© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the ZTO Express First Quarter Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Huiping Yan, Chief Financial Officer. Please go ahead.
Thank you, operator, and hello, everyone. Thank you for joining us today. The company's results and an Investor Relations presentation were released earlier today and are available on the company's website at ir.zto.com. On the call today from ZTO are Mr. Meisong Lai, Chairman and Chief Executive Officer; and I, Huiping Yan, Chief Financial Officer. Mr. Lai will go through his prepared remarks, highlighting business operations, and I will then go through the financials and guidance. We will both be available to answer your questions during the Q&A session that follows. As a reminder, 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 view and expectations of the 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, and may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties and factors are 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 go through his prepared remarks in its entirety in Chinese before I translate for him into English. Mr. Lai, please go ahead.
[Foreign Language]
Thank you, Chairman.
[Interpreted] Hello, everyone, and thank you for joining us today. In the first quarter of 2022, ZTO delivered a parcel volume of 5.2 billion, which increased 16.8%, expanding our market share by 1.2 points to 21.6%. Adjusted net income grew 34.9% to CNY 1.1 billion. Starting in early March, Omicron infections that erupted and spread across the country disrupted the industry's growth momentum, causing delays and stoppage in express delivery industry. Quarterly parcel volume level was below expectations. During this extraordinary time, ZTO headquarter and our provincial operations coordinated action plans and efforts, tightened prevention measures and maintained continued operations wherever possible. We carried out stringent safety protocols while continuing to focus on achieving goals and objectives that we set forth in the beginning of the year. First, we prioritized on protecting the rights and interests of the grassroots and insisted on passing through the increase in delivery fee in its entirety into the hands of delivery outlets and couriers. Through supportive measures such as detailed standardized pickup and delivery fee schedule and equitable reallocation procedures, added landing for designated prevention use, renewal of couriers' accidental group insurance and special care funds, we strengthened the network foundation that -- ensuring its resilience and vitality. Second, we raised bars for comprehensive outlet management on an outlet-by-outlet basis from establishing direct routes to and from sorting centers to improving timeliness of parcel bound for urban and rural areas to enhancement of managerial effectiveness. We are fine-tuning the matrix model of management for Tier 1 partner outlets. As a result, more appropriate policies and performance measures are put in place so that our network of outlets can become more stable, profitable and sustainable. Third, we accelerated the digitization initiatives to streamline end-to-end process, allowing close monitoring and coordination of all critical stages of operations to drive effectiveness and efficiencies. Technology solutioning was there to provide more scientific approach to maximize resource utilization, productivity gains and safe operations. Development of an operating system from all its perspective has transformed previous toolkit applications into an integrated process-driven task management framework. Fourth, we improved the performance evaluation and associated reward and reprimand mechanisms. During the COVID disruption, more user-friendly scorecards were set up to ease burden and boost confidence for our network partners. Fifth, we designed diversified products and services to meet varying customer demand. Our presence among mainstream e-commerce volume continued to increase as we introduce more time-definite products such as premium and standard as part of the effort for product enrichment. The higher-end service that was nicknamed as [indiscernible] and other expanded cross-border capabilities are all being developed and tested.
Recently, sorting centers and service outlets in the affected areas have been gradually resuming operations, while outbreaks across the nation become more and more under control. Contrast to a year-on-year decline of nearly 12% in April, express parcel volume recorded a 2.3% increase during the May holiday break for the industry. Government agencies have been paying close attention to logistic industries and proactively working with companies on their day-to-day challenges by coordinating policies from different governing bodies, sorting through conflicts and blockages. ZTO Shanghai was among the first few logistic companies to restart operation in early May. Volume and timeliness are gradually trending normal. Before the goal of dynamic zeroing is achieved, we expect prevention procedures will become part of the daily norm.
The central government has established clear directives that the epidemic must be contained, the economy must be stabilized, and growth must be safe. Express delivery companies will continue to play an active role in ensuring smooth and safe logistic operations, which will support the economic growth. We anticipate that the consumer demand will remain strong. We believe in our competitive advantages with scale and efficiency, and we are confident in our entire network's ability to endure hardship and overcome challenges. Looking ahead, routines need to be established for prevention on one hand, while we firmly implement our strategic goals through data-driven management, precise policy design and timely adjustments to enhance productivity and profitability. We aim to seize rebound opportunities and reestablish momentum so as to accelerate our market share gain and earnings growth. May 8 marked ZTO's 20th anniversary. In the 20 yesteryears against all odds, we went from keeping up to catching up to taking the lead, achieving all records we set for ourselves in both quality and quantity. All of our past success came not only from the hard work of our people but also from the support of the time and history and the entire society. We do not take for granted of what we have, and we'll journey forward with gratitude. Today, riding the rising tide, we are determined to buckle details and enforce execution. Tomorrow, we will hang tight to our aspiration and belief, secure our core competencies and enhance quality, develop comprehensive might that extend to equal advantages, which will enable us to bring happiness to more people through our services. Now allow me to take us through the financial results. As I go through financials, please note that unless specifically mentioned, all numbers quoted are in RMB, and percentage 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'll only go through some of the highlights here. In the first quarter, ZTO maintained the momentum of profitable growth. Our parcel volume grew 16.8% to 5.2 billion, expanding the quarterly market share by 1.2 points to a record 21.6%. With steady execution of our strategy, the income from operations robustly increased 76.4% to CNY 1.4 billion, and associated margin grew 4.3 points to 14.1%. Total revenue increased 22.1% to CNY 7.9 billion. ASP for the core express delivery business increased 8.5% or CNY 0.11, thanks to healthier competitive dynamics. There is an average of CNY 0.15 to CNY 0.20 per package delivery fee increase since fourth quarter last year. Total cost of revenue was CNY 6.3 billion, which increased 16.9%. Overall unit cost of revenue for the core express delivery business increased 3.6% or CNY 0.04. More specifically, line-haul transportation cost per parcel decreased 0.2% to CNY 0.57 as a combined result of surging fuel cost, offset by cost efficiency gains from increased use of high-capacity trailer trucks, improved load rate and better route planning. Unit sorting cost increased 6.5% to CNY 0.36, driven by increased labor rates and higher depreciation and amortization charges not entirely absorbed by increased level of automation. Lower-than-expected volume dampened our scale advantage for the quarter. And as we look forward to volume returning to normal, our cost advantage and scale efficiencies will continue to demonstrate. Gross profit increased 47.7% to CNY 1.6 billion as a result of increased volume and ASP. Gross margin rate increased 3.6 points to 20.5%. SG&A expense, excluding share-based compensation, as a percentage of revenue dropped 0.2 points to 5.6%, demonstrating a stable and sound corporate cost structure. Adjusted net income increased 34.9% to CNY 1.1 billion, and associated margin grew 1.2 points to 13.3%. Our operating cash flow grew 131.8% to CNY 1.1 billion. Capital expenditure totaled CNY 1.8 billion, which is at a lower level as planned. Now let's talk about the guidance. The spread of Omicron caused the derail of the entire industry's growth momentum starting in March, and we are slowly but surely coming out of it. The industry declined 11.9% year-over-year for the month of April. But the good news is that in May, we saw daily volume reached over 300 million, especially during and after the 3- to 4-day May holiday break. Volume growth has come back to positive. Given our visibility into the month of May, we estimated the cumulative volume increase for the first half of the year to be around 4.5% to 5% for the industry and around 9% to 11% for ZTO. There is a fair chance that an orderly recovery will take place, and the economy would resume growth. Accordingly, the express delivery industry could also continue its current trajectory and get back to a healthy [ click ] of around 10% to 13% of growth for the second half, which means the industry for the whole year could grow between 7.5% to 10%. Now taking into these considerations as well as the current market condition plus the COVID uncertainties that still remain, the company revised its annual parcel volume projection to be in the range of 24.96 billion to 25.86 billion, representing a 12% to 16% increase year-over-year. Relative to the entire industry performance, the company is confident to achieve 1 percentage point or more increase in its market share gain for the entire year. These estimates represent management's current and preliminary view, which are subject to change. Now this concludes our prepared remarks. Operator, please open the call for questions. Thank you.
[Operator Instructions] Our first question will come from Thomas Chong with Jefferies.
[Foreign Language] I have a question regarding the situation of the pandemic and the monthly parcel volume trend. Given we have seen positive parcel volume growth in the first few days of May, how should we think about for the full month as well as thoughts about the June performance? And a follow-up on that, that is relating to [ a couple ] confirmed, the first half, the growth is around 4.5%. And how should we think about the growth momentum in Q3 and Q4?
Thank you, Mr. Chong, for your question. Let me answer this. I'll give you a little bit more breakdown. Yes, indeed, in the month of May, we saw a recovery, especially during the May holiday. And on a cumulative basis, including the first 5 months of the year, we are looking at around 3%, 3.5% at most of cumulative growth because the, really, first 2 months of the growth is fairly strong for the industry.
The industry, specifically for the month of May, we think it's probably just coming out of the negative and into the positive territory. And then for the month of June, with the consideration of the shopping gala of 6/18, we think it could have a good possibility of reaching the high single digits of growth year-over-year. Now with these together, it gives us a rough estimate of the first half of the year for the industry to be around 4.5%.
Now going into the third and the fourth quarter, we referenced to what happened in the first outbreak of COVID-19 in late 2019 into 2020. The rebound was healthy. And with that into consideration and also referencing to the projection that was given by the State Post Bureau in the beginning of the year, which says the industry is capable of growing at least 13%, we estimated the third quarter and the fourth quarter, for the second half of the year, to grow at around 10% to 13%. So specifically, perhaps 12% to 14% or 10% to 12%, respectively, for the third and the fourth quarter. That gives us for the entire year around 7.5% to 10% growth for the industry.
I hope that is detailed enough. However, I want to ensure that you understand there are still lots of uncertainties in the outcome of the recovery, what might take place in terms of the pace. For sure, it's going to recover. It's a matter of how long it will take. And as we go deeper into the second half of the year, then we will have a better view. Thank you.
Our next question will come from Tian Hou with TH Capital.
[Foreign Language] The first one is the difference between the 1P business and the franchise model, what is Mr. Lai's view on that? What does 3PL -- how this is going to strengthen its own competitive advantage? The second is regarding the end user behavior change from long haul to short distance from e-commerce to foods and grocery delivers. So in that front, does ZTO have any plan? [Foreign Language]
[Foreign Language]
Thank you, Tian, for your question. I'll translate for Mr. Lai and also supplement where needed.
[Interpreted] First of all, the -- whether a directly operated, vertically owned model or a franchise model is better is really a discussion we had for years. And it's not about one better versus the other, but each has its own advantages or disadvantages. We look back in the history, the speed of expansion, the way that we are able to motivate thousands of entrepreneurs to be part of the tremendous growth supported with economic growth, all these shown that the express delivery in a franchise model is not necessarily providing any quality of services inferior to the directly operated model.
The important part is it is a crucial element in terms of how we are able to ensure the investment and the reward of our franchise network is fair and equitable. And our initiatives throughout our 20 years demonstrates that commitment and also result of success in allowing the express market share gain -- efficiency gain as well as servicing the customer needs.
You specifically talked about during the pandemic or hard times what happens to some of the more vertically operated business. Our view is that the time as this are extremely fortunate but rare. The entire growth of the industry hinged upon economic growth is -- has been intact and then also will be intact going forward, and a franchise model will continue to demonstrate its foundational design, which is to, again, motivate with self-propelled intention to grow in quality as well as quantity.
That leads to the second part of the question. The express delivery industry is a long journey. We do know that the first part of the year, the Omicron impact was quite devastating. However, despite such, we saw the rebound in the month of May, and we're expecting the demand remains intact. Volume or not, distance short or long, we think the critical consideration is whether efficiencies is there.
For example, as we grow into more of the rural area, going into the farm, going into the factories, the goal is to spend less but achieve more, either for manufacturers, for merchants or for consumers. The efficiency and the scale achieved by the express delivery industry has been an enabler for the past growth. And then also, we expect it to continue to be the case in the future.
The example Mr. Lai gave us is that when we have products in the eastern part of the country or north part of the country, as it's being shipped, the produces or goods or daily necessities, the cost of going into all these directions across the nation are very much similar with very little differences. And that is because of the efficiencies of the entire network, the high efficient operations and the people and, of course, the network partners that made it all possible.
So going into the future, certainly, we will expand our capabilities into diversified products and services, serving different needs, different distances or different type of goods and different consumer groups. But that doesn't change our overall goal to continue to seize the opportunity that is presented to us in the Chinese economic growth and the industry growth. I hope that answered your question.
Our next question will come from [ Frank Duo ] with Daiwa Capital Markets.
[Foreign Language] So I got 2 questions. First, related to the market competition landscape. And so how is the view for the industry ASP both for this year? And do you see any changes for the market competition after the recent outbreak, pandemic outbreak? And the second question is what is the financial impact of the express services VAT waiver?
[Foreign Language]
Let me first translate for Chairman for the first question, and then I'll take your second question.
[Interpreted] It doesn't matter what the external changes are. There are a few critical internal considerations, especially our capacity, our efficiency gain. It's because the overall growth trajectory of the economy of China is still on an upward trend, and the express delivery industry has been a catalyst or as well as a beneficiary of that growth. So I -- we think that industry dynamics will continue to shift towards more concentrated players taking greater share of the market, and the stronger ones are becoming even more strong -- become stronger.
In terms of the pricing, we think the Omicron or the pandemic is going to become a thing of the past even though it might continue to be part of our norm as prevention measures are becoming our day-to-day norm. Yet the competition since the month of September last year has becoming -- has become more stabilized and sensible because everyone has realized and experienced the past pain. And market share gain is -- could be a short stint, but it's not sustainable for the long run. Quality and efficiency is still what consumers or our customers demand.
So pricing going forward, we think, will continue to remain stable. Here and there, in certain regions, depending on the capacity and the demand, there will be reasonable changes. But that is all part of the normal competition, and we think that's not going to become as an unreasonable and out of economic basis.
The second part of the question, yes, the government has given VAT waivers for services related to the prevention, related to goods that are for prevention. So what happened to our business is the impact might come with the rate differential. In other words, because we pay VAT for the entire receipt, which includes the delivery fee, and the delivery fee element is enjoying the VAT waiver as they go into the hands of our network partners who deliver those packages. And of course, the delivery network will issue receipts to us. Some of those network partners are able to enjoy 0 VAT rate. And as we report the entire receipts with our 6% because we don't differentiate in our receipts whether it's 0 or 6% taxed, so there is a rate differential that we are required to take the burden of. Does that answer your question?
[Foreign Language]
Our next question will come from Parash Jain with HC (sic) [ HSBC ] Hong Kong.
If I may ask 2 questions. First of all, when I look at your Slide 9, and for whatever it's worth, when we look at your next 5 years of e-commerce sales forecast versus the parcel volume growth, parcel volume growth is trailing by about 3.5%. Shall we think more as the differential is more of an inflation? Or are we seeing a trend where customers are -- again start to consolidate the volume before they place an order?
And secondly, given the inflationary environment, I really appreciate if you can talk about a bit of sensitivity to some of your key cost items, specifically related to fuel and labor, and your operating leverage opportunity, i.e., M&A. You have done a tremendous job in the first quarter. But how shall we think about every additional 10% of volume that you handle? How shall we see the change in cost, i.e., what is -- what shall we think as more fixed versus variable? Hello?
Yes. Thank you for your question. On Slide 9, we talked about -- hello?
Yes. I can hear you.
Yes. On Slide 9, we talked about -- the volume growth in China, I think the volume growth has started to exhibit a -- hold on one second. On Page 9, for the market growth, the express delivery, let me just give you an overview. I'm looking at the Page 9. It's a percentage of market share by various different players. Is that correct?
I was more referring to expectation is that the volume growth will be 8.5% driven by 12% growth in online retail sales. So the volume growth is trailing the retail sales. Is it because the ticket size is increasing? And is it largely inflation? Or you think that we will continue to see the volume growth will trail the online retail sales as consumers start to consolidate the volumes before they place an order?
I think the interpretation when you look at the online retail growth, the online physical goods growth and the entire economic growth, we believe the e-commerce growth is at a faster pace. And it's still being -- growing at a faster pace because more and more of the people are going online and become web shoppers. Then the parcel in itself, we do believe they are becoming more scarce or more of a sporadic order placing versus concentrated as in before during the shopping gala of November 11. So day-to-day goods are being also placed -- orders are also being placed online instead of going to the grocery stores. So that is the trend.
And in that, also another factor to consider is we are going into the -- other than consumer logistics, we are also going into the rural areas, going into the farm, going into the factories and bringing in service to those needs and those demand. The produce, which is of recent years development, more and more people are developing the habit of buying their perishables even online.
And then there's the second part of -- yes, the second part of the question relates to our cost element. Overall, I think the industry is, in a way, a brick-and-mortar. So we do have facility cost. We have the depreciation and amortization of our invested assets, hard assets. The machinery, the trailer trucks that we have mentioned, those are also all part of our cost. The labor cost is what we are keeping watchful eyes on because that's still a large portion of our total cost.
The leverage is on gradually introducing a replacement of these labor costs with machinery. Automation and then also the digitization investment into our IT technology is also part of our effort to continue to address the cost increases in the labor. The network framework of how we are developing more direct routes will also reduce the number of sortation, hence, reducing the sorting cost and transportation cost. And then that's also part of the structure of the cost that we are able to find opportunities to further enhance efficiencies.
This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Yan for any closing remarks.
Thank you, everyone, for your interest and continued support of our business. But the fact that the Omicron disrupts the business process is, I think, largely behind us, and we are optimistic about the growth prospect of the Chinese economy as well as the express delivery industry. With our advantages clearly distinguished from the rest and our capacity and efficiency gains that are still underway with the benefit of digitized approach in proper and more detailed management in finding productivity as well as efficiency. So we are confident in the growth of our business in terms of volume as well as our ability to deliver even faster growth in our profitability.
So with that, again, thank you, everyone, for joining today's call. We look forward to speaking with you individually soon. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]