Company Reports

While narrow-moat ZTO Express’ first-quarter revenue and operating profit are tracking ahead of our full-year expectations, market share and parcel volume growth are trailing our 2024 estimates. We are concerned that ZTO’s number-one position in the economy express delivery segment may be challenged, as the market share by parcel volume gap between ZTO and number-two player YTO Express had narrowed to 4.3 percentage points in the quarter from 6.5 percentage points in the December quarter. This is because express delivery is a scale-based business where high volume will help reduce unit cost and, in turn, attract more business volume. We maintain ZTO’s fair value estimate at USD 14.70 per ADS (HKD 115.00 per share) and leave our estimates unchanged. We expect parcel volume to grow 17% versus management’s guidance of 15% to 18% in 2024. Considering management’s unchanged volume guidance for 2024 despite its lower volume growth in the quarter compared with its full-year guidance, we think ZTO may increase price cuts and sacrifice some profitability to increase volume in the rest of the year. This would allow revenue and profit growth to converge to our 2024 full-year forecasts. We believe ZTO is overvalued currently and advise investors to wait for a better entry point.

The network partner model-based companies in China have gained parcel volume share from direct operation-based companies, with share rising to 76% in 2022 from 66% in 2011. The six largest express delivery companies controlled around 86% of China’s parcel deliveries by volume in 2022, based on data from the companies and China’s State Post Bureau. With share already high, we think further volume share gain is limited for the network partner model-based companies.

We maintain narrow-moat ZTO’s fair value estimate at USD 14.70 per ADS and HKD 115.00 per share. Our 2024-26 EBIT forecasts increase by 6% as we assume better cost control. We forecast revenue to increase by a 5% compound annual growth rate during 2023-33. We assume a 5% CAGR for express delivery services business revenue—92% of total revenue in 2023—in the coming 10 years. While we think ZTO is a quality economy express company, the shares are overvalued due to the threat of the current price war in the industry.

Narrow-moat ZTO Express' fourth-quarter revenue increased 7.6% year on year, 6% higher than our estimate, thanks to stronger-than-expected express delivery industry parcel volume growth. Operating profit grew 14% year on year and beat our estimate by 11%, as ZTO's cost control measures surpassed our expectation. However, ZTO's parcel volume market share in the quarter was 22.4%, flat compared with the third quarter, and below our estimate of 23.5%. Our USD 14.70 fair value estimate on ZTO is unchanged. We think ZTO is overvalued, as we believe price competition will eventually weigh on ZTO's profitability.

We initiate wide-moat SF Holding, or SF, with a fair value estimate of CNY 54.00; narrow-moat ZTO Express with a fair value estimate of USD 14.70 per ADS and HKD 115.00 per share; no-moat Yunda Holding with a fair value estimate of CNY 10.00; no-moat YTO Express with a fair value estimate of CNY 7.80; no-moat STO Express with a fair value estimate of CNY 9.60; no-moat Kerry Logistics Network, or KLN, with a fair value estimate of HKD 11.90; and no-moat JD Logistics, or JDL, with a fair value estimate of HKD 10.70. We think SF and KLN are undervalued; Yunda, STO, and JD Logistics are fairly valued; and ZTO and YTO are overvalued.

The network partner model-based companies in China have gained parcel volume share from direct operation-based companies, with share rising to 76% in 2022 from 66% in 2011. The six largest express delivery companies controlled around 86% of China’s parcel deliveries by volume in 2022, based on data from the companies and China’s State Post Bureau. With share already high, we think further volume share gain is limited for the network partner model-based companies.