Good day and welcome to the ZTO Express second quarter financial results 2020 conference call and webcast. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. We ask that all participants limit their questions to two per person and if you have any further questions you will need to rejoin the queue. Please note, this event is being recorded. I would now like to turn the conference over to Sophie Li, IR Director, to read the safe harbor. Please go ahead, Sophie.

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 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 will 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 statements 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.

[FOREIGN LANGUAGE] Thank you Meisong. Now please allow me to translate. Hello to everyone and thank you for joining us for today's earnings call. As the COVID-19 transmission further stabilize, China experienced a healthy rebound in economic activities and a strong rally in domestic consumption during the second quarter of 2020. As such, China express delivery industry generated 5.64 billion incremental parcels and grew 36.7% year-over-year, which is the highest level of quarterly volume growth since 2017. As the industry leader, ZTO achieved a total of 4.6 billion parcels in the second quarter representing 47.9% year-over-year growth and we expanded our leading market share to 21.5%. Meanwhile, we were able to maintain an improvement trend on quality of services and customer satisfaction while achieving high-volume growth. During the second quarter, we maintained our key strategy which is to accelerate volume growth, increase our lead and continue expanding our market share. When price competition intensified, we made necessary modifications to our network policies to boost the level intensive and show up collaboration between pickup and delivery allies with fee balancing mechanism. In addition, we granted low or zero interest loans to selected network partners through ZTO Finance to provide cash flow relief. Amidst a competitive pressure withstood by our network partners to face challenges and look to the future, our network remained stable. Meanwhile, we furthered our effort to improve cost of productivity. Subsequent to the first quarter investment, we brought in roughly another 2,100 additional high-capacity vehicles, opened up by 500 new line-haul route and greatly reduced the use of third-party logistics services during the second quarter. The increased use of automation equipment and continuous functional upgrades allowed us to less dependent to labor. New initiatives on improving timeliness such as process breakdown and separate monitoring enhanced the certainty and…

Thank you Chairman Lai and thank you Sophie. Hello to everyone on the call. As I go through our financial results, please note that unless specifically noted, all numbers quoted are in RMB and percentages changes refers to year-over-year comparisons. Detailed analysis of our financial performance, unit economics and cash flow are posted on our website and I will highlight some of the key points here. Benefited from a strong rebound in e-commerce-driven consumption after the COVID-19 situation has been significantly contained within China, ZTO delivered a strong volume growth in the second quarter. Our parcel volume grew 47.9% to 4.6 billion and our market share expanded by 1.6 points to reach 21.5%. Total revenues increased by 18% to RMB6.4 billion. For core express delivery businesses, the ASP declined by RMB0.34 or 20.9% for the quarter, better than the industry peers. It included RMB0.28 volume incentives as added support to our network partners in order to maintain and protect market share as well as keeping our network stable, RMB0.02 related to increased adoption of single sheet digital waybill and RMB0.02 decline due to parcel weight drop. Gross profit of RMB1.8 billion, which was relatively flat from last year. Gross profit margin decreased five points to 27.6% as a combined result of volume increase, unit price decline, as previously stated and cost productivity gain. Unit transportation costs declined 20.4% or RMB0.12 to RMB0.43, primarily due to increased number of self-owned high capacity trailer trucks. The decrease in diesel price and national toll-free policy that ended nearly towards the end of the May also contributed to cost decreases. Unit sorting costs declined 11.1% to RMB0.04 to RMB0.27 as a greater number of automated sorting equipment were placed in use, allowing a higher proportion of parcels to be processed automatically instead of manually.…

[Operator Instructions]. Your first question comes from Baoying Zhai with Citi. Please go ahead.

[Foreign Language] Two questions. The first question is regarding the second quarter KA business. We actually noticed sudden acceleration of the KA volume growth in second quarter, which also leads to the KA cost increase a lot in second quarter. What's the reasons behind, it is as intentional to do the KA business in second quarter? Or it's due to the pandemic stimulation which helped more online penetration of our KA clients? The second question is regarding the guidance. May I ask Huiping Yan to provide more breakdown into the implied ASP assumption and the cost reduction assumption in the second half? And also I want to touch on the intention behind the guidance. Actually we can see the first half, our pricing strategy was executed very well until some external disruption or is supposed to see a very good opportunity to clear the landscape among Tongda players. But now, we are going to see more complex competition not only from Tongda players but also non-Tongda players will you still insist our first half strategy was the reason behind it?

Thank you for your question. Let me address the KA question then I will turn it over to Chairman Lai for the pricing strategy. KA increase, yes, this quarter we did see surge in the KA and this is partly proactive and partly not proactive. The decline in the gross margin is in line with the margin activity or margin movement with the express core business other than KA.

[FOREIGN LANGUAGE] Okay. Chairman says, first of all our strategy remains. We will focus on prioritizing on expanding our market share and increased our lead. And we will further leverage our advantages to maintain the discipline. While we did see in the second quarter the price decline more severely as expected, we always believe to ensure our network partners maintain their level of profitability and also our couriers achieve highest pay in the market and our team maintains confidence. These are important things for us to uphold. Short term gains are easily obtained. But we are focusing more on all parties' interest and we want to be able to allow and ensure our network partners are better off than our competitive peers' network partners. And then we also will be insistent upon making profit on all aspects throughout the whole process of a particular package. So we don't bring in ineffective volumes, as we stated before. With all these thinking, if I may supplement that we still see in the third quarter, the price competition persisted and to be prepared for implementing the strategies that Chairman Lai just described, we lowered our profit target to be ready and also it is a level. It maintains a level comparable to our last year's level for the last three quarters. If you notice that the first quarter COVID-19 impact was severe to the business, but the last three quarters looking forward, we are confident in achieving the targeted level of profit and further accelerate the growth on our market share. If I further may add, looking beyond this year or looking beyond the next few quarters is more of our focus because we do look forward to the long term prospect. The 300 million daily volume may arrive sooner than we expect. So we are focusing on our ability to build capacity to be ready and our capacity, our capability is our advantage so that we can gain more market share and the pricing power will follow.

[Foreign Language] So may I follow-up on the cost reduction guidance for the next few quarters.

Thank you for your question. We have always been focusing on gaining productivity. As volume increases, we will naturally achieve the scale leverage, but further in addition to that, we will continue to innovate, continue to modify and improve our network structure, as Chairman had mentioned in his prepared remarks. Delayering and also streamlining our overall network structure will allow us to reduce costs, improve efficiency and timeliness of our overall product. So the outlook for our productivity gain on transportation and our sorting are going to be expected.

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

Thank you. Let me ask in Chinese and I will translate in English. [Foreign Language] Now I will translate. So it seems the very high efficiency of how the ASP cuts versus the market share gain that you achieved in the second quarter and our profit guidance roughly suggests flat to slightly up in profit growth, as you said, versus last year. So should we interpret this strategy as not only in the second half but actually for the next one or two years as well until we achieve a scale that we are happy with, which you mentioned before, the 25% market share in two years time? So when I hear about how do we think about absolute net profit? Any requirements there that we want to achieve? Or we should, given the high efficiency, we should continue this strategy until we reach scalable, at least the 25% scale that you talked about? Thank you.

[FOREIGN LANGUAGE] Okay. So let me translate. First of all, we believe the express delivery industry has still a long way to go. It is a marathon. The concentration of the market share will continue to concentrate and the stronger will get stronger and the bigger will get bigger. The Chinese market industry cannot contain that many players. Our business, particularly our network, is the most stable. And despite the competition, our price compared to our peers still has premium and in fact we believe in certain areas the price differential is expanding. That is to say that our business is more preferred compared to our other competitive peers. In the meantime, to anticipate volume increases, we are preparing on many aspects as following. One, continue to and if not increasing our investment in infrastructure, not only to improve our facility capabilities, but also help and empower our network partners through financing support to help them invest in facilities as well as automation. The overall effort in developing differentiated products, as we mentioned before, including time-definite products or individualized on-demand pickup and delivery as well as coaching. All these, as we mentioned, will help us expand our leadership and ensure our last-mile network partners as well as our couriers achieve the highest probability and overall capability as well as stability. Looking to the future, as you asked Ronald, to reach 25% price competition. Around 2020, our goal is to reach 25%, price competition may not be necessary. As the Chairman said, even without price competition, our market share will continue to expand because of our core capability of our better managed and the higher operational efficiencies, as well as the entire network with better quality of earnings. So with that we believe, again, our focus is on the future is to achieve and one of the items, if I may go back to, is that, Chairman described further what it means to delayer. In the past, we won and we surpassed our competitors through connection or better efficiency connecting our transit supercenters. And gradually throughout the past and going forward, we developed capabilities to connect origination sorting center to destination outlets. Going forward, we would further supplement the capability of our network, including connecting between the origination outlet and destination outlets. That is what we said, reducing the frequency of sortation that will further expand our capability so that we could bring in more volume, process it better and deliver it faster and better.

Thank you. Meisong, thank you.

[Operator Instructions].Your next question comes from [indiscernible] with GTJA Securities. Please go ahead.

[Foreign Language] My question is mainly about your last-mile. The first one is about short term. What are the proportions of our different last-mile solutions in the second quarter? Did they change a lot? And second question is about long term last-mile price differential. Because in recent years, last-mile fee has taken more and more proportion in our total cost and cost of different last-mile solutions were allowed. So I was wondering, in the future is it possible to have different prices for different last-mile solutions? Thank you.

Thank you for your question. So far, the last-mile investment and development has been benefiting us in handling greater amount of last-mile delivery as well as reducing cost for our network partners. Again, the cost of delivery up to the last-mile belongs to our network partners. And the volume is somewhere between 40% to 45% of the last-mile packages now being handled by non-door-to-door delivery. And you talked about potential differentiation or the last-mile cost differentiation. And here are some of the thoughts. Last-mile is a key fee segment of our business in terms of the four segments. So the impact of the pickup and delivery being the two ends. The delivery cost going forward with volume increase, you would anticipate it increased if without any of the alternative methods such as drop-off box or post. So we believe, first of all to address this increase in cost, we started early in 2018, towards the end of 2018, encouraging our network partners to invest in the last-mile capability because last-mile resources are scarce and to ensure our presence there will help our network partners to secure the lowest cost of delivery in the future. Now another second layer which probably is more related to your question is that because of our last-mile presence and our connectivity with consumers, with customers, our couriers are able to achieve a better connection and hence bring about potential commercial opportunities. And that is part of what we are currently investing, researching and design and implementing so that we could help our network partners to one, ease the initial investment pressure when they first start the last-mile post operations and then two, allowing them to gradually ramp up their capabilities of commercial operations. I hope that answers your question.

Thank you. Your next question is a follow-up question from Baoying Zhai with Citi. Please go ahead.

[Foreign Language] So my question is regarding the payment to delivery guys because Meisong emphasized that ZTO actually paid much better to their delivery guys compared with peers to ensure the stability of network. I actually noticed there was a program that's called like the direct payment of the deliveries to last-mile delivery guys. Could you please share more details on this program and that target of the program and how is the feedback so far? Thanks.

[FOREIGN LANGUAGE] The design thinking behind this model of directly connecting with our courier is as such. It's part of our delayering initiatives. As we mentioned before, if I may, that we have started to develop the standard pickup and delivery fee schedule in 2018 and when we are able to make it transparent between what we pay to the network partners and what they pay to the couriers because we think the business, the platform, the transit and the sortation is strong but most importantly the package needs to be delivered and that's the touch point with our consumers. So therefore, our courier holds a very important key, facing customer. So to help them develop from an employee or may be a just a little entrepreneur to truly motivated to work for their own because they are able to achieve more market-driven as well as a fair pay that is passed through to them through the network partners. And so far what we have seen is that our network partners responded quite well at to this model. In fact they believe their couriers are more stable, are more focused on the quality of services to their customers. So therefore they are bringing in more volumes and bringing in more customers. So it's a win-win for all the parties involved. So far around 40% of our network partners have signed up and started to implement this model. And our goal is to achieve at least 50%. But by looking at the current trend or current responses, we believe we may exceed that 50% coverage goal that we set before.

Thank you. Your next question is a follow-up question from [indiscernible] with GTJA Securities. Please go ahead.

[Foreign Language] My question is about the capital expenditure. The first one is that we noticed that the capital expenditure in the second quarter increased about more than 170%. And will it continue in the second half of the year? And the second question is about the capital expenditure of our network partners. So for the capital expenditure, our network partners have the same importance with ourselves. So do you have a rough estimate for the proportion of capital expenditure for ourselves and our network partners? Thank you.

Thank you for your question. Indeed, as you stated, this quarter, the past second quarter, we acquired and placed in service a lot of the increment of trucks and vehicles that we invested is around 2,100 or 2,200. So this is one-time. But yes, we believe investment in the infrastructure is one of our key strategies to build capacity in anticipation of the high-volume by incoming volume. The overall budget for CapEx spending is around RMB7 billion for this year. We think that is somewhere close to what we had previously talked about, RMB6 billion to RMB8 billion range. The investment by our network partners, yes, indeed are increasing. As we know, we invest in our own capacity, but because it is pickup, transit, sorting and delivery, all four aspects needs to be coordinated and in sync. So a lot of our network partners are expanding their capabilities as well. Some of the figures I could provide you is that we have anticipated over 100 automation lines to be installed by our network partners. And so far, we have already seen the network partners invested over 50 of that. So towards the high season, we think the investment pace will pickup even further. Some of our larger network partners also invest in land and this is a long term investment, which again demonstrated their belief and the confidence in the future of the business together with us.

Thank you. This concludes our conference for today. I would like to turn the conference back to the company for any closing remarks.

Thanks again for everyone joining us for today's call. Any further questions, we welcome and we are looking forward to talk with you soon.