Good day, and welcome to the ZTO’s Second Quarter 2018 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Sophie Li, Investor Relations Director. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. The company’s results and the Investor Relations presentation were released earlier today and are available on the company’s IR website at ir.zto.com. On the call today from ZTO are Mr. Meisong Lai, Chairman and Chief Executive Officer; and Ms. Huiping Yan, Chief Financial Officer. Mr. Lai will give a brief overview of the company’s business operations and highlights followed by Ms. Yan, who will go through the financials and guidance. They will both be available to answer your questions during the Q&A session that follows. I remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management’s current expectations and current market and operating conditions, and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company’s control, which may cause the company’s actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding this and other risks, uncertainties and factors is included in the company’s filing with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law. It is now my pleasure to introduce Mr. Meisong Lai. Mr. Lai will read through his prepared remarks in their entirety in Chinese before I translate for him in English. Mr. Lai, please go ahead.

[Foreign Language] Okay. Now, let me translate for Chairman. Hello, thank you, everyone, for joining our call this morning. Our business delivered a strong performance during the quarter. Once again, we exceeded our expectations with parcel volume growing to 2.12 billion parcels, while generating adjusted net income of RMB1.1 billion. We also enhanced the quality of our services and improved our customer satisfaction scores. Our parcel volume increased by 41.7% [ph], faster than the industry average by 16.7 percentage points. During the quarter, our market share increased to 17.4% from during the same period last year. Adjusted net income rose by 50%, and net cash provided by operating activities increased by 63% year-over-year. Our strong second quarter performance is a result of our commitment to and focus on implementing our overall growth strategy and ensure growth of parcel volumes that are effective, with the growth prospects of the express delivery industry in China. Our goal is to grow our parcel volume faster than the industry average by 10 percentage points each year, hence increasing our market share. On the premises of achieving targeted profit and improving service quality, during the quarter, in response to off-season price fluctuations in certain regions or markets, we selectively implemented appropriate pricing and incentive policies to protect existing parcel volume, incentivized additional parcel volume at the reduced yet still profitable levels. In other words, the incremental volume is effective in which it is still profitable. Therefore, our rapid growth rate is a profitable growth. While we continue to carefully balance parcel volume and targeted profits, we continue to focus on developing and improving our parcel pickup, transits and delivery capabilities. We once again significantly improved transportation efficiency during the quarter by refining warehouse management and constantly optimizing vehicle capacity allocation. Additional automated sorting equipment put…

Hello, everyone. I’m glad to go behind the numbers to explain what is taking place in our business. Please note that all the numbers are in RMB unless specifically mentioned. All percentages refer to our changes from prior measuring period unless otherwise specified. In the second quarter, we continue to build our platform out to scale and to quality with efficiency gains in both sorting operation and transportation. As of June 30, we have 64 sets of automatic sorting equipment in service across the network compared to the 22 sets during the second quarter last year. This allowed us to manage the average headcount cost of sorting hub workers to an increase of only 16.7%, which is significantly lower than the parcel volume increase of 41.7% in the quarter. In addition, we added more than 170 high-capacity, 16- to 17-meter long trucks to our own fleet. Quarter-end number of self-owned trucks increased from 3,500 as of March 2018 to 3,800. Since late 2016, we have gradually reduced our dependency on outside transportation services, which are relatively less cost-effective compared to our own managed fleet. Revenue increased in the quarter by 41.3% to RMB4.2 billion, primarily driven by an increase in volume, offset by slight ASP or price decrease. The volume increased by 41.7%, and our per package price declined by 7.5%. This decline was driven by three factors: decrease of average weight per parcel; as well as the incremental incentive we provided for additional volume growth; and also the consistent use and increase of e-waybill. Cost of revenue rose to RMB2.74 billion, an increase of 48.3% primarily due to an increase in line-haul transportation [ph] cost, again, below the increase of revenue, as well as sorting hub operation cost, accessories and other costs. This total cost of revenue also included…

We will now begin the question-and-answer session [Operator Instructions] Your first question comes from Edward Xu from Morgan Stanley.

Hello. Can you hear me?

Hi.

[Foreign Language] The first question is regarding your cost control. We found that unit cost continue to decline, but the magnitude of the cost decline is not as significant as we saw in first quarter. So can you share with more color on your cost control and also give us some guidance on the cost trend in the next few quarters? And the second question is regarding your financial income because we noticed that your cash balance increased a lot. And especially in third quarter, you are going to see more cash increase. So is there any way of more effective cash management and to enhance your efficiency? Thank you.

[Foreign Language] Okay. Let me translate for Chairman first. Thank you, Edward, for your question. If I may remind everyone that our second quarter comparatives indicated that the transportation cost had decreased significantly from last year. And part of that decrease was due to much higher cost in 2017 as we were working on reducing the reliance on third-party transportation cost. So for second quarter of this year, the decline of RMB0.21 in our transportation cost partly was against – comparative against an unusual amount of cost in prior year. So the normal decrease we have discussed last time in our call is that RMB0.10 is reasonable. So in this quarter, for 2018, we were able to achieve around RMB0.11 decrease for the transportation cost, so that’s reasonable and normal. Now you mentioned about the cost of gasoline. The cost of gasoline actually had a minimal impact as it increased by only 4%. So the unit cost, operating cost in our operation continues to decrease. Excluding the impact of acquisition of COE, our unit cost decreased to RMB1.16 during the quarter from the previous RMB1.24. And unit cost – the transportation unit cost decreased to RMB0.60 during the quarter from the previous RMB0.71 in 2Q of 2017. And this decrease was mainly due to a decrease in the parcel weight – per parcel weight, so that we are able to optimize the packing of our trucks. And then also, coupled with use of high-capacity trucks, this entire efficiency has increased. And then we’re continuing to decrease the dependency on the third-party transportation services. As we indicated earlier, the use of self-owned vehicles increased to 62% in this quarter from 53% last year same period. Unit sorting cost also decreased to RMB0.33 from RMB0.35 a year ago, and this decrease was…

Okay. Thank you.

The next question comes from Vivian Tao from Citi. Please go ahead.

[Foreign Language] So I have two questions. The first question is on the cost side. Earlier, the management explained the line-haul transportation cost, the unit cost has declined from RMB0.71 per parcel last year to RMB0.60 per parcel this year. Management attribute this naturally to – because of the decline of the average parcel weight as well as increase of this self-transport proportion. So my question is that – because we understand that direct shipment also has been increasing recently. Does that also help to reduce the line-haul transportation cost? If it is, can you please further break down that RMB0.11 cost savings? How much of that is coming from the lower average weight? How much is from the increase of the self-transportation portion? How much is from the hub, the increase of the direct shipment? The second question is on the market condition. Earlier, Mr. Lai mentioned, based on the market condition in the third quarter, management expect the competition might intensify in the near term. I’m just wondering, management, would you please further elaborate now what have you seen in the market in the third quarter?

[Foreign Language] So the first question, let me translate first. First of all, the direct shipment route is a approach to connect the pickup service outlet to the destination sorting hub. And the direct shipment has been developed since 2017. Parcel volume of the direct shipment business accounts for less than 5% of our total volume during the quarter. And the direct shipment business accounted for about 7% of the total routes. And before 2017, only certain outlets that reach a volume would be qualified for running this direct route. And direct route is very much a efficiency gain as well as cost management approach. With the increase in volume, it is inevitable in the future that more and more direct routes will open up. But again, it’s gradual. There are volume requirements. Typically a sorting hub, if it reached about 50,000 tickets a day, it would most likely then able to fill a truck that is destined to the destination hub, so as to bypass the starting sorting activity. Currently, we have the number of sorting – the times a package went through the sorting, we have certain statistics if we may go through with you, about 12.6% of our total parcel’s gone through sorting only once. 63%, which is a larger portion, 63% are sorted twice; 21% sorted three times; about 2.6% sorted four times; and above five times is almost negligible. There is none. And with the increase in the package volume, we are targeting to reduce the number of times a parcel is sorted to three times or even less. We want to increase the proportion of parcels sorted once so as to increase efficiency and eliminate unnecessary cost. With our better route planning, it is the main driver of our cost reduction this quarter. As…

Your next question comes from Nicky Ge [ph] from CCBI.

[Foreign Language] My first question is about Pinduoduo’s volume contribution to us and its parcel economics versus other ordinary parcels. And my second question is about the progress of our cooperation with Cainiao.

Okay. So your question relates to Pinduoduo. As we mentioned in the past, Pinduoduo is part of a fast-growing e-commerce business in China. In the second quarter, Pinduoduo represents roughly about 13% of our total volume and a slight increase from our previous activity levels. And Pinduoduo, in terms of its pricing, I think, for ZTO’s perspective, we don’t differentiate significantly what platform or e-commerce platform it comes from. We do price our packages by weight and by distance. So in that sense, it has very limited impact on our business as a whole. And then the third – the second question relates to our collaboration with Alibaba. The investment carries a long-term focus on digitizing the e-commerce as well as the supply chain, including logistics operation. Alibaba invested in a leading operator in this logistics business, which is ZTO, and we have been focusing on developing on-the-ground activities or on-the-ground initiatives. Some of our prior time-definite products are being upgraded. And certain aspects or segments of the entire process are being fine-tuned so as to truly differentiate from the day-to-day express packages. Cainiao Post also specifically we have piloted programs in a number of cities in cobranding and increasing the capacity of our delivery courier capacity. So all of these are underway. And some of the activities are carried out because of ZTO’s leadership, and we will be able to take along all the other key players as well in exercising and executing the strategy and the plan. Thank you.

Your next question comes from Xin Yang from CICC. Please go ahead.

[Foreign Language] So my first question is about the ASP. I don’t know how much of the ASP decrease was due to the decrease of the weight, the average weight of the parcel. And the second question is related to the structure or the competitive landscape. We saw that the complaint ratio of STO and BEST, actually, it’s better than ZTO in the last period. So what do you think about the future competition? Thank you.

Okay. For the first question, our ASP per package reduced 7.5% or RMB0.15. About RMB0.05 is attributable to the weight decline, RMB0.02 is associated with our regular incentive for e-waybill usage. That is the same amount from last quarter. And then the RMB0.08, driven by incremental incentive, so all together, RMB0.15 decrease are driven by these three factors. And then Chairman will answer the second question.

[Foreign Language] So first, let me explain the metrics that is used for measuring complaint rates. Prior to June, for example, in April, there’s one set of complaint rates, and that is considered effective complaint rate. An effective complaint rate is as a result of customer service, solving problems, also making necessary reimbursements or damage – pay for damages and all. So after all those work has been done, then the complaint rates is published. Now starting in June, the postal – government agency postal bureau initiated a new set of metrics that opened up – provided visibility to the complaint – entire complaint process. So first of all, how many complaints come in initially. And then second, how many complaints were settled satisfactory – to consumers’ satisfaction. And then those measurements provided a better measurement to indicate, first of all, the entire quality of service of a company, of the delivery services. And then it zeroes in on the capability of a company’s customer services on solving the issues, solving the problem. So Chairman has read through some of the numbers, if I will also do the same. In April, ZTO’s effective complaint rates, again, under the old metrics, we ranked number three, that is 1.19 per million compared to some of the other, for example, BEST, 0.35 per million that ranked number one. We are number three. In May, similarly, we are 0.65 compared to Shentong, STO’s 0.64. So again, these figures are after the complaints being submitted and issues resolved. So now let’s look at the set of metrics in June. If you look at in June, the total complaints that came into the pool, which means everyone that has a complaint that came into the play, ZTO has the lowest amount, which in other words, the entire service quality measured as a whole before customer service injection, before any of the fines or any of the damages were paid, ZTO stands the best. We are at 18.31 compared to some of highest at 33.44. Going forward, we will continue to monitor and balance between the quality of services as well as our volume growth and profitability to continue to secure and protect our number one position in the current geostatistics. Our total complaint rates that came in was at 0.52, which is, again, ranked number one in the entire measurement. At the end of the year typically, the postal government will issue a more comprehensive set of data, which includes satisfaction rate as well as on-time delivery, on-timeness. In all those measurements in the past, ZTO has always been ranked in the top three. So we will be continuingly focusing on a comprehensive set of data as well as a more indicative complaint rate metrics going forward. Thank you for your questions.

Thank you. This concludes our question-and-answer session. I would now like to turn the conference back over to Sophie Li for closing remarks.