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Operator
Good day and welcome to the ZTO Express Third Quarter 2023 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.
Sophie Lee
Thank you, operator. Hello, everyone, and thank you for joining us today. The company's results and the investor relations presentation were released earlier today and are available on the company's IR website at ir.zto.com. On the call today from ZTO are Mr. Mason Lai, Chairman and the Chief Executive Officer, and Ms. Weiping Yan, Chief Financial Officer. Mr. Lai will give a brief overview of the company's business operations and highlights, followed by Ms. Yan, who will go through the financials and the 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 the 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 statement. 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 in Chinese before I translate for him in English.
Mason Lai
The market share has increased to 22.4%, and the service quality ranking maintains the industry's lead, and the adjusted net profit of 23.4 billion yuan has increased by 25%. In the third quarter of this year, the industry's business volume increased by 16.7%, and it still maintains a rapid growth. At the same time, the competition for price and exchange has significantly increased. In the face of competition, to maintain the same strategic goals, that is, to maintain high quality, high level of service, and to improve market share under the premise of achieving a fixed profit and profit goal, to keep up with the bottom line of losing capital, and to emphasize the construction of self-sufficient network stability and long-term competitiveness, to continue to advance and implement the following specific work. The industry and assets have suffered certain losses. In the face of natural disasters, the whole network is actively cooperating with the network in various areas to adjust the network, to carry out shareholding, and to maintain the overall service quality of the network. In September, the CPC's full network efficiency returned to its previous position in the industry. Second, while the service quality is steadily improving, we are not only reducing its efficiency and cost, to find the best balance between these two goals. The performance of the three systems is once again exceeding expectations. This trial and evaluation system has advanced standardization operation, and has improved the ability to track the process data and track people. We have passed the test, visualized the comparison method, and improved the law, and effectively discovered abnormalities. We have optimized the whole system in a targeted way, 3. Increase the overall operation efficiency. Increase the overall operation efficiency of the full chain road in the deepening and completion of the completion ability construction. Increase the overall operation efficiency of the full chain road in the deepening and completion ability construction. China's fast food industry has experienced 30 years of development and change. It is in the critical stage of development. Even though the competitive environment has changed, the monopoly advantage is already very obvious. The President has been pursuing sustainable development, focusing on protecting the service industry, optimizing customer satisfaction, increasing brand value, and creating long-term competitive advantage. Next, We will integrate our own development rhythm, continue to hinder the network base, promote products and operate innovation, and deeply promote the following five key tasks. First, strengthen the corner to the edge, strengthen the snake to the corner to the edge, guide the end point, let the courier enjoy the first-hand market price, and try to increase the return volume. Second, we will promote the development of end-to-end capabilities, accelerate the deployment of post-housing homes, reduce the cost of the industry, and improve the service capability of the upper door, enriching and improving the income of late-time and business people. Third, we will upgrade the digitalization tools, digitize and downgrade the data, improve the management of the industry, and transform the management capability from post-housing to pre-management. to further enhance the management effect. Fourth, to enhance the output effect of infrastructure construction. This will further optimize the production and planning investment of long-term development needs and investment capabilities of the whole network. Fifth, to strengthen the express main business, which is based on third parties, to enrich and diversify practical products, to compensate for the demand for diversified market, Thank you very much. Thank you very much. We will continue to insist on quality of goods, business scale and profit level, the balance of these three strategic goals, and continuous improvement. By using the rich energy of technology, pay attention to product and service diversification, medium-sized frequency reduction, and central and end-to-end value chain, and other model-based innovation, we can create an absolute competitive advantage from the top, starting from the new starting point of the Japanese military, to all customers, middle-sized entrepreneurs, investors,
Sophie Lee
Thank you, Chairman Lai. Hello, everyone. Thank you for joining today's conference call. For the third quarter of 2023, ZTO's parcel volume was $7.52 billion, which increased by 18.1%, and expanded our market share to 22.4%. We maintained our industry-leading service quality and achieved an adjusted net profit of $2.34 billion, representing a 25% year-over-year growth. In the third quarter, China's express delivery industry maintained relative vigor and grew its volume by 16.7% year-over-year. At the same time, low price for volume tradeoffs became rampant. Facing disruptive price competition, ZTO adhered to its consistent strategy of maintaining a high level of service quality, achieving targeted earnings while advancing our market presence. The company shored up defenses and exercised discipline around no loss-making volume and put our main focus on firming up network stability and long-term competitiveness. The following are some of our key initiatives. Firstly, it plays a great deal of emphasis on end-to-end timeliness by enhancing digitization tools to initiate interferences needed to manage operating processes. Quality standards for each of the key steps throughout the flow of package ensured quick discovery of root causes to defects, resulting in improved end-to-end timeliness and overall customer satisfaction. At the beginning of August, severe weather brought floods in the city of Zhuozhou and suspended the operations of our Jinglan Center for nearly a month, causing property damages and loss of packages. Facing natural disasters, we actively coordinated major knots and modified routes to divert puzzles to minimize negative impact on overall service quality across our network. ZTO's end-to-end timeliness returned to the top of the industry in September. Secondly, while steadily improving service quality, we continuously seek optimal balance between improving timeliness and reducing costs. Cost efficiency gain in this third quarter once again exceeded expectations. A further refined assessment system raised the level of standardization and enhanced the ability to isolate relevant workstation or individual task operator. Through visibility, comparability, and reward or reprimand, we promptly and effectively identified anomalies, optimized and rectified them with precision and improved overall operational efficiency. Thirdly, We helped to upgrade capability and the capacity of partner outlets, which serves as an integral part of overall efficiency of the entire transit process. We provided technical input and implementation oversight on design and construction process, safety measures, service quality measures, and information management, so as to improve our partners' operational efficiencies and last mile connectivity. The express delivery industry in China has undergone 30 years of development and is at a critical turning point. Despite frequent shifts in competitive landscape, leaders of undisputed advantages have clearly emerged. ZTO has consistently pursued healthy and sustainable growth and has focused simultaneously on service quality. customer satisfaction, and brand value with long-term competitive strength. Going forward and in accordance with a healthy pace, we will continue to strengthen our network foundation, enrich product offering, and innovate operations. The following are five of our key initiatives. First, we will advance forward the implementation of marketing initiatives. and encourage network partners to pass market pricing to couriers in order to incentivize pickup responsiveness, therefore increase non-e-commerce volume. Second, we will accelerate the expansion of our last mile presence with 2C Life Plus to reduce pickup and delivery costs, enhance in-person delivery fulfillment, and improve network partners' and couriers' profitability. Third, We will continue to refine digitization processes and tools, disseminate data analytics across frontline operations, and elevate process management from post-modern to predictive and drive greater effectiveness. Fourth, we will improve economic output of infrastructure investments by more scientifically aligning long-term growth planning, capital budgets, installed capacity, and utilization optimization. Fifthly, we will continue to strengthen our e-commerce-driven core express delivery business by introducing differentiated time-definite products. Meanwhile, we will respond to varied emerging market demands by designing and providing innovative products and services capabilities. advancing forward towards comprehensive logistics strength. During the recent Double 11 Shopping Festival, ZTO reached a new milestone with daily parcel orders surpassing 100 million for consecutive days, which peaked at over 160 million. Our leading timeliness performance led to the way to excellent quality, fast delivery, high volume, and stable pricing. we leveraged our strong capacity and streamlined operations to maximize scale and efficiency. This not only proved the effectiveness and the sustainability of our strategic approach, but also instilled greater confidence in our ability to execute for long-term excellence. China's express delivery industry is undergoing a distinctive dynamic shift, where volume is further concentrating yet quality continues to diverge, where the better and the stronger are rising to even higher grounds. With comprehensive strengths we built and accumulated over the years, such as superior service quality, stable partner network, high profitability, and stronger capital reserves, ZTO firmly stands in the leadership position. We will continue to strive for balanced increases in all three of our strategic objectives of quality, earning, and scale going forward. With the help of technology, we will focus on long-term initiatives such as diversifying products and services, reducing transit frequencies, improving direct linkage across sorting centers, outlets, and last mile posts. therefore fortifying our competitive edge. Embarking from the nearest milestone of over 100 million puzzles a day, we are committed to create increasing value to all participants in the success of ZTO, including customers, employees, partners, suppliers, and investors, as well as the country and society that have nurtured our growth and development. With that, let's welcome our CFO, Ms. Yen, to review our financials. Ms.
Lai
Thank you, Chairman. Thank you, Sophie. Hello to everyone on the call. Allow me to take us through the financials and then guidance. Please note that unless specifically mentioned, all numbers I will be quoting are in RMB, and percentage changes refer to year-over-year comparisons. Detailed financials of our performance, unit economics, and cash flow are posted on our website, and I'll go through some of the highlights here. In the third quarter, ZTO maintained profitable growth thanks to sound execution of our consistent corporate strategies. Parcel volume increased 18.1% to $7.5 billion, and our adjusted net income grew 25% to $2.3 billion while we maintained high quality of services and customer satisfaction. Total revenue increased 1.5% to $9.1 billion. ASP for the core express delivery business decreased 13.5% or 19 cents, mainly driven by mixed shift impact from the decrease in the proportion of KA volume, increase in volume incentives, and lower average weight per parcel. We cranked up incentives to the extent necessary to protect existing market share as we faced radical price competition during the quarter. Our quarterly market share rose slightly by 0.3 points to 22.4%. Total cost of revenue was $6.4 billion, which decreased 2%. Combined unit cost of sorting and transportation decreased 11%, or 9 cents, benefiting largely from economies of scale. In addition, unit cost of line haul transportation decreased 11.4% to $0.43, driven by more effective route planning in conjunction with low rate improvements without negatively impacting timeliness. Decreases in fuel prices also helped. And the decrease of 10.4% of $0.23 to $0.25 for unit sorting costs came from the increase in level of automation as well as labor efficiency gains achieved through standardization in operating procedures and optimization of performance metrics. Gross profit increased 10.7% to $2.7 billion as a combined result of increased volume offsetting ASP decline plus added benefits from cost productivity gain. Gross profit margin rate increased to 0.5 points to 29.8%. SG&A expenses excluding share-based compensation as a percentage of revenue dropped 0.1 points to 4.8%, demonstrating a healthy and lean corporate cost structure. Income from operations increased 11.4% to $2.4 billion, and associated margin rate grew 2.4 points to 26.7% as we continue to improve quality of earnings to reach a level better than 2019, which is prior to the COVID-19 pandemic. Operating cash flow was $2.94 billion for the quarter, and EBITDA was $3.45 billion. Capital expenditure totaled $1.3 billion, and we anticipate annual CapEx in 2023 will come in below $7 billion. We are on track to achieve another year of free cash flow. Now moving on to our guidance. We have previously guided 1.5 percentage point annual market share gain, and we strived to achieve such goal up until it became no longer justifiable considering extreme price competition during the quarter. We made a decision to hold our grounds and to then turn our attention to more longer-term gains, such as improving end-to-end timeliness by reaching deep for operational effectiveness and efficiencies. Market share gain will continue to be one of our key measures of growth, yet it cannot be obtained by causing unnecessary losses to our bottom line. as we further our balanced approach to all three aspects of our corporate strategies. On that note, the company reiterates that its parcel volume for 2023 is expected to be in the range of $29.27 billion to $30.24 billion, representing a 20% to 24% increase year over year. These estimates represent management's current and preliminary view, which are subject to change. Now, this concludes our prepared remarks. Operator, please open the line for calls and questions. Thank you.
Operator
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 star then 2. We ask that you please limit yourself to two questions. At this time, we will pause momentarily to assemble the roster. And our first question comes from of Morgan Stanley. Please go ahead.
spk08
Thank you. The first question is about the company's competitive strategy. We actually see that this year, the company has balanced the expansion of the share and the growth of profits. But in the third quarter, we actually see that the market and other competitors are actually divided. Some competitors seem to be wandering on the edge of not making money in the third quarter. But we also heard that some other competitors said that next year, more priority to consider the expansion of market share. So I would like to ask the company about this year's stimulus and the entire competitive strategy of 2024. Or more clearly, do you think the growth of profits we talked about before is faster than the growth of volume? And then the growth of volume is faster than the growth of total volume of the market. This is still feasible. This is the first question. Then the second question is about this policy of next year's dividend. Because we noticed that the company's capital spending still has a relatively obvious year-on-year decline. Then the operating cash flow is also very stable. I would like to ask at this time, do we have a higher visibility of the dividend rate next year? Thank you for the presentation, Ms. Yanzhong and Sophie, and thank you for the opportunity to ask the question. Congratulations on very solid results despite industry competition pressure. I have two questions. The first one is about the competition strategy. We noted that the company here today has achieved very balanced growth in terms of profitability and market share gain. But we do notice that the competition strategy from peers may have changed. Some of them seem to be quite difficult in terms of profitability in their third quarter results. But some of them also reiterated that next year their priority will be market share gain in terms of profitability. So the question is, what's the competition strategy from our company in the first quarter of this year and into 2024? Do we still think the target that profit grows to be faster than volume growth and our market share will continue to grow versus peers is achievable? My second question is about the dividend payout. So we do notice that CAPES has decreased on a year-on-year basis, and the free cash flow remains very healthy. We did mention that we have the intention to increase the dividend payout to reward our shareholders. Do we have a higher visibility on the dividend payout for our four-year, after our four-year results next year? Thanks.
Mason Lai
Thank you for your question This is what we have been doing. Next year, we will see how the competition will be. Actually, everyone knows that There is a cost advantage and a scale advantage. If you have a good network, the market share will definitely increase. We are more focused on the future strategy, more focused on the improvement of the service quality, that is, the improvement of the efficiency and user confidence. We hope that the president will really start from high speed, like high-speed sales, Now let me first translate the first question for Chairman. The first question relates to the competitive outlook.
Lai
We've always focused on our long-term growth because we understand that express delivery business, the industry in nature, is a long-term marathon instead of a short sprint. ZTO has consistently focused on our three aspects of the corporate strategy. We maintain the principle that we don't do loss-making businesses. So consistently in the past, we have been able to adhere to our three-prong approach, which is conditioned upon quality of services and targeted earnings goal achieved. We will improve our market share. So that still stays the same. It is consistent going forward. Now, given market dynamic changes, however, we always believe The strength of quality of services and capacity to deliver such high-quality services will continue to draw customers and draw market share. And timeliness and customer satisfaction and also the brand awareness will continue to be our focus going forward, and we believe from a strategic standpoint that will further extend our goal. Again, market share will remain. Now, what you mentioned specifically, profit, volume, and market share development is always going to be a balance, and we still believe we are confident to achieve the goal that we set. The second part of the question, I'll answer that. The business is operating in its optimal and continue to go up to the higher increase in the higher level. So the capex spending for our core express delivery businesses is pretty much set. So as we look into developing our comprehensive logistic capabilities, there might be some investment cycles come through, but now what we are looking at is being gradual and not all of a sudden, right? So it's a matter of time for us to raise our dividend rates payout ratio because it is our clear objective to return the capital, return the investment to our shareholders.
Mason Lai
Thank you.
spk08
Thank you, Lai Zong and Yan Zong.
Operator
The next question comes from Ronald Kuehling of Goldman Sachs. Please go ahead.
Ronald Kuehling
Thank you, Mr. Lai, Ms. Yan, and Sophie. Congratulations to Goldman Sachs for doing a very good job of increasing our profits in the third quarter full of competition. I have two questions. Of course, we may also think about the situation of this competitive pattern. Secondly, if this competitive pattern is maintained in this situation, in fact, we will almost have profit growth in the entire industry. Then the cash flow is also particularly strong. Just now, Mr. Yan said that there is free cash flow or positive. Will we actually be in this environment? For example, strategy to maintain our leading cost advantage and leading profit situation of each package. Then how do we judge, for example, the profit and loss of each package in our industry in 24 years? The second is that we have already done the double market in two places before. Then, what kind of experts should we have to be able to increase the exchange rate of Hong Kong stocks, so that we can enter the Hong Kong stock market? Thank you for your question. Let me translate it first. Sorry, let's wait. Thank you for your question. Let me translate it in English. I think in terms of the current competitive landscape, well, it's been quite concerning, but we've actually done really well, and earnings have grown healthily, and we also generated free cash flow. So this outperformance versus peers means how should we think about the landscape from here if we could capture very healthy earnings and cash flow? Should this actually strengthen our position into the longer term? Are we trending well even in this competitive environment and how do we see the outlook for 2024 as a result in our strategy? My second question is about our Southbound Connect potential. We see some of the limited trading volume in our Hong Kong shares might have caused a later than expected Southbound Connect. Are there any proactive steps that management could take in expediting this South Bank Connect potential? Thank you.
Mason Lai
We think that the division will be more obvious in these 8 or 9 companies. If you have a cost advantage and you have a good service quality, you will definitely increase the profit and share price. But in general, the strategy is that we used to have a market share with a service quality and profit level. In the future, we will pay more attention to the improvement of our service quality, profit, and gender. Today, in the field of e-commerce, we can see that in the past three seasons, the overall profit has been challenging. If In the case of lightning ratio or image, the increase of these relatively high prices is able to make the network more stable. In other words, the central strategy is to do a good job of the balance between the center and the employees. We pay more attention to the increase of lightning ratio, the increase in the revenue of our customers and our employees. Thank you very much. This rule is that we have already been included in the survey range of the Hong Kong Stock Exchange. Every year from March to September, we adjust the window for the Hong Kong Stock Exchange. According to the policy requirements, during the survey, we have to satisfy all four of them. On the second day, the turnover is not lower than 6 billion Hong Kong dollars. There is still time to go up. Six months plus 20 Hong Kong Stock Exchange days. Thank you, Ronald. So let me translate for Chairman for the answers.
Lai
As far as competitive landscape, we think the long-term trajectory is continued to stabilize. As you can see that the number in the marketplace, about eight or nine, we don't think there are major changes. However, the diversification, I should say, the bifurcation is becoming more and more apparent. where you have advantage in cost, efficiency, and quality of services, those will eventually win more market share and increase market presence. In the past, we've always focused on all three, and those continue to be our focus. And relatively speaking, however, as we see that the development of e-commerce, the overall profit is is meeting resistance because of the price competition. So offering more diverse products and services, for example, increase the non-e-commerce packages, also servicing more of the reverse logistic or return packages will help us improve the earnings of our network outlets as well as couriers. So focusing on those areas, improving the network stability, at the same time improving our overall capability of serving not just e-commerce packages but including a higher percentage of non-e-commerce packages will help us deter or offset some of the impact from the e-commerce So, in other words, we do believe out of the three, relatively speaking, we will focus in that regard more of the enriched product offering and varied revenue structure so that it could propel us forward into the future where we maintain a high level of quality of earnings and at the same time increasing our market share. The second question relates to the strategy of us going into the . We think that we will continue to maintain high quality of operations, and that is really the key, increasing our volume of trading of liquidity. This is somewhat more determined by some of the metrics or measurement. The company has been included in the stock inspection scope of the Stock Connect. The adjustment window for the Stock Connect is in March and September each year. And according to the policy measurements during the measurement period, we must meet certain standards of trading volume, and so on and so forth. And we believe we have a, based on current information, we have a high probability of being entered or admitted into the Connect by next year in March.
Ronald Kuehling
Thanks, Yandel.
Operator
The next question comes from Aaron Liu of UBS. Please go ahead.
Aaron Liu
Hello, President Lai, President Yan, and President Sofei. Thank you for accepting my question. Congratulations to the company for achieving good performance in 3G. I also have two small questions here. One is about our productivity rate. Just because President Lai mentioned that when we were in Double 11, Japan's package volume also broke 160 million pieces. I would like to ask how much of our current maximum economic capacity we have. And also, in the next few years, what will our CapEx investment plan look like? The second question is, as Leighton mentioned earlier, we will focus more on medium- and high-end packages, including commercial and retail items. I would also like to ask, Let me translate myself first. Thank you, Ms. Lai, Ms. Yan, and Sophie for taking my question, and congrats for the solid Q3 earnings. And I got two questions. One is about our capacity utilization. As you mentioned earlier, we achieved the peak daily volume in 2011 to around 160 million parcels. And I'm a bit curious to what is our ideal capacity utilization rate. And what's our capex expenditure plan going forward in the next couple of years? And the second question is more about our long-term strategy to focus more on the neutral high-end parcels, like Mr. Lai mentioned earlier, the business parcels or the individual parcels. So what's the development so far and what kind of expectation we should have like the volume share in kind of go like to what percentage going forward? Thank you so much.
Mason Lai
Thank you for your question. The first one is the capacity of the industry. China has always valued the ability to build. In fact, we are now in the industry. Own the production plant, the whole factory, the free equipment car. This ratio is very high. After our 31st, we basically reach the level of the first line every day. In fact, the best way to make a profit is to spend about 100 million yuan a day. This is the lowest cost. The second problem is the issue of capital and spending. In the past few years, basically, in the main cities all over the country, these cities with distributed functions, we have the freedom, property, The free land and the free market have basically been set up. So let's look at the capital investment. In fact, compared to last year, we have reduced it. This year, it's about 7 billion. In the future, next year, it may be about 6 billion. Let the business owner be able to get a certain price. Develop his inner motivation. Let him be able to provide better service to our consumers. Secondly, we clearly know the efficiency of the delivery and the delivery. Our standard product and...
Lai
Okay, the first question relates to our optimum capacity. We've always focused on infrastructure development, and we are one of the players in that. Amongst all the industry players, we are the one with the highest level of self-owned facilities and also transportation fleet. And we have currently, after the Double 11, achieved over 100 million day level, and that is the current most optimum capacity for because that is where our cost is the most effective or efficient. We have, throughout the years, invested and built infrastructure across the whole country, especially in the key major nodes or major cities across the nation. Compared to the past, this year our capex spending is going to come in below $7 billion. And for next year, we'll be somewhere below $6 billion. So we believe some of our facilities do require upgrades, and some have a phase two or phase three that could be easily developed to double the capacity. So actual investment will most definitely taper down. The third question relates to our diversified product offerings. The current year, our standardized packages, the increase in its volume has way surpassed or much faster than our regular express packages. So we do believe we have built up a momentum to increase within express delivery a time-definite product and outside, focusing on developing more of the non-e-commerce packages. We do see this as a key initiative because it could help us improve the quality of earnings by our network partner and also couriers as we ensure the couriers receive the market front-end pricing instead of the same pricing given for regular express delivery packages so that they are more motivated to work for themselves, to improve their customer connection, and also improve quality of services. We have made it a mandate and put measurements around the two-door pickup so that they are more timely and they are more responsive. In this overall approach, without disclosing the specific percentages, we do believe we do want to have this varied product offering. And at the same time, it could come back and help us improve the overall and also quality of earnings for all the players, including us and also the network partners and couriers.
Aaron Liu
Thank you.
Operator
The next question comes from Chung Ayan of CICC. Please go ahead.
Chung Ayan of CICC
In this area, I wonder if we can provide some specific data. Let's take a look at, for example, the business volume of this area and some of our strategic strategies. Because in this area, the quality of service is relatively high, and the profit is relatively good. It should be a market where we can eat more. This is the first question. The second question is, Mr. Lai also mentioned that we are at the end of this, including the construction of Tooxie, which is also an important strategy for us. Let me translate for myself. Thank you, Lai Dong and Sophie. for taking my question. So I have two questions. The first one is about reverse logistics for e-commerce parcels because we know this kind of business requires higher service quality and will generate higher return. So can you share with us our volume in terms of this kind of business and our future strategy? and the second one is about our last mile facilities such as uh kushi uh parcel supermarket as uh mr mentioned in his speech so can you share with us uh as current states uh how many uh of these facilities are there we have built and is there any uh
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