We believe ZTO’s market share growth strategy will continue in 2021E as management reiterated in the post-results briefing that scale remains the key factor to win the war of industry consolidation. While we lower our net profit forecast in 2020E/21E/22E by 9%/3%/3% due to more conservative parcel ASP assumptions, we believe the growing scale and on-track cost reduction trend will help solidify ZTO’s position as a cost leader in the long-run. We revised our TP to HK$292 from HK$297, based on unchanged 33x 2021E P/E. Maintain BUY.
- 3Q20 earnings highlight. ZTO’s reported net profit dropped only 8% YoY to RMB1.2bn, which was helped by a one-off tax refund of RMB200mn as Shanghai Zongtongji Network (a subsidiary of ZTO) was recognized as a key software enterprise that qualified for a preferential tax rate of 10%. Excluding this one-off tax refund, the result would be lower than our expectation. On the other hand, ZTO reported RMB64mn of FX loss, mainly due to the translation loss as a result of the depreciation of US$ against RMB.
- Strong volume growth in 3Q20. ZTO’s revenue increased by 26% YoY to RMB6.6bn. Parcel volume surged 51% YoY to 4.6bn units in 3Q20, outpacing the industry growth of 38%. In terms of parcel shipment volume, ZTO’s market share reached 20.8%, up 1.9ppt YoY but slightly down 0.7ppt QoQ. ZTO maintains its target of achieving 25% market share in two years.
- ASP dropped less than major players. ZTO’s parcel ASP dropped 18% YoY (or RMB0.30/unit) to RMB1.33/unit in 3Q20 (breakdown: [1] RMB0.22 for incentives to support network partners, [2] RMB0.03 for the use of lower-priced waybills, and [3] RMB0.05 due to lower parcel weight). Such pricing reduction was similar to SF Holding (002352 CH, BUY) but less than the major “Tongda” players. On QoQ basis, the ASP increased 3%.
- Unit cost down 6.7% YoY in 3Q20. ZTO’s unit cost of transportation and sorting hub dropped 9.2% YoY and 8.5% YoY, respectively, to RMB0.53 and RMB0.29. The transportation cost reduction was driven by higher portion of volume transported by self-owned trucks (93%, vs 74% in 3Q19) and higher portion of the use of high-capacity trucks (80%, vs 69% in 3Q19). For sorting hub cost, the reduction was mainly by the use of more sets of automated sorting equipment (300 sets, vs 208 sets in 3Q19). Management targets to achieve 10% YoY reduction on the two cost items in 4Q20E.
- Major risk factors: (1) prolonged price war; (2) slowdown of online retail sales; (3) lack of effective control over network partners.
