Logistics company delivered 31% more packages last year, but revenue grew by a slower 21% as the ultra-competitive sector engaged in its latest price war

Key Takeaways:

  • ZTO’s adjusted profit grew 35% in the fourth quarter, reversing a trend that saw the figure decline in five of the last seven quarters
  • Return to profit growth comes as recent price war eases, and amid growing signs of consolidation in the fragmented logistics sector

By Shirley Lau

Staying on top in an established industry is no easy feat, let alone in a vibrant and fiercely contested one like China’s logistics sector, where a half-dozen major companies deliver millions of packages daily for legions of e-commerce shoppers.

For the past two years, ZTO Express Cayman Inc. (ZTO.US; 2057.HK) has taken great pains to safeguard its big share in China’s courier sector and also improve its profitability, amid the dual challenges of Covid disruptions and a vicious price war that is only now easing. It seems to be succeeding – at least for now – based on its latest results published last week that showed the company returning to profit growth after an unstable period of mostly declines.

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

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

Despite those upbeat numbers, investors were unimpressed. ZTO’s U.S.- and Hong Kong-listed shares climbed just slightly in the days after the results were announced, even as many other Chinese companies rallied on signals that the U.S. and China may be close to a deal that would allow Chinese companies to remain listed in New York. Then again, logistics is hardly as sexy as the high-growth internet, and intense competition makes it even less attractive.

ZTO’s solid performance can be attributed to both internal and external factors: the company’s own resilience in the face of challenges, and, perhaps most important, the easing of an extended price war that only dissipated after the government stepped in.

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

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

ZTO is the youngest among that group, born in 2002. But it has made up for lost time through efficient operations, and now counts all of China’s major e-commerce companies among its clients. It listed in the U.S. in 2016, in the country’s biggest IPO that year, and two years later got a major vote of confidence when e-commerce leader Alibaba bought 10% of its shares. In September 2020, ZTO completed its secondary listing in Hong Kong.

Unsustainable price wars

While the China logistics market has grown rapidly, intense competition has led couriers to rely on unsustainable price wars that inevitably eat into their profitability. Such infighting has led average parcel delivery prices to fall by 57.1% over the last decade, according to the State Post Bureau.

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

In March 2021, ZTO’s CFO Yan Huiping said “accelerated volume growth and market share gain is the most critical among our primary goals,” reflecting a “market share above all” mentality that’s often seen in China’s emerging industries. To that end, the company allowed the average selling price of its core express delivery business to drop by about 20%, enabling it to add 1.3 percentage points of market share.

Around the time of Yan’s remark, the price war got even more brutal as newcomer J&T Express slashed prices to as low as 1.05 yuan per package – compared to at least 1.20 yuan charged by YTO and STO. That set off what an analyst described as one of the “deadliest price wars in China,” which was made worse by frequent disruptions created by China’s Covid-19 pandemic.

While the logistics companies’ profits suffered, the biggest victim was arguably delivery workers who saw their wages cut and sometimes failed to get paid. Authorities finally took action last April, punishing J&T and another courier firm Baishi Express for price-dumping in Yiwu, a city in Zhejiang province in known for its massive wholesale markets.

A few months later the State Post Bureau issued a guideline on protecting the rights of delivery personnel, representing a victory for workers but putting further pressure on ZTO and its rivals.

The big six were quick to respond, imposing an extra charge of 0.1 yuan on each parcel. ZTO also organized meetings with its couriers and set up a department dedicated to giving them more support. Chairman Lai Meisong said in August that sacrificing profitability in return for short-term expansion of market share was “unwise and unsustainable.”

This year, signs have emerged that the price war is subsiding. As Yan noted this month, “the impact from competition-driven price declines continued to diminish”.

Meanwhile, a new trend is taking shape with signs of much-needed consolidation. A number of second- and third-tier operators have exited the business, such as Beijing-based Rufengda, which shut down its operations in 2019.

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

Will ZTO, which has a healthy price-to-earnings (P/E) ratio of around 28, also make a move and acquire some smaller operators? Chairman Lai recently told journalists that the best companies would be those that could offer a wide range of logistics services in the future, with synergy and efficient use resources as key. He said ZTO was striving to build a multifaceted ecosystem featuring everything from express delivery to cold chain logistics, finance and aviation.

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