Good evening and welcome to the ZTO First Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ms. Sophie Li. 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 the 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 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 the 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 statements as a result of any 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.

Thank you, Lai. Now please let me translate for you. Hello everyone and thank you for joining our call today. In the first quarter of 2019 ZTO's parcel volume was 2.26 billion and we generated RMB 970 million adjusted net income. Parcel volume grew 41.6% which was 19 percentage points faster than the industry average growth. We maintained our leadership position in China's express delivery industry with 18.6% market share at the end of the quarter which increased 2.5 percentage points over the same period of last year. During the first quarter, China's express delivery industry maintained a steady growth. We initiated a network wide volume incentivizing metrics which was straightforward and fair leading to better equipment [ph] of our first line outlet to win volume and promote tighter connections as well as alignment, interest among ZTO outlets and our couriers. The results improved which is five couriers in turn draw higher volume increase. Meanwhile, we continue to reduce the line haul transportation and sorting hub costs through effective cost control and the economy of deal leverage which helped us to offset the impact of subsidies necessary to fend off competition and achieve steady growth in operating profit in the first quarter. ZTO has always focused on being the best we can with clear objectives and discipline. The strategic growth in the execution plan [indiscernible] at the beginning of the year, were well implemented in the first quarter. As we grew volume rapidly we're paying more attention to quality of services. During the first quarter ZTO's overall customer satisfaction was once again ranked first [indiscernible] our peers. More and more customers are recognizing ZTO's strength, value and they are selecting services by ZTO. In developing our last mile capabilities we actively collaborated with Cainiao [ph] to rapidly build out the…

Thank you, Sophie. Good morning everyone. Thank you for joining our call. As a reference to the section of this call please refer to the financial details that we posted on our website in addition to our standard presentation. First section financial performance. We will go over financial performance in totals before diving into more detail on unit economics. First, to reiterate, average industry growth was 22.5% in the first quarter. ZTO's was 41.6% exceeding average by 19.1 percentage points. We gained market share compared to last year by 2.5 percentage points to reach 18.6%. With this backdrop, let's now go into line items. First, revenues. Revenues excluding our COE business was RMB 4.28 billion an increase of 31.8%. [Indiscernible] revenues were RMB 544 million, an increase of 66.1% mainly driven by a 99% parcel volume growth. Next, cost of goods of operations. All key costs of revenue grew at a rate slower than the volume growth which demonstrated scale, leverage and efficiency gain. First, line-haul transportation cost was RMB 1.59 billion and increase of 34.7%. Cost of self-owned trucks as a percentage of total transportation cost increased from 53.4% to 59.8% year-over-year as the usage of self-owned and more efficient high capacity trailer trucks increased. The number of self-owned trucks and high capacity trailer trucks increased to 4,850 and 3000 respectively by the end of the first quarter 2019. Two, sorting hub operating cost was RMB 891 million an increase of 29.8% which was less than the 41% increase in the volume, demonstrating again effective cost productivity gain. Next, gross profit. Gross profit margins excluding our COE business was 29.3% compared to 31.5% as of first quarter last year. The decrease in gross profit margin was a net result of parcel volume growth and continued cost productivity gain offset…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question today comes from Baoying Zhai with Citi. Please go ahead.

So first is on ASP, actual ASP is better than expected and I can see from the financial details we see the [indiscernible] that's risen and incentive data increase, actually was increased by 16 cents, so how is the outlook for this two parts going into the rest of 2019? And we also noticed there is the low decreased policy this has affected timing this year for ZTO, particularly it is always [indiscernible] on the balance between the trucks and delivery [indiscernible] this will hurt the delivery how it automates on net basis, so how do late back balance and how this policy to be more effective in market share grabbing? Second question is on cost, actually first quarter cost reduction is back to trucks and is much better than expected, especially on the transportation cost, the loading rate already reached to 90%, how did we achieve that? And I'll be going to that after cost reduction guidance, costs were only guided 5% unit cost reduction at the beginning of the year about the first quarter was a good start and it may be better than this? And third question on SBC, SBC was huge in the first quarter of this year what was the reason for that and how should we forecast going forward? Thanks.

Lai?

First let me translate Chairman's answer first. He commented that the fact that totally SBC did decline and is driven by the incremental incentives and in a competition environment we find that it is still effective to use the ASP, the pricing subsidies and in this quarter we did increase relatively compared to the previous because of the heating competition. And to your question following about the weight, the weight yes, increased by 2 cents to our ASP. We have done some analysis and we've found that without any proactive policy in sight, we are actually noticing the packaging of packages being more standardized and the packaging are heavier. It is actually good in one way because standardized packaging allow us to process automation more effectively. Odd shaped packages actually could not get processed well on automated machines. As a trend we believe the weight increases would not be significant because if the driver simply the packaging, certainly as the percentage of the packaging became more standardized the will go up a little bit, but as of current in the near term we don’t expect the impact to be significant. Number two, the policy change in during May timeframe, we plan to – this is really our intention is to better balance the profitability across the entire network by adjusting our last mile delivery fees and it actually empowers our network operators to be more incentivized to gain market share locally. The result is that our front line couriers actually are able to make more money in a sense that the volume has increased, the overall pickup are not just for passive e-commerce packages, but more so for including non-e-commerce packages. And despite the adjustment there was no decline in the last mile fees. Our last mile delivery fees are…

[Foreign Language]

So the question was, what is the thinking around incentive subsidies to volume increase and then Chairman answered that, one the main consideration surrounding the volume incentive metrics is the volume. If volume continued to increase because of the structure of our incentive metrics, the over the total amount of incentives will increase because our goal is to maintain existing volume and stimulate incremental and if the volume continues to increase which means the incrementals are increased and so therefore our subsidies will increase as a total amount. However we should also consider the fact that the volume brings in not only market share but also profitability. ZTO is very consistent in bringing in effective and profitable volume. So you should expect cost increase yes, but also our overall margin and profitability continued to expand.

Thank you.

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

Thank you, management. I have two questions, firstly one issue about management's authority in achieving volume growth and the volume guidance or the profit guidance based on the first quarter trends you have delivered on both and actually had over delivered on profit based on the year-on-year trend which is higher than the full-year guidance. Well, given that buffer how are we planning to strategize ourselves for the rest of the second, third and fourth quarter and could you share some trends in the first April and May whether the landscape has done more competitive versus the first quarter? And my second question is about national [ph] fees and you only just mentioned we have one of the highest national fees in the industry so I would like to hear are we around 1.6, 1.7 per delivery or is there any number that you could share? Thank you.

Thank you for your question. I will just take the questions. In our first quarter we have communicated that the fact that's gaining market share is important, because there are factors impacting our financial performances is volume. So volume, if you were to ask us to pick a priority volume is our first priority. However, again let's reiterate the fact that we did not bring in non-effective of volumes that are not going to generate profit overall for us and the network. And looking at the second quarter we do see that the competition remains and the April numbers are out, the average industry growth is still able and healthy. So we will maintain our strategy in focusing on prioritizing the volume balance with approach to gain further profit growth as well as maintain high quality of services. The second question relates to the last mile. The last mile fee you've asked what is the average rate for the total tons up, we are around 15 to 20 cents on the average higher and this quarter is about the same.

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

Thank you. Let me just translate my questions. So first, I would like to get any updates on the numbers. For example, the ratio of the breakdown for the revenue from Alibaba, Pinduoduo, JD [ph] et cetera? And the second is that could you share with us how much of the volume handled by the automation and also what's the percentage of the volume for the direct operated trucking routes? And the second quarter is regarding the tax, because we learn that the government has reduced VAT tax for the logistic industry, so can you quantify the impact, especially any impact there for the first quarter? And the final question is regarding your volume, because we understand that in previous year's first quarter usually the volume growth on a year-on-year basis was very high and this year it is 41.6% which is very high as well. So could you give us more guidance on the full year target? Thank you.

Okay, now let me explain in English. The percentage of packages from Alibaba, Pinduoduo and Taobao is a percentage of ZTO's is 67% for this quarter. Pinduoduo is around 18%. The second question relating to the number of automation, as we talked about earlier there is total about 130 sets of automotive sorting equipment in place. They process over 63% of our total packages and increased from 53% from last year. Our Chairman reiterates the fact that we have installed more of the bulky parcel process equipments this year. It is also integrated with the dynamic weighing machine. The next question relating to the VAT that you raised, first of all we have been very compliant, relatively more compliant than our network partners. The VAT rate that we do that is applicable to us has not really changed significantly. So the impact of this April's VAT rate reduction has very minimum impact on our business. Regarding our guidance on the overall volume growth, we have – I'll come back to the direct route question. The overall growth is considered at expected to be at 35% to 40% and although it has continued to be above at least 15 percentage points of the industry average and we are confident that we are able to achieve that or surpass that. Now a little bit more elaboration on the direct lines. The volume increase is really the main driver and we - our network needed to be altering as the volume comes in. What we have seen there, because of volume increases the total number of routes that are running directly from destination to – from origination to destination does have slight increase. And in the future as volume continued to increase we will have more significant number of direct runs. As we talked earlier, the load rate is already achieved over 90% which driven by higher volume increases we will need to, one establish more routes and two, opening up more direct routes so that at the end the number of sorting times will reduce and further improve our delivery efficiency. I hope that answers all your questions, Edward.

Yes, thank you.

Thank you. Your next question comes from Melissa Chen with China Renaissance. Please go ahead.

Hey, good morning management. I have two questions. I will translate for myself. So I have two questions, the first question is on the macro impact on the industry. So we noticed the volume growth for April is around 31% which is accelerating from the Q1. So I am wondering like management explain this number and whether we would achieve like 50% of upper industry average? And the second question is on the CapEx. So if you spend more money on Q2 and Q3 you need to only spend RMB 1 million in one Q and will that provide more costs say before Q4? Thank you.

So I'll translate. Yes, indeed for April average increments for the industry is over 31% and ZTO's strategy is to outperform by at least 15 percentage points in our performance and our current view is in accordance with that strategy and we are confident that we will be able to deliver on our strategy. The second question relating to the CapEx, the numbers that we have reported is on a cash basis first of all. So our overall goal is to still to have the plan around RMB 6 billion to RMB 8 billion for the full year. Now if I may add, the acquisition of land will continue to provide us cost advantage because the rental cost increases much faster and more significant as well as the fact that resources are becoming more and more scarce. So we will continue to focus on securing land, resources, building sorting facilities where it is necessary and spending goal is RMB 6 billion to RMB 8 billion as of current. Now because of the scarcity there might a shortage of smaller parcels, so we are currently looking at larger parcels which will cost significantly higher amount in investment and then we should see in the second and the third quarter this standing amount increase.

Got you, thank you, so much.

Thank you, Melissa.

Thank you. [Operator Instructions] Your next question comes from Kelvin Wong with JP Morgan. Please go ahead.

[Foreign Language]

Thank you, Kelvin for your question. Yes, we do believe that the competition between Alibaba and Pinduoduo are intensifying. However, ZTO is an open platform. We treat everybody equally and our focus is to grow our overall volumes. The numbers that we provided earlier, 57% on Alibaba and 18% on Pinduoduo is the results of our fair and equal policy. Two, you've asked the proportion of CapEx spending, yes that hasn’t changed as of now, around 65% to 70% will go towards land acquisitions, 15% to 20% toward automation and then the remaining 10% to 15% to trucks and improve our high-capacity transportation capabilities.

Thank you.

Thank you.

Thank you. Your next question comes from Xin Yang with CICC. Please go ahead. Sorry, his line has just disconnected. The next question comes from Trey Bong [ph] with TH Capital. Please go ahead. Trey Bong are you there? We will then go to the next question is from Xin Yang with CICC. Please go ahead.

So I will do translation for myself. First question is regarding the competition, what is your view about the current competitive landscape compare to two years ago especially? And the second question is regarding the timely, the average time that it takes for the total delivery time, what is the average delivery time for ZTO now and what is renting? Thank you.

Okay, so let me translate the answer. The Chairman says this is our view and it has been consistently our view for the past over the years that the Chinese impact rest of the industry has received great support of the growth of the economy and we are confident that growth in the future will be also very promising. The volume increments every year for the last year and this year was typically in the past taking more than three or four years to achieve what we have experienced within one year and then that is a good indication of the future growth is prospects is very good. And so, ZTO is focusing on our own capabilities in order to meet that demand. So in the past few years we've continuously invested in our overall transit and sorting capabilities. This current quarter policy that we have issued are aiming towards balancing the pickup and the delivery capabilities so that we could have our front end and frontline incentives reaching not only delivery but also pickup, so that the pickup and the delivery ratio will gradually move towards a balance typically in some of those regions that are not with concentrated originating packages. The overall view is, when there is competition, there will be improvements and development in capabilities, in efficiencies. So our view is very positive and proactive in front of the competition. From the sorting hub to sorting hub average transit or turnaround time is 20 hours and it has improved by one to two hours.

Next question please operator?

Thank you. We are showing no further questions at this time. This concludes our questions and answer session. I would like to turn the conference back over to Sophie for any closing remarks.

Okay, thank you everyone for joining us this morning. If you have any question or comments or would like to visit us in China, please don’t hesitate to reach out to us and this concludes the call. Thank you.