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spk04: Good day and welcome to the ZTO Express Third Quarter Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Sophie Lee. Please go ahead.
spk03: Thank you, operator. Hello, everyone, and thank you for joining us today. The company's results in the investor relations presentation were released earlier today and available on the company's IR website at ir.zto.com. On the call today from ZTO are Mr. Mason Lai, Chairman and Chief Executive Officer and Ms. Hui-Ding Yan, Chief Financial Officer. July will give a brief overview of the company's business operations and highlights, followed by Ms. Yan, who will go through the financials and guidance. They will both be available to answer your questions during the Q&A session that follows. I remind you that this call may contain forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statements. Further information regarding this and other risks uncertainties and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise, except as required under law. It is now my pleasure to introduce Mr. Mason Lai. Mr. Lai will read through his prepared remarks in their entirety before I translate for him in English.
spk01: Hello, everyone. Thank you for attending today's telephone meeting. In the third quarter of 2020, the total business volume of the express delivery industry was 222.7 billion lines, which increased by 37.8%. The total business volume of 46.2 billion lines was increased by 51.2%. It is the same growth record since the third quarter of 2016. The market share has increased by 1.9% to 20.8%. While the scale is expanding, we are working hard to maintain the overall service quality and customer satisfaction. The competition in the third quarter industry is still quite intense. The overall status of the target revenue decline is 12.1% in the middle. We built a large area of land. We have improved the number of free vehicles and further optimized the transport structure, especially the proportion of trailers. Among the 9,250 free vehicles used by the three systems and the headquarter, the proportion of high transport vehicles exceeds 80%, and the proportion of trailers reaches 1 to 1.3. The use of three-way transport vehicles is also even greater. The operating cost of single ticket has dropped by 6.7%. The operating cost of single ticket and distribution has dropped by 8% or 9%. The transformation of new construction facilities and existing facilities in Zhongtong has increased the capability of mechanical and intelligent operation and the deployment of high transport capacity. The transfer efficiency of our platform will be further improved. Second, in terms of network construction, we continue to implement structural flatness and network node generation and upgrade. In the past three years, there have been more than 5,150 network node co-operative partners. More than 30,000 network nodes cover 99% of the country's land and 92% of the townships. We are using headquarters and local network policies to support network co-operative partners in dealing with competition and profit pressure. While using the central financial resources to provide mobile funds and capital investments in the future, to solve the pain points, while clearly and properly implementing the business requirements and assessment mechanism to eliminate the drop-down point or the operator, manage and upgrade the network, The continuous evaluation and inclusion of the joint network will ensure that Shopee is an effective full-time platform to ensure the growth of online business and improve service quality and operational efficiency. Third, in terms of the MoDAN construction, our last step is to increase the size. The Chinese Communist Party and the Chinese Communist Party of China have accelerated the construction of the MoDAN station. These deployments include self-supply cabinets and courier houses, and other multi-faceted end-to-end resources. In fact, in the last three seasons, the total number of shipments exceeded 65,000. In place of the package balance sent to the home, it has already reached 46%. In order to welcome the arrival of hot military equipment and even higher business volume, we have laid the groundwork for B2 and Z2 in terms of controlling the cost and profit space. On September 29, 2020, ZTE was successfully listed in Hong Kong. This gives us a sense of hope and a chance to look forward to the future. We believe that express delivery has just begun its contribution to society. The red line in the express delivery industry has not yet arrived. ZTE's stock code is 2057, which represents the year 2020. China's economy has driven the express delivery industry to develop rapidly. The total order volume during the first day has exceeded 8.2 billion yuan. The total business volume has exceeded 7.6 billion yuan. As you can see, with e-commerce, Thank you, Lai Zong. Allow me to translate first. Hello, everyone, and thank you for joining us today. In the third quarter of 2020,
spk03: China Express Delivery Industry grew parcel volume by 37.8% to achieve 22.3 billion parcels year-over-year. BTO achieved 4.62 billion parcel volume in the sub-quarter and extended our volume market share by 1.9 percentage points to achieve 20.8. 51.2% growth rate broke the quarterly record set in the sub-quarter of 2016. while accelerating scale expansion. We continue to thrive and attain a high level of service quality and customer satisfaction. As fierce competition persisted and causing a landslide of peer-level net profits, our $1.21 billion adjusted net profit with an 8.2% year-over-year decline was relatively less abrasive. In the third quarter of 2020, We remain focused on our key strategy to accelerate volume growth, widen our lease, and expand our market. First of all, we continue to increase investment in infrastructure and capacity development. Simulative capital expenditure in the first three quarters reached $6.2 billion, which surpassed the total amount for the whole year of 2019. We acquired larger tracts of land and secured scarce resources to design and develop . We have increased the proportion of the self-owned vehicles for our fleet, further optimized structural transportation capacity, particularly the engine . At the end of the third quarter, high-capacity trucks made up more than 80% 9,250 self-owned vehicles in operation. And the ratio of engine to trailer increased to 1 to 1.3. We have also further rationalized the utility logistics. In this quarter, total core express delivery costs for Paso decreased by 6.7% as the combined unit transportation and sorting costs increased by 8% or 9%. For construction of new and upgrade of old sorting hubs and facilities, we have raised the level of automation and digitization to enable data driven smart sortations that are seamlessly integrated with transportation, ensuring further improvements of the capacity and efficiency of our platform. Secondly, we continue to de-layer and upgrade our partner network. By the end of the sub-quarter, we have over 5,150 direct network partners and nearly 30,000 outlets, covering approximately 99% of cities, as well as 92% of villages across China. Well-coordinated centralized and local policies are supportive of our network partners' space completion and profit pressures. We've made good use of our strong cash reserve to ease their liquidity pressure and provide for capital. Well, we helped to ease the pain experienced by our network partners clearly stated targets and included fair evaluation to identify and eliminate underperforming in order to optimize overall network quality. Such persistent efforts will allow proper match-up of pickup and delivery, and ensure the growth of hustle volume with improving service quality and operation efficiency across our entire network. Thirdly, we have started to establish scale in our last-mile footprint. CTO and Cai Niao collaboratively accelerated development of last mile posts, and we actively implemented lock boxes as well as virus express plus terminal resources. At the end of this quarter, total number of our last mile posts is 65,000, and approximately 46% of last mile delivery utilized the master's alternative to home delivery. We have laid a critical foundation for managing last mile cost and profitability in order to usher in an average daily volume of 100 million and more in the future. On September 29, 2020, ZTO successfully completed secondary listing in Hong Kong. We took the opportunity to reflect on the past and look forward to the future. We firmly believe that express delivery industry's value contribution to society has just begun, and the meaningful payback to express delivery industry has not yet arrived. The stock code of ZTO on the Hong Kong Stock Exchange is 2057, in which 20 represents the year of 2020. when the healthy recovery of China's economy is driving the accelerated growth of China's express delivery industry. And 57 is the humble beginning number of PASO on the first day of our business. The sparks from these speakers mark the new beginning of our journey ahead, where ZTO is to enhance its competitive edge, raise the bar, being our best at the present, and innovate for the future. On this past single-day shopping gala, our parcel volume was close to 130 million. The cumulative number of orders from November 1st to the 11th exceeded 820 million, and the cumulative parcel volume exceeded 760 million. We have been witnessing continuous innovations in e-commerce marketing practices and the creative format. Contrasted to the ever so fragmenting e-commerce menu, the express delivery industry has accelerated consolidation and polarization, relying on the maximizing skill and efficiency. Express delivery can serve almost everyone, shortening the distance between production and consumption, goods and users. With increasing build-out of key resources and ability to gain access and integrate and utilize even more, enterprises like ZHEO will be able to develop comprehensive logistic service capabilities and become increasingly eco-advantaged. Now, let's turn to our CFO, Ms. Yen, to take us through our financials.
spk02: Thank you, Chairman, and thank you, Sophie. Hello to everyone on the call. As I go through our financials, please note that unless specifically mentioned, all numbers quoted are in RMB related to third quarter of 2020, and percentage changes refers to year-over-year comparisons for the quarter. Detailed analysis of our financial performance, unit economics, and cash flow are posted on our website, and I'll go through some of the key highlights here. Driven by a steady economic recovery, China Express delivery industry maintained its strong growth momentum from previous quarter. ZTO grew parcel volume by 51.2% to 4.6 billion in the third quarter. Our market share further expanded by 1.9 percentage point to 20.8%. Total revenue increased by 26.1% to 6.6 billion. ASP for the core express delivery business declined by 18.4% or 30 cents, which was relatively moderate compared with our industry peers. The 30 cents price decline included 22 cents for incentives or subsidies to support our network partners to grow market share while maintaining confidence and keep the network stable. $0.03 decline came from increased use of lower-priced single-seat digital weight bills, and $0.05 decline was associated with parcel weight drop. Average weight per parcel declined 7% to 1.04 kilo. Total cost of revenue increased by 43% to $5.2 billion, while core expressed Delivery business unit cost of revenue decreased by 6.7%, or 7 cents. Unit transportation cost declined by 9.2%, or 5 cents, to 53 cents, primarily due to increased use of self-owned high-capacity trailer trucks. Unit sorting cost declined 8.5%, or 3 cents, to 29 cents as a result of increased level of automation and improved economies of scale. Gross profit decreased by 12.9 percent to 1.4 billion, and gross profit margin decreased 9.4 points to 21 percent as a combined result of volume increase, unit price decline, and improved cost productivity as previously described. SG&A increased by 28.5% to 374 million mainly due to increased headcount and average salaries and a higher depreciation and amortization expenses driven by increased capex investment. SG&A cost as a percentage of revenue remained low at 5.6%, where our corporate cost structure remained stable. Income from operations excluding SBC decreased by 17.2%, and associated margin decline was 9.2 percentage points, which is narrower than the gross margin decline because of positive SG&A leverage and increased other operating income, namely, VAT super deduction, and government subsidies and tax rebates. Operating cash flow was $1.5 billion for the third quarter, increased 4.4% from $1.4 billion last year. CapEx increased by 29.1% to $2.2 billion for this quarter as we expanded our investment in infrastructure and also facility construction and upgrade. Looking for the year we are likely to exceed our six to eight billion total year capex plan to reach 10 billion. We are able to secure larger tracts of land this quarter and those are also in the pipeline provided such estimate. The negative Income tax of 27.8 million resulted from a corporate income tax refund of 200.7 million that was received in this quarter by our wholly owned subsidiary, Shanghai Zhongtongji Network, which was recognized as a key software enterprise and qualified for a preferential tax rate of 10% for tax year 2019. Now turning to business outlook. Considering the current market condition and our prioritized goal to achieve accelerated market share gain while still manage to maintain a target level of earnings, the company maintains its current annual guidance. Parcel volume is expected to be in the range of 16.2 billion to 17 billion. representing a 33.7 to 40.3 percent increase year-over-year. And adjusted net income is expected to be in the range of 4.8 billion to 5.2 billion, representing a 1.7 percent to 9.3 percent decrease year-over-year. These estimates represent management's current view of the market condition and are preliminary and also subject to change. This concludes our prepared remarks. Operator, please open the line for questions. Thank you.
spk04: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press store then two. We ask that you please limit yourself to two questions. At this time, we will pause momentarily to assemble our roster. And the first question comes from Ronald Keung of Goldman Sachs. Please go ahead.
spk00: Thank you, Mr. Lai, Mr. Yuan, and Sophie. I have two questions. First, I would like to hear about our business environment, especially the trend, the ups and downs. How do we look at 2021? Because this year is almost over. I would like to hear about how we look at the price and the profit of certain bills in 2021. Secondly, I would like to ask you about what you have been talking about more recently, such as live streaming and community shopping. In fact, we have 65,000 last mile posts and materials. We also have some of them. In this community shopping, especially our business owners, what role will we play in this potential growth space, including using us as a subject? Thank you, Mr. Lai, Mr. Yan, and Sophie. So I have two questions. First, I just want to ask about the competitive landscape with these new entrants from Fung. J&T, just how do we see the outlook particularly for 2021 given this year is kind of already nearly concluding. For 2021, how do we see ASPs and how profit per parcel trends may look heading into the next year? And then my second question will be on community group purchase. These are seemingly some new models that's growing for groceries and for some of the e-commerce goods. So Given that we have 65,000 last mile posts, do we see this as an opportunity for us, for our franchisees in being a self-pickup location? And will this kind of group purchase model have any impact on what we see as express delivery growth outlook for the next few years? Thank you.
spk01: In fact, this is an inevitable trend. Because in the past, we saw that the Chinese express business was not divided. Everyone's share is almost the same. This is an inevitable example. In fact, the world is the same. The United States and Japan have also come this way. With the diversification of market share, the difference between the comprehensive market share, we see that the top companies are also diversifying this year. That is, some market shares have increased, and some market shares have decreased. It is impossible for China to be so even. Everyone has a market share of more than 10%. In the future, there will be more than 30% of this process and process. Then the price is actually related to the market environment, that is, the production capacity of American people is related to the volume of the market. With the process of division, I think it will even have a turning point in terms of price, that is, when the price is separated by market share, its price will have a turning point. This industry, in fact, China's express delivery is so large, and every year it will maintain an increase of more than one billion yuan. So the prospects are still very good. I mentioned earlier that the red interest rate has not yet come. We believe that after the stock market stabilizes, its profits will naturally increase significantly. This is a necessary fact. Then your second question is that this social shopping for our express delivery What impact will it have? First of all, the various models of e-commerce, such as community shopping and grocery shopping, are actually increased from offline to online. For the express business, it is actually to ensure that the increase is even greater. So it is increase, not decrease. In fact, it is a good thing for the express business to have a positive effect. More is not this area or competition. In fact, more is cooperation. From the scale is to transform into a co-operative advantage. This is what we can actually see. So major e-commerce platforms, community shopping, or buying vegetables, there are many that are in our hands. For example, in the mode of division, this will help it to reduce costs and at the same time, Okay, thank you. Thank you for your question. Let me translate for Chairman Lai. First question relating to the competitive environment. We have commented that it is an overall trend that is inevitable
spk02: We have seen the world, including developed countries such as US or Japan, before the market shares are stabilized, the process of competition is not avoidable. We have observed in China, the express delivery industry has been in the past and still continuing to consolidate. And at the same time, the polarization is also taking place with the bigger ones getting bigger and the smaller ones are slow in growing their scale and volume. We think that when the market are no longer equally shared as of recent, what we've seen in China market, there will be one or two players expanding their market share to 30 percent or even 40 percent or greater. And when that comes, the price will stabilize. Competition will no longer be driven by price because we still firmly believe express businesses depend largely on its capacity and capability. As the market share becomes
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