Zto Express (Cayman) A

Good day and welcome to the ZTO Express second quarter financial results 2020 conference call and webcast. After today's presentation there will be an opportunity to ask questions. To ask a question you may press star then 1 on your touch tone phone. To withdraw your question please press star then 2. We ask that all participants limit their questions to two per person, and if you have any further questions, you will need to rejoin the queue. Please note, this event has been recorded. I would now like to turn the conference over to Sophie Lee, IR Director, to read the safe harbour. Please go ahead, Sophie.

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 are available on the company's IR website at ir.vto.com. On the call today from VTO are Mr. Mason Lai, Chairman and the Chief Executive Officer, and Ms. Kweiping 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 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 Security Litigation Reform Act of 1995. Such statements are based on management's current expectations in 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 filing with the U.S. Security and Exchange Commission. The company does not undertake any obligation to upgrade update any forward-looking statements 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.

大家好,感谢各位参加今天的电话会议。 2020年二次度, The epidemic situation in China is steadily stabilizing. The national economy and social consumption levels are recovering well. The business volume of the fast food industry increased by 57.4 billion in the same period as last year. With a 36.7% increase, we have refreshed the record of system business volume growth since 2017. This industry's leading enterprise has completed a business volume of 4.6 billion in total. Our market share has increased to 21.5%. At the same time, in the case of further expansion of our business volume, our service quality has maintained a stable and healthy state of mind. Second, we continued to increase the growth of the volume of business at the beginning of the year, and expanded the leading advantage and continued to increase the market share. In the case of further increase in market competition, we made adjustments to the network policy, including the currency balance mechanism, and increased the intensity to the end. Third, the price system of the two parties, and through central finance, provide some free funding for some of the endpoints. Although the competition is stressful, we work together with our partners to face the challenges ahead, and maintain confidence in the future, and maintain the stability of the network. At the same time, we are gradually implementing the work of reducing the cost-effectiveness, On the basis of a system, we have about 2,100 high-performance vehicles in our new headquarter, and about 500 rail lines and transport lines have been newly opened, which has greatly reduced the use of three-way traffic. The continuous expansion and greater scope of use of the automated division system has reduced our dependence on artificial labor. The operation management and process management have become more precise. For example, in terms of practical management, and heated up the process of focusing, scheduling, sorting, and assessment. This step has ensured the effectiveness and stability of the implementation. The cost of single-voting supply and division has also dropped by 11.17% and 17.1% to improve platform operation efficiency and gain room for market competition. Due to the high growth in the number of businesses that have been promoted internally, will lead to a drop in price and increase in cost-effectiveness. The second phase is that after 14.5 billion was adjusted, the net profit increased by 5.6%. In this competitive environment, we have achieved a balance of market share, service quality, and profit in three aspects. We believe that the Chinese express business has a good development prospects. From the front, the leading enterprise is still in a relatively poor market structure. Competition is something that can't be avoided. We have to focus on making ourselves bigger and stronger. We have to pull the distance so that wisdom can take the absolute advantage. In the next two to three years, the express delivery industry is likely to attract 300 million lines and even more hot business. 我们必须抬头放眼未来,低头深耕事做, 充分做好综合的准备工作。 接下来,我们仍然会为秩序围绕平台与网络 支出能力建设以及管理效能的提升 来落地以下制体的工作,以加强 On the one hand, we can increase our own production and investment. At the same time, through financial services, support and support, we can increase and accelerate the investment of infrastructure. On the other hand, we can further optimize the network structure to make it more flat and flexible, and reduce distribution times. continue to improve the efficiency of platform transportation. On the one hand, further optimize the configuration of transport resources. On the other hand, increase the self-development of distribution centers towards the direction of smart logistics ecotourism. 3. Enhance the last mile of multi-purpose food for couriers. On the one hand, further deepen the implementation of some of the staff's collection system. Develop the power of small power lines for self-management. On the other hand, we continue to advance the construction of the end-of-the-year station, which will further win competitive advantages in terms of express delivery cost, and reduce the distance between products and users, and accelerate the expansion of new products. For example, the power supply, the self-supply, and the oil and energy, etc. are designed to meet the individualized needs of users, or to meet the demand for specific storage and storage solution solutions. to upgrade products and create the corresponding operating capabilities to enhance the user experience and new knowledge. Enhance the network infrastructure capability, improve the efficiency of platform transfer, and strengthen the last 1 km of solar power and the expansion of new products are the core points from the leading advantage to the ecological advantage of ZTE. We have to rely on technology and information technology to make these mistakes effectively. While we ask our management team to achieve the target of the business, we also ask everyone to learn to understand the numbers and track the digitalized business process in the heat management process, to accurately calculate the stock price of the business, and to make the necessary decisions and adjustments. Product quality, market share, and profitability. Our current strategic focus, the improvement of the main business will become the world's first-class comprehensive logistics service supplier to build the Hucheng River for China. The construction and expansion of the ecosystem is the path for China to achieve its mission. As you can see, we have increased the forecast of annual business volume. We must do our best to achieve this goal. According to China's current volume, We believe that the Chinese express industry will continue to develop steadily. The President has firm confidence in his ability to seize the opportunity to run the express marathon. Thank you, Lai Zong. Now, please allow me to translate.

Hello to everyone and thank you for joining us for today's earnings call. As the COVID-19 conditions further stabilized, China experienced a healthy rebound in economic activities and a strong rally in domestic consumption during the second quarter of 2020. As such, China expressed delivery industry generated 5.64 billion incremental parcels and grew 36.7% year-over-year, which is the highest level of quarterly volume growth in 2017. As the industry leader, ZTO achieved a total of 4.6 billion households in the second quarter, representing 47.9% year-over-year growth. And we extended our leading market share to 21.5%. Meanwhile, we were able to maintain an improvement trend on quality of services and customer satisfaction while achieving high body growth. During the second quarter, we maintained our key strategy which is to accelerate volume growth, increase our lead, and continue expanding our market share. When price competition intensified, we made necessary modifications to our network policies to boost the level of incentives and show up collaborations between pickup and delivery outlets with fee-balancing mechanisms. In addition, we granted low or zero interest loans to selected network partners through ZTO Finance to provide cash flow relief. Amidst the competitive pressure, we stood by our network partners to face challenges and look to the future. Our network remained stable. Meanwhile, we furthered our effort to improve cost of productivity. Subsequent to the first quarter investment, we brought in roughly another 2,100 additional high-capacity vehicles, opened up 500 new line haul rods, and greatly reduced the use of third-party logistics services during the second quarter. The increased use of automation equipment and the continuous functional upgrades allowed us to be less dependent to labor. New initiatives on improving timeliness, such as process breakdown and separate monitoring, enhanced the certainty and the stability. As a result, Our combined sorting and transportation costs per parcel declined by 17.1%. The continuous improvement in our operating efficiency dampened the impact of price competition. Despite the intense competition, ZTO was able to balance among quality of services, market share, and earnings. as a combined result of strong consumption-driven volume growth and cost-efficiency gain, which helped to offset the impact from ESB decline. We achieved an adjusted net income of 1.45 billion, which increased to 5.6%. We believe in the positive growth prospects of the China Express delivery industry. We also recognize that with the current market dynamics, where the leading-scale express delivery companies are relatively close in market share, and competition becomes inevitable, we must focus on what we can do to scale up and widen our competitive lead in order to achieve absolute supremacy. Within the next two to three years, average daily parcel volume is likely to top over 300 million parcels, and we must maintain a long-term vision and focus on immediate tasks and work diligently to attain comprehensive readiness. Going forward, we will continue to focus on strengthening infrastructure across our entire network and improving operational efficiency through the following. First, developing our infrastructure to be capable of handling over a 100 million daily volume in the near future. We will increase investment in self-owned facilities and provide financing to support our network partners who will also increase their processing capabilities. We will gradually enhance the network structure through the layering and the streamlining, reducing the frequency of aggregation and sortation. Secondly, improve our operational efficiencies to consistently reduce unit costs in addition to skill leverage. Enhance resource planning and dispatch in line haul transportation and raise the level of digitization and automation for sortation. And advance towards building smart technology-enabled logistic parks. Thirdly, lay a strong foundation for multi-channel last mile express plus business model. Further implement standard frontline career fee structure Cultivate entrepreneurial initiatives on one hand, and accelerate development of last mile posts to secure delivery cost advantage and shorten the distance between products and consumers. Last but not least, accelerate design and the implementation of innovative products, such as scheduled pick-up, on-demand delivery, and coaching services either cater towards consumers' individualized needs or fulfill logistic requirements for specialty goods and create differentiated product lines and relevant processing capabilities. With brand awareness, develop consumer psyche through improved logistic experience. All above endeavors hold the key to us transforming from a leading express delivery company to an equal advantage comprehensive logistics service provider. And to accomplish such, technology and data analytics are instrumental. Apart from delivering results through our daily operations, our business managers are learning to monitor and analyze processes. and associated results in order to identify problems and make necessary decisions accordingly. Quality of services, market share, and profitability remain our strategic priorities. Sustained growth of our core express business will establish strong modes for ZTO to transform into a world-leading comprehensive logistics service provider. and the development of our ecosystem is our passageway to achieve our mission. We have raised the guidance for the full-year passive volume to reach between $16.2 to $17 billion, a goal we will endeavor wholeheartedly to achieve. Given our skill today, it will not be difficult to obtain short-term profit. However, We choose to focus on sustainability and a balanced interest of all our constituents for long-term win-win. We firmly believe that the China Express delivery industry will continue to progress well. We are confident in our ability to seize the opportunity and win this marathon-like race. Perhaps the biggest challenge as well as the mightiest strength lies with whether we and our partners can stay true to our intentions. focus on our common goals and maintain faith and confidence and deliver solid execution in every aspect. With that being said, let's turn to our CSO, Yan Dong. Please go through our financials.

Thank you, Chairman Lai, and thank you, Sophie. Hello to everyone on the call. As I go through our financial results, please note that unless specifically noted, all numbers quoted are in RMB and percentages changes refers to year over year comparison. Detailed analysis of our financial performance, unit economics and cash flow are posted on our website. And I will highlight some of the key points here. Benefited from a strong rebound in e-commerce driven consumption after the COVID-19 situation has been significantly contained within China ZTO delivered a strong volume growth in the second quarter. Our parcel volume grew 47.9% to $4.6 billion, and our market share expanded by 1.6 points to reach 21.5%. Total revenues increased by 18% to $6.4 billion. For core express delivery businesses, the ASP declined by 34 cents, or 20.9% for the quarter, better than industry peers. It included 28 cents volume incentives as added support to our network partners in order to maintain and protect market share, as well as keeping our network stable. Two cents related to Increased adoption of single sheet digital waybill and two cents decline due to parcel weight drop. Gross profit of 1.8 billion, which was relatively flat from last year. Gross profit margin decreased five points to 27.6% as a combined result of volume increase, unit price decline, as previously stated, and cost productivity gain. Unit transportation costs declined 20.4%, or 12 cents to 43 cents, primarily due to increased number of self-owned high-capacity trailer trucks. The decrease in diesel price and national toll-free policy that ended nearly towards the end of May also contributed to cost decreases. Unit sorting costs declined 11.1% to 4 cents or 4 cents to 27 cents as a greater number of automated sorting equipment were placed in use, allowing a higher proportion of our parcels to be processed automatically instead of manually. SG&A increased by 2.3%. Excluding share-based compensation, SG&A as a percentage of total revenue decreased by 0.5 points to 4.9%, demonstrating positive operating leverage from our efficient corporate structure. Income from operations excluding SBC increased by 9.5% and associated margin declined two points, which is narrower than the gross profit margin decline. Because of SG&A leverage and increased other operating income mainly consisted of government subsidies and tax rebates. Operating cash flow was $1.252 billion for second quarter compared with $1.993 billion in the same period last year. The decrease resulted mainly from the increase in financing provided to our network partners and higher prepaid fuel and toll cost given by larger self-owned fleet. CapEx for the quarter was $2.25 billion, $1.44 billion higher than the same period last year, as we increased investment, such as adding over 2,100 high-capacity vehicles to further strengthen our infrastructure and capacity for anticipated volume increase in the core business. Now turning to our business outlook. Taking into consideration the current market condition, the negative impact from COVID-19 price competition and the company prioritized goal to achieve accelerated market share gain while maintaining our target level of earnings, we raised our 2020 annual parcel volume projection to be in the range of $16.2 billion to $17 billion, representing a 33.7% to 40.3% increase year over year. And we lowered the adjusted net income for 2020 to be in the range of $4.8 billion to $5.2 billion, representing a 1.7% to 9.3% decrease year over year. These estimates represent management's current and preliminary view which are subject to change. This concludes our prepared remarks. Operator, please open the lines for questions. Thank you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star and then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Your first question comes from Byung-Zai with City. Please go ahead.

Hello, Mr. Lai, Mr. Yan, Sophie. Good morning. I have two small questions here. The first one is actually about this quarter's performance. I saw that the increase in our volume of KA suddenly increased, so our KA cost has also increased a lot. Then I want to ask what is the reason behind this. Is it because we want to increase the deployment of KA's business or is it because of the COVID-19 pandemic? Because we see some competitors, some of their major customers also have an online acceleration after the COVID-19 pandemic. Is this the case for us? This is the first question. The second question is actually to ask the guide. It's mainly because we see that our guidance is actually a little bit down. I want to ask Mr. Yan, can you tell us about the assumption behind this guidance? It's about the price and cost of the next half of the year. What are the assumptions? And then I would also like to refer to the idea behind the guidance of Mr. Lai and Mr. Yan. Because in fact, our price strategy in the first half of the year should say that the implementation is actually quite successful. Originally, in the first half of the year, we should see that there is at least one better pattern between通达, but later some external interference was received. But now, in fact, we see that通达 has not finished yet, and then非通达 also came in immediately. Two questions. The first question is regarding the second quarter K-A business. we actually noticed a sudden acceleration of the KA volume growth in second quarter, which also leads to the KA cost increase a lot in second quarter. With the reasons behind, it is as intentional to do the KA business in second quarter, or it's due to the pandemic stimulation, which helped more online penetration of our KA clients. The second question is regarding the guidance. may not bother Yan Zhong to provide more breakdown into the implied ASP assumption and the cost reduction assumption in the second half, and also want to touch on the intention behind the guidance. Actually, we can see the first half of our pricing strategy was executed very well until some external disruption, or it's supposed to see a very good opportunity to clear the landscape among Tongda players. But now we are going to see more complex competition, not only from tone-down players, but also non-tone-down players. We still insist our first half price strategy with the reason behind. Thank you.

Thank you for your question. Let me address the KA question, then I'll turn over to Chairman Lai for the pricing strategy. KA increase, yes, this quarter we did see surge in the KA, and this is partly proactive and partly not proactive. The decline in the gross margin is in line with the margin activity or margin movement with the express core business other than KA.

Okay. I will share with you about the leadership. First, the president still maintains the advantage of expanding this strategy. So we will maintain a stable long-term plan. In fact, our business leadership is perfect. Second, this year, in fact, the rate of the price drop of the entire price range is also above expected. We think that express delivery is a marathon. We will also maintain our definition. We think that our cooperative partners, let our cooperative partners gain profit, let our employees have a higher income than their peers, and let the team of Zhongtong be stable. This has always been our style. So I was talking about it earlier. Actually, the scale effect of Zhongtong today, in fact, in the short term, we can make money. It's not a problem to win profits. So, or to win more profits, it's actually not difficult. When we want to achieve the long-term supply of various profits, we must make our end point more stable than the same line. So, in terms of price strategy, we still keep the same style. We don't do the whole chain on the loss of money. Okay, Chairman says, first of all, a strategy remains.

We will focus on prioritizing on expanding our market share and increase our lead. and we will further leverage our advantages to maintain the discipline. What we did see in the second quarter, the price decline more severely as expected. We always believe to ensure our network partners maintain their level of profitability and also our couriers achieve highest pay in the market and our team maintain confidence, these are important things for us to uphold. Short-term gains are easily obtained, but we are focusing more on all parties' interests, and we want to be able to allow and ensure our network partners are better off than our competitive peers' network partners. And then we also will be insistent upon making profit on all aspects throughout the whole process of a particular package so we don't bring in ineffective volumes, as we stated before. With all these thinking, if I may supplement, that we still see in the third quarter the price competition persisted. and to be prepared for implementing the strategies that Chairman Lai just described. We lowered our profit target to be ready. And also, it is a level, it maintains a level comparable to our last year's level for the last three quarters. If you notice that the first quarter COVID-19 impact was severe to the business, but the last three quarters, looking forward, we are confident in achieving the targeted level of profit and further accelerate the growth on our market share. If I further may add, looking beyond this year or looking beyond the next few quarters, is more of our focus because we do look forward to the long-term prospect. The 300 million daily volume may arrive sooner than we expect, so we are focusing on our ability to build capacity to be ready, and our capacity, our capability is our advantage so that we can gain more market share and the pricing power will follow.

We have, yes, thank you for your question.

We have always been focusing on gaining productivity. As volume increases, we will naturally achieve the scale leverage. But further, in addition to that, we will continue to innovate, continue to modify and improve our network structure, as Chairman had mentioned in his prepared remarks. Delayering and also streamlining our overall network structure will allow us to reduce cost, improve efficiency and timeliness. of our overall product. So the outlook for our productivity gain on transportation and on sorting are going to be expected.

Thank you. Your next question comes from Ronald Kong with Goldman Sachs. Please go ahead.

Thank you. Let me ask in Chinese and I'll translate in English. Let me ask in Chinese and I'll translate in English. Let me ask in Chinese and I'll translate in English. In fact, we can take a higher percentage of the profit and increase the quantity. Can this strategy be continued to the rate of 25% or do we still have some requirements for the absolute profit? In fact, in this relatively high efficiency situation, should we maintain the current profit background and use lower prices to reach our previous target of 25% market share? I want to hear how we should think about our absolute profit in the next two or three years, especially in the second half of the year. So we've seen the very high efficiency of how the ASP cuts versus the market share gain that you achieved in the second quarter. And our profit guidance roughly suggests flat to slightly up in profit growth, as you said, versus last year. So should we interpret this strategy as not only in the second half, but actually for the next one or two years as well, until we achieve a scale that we're happy with, which you mentioned before, the 25% market share in two years' time. So I want to hear about how do we think about our absolute net profit, any requirements there that we want to achieve, or we should, given our efficiency, we should kind of continue this strategy until we reach a scalable, at least a 25% scale that we talked about. Thank you.

Hello. We think that express delivery must be a marathon. The direction of express delivery in the future must be that the market share is getting more and more concentrated, and the stronger, the stronger. So today, in fact, we have seen that in the past few years, the price of Chinese express delivery has continued to fall, especially this year, with a drop in the rate of income. In fact, I myself think that the capital is already at the bottom. So in the future, this market share, for example, we will have a market share of 25 in 2022. It may not have to fight a price war, but it will be 25 or even more than 25. We are confident about this. The second is that China does not need so many courier enterprises because its internal industry, for example, what we are doing today, on the one hand, we need to maintain the competitiveness of our retail orders. In other words, We are the most stable in the copper industry. At the same time, in the context of such a competitive competition, the difference between our spending and the copper industry is actually expanding, not decreasing. So the president's strategy is to provide for each party. Our partners, our businessmen are the ones who receive the sender. It is one of the core competitiveness. At the same time, we are actively preparing for the next two years. It is possible that our express delivery capacity will be at least in the second half of the year. We are doing what we are doing now, which is that our ability is suitable for the market. This is the most important. It's not because of the price. If your price is low, you will be able to withstand such a large volume. We are continuing to do it. On the one hand, we are stabilizing and helping our infrastructure to complete. foreign foreign foreign We hope that in the future, at the same time, we will still be doing the logistics. As I mentioned earlier, we are in the implementation of the implementation of the implementation of the implementation of the implementation of the implementation of the implementation of the implementation of the implementation of Then what we are doing today is to increase our own ability to build. At the same time, we use financial resources to increase their production land and investment in smart devices with us. In the past, the central government relied on the establishment of stations, the establishment center, and the destination center. We have surpassed our friends, surpassed our big brothers. In the future, we must believe that reducing the spread rate, that is, increasing the link between the starting point and the destination center, and even the link between the starting point and the destination, we are currently building this ability. Okay, so let me translate.

First of all, we believe the express delivery industry has still a long way to go. It is a marathon. The concentration of the market share will continue to concentrate and the stronger will get stronger and the bigger will get bigger. The Chinese market industry cannot contain that many players. Business, particularly our network, is the most stable. And despite the competition, our price compared to our peers still has premium. And in fact, we believe in certain areas, the price differential is expanding. That is to say that our businesses is more preferred compared to our other competitive peers. In the meantime, to anticipate volume increases, we are preparing on many aspects as following. One, continue to, and if not increasing, our investment in infrastructure, not only to improve our facility capabilities, but also help and empower our network partners through financing support to help them invest in facilities as well as automation. The overall effort in developing differentiated products, as we mentioned before, including time-definite products or individualized on-demand pickup and delivery as well as coaching, all these as we mentioned, will help us expand our leadership and ensure our last mile network partners as well as our couriers achieve the highest profitability and overall capability as well as stability. Looking to the future, as you asked, Ronald, to reach 25%, price competition around 2020, our goal is to reach 25%. Price competition may not be necessary. As Chairman said, even without price competition, our market share will continue to expand because of our core capability of our better managed and higher operational efficiencies, as well as the entire network with better quality of earnings. So with that, we believe, again, our focus is on the future, is to achieve, and one of the items, if I may go back to, is that Chairman described further what it means to delayer. In the past, we win, we won, and we surpassed our competitors through connection or better efficiency connecting our transit supercenters. And gradually throughout the past and going forward, we developed capabilities to connect the origination sorting center to destination outlets. Going forward, we would further supplement the capability of our network, including connecting between the origination outlets and destination outlets. That is what we said, reducing the frequency of sortation. And that will further expand our capability so that we could bring in more volume, process it better, and deliver it faster and better.

Thank you.

Once again, if you wish to ask a question, please press star, then 1. Your next question comes from Huangfu Zhaozhan with JPJA Securities. Please go ahead.

Hello, President Lai, President Yan, and all of you. I am Huangfu Xiaohan, a researcher at the National Institute of National Security. I am very grateful to have the opportunity to interact with you. I have two questions about the last mile of the end of the border. One is about the short-term, which is what is the comparison of the different delivery methods in our second quarter of the end of the border with the previous one? Is there any major change? And the other one is about the long-term difference in the price of the end of the border. Because we see that the cost at the end is more and more in our total cost. And the cost of different delivery methods at the end is actually very different. So if you look at it from a distance, can we achieve a difference in the price of different delivery methods? If it can't be achieved, what do we think is the main obstacle? My question is mainly about last mile. The first one is about short-term. What are the proportions of our different last mile solutions in the second quarter? Did they change a lot? And the second question is about long-term last mile price differential, because in recent years, last mile fee has taken more and more proportion in our total cost, and the cost of different last mile solutions vary a lot. So I was wondering in the future, is it possible to have different prices for different last mile solutions? Thank you.

Thank you for your questions. So far, the last mile investment and development of CTO has been of benefiting us in handling a greater amount of last mile delivery, as well as reducing costs for our network partners. Again, the cost of delivery for the last mile belongs to our network partners. And the volume is somewhere between 40% to 45% of the last mile packages now being handled by non-door-to-door delivery. And you talked about potential differentiation or the last mile cost differentiation. And here are some of the thoughts. Last mile is a key segment of our business in terms of the four segments, the pickup delivery being the two ends. The delivery costs, going forward with volume increase, you would anticipate increase if without any of the alternative methods, such as drop-off box or post. So we believe, first of all, to address this increase in cost, we started early in 2018, towards the end of 2018, encouraging our partners to invest in the last mile ability because last mile resources are scarce, and to ensure our presence there will help our network partners to secure the lowest cost of delivery in the future. Now, another second layer, which probably is more related to your question, is that because of our last mile presence and our connectivity with consumers, with customers, our couriers are able to achieve better connection and enhance, bring about potential commercial opportunities. And that is part of what we are currently investing, researching, and design and implementing so that we can help our network partners to, one, ease the initial investment pressure when they first start the post- last night post operation, and then two, allowing them to gradually ramp up their capabilities of commercial operations. I hope that answers your question.

Thank you. Your next question is a follow-up question from . Please go ahead.

Mr. Lai, Mr. Yan, I have a question. I just want to ask, because Mr. Lai has emphasized many times that we are better than Tonghang in terms of salary. And then I also noticed that in fact, a while ago, we started a project called straight chain, which is a system that has a direct settlement and payment with Xiao Ge. Can you please share more details with us? That is to say, to what extent do we do it now, and to what extent do we hope to achieve it in the future? So my question is regarding the payment to delivery guys. I emphasize that ZTO actually paid much better to their delivery guys compared with peers to ensure the stability of the network. I actually noticed there was a program It's called like the direct payment of the losses to last mile delivery guys. Could you please share more details on this program and the target of the program and how is the feedback so far?

Thank you. 你好,这个责念快递小哥,目的其实就是要责念跟扁平。 Because as long as there is a balance of responsibility, its efficiency will be higher. Our idea is to let businessmen go from employment to entrepreneurship, and let them do it for themselves. The strategy of ZTE is that the platform must be big and strong. The platform must be big and strong, and the inkwell must be small and pure. We want every courier to go from hot to hot. We want it to make more money than its peers. Then the reason behind us is that after refining, our future network, between us and our partners, between the courier staff, between the courier staff, is more transparent. We can enjoy the price of one hand, that is, the price of our one-handed middle-class fee, and develop its internal power, the machine of the driver, because it is for itself. At the same time, we can balance the headquarters with our partners, China.

The design thinking behind this model of directly connecting with our courier is as such. It's part of our de-layering initiatives. As we mentioned before, if I may, that we have started to develop the standard pickup and delivery fee schedule in 2018. and when we are able to make it transparent between what we pay to the network partners and what they pay to the couriers. Because we think the business, the platform, the transit and the sortation is strong, but most importantly, the package needs to be delivered, and that's the touchpoint with our consumers. So therefore, our courier holds a very important key facing customer so to help them develop from an employee or maybe just a little entrepreneur to truly motivated to work for their own because they are able to achieve more market driven as well as a fair pay that is passed through to them through the network partners. And so far, what we have seen is that our network partners responded quite well to this model in the fact that they believe their couriers are more stable, are more focused on quality of services to their customers. So therefore, they are bringing in more volumes and bringing in more customers. So it's a win-win for all the parties involved. So far, around 40% of our network partners have signed up and started to implement this model. And our goal is to achieve at least 50%. But by looking at the current trend or current responses, we believe we may exceed that 50% coverage goal that we set before.

Thank you.

Your next question is a follow-up question from Hangfu Zhaozhen with JPJA Securities. Please go ahead.

Hello, I have a follow-up question about our capital spending. These are two questions. The first one is that I see that our capital spending in the second quarter has increased by more than 170%. This is still a relatively large increase. Of course, this may also be due to our second quarter's So I want to ask if the increase in capital spending in the second half of this year is still the same as the previous increase. And then the second question is actually about capital spending. But that is to say, what we have seen more in the past is capital spending on the company level. But in fact, when the industry competition is getting more and more intense, the capital spending of joiners will also be more and more different. So we are still very concerned about the capital spending of joiners. Although this data is very small, but I don't know if we have a general estimate. How much is the ratio of the capital spending of our headquarters and the capital spending of joiners in the past two years? My question is about the capital expenditure. The first one is that we noticed that the capital expenditure in the second quarter increased about more than 170% and really continued in the second half of the year. And the second question is about the capital expenditure of our network partners for the Capital expenditure, our network partners have the same importance with ourselves. So do you have a rough estimate for the proportion of capital expenditure from ourselves and our network partners? Thank you.

Thank you for your question. Indeed, as you stated, this quarter, the past second quarter, we acquired and placed in service a lot of the increment of trucks and vehicles that we invested is around 2,100, 2,200. So this is a one-time, but yet we believe investment in the infrastructure is one of our key strategies to build capacity in anticipation of the high volume, incoming volume. overall budget for capex spending is around 7 billion for this year we think that is somewhere close to what we had previously talked about six to eight billion range the investment by our network partners yes indeed are increasing as we we know we invest in our own capacity but because it is pickup, transit, sorting, and delivery, all four aspects needs to be coordinated and in sync. So a lot of our network partners are expanding their capabilities as well. Some of the figures I could provide you is that we have anticipated over 100 automation lines to be installed by our network partners. and so far we've already seen the network partners invested over 50 of that. So towards the high season, we think the investment pace will pick up even further. Some of our larger network partners also invest in land, and this is a long-term investment which, again, demonstrated their belief and confidence in the future of the business together with us.

Thank you. This concludes our conference for today. I would like to turn the conference back to the company for any closing remarks.

Thanks again for everyone joining us for today's call. Any further questions, we welcome and we're looking forward to talk with you soon.