ZTO Express (Cayman) Inc (ZTO) 2020 Q4 法說會逐字稿

Hello, and welcome to the ZTO Express conference call to announce fourth quarter and fiscal year 2020 financial results. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Sophie Li, Director of Investor Relations, with Meisong Lai, Director and CEO; and Huiping Yan, CFO. 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 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 upload 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)

Thank you, Lai. Now please let me translate first.

[Interpreted] Hello, everyone, and thank you for joining us today. The year of 2020 represented another milestone in ZTO's development. We maintained our lean overall customer satisfaction and grew annual cost of volume by 48.3% over last year to exceed CNY 17 billion, expanding our #1 market share to 20.4%.

2020 was also an extraordinary year. We remained true to our shared success philosophy. By leveraging on our extensive coverage and brand recognition, leading scale and capacity, continuously improving operational efficiency and trusted and collaborative network partners, we maintained top rental service quality while growing volume rapidly. Amidst the hard blow of pandemic, frequent changes in industry dynamics and serious price competition, we recorded CNY 4.59 billion of adjusted net profit, demonstrating a highly differentiated quality of earnings compared to our work market here.

ZTO's consistent strategy to accelerate parcel volume acquisition and expand market share, while balancing service quality and profitability has been proven effective. First, we focused on building transit capabilities. On one hand, we acquired relatively larger tracks of land for constructing comprehensive smart logistics parks with integrated operations such as in warehouse processing, logistics fulfillment, while enhancing the level of automation and utilization.

We are designing tests that are fruitful for coordinated yet varied operational flows. We have increased the proportion of self-owned fleet, including high-capacity trailer trucks and improved the engine to trailer ratio. We also better optimized the use of third-party logistics to supplement our own fleet.

On the other hand, we continue to enhance the development of IT technology platform. In addition to the thematic of upgrades of our existing operating modules such as Zhongtongji, Shentong, Galaxy and the Busybees. We achieved a new breakthrough in areas such as user interface, process streamlining new product innovation and ecosystem value proposition. With consistent capacity development, we find the process management, economies of scale and favorable EPC policy during a pandemic. The combined sorting and transportation cost per peso decreased to 14.3% year-over-year.

Secondly, we continue to expand development on pickup and delivery and strengthened our last mile capacity and service quality. While focusing on scale and the efficiency of transit and sorting centers, on one hand, by providing financing, technology support and operational know-how, we helped our network partners who reached the capacity bottleneck or faced challenges in managerial capabilities.

Given the strength of the group, we are able to modify subsidy policies frequently and appropriately to help coping with highly competitive and consistently changing market conditions.

On the other hand, for those with segment and the negative growth or weak quality performances, we deployed a great based attention approach, which tends (inaudible) fully address problems and implement improvement plans.

Thirdly, we accelerated last mile development. Since the beginning in 2018, ZTO's last mile presence has been increasingly enhanced. By the end of 2020, we have more than 68,000 last mile posts, leading the industry. Last mile delivery matters other than door to door, such as the last mile foot have not only effectively reduced the handling load and the cost pressure but also provided room for front end customer acquisition. Meanwhile, the proactive trial and adaptation of the Express plus model provided valuable experience in supply chain approach based on IoT mindset, thereby strengthening connectiveness with our last mile consumers. At the commencement year of the 15 -- 5-year plan, 2021 will also be an important year for ZTO to build brand value and recognition, extend and upgrade its services and product, and establish collaborative ecosystem.

While carrying forward our current initiative, we will focus on the following aspects. First, to ensure sustainable growth, we shall take on corporate social responsibilities, including operating in environmental-friendly way and help newcomers and alleviating poverty. Our efforts are underway, such as new screen packaging, operate vehicles that run on renewable energy, wind services to villages and the rural workshop, offer logistic solutions to help revitalizing rural economy and provide basic care for grassroot workers.

Secondly, we are optimistic on the growth prospects of the express delivery industry in China. Our top priorities are to solidify our leading position in parcel volume and further expand our market share. We will increase investments in infrastructure, not only for the expansion of our core Express delivery business and the improvement of our transit efficiency. But also for organic yet rapidly developing equal advantages. We will attach equal importance to assist and reforming our network partner management to ensure a cohesive match of capabilities between pickup, delivery and the transit operations.

Fierce competition is likely to remain or even become more intense as they draw closer to an end. We will take responses and flexible approach to policy making to effect active control our risks and opportunities. We will accelerate the expansion of our last mile lockbox and a postal facility for Express packages. Coupled with our increasing parcel volume, we aim to enhance our pickup delivery capability and managed costs. Through an Express plus model with openings to all, we drive to seize opportunities under the emerging commerce development to establish stronger connection with our customers in the last mile. Adhering to our principle of shared success, we seek to inspire and enroll our loyal network partners to invest in the last mile opportunities and create long-term value that are win-win.

Last but not the least, we will optimize our organizational structure and upgrade talent strategies. We have implemented our accountability system at a provincial and sorting center level where rights and responsibilities are assigned to the front liners. We are developing future leaders through multiple pipelines with the survival-of-the-fittest approach to performance evaluation backed by innovative technology tools. We seek to establish a culture of management that relies on digitized process managing performance of people to drive results.

During the Chinese New Year holidays, ZTO implemented uninterrupted service initiative with more than 97% of our direct network partners in the tens of thousands of drivers, operators and carriers remained on the post, handling 140 million parcels for customers across the nation. ZTO blue were saying anywhere. We deliver not only daily necessities, but also happenings in warmth to our customers.

Our brand building will go deeper with our differentiated products and services, allowing our customers to truly experience the difference and form unique recognition at heart. The recent launch of our integrated coaching and time definite service network was a giant, policing our 5-year plan of brand building strategy. We believe that our ecological deployment and the collaborative development will enable us to maximize the utilization of geared resources with products to provide differentiated and the personalized services and products to our customers and create a compounded return for our partners and investors.

As preventative measures became normalized for the COVID-19 pandemic, more and more consumer categories, including main brands, are establishing greater online and off-line presence. The online categories are food sold in the internet shoppers, demographics are expanding and shifting to more diverse economic regions. In contrast to more dispersing or fragmenting digital sales channels, Express delivery industry has become more and more concentrated, and the leading group of players are also polarizing into stronger and weaker path.

Almost a quarter of 2021 have passed, and Express delivery industry experienced unprecedented growth so far into the year. For ZTO, we focus more on a marathoner seminar. We are merely 18 years' old. While no one can predict precisely how the future will unfold, we can, however, think clearly of what we want and when. What spends we have to rely on and what direction and path we shall take. Journey begins beneath our feet, and we are on our way. Thank you all for your trust and support.

Now please allow Ms. Yan to take us through ZTO's financial results.

Thank you, Chairman. Thank you, Sophie. 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 referred to year-over-year. Detailed analysis of our financial performances, unit economics and cash flow are posted on our website. And here, I will go through some of the key highlights.

Driven by a strong consumption demand post-pandemic and our sound execution of strategies, we exceeded the high end of our volume target range by growing parcel volume, 40.3% to over 17 billion of parcel for the year. The 4.9 billion incremental parcels in 2020 is industry #1 and is greater than the total parcel volume we achieved for the entire year of 2016.

Our leading market share further expanded by 1.3 points to 20.4%. The revenue increased 20.6% to CNY 8.3 billion for the fourth quarter and increased 14% to CNY 25.2 billion for the year. ASP for the core Express delivery business declined by 20.1% for Q4 and declined by 20.2% for the year, which is moderate compared with industry peers. The price decline resulted from, one, volume incentives to support our network partners to grow market share while maintaining confidence in keeping the network stable; two, increased use of lower-priced single-sheet digital waybills; and three, parcel weight drop of 8% to 1.05 kilo for the year or 1.06 kilo for the quarter.

Total cost of revenue increased 31.9% for Q4 and increased 25.1% for the year. Unit cost of revenue for the core business decreased by 12.1% for Q4 and 11.8% for the year. Unit transportation costs declined by 15.7% for fourth quarter and declined by 17% for the year, primarily due to increased use of self-owned high-capacity trailer trucks. We also benefited from the favorable toll road waiver policy from mid-February to early May and also the decline in diesel prices.

Unit sorting costs decreased by 12.4% for Q4 and 9.4% for the year as a result of higher level of automation and improved economy of scale. Gross profit decreased 6.9% for Q4 and 11.8% for the year. Gross margin -- gross profit margin decreased 6.6 points to 22.5% for Q4 and decreased 6.8 points to 23.1% for the year, which resulted mainly from competition-led ASP decline, partially offset by cost productivity gain.

SG&A, excluding SBC, increased 9.5% to CNY 418 million for Q4 and increased 13.8% to CNY 1.4 billion for the year, mainly due to increased salaries, headquarter facility expenses, and depreciation and amortization expenses. SG&A cost as a percentage of revenue remained low at 5.1% for Q4 and 5.6% for the year. Our corporate cost structure remained stable.

Income from operations, excluding SBC, decreased by 13.9% for Q4 and 13.2% for the year. Associated margin declined 7.6 points for Q4 and 6.2 points for the year, which is narrower than the gross margin -- the gross profit margin decline because of positive SG&A leverage and increased other operating income, namely VAT super deduction, government subsidies and tax rebates. Due to the depreciation of onshore U.S. dollar-denominated bank deposits against RMB, the company incurred a foreign currency exchange loss of CNY 82 million for Q4 and CNY 127 million for the year. Operating cash flow was CNY 2 billion for Q4 and CNY 5 billion for the year, decreasing 9.7% and 21.5%, respectively.

CapEx increased by 68.9% for Q4 and by 76.2% for the year as we secured larger tracks of land for developing comprehensive logistics facilities, purchased more self-owned vehicles and installed more automated equipment. As we further strengthened our infrastructure to support accelerated volume growth for the core Express business as well as resource planning and development of our ecosystem, our annual CapEx plan would remain at a similar or a slightly higher level for 2020. The company announced a USD 0.25 dividend for the year for shareholders on record as of April 8, 2021, representing a 30% dividend payout ratio, similar to previous years.

Turning to our business outlook. As COVID-19 has been largely contained in China, we are confident to achieve our prioritized goal to accelerate market share gain. Considering the current market condition, the company expects the parcel volume of 2021 to be in the range of CNY 23 billion to CNY 23.8 billion, representing a 35% to 40% year-over-year increase. We are not providing earnings guidance, given careful considerations for the level of uncertainties and the competitive dynamics in the marketplace.

More importantly, volume growth and accelerating market share gain weighs much higher as we continue to maintain high level of quality of services and achieve appropriate level of earnings accordingly relative to our competitive peers. Our track record has provided clear evidence that our earnings quality is among the top of the industry.

The above estimates represented management's current preliminary view and are subject to change.

This concludes our prepared remarks. Operator, please open the line for questions.

(Operator Instructions) Your first question comes from Thomas Chong from Jefferies.

Congratulations on a solid set of results. My question is about the competitive landscape in 2021. Should we expect the landscape to be more moderate compared to last year? And on that one, how should we think about the ASP as well as the cost per parcel trend in coming quarters?

And my second question is about the various initiatives that we may potentially pursue. In particular, any thoughts about the delivery in a community group purchase?

(foreign language)

Thank you for your question. And let me translate for the Chairman.

[Interpreted] As you can see that we have experienced a very price-competitive dynamic year. But as we go through the process, the lower-tier players are pretty much out of the picture. And even so, the top group of -- with concentrated players with scale are also showing polarized dynamics with the bigger ones, bigger and more profitable, but the smaller ones not growing and also not making money, making losses. So everyone's positioning in the market among the top-tier players are very different.

We believe the Chinese market, especially the express delivery market will continue to grow steadily, and by an official estimate by the year of 2025, the total volume will near double of current level. And that would mean that scale and infrastructure construction is crucial to our sustained growth. This year, we invested CNY 9.2 billion in infrastructure, and it is consistent to our longer-term initiative or strategy to build strong capacity and also capability. The Chairman also mentioned that not only we are developing our own platform, scale and operational efficiency. We are also helping our network partners through financing, through management consulting to help them develop their capability of managing their businesses and also break through some of the potential bottlenecks in their facility and capacity.

Now with all these investments, while the market continues to grow, we think the dynamics would be much more clear and within a reasonable number of -- period of time. Our leading position will likely and make it much more stable for the competitive landscape. Express delivery business rely on scale. And when you mentioned -- when you asked the cost per parcel, whether -- what are the trend, in the near future or as we are currently working on, the 3 network or 3 layers of our network approach will further provide cost efficiency for ZTO. Specifically, in the past, as we surpassed our competitors, the key advantage is within our better connection and more efficient connectivity between our sorting hubs.

And today, as we develop volume, the origination network, the origination outlets are able to surpass the origination -- bypassed origination sorting hubs and go directly to the destination sorting hubs. And we are seeing the number of sorting -- sortation, the times of sortation has declined.

The second layer of network is referring to the origination outlet to the destination sorting center. And yet at the same time, we are also seeing more and more direct routes are opening up between the origination outlets and the destination outlets. With this more direct, more streamlined process, cost efficiencies will be further demonstrated. And also our consumers' experience will be improved because product -- packages will be traveling at a much faster speed. So timeliness will improve.

With regards to the group buying, certainly, as we mentioned, the digital commerce has been evolving. The competition for express delivery will become end-to-end and not only just the platform capacity and capability. We've reinvested in building smart logistics, comprehensive logistic service parts, which will include LTL, co-chain, warehouse, not only because they each are synergistically related, but also the resource utilization could maximize value and provide differentiated product to our consumers or customers. Group community buying intersects with our last mile presence, which is leading in the industry. So we think there is great opportunity for us to capture the value throughout this new approach of commerce. Our last mile capability is not only in the post in terms of number, but also from a penetration and coverage perspective is more advantaged compared to all the others. For example, the county coverage is over 92%, and our initiatives to further bring about our presence in the rural area into the villages are going to further provide access to any of these new coming, new forms of commerce because at the end, the consumers are there. Thank you for your question.

Your next question comes from Tian Hou from T.H. Capital.

(foreign language)

Two questions. One is from the market share point of view. I see a little bit shrinking than previous quarters. So how do we maintain our market share in 2021? What are some specific actions ZTO is going to take? That's the first one.

Second is regarding the competition, it will be very hard to maintain the possibility, while we will have to deal with price competition. So what are some specific actions or strategies ZTO is going to take to balance these 2 very contrasted issues? That's my question.

(foreign language)

[Interpreted] Thank you, Tian, for your question. Yes, we did notice the slight decline from quarter-to-quarter. And we think that the key reason is the 8 to 10 points improvements in market share by J&T, and it is creating a dilutive impact on everybody. But we think that is not a sustainable long-term trend. From our perspective, express delivery is still a volume and scale and operating efficiency gain where we have continually invested in our infrastructure. Our scale leverage has provided significant advantage to our balanced approach in not only growing volume and expanding market share while maintaining quality of services, but also achieving a high level of earnings. We believe our focus is on the longer term in an infrastructure investment this year. We are -- we have achieved a historical high of CNY 9.2 billion, and it will continue to increase for the next year.

A stable network is the second key important factors for sustained long-term growth, the network partners operating within a highly competitive marketplace, and they are still investing in their facilities. They are also working with us in our development of our network changes, where we are streamlining, we are delayering. They are also working with us. And it's apparent, our network partners are much more confident in our approach and in our business to continue to lead. So our network is the most stable.

And then thirdly, specifically speaking, when we issue network policies, it's also unlike any other. It's transparent, it's fair. And it is also, in a highly competitive dynamic, much more in sync with the market condition. In other words, we are asking or designing our policy to be competitive compared to all the other competitors in the marketplace. We are not any better off or worse off, yet because of our operational efficiency, we are able to leave more room for our network partners. The longer-term growth of Chinese express delivery industry for the near term is when we -- as we see around 15% to 20% growth annually, and ZTO's goal is to achieve 10 percentage points higher than the industry growth. With that pace, we believe, in 2021, our volume growth will lead us to achieve 22% at least of the market share. And we're still on our way to achieve a higher market share. And our goal set for 2022 is around 25%.

Your next question comes from Ronald Keung from Goldman Sachs.

(foreign language)

We have seen the unit cost in 2020, where there was a big decline in costs. Particularly there was toll fee exemptions in the second quarter, VAT rebate, social insurance exceptions. And so as you look into 2021, with these cost push, do we expect players to pass-through these costs and will our ASP declines actually be less in this year versus 2020?

And then my second question would be, we talked about the logistics parks and kind of combining express LTL, co-chain, warehouse and with a more comprehensive solution for our customers. I see that LTL is actually an associate that we own a high teens stake. So will we have plans to increase our stake there? Or what's the plan for the LTL business?

Okay. Let me answer the first part of the question. The fourth quarter ASP decline is still largely related to the market competitive environment. We have seen that in the fourth quarter, given -- we've given our much more incentives for our network partners, for the fourth quarter is CNY 0.25 decrease of a total of CNY 0.36 and the decrease for -- related to the network incentives was CNY 0.25. And so the cost side of the equation, certainly, we've mentioned, we did experience policy benefit in the first quarter of this year because of the toll road waiver and also there are some benefit from the oil price decline. But that is still compared to our own operational cost-efficiency gain. We believe the cost competitiveness would continue to be had going forward aside from any of the policies or benefits in the marketplace.

So going forward, we think ASP, the trend is still very much related to the market condition. When we did say that the competition has been going on for a while, and each of the player's profitability and also their ability to grow, which is largely dependent on how and where their network partners are investing, if not investing the end-to-end competitiveness, will not be in -- continue to be intact. So the clear leaders are those who are able to maintain stable network, invest in the infrastructure and have strong infrastructure as well as further cost and scale efficiency gains.

And for the second part of the question, the LTL business and all our other ecosystem development are in a way very much organically in sync. So we developed our LTL business and then our cloud warehouse business. And today, we've decided that it's time for us to invest more in smart logistic operational parks because of their inter synergies that are being able to carry out by all our businesses. LTL business being one of the earlier exercises or earlier trials of our approach to a new adjacent business, and it's been doing quite well. It's been among the top 5 now with a very short period of time, only 3 or 4 number of years, it's attained its market position. And we think that it will lead our approach of a synergistic development of our ecosystem businesses.

That does conclude our time for questions. I'll now hand the conference back over for closing remarks.

Thank you, operator. In closing, on behalf of the entire ZTO management team, we would like to thank you for your interest and participation in today's call. If you require any further information or have any interest in visiting us in China, please let us know. Thank you for joining us today.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]