ZTO underperformed quarter-on-quarter despite robust year-on-year gains

The delivery company’s revenue and profit both rose year-on-year despite China’s economic slowdown, but both figures were down from the second quarter

Key Takeaways:

  • ZTO earned 2.35 billion yuan in revenue in the third quarter, up year-on-year but 8.4% lower than the previous quarter 
  • The package delivery company said it might not meet its earlier goal for market share gains as it prioritizes maintaining profitability


By Lau Chi Hang

China’s economy may be slowing, but ZTO Express (Cayman) Ltd. (2057.HK; ZTO.US) still managed to deliver growth in the face of such headwinds, albeit small growth. The company, one of China’s top parcel delivery firms, reported this month that its third-quarter revenue rose 1.5% year-on-year to 9.08 billion yuan ($1.27 billion), and its profit rose by an even larger 21% to 2.35 billion yuan.

Its parcel deliveries for the quarter reached 7.5 billion, up nearly 18%, though its core express service revenue increased by a far smaller 2.2%, reflecting pricing pressure in the fiercely competitive sector. Its market share rose to 22.4% for the third quarter. The results look quite impressive in general against the backdrop of stiff competition and China’s slowing economy.

ZTO already outperforms many of its rivals where it counts the most, on the bottom line. Its revenue trails giants like S.F. Holding(002352.SZ), with quarterly revenue of 64.7 billion yuan, as well as YTO (600233.SH), Yunda (002120.SZ) and STO Express(002468.SZ), all with more than 10 billion yuan. But ZTO wins in terms of profitability, posting a profit that’s 12% higher than S.F.’s 2.09 billion yuan, despite SF’s far larger revenue.

Its ability to trample its competitors on the bottom line is reflected in its enviable 29.8% gross margin in the third quarter, more than double the figures between 11% and 12% for S.F. Express, YTO and Yunda, and light years ahead of STO’s paltry 3.1%.

The company attributes its high gross margin to its strict attention to cost controls. “Faced with intensified pricing competition, ZTO has focused on improving our service quality and obtaining profitable business growth,” said Chairman Lai Meisong. “Our digitalization and detail-oriented management efforts have continued to drive cost efficiency improvement in sorting and transportation.”

CFO Yan Huiping added ZTO used standardized digital management facilities to lower its sorting and transportation costs by 11%, more than it previously anticipated. At the same time, sales and management expenses as a share of revenue remained stable at about 5%.

Shareholders unimpressed

Despite the small revenue gain and solid profit growth, investors weren’t impressed by the latest report. Instead of rising, the company’s Hong Kong-listed stock fell below the HK$180-per-share mark to close at HK$179, shedding 4.3% after the results came out. The stock has continued to come under pressure since then, falling another 5%.

It seems investors aren’t quite ready to reward ZTO just yet, despite its ability to keep growing in such a tough environment. But while it managed to grow year-on-year, its quarter-on-quarter numbers seem to suggest the company may be losing some momentum or even starting to decline. ZTO posted revenue of 9.74 billion yuan and a 2.54 billion yuan profit in the second quarter, meaning its third-quarter performance for both figures was down sequentially.

Similarly, its third-quarter gross margin of nearly 30% was up nearly 3 percentage points year-on-year, but down 4.2 percentage points from 34% in the previous quarter. Business also began to slow a bit, with parcel volumes falling from 7.68 billion in the second quarter to 7.52 billion in the third.

Pricing pressure returns

Despite facing competitive pressures, the company reaffirmed its goal of delivering 29.3 billion to 30.2 billion parcels for all of this year, which would represent an increase of 20% to 24% year-on-year. But it was less optimistic about reaching its target of boosting its market share this year by 1.5 percentage points. With pricing competition ratcheting up again, garnering profitable business growth is becoming less realistic, it said.

Despite a modest rebound of the express delivery industry this year, the resurfacing of price competition is a growing concern following a period of relative calm. In September, the average price of parcels delivered by YTO fell 7.32% year-on-year, while the figures for Yunda and STO fell by an even larger 12.9% and 13.5%, respectively. ZTO’s unit revenue also fell by 13.5%, hinting that price competition is intensifying and will continue into the fourth quarter. 

The difficult market aside, some investors are also still jittery over ZTO after a short seller attack earlier this year. In that attack in March, Grizzly Research accused the company of engaging in fraudulent practices, arguing that its high gross margin was the result of creative accounting and it misrepresented its payroll numbers to lower overall costs. 

Investor vigilance 

In response to the report, ZTO issued a boilerplate response calling the allegations baseless and adding the report contained numerous errors, unsupported speculation and misleading conclusions that demonstrated Grizzly’s lack of understanding of the company’s business. A month later ZTO said an independent probe led its audit committee to conclude the accusations in the short-seller report were unfounded.

Grizzly Research isn’t the only one to raise concerns about ZTO. Back in 2017, the Birmingham Pension Fund sued ZTO and its New York IPO underwriters, Morgan Stanley and Goldman Sachs. Among other things, the lawsuit accused ZTO of using a system of “network partners” to handle lower-profit margin parcel delivery services so that its unprofitable business did not show up on its own books.

Such concerns may be keeping investors wary, and current weakness in both financial markets and also China’s economy are adding to the jitters. ZTO’s stock might continue to face strong headwinds, given that institutional investors are hesitant to get onboard, price competition is surging again and the company’s business is showing signs of slowing and perhaps even starting to decline. 

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