ZTO Express (Cayman) Inc. (ZTO) Q1 2021 Earnings Report, Transcript and Summary

Good day and welcome to the ZTO Express, Inc. First Quarter 2021 Conference Call. [Operator Instructions] Please note that today’s event is being recorded. I would now like to turn the conference over to Ms. Sophie Li. Ms. Li, the floor is yours, ma’am.

Thank you, operator. Hello, everyone and thank you for joining us today. The company’s results in the Investor Relations presentation were released earlier today and are available on the company’s IR website at irzto.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 in current market and operating conditions and relate to events that will not 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 brief through his prepared remarks in their entirety in Chinese before I translate for him in English. Meisong, please.

Thank you, Meisong. Please let me translate first. Hello, everyone and thank you for joining us today. In the first quarter of 2021, ZTO for field services was CNY4.5 billion, grew our volume 88.5% year-over-year and exceeding the industry average growth rate by 13.5 percentage points. ZTO’s market share expanded by 1.5 percentage points to 20.4% further solidifying our industry leadership. While accelerating an expansion, we maintained service quality to be among the top ramping. For the first quarter, ZTO achieved an adjusted net profit of CNY782 million, which increased 23.1% year-over-year. In the first quarter, the industry experienced rapid growth and the competitive dynamics continue to evolve in an environment of prolonged price decline. Major players of the industry formed diverse profit level lineup, while positively growing its profit, ZTO has made further strides in improving transit efficiency, optimizing network management and enhancing last-mile presence. First, efficiency of the sorting and transportation platform were further improved, where increased investments in self-owned transit facilities in preparation for capacity demand increase in the future. Capital expenditure in the first quarter was CNY2.28 billion. We acquired usage rights to [indiscernible] logistics land and carried out up to 3 years forward planning. Site modification and expansion, aiming to develop smart comprehensive logistics service parts. There are over 10 projects under construction at this time. For transportation, without losing sight to timeliness and cost control, we further optimized the balance between cell phone fleet and third-party vehicle usage to better leverage higher operating efficiency by our own vehicles. With the help of technology and data analysis, we continue to enhance existing rock scheduling and adding new rocks that are more direct in accordance with demand to recalibrate capacity utilization. For sorting operations, while continuing to improve coverage and functional efficiency in automation, we implemented certain center level performance appraisal mechanisms to detail managed shift planning and digitize the performance measures to enhance labor productivity, benefiting from capacity buildup and wider application of technology solutioning. The combined sorting and transportation cost per parcel in the first quarter decreased to 5.2% despite the absence of benefits from ETC waiver policy that lasted from February to May of 2020, which skewed the year-over-year comparison. Secondly, network stability was maintained, which made it possible to promote organizational structure upgrades and capacity development. At the end of the first quarter, the number of outlets in the whole network remained stable with less layering. On one hand, we furthered our great approach of management to empower, assist, rectify and replace where appropriate. On the other hand, we have focused on strengthening direct link to last-mile posts and couriers, promoted courier rapid protection as well as further developed OLED [ph] processing capability. We believe a stable network is the foundation for brand value recognition and competitive strength for our OLEDs [ph]. Thanks to a network that is built on fairness and trust. ZTO achieved high-performance in various categories of quality measures, including complaint rates, [indiscernible] explore and overall public satisfaction ranking in the first quarter. Thirdly, the last-mile presence development has been accelerated. Advantage of our last-mile presence became more apparent. By the end of the first quarter, we owned or operated close to 70,000 last-mile posts, far more than our competitors. At present, with the gradual shift in receiving habits, nearly half of ZTO’s parcels were delivered other than to-door, of which approximately 90% were affected through last-mile posts. Last-mile posts represent great possibility for future development of [indiscernible]. In order to handle the daily parcel volume of 100 million or more, last-mile delivery cost containment hence outlays viability and pricing power, has become one of our most important focuses. In the first quarter, we delivered a set of relatively satisfactory results. Aside from consistent focuses on execution of our existing strategies for our core express delivery operations, we started to pay added attention to maximizing the utilization of our eco resources as well as effective collaboration among our Brazil ecosystem businesses so as to form comprehensive logistics service capabilities. Our goal is to establish differentiated products and services to distinguish ourselves in the mind of our customers and enhance distinctive recognition and awareness of the ZTO brand. We firmly believe that competitive advantage is only meaningful at this synergetic level across comprehensive logistics capabilities. Opportunities are beyond our imagination, such as more expensive service, categories, higher levels of digitized operation and management, brand content investment and resource planning and utilization. We will strive forward with stronger commitments and higher confidence, more solid work and perseverance. Together with our network partner, we will maintain positive momentum, keeping employees a brighter future. Thank you for trusting and supporting us. Now, please allow Mr. Yan to take us through detailed financial results.

Thank you, Chairman Lai. Thank you, Sophie and hello to everyone on the call. As I go through our financials, please note that unless specifically mentioned, all numbers quoted are in RMB, which changes refer to year-over-year comparisons. Detailed analysis of our financial performance, unit economics and cash flow are posted on our website and I will go through some of the key highlights here. In the first quarter, thanks to steady economic recovery and firm implication of our consistent strategies, ZTO grew parcel volume by 88.5% to CNY4.5 billion, outperforming the industry average by 13.5 points. Our leading market share further expanded 1.5 points to 20.4%. Total revenue increased 65.3% to CNY6.5 billion. ASP for the core express delivery business declined by 12.4% or CNY0.18. This is the least amount of drop compared to industry peers, yet we have achieved the most market share gain. The CNY0.18 price decline consisted of approximately CNY0.09 volume incentives used to support our network partners to grow market share and maintain confidence as well as keep the network stable at the same time. There is CNY0.07 decline associated with parcel weight drop. Average weight per parcel declined about 10% to approximately 1.04 kilo. And then there is CNY0.02 decline due to increased use of lower-priced e-way bill, yet it is more environmentally friendly, because it’s a single sheet. The total cost of revenue increased 73.6% to CNY5.4 billion. Overall, unit cost of revenue for the core express delivery business decreased 6.7% or CNY0.08, generally benefited from economies of scale. And more specifically, unit transportation costs increased 3.6% or CNY0.02, mainly due to the combined effects of increased use of more cost efficiently run self-owned high capacity trucks and the absence of favorable ETC toll waiver policy that lasted from February through May last year. Unit sorting costs declined by 17%, or CNY0.07 because of higher level of automation. Gross profit increased 33.9% to CNY1.1 billion. Gross profit margin rate decreased 4 points to 16.9%, which resulted mainly from competitive led ASP decline and per parcel weight decline then partially offset by scale leverage and cost productivity gains. SG&A, excluding share-based compensation, or SBC, increased 25.8% to CNY372 million, mainly due to increased salaries, headquarter facility expenses and depreciation and amortization expense. SG&A cost as a percentage of revenue decreased 1.8 points to 5.8%, given our lean corporate support structure. Income from operations increased 70.1%. Excluding SBC, income from operations increased 38.5% to CNY881 million. Associated margin rate declined 2.6 points, which is narrower than gross margin decline because of positive SG&A leverage and increased other operating income mainly VAT super deduction and government subsidies. Adjusted net income increased 23.1% to CNY782 million. Net income margin rate declined 4.1 points to 12.1%. Operating cash flow increased 168.3% to CNY477 million. CapEx increased 31.3% to CNY2.3 billion as we focus more on building comprehensive logistics services capabilities as we further strengthen our infrastructure in preparation or increasing demand for the core express delivery businesses as well as resource planning for development of our ecosystem. Our annual CapEx would remain at a higher level for the whole year to be around CNY11 billion to CNY13 billion. Turning to business outlook, based on current market condition and operational results, we maintain our annual volume guidance of 35% to 40% year-over-year growth. Our annual parcel volume is estimated to be in the range of CNY22.95 billion to CNY23.8 billion. Such estimates represent management’s current and preliminary view and are subject to change. This concludes our prepared remarks. Operator, please open the line for questions. Thank you.

Yes, ma’am. [Operator Instructions] And the first question we have will come from Thomas Chong of Jefferies.

Thanks management for taking my questions and congratulations on a very solid set of results. My question is about the competitive landscape, given that the market is getting more intense in terms of the price war, I just want to get a sense about how we should think about the trend of the ASP as well as our strength in operational efficiencies and how we think about the unit cost per parcel going forward? And on that front, can management also share our target on the market share in the next 1 to 2 years? Just want to get a sense if there is any chance that we can come in better than previous expectations? Thank you.

Thank you for your question, Thomas. Operator, please allow me to translate for Chairman. Thank you. Thank you, Thomas. In the future 1 to 2 years, the question is about the business trend in the direction as also ASP and cost per parcel. So, I will translate as well supplement answers for your question. First of all, our confidence remains on the growth prospects of Chinese economy and as well as the industry growth for express delivery. The next 1 to 2 years growth will remain mid to high – high to mid-level of growth for the next 2 years for sure. And this is a – with high confidence that we have provided this outlook. With regards to competition, express delivery, the essence of it in terms of competition is about scale and efficiency, in turn, providing better quality of services. ZTO has been in the past consistently focusing on maintaining high level of quality of services, targeted profitability while focusing on gaining market share. And this will not change for the near-term. Infrastructure construction is very important. The strength of the network stability as well as the Network Partners Trust and confidence in the brand will ensure our strategy’s consistent execution. As you have observed, those with scale, with operational efficiency as well as better quality of services, are gaining market share are achieving balanced growth. ZTO’s goal is to focus on our growth rate higher than the industry and our profit expansion healthier. Today, we look at our very stable network base. With that, our confidence remains for our steady growth on our market share. ASP, we believe competition is still there as market dynamics continue to evolve. Cost per parcel is within our own control. And we have implemented, as I previously described, many initiatives for near-term as well as longer term productivity gain as volume continued to increase. So, we are confident in maintaining our goal to achieve market share expansion as well as delivering healthy bottom line while maintaining good quality of services to our consumers and customers.

Thank you.

And next, we have Ronald Keung of Goldman Sachs.

Thank you, Lai-tong, Yan-tong, Sophie. Thank you. Just want to ask on two questions. First is on the competitive landscape again, just how do we see new entrants like J&T given that they have grown very significantly over the past year? Is this industry prone to just players that could have burned money through to grow and scale? And we are very confident with our leading position that even through cash burning, those would not impact – those players will not impact our very solid scale and efficiency in our number one position here? And then a follow-up on that is recently there has been regulations on the EU pricing setting a flow on pricing levels, how do we see this trend ahead with more governments and [indiscernible] local also push through more of these and how do we see these regulations could have any impact or benefit to our business? Thank you.

Thank you, Ronald, for your question. We have consistently believed that scale in efficiency and cost are the key competitive factors to ensure sustainability or continued growth. There are four specific segments for a package to travel from end-to-end, pickup transit, sorting, delivery. The infrastructure as well as scale and cost efficiency is the determining factor or competitive edge. J&T entered into the market with significant capital. And yes, it is indeed a cash burning model as of now. Temporarily, it does created impact to the entire industry. However, we want to point out that if you look into the past, in the industry growth. The smaller ones or those without its own sustained capabilities are all gradually exited have all gradually exited the scene. Future competition starting today or starting the year past has been the scale and cost efficiency in that area. With the top players, about eight of them, representing over 80% of the market. Their volume are in the range of CNY30 million to CNY60 million per day. For those that are running at CNY30 million per day, their profitability is very much under pressure already. So for a model that largely rely on third-party resources where cost and efficiency are less under their own control. This model, we believe, is not sustained. So our assessment is that in the longer term, you must combine capital that is deployed towards infrastructure establishment or development that could allow a model to continue to sustain, continue to grow. And on your second question, the recent EU policies issued by the government. Our view is that if career operators providing services that are below cost for a prolonged period, the revenue of all the players will be largely suppressed, and it’s hard to guarantee quality of services. Currently, there are over 4 million per year staff nationwide, and with an addition of about approximately 200,000 each year when government carries out focus and attention in supervising the market to restore healthy competition. We are welcoming that, and we support that action. It will not only ensure healthy competition but more importantly, as we always have been focusing on in ensuring the last-mile couriers for those who are small entrepreneurs to achieve healthy and high-quality of growth. This regulation issued recently also specifically prohibits price that is below cost. And then that helps narrow the gap between all different players, especially during those competitive regions where production output are more concentrated. So this will allow all the enterprises or businesses to focus more on service quality, network stability and infrastructure development instead of short-term, near-term price driven market share gain. In addition, if we may add, the policy also specifically addressed e-commerce platforms, some of the actions or practices that are restricting for in designation of specific courier operators prohibiting monopolized operations, these are all very positive. So it adds to our further confidence in an improving healthy competitive environment for us to compete for the future.

Thank you so much Meisong and Yan-tong.

Next, we have Tianxiao Hou of TH Capital.

The first question is related to those freelancer deliver guys. There are some issues regarding their insurance and warfare. And what is the company’s thoughts regard – in this regard? That’s number one. Number two, what’s the outlook for the per parcel revenue in the next several quarters from current competition point of view? The third question is related to the new business development. One is time-sensitive parcels and the one is co-chain logistics. In these two fronts, what is the current development? What is outlook for the rest of the year? Thank you.

[Foreign Language]

[Foreign Language]

Thank you for your question. Let me first question regarding the freelancer. Fresh delivery personnel is a very critical part of our business. And because the ZTO is a network partner model, it presented its inherent challenges to ensure the couriers, rights and also interests are well protected. In the past, ZTO has been working hard on implementing many of the initiatives to ensure that part of the equation. For example, we rolled out direct link or direct accounting approach to ensure timely payment to our carriers. Recently, we have at the headquarter level funded a nationwide policy insurance policy to ensure 24/7 protection of our personnel of couriers for any of the unexpected incidents that could harm them either during work or outside of work. We have, in the past, rolled out policies to establish standardized pricing for pickup and delivery to make sure our courier could have the opportunity to receive market price in picking up packages. Where we continue to focus on these areas, we are also in response to government’s focus as well as policies to ensuring freelancer members of the society to continue to have a healthy work environment as well as fair allocation of the payment as well as their basic rights, for example, social rights for to medical, to insurance. And all these are a process that involves not only us at the headquarter but also our network partners. And especially during fierce competition, this work becomes even more important and requires more attention and resources. And we will continue to work on those areas. And your second question relating to essentially competition, the price per parcel, what is the trend? While we cannot specifically identify or point out the time when the price may resume so we are able to provide our view on understanding when – from a qualitative standpoint, the turning point may occur. As we said in the earlier conversation, the competitive advantage lies within the scale, cost efficiency and the quality of services of the entire network. The market dynamics have been evolving and has been continually concentrating. While with the large demand in the Chinese express delivery industry, there is not a possibility for one or two players to serve the entire market. But we do believe the concentration will continue to take place. Enterprise competition will ease off as the market share leadership becomes more apparent. In other words, the bigger will get even bigger, and the smaller or the weaker ones will be still there. However, their growth will be tapering off. And when that time comes, the price will then have an opportunity to resume normalcy and perhaps start to coming back in accordance with CPI or normal price adjustments. Earlier, the government also – we mentioned that the government also have interjected and provided attention in insured discouragement on low price competition, and that is an added confidence to us looking towards the near end of the tunnel type of situation as we can see. The third question relating to our time definite products, we believe competition in the future is not only with – or no longer, we should say, with core Express delivery business. It has to be relying on comprehensive, synergetic competitiveness across the supply chain of logistics services. Our goal is to become a world class leading comprehensive logistics service providers and we have, since 2016, started to build our comprehensive capabilities. Specifically, with regards to our time definite products and co-chain operations, this year, in April, we have opened up time definite products in Shanghai in Hefei with standardized pricing as well as time definite programs. Second quarter, our co-chain business we will establish operation across five major cities, and we have already raised a network of franchisees in those areas. Our fleet program even without a single airplane, have been successful in consolidating demand and matching the best effectively priced, efficiently priced resources or airfreight. In all these, our effort surrounding the brand development in making sure specific definite expectations as well as differentiated product, understanding and recognition are being provided to our consumers. Further, internationally speaking, we have deployed resource planning, including large warehouses or including warehouses and different sizes of packages in weight as well in preparing for expansion internationally in the future. As Chairman said earlier, we will focus on in the next 3 to 5 years in developing differentiated products in altering ZTO’s recognition or ZTO’s value so that it could be differently viewed than the rest of the [indiscernible] currently. And there are many initiatives underway right now. Thank you.

Thank you, Meisong.

Well, at this time, we will conclude our question-and-answer session. I would like to turn the conference call back over to Ms. Sophie Li for any closing remarks. Ma’am?

Thank you, everyone, for joining in the call. On behalf of the entire ZTO management team, we would like to thank you for your interest and your participation today. If you require any further information or have any interest in visiting us in China, please let us know. Thank you for joining us today.

And we thank you, ma’am and also to the rest of the management team for your time today. Again, the conference call is now concluded. At this time, you may disconnect your lines. Thank you. Take care and have a great day, everyone.