E-COMMERCE: Alibaba, ZTO Take US Hits from Trade Group, Investors

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ZTO dives in trading debut

Two names closely associated with e-commerce are in the headlines, led by industry leader Alibaba (NYSE: BABA), which is coming under fresh assault from a coalition of US trade groups for allowing trafficking in pirated goods in its online marketplaces. The other headline involves parcel delivery giant ZTO Express (NYSE: ZTO), which is coming under a different kind of assault as investors dumped its newly-listed New York shares on their first trading day after an impressive $1.4 billion IPO.

E-commerce aside, this pair of stories also has a common theme in the fact that both Alibaba and ZTO chose to list their shares in New York, even as their Chinese peers are opting for IPOs in China where they can get higher valuations. Alibaba broke world records with its $25 billion IPO 2 years ago on the New York Stock Exchange, and now ZTO has just become the largest listing by a Chinese firm in New York since then.

We’ll begin with Alibaba, which landed at the heart of a major scandal nearly 2 years ago involving rampant trading in counterfeit goods on its popular Taobao C2C marketplace. The company has been in a state of damage control for much of the time since then, and narrowly avoided having its name included last December on an annual US list of “notorious” marketplaces for piracy.

One of Alibaba’s biggest critics has been the American Apparel & Footwear Association  (AAFA), a trade group that earlier this month called for Alibaba’s name to be included on the next edition of the “notorious” list that’s likely to come out from the US Trade Representative’s (USTR) office in the next 2-3 months. (previous post) Alibaba has protested the AAFA’s calls, saying it has taken a wide range of steps to clean up Taobao and raise broader awareness about piracy.

But the AAFA still isn’t content, and seems intent on seeing Alibaba’s name returned to the list. Such a development wouldn’t have any legal implications for Alibaba, but would be a major embarrassment. Now AAFA has just put out a renewed call, and added the names of 17 other groups to its latest petition to the USTR’s office. (press release)

The list of associations joining the AAFA includes mostly anti-counterfeiting and apparel industry groups, and does seem like a big blow against Alibaba. Alibaba has issued its own statement in response, saying the AAFA has ignored the many steps it has taken to clean up its sites. Alibaba also notes the difficulty of the task due to the huge volume of goods traded on Taobao. (company announcement)

This latest exchange shows that powerful forces in the US and Europe are lining up against Alibaba, which itself has hired a small army of seasoned Washington lobbyists and PR executives to defend itself on the piracy issue. The battle has become quite heated, and at this point I would only give Alibaba a 50-50 chance of staying off the next “notorious” list.

ZTO Fails to Impress

Next there’s ZTO, which has become China’s first parcel delivery company to list in New York and one of the only ones to list outside China. This particular offering drew attention because the parcel delivery sector has boomed in China in tandem with the e-commerce explosion, but is also intensely competitive. As a result nearly everyone is losing big money, though ZTO surprised everyone by disclosing in its IPO prospectus that it is quite profitable.

The company ended up pricing its offering at $19.50 per American Depositary Share (ADS), or quite a bit above its previously announced range, indicating demand was strong and helping it to raise $1.4 billion. But then investors apparently lost their appetite for the stock when trading began, and the shares fell 15 percent on their debut. (English article; Chinese article)

So why did investors get so excited before the IPO, only to lose their interest after trading began? My best guess is that ZTO’s backers, including the well-connected Warburg Pincus Hillhouse Capital and Sequoia Capital, were able to call on their friends to buy up a lot of the shares before the listing. But the broader market has always been cool on the stock, which would explain the big drop after trading began and a potential continued decline for the stock in the months ahead.

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