ZTO Express (Cayman) Inc (ZTO) 2021 Q4 法說會逐字稿

Good day, and welcome to the ZTO conference call and webcast to announce the fourth quarter and full year 2021 financial results. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Ms. Huiping Yan, Chief Financial Officer. Ms. Yan, the floor is yours, ma'am.

Thank you, operator. Hello, everyone, and thank you for joining us today. The company's results and an 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, myself, Chief Financial Officer. Mr. Lai will give a brief overview of the company's business operations and future plans, followed by myself who will go through financials and guidance. We will both be available to answer 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 conditions 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, performances or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties and factors are included in the company's filings with the U.S. Securities and Exchange Commission. Company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required by law.

It is now my pleasure to introduce Mr. Meisong Lai. Mr. Lai will go through his prepared remarks in their entirety in Chinese before I translate for him in English. (foreign language)

(foreign language)

Thank you, Mr. Lai. Let me translate first.

[Interpreted] Hello, everyone, and thank you for joining us today. In the fourth quarter of 2021, ZTO delivered a 6.34 billion parcel volume, which increased 17.2% and expanded our leading market share by 0.2 points. While maintaining a superior quality of service and customer satisfaction, we continued our focus on profitable growth volume and grew our net income 35% year-over-year to reach CNY 1.75 billion.

The year of 2021 was exceptional. Facing continued COVID-19 pandemic shock waves, complex geopolitical environment and intense competition in the industry, ZTO once again achieved solid growth against a slew of uncertainties by being self-assured and the best we can. We delivered 22.3 billion parcels and became the first express delivery company in the world to achieve an annual parcel volume that exceed 20 billion.

Our market share advanced to a robust 20.6% for the year. Everyone under the ZTO brand collaborated and made remarkable progress in enhancing brand recognition, optimizing operational efficiencies and improving comprehensive capabilities.

First, during the annual Double 11 shopping festival, ZTO became the first express delivery company with a daily capacity of over 100 million parcels across all stages, 4 of them, throughout the parcel flow. The incremental volume of 5.29 billion parcels for the year solidified our #1 position in the industry for the sixth consecutive year.

Second, we held steadfastly the #1 position above our peers for quality of services and customer satisfaction, measured by a comprehensive set of indexes tracked by Cainiao and the customer complaint rate closely monitored by the State Post Bureau.

Third, we made further strides on creating a just, equitable and transparent environment in which our shared success culture was deepened, our sense of social responsibility and accountability enhanced, and our network partners are increasingly self-motivated with renewed confidence.

Fourth, we further integrated operations, finance and technology through standardization and digitization to manage and measure business processes so that our vast network of infrastructure resources could generate greater efficiencies and better economies. As our core business solidly developed, we endeavored to build up our comprehensive capabilities such as services for heavy and bulky parcels, integrated warehousing and delivery, cross-border logistics, some our equipment design and manufacturing, financial services, time-definite and coaching services, last-mile cost and commercial solutioning. We were exploring and building more and more capabilities to cater towards varied logistic needs. It was with joint effort by everyone they were -- we were unable to overcome challenges and achieve satisfactory results towards our strategic goals in market share gain, service quality and earnings.

In 2022, our strategy remains, and our execution plans will test around the following 5 objectives. First, to achieve solid growth of our market share, we must ensure the health of our network. Start from the aspiration to empower, we will rely on objective data to differentiate varied conditions or potentials associated with our network partners, more suitable and precise policies and better incentivize overall volume growth. For outlets with slow or negative growth, more still visits aim to gain deeper understanding of the real challenges our network partners faces can help us identify root causes and appropriate solutions. Moreover, we must protect the rights in interest of those on the front line, alleviate the bottleneck in workload and cost pressure by building last-mile post. With ease of access to commerce and services for customers, our market share will steadily grow.

Second, to ensure profitability and earnings growth across the entire network, we need to build a systemic framework of digitized operating process, tracking and quick decision-making. Practical implementations of technological tools can help bring visibility to key metrics for process effectiveness and efficiencies from end to end and allow us to advance from post-modern reactive to in-progress responsive or even ahead-of-time predictive. The volume cost profit project we initiated in later part of 2021 has generated meaningful results. Further initiatives will help delineate op costs with greater granularity so that more holistic, accurate and timely pricing decisions can be made to drive better productivity, less waste of resources and higher earnings.

Third, to ensure continued lead in service quality, we need to further improve our service capabilities. In 2022, we will pay continued attention to infrastructure development and focus more on optimized design and layout of the sorting centers, consistent with longer-term needs. Our integrated tri-layer throughput model will gradually evolve with increasing volume intake and operations adaptations. Meanwhile, we will improve performance evaluations as well as reward and reprimand regulations to promote productive actions by network partners and couriers out of their own initiatives. A comprehensive, systematic yet flexible governing system that is capable and pliable to multiple needs and customized demand for customers for products and services can help provide consistent, efficient, safe, convenient and high-quality product and services experience for our customers.

Fourth, to ensure the safety of pickup and delivery, transit and sorting and the flow of critical information through the whole process, we must build and strictly enforce safety assurance measures, uninterrupted operational process and necessary checks for safety and precautions are sometimes competing priorities, but we must be vigilant with both, paying close attention to conditions of the livelihood in front line while maintaining high levels of integrity can deter corruption and cultivate self-discipline.

Fifth, to ensure a continued development of our ecosystem, we need to enhance coordination and synergy. This year, we will promote collaboration and seek opportunities to cross-pollinate and expand customer base as well as market presence. Through ongoing efforts to enhance our integrated service capabilities, ZTO can then effectively convey to our customers a comprehensive logistics brand concept of reliability, stability and efficiency.

To achieve all of the above, of course, we need to ensure an environment conducive for shared success -- shared success culture, a culture that is built upon a common goal and behaviors by a group of people who trust one another, work cohesively, contribute as individuals or as a team. Our future depends on the new generation of leaders who has great potential and are recognized by effective talent identification and training system who seek personal growth and are given the chance to set up -- to step up for greater responsibilities under a fair promotion and elimination framework.

2022 is a year when ZTO will turn 20, and this is also the year in which we will embark on our second venture. Despite many uncertainties in the world, the foundation of China's economy is solid, and its upward momentum and stamina is strong. Being an infrastructure that is crucial to day-to-day lives, express delivery industry will continue to maintain a medium to high speed of growth towards a promising future.

Our industry will continue its consolidation where strong players get stronger and the competitive dynamics gradually stabilize. Price and quality will strike new balances where competition advantage -- competitive advantages are increasingly demonstrated through scale and efficiency. ZTO is very favorably positioned. In the process of transforming from quality to be with higher -- from quantity to be with higher quality, we will rely on digitized tools, pay consistent attention to capacity and capability development, effective and efficient resource allocation, partner network stability with secured fundamental rights and interests.

The successful development of a competitive moat with high-quality, comprehensive logistics service capabilities within the next 5 years will ensure us to go from a leading advantage towards absolute and equal advantage. We firmly believe that we can achieve greater and better results in our journeys ahead.

Now let's have Ms. Yan take us through our financials.

Hello, everyone. As I go through our financials, please note that unless specifically mentioned, all numbers quoted are in RMB, and percentage changes refer to year-over-year comparisons. Detailed analysis of our financial performances, unit economics and cash flow are posted on our website, and I'll go through some of the highlights here.

We achieved volume target by growing parcel volume 31.1% to 22.3 billion for the year, with firm implantation of our consistent strategies. Our leading market share further expanded by 0.2 points to 20.6%, while maintaining superior quality of services for the year. Our adjusted net income increased 7.8% to CNY 4.9 billion. Total revenue increased 11.6% to CNY 9.2 billion for Q4 and increased to 20.6% to CNY 30.4 billion for the year.

Annual ASP for the core express delivery business declined 1.3% and 5.7% for the quarter and the year, respectively, as competition turning towards sensibility. Average parcel weight drop contributed CNY 0.03 out of the total of CNY 0.07 decrease in ASP for the year. Average parcel weight decreased 4.9% to 1 kilo for the year of 2021.

Total cost of revenue was CNY 6.97 billion and CNY 23.82 billion, respectively, for Q4 and 2021, which increased 8.9% for the quarter and increased 22.9% for the year. Unit cost of revenue for the core express delivery business decreased 2.9% for Q4 and for the year.

Unit transportation costs declined 3.3% for Q4 and increased 0.8% for the year, primarily due to the combined effects of increased use of self-owned high-capacity trailer trucks and improved low rate as well as a negative impact for increase in diesel price and the expiry of favorable toll road fee waiver from mid-February to May in 2020.

Unit sorting costs increased by 4.1% for Q4 and declined 1.1% for the year because of a higher level of automation and improved economies of scale, offset by increased labor costs and higher depreciation and amortization charges given there were more set of automation sorting equipment and facilities placed in service.

Gross profit increased 21.1% for Q4 and 12.9% for the year. Gross profit margin increased 1.9 points to 24.4% for Q4 and decreased 1.5 points or 21.7% for the year, which resulted mainly from competition-driven ASP decline, partially offset by cost productivity.

SG&A exclude SBC increased 13.1% to CNY 472 million for Q4 and increased 16.3% to CNY 1.6 billion for the year. SG&A costs as a percentage of revenue remained low at 5.1% for the quarter and [5.4%] for the year as our corporate structure remained lean and stable. Income from operations, excluding SBC, increased by 31.1% for Q4 and 14.6% for the year. Associated margin increased 3.3 points for Q4 and decreased 1 point for the year, which performed better than the gross profit margin change because of positive SG&A leverage and increased other operating income, namely VAT super deduction and government subsidies and tax rebates.

Operating cash flow was CNY 3 billion for Q4 and CNY 7.2 billion for the year, increasing 48.2% and 45.8%, respectively. CapEx expenditure totaled CNY 9.3 billion for the year as we secured larger tracts of land for developing comprehensive logistics facility and increased the number of self-owned fleet and automation equipment. We reasonably anticipate cash generated from operating activity will well exceed capital expenditures for 2022 and onwards.

The company announced a USD 0.25 dividend for the year for shareholders on record as of April 8, 2022, representing a 25.9% dividend payout ratio similar to those of previous years.

Now turning to business outlook. Considering the current market condition uncertainties, the company expects the profit volume of 2022 to be in the range of CNY 26.3 billion to CNY 27.6 billion, representing an 18% to 24% year-over-year increase, that is well above the anticipated industry average. These estimates represent management's current and preliminary view and are subject to change.

Now this concludes our prepared remarks. Operator, please open the line for questions. Thank you.

(Operator Instructions) The first question we have will come from Qianlei Fan of Morgan Stanley.

(foreign language) So I'll translate for myself. Congratulations on the very solid fourth quarter results. So I have 2 questions. The first question is about cost trend. So considering several factors, higher fuel price and potential labor cost inflation, also taking into consideration potential economy of scale, following a higher volume being handled in this year and also the potential disruption from the recent COVID resurgence, which might bring some fluctuation to the volume, so what's the unit cost outlook for 2022 from the management's expectation? So this is the first question.

And the second question is about profitability. So we have heard from the industry that some of the players are discussing with their customers about pricing hikes due to the cost inflation. But taking into consideration of the current economic outlook, the potential pressure your customers are facing, considering for example, the soft consumption demand growth as well as the cost inflation they are facing, do you think there could be downside risk to the pricing or unit profitability? Do you see downside risk to the previous guidance on the bottom line over 30% year-on-year profit growth, which you have guided last time? So these are my questions.

(foreign language)

[Interpreted] Thank you for your...

(foreign language)

Thank you for your question. And let me translate and supplement where needed.

[Interpreted] First question, you really asked 3 questions. The first question is regarding the cost. Assuming the current condition remains, the stable market conditions and pandemic situation remains under control. We believe our cost productivity will continue to generate results. The digitized initiative as well as more detailed level of management throughout our operating process. For example, low rate, increased utilization of resources improvements, the high -- there is a high probability that our costs will continue to be managed down.

I'll supplement one point. The oil price increase, the special situation in China because there is a regulating mechanism, so in the fourth quarter, we are already seeing such impact coming through. But yet we are able to utilize some of the stock that we purposefully purchased so that we can alleviate some of the cost increases. In fact, the estimated oil hike cost impact is about CNY 0.03 in the fourth quarter and we were able to still gain around CNY 0.03 of productivity in our transportation segment. So that is to say that very reasonably anticipated cost management will give us a confidence that our overall operating costs will likely to continue to gain productivity and perhaps decrease.

Second question you asked is really around the pricing. What has happened in 2021 and before fierce competition and some of them are insensible and deviating from the market reality, those are no longer the case. We believe, in 2022, the stabilization of pricing will go hand in hand with the entire industry's shift from high quantity to higher quality, i.e., higher quality of earnings.

Speaking for ourselves, the initiatives that we described earlier in gaining profitable growth through specific mechanisms in pricing, in finding waste and eliminating waste of resources, providing proper pricing to our network partners will allow us to achieve our goal. And currently, first of all, we didn't give guidance. But in any case, on the earnings, we have high confidence that we will significantly improve our earnings compared to 2021.

And the next question we have will come from Tian Hou of TH Capital.

(foreign language) Congratulations for a great performance in 2021 under the extreme situation. I have 2 questions. One is what is ZTO's investment plan in 2022 given the market competition is really competing on the uniqueness and competitiveness. So in which area ZTO want to invest to further enhance our competitiveness?

And the second is how does Mr. Lai to see the logistics market, the future, given JD is acquiring Debang. So that is 1 thing happened in the logistics market. What's going to happen next? So I would like to hear what's Mr. Lai's view on that.

(foreign language)

Let me translate for Mr. Lai and also supplement answers.

[Interpreted] We have consistently invested in our infrastructure as well as comprehensive capabilities because we do believe that the future of competition lies with not just the express delivery itself, but all the other comprehensive integrated services that is an ecosystem. Our focus, especially of late, on collaboration amongst all the ecosystem businesses that are developing in our whole system is to maximize the utilization. Our past focus as well as going forward will continue to be on the land acquisition, vehicle upgrades and also automation level of improvement. We are also increasingly paying more attention in supporting our network partners in providing them financial support where needed in developing their own capabilities that is consistent and in sync with our platform's capabilities.

And thirdly, we have also begun to invest in technology, in digitization so as to drive further productivity and become competitive in digitized solutioning. Our frontline partners' interest and their right are, in a way, well preserved and protected because we are also investing in our last-mile post system.

In summary, all these will allow us to steadfastly, consistently develop our capability internally as well as externally, to go from leading to absolute and equal advantage.

The example Mr. Lai gave relates to a tract of land that we acquired lately that is designed to house 6 levels of operations. The first 2 being designed for express delivery business and all the above are open for in-warehouse processing and delivery as well as other comprehensive capabilities that are evolving, such as cold chain services. This will reduce overall cost, improve timeliness and provide better experience for our customers.

Now you mentioned about the acquisition by Jingdong of Debang. Certainly, there are many ways of increasing capabilities either through organic or inorganic growth. As we set our sights on developing equal advantage in the future, we will explore feasible and fit in terms of inorganic growth. The development of total comprehensive capabilities has to be done in a way that is the most cost-efficient, driving greater synergy as well as integratable solutions. I hope that answers your question.

Yes, it does.

And next, we have of Gangxian Liu of CICC.

(foreign language) So let me translate for myself. Congrats for another strong quarter. Two questions on my side. First is sort about ADR. We heard some news about SEC, and we already see some secondary listed company preparing for primarily dual listing in Hong Kong. So I wonder to share -- management to share your view about this potential sort of political risk. And is there any planning or initiatives that we will take?

And the second is about the combination of so-called 3 networks. So I wonder what's the current progress and the results as of now? And is there any other specific -- more specific targets for this year? Or a couple of years into the future that you can share with us?

(foreign language)

First, let me translate for Mr. Lai for the first question, the answer relating to the tri-layer integrated throughput system.

[Interpreted] We have consistently, throughout our past, focused on efficiencies. And we showed our advantage by investing early in planned and facility vehicles as well as sorting equipment. As our competitors slowly catches up with their investment, then that difference within those advantages are narrowing. However, because of our increasing volume and our efficiencies in our traditional first layer, which is connection very effectively run between sorting hubs center to center, we are developing greater efficiencies and capabilities amongst all the outlets towards their connection, better connection with our sorting hubs.

The second layer is the origination outlets to destination sorting hub. So therefore they are bypassing the origination sorting center. In the future, we are expecting about 100 of super sorting centers that is owned and operated by us with 200 to 300 self-sufficient and capable sorting -- or sorting mini centers operated by our network partners, who has the capability of connecting directly to sorting centers bypassing the origination center. And that is the second layer.

The third layer refers to the capability of direct route trucks running, connecting our origination outlets to destination outlets. We have estimated each segment of the trip saved could reduce per parcel cost by around CNY 0.30, and that is quite meaningful. To achieve that, we are currently and have been in the past, but currently more so, in helping our network partners, who we mentioned that has been with the company, has confidence and trust in us and the future, who are willing to invest and develop their own capabilities. We expect in the next 3 to 5 years, about 15% to 20% of our volume will come from the operating layers other than the original center-to-center player. And the estimated cost reduction is about CNY 3 billion to CNY 4 billion.

Now let me go through the second -- your first question regarding the current listing and SEC requirements. Recently, you all have seen the active discussions amongst the authorities and government bodies. So while we are hopeful that productive and practical solutions could be reached, an agreement could be put in place, we are actively searching and planning, researching and planning for our options. Hong Kong primary dual listing is one of the options. That will give us proactive control. So positively response to your question that we are in the process of evaluating such options to us.

I should add that finding a solution such as -- or preparing for with a solution that is, for example, Hong Kong dual primary listing is not for avoiding of disclosure. You know that we have always been very open and transparent in providing all the pertinent information to our investors who can make sound decisions. This is also -- our initiatives are also for the purposes of opening up more investment opportunities for investors that are closer to our home market. So this is a comprehensive decision and approach.

Next, we will take Fan Tso of Bank of America.

(foreign language) Maybe now I'll translate my 2 questions. Number one is the COVID lockdown impact on our volume. Would management be able to quantify a little bit, especially in cities that we are seeing more stringent lockdown such as Shenzhen and Dongguan, how it is impacting our daily volume?

And second question is about our time definite parcel business. Could management provide an update? And are there any target in terms of volume or revenue contribution in the medium to long term?

First of all, let me make a remark that we have already exceeded our 1-hour call and the market is already open. So we will refrain from any comments that could specifically communicate numbers and so on. But we are willing to answer the question regarding the COVID situation.

(foreign language)

[Interpreted] Let me just make some closing remarks here because we really want to make sure our compliance -- the -- we have trust in the government and the agencies who are working hard day and night in addressing the COVID situation. The impact is there for sure. You are all aware what's in the public. It was announced here and there all the numbers. So please pay attention to those and gather your numbers on that.

And regarding the time definite product, very quick, it's a product that we rolled out last year aimed to standardize the time definite requirements and for commitment around the promise of time and also for the delivery.

So please, operator, we need to conclude this call.

Great. Yes...

We are open for call subsequent. We have scheduled many calls for you. And please feel free to connect with us.

Thank you, ma'am. Sorry about that. All right. Again, the conference call has now concluded. Again, we thank the management team for your time today, and thank you, everyone, for attending. At this time, you may disconnect your lines. Thank you, everyone. Take care, and have a wonderful day.

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