Birmingham Retirement and Relief System sues Chinese ZTO over untrue financial statement in its 2016 IPO

The lawsuit states that the underwriters had failed to do their due diligence.

A U.S. pension fund has sued Chinese courier ZTO Express and its underwriters alleging that the company has significantly hiked its profit margins to attract investors for its $1.4 billion IPO.

Goldman Sachs Group Inc and Morgan Stanley, who spearheaded ZTO’s IPO have been named in the class-action lawsuit filed in a Alabama state court by the city of Birmingham’s pension fund.

ZTO’s IPO in 2016 in the NYSE was the largest U.S. listing and was the biggest by a Chinese company since Alibaba’s $25 billion IPO in 2014.

With the news reaching the market on Thursday, ZTO’s shares rested at $15.68, down 20% below its IPO price of $19.50.

“We believe the claims are without merit and intend to defend ourselves vigorously,” said a ZTO spokeswoman.

The lawsuit filed on May 16 by the Birmingham Retirement and Relief System states that ZTO had issued “untrue statements” and omitted “crucial realities” in its registration statement. It goes on to say that ZTO has inflated its profit margins by keeping certain low-margin segments of its business out of its financial statements.

“ZTO used a system of ‘network partners’ to handle lower-margin pickup and delivery services, while maintaining ownership of core hub operations. By keeping the ‘network partners’ businesses off its own books, the company was able to exaggerate its profit margins to investors,” reads the lawsuit.

Morgan Stanley and Goldman did not immediately respond to requests for comment.

In its pre-IPO filings ZRO had stated to the stock exchange that had achieved operating profit margins of 15.4% and 25.1% in 2014 and 2015, respectively.

ZTO’s unaudited results, for the quarter ended March, published on May 17, shows a jump of 48% in net income from its previous year; it also shows a jump in its revenues by 34%.

The lawsuit has also named ZTO IPO’s smaller underwriters, including China Renaissance Securities, Credit Suisse, Citigroup and J.P. Morgan. Individual defendants, include ZTO’s CEO and CFO.

The lawsuit comes at a time when Chinese logistics company Best Inc, is preparing to raise up to $750 million with its U.S. IPO.

As per a financial report published on the city of Birmingham’s website, the Birmingham Retirement and Relief System had assets worth $1.05 billion at the end of June 2015.

The case is City of Birmingham Retirement and Relief System v. ZTO Express (Cayman) Inc., 01-cv-2017-902004.00, Circuit Court of Jefferson County, Alabama (Birmingham).


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