Summary. ZTO delivered strong 2Q19 results, as market share ratcheted up to 20% and adj. net profit beat consensus/ our est. by 8%/ 10%. However, its greater-than-expected ASP decline revealed the heated price war. We believe the heightened competition will continue in 2H19E, and the pitched battle will shadow the profitability outlook. We revised down adj. EPS in FY19/ 20E by 5%/ 3%, but maintain BUY with TP cut to US$22.17 based on 25x FY19E P/E, to reflect its cemented leadership and visible share gain amid sector consolidation.
- 2Q19 beat amid fierce competition. In 2Q19, ZTO’s parcel volume increased to 3.1bn (+47% YoY), and the market share reached 19.9%. Revenue grew 29% YoY to RMB5.4bn, in line with consensus and our est., due to strong volume growth offset by unexpectedly dramatic ASP dive (-11% YoY). Adj. net profit came in at RMB1.4bn, 8%/ 10% above consensus/ our est., driven by unit cost decline of 8% YoY.
- Margin under pressure as price war to culminate. We deem that it’s ASP dive leading to the operating profit miss on our est. by 10%, and it epitomized the heightened competition at current stage. Though momentum bifurcation between top players has seen stretched recently, we still maintain our cautious outlook toward the price war trend, especially considering STO’s (002468 CH) most likely rise after Alibaba’s takeover. Further, we think the ongoing pitched battle will hurt ZTO’s profitability in 2H19E. As a result, we revised down our GP/ OP forecast by 9%/ 12% in FY19E.
- Eyes on last-mile cost control. ZTO used to build up edges in cost control over peers by self-operation, high-capacity truck replacement and sorting automation. Going forward, we believe cost control capability matters most in the ongoing rat race against the backdrop of ASP inevitable decline. On top of continued upgrade on sorting and transportation capacity, ZTO is also geared up to optimize last-mile cost through post functionality expansion and franchisees’ income balancing. Mgmt believes the innovation and effort on last-mile process would bolster ZTO’s further cost improvement.
- Maintain BUY with TP trimmed. Due to intensified competition and prudent margin outlook, we revised down our adj. net profit forecast in FY19/ 20E by 5%/ 3%. We reiterate BUY and slightly trim our TP from US$23.64 to US$22.17, based on 25x FY19E P/E. Key risks include 1) slower-than-expected e-commerce growth, and 2) greater-than-expected ASP decline.
