ZTO Express announced financial results for 4Q19 and FY19. Parcel volume and adjusted net income for FY19 beat expectations. We expect to see strong recovery in the Company's business after 1Q20E, and we expect the price war and industry consolidation to end earlier than expected. We adjust TP up to US$ 25.98. The Company is currently trading at 24.2x 2020E P/E, above historical average. Downgrade to HOLD.
- Parcel volume and adjusted net income for FY19 beat expectations. In 4Q19, parcel volume increased 36.1% YoY, 16.9ppt above industry average. Annual parcel volume increased 42.2% YoY to 12.1bn, capturing a market share of 19.1%, an increase of 2.3ppt YoY. For FY19, revenue increased 25.6% YoY to RMB 22.1bn. Adjusted net income increased 26.0% YoY to RMB 5.3bn. Adjusted EPS increased 21.0% YoY to RMB 6.75. Net cash generated by operating activities increased 43.1% YoY to RMB 6.3bn.
- We expect to see strong recovery in the Company's business after 1Q20E. As domestic COVID-19 epidemic eases, we expect to see strong recovery in the Company's business, benefiting from (1) release of consumption demand, and (2) the decline in oil prices. Generally speaking, oil prices account for ~25% of the Company's line-haul transportation cost. We expect the saved costs to be converted into lower unit prices, which will help the Company to gain market share during the price war.
- We expect the price war and industry consolidation to end earlier than expected. Due to tightened liquidity, we expect the price war and industry consolidation to end earlier than expected. In 2019, the Company’s net cash generated from operating activities increased 43.1% to RMB 6.3bn. The Company will benefit from its net cash position and accelerated industry consolidation.
- Valuation. For FY20E, we expect the Company’s parcel volume will increase 35% YoY, 15ppt above industry average. ASP will decrease 11% YoY and unit COGS will decrease 10% YoY. We forecast 2020E adj. EPS to increase 7.7% YoY to RMB 7.28. We adjust TP up to US$ 25.98. Our TP corresponds to 25x 2020E P/E, one standard deviation above historical average of 21x. The Company is currently trading at 24.2x 2020E P/E. Downgrade to HOLD.
