ZTO Express Earnings: Maintain Fair Value Estimates After Mixed First-Quarter Results

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.