Chinese company ZTO Express (Cayman) Inc. held a public offering of American Depository Shares (ADSs) in October 2016 at which it sold over 72 million ADSs. But the complaint for this class action alleges that the company both made untrue statements and omitted material facts in its Registration Statement, violating the Securities Act of 1933.
The class for this action is all persons or entities who acquired the common stock of ZTO from or traceable to ZTO’s public offering of ADSs on or around October 27, 2016.
ZTO is an express delivery company headquartered in Shanghai, People’s Republic of China, that provides express delivery service throughout China as well as other value-added logistics services.
Also named as defendants in this class action are officers of ZTO, and the companies that were underwriters for the offering, including Morgan Stanley & Co. International, PLC, Goldman Sachs (Asia), LLC, China Renaissance Securities (Hong Kong) Limited, Citigroup Global Markets, Inc., Credit Suisse Securities (USA), LLC, and JP Morgan Securities, LLC. According to the complaint, underwriters are expected to conduct a due diligence investigation and are therefore responsible for the misstatements in the Registration Statement materials.
The complaint quotes the Registration Statement materials, in which the company claimed to have a high operating margin, “one of the highest among the major publicly listed logistics companies globally.” It attributed this partly to a “highly scalable network partner model” that provided pickup and last-mile delivery. It also presented figures showing tremendous growth and talked about acquiring “the express delivery business and assets of selected network partners … to optimize our nationwide network.”
However, these statements were false and misleading, the complaint claims, because at the time of the offering, the company was inflating its profit margins by keeping certain low-margin segments of the company out of its financial statements. The “network partners” ZTO spoke of handled the low-margin pickup and delivery services, which were kept off ZTO’s books, while ZTO claimed only the more profitable core hub operations.
Also, Item 303 of Regulation S-K requires that issuers of Registration Statement materials disclose events or uncertainties that may cause the company’s future operating results to differ. The complaint says that in ZTO’s case, adverse events or uncertainties associated with ZTO’s operating margins were likely to have an impact on profitability and therefore should have been disclosed.
Since the offering, the price of ZTO’s ADSs has declined by about 25%, because, the complaint says, investors have learned about ZTO’s exaggeration of its profit margins.
According to the complaint, the false or missing information represents violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933.