Major Expresses' Listing Competition Turning White-hot,
Model Analysis of the Alliance System
ZTO express published its U.S. prospectus on September 30, 2016, indicating its entrance into the final dashing phase in its U.S. listing process. With ZTO's publication of its prospectus on the New York Stock Exchange, all the four major expresses with an alliance system in China, also known as the "Three Tong and One Da", have proposed their listing plans. Besides the ZTO's U.S. listing, YTO Express (Logistics) Co., Ltd., STO Express and Yunda Express all planned to go public on China's A share market through backdoor listing.
Industry insiders believed the "listing competition" in the express industry showed the competition has expanded to the capital market from the low-price competition. Based on the needs of infrastructure construction and capital operation, going into the capital market first will provide them with a leading advantage over other competitors and leave other companies far behind.
Besides the differences in listing locations, the "Three Tong and One Da", though all with alliance system, have showed big differences in gross profit margins due to different settling models of delivery charges, based on the comparisons of related materials published.

The "Listing Battles" Among Expresses
Judging by the listing process, YTO is the fastest among the four, with its backdoor listing plan of replacing Dayang Chuangshi Co. being approved by the China Securities Regulatory Commission (CSRC). Its completion of asset transfer with the target also made it the first express entering into the A share market. Meanwhile, STO Express and Yunda Express also plan to list on the Shenzhen Stock Exchange, with their listing plans under CSRC's examination and their entries into the capital market seen in the near future.
Judging by the listing locations, YTO chose to list on the Shanghai Stock Exchange, STO and Yunda chose the Shenzhen Stock Exchange while ZTO preferred the NYSE. Different capital markets have different requisitions and different processes for listing, and will have different impacts on the coming capital market operations.
Another significant difference between listing in China and in the U.S. is valuation. For Chinese companies listing on the domestic market, local investors will have a direct observation of their services and products, and thus the companies will win higher recognitions compared with companies listing in the U.S. and will be more easily understood by investors. All these will be significantly demonstrated in the investors' valuation towards the companies. Chinese companies usually have higher price/earning ratios in A share market, and that's why many Chinese companies listing in the U.S. chose to return to A share market in recent years.
While ZTO's main business is based in China, why it is seeking a publication in the U.S.? Industry participants think it is highly related to its share structures. ZTO has introduced dollar funds, such as Sequoia Capital, Warburg Pincus and Hillhouse Capital, in its early development. However, foreign companies are not allowed to invest in China's express business with mail delivery, according to the country's Post Law and Express Business' Operation and License Regulations. As a result, ZTO may face law risks if it goes public on the local market. Meanwhile, the process for listing on the NYSE, a matured capital market, would be fast, and it is believed to be a major reason for ZTO choosing to list in the U.S.

The Market Positions of "Three Tong and One Da"
The "Three Tong and One Da" are well recognized as the bellwethers in China's express enterprises with alliance systems. According to the public information, China's express volume totaled 20.67 billion pieces in 2015, of which 10.68 billion pieces were done by the "Three Tong and One Da", which accounted for more than 50% of the total market. The "Three Tong and One Da" have similar operating models, and their market positions and business scales are similar as well.
However, industry participants said these companies have their own characteristics in their development, showing the differences. YTO and ZTO are more focused on direct operations in their transiting services, having set up direct transiting central networks covering major operating areas. While STO have many franchisers participating in its transiting center operations. According to the public information, STO hasn't set up any direct transiting centers in first line cities such as Beijing and Guangzhou, or mid and western provincial capitals such as Wuhan, Changsha, Zhengzhou and Xi'an. Yunda, though lags behind STO, YTO and ZTO in business volumes, managed to become one of the leading companies in the industry with its differential competing strategy of concentrating on big packages delivery.
What a coincidence is not only the four companies all chose to land on the capital market in 2016, but also the three of which, STO, YTO and Yunda, are very similar in restructure valuation and profits promise. But further analysis of their financial data showed that their key financial indicators such as operating revenues and gross profit margins were quite different. The business volumes of YTO, STO, ZTO and Yunda in 2015 were 3.03 billion pieces, 2.57 billion pieces, 2.95 billion pieces and 2.13 billion pieces, respectively, while their operating revenues were 12.096 billion yuan, 7.711 billion yuan, 6.086 billion yuan and 5.053 billion yuan, respectively. Their gross profit margins of the main business were 13.42%, 16.32%, 34.30% and 30.91%, respectively. These differences puzzled a lot of investors.
Industry participants explained the reasons behind such differences. They said the profitability shouldn't be quite different among the four companies, and the big differences were mainly attributed to long business chains, complicated revenue and cost models related and different accounting treatments as to the revenue allocation, cost allocation and charge allocation. STO and YTO put more revenue and expense directly into operating revenue and operating cost categories, leading to the much higher revenues and costs and the comparatively lower gross profit margins than the other two. Of these differences the most significant one is the different dealing models towards "delivery charges" accepted by the four companies.

Different Business Logic
Under the operating model of alliance express enterprises, packages are collected and delivered by alliance franchisers at departure and destination, respectively, and the delivery charges are directly paid to the package collecting franchisers by the senders. Thus the collecting franchisers need to pay the express headquarter with fees such as extra express receipts and transiting fees, and pay the delivering franchisers with delivery fees. STO and YTO put the above delivery fees into operating revenue and operating cost, separately, while ZTO and Yunda take the external circulation model, with delivery fees not represented in their financial data. The delivery fees of ZTO and Yunda in 2015 were estimated at 4.1 billion yuan and 3 billion yuan, respectively, based on the calculations of delivery fee per piece disclosed by STO and YTO.
Under the alliance express service network, package delivery is an important link in the express service chain, and the dealing of delivery fee is also the key point in the business operation. The two different dealing models above are express companies own choices, and shouldn't be judged. However, industry insiders said the different model actually has tricks hiding behind. The model taken by ZTO and Yunda is not in line with the business logic and business characters of alliance express enterprises.
On the one hand from the cooperation model prospect, an alliance express enterprise takes the model of "core enterprise + alliance network", with the business operation flow, fast delivery flow, capital flow and information flow all linked through the express headquarter, and there are no direct business exchanges among alliance franchisers. There are no service contracts signed between collecting franchisers and delivering franchisers, and their connections are automatically assigned by the core company's information system based on the packages' delivery paths. On the other hand, the core enterprise not only acts as a fund settlement platform, but also manages through the whole process from collection and transition to transportation and delivery. Express delivery and delivery charge balance, as the core part of the business chain, could not operate independently without the management of the core enterprise. Meanwhile, the delivery charges are adjusted by the core enterprise in accordance with the market development to balance the benefits of the whole network.
What's more, from the package direction and deposit responsibility's point of views, transiting packages from collection franchisers to the core enterprise means the core enterprise is entrusted (by the collection franchiser) to complete the following process of transition; while at the same time, when the packages are passed onto the delivery franchisers by the core enterprise, the delivery franchisers are entrusted (by the core enterprise) to complete the following process of delivery. On each stage, risks and payments related to the express are passed on to the next link from the previous one, showing the service providing relationship and purchase relationship.
So the model of putting the delivery charges into revenue and cost, such as taken by STO and YTO, is good for the core enterprise to manage its franchisers, and the transfer of capitals and bills as well as the accounting management will be more standardized. Then why did ZTO and Yunda take the model of external settlement?

Looking Beyond the Different Settlement Models
It is believed the external circulation model is very possibly a temporary measure taken to avoid tax risks.
According to the Notice of Putting Railway Transportation and Post Industries Into Value-added Tax Trial Instead of Business Tax (Financial Tax [2013] No.106) jointly published by the Ministry of Finance and State Administration of Taxation, related industries including the road transportation should carry out the VAT instead of business tax nationwide from Jan. 1, 2014, in accordance with the revised Trial Measures for Implementing Value-added Tax Instead of Business Tax. As a result, a VAT rate of 6% is applied to the collection and delivery of express service under the category of modern service and logistics supplementary.
From the VAT mechanism's point of view, the practice of STO and YTO reflected a unified mechanism of capital flow, goods flow and receipts flow, with clear capital links between upstream and downstream as well as distinct tax responsibilities among different subjects. The core enterprises also take important social and legal responsibilities during the tax collecting process. However, under the practice by ZTO and Yunda, the capital flow and goods flow are not unified; the value-added chains are unclear while the tax collecting efficiency is far lower than STO and YTO.
For example, if there are 3,000 franchisers, with the practice of STO and YTO only 6,000 invoices will be needed (that is 3,000+3,000), while with the practice of ZTO and Yunda theoretically 9 million invoices will be needed (that is 3,000*3,000). However in the daily practice, franchisers are unlikely to write VAT invoices, greatly challenging the tax supervision and easily causing the tax losses. As a result, ZTO and Yunda will pay less taxation.
We could see from the above that the delivery fee dealing model of STO and YTO is more regulated and reasonable, and is good for the management of franchisers by the core express company and the industry's long-term development. But that also leads to the much higher tax cost and operating cost than ZTO and Yunda. According to the published financial sheets, the delivery fee revenues of STO and YTO in 2015 were 3.93 billion yuan and 4.24 billion yuan, respectively, indicating higher taxation of 240 million yuan and 250 million yuan by franchisers, respectively, based on the VAT rate of 6%. To maintain the stability and competing ability of their service network, however, the higher taxation costs are finally charged with STO and YTO through adjusting the settlement prices with their franchisers, damaging the headquarter's profitability to a certain degree.

Where Will the Competition Goes Under the Capital Market?
Industry participants said the alliance express enterprise is a new business model in a new industry, and there are no specified laws and regulations regarding the financial practice and tax practice of delivery fees.
"Although ZTO and Yunda put delivery income and expense outside their own legal subject, whether such a model could successfully avoid tax risks is not optimistic, as the direct payment and issuance of invoice among franchisers are not supported by service contracts and an actual business cooperation background" an industry person said, adding that putting delivery income and expense into core enterprise's VAT flowing links is more reasonable from the business operation's angle.
The year 2016 is the stock listing debut of Chinese express enterprises, indicating the development of express industry to be fostered by the wings of capital. Meanwhile, the industry's competition structure will be upgraded and switched. The capital operation ability and resources integration ability will be the strategic peak in future competitions, besides the usual competing measures of product prices, service networks and service quality.
In an industry with super high speed development, all express companies competing in a free environment is good for the enterprise development, market development and the services to customers. It is possible in the initial developing stage. But with the leading companies making plans to go public and landing on the capital market to accept investors' examinations, further development will be more supported by capitals. The companies will be under more strict capital market supervision and investors' inquiries.
For now, the curtain of express industry landing on the capital market is raised. Who will be the final winners in the coming competitions? Time will show us the answer.