ZTO emerges from latest delivery price war with return to profit growth

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Staying on top in an established industry is no easy task, let alone in a dynamic and fiercely contested industry like China’s logistics sector, where half a dozen large companies deliver millions of packages a day for legions of e-commerce buyers.

For two years, ZTO Express (Caymans) Inc. (NYSE: ZTO; 2057.HK) has taken great pains to preserve its large share in China’s courier industry and also improve its profitability, amid the twin challenges of Covid disruptions and a vicious price war that is only getting worse. ‘mitigate. He seems to be succeeding – at least for now – based on his latest results released last week which showed the company returning to earnings growth after a volatile period of declines.

All key metrics in its latest report look encouraging: annual revenue rose 20.6% to 30.4 billion yuan ($4.8 billion); and parcel volume increased by 31.1% to 22.3 billion parcels delivered, helping ZTO maintain its No. 1 position in terms of market share for a sixth consecutive year.

But the best news for investors concerned the company’s bottom line. ZTO’s adjusted net profit rose 35.2% in the fourth quarter year-on-year to 1.7 billion yuan, reversing a trend that has seen the figure decline in five of the past seven quarters.

Despite these optimistic figures, investors were not impressed. ZTO shares listed in the United States and Hong Kong rose slightly in the days after the earnings announcement, even as many other Chinese companies rallied on signals that the United States and China could be close to an agreement that would allow Chinese companies to remain listed on the stock exchange. New York. Then again, logistics isn’t nearly as sexy as the high-growth Internet, and intense competition makes it even less appealing.

ZTO’s strong performance can be attributed to both internal and external factors: the company’s own resilience in the face of challenges and, perhaps most importantly, the easing of a protracted price war that has not dissipated only after government intervention.

China’s parcel delivery industry, the world’s largest by parcel volume and revenue in 2021, now employs some 3 million people. The sector handled 108.3 billion packages in 2021, up 29.9% from 2020 and equivalent to more than half of all packages delivered globally, according to the country’s National Post Office.

ZTO is among the top six players in the industry, leading a group of five that includes YTO-Express (6123.HK; 600233.SH), STO-Express (002468.SZ) and Yunda-express (002120.SZ) which all operate on a network-franchise model. SF-Express (002352.SZ) distinguished itself from its rivals by using a straightforward operating model until recently. The other major player in the industry is JD Logistics (OTCPK: JDLGF; OTCPK: JDLGY; 2618.HK), the delivery arm of e-commerce giant JD.com (JD).

ZTO is the youngest of this group, born in 2002. But it has made up for lost time with efficient operations and now counts all major Chinese e-commerce companies among its customers. It listed in the United States in 2016, in the country’s biggest IPO that year, and two years later won a major vote of confidence when e-commerce leader Alibaba (BABA) bought 10% of its shares. In September 2020, ZTO completed its secondary listing in Hong Kong.

Unsustainable price wars

As China’s logistics market has grown rapidly, intense competition has led couriers to rely on unsustainable price wars that inevitably eat away at their profitability. These infighting have caused average parcel delivery prices to drop 57.1% over the past decade, according to the National Post Office.

While consumers reap huge benefits from low delivery costs, the price for couriers has been high. In 2020, only SF and YTO recorded net profit growth among the top six players. ZTO’s net profit fell 23.7% on the year.

In March 2021, ZTO Chief Financial Officer Yan Huiping said that “accelerating volume growth and gaining market share are the most critical among our primary goals”, reflecting a “market share first” mentality. often seen in China’s emerging industries. To that end, the company let the average selling price of its core express delivery business drop by about 20%, which added 1.3 percentage points of market share.

At the time of Yan’s remark, the price war became even more brutal when newcomer J&T Express slashed prices to 1.05 yuan per package from at least 1.20 yuan charged by YTO and STO. It sparked what one analyst described as one of China’s “deadliest price wars”, which has been compounded by the frequent disruptions created by China’s Covid-19 pandemic.

While logistics company profits have suffered, arguably the biggest casualty has been delivery workers who have seen their wages cut and sometimes not paid. Authorities finally took action last April, punishing J&T and another courier company Baishi Express for dumping prices in Yiwu, a city in Zhejiang province known for its huge wholesale markets.

A few months later, the National Post Office issued a directive on protecting the rights of delivery workers, representing a victory for workers but putting additional pressure on ZTO and its rivals.

The Big Six were quick to respond, imposing a 0.1 yuan surcharge on each package. ZTO also held meetings with its couriers and set up a dedicated service to provide them with more support. Chairman Lai Meisong said in August that sacrificing profitability in exchange for short-term market share expansion was “reckless and unsustainable.”

This year, signs have emerged that the price war is easing. As Yan noted this month, “the impact of competition-induced price cuts has continued to diminish.”

Meanwhile, a new trend is emerging with much needed signs of consolidation. A number of second- and third-tier operators left the company, such as Beijing-based Rufengda, which went out of business in 2019.

In September 2021, SF acquired 51.5% of the Hong Kong-listed company Kerry Logistics Network (OTC: KRRYF; 0636.HK). Shortly thereafter, the losing courier business of BEST Inc. (BEST), listed in New York, China, was acquired by J&T. And in the latest development, JD Logistics announced earlier this month the acquisition of a majority stake in Shanghai’s Deppon Logistics (603056.SH).

ZTO, which has a good price/earnings ratio (P/E) of around 28, will it also move and acquire smaller operators? Chairman Lai recently told reporters that the best companies would be those that could offer a wide range of logistics services in the future, with synergy and efficient use of resources being key. He said ZTO strives to create a multi-faceted ecosystem including everything from express delivery to cold chain logistics, finance and aviation.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.