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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 to Announce Third Quarter Financial Results on November 17, 2021, Conference Call. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Sophie Li, Director 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 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 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 and the 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]
[Foreign Language]
[Interpreted] Thank you, Chairman. Now please allow me to translate first. Hello, everyone, and thank you for joining us today. In the third quarter of 2021, ZTO completed 5.7 billion parcels and grew volume 23.3% to secure 20.8% market share. Since second quarter this year, we paid more attention to the quality of our volume growth by focusing on profitable parcels, continuing to drive our cost productivity. And we achieved CNY 1.15 billion of net income. On a comparable apple-to-apple basis, our net income increased 13.7% year-over-year.
Steady and fast development of the express delivery industry has relied on the long-term guidance and support by relevant government agencies. Market-driven, healthy competition has benefited from continuous regulatory attention. Radically low-price approach not only disrupts market order but also hinders sustainable growth. Constructive micro steering provided assurance to a sustained growth and development of the industry. In an orderly competitive environment, ZTO put more emphasis on profitability while maintaining quality of services, increasing market share and maintaining smooth operations throughout the network.
Looking at the industry dynamics. Second- and third-tier express delivery companies have all but exited, and the top group are dividing with clearer distinctions. Competition has been cooling off and returning to sensibility, and it is hopeful that industry pricing will gradually stabilize by 2022. At the same time, we have observed deceleration in the growth of e-commerce. The thesis in front of ZTO is how we can maintain our industry lead and grow and particularly achieve the transformation from quantity to quality.
Our consistent strategy is to maintain high quality of customer services and achieve targeted profits while expanding our market share. At different stages of our business development, our emphasis and execution must be coherent to achieve intended balance among the 3 priorities.
On capacity and infrastructure development, because the nature of express delivery business is scale- and efficiency-driven, we will continue to expand our capacity investments so as to improve capability across all 4 stages of parcel flow, meaning increase the volume demand. In the meantime, we will support and collaborate with our network partners to develop their capability, reduce number of sortations, improve efficiencies and achieve integrated 3-layer throughput, that is direct parcel flow between origination and destination sorting centers or outlets. We shall accelerate the development of our last-mile post network, expand and penetrate into wider range of localized commercial opportunities so as to improve connectivity with consumers and customers as well as reducing last-mile costs.
On profitability and business development. Adhering to proper cost coverage and effective resource allocation, we will design our network policy with precision, transparency and fairness so as to increase network partners' earnings and to promote trust and confidence. Meanwhile, we will pay attention to the evolving needs of our customers and expand our products and services, which will [ support ] fulfillment guarantees. We will speed up the development of ecosystem businesses such as LTL, coaching, cloud warehouse to provide comprehensive, customized or individualized solutions to our client needs, improving brand value and recognition.
On operations and network management, we will rely on information technology to improve operational efficiency. Digitization and data analytics will ensure efficiency improvements throughout the entire process. We will pay close attention to team building and develop comprehensive [indiscernible]. Our core teams of managers and operators are becoming younger and technology savvy. We will deepen our management reach for the network, including the [indiscernible] delivery, and we will support stability and develop our network partner by providing support from various aspects, including simplify regulations and a shift towards positive enforcement versus heavy fines. Our policies will be fair and transparent, which will help instill a sense of belonging and achievement.
Challenges and opportunities go hand in hand. Express delivery business will continue to grow at a medium to high speed, which presents tremendous potential. We remain confident on the long-term growth prospects of this industry. Being the best of ourselves, execute diligently and well, we believe we can significantly expand our corporate earnings while attaining greater volume and higher market share by relying on superb capacity, operational excellence and efficient network synergies.
Now let's have Ms. Yan to take us through our financial results.
Thank you, Chairman. 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, 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 go through some of the key highlights here.
In the third quarter, ZTO achieved profitable volume growth. We grew parcel volume by 23.3% to 5.7 billion, secured a leading market share at 20.8% and widened our profit lead with CNY 1.15 billion adjusted net income. Normalized for the onetime 2019 income tax refund received in 2020 for a wholly owned subsidiary, adjusted net income increased 13.7% on a comparable basis.
Total revenue increased 11.3% to CNY 7.4 billion. ASP for the core express delivery business declined 7.2% or CNY 0.09, which consisted of approximately CNY 0.05 decrease due to normal parcel weight drop and CNY 0.04 related to normal volume incentives. Average weight per parcel declined 5.8% to approximately 0.98 kilo. The cost of revenue was CNY 5.8 billion, which increased 10.9%, a much lower rate against 23.3% volume growth. Overall, unit cost of revenue for the core express delivery business decreased 7.3% or CNY 0.07. More specifically, line-haul transportation costs per parcel decreased 5.9% to CNY 0.50, and unit sorting costs decreased 2% to CNY 0.29.
Gross profit increased 12.7% to CNY 1.6 billion as a combined result of increased volume, decreased ASP, partially offset by unit cost efficiency. Gross profit margin rate increased 0.2 points to 21.2%. SG&A increased 4.2% to CNY 389 million, driven by increase in compensation and benefits and office expenditures. SG&A expense as a percentage of revenue dropped 0.3 points to 5.3%.
Net other operating income, mainly consisted of tax rebates, government subsidies, included a CNY 20 million this quarter for a charitable donation made to Zhengzhou Red Cross to aid the recovery from heavy flooding in Henan province. Income from operations increased 16.4% to CNY 1.4 billion. Associated margin rate increased 0.8 points to 18.4%. Operating cash flow grew 20.7% to CNY 1.8 billion as capital expenditure totaled CNY 2.6 billion.
As we go into the final stages of our current investment cycle, the level of capital spending is expected to level off and begin to decrease. As Chairman Lai explained earlier that we intend to recalibrate our strategy priorities to achieve quality growth, we expect net income growth will exceed meaningfully over revenue growth, accordingly driving stronger cash generation and enable us to resume cash flow position within 2 years.
Now turning to our guidance. Based on current market conditions, the company revised its annual guidance. Parcel volume for 2021 is expected to be in the range of 22.2 billion to 22.7 billion, representing a 30.6% to 33.5% increase. These new estimates represent company's current view, which are subject to change.
This concludes our prepared remarks. Operator, please open the lines for questions. Thank you.
[Operator Instructions] Our first question will come from Thomas Chong with Jefferies.
[Foreign Language] I have a question regarding the competitive landscape after we have been seeing J&T and BEST M&A deal. Given that the combined company would be bigger going forward, I just wanted to get a sense about, would there be any change in terms of our strategy? Will the new player or, I would put it this way, or the combined bigger company challenge our position?
[Foreign Language] My second question is about the earlier management comments with regard to earnings growth to be faster than revenue growth. I just want to get a sense about how this would be translate into ASP, cost per parcel as well as the volume trend over the next couple of years. Any qualitative color would be great.
[Foreign Language]
[Interpreted] Thank you, Chairman. And I will first translate and I will supplement answers. First of all, as you clearly pointed out, the market dynamics is becoming much clearer to us. Very specifically, the top players are gaining more on not only volume concentration but also profitability. And then secondly, the entrants or the likelihood of new entrants similar to J&T is unlikely.
The fact that the 2 combined together, this is the part that I supplement, the J&T and BEST combination, first of all, theoretically, the integration will present some challenges. And then two, we don't believe this is a clear 1 plus 1 greater or equal 2 type of scenario. These 2 businesses are very different from the rest profitability-wise, infrastructure-wise. So we think for them to successfully complete their integration, it will take some time. It will take patience from capital.
And at the same time, the rest of the top players will continue to leverage on their own strength and perhaps even taking advantage of some of the fallout of the volume that may be not able to consumed or absorbed by the integration. In the meantime, the entire market is also going to grow, even though we did observe slowdown in the e-commerce development.
In terms of the second part of the question, very specifically, we talked about the earnings growth will be expanding much faster than the revenue growth. Now talking about ASP that you specifically asked, this quarter, our ASP decline is driven by the normal development of the market or of the packages. And also, if I may explain a little bit more on the normal volume incentives, this policy has been in place for many years where every year, incremental volume will receive a small incentive. So as we grow our businesses, there will be some volume-driven ASP impact.
Now with that said, as we grow our volume even faster and as our market competition start to becoming more sensible, price will start to stabilize in -- starting as early as next year, we believe ASP increases will come soon.
Cost per parcel. We have been gaining on cost efficiencies. Going forward, we also are going to develop what we mentioned the tri-layer integrated throughput, will fundamentally change our operational cost structure and deliver much greater cost efficiencies. That is with -- but with this understanding, we presented our confidence that the earnings growth will be at a much faster pace than the revenue growth. For 2021, we expected our overall adjusted net income to grow no less than 30% compared to last year. And for next year, the growth will also be no less or even slightly higher than this year's net income growth. Hope that answers your question.
Our next question will come from Gangxian Liu with CICC.
[Foreign Language] So let me translate for myself. I have 2 questions. First is about CapEx guidance. As you mentioned just now, for the next year, we will see CapEx will be top or -- start to decrease. And I want to know about the exact guidance about the CapEx next year.
And the second one is about VAT super deduction. How do we expect that to forecast for next year?
[Foreign Language]
[Interpreted] Thank you for your question. First of all, the capital spending. Our spending is largely towards acquisition of land use rights. About 70% of those are land use rights and facility constructions. About 15% relates to our transportation capabilities, large vehicles or replacement of those. And then the rest will be for other infrastructure, including technology and so on and so forth. And this structure has been the case, has remained as such for the past few years.
Now the larger portion of the investment that goes towards land use rights and also facility construction are not just for our express core businesses. We are intending to utilize and maximize the utilization of these facilities for our ecosystem development, including, for example, LTL business, cloud warehouse business as well as cold chain business that just came online. Capital spending for this year is around, total, CNY 9 billion, and we think next year will be no more than CNY 9 billion, perhaps even reducing in that total.
Second question, the VAT super deduction. As it expires, we think that this -- by the end of this year, the super deduction policy will go away. And that's the end of that positive impact.
Our next question will come from Ellie Jiang with Macquarie.
[Foreign Language] Let me translate myself. As we see ASP continues to climb back positively for the industry, how do we think about the overall industry pricing trends in 2022?
And the second question is the potential impact into our fourth quarter operations with regards for the recent electricity shortage and COVID impact.
The -- if you look into the structure of the ASP, you'll notice that some of the peers included the delivery fee in their ASP. So on an apples-to-apples comparison basis, ZTO's ASP in that regard also increased. And then for next year, we think that we will be in sync with the market. As we talked about earlier, the total price competition has becoming more and more sensible. And then specifically, for what we call entitlement delivery fee of CNY 0.10, that was pretty widely implemented by the industry. So the ASP increases is mainly driven by that. So on a comparative basis, if we included the delivery fee, our ASP would also increase accordingly.
Your second question relate to the electrical shortage or -- as well as some of the impact on the regional outbreak of COVID. We have a significantly large network. And also, at the meantime, we have very specific on-the-ground team working diligently on addressing some of the risks and issues that brought about by the COVID. So far, there hasn't been any significant issues. And we -- with the strength of large network, impacts here and there are minimal without causing systematic issue. Hope that answers your question. Thank you.
Our next question will come from [indiscernible] with UBS.
[Foreign Language] So my question is quite simple. Just to confirm, the fourth quarter earnings guidance is no less than 30% year-on-year growth. And how about next year?
Thank you for your question. Yes, it's based on our current view. Because we are already very much into this quarter, we expect our earnings growth for this quarter to be no less than 30%. And this is a trend that has been slowly establishing since the second quarter when we refocused our business priorities to achieve greater-quality growth, driving out not profitable volume but going after the profitable ones. So next year, consistent with our strategy this year, the earnings growth will be no less than the revenue growth. And we think a 30% to 35% range is a safe bet.
Our next question will come from [ Yair Zhang ] with TH Capital.
My question is mainly about your market share. And firstly, can you comment about the overall performance during double 11 shopping festival? We know the consumption demand may be a little weak this year, while the demand also tends to be more diverse to different platforms. So can you -- can we assume those other positive impacts for ZTO to capture the market share?
The second one is about your -- about the competition and market share. We know J&T is buying BEST China express delivery business. Can you comment about the impact of the acquisition? Will it change the whole competitive landscape in China express industry? Let me translate myself. [Foreign Language]
[Foreign Language]
[Interpreted] Let me translate for Chairman. The double 11 that we just experienced, some of the figures from November 1 to the 14 cumulative order reached 1.22 billion. Cumulated volume was 1.19 billion. And during the peak days, order volume reached 180 million. The daily pickup volume reached 130 million. The delivery volume reached 110 million. So across the whole globe, if you may, we are the only company that achieved all 3 metrics over 100 million. And specifically also, the quality of services in the day -- on the 3rd to the 10th, according to Cainiao's indices, we are #1 not only among the Tongda but across the entire industry. These figures represented -- or is evident to the fact that we have significant advantages in terms of infrastructure, operational excellence, network stability, capability as well as our financial strength.
So with that, if I may lead into the question that you asked about the joint -- or the M&A activity that took place, before J&T entered into the marketplace, we have a plan of growing our market share consistently to reach 25% goal in the next 2 to 3 years. With J&T coming in and particularly its business model, i.e., low cost, low price-driven and loss-making, it did disturb our pace in achieving consistent market share gain. And also, with the attention and interference -- or intervention, I should say, positively speaking, from the government official to address the frontline operators' interests in protection of their rights, we have shifted our execution level of strategy to focus more on profitable volume.
And that is why we didn't let go of the price. We didn't go after loss-making volume and then, at the same time, wasn't able to obtain that 6 to 7 points that was gotten by J&T due to its low-price approach. So normalized-wise, we are not -- normalized-wise going forward, we believe the quality-focused growth will allow us to again rely on our significantly better competitive advantage and gaining the share that is coming through, through organic and inorganic growth.
One point to make is that we are able to see the consolidation that is taking place in the market dynamics. Going forward, the stronger, i.e., capacity-wise, capability-wise and the financial strength-wise, those larger ones and leader will continue to pull away from the rest. And we are expecting the number of players to gradually reduce as the bigger ones get bigger and get stronger and more profitable. I hope that answers your question.
Our next question will come from Peter Chen with Green Court Capital.
[Foreign Language]
[Foreign Language]
First of all, the question is -- go ahead. So the question, first of all, for those that are English-speaking on the line, the question regards to our ecosystem. Really, it's asking, the core business is developing quite well. And what's happening in the ecosystem arena? What are our second growth trajectory? Where do they come from?
So Chairman has mentioned that the growth plan of our ecosystem has been long in place since 2015. We recognize that the future competition of the businesses or the industry will be on a comprehensive level, comprehensive meaning not just the express delivery business, which currently is largely dependent on e-commerce packages. So since 2015, we started to grow out of the current core businesses, the international business, the LTL business, less than truckload, i.e., and the cloud warehouse business, which provides in-warehouse processing as well as integrated delivery services.
These are natural extensions of our core businesses because as we invest, utilizing capital, invest in our infrastructure, we began to shift from solely invest for express business to investment for comprehensive logistic capabilities. And hence, currently, we have all these 9 altogether ecosystem separate segments developing at different stages. All are able to utilize the resources, either its hard physical resources or assets as well as customers, market, products and services. And as we build our comprehensive smart logistics parks, we are seeing that the product and services goods are aggregating and redistributed at a much more efficient way because we are closer to each other. The facilities are able to serve on a more responsive basis.
And the utilization of our resource and investment or, in some cases, multiple uses and also, at the same time, driving synergies across business segments is the way that we go about developing our ecosystem. As we said earlier, they are developing at different stages based on the needs of our customers and becoming more problem solution -- problem-solving and solutioning. Going forward, we will have, one by one, these businesses coming online and contributing greater share of our total economics in the next 5 to 10 years.
Our next question will come from Tian Hou with TH Capital.
[Foreign Language] In the last more than 20 years, the express industry grew together with China's e-commerce. However, at today's stage, the high growth from e-commerce is over. So if we are looking for the new additions and the new growth drivers for the express industry, we must looking for somewhere else, so particularly like same city deliver growth to -- community grocery shopping or overseas services. For the overseas services, we also noticed the supply chain issue across the border. So I think I would like to hear management make some comments. So for this year, what are the new growth drivers in addition to e-commerce will be next year? What will be the focus of ZTO in 2022? [Foreign Language]
[Foreign Language]
[Interpreted] Let me translate. The growth, indeed, for the e-commerce business in China has, on a rate basis, slowed down. It indeed has -- the fast 50% to 60% annual growth is a thing of the past. But still, it has already established huge base. So going forward, it will be a stable growth but not 40%, 50%.
With that said, together with the new and up-and-coming format of commerce in China, we think the total express delivery industry this year, of course, we think that it's very likely to go over 100 billion or even reach 110 billion volume. In the next few years, at a medium to high speed of growth, it will likely reach total 200 billion, and it's very likely the case. So that means express delivery business itself still has plenty of room to grow. The key factors that we need to consider about express business is, first of all, scale. Scale leverage is determined by its distribution or by its density. At 60 million to 70 million package per day, ZTO certainly is one of the top performer. And second factors to consider is its wide coverage. So what you mentioned, going overseas and expanding our business horizon, including the air transports and all that, is all part of our comprehensive logistic capability development plan. The government is also promoting the 2 entrants and 1 exit, right? So this relates to going deeper into the rural, going deeper into the country, going into the factories. And then the -- going outward is to international.
So as we, on one hand, building our capabilities, developing our infrastructure, we are going to follow, when the right time comes, the businesses that are going overseas. Currently, we already have businesses expanding in the Southeast Asia countries as well as Africa countries in terms of resource planning as well as collaboration with some of the already local players. Going forward, this network of operations will continue to expand. So hence, we are able to achieve and reach our mission to become the world's leading comprehensive logistics service provider.
This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Yan, CFO, for any closing remarks.
Thank you, everyone, for joining us today. We are looking forward to share with you some of our renewed thoughts about how we go about the next stage of our business development. And once again, thank you for your long-term support and trust in ZTO. We'll speak to you soon.
[Foreign Language]
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.]