listed logistics company with one of the highest profit margins in the world," ZTO Express said in its registration document submitted to U.S. Securities and Exchange Commission (SEC).

The indictment states that the foundation made its investment decision in accordance with the statements made by ZTO Express. The suit names Chief Executive Lai Haisong, Chief Financial Officer Guo Jianming and other board directors as individual defendants. The lawsuit is dated May 16 this year, but has not yet been heard.

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Keywords: ZTO EXPRESS , US , IPO