ZTO Express: Watch Industry Data And Company Guidance

Elevator Pitch

I continue to assign a Hold investment rating to ZTO Express (Cayman) Inc.'s (NYSE:ZTO) [2057:HK] stock.

My prior update for ZTO Express written on February 9, 2023, touched on ZTO's stock price outperformance in the early part of this year, which I thought was unsustainable. It is worth noting that ZTO Express' share price has declined by -2.3% (source: Seeking Alpha price data) in the four-month period since my earlier article was published.

In this latest write-up, I analyze recent industry data and the company's updated guidance. I come to the conclusion that ZTO Express' prospects are mixed, which warrants a Hold rating for the stock.

Recent Industry Data Shows A Mixed Picture

JPMorgan (JPM) recently published a research report (not publicly available) titled "China Express Parcels: April Data" on May 22, 2023, which cited data for the Chinese express delivery industry from sources such as the State Post Bureau and Wind (China's equivalent of Bloomberg). According to JPM's recent May 22 report, China's express delivery industry witnessed both volume growth and ASP (Average Selling Price) compression in April.

The number of average daily express parcels delivered in China was 340 million units for April 2023. This meant that the daily express parcel delivery volume growth for the Chinese market accelerated from +23% YoY for March to +37% YoY in April. On a month-on-month or MoM basis, China's number of average daily express parcels delivery increased by +0.6% from 338 million units in March 2023. In my February article on ZTO, I highlighted "reopening tailwinds" for ZTO Express and the Chinese express delivery industry. As such, it is no surprise that China's express delivery market has seen growth on both MoM and YoY terms in the recent month.

On the flip side, the recovery of China's express delivery industry (in volume terms) means that the return of price wars is inevitable, with industry players turning their attention to volume share gains. The ASP on a per-parcel basis for the Chinese express delivery market contracted by -8.5% YoY to RMB9.06 in April 2023 as indicated in JPMorgan's May 22 report. In contrast, the express delivery market's ASP declined by just -3.2% YoY for March this year. The ASP for the express delivery industry also decreased by -2.4% in MoM terms in April.

In a nutshell, the outlook for the Chinese express delivery market is mixed, with volume growth being negated by a decline in ASP to some extent.

Financial Guidance And Management Commentary Also Send Mixed Signals

ZTO Express' updated full-year FY 2023 guidance and the company's management commentary at its Q1 2023 earnings briefing are consistent with recent industry data highlighted in the preceding section.

ZTO lifted the mid-point of its parcel volume growth guidance from +20% previously to +22% when it recently announced its first quarter financial results in mid-May. The company mentioned at its first quarter results call that "China's economy is showing signs of gradual recovery, and consumers' confidence level is also expected to continue to recover." As such, favorable "market conditions" have given ZTO Express the confidence to raise the company's parcel volume growth guidance.

But the sell-side analysts' consensus financial projections are not entirely consistent with ZTO's bullish volume growth expectations.

Based on the market's consensus estimates for ZTO Express sourced from S&P Capital IQ, ZTO's consensus FY 2023 top line forecast was increased by merely +1% from RMB41,327 million at the start of this year to RMB41,811 million now. In addition, the analysts' consensus revenue estimate of RMB41,811 million translates into a growth rate of +18.2% for the current year, which is much lower than the company's 2023 volume growth guidance of +22%.

In my view, ZTO Express' actual ASP for full-year FY 2023 might be lower as compared to FY 2022, and this will help to explain why ZTO's sell-side consensus revenue growth rate is slower than the management volume growth guidance.

There are three factors worth considering in assessing ZTO's ASP outlook for 2023.

Firstly, recent industry data as outlined in the previous section suggests that price wars are currently playing out in the Chinese express delivery industry.

Secondly, ZTO Express has been offering a higher level of volume rebates to its clients in the most recent quarter. ZTO's express delivery business ASP contracted by -3.7% YoY in the first quarter of 2023, and the company highlighted that the "increase in volume incentives" for Q1 was a major contributing factor.

Thirdly, the company's share of China's express delivery market expanded by +1.8 percentage points YoY in Q1 2023, which is in line with its target of gaining a minimum +1.5 percentage points of market share for the full year. It will be a tough balancing act for ZTO Express to win market share while still maintaining its ASP. It is likely that ZTO will have to sacrifice ASP in exchange for share gains. ZTO Express guided in its Q1 2023 earnings call that its "unit price will remain relatively stable throughout the year", which implies that a flat ASP for 2023 might already be a favorable outcome.

In summary, there are positive signals for ZTO relating to volume expansion and market share gains, but pricing pressures is a key negative signal that can't be ignored.

Closing Thoughts

I am maintaining my Hold rating for ZTO Express. Recent industry data and updates to the company's volume guidance don't change my Neutral view of ZTO.

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