By Michael Elkins
Grizzly Research released a research report on ZTO Express Inc. (NYSE:ZTO), accusing the Chinese logistics company of faking their finances and stealing from the company to enrich insiders.
Despite standardization across the industry, ZTO boasts margins >2x the average of its peers. Researchers at Grizzly believe the company’s superior margins are just the result of its potentially falsified financial statements. “We believe ZTO has underreported revenue and costs to engineer these standout results,” wrote Grizzly.
ZTO is a logistics company that provides delivery services in China. Like peers, ZTO’s profitability was in a downward trend from 2018 to 2021. Yet, the decline ZTO experienced was seemingly less pronounced. The average net margin for comparable companies declined from ~11% in 2018 to 1.7% in 2021. Meanwhile, ZTO’s net margin decreased from ~25% in 2018 to 15.6% in 2021.
“We find it unusual that a logistics company with high labor costs and overhead has margins that are multiples of peers’ and in line with best in-class operators in more profitable industries,” wrote Grizzly.
Grizzly researchers concluded that ZTO’s outperformance was either due to an exceptional management team or the financials are too good to be true.
Grizzly obtained ZTO’s SAIC files, as well as the files for 4 other relevant companies. After comparing the consolidated financials from SAIC, a Chinese government source, with the financial data that ZTO reported to SEC, Grizzly claims to have found significant discrepancies between these two sets of data.
“The net margins reported in ZTO’s SEC filings were 25.7%, 17.2%, and 15.5% for 2019, 2020, and 2021, respectively. Whereas the net margins from SAIC financials were 10.6%, 7.9%, and 6.3% for the same periods. These margin differences are significant and also support our suspicions that were laid in the previous part: ZTO’s SEC-reported margins are simply too good to be true, while adjusted SAIC numbers are in line with Chinese competitors," added Grizzly.
Grizzly also believes that ZTO utilized partner acquisitions to steal from the company and enrich insiders. According to Grizzly, ZTO vastly overpaid for partner acquisitions from 2014 to 2015. According to data collected by Grizzly, ZTO paid RMB 122.16 million (RMB 1 = $0.14) in cash and RMB 3.66 billion worth of stock to acquire 24 network partners from 2014 to 2015. However, the fair value of the fixed assets of these 24 network partners in total is only RMB 122.16M, which is exactly the amount of cash paid by ZTO.
“It seems ZTO has drastically overpaid for its network partner acquisitions from 2014 to 2015.”
Grizzly concluded the article saying, “We believe that ZTO’s SEC reported financials simply are not reliable and see at least 50% downside potential for the stock in the short to medium term.”
Shares of ZTO are down 1.13% in afternoon trading.