ZTO Express (Cayman) Inc. Q1 FY2024 earnings call

Key Points

• ZTO maintained industry-leading service quality, with parcel volume growing 14% y-o-y in Q3 2024 and adjusted net profit up 16%. In Q1 2024, express delivery industry parcel volume grew 25.2% y-o-y.
• Shifted focus to service quality at the start of 2024, placing more attention on differentiated products/services to meet customer needs. Improved service quality in first quarter, with reverse and retail parcel growth surpassing overall market volume growth.
• Q2 initiatives: improve transit efficiency via digitization/data analytics, enhance product mix by diversifying services and leveraging logistics ecosystem, address price competition with precise pricing, strengthen last mile via profit sharing and retail parcel intake, and support franchisees with improved communication and technology tools.

In the first quarter, ZTO's parcel volume was RMB 7.2 billion, growing 13.9% year-over-year, with a market share of 19.3% (contracting by 1.9 percentage points compared to last year). The core Express ASP decreased to $0.04 year-over-year. Combined sorting and transportation costs per parcel decreased by $0.06. Gross profit increased 19% to RMB 3 billion, with a gross profit margin rate of 30.1%. Operating income increased 16.2% to RMB 2.3 billion, with an associated margin rate of 22.8%. Operating cash flow was RMB 2 billion, down 25.8% year-over-year. Adjusted EBITDA was RMB 3.7 billion. Capital expenditure totaled RMB 1.7 billion, with anticipated annual capital expenditure below RMB 6 billion.

Guidance

• Anticipates overall industry volume growth of around 15%-20% for the year.
• ZTO's parcel volume for 2024 is expected to be in the range of RMB 34.7 billion to RMB 35.64 billion, representing a 15%-18% increase.
• Prioritizes improvements in service quality and development of differentiated products/services to enhance brand value.

Risks

• Intense price competition in the express delivery industry, particularly in major regions.
• Structural shifts in consumption and express delivery price competition posing challenges.
• Uncertainties related to market dynamics, regulatory changes, and operational efficiency.

Q: What triggered the strategic focus shift to giving up some loss-making volumes and expectation on industry consolidation?

A: The shift is to focus on longer-term profitable growth due to market dynamics with more lower-valued parcels. ZTO aims to maintain profitable growth and enhance brand recognition through differentiated services. Regarding industry consolidation, ZTO focuses on balanced growth of service quality, earnings, and volume.

Q: How much did retail volume increase in Q1 and measures to increase individual parcel market penetration?

A: Retail volume grew over 40% in Q1. Measures include installing machinery at outlets to free up couriers, allowing them to focus on delivery and pickup services, and aiming to increase retail volume to 6 million parcels this year by improving courier focus and pricing benefits.