ZTO fights for market share as parcel pace slows

The Chinese logistics giant posted higher quarterly revenues and profits, but a moderating growth rate for parcel deliveries was a red flag for investors

Key Takeaways:

• ZTO’s parcel volume grew 15.9% in the third quarter, down from 18% in the same period of 2023
• The company also lowered its guidance for annual growth in parcel volume, citing challenging economic conditions

By Lee Shih Ta

Despite a slowing economy, China remains gripped by an online shopping craze that delivers a mountain of parcels every day.

The unstoppable rise of ecommerce has been enabled by logistics giants such as ZTO Express (Cayman) Inc. (2057.HK; ZTO.US), the company that handled the biggest volume of Chinese packages last year.

Since then, government policies to stimulate consumer spending have helped to power the ecommerce juggernaut, pushing the annual number of express parcels past the 150 billion mark this year, according to official Chinese statistics. Only a decade ago the industry was celebrating a much lesser milestone of delivering more than 10 billion items in a year.

However, the battle for that delivery business is growing ever more intense, as reflected in ZTO’s latest quarterly earnings on November 19.

The main financial metrics were all positive. Third-quarter revenues rose 17.6% to 10.68 billion yuan ($1.47 billion) from the same period a year earlier. Adjusted net profit edged up 2% to 2.38 billion yuan, while gross margin rose to 31.2% from 29.8%.

Decelerating pace for parcels

But the company’s Hong Kong share price has slipped since the results came out and is down around 9% for the year to date.

Notably, the momentum for parcel deliveries showed signs of flagging. ZTO’s parcel volume grew more slowly than expected, rising 15.9% to 8.72 billion pieces from the year-earlier quarter. The pace lagged the 18% growth rate achieved in the third quarter of last year.

Meanwhile, some of the firm’s leading rivals turned in better growth numbers. STO Express (002468.SZ) delivered 5.88 billion pieces in the same period, a 28% year-on-year rise, while YTO Express (600233.SH) handled 6.71 billion items, an increase of more than 28.2%. S.F. Holding (6936.HK; 002352.SZ) was not far off ZTO’s pace, with volume rising 14.4% to 3.23 billion parcels.

ZTO’s parcel numbers rang alarm bells for sector analysts, who revised their outlooks for the company’s share price. CLSA noted that ZTO’s parcel pace was lower than the industry average of 20% over the same period. Citing fierce market competition, the investment bank cut the target price for the share from HK$223.43 to HK$188.28 but maintained an “outperform” rating. Daiwa also lowered its price target from HK$210 to HK$195 while reiterating a “buy” rating.

In its earnings statement, ZTO also revised down its guidance for annual parcel volume to a range of 33.7 billion to 33.9 billion items, representing a growth rate of 11.6% to 12.3% compared with its earlier forecast of 15% to 18%.

An impressive pace of parcel growth used to be a hallmark of ZTO’s business. A slowdown when the overall delivery market keeps on expanding points to a highly competitive environment, but strategy could also be factor.

Instead of going all out for sheer volume, ZTO has focused on fortifying its networks, developing bulk cargo capability and working on the delivery of fresh produce. It has also been active in so-called reverse logistics, where goods are sent back through the supply chain for recycling, disposal or repair.

ZTO founder and CEO Meisong Lai said in a statement accompanying the figures that retail volume had grown more than 40% in the quarter as the company deepens its ties with major e-commerce platforms in reverse logistics, premium services and deliveries to remote areas. He said ZTO was committed to being a leader in parcel volume and was making efforts to regain market share.

However, the company also said spending restraint could persist for some time before the economy turns around, limiting the average size of packages.

In the crosshairs of short sellers

ZTO stands out in the industry for a gross margin that is several times bigger than the sector norm. According to the results, the company’s gross profit rose 23.2% to 3.33 billion yuan in the third quarter, taking gross margin to 31.2% from 29.8% in the same period of 2023.

The figures put ZTO’s competitors in the shade. During the same period, S.F.’s gross margin was 14.1%, less than half the level achieved by ZTO, while YTO lagged further behind with just 9.6%. Bringing up the rear were Yunda Holding (002120.SZ) with a gross margin of 8.5% and STO at 5.4%.

ZTO is so far out in front that its figures have been called into question by the short-selling firm Grizzly Research. After an internal investigation, ZTO rejected Grizzly’s fraud allegations as unfounded.

Nevertheless, some market watchers are skeptical about ZTO’s high gross margins, wondering whether unprofitable businesses could have been left out of the equation.

ZTO does seem to have a knack for limiting costs. In the third quarter, the company managed to lower the unit costs of sorting and transportation by 8.4% through efficiency savings and productivity initiatives. Administrative expenses as a percentage of revenue stabilized at around 5%. Meanwhile, the unit price in the core express delivery business rose 1.8%. Overall, operating costs grew 15.2%, outpaced by a 17.6% revenue rise over the same period.

The company’s price-to-earnings (P/E) ratio stands at 13.5 times, lower than the 19.4 times for STO, the 20.6 times for S.F. and a multiple of 23 times for JD Logistics (2618.HK), although ZTO comes out just ahead of YTO’s 12.6 times. The P/E gap suggests ZTO does not command the full confidence of investors, despite its ability to generate profits.

ZTO’s revenues were only about one-seventh of S.F.’s turnover in 2023, but it made more profit than its competitor. Investors can weigh up the merits of the two delivery giants after S.F. goes public in Hong on November 27, bringing the firms’ business rivalry to the stock market. Investors seem to favor the revenue champion over the profit winner, posing a challenge to ZTO’s share price.

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