Hello everyone, and welcome to the ZTO Third Quarter 2018 Earnings Conference Call. All participants are in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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 Mrs. Huiping Yan, Chief Financial Officer. Mr. Lai will give a brief overview of the company's business operations and highlights, followed by Mrs. 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 filings 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. First, let me translate for Chairman. Hello, and thank you, everyone for joining our call today. Our business achieved another solid volume growth and a strong financial performance during the third quarter of 2018. Parcel volume increased by 36.5% year-over-year to 2.1 billion. Net income was RMB 1.06 billion, which grew 47.7% from last year, all thanks to parcel volume growth. ZTO's market share in terms of parcel volume increased 1.4 percentage points to 16.6%. ZTO continues to solidify industry leadership position with scale advantage as well as superior earnings quality. Our strategy remains which is to manage the healthy pace of growth in relationship to the overall industry and consistently expand our market presence while achieving targeted profit growth and improving quality of service and customer satisfaction. During the third quarter, radical pricing practice still existed, especially in areas with high concentrations of e-commerce merchants or goods. Following our second quarter pricing strategy, we kept our focus on effective parcel growth by protecting existing volume and associated profits, then providing appropriate amount of incentive to steer towards incremental parcel volume that are profitable. While growing volume, we continue to direct attention and resources towards strengthening our transit and sorting capability and productivity improvement. In an environment of rising costs such as that of fuel and labor, our combined transit and sorting hub's cost per parcel declined CNY 0.09 year-over-year during the quarter. At the end of the quarter, ZTO owned and operated over 4,000 transportation trucks, including 2,270 15- to 17-meter long high-capacity vehicles. 200 of which were added this quarter through digitalization, intelligent control technology and the process improvement initiative in smart route planning, improved safe utilization, on-time loading and dispatching, sorting automation, integrated with dynamic weighing equipment, our operating efficiencies improved consistently for the past three…

Thank you, Chairman Lai. And hello to everyone on the call. As I review our financial results, please note that unless specifically noted, all numbers quoted are in RMB and percentage changes refer to year-over-year comparison. In summary, ZTO achieved an in line parcel volume growth of 2.1 billion, increasing over 11 percentage points faster than the industry average. Meanwhile, adjusted net income exceeded the high end of our guidance for the quarter to reach CNY 1.06 billion. Our strategy of continued expansion in market share while maintaining high quality of services and profitable volume growth is well executed in the third quarter. Revenues increased 34.7% to CNY 4.23 billion, mainly driven by increase in revenues from express delivery services, which increased 23.3% to CNY 3.69 billion as a result of 36.5% volume increase and offset by per parcel price decrease of about 8.1% year-over-year, or CNY 0.17, which was comprised of CNY 0.05 due to decreased in weight per parcel; CNY 0.03 normal subsidy for label usage; and CNY 0.09 for volume incentive. The freight forwarding business we acquired and started consolidating during the fourth quarter of 2017 contributed CNY 291.2 million of revenues. Revenues from sale of accessories was CNY 200 million, mainly consisted of sales of thermal paper used for printing of digital waybills. Total cost of revenues increased 45.1% to CNY 2.91 billion, which includes CNY 282 million in cost associated with the freight forwarding business. Going into further detail of cost of revenue, line-haul transportation cost was CNY 1.35 billion, an increase of 22.7% from the same period last year. As a percentage of revenue, line-haul transportation cost decreased to 32% from 31 – 35.1% last year, driven by lower weight per parcel, increased usage of self-owned vehicles, more efficient high-capacity transport trucks and improved…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Nicky Ge from China Renaissance. Please go ahead.

[Foreign Language] My question is about our fourth quarter guidance. Looking at the guidance, actually, the volume growth has decelerated a lot – a little bit. Just wondering whether we have adjusted our market strategy or are we still targeting 10% outpacing the total market? And looking forward to the 2019, what is our market strategy going forward? And how do I see the market growth of – in next year?

[Foreign Language]

Thank you, Chairman. Let me help translate. There are three questions, so if we may, one by one, elaborate. The first question. Fourth quarter, our guidance, it seems to be – for the entire China market, it seems to be soft. If you look at the third quarter, the price for the entire express delivery industry is declining, which still indicates a pressure or, in other words, competition pressure comes from the growth potential of the industry. So we still believe there are growth potential. However, in the fourth quarter as you also noted from the Postal Bureau, the e-commerce volume does have a downward adjustment. So we are, on one hand, focusing on our strategy to continue to grow our market and at the same time, monitoring what's happening in the marketplace. Our guidance is appropriate at this time, not conservative, neither aggressive. The second question for the total market, are we changing our strategy. Mr. Chairman went into more elaboration on that part of the question. If you look at the overall industry in 2017 to 2018, an estimated CNY 100 million growth, that is a – CNY 1 billion growth, I'm sorry. That's a significant growth and unprecedented. For ZTO we have looked into our past. Our absolute volume growth is consistently increasing year-over-year. For example, 2017, so [Foreign Language], CNY 1.7 billion last year and then CNY 2.2 billion estimated for 2018. And these growth indicated a tremendous opportunity in the marketplace as well as our focus on the following: One, infrastructure development. The way we invest is consistent throughout the past years. We invest in our facility, ensuring that the specific design by our facility would accommodate large capacity transport trucks coming in and out easily. The scarce resources is becoming more of a constraint…

[Foreign Language]

Thank you. Your next question comes from Ronald Keung from Goldman Sachs. Please go ahead.

[Foreign Language] I have two questions, Lai, Huiping. First is about the industry, where we have seen online retail growth decelerating in the past few months but the passive growth has actually held up quite nicely. So glad to hear anything that you're seeing on the ground including ticket size or anything that has contributed to a more healthy parcel growth that we're seeing so far. The second question is could you break down a bit on the ASP this quarter? Like what you've done last quarter about how much was the decline contributed to the weight decline and the incentives, and we'd like to hear about the direct shipment and key accounts, whether those have contributed to the ASP changes.

[Foreign Language]

Let me first translate the first question answered by – for the first question. And then I'll answer the second one. Yes, indeed, if you look at the overall e-commerce that there are downward adjustments. But if we look at the entire industry, commerce in China will continue to grow on a large base, particularly if we look at some of the areas that are not fully developed yet or perhaps the spending power is not completely released yet. For example, the rural area and international. As we mentioned earlier, e-commerce in China, the growth of it is supported greatly by the effectiveness and cost advantage of express delivery businesses. And going forward, it will continue to be the supporter of this growth in China. And we are still optimistic and we remain focused on the longer-term longevity of the entire industry's growth. And then second, Mr. Lai emphasized on the fact that there are factors that are not within our control. So we are focusing more on our own capabilities and building our own capacity and efficiency. If you are able to take a relatively stronger position in competitiveness, then you are able to win at the end. If you consider the fact that we have grown consistently, continue to increase the absolute volume in our history and consistent results in our efficiency gain, based on those, then we have higher confidence in the fact that we will succeed in the long journey. Our focus on profitability as well as customer services are supportive of our entire volume growth and market share gain to get up to a higher level of proficiency and earnings quality. So it's important for us to continue to maintain focus on our own capability as opposed to distracted by potential short-term uncertainties of the…

Thank you. Your next question comes from Eric Zong from Macquarie. Please go ahead.

[Foreign Language] I have two questions. The first question is regarding the parcel pricing trend. So I wonder what's the parcel ASP trend so far in the fourth quarter. And also, I found like in October month the industry parcel ASP declined by 4.5% year-on-year. So on a Q-on-Q basis, have you seen the parcel ASP which is higher than the third quarter? So my second question is regarding on cost. So the unit sorting cost declined by 4% year-on-year. So I feel that China is a little bit below expectation compared with the second quarter, which we saw a 6% year-on-year decline. So I just wonder what's the reason behind this trend.

Thank you, Eric. First of all, if you look at the fourth quarter, generally speaking, the weight per parcel will increase. So the ASP will – naturally will decline, and that's what we are seeing. The price increase that we implemented started in November. So there is a blended effect there but still per parcel-wise, we believe there are pressure because of the weight increase. The sorting facility, let's say a little bit more on that, elaborate a little bit more on that. And indeed, the year-over-year efficiency gain is not as apparent if you just look at the sorting hub cost. There are good reasons behind that for specifically this quarter that we had just experienced. The labor cost, first of all, increased per headcount even though we have a total headcount increase well below the volume increase, as well as the fact that if you think about sorting machine – automation machine implementation, it's a gradual process. There are various segments of the use of the equipment. It's currently, first of all, covering a portion, about 50% or so, of our total sorting hubs, not all of the sorting hubs have installed because comparing to the volume, we believe there is an inflection point where utilizing people is still more cost-effective. As we gradually improve and increase the automation installation, you should see continued efficiency – release in efficiency gain. Sorting hub implementation, as I mentioned earlier, it's – as it crossed the entire process of unloading, sorting and reloading onto the truck will take a good – it will take a process as we retool and recalibrate the destination outputs of all the stations. All these are to be planned and in an overall – from an overall perspective. Looking forward as more volume coming in, the automation machine that we have installed, together with the dynamic weighing machine that's integrated into our automation sorting equipment, will gradually and consistently release efficiency.

Thank you. Your next question comes from Edward Xu from Morgan Stanley. Please go ahead.

[Foreign Language] I've got two questions. First is regarding the ASP trend because Mr. Lai mentioned that in fourth quarter, you are going to be more balanced on the volume growth, market share and the profitability side. So does that mean that the ASP decline will narrow? And what do you expect the overall trend for the industry for present competition over the next six to nine months? That's the first question. Second question is that regarding your new services and products, are you planning to promote some more products that can better differentiate your services rather than pure pricing competition? And what is the progress so far?

[Foreign Language]

Let me translate. Our strategy has been consistent throughout the past year, which is to balance the three factors: volume growth, customer service and satisfaction as well as profitability. So there is no change, and for the third quarter in the fourth quarter, it's the same. With regards to pricing, we think that the action that's taking place – on the price action that's taking place in the marketplace is likely to remain. However, that's not a sustainable – that's not sustainable. In other words, a short-term gain on the market share doesn't help solidify the overall competitiveness of the company. And that is why we have always focused on the balance of the three. Very practically speaking, right now, we set our goal to grow approximately 10 percentage points higher than the market average. Why don't we set it at 20? Why don't we set it higher? We have the capacity, we have the capability. But if we look at all three goals that need to be balanced and that need to be achieved, we believe at a consistent pace, not too much, not too little, in reference to the market managing the pace and focusing on our own internal strength and its growth, that will help us win in the longer term. Consistency and focus is the key. Specifically, for example, in some of the areas, because our volume advantage, we are able to quickly draw in volume, but yet we don't do that. First of all, maintaining a level of services require us to look at our capacity and capability. At the same time, we look at our network partners. Their capability as well as the couriers, their employees, the couriers that are hoping to becoming more profitable and in turn, support the stability of the network,…

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