ZTO Express (Cayman) Inc
HKEX:2057
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ZTO Express (Cayman) Inc
Earnings Call Analysis
Q1-2024 Analysis
ZTO Express (Cayman) Inc
ZTO Express continued to maintain its industry-leading position with a focus on service quality and profitable growth. In the first quarter of 2024, the company saw a 14% year-over-year increase in parcel volume to 7.7 billion. Despite this rise in volume, the key highlight was a 16% year-on-year increase in adjusted net profit, which reached RMB 2.22 billion.
The total revenue for ZTO increased by 10.9%, hitting RMB 10 billion. The growth was propelled by a 15.8% increase in adjusted net income, reaching RMB 2.2 billion. The company achieved significant cost efficiencies; overall unit cost for core express delivery business decreased by 5.3%, characterized by a 7% decrease in line-haul transportation costs per parcel and a 5.4% reduction in unit sorting costs. Consequently, gross profit saw a 19% increase, nudging the gross profit margin rate up by 2 points to 30.1%.
In response to the shift towards lower-priced e-commerce parcels driven by frequent promotions, ZTO recalibrated its strategy to focus more on service quality. This strategic pivot is aimed at balancing service quality, profitability, and scale. The market share for ZTO's parcel volume slightly contracted by 1.9 percentage points in the first quarter compared to the previous year, yet the company's earnings widened compared to industry peers.
Looking ahead, ZTO estimates overall industry growth to range between 15% to 20% for the year. The company expects its own parcel volume for 2024 to be in the range of RMB 34.7 billion to RMB 35.64 billion, representing a growth of 15% to 18%. The focus remains on delivering quality service and developing diversified products, which the company believes will enhance its brand value and recognition.
Operational efficiency gains were highlighted by a drop in overall unit costs by RMB 0.06, attributed to enhanced resource utilization and better route planning. The sorting cost per parcel reduced by 5.4% to RMB 0.30 due to continued improvements in labor and automation productivity. The emphasis on cost efficiency is complemented by strategic investments, with total capital expenditure anticipated to remain below RMB 6 billion annually.
One of the key highlights of the quarter was the robust 40% year-over-year growth in retail parcel volume. Initiatives to boost higher-value parcels included enhancing courier efficiency and implementing machinery to facilitate quicker deliveries. This resulted in a daily average of 5 million parcels, of which 3 million were proprietary and the remainder comprised reverse logistics.
ZTO maintained a balanced approach amidst fierce price competition. The strategic focus was on quality service enhancement, leveraging digitalization and data analytics to improve process management and resource utilization. The company believes that balanced growth across service quality, profitability, and volume is key to sustaining long-term competitive advantage and market presence.
ZTO has been actively expanding its cross-border logistics services in regions like Southeast Asia and Africa. The recent rebound in the international business, driven by standardized market pricing and the expansion of new specialty line services, indicates promising growth potential. Future strategies include further development of international individualized services while maintaining stringent cost control measures.
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Good day, and welcome to the ZTO Express First Quarter 2021 financial results conference call. [Operator Instructions] I would now like to turn the conference over to Sophie Li, Head of Capital Markets. Please go ahead.
Thank you, operator. Hello, everyone, and thank you for joining us today. The company's results and the Investor Relations presentation released earlier today and 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 has been 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 intent or otherwise, except as required under law. It is now my pleasure to introduce Mr. Meisong Lai. Mr. Lai will grace through his prepared remarks in their entirety in Chinese before I translate for him in English.
[Interpreted] Hello, everyone. Thank you for joining today's conference call. In the third quarter of 2024, ZTO maintained its industry-leading service quality ranking with a parcel volume of RMB 7.7 billion, which grew 14% year-over-year, we achieved an adjusted net profit of RMB 2.22 billion, representing a year-on-year increase of 16%. In the first quarter of this year, parcel volume of the express delivery industry increased by 25.2% over last year, far exceeded expectations. The booming development with frequent promotions by new live streaming e-commerce and the social network retailing helped stimulate online consumption and fuel the growth of express delivery volumes. On the other hand, it also contributed to an increase in the proportion of low-priced e-commerce parcels. We firmly believe that the ultimate purpose of a business is to create value. ZTO insisted on healthy and sustainable growth and total net growth on profitable parcel volume on the premise of base level volume necessary for scale leverage. In the first quarter, our market share contracted by 1.9% points compared to last year. However, our leading level of earnings among industry peers further widened. ZTO's consistent strategy is to maintain balance in three aspects of growth, including service quality, profitability and scale. At the beginning of 2024, we shifted our focus to service quality. While maintaining a healthy level of volume and achieving optimal profit, we placed more attention and resources on developing differentiated products and services to meet the diverse and personalized needs of customers, which will enhance ZTO's brand awareness and recognition. In the first quarter, we further improved our leading position amongst [indiscernible] including end-to-end [indiscernible]. The responsiveness of to door and on-demand service capability of last mile have improved and the increase in reverse and retail parcel significantly surpassed overall market volume growth. While proactively addressing the structural shift in consumption and express delivery price competition, we focused on our own expanded higher value customer base, increased the proportion of retail parcels and enhanced the revenue structure. In the first quarter, our core Express ASP decreased to $0.04 year-on-year, which was significantly lower than our industry. Thanks to further implementation of lean management initiatives, our combined sorting and transportation costs per parcel decreased by $0.06 compared to last year. And in combination with a stable corporate cost structure, both profit per parcel and total profit have increased.Entering into the second quarter, the industry volume demonstrated strong growth momentum. Meanwhile, price competition remains fierce, particularly in major regions. ZTO remained firm on our strategic focus and execution surrounding the following main tasks: First, improved transit efficiency, taking innovative approach towards the mature and established operating framework, rely on digitization and data analytics to drive process management in the problem solving, focus on safety production, time guarantee and resource utilization throughout the entire chain to improve quality and efficiency and reduce sorting frequency. Second, enhanced product mix, diversify and enrich express delivery services, increase market penetration of distinct products, such as ZTO [Hubei]. Synergistically leverage ZTO Logistics ecological resources, develop capabilities for comprehensive supply chain management, refined differentiated products and services in order to increase brand awareness and recognition. Third, effectively address press competition. Stay tuned into market intelligence and take clear account of our own resources, improve precision of pricing policy to become more kit-specific as well as fair and transparent. Fourth, strengthen last mile presence, drive firm implementation of last mile profit sharing strategy and increase the intake of retail parcels, increase direct linkage between sorting center and last but not least plus career. Bringing up delivery personnel to concentrate our servicing last mile customers, improved capabilities and cost competitiveness of last mile posts and offer solutions to serve non-ZTO volumes in term promote healthy development of the industry. Introducing commercial opportunities to existing express pick up and delivery traffic so as to enhance last mile economics. Fifth, in cover franchisee partners, improve communication, unified thinking out of a kit balance between long-term and short-term interest, protect the rise and interest of all this and careers, ensure fairness of all of network policies, develop useful technology tools to help improve visibility to operational data as well as convenience to conduct a day to day. The shift from quantity driven to growth in both quantity and quality for China's express delivery industry is inevitable. We have modified our strategic focus to prioritize service quality. The goal is to build new engines of growth and innovate greater competitive advantages with which to forge strong mode for ZTO's longevity. Standing at the turning point of industry transformation, everyone under the ZTO brand, including network partners and couriers will work together to maintain aspiration and confident, shore-up competitive strength and ongoing relevance. Through our comprehensive end-to-end capabilities and leadership role with inclusiveness, we intend to promote healthy competition and growth of the industry. Maximize last mile resource utilization, synergize common interest, hence, creating value for industry participants, investors and ultimately the society. Now let's hear from our CFO, Ms. Yan about our financial results and targets.
Thank you, Chairman Lai, and thank you, Sophie. Hello to everyone on the call. As I go through our financials, please note that unless specifically mentioned, all numbers quoted are in RMB and percentage changes refer to year-over-year comparisons. Detailed financial information, including unit economics and cash flow are posted on our website, and I'll go through some of the highlights here. In the first quarter, while we paid more attention to quality of services and brand value improvements, we adhered to the principle of profitable growth and achieved a 15.8% increase in adjusted net income to reach RMB 2.2 billion. Our parcel volume grew 13.9% to RMB 7.2 billion, representing a market share of 19.3%, which decreased 1.9 points compared to the first quarter of last year. An increase in the proportional share of lower-priced parcel driven by frequent and deep discounts offered by e-commerce platform, including live streaming and social network retailing that stimulated consumption prompted us to recalibrate effort and resource allocation between volume and profit. We limited the amount of incremental volume incentives for the quarter and the ASP of our core express delivery business decreased 2.5% or RMB0.04, which is well below the volume-weighted average ASP decrease of about RMB0.20 for the top four Tongda players. Our total revenue increased 10.9% to RMB 10.0 billion. Total cost of revenue was RMB 7 billion, which increased 7.7%. Overall unit cost for the core express delivery business decreased 5.3% or RMB0.06. Specifically, line-haul transportation costs per parcel decreased 7% to RMB0.47, driven by improved resource utilization and route planning. Unit sorting costs decreased 5.4% to RMB0.30, thanks to continued standardization in sortation procedures and improved labor and automation productivity. Gross profit increased 19% to RMB 3 billion, and gross profit margin rate increased 2 points to 30.1%. Consistent with gross profit income from operations increased 16.2% to RMB2.3 billion and associated margin rate grew 1.1 points to 22.8%. The SG&A expenses, excluding SBC as a percentage of revenue grew 0.1 to 6%, given a stable and sound corporate cost structure. Operating cash flow was RMB 2 billion, which decreased 25.8% against a high base amount for first quarter 2023. In first quarter last year, receivables collection increased during the process of KA accounts optimization. In addition, KA accounts for first quarter of 2024 included newly established headquarter level platform customers who enjoy longer receivable terms. Our retail parcel volume grew over 40% year-over-year under the initiatives to increase higher-value parcels. Adjusted EBITDA was RMB 3.7 billion. Capital expenditure totaled RMB 1.7 billion, and we anticipated, again, annual capital expenditure to be below RMB 6 billion.Now moving on to our guidance. We estimated the overall industry growth to be around 15% to 20% for the year, and we reiterate that our parcel volume for 2024 is expected to be in the range of RMB 34.7 billion to RMB 35.64 billion, representing a 15% to 18% increase. We remain committed to our balanced approach for sustainable and profitable growth. We have prioritized improvements in quality of services and development of differentiated products and services to enhance brand value and recognition.Under the near-term market dynamics, we aim to reach our earnings goal and then attain appropriate level of volume share. The above estimates represent management's current and preliminary view, which are subject to change. Now this concludes our prepared remarks. Operator, please open the line for questions.
[Operator Instructions] And today's first question comes from Qianlei Fan with Morgan Stanley.
[Interpreted] Mr. Lai, Ms. Yan and Sofie, congratulations on the very strong earnings growth. I have two questions. The first question is about what Mr. Lai has mentioned. In this year, we have strategically given up some loss-making volumes. What has triggered this strategical focus shift? What's your expectation on the industry consolidation dynamics going forward? My second question is about unit profitability. It's encouraging to see unit profit has increased year-on-year and quarter-on-quarter. If we assume competition strategy from peers to stay largely unchanged for the rest of the year, is it reasonable to expect unit profit expansion on a year-on-year basis will continue for the rest of the year?
[Interpreted] Thank you very much for your question. Yes, indeed, we readjusted our focus on all three of our priorities. It is -- the reason for that change is because we want to focus more on longer-term profitable growth given the market dynamics as of now, specifically, if I may supplement that the mix or the structure of the parcels in the marketplace included a greater portion of lower valued items, which, in a way, is a pressure or challenge to the profitability of all express delivery businesses. And yet on the other hand, our goal is to maintain profitable growth. So, the strategy shift on one consideration is to avoid unnecessary volume. We increased our retail volume. We increased what we call effective volume to maintain our profit focus. And also, at the same time, for the longer-term view, quality of services is not just certain measurements but more for recognition within our consumers' mind as they think about ZTO. Differentiated product and services is something that we must and we need to develop going forward instead of the marginalized competition. On the second part of the question, we will continue to maintain a balanced growth. We -- there is a saying in our business that loss-making parcels are avoided or strategically speaking, if it's unnecessary we do not want to take in loss-making parcels. The overall industry growth is continued shifting towards quality and quantity. Our goal is to maintain or improve our proportional share on the earnings side as well for the future growth.
Our next question comes from Louis Zing with Haitong Securities.
[Interpreted] How much has the proportion of the individual parcels increased in the first quarter of the company compared to the same period last year? How does the company view the prospects of the individual parcel market? What specific measures that the company takes is want to increase the penetration rate in the individual parcels markets, including self-owned and reverse logistics? Thank you.
[Interpreted] Thank you very much for your question. First of all, as we mentioned earlier, our first quarter retail volume grew over 40%. Our daily average is now is 5 million parcels and included which 3 million is our own, and then the rest about RMB 2 million is reverse logistics. One of the key initiatives through which we hope to increase and continue to see result is the way to free up our couriers. We installed certain machinery at our outlets. Once they reach certain level of daily volume, we require such equipment to be used so as to free up our couriers. Typically, in the past, carriers have to go to their station or go to their outlets to help sortation and then take their own parcels. They're all meaning the region that they serve, take those parcels back to conduct delivery services, which is very time consuming for the first step in order to get those parcels for themselves. So with those machinery installed, the couriers are able to focus around delivery in providing to door services, including pickup as well. This year, we have a goal to increase our retail volume to 6 million parcels. Last year was less than RMB 4 million. Our ultimate goal is to continue to raise this proportion and through mainly two initiatives. One is to ensure our couriers receive the front-end pricing benefit so that they could certainly truly differentiate pickup and delivery fee income; two, we want to improve the -- what we call it direct linkage, as I described earlier, so that the couriers can spend more time working within a shorter radius in their service area to help improve quality of services, including on-demand, to door delivery and quicker response to pick up so that they can improve retail ratio.
And our next question comes from Ronald Keung with Goldman Sachs.
[Interpreted] Two questions. One is to think about the eventful express delivery industry landscape. If we're focusing more on profitability in the near term, but less on expanding market share in the near term, how do we think about in the next three to five years, will China's express delivery industry become more like three, four players at similar scale by consolidating to those three, four players? Or where we still expect it to be a one major leading player followed by two to three smaller in the two, three, four. So, some thinking and how strategy may evolve over the next three to five years? Second is as the China market matures, how are we progressed or thinking about expanding beyond China and going global? Any progress there or new strategies you think?
[Interpreted] First question relates to our strategy and specifically relates to our market share. As you know, we always focused on a balanced approach of all three focus areas, meaning quality of services, earnings and also volume. We still believe our goal of achieving 15% to 18% growth is appropriate given the current market environment. We're not to say that we don't want volume. We're only recalibrating the focus because we think for the longer term, the brand recognition in our customers is more important for the long-term sustainable volume growth and profitable growth.The -- in addition, the increase in retail volume or hence improvements in our revenue structure will help improve the profitability of outlets and couriers. We believe after a period of time of our initiatives to improve their earnings capability, it will further stabilize our network in preparing for the longer-term growth. In a longer run, we believe we will continue to focus on our own affairs, i.e., any point in time, we will focus on: one, we want quality of services. We also seek profitability. And most importantly, the healthy growth depends on our business brand -- recognition. As a matter of how many are going to remain in the marketplace or what are the proportional share taken by each players is not something that we are able to determine right now. But we are sure of -- what we are sure of is our own goal and focus. We want to continue to enhance and develop growth engines and enhance our competitive advantage. We believe it is those who are with scale, quality of services and profitability that will grow continuously and sustain in a much longer term.The second part of your second question is relating to our international business. Throughout the year, ZTO has formed a rich cross-border product layout with business types, including import bounded, direct mail, freight forwarding, warehousing, export, dedicated line, etc., in Southeast Asia, including Cambodia, Laos, Myanmar and Africa, Nigeria, Kenya, Uganda, Egypt, South Asia, including Pakistan and some of the other regions have all developed local express services on the ground. The -- given the rebound in the international business recently due to standardization in cross-border market price, the smooth expansion of new specialty line services are some of the things that we are exploring. The company will further attempt to develop international individual and boutique services while strictly controlling cost efficiencies, seeking cost efficiencies so that we are expected to further expand that part of our strategy of future growth.
And our next question from [indiscernible] with Zhonghong Securities.
[Interpreted] Thank you for giving me this opportunity to ask these questions. And the first question is perhaps most concerning and right topic in market right now can be expressed delivery industry structure, the uplines. We have always believed that the express delivery industry has economies of skill and the strong will to remain strong in the future. However, the gross rates of CapEx volume last year and the first quarter of this year do not seem to support this judgment. We found that the share of second tier companies have increased significantly and cost optimization seem to be accelerating. We'd like to ask how you view the [indiscernible] of the express delivery industry and with the market share will still be [indiscernible] in the next five to ten years? Is service quality of profits are more important than market share? And where is the bottom line of our company's market share? Second question is how long does our [indiscernible] expect to take achieve consumer awareness and product upgrades? What goals we want to achieve in the long term of the future?
[Interpreted] Thank you very much for your question. First, relating to the market share dynamics going forward. It is important to view an express delivery company or any express company on all three aspects, not just only on market share. Those all three aspects are volume certainly, profit and importantly quality of services because we are looking at the express delivery business growth as a marathon. Our shift in the focus of our -- among all three is specifically for the purpose of a longer-term growth. Indeed, our first quarter market share has decreased. But yet, we are also looking at a healthy level of our quality of earnings and including the quality of earnings of our network partners. We think the longevity of a business depends on balanced growth of all these three areas and focusing more on our own capability for much longer future growth, including developing consumers' awareness of our brand and the value recognition will help us achieve greater market presence with healthier earnings and richer product and services. So, this goes into the second part of the question. We are continuously leading in the quality of services. We hope in the future that we will become one of the top choices among the players of the industry, including [indiscernible]. Our goal is to pull apart or pull away from the homogenous competition, specifically only for pricing among the Tongda players. With our balanced growth in our own business -- it's not to say that we don't want volume. Volume is important, especially for a scaled business model. Our first quarter and including today's daily volume is between RMB 95 million to RMB 100 million, so that our scale leverage and cost productivity gain will continue to demonstrate. The entire industry with its current growth and what we anticipate for the future, which is going more towards quality and quantity together. The profitability will gradually release. As you know, compared to developed country, the GDP cost of logistics as a GDP percentage of GDP is still not as efficient as those developed country. With our countries focus on going into the factory, going into rural area as well as going overseas. There are huge opportunities represented towards comprehensive logistics growth. Express delivery industry with its scale and network resources already in place has huge advantage under such development scenario of the future. So we believe we will continue to focus on our own balanced approach and growth, taking shares where we need to and must but focus more on quality and quantity together will be a sustainable growth in the future.
Thank you. And this concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.
Thank you again, everybody, for joining today's call, and we look forward to speak with you off-line when you have further questions.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation.