5 Things to Know About China's Newly Public Best Inc.

Chinese logistics company Best Inc. (NYSE: BSTI) went public on Sept. 20, and its market debut was a rocky one. The company originally proposed to sell 62.1 million shares between $13 and $15 each, but soft demand caused it to revise the offering to 45 million shares at $10 each. Best stock jumped 18% on the first trading day, but those gains quickly faded and it finished with a modest 5% gain. The stock roared back over the next three days, rising above $13 before dipping back below $12 again. It closed Oct. 3 trading at $11.62 per share.

Despite that volatility, Best represents an interesting opportunity for long-term investors. Let's take a look at five facts you should know about this play on the growing Chinese economy, including that Alibaba is its biggest backer.

1. Its founder is a former Googler

Best founder and CEO Johnny Chou was the co-president of Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google China until late 2006. The following year, Chou founded Best to capitalize on the surging demand for logistics solutions across the country. Between 2012 and 2016, Best's freight volume achieved a CAGR (compound annual growth rate) of 93%.

Today, Best offers integrated logistics and supply chain services, last-mile services, and value-added services across China. Its freight network reaches 96% of all Chinese cities, with hundreds of warehouses and thousands of line-haul routes. It also operates warehouses in the U.S. and Germany, and ships to Australia, Japan, and Canada via regional partners.

2. Alibaba is its biggest backer

It might seem that smaller logistics players could be wiped out by logistics services from e-commerce giants like Alibaba (NYSE: BABA). However, Alibaba is actually Best's top investor, with a 23.4% stake in the company.

Back in 2013, Alibaba and its partners pledged to invest about $16 billion in building a streamlined logistics network across China over the next eight to 10 years. Alibaba said that network should deliver goods across China within 24 hours and support annual sales of 10 trillion yuan ($1.5 trillion). More recently, Alibaba pledged to spend 100 billion yuan ($15 billion) to expand its logistics network within the next five years.

Instead of building a network from scratch, Alibaba and its partners invested in smaller players like Best, which secured logistics partnerships across the country. Prior to investing in Best, Alibaba invested in Suning Commerce, China's largest electronics e-tailer, mainly to gain access to its logistics network. It also recently acquired a controlling stake in smart logistics provider Cainiao.

3. But there's still plenty of competition

Alibaba's backing is a vote of confidence for Best, but there are still plenty of competitors across the fragmented logistics industry in China. Major rivals include JD.com's JD Logistics, SF Holdings, and ZTO Express (NYSE: ZTO) -- which also went public last year.

Speaking to CNBC in September, Chou admitted that the competition was going "to be fierce, like anywhere else in the world." But he also declared that Best still has "a great opportunity," and that the overall market was "growing at a tremendous amount of speed."

4. There is incredible revenue growth

That growth is certainly noticeable. Best's revenue rose 71.5% to 5.23 billion yuan ($790 million) in 2015, and climbed another 68.3% to 8.84 billion yuan ($1.3 billion) in 2016. Its revenue in the first half of this year surged 133.5% annually to 3.47 billion yuan ($520 million).

Best's current market cap of $2.9 billion gives it a price-to-sales ratio of 2.2. That merely matches the industry average of 2.2 for business service providers, but remains much lower than ZTO's P/S ratio of 6.2.

5. But it's still deeply unprofitable

Best's net losses widened over the past three years. It reported net losses of 718.5 million yuan ($108 million) in 2014, 1.06 billion yuan ($160 million) in 2015, and 1.36 billion yuan ($201 million) last year.

But on the bright side, Best's loss narrowed slightly from 634.8 million yuan ($96 million) to 624.6 million yuan ($92 million) between the first halves of 2016 and 2017, which was attributed to improved operating efficiency. Nonetheless, that weak bottom-line growth could make it tough to keep up with the growing competition.

The key takeaways

Logistics is a tricky business that can crush companies that lack the cash flows, discipline, and scale to become profitable. During the dot-com bust, many online companies folded because they didn't understand logistics.

Alibaba is playing it safe by investing in regional logistics leaders, since it can reap the benefits of expanded networks with less financial risk. Meanwhile, companies like Best and ZTO shoulder all the risks, which makes them much riskier plays than straight e-commerce investments.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and JD.com. The Motley Fool has a disclosure policy.