ZTO Express (Cayman) Inc. (NYSE:ZTO) Q2 2021 Earnings Conference Call August 18, 2021 8:30 PM ET Company Participants Sophie Li - Director of Investor Relations Meisong Lai - Founder, Chairman and Chief Executive Officer Huiping Yan - Chief Financial Officer Conference Call Participants Ronald Keung - Goldman Sachs Group, Inc. Ellie Jiang - Macquarie Group Lin Chen - JPMorgan Chase & Co. James Teo - Bloomberg Intelligence Parash Jain - HSBC Operator Welcome to the ZTO Reports Second Quarter 2021 Unaudited F ...

[Financial and Operational Highlights](index=2&type=section&id=Financial%20and%20Operational%20Highlights) ZTO Express reported a 25.6% increase in Q2 2021 parcel volume and 14.4% revenue growth to RMB 7.33 billion, yet adjusted net income declined 12.5% to RMB 1.27 billion, despite strong operating cash flow Key Financial Indicators for Q2 2021 | Metric | 2021 Q2 | 2020 Q2 | YoY Change | | :--- | :--- | :--- | :--- | | Revenue | RMB 7.325 billion | RMB 6.402 billion | +14.4% | | Gross Profit | RMB 1.674 billion | RMB 1.769 billion | -5.4% | | Net Income | RMB 1.272 billion | RMB 1.454 billion | -12.5% | | Adjusted Net Income | RMB 1.272 billion | RMB 1.454 billion | -12.5% | | Basic and Diluted EPS per ADS | RMB 1.56 | RMB 1.85 | -15.7% | | Net Cash Flow from Operating Activities | RMB 1.932 billion | RMB 1.252 billion | +54.3% | Key Operational Data for Q2 2021 | Metric | 2021 Q2 | 2020 Q2 | YoY Change | | :--- | :--- | :--- | :--- | | Parcel Volume | 5.772 billion parcels | 4.595 billion parcels | +25.6% | | Market Share | 21.0% | - | - | | Pickup/Delivery Outlets | >30,100 units | - | - | | Line-haul Vehicle Fleet | ≈10,300 units | - | - | | High-capacity Vehicles | ≈8,150 units | - | - | [Management Commentary and Strategy](index=3&type=section&id=Management%20Commentary%20and%20Strategy) Management highlighted a strategic focus on balancing service quality, volume, and profit, prioritizing profitable parcels which slightly impacted market share but ensured strong profitability and network stability, with future investments targeting capacity and operational efficiency - CEO Meisong Lai stated that the company's choice to prioritize profitable parcels over short-term market share gains was the main reason for the slight decline in market share this quarter, which ensured strong profitability and network partner stability[7](index=7&type=chunk) - Management anticipates China's express delivery industry will reach over **400 million parcels daily** in the next 2-3 years, with capacity and operational efficiency being key determinants of success, where ZTO has established an efficiency advantage[7](index=7&type=chunk) - CFO Huiping Yan stated that capital expenditure for the quarter was **RMB 2.2 billion**, with nearly 70% allocated to land acquisition and upgrading sorting centers, aiming to strengthen core express delivery infrastructure and develop integrated logistics service capabilities[7](index=7&type=chunk) [Detailed Financial Performance](index=4&type=section&id=Detailed%20Financial%20Performance) Total revenue grew 14.4% driven by core express services, but operating costs surged 22.0% due to policy changes and rising fuel prices, resulting in a gross margin decline from 27.6% to 22.8% and a 12.5% decrease in net income [Revenue Analysis](index=4&type=section&id=Revenue%20Analysis) Total revenue reached RMB 7.33 billion, up 14.4%, driven by core express services' 18.1% growth from increased parcel volume despite lower average prices, while freight forwarding revenue declined 32.9% Q2 2021 Revenue Breakdown (Millions of RMB) | Business Segment | 2021 Q2 | 2020 Q2 | YoY Change | | :--- | :--- | :--- | :--- | | Express Delivery Services | 6,652.9 | 5,540.7 | +20.1% | | Freight Forwarding Services | 313.6 | 467.1 | -32.9% | | Sale of Materials | 314.1 | 321.2 | -2.2% | | Others | 44.4 | 73.5 | -39.6% | | **Total Revenue** | **7,325.1** | **6,402.4** | **+14.4%** | - The growth in core express delivery service revenue was primarily driven by a **25.6% year-over-year increase in parcel volume**, partially offset by a **5.9% decrease in average selling price per parcel**[8](index=8&type=chunk) [Cost Analysis](index=4&type=section&id=Cost%20Analysis) Total operating costs increased 22.0% to RMB 5.65 billion, driven by a 38.4% surge in line-haul transportation costs due to policy changes and fuel prices, and a 28.6% rise in sorting center costs from wage increases and automation Q2 2021 Operating Cost Breakdown (Millions of RMB) | Cost Item | 2021 Q2 | 2020 Q2 | YoY Change | | :--- | :--- | :--- | :--- | | Line-haul Transportation Costs | 2,763.3 | 1,996.6 | +38.4% | | Sorting Center Operating Costs | 1,612.7 | 1,254.3 | +28.6% | | Freight Forwarding Costs | 266.2 | 416.7 | -36.1% | | Other Costs | 911.1 | 853.3 | +6.8% | | **Total Operating Costs** | **5,651.4** | **4,633.3** | **+22.0%** | - Per-parcel line-haul transportation cost increased by **10.2% to RMB 0.48**, primarily due to the combined impact of the expiration of toll exemption policies in the prior year period and rising fuel prices[10](index=10&type=chunk) - As of June 30, 2021, the number of automated sorting equipment in operation increased to **361 sets** from 282 sets in the prior year period, contributing to higher depreciation and amortization costs related to sorting centers[10](index=10&type=chunk) [Profit and Profitability](index=5&type=section&id=Profit%20and%20Profitability) Gross profit declined 5.4% to RMB 1.67 billion and gross margin fell to 22.8% due to faster cost growth, leading to an 11.6% decrease in operating profit and a 12.5% decline in net income to RMB 1.27 billion - Gross margin decreased from **27.6%** in the prior year period to **22.8%**, primarily due to the combined impact of a **5.9% decrease in average selling price per parcel** and a **1.7% increase in per-parcel cost** for core express delivery services[12](index=12&type=chunk) - Operating profit was **RMB 1.46 billion**, a **11.6% year-over-year decrease**; operating margin declined from **25.7% to 19.9%**[12](index=12&type=chunk) - Net income was **RMB 1.27 billion**, a **12.5% decrease** from RMB 1.45 billion in the prior year period[13](index=13&type=chunk) [Earnings Per Share (EPS)](index=5&type=section&id=Earnings%20Per%20Share%20(EPS)) Basic and diluted earnings per American Depositary Share (ADS) attributable to ordinary shareholders were RMB 1.56 this quarter, a decrease from RMB 1.85 in the prior year period Earnings Per American Depositary Share (RMB) | Metric | 2021 Q2 | 2020 Q2 | | :--- | :--- | :--- | | Basic and Diluted EPS per ADS | 1.56 | 1.85 | | Adjusted Basic and Diluted EPS per ADS | 1.56 | 1.85 | [Business Outlook](index=5&type=section&id=Business%20Outlook) The company maintained its full-year 2021 parcel volume guidance of 22.95 billion to 23.80 billion parcels, representing a 35% to 40% year-over-year growth - The company maintained its full-year 2021 parcel volume guidance unchanged, expecting a range of **22.95 billion to 23.80 billion parcels**, representing a **35%-40% year-over-year increase**[13](index=13&type=chunk) [Capital Management: Share Repurchase Program](index=6&type=section&id=Share%20Repurchase%20Program) The board approved increasing the share repurchase program to $1 billion and extending it to June 30, 2023, with approximately 17.52 million ADSs repurchased at an average price of $23.17 as of June 30, 2021 - The share repurchase program size was increased from **$500 million to $1 billion**, with its validity extended to **June 30, 2023**[15](index=15&type=chunk) - As of June 30, 2021, the company had cumulatively repurchased **17,519,583 ADSs** at an average purchase price of **$23.17**[15](index=15&type=chunk) [Appendix: Financial Statements](index=9&type=section&id=Appendix%3A%20Financial%20Statements) This section provides detailed unaudited financial statements, including consolidated comprehensive income, balance sheets, cash flows, and reconciliations of GAAP to Non-GAAP results [Unaudited Consolidated Statement of Comprehensive Income](index=9&type=section&id=Unaudited%20Consolidated%20Statement%20of%20Comprehensive%20Income) This statement presents detailed revenue, cost, expense, and profit data for the three and six months ended June 30, 2021 - For detailed unaudited consolidated statement of comprehensive income data, please refer to the original document[27](index=27&type=chunk) [Unaudited Consolidated Balance Sheets](index=10&type=section&id=Unaudited%20Consolidated%20Balance%20Sheets) This statement lists the company's assets, liabilities, and shareholders' equity as of June 30, 2021, and December 31, 2020 - For detailed unaudited consolidated balance sheet data, please refer to the original document[28](index=28&type=chunk) [Unaudited Consolidated Statements of Cash Flows](index=11&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Cash%20Flows) This statement illustrates the company's cash flows from operating, investing, and financing activities for the three and six months ended June 30, 2021 - For detailed unaudited consolidated statements of cash flows data, please refer to the original document[29](index=29&type=chunk) [Reconciliation of GAAP and Non-GAAP Results](index=12&type=section&id=Reconciliation%20of%20GAAP%20and%20Non-GAAP%20Results) This section provides detailed reconciliations of Non-GAAP financial metrics, including adjusted net income and EBITDA, to their most comparable GAAP measures - Provides detailed calculations for reconciling GAAP net income to Non-GAAP adjusted net income, adjusted EBITDA, and adjusted earnings per share[31](index=31&type=chunk)[33](index=33&type=chunk)

ZTO Express (Cayman) Inc. (NYSE:ZTO) Q1 2021 Earnings Conference Call May 19, 2021 8:30 PM ET Company Participants Sophie Li - Investor Relations Meisong Lai - Chairman and Chief Executive Officer Huiping Yan - Chief Financial Officer Conference Call Participants Thomas Chong - Jefferies Ronald Keung - Goldman Sachs Tianxiao Hou - TH Capital Operator Good day and welcome to the ZTO Express, Inc. First Quarter 2021 Conference Call. [Operator Instructions] Please note that today’s event is being recorded. I w ...

Financial Performance - ZTO Express reported a total revenue of approximately $1.5 billion for the fiscal year ended December 31, 2020, representing a year-over-year increase of 30%[3]. - The company reported a net income of approximately $300 million for 2020, reflecting a net profit margin of 20%[3]. - The company reported a total revenue of RMB 100 billion for the fiscal year ending December 31, 2020, representing a year-over-year increase of 15%[10]. - The gross profit margin for the year was reported at 25%, a slight increase from 24% in 2019[10]. - The company anticipates a revenue guidance of RMB 115 billion for the fiscal year 2021, indicating a growth target of 15%[8]. - Total revenue for the latest quarter reached RMB 25,214,290, with a gross profit of RMB 5,837,106, resulting in a gross margin of approximately 23%[12]. - Operating profit for the quarter was RMB 4,754,367, reflecting a decrease of 13% compared to the previous quarter[12]. - Net profit attributable to shareholders was RMB 4,312,213, with earnings per share (EPS) of RMB 5.42, down from RMB 7.24 in the previous quarter[12]. Package Volume and Logistics - The company processed approximately 4.7 billion packages in 2020, an increase of 26% compared to the previous year[3]. - The total package volume handled by the company reached 10 billion packages in 2020, reflecting a growth of 20% compared to the previous year[10]. - Over 90% of the company's total package volume in December 2020 came from e-commerce platforms, indicating a strong reliance on the growth of the Chinese e-commerce industry[16]. - As of December 31, 2020, the company operated approximately 30,000 pickup/delivery points and had over 5,350 direct network partners, emphasizing its extensive operational network[19]. - The company has established a comprehensive and reliable delivery network, supported by partnerships with network operators[136]. - The company currently operates over 68,000 end stations in China, which serve as pickup locations for recipients[146]. Growth and Expansion Plans - ZTO Express expects revenue growth to continue in 2021, projecting an increase of 25% to 30% year-over-year[3]. - The company plans to expand its service network by adding 1,000 new service stations in 2021 to enhance its logistics capabilities[3]. - The company plans to expand its service network by adding 1,000 new delivery points in 2021, aiming to enhance customer accessibility[8]. - The company aims to enhance its market share in the e-commerce logistics sector, targeting a 5% increase in market penetration by the end of 2021[3]. - The company is exploring potential mergers and acquisitions to strengthen its competitive position in the logistics industry[3]. - The company is exploring potential acquisitions in the logistics sector to strengthen its competitive position in the market[8]. Technology and Innovation - ZTO Express is investing in technology development, focusing on automation and artificial intelligence to improve operational efficiency[3]. - The company is investing RMB 2 billion in new technology development to improve sorting efficiency and delivery speed[8]. - The company has developed proprietary algorithms for order scheduling and forecasting, capable of processing up to 100 million orders per day[155]. - The company utilizes automated hardware and software solutions to improve operational efficiency, including dynamic weighing machines and image-based learning algorithms for package inspection[143]. - The proprietary Zhongtian system includes over a hundred modules for package sorting, transportation, and tracking management, which is crucial for operational efficiency[153]. Sustainability Initiatives - The company is committed to sustainability initiatives, aiming to reduce carbon emissions by 15% over the next five years[3]. - The company has established a special team to lead environmental sustainability initiatives, promoting the use of green, recyclable, and biodegradable packaging[161]. - The company has implemented energy-efficient equipment in sorting, transportation, and distribution processes to reduce environmental impact[161]. - The company actively promotes rural market development through the "Express Delivery to Villages" initiative, enhancing logistics services in rural areas[161]. Risks and Challenges - The company faces significant risks from various factors affecting the e-commerce sector, including consumer spending ability, regulatory changes, and macroeconomic conditions[17]. - The company is vulnerable to external factors such as economic downturns, inflation, and geopolitical issues, which could adversely affect consumer confidence and spending behavior[17]. - The company may face increased operational costs due to compliance with the demands and regulations of third-party platforms like Alibaba[18]. - The competitive landscape in the Chinese express delivery industry may lead existing network partners to switch to competitors, posing a risk to service continuity[20]. - The company faces intense competition from leading domestic express delivery companies, which may adversely affect its operational performance and market share[21]. Regulatory Compliance - The company is subject to various regulations regarding its express delivery operations, including compliance with the Express Delivery Interim Regulations, which mandate timely registration of delivery points and proper handling of user information[35]. - The company must comply with the E-commerce Law, which includes obligations for logistics service providers to adhere to service standards and use environmentally friendly packaging materials[36]. - The company is required to report any incidents of user information leakage to the relevant postal authorities immediately[35]. - The company must comply with various construction requirements under Chinese laws and regulations, including obtaining necessary permits before commencing construction projects[182]. Financial Position and Investments - Cash and cash equivalents increased to RMB 14,212,778, indicating a strong liquidity position[13]. - The company generated net cash flow from operating activities of RMB 4,950,749, demonstrating robust operational efficiency[14]. - The company reported a net cash flow from financing activities of RMB 8,337,407, highlighting strong capital inflow[14]. - The company has authorized a share repurchase plan with a maximum value of $1 billion, extending the plan until June 30, 2023[133]. Human Resources and Labor Relations - As of December 31, 2020, the company employed 22,536 employees and over 57,000 outsourced personnel, indicating a labor-intensive business model[25]. - The company has established a comprehensive talent development mechanism, including a management trainee program to cultivate future leaders[161]. - The company provides ongoing training and performance evaluations for network partners to ensure high-quality customer service[152]. Shareholder and Governance Issues - The company’s dual-class share structure allows B class shareholders to have ten votes per share, while A class shareholders have one vote per share, leading to concentrated voting power[108]. - The concentration of ownership may hinder potential mergers or acquisitions, affecting the ability of other shareholders to realize premium value on their shares[108]. - The company’s organizational documents include provisions that may hinder third parties from acquiring control, impacting shareholder rights[116]. Market and Economic Conditions - The company is sensitive to changes in the economic conditions and political policies in China, which could impact its overall growth rate[53]. - The company’s ability to raise additional capital on favorable terms may be limited, especially in disappointing operational performance scenarios[50]. - The company faces significant adverse impacts on its business and financial condition due to potential severe or prolonged economic downturns in China or globally[53].

Part I [ITEM 3. KEY INFORMATION](index=7&type=section&id=Item%203.%20Key%20Information) This section presents ZTO Express's selected consolidated financial data and outlines significant risk factors across business, corporate structure, and operations in China [Selected Consolidated Financial Data](index=7&type=section&id=A.%20Our%20Selected%20Consolidated%20Financial%20Data) ZTO Express experienced revenue growth from RMB 17.6 billion in 2018 to RMB 25.2 billion in 2020, despite a net income decrease in 2020 Selected Consolidated Comprehensive Income Data (2018-2020) | Indicator | 2018 (RMB millions) | 2019 (RMB millions) | 2020 (RMB millions) | | :--- | :--- | :--- | :--- | | **Revenues** | 17,604.45 | 22,109.95 | 25,214.29 | | **Gross Profit** | 5,364.88 | 6,621.17 | 5,837.11 | | **Income from Operations** | 4,332.22 | 5,462.83 | 4,754.37 | | **Net Income Attributable to ZTO** | 4,383.03 | 5,674.15 | 4,312.21 | | **Basic EPS (RMB)** | 5.83 | 7.24 | 5.42 | | **Diluted EPS (RMB)** | 5.82 | 7.23 | 5.42 | Selected Consolidated Balance Sheet Data (as of Dec 31, 2019-2020) | Indicator | 2019 (RMB millions) | 2020 (RMB millions) | | :--- | :--- | :--- | | **Total Assets** | 45,890.50 | 59,204.75 | | **Total Liabilities** | 7,487.11 | 10,105.05 | | **Cash and cash equivalents** | 5,270.20 | 14,212.78 | Selected Consolidated Cash Flow Data (2018-2020) | Indicator | 2018 (RMB millions) | 2019 (RMB millions) | 2020 (RMB millions) | | :--- | :--- | :--- | :--- | | **Net cash provided by operating activities** | 4,404.05 | 6,304.19 | 4,950.75 | | **Net cash used in investing activities** | (12,872.63) | (3,664.21) | (3,549.34) | | **Net cash provided by/(used in) financing activities** | 7,042.12 | (1,982.31) | 8,337.41 | [Risk Factors](index=9&type=section&id=D.%20Risk%20Factors) ZTO faces diverse risks including high e-commerce dependency, intense competition, VIE structure vulnerabilities, and potential delisting under the HFCA Act - The company's business is highly dependent on the Chinese e-commerce industry, with over **90% of its parcel volume in December 2020** attributable to e-commerce platforms. Any slowdown or adverse regulatory changes in this sector could significantly impact ZTO[20](index=20&type=chunk) - ZTO faces intense competition from other major domestic express delivery companies like YTO, STO, Yunda, and SF Express, as well as potential competition from e-commerce platforms like Alibaba and JD.com developing their own in-house logistics[31](index=31&type=chunk)[32](index=32&type=chunk) - The company relies on a Variable Interest Entity (VIE) structure to operate its domestic mail delivery services due to PRC restrictions on foreign investment. This structure carries risks, as PRC authorities could find the contractual arrangements non-compliant, leading to severe penalties[131](index=131&type=chunk)[133](index=133&type=chunk)[134](index=134&type=chunk) - The Holding Foreign Companies Accountable Act (HFCA Act) poses a significant risk. If the PCAOB is unable to inspect the company's auditor in China for three consecutive years, ZTO's ADSs could be delisted from U.S. exchanges, which would materially affect the value of the investment[190](index=190&type=chunk)[191](index=191&type=chunk) [ITEM 4. INFORMATION ON THE COMPANY](index=56&type=section&id=Item%204.%20Information%20on%20the%20Company) This section details ZTO's history, business operations, and corporate structure, including its network partner model and critical VIE arrangement [History and Development of the Company](index=56&type=section&id=A.%20History%20and%20Development%20of%20the%20Company) ZTO's key milestones include its 2016 NYSE IPO, a **US$1.38 billion** Alibaba investment in 2018, and a **US$1.4 billion** Hong Kong secondary listing in 2020 - The company completed its IPO on the NYSE on October 27, 2016, raising approximately **$1.4 billion** in net proceeds[266](index=266&type=chunk) - In May 2018, Alibaba and Cainiao Network made a strategic investment of **US$1.38 billion** in ZTO, acquiring approximately **10%** of the company's equity interest at the time[266](index=266&type=chunk) - The company completed a secondary listing on the Hong Kong Stock Exchange on September 29, 2020, raising net proceeds of approximately **HK$11.1 billion (US$1.4 billion)**[269](index=269&type=chunk) [Business Overview](index=58&type=section&id=B.%20Business%20Overview) ZTO operates a leading express delivery network in China, utilizing 94 sorting hubs, 9,700 vehicles, and 5,350 network partners, managed by its proprietary Zhongtian system - As of December 31, 2020, ZTO's network infrastructure included **94 sorting hubs**, over **3,600 line-haul routes**, approximately **9,700 self-owned vehicles**, and over **5,350 direct network partners** operating about **30,000 pickup/delivery outlets**[271](index=271&type=chunk) - The company utilizes a network partner model where partners own and operate pickup and delivery outlets. ZTO provides the core sorting hubs and line-haul transportation network, charging partners a network transit fee[296](index=296&type=chunk)[297](index=297&type=chunk) - ZTO's operations are managed through its proprietary and centralized "Zhongtian system," which handles parcel tracking, fleet management, route planning, and fee settlement across the network[310](index=310&type=chunk)[37](index=37&type=chunk) - The company faces competition from major domestic express delivery companies including YTO Express, STO Express, Yunda Express, Best Express, and SF Express[320](index=320&type=chunk) [Organizational Structure](index=89&type=section&id=C.%20Organizational%20Structure) ZTO Express operates its PRC business through a VIE structure, using contractual arrangements to maintain control and consolidate the financial results of its domestic operating entity - The company uses a VIE structure because PRC laws prohibit foreign investment in domestic mail delivery services. The structure allows the Cayman holding company to control and consolidate the financial results of the PRC operating entity, ZTO Express Co., Ltd[263](index=263&type=chunk)[265](index=265&type=chunk) - Key contractual arrangements that establish control include a Voting Rights Proxy Agreement, Equity Pledge Agreement, and an Exclusive Call Option Agreement, which grant the company's WFOE effective control and the option to purchase the VIE's equity[414](index=414&type=chunk)[415](index=415&type=chunk)[417](index=417&type=chunk) - An Exclusive Consulting and Services Agreement entitles the WFOE to receive an annual service fee equal to **100% of the net income** of the VIE, ensuring the economic benefits flow to the holding company[421](index=421&type=chunk) [Operating and Financial Review and Prospects (MD&A)](index=93&type=section&id=Item%205.%20Operating%20and%20Financial%20Review%20and%20Prospects) ZTO's 2020 revenues grew **14.0%** to **RMB 25.2 billion** driven by parcel volume, but net income decreased **23.7%** to **RMB 4.3 billion** due to unit price decline and increased costs [Operating Results](index=93&type=section&id=A.%20Operating%20Results) ZTO's 2020 revenues increased **14.0%** to **RMB 25.2 billion** with **40.3%** parcel volume growth, but net income decreased to **RMB 4.3 billion** due to unit price decline and higher costs - The COVID-19 outbreak caused a temporary decline in parcel volume in January and February 2020, with decreases of **9.1%** and **14.2%** year-on-year, respectively. However, operations gradually resumed from March 2020[434](index=434&type=chunk) Revenue Breakdown (2018-2020) | Service Line | 2018 (RMB millions) | 2019 (RMB millions) | 2020 (RMB millions) | | :--- | :--- | :--- | :--- | | Express delivery services | 15,400.08 | 19,606.21 | 21,900.20 | | Freight forwarding services | 1,278.74 | 1,235.96 | 1,862.69 | | Sale of accessories | 812.87 | 1,089.98 | 1,133.71 | | Others | 112.76 | 177.79 | 317.69 | | **Total revenues** | **17,604.45** | **22,109.95** | **25,214.29** | Cost of Revenues Breakdown (2018-2020) | Cost Component | 2018 (RMB millions) | 2019 (RMB millions) | 2020 (RMB millions) | | :--- | :--- | :--- | :--- | | Line-haul transportation cost | 5,757.70 | 7,466.04 | 8,697.08 | | Sorting hub cost | 3,197.67 | 4,109.34 | 5,224.54 | | Freight forwarding cost | 1,239.44 | 1,209.52 | 1,712.59 | | Cost of accessories sold | 491.72 | 544.17 | 391.25 | | Other costs | 1,553.04 | 2,159.71 | 3,351.71 | | **Total cost of revenues** | **12,239.57** | **15,488.78** | **19,377.18** | - The gross profit margin decreased to **23.1% in 2020** from **29.9% in 2019**, primarily due to the **20.2% decline in unit price per parcel**, which was a result of competition and the COVID-19 outbreak[460](index=460&type=chunk) [Liquidity and Capital Resources](index=110&type=section&id=B.%20Liquidity%20and%20Capital%20Resources) ZTO maintained strong liquidity with **RMB 14.2 billion** cash and equivalents in 2020, supported by **RMB 5.0 billion** operating cash flow and **RMB 8.3 billion** from financing activities Cash Flow Summary (2018-2020) | Cash Flow Activity | 2018 (RMB millions) | 2019 (RMB millions) | 2020 (RMB millions) | | :--- | :--- | :--- | :--- | | **Net cash provided by operating activities** | 4,404.05 | 6,304.19 | 4,950.75 | | **Net cash used in investing activities** | (12,872.63) | (3,664.21) | (3,549.34) | | **Net cash provided by/(used in) financing activities** | 7,042.12 | (1,982.31) | 8,337.41 | - Capital expenditures for property, equipment, and land use rights totaled approximately **RMB 9.2 billion (US$1.4 billion)** in 2020, a significant increase from **RMB 5.2 billion** in 2019, reflecting continued investment in network expansion and upgrades[539](index=539&type=chunk) [Directors, Senior Management, and Employees](index=114&type=section&id=Item%206.%20Directors%2C%20Senior%20Management%20and%20Employees) This section details ZTO's leadership, compensation, board structure, and workforce, highlighting concentrated share ownership and a dual-class share structure [Directors and Senior Management](index=114&type=section&id=A.%20Directors%20and%20Senior%20Management) The company's leadership includes founder Meisong Lai as Chairman and CEO, supported by key executives and independent directors with diverse expertise - Meisong Lai is the founder, Chairman, and CEO of the company[551](index=551&type=chunk) - The board includes a director, Zheng Liu, who was appointed pursuant to the investment agreement with Alibaba and Cainiao Network[550](index=550&type=chunk) [Compensation](index=117&type=section&id=B.%20Compensation%20of%20Directors%20and%20Executive%20Officers) In 2020, ZTO paid **RMB 8.6 million** in cash compensation to executive officers and utilizes a 2016 Share Incentive Plan and Employee Shareholding Platform for equity incentives - Total cash compensation for executive officers in 2020 was approximately **RMB 8.6 million (US$1.3 million)**[569](index=569&type=chunk) - The company has a 2016 Share Incentive Plan, under which the award pool was **18,000,000 shares** as of the date of the report[570](index=570&type=chunk) - An Employee Shareholding Platform was established with **16,000,000 ordinary shares** to provide incentives for employees in China[579](index=579&type=chunk) [Board Practices](index=122&type=section&id=C.%20Board%20Practices) The nine-member board of directors operates with Audit, Compensation, and Nominating and Corporate Governance committees, with directors serving without fixed terms - The board has three committees: Audit, Compensation, and Nominating and Corporate Governance[590](index=590&type=chunk) - The Audit Committee is composed of independent directors Herman Yu, Qin Charles Huang, and Xing Liu, with Mr. Yu serving as the designated financial expert[591](index=591&type=chunk) [Employees](index=124&type=section&id=D.%20Employees) As of December 31, 2020, ZTO had **22,536 employees**, primarily in Sorting and Transportation, supplemented by over **57,000 outsourced personnel** Employee Breakdown by Function (as of Dec 31, 2020) | Functional Area | Number of Employees | % of Total | | :--- | :--- | :--- | | Sorting | 8,095 | 36.0% | | Transportation | 4,915 | 21.8% | | Management and Administration | 4,126 | 18.3% | | Customer Service | 2,076 | 9.2% | | Operation Support | 1,453 | 6.4% | | Technology and Engineering | 1,560 | 6.9% | | Sales and Marketing | 311 | 1.4% | | **Total** | **22,536** | **100.0%** | - The company's workforce also includes over **57,000 outsourced personnel** as of December 31, 2020[600](index=600&type=chunk) [Share Ownership](index=125&type=section&id=E.%20Share%20Ownership) ZTO's share structure features concentrated ownership and dual-class shares, with founder Meisong Lai controlling **77.1% of voting power** as of March 31, 2021 - The company has a dual-class share structure where Class A ordinary shares have one vote per share and Class B ordinary shares have ten votes per share[608](index=608&type=chunk) - As of March 31, 2021, founder Meisong Lai beneficially owned **25.9% of total ordinary shares**, which translated to **77.1% of the aggregate voting power**[608](index=608&type=chunk)[610](index=610&type=chunk)[611](index=611&type=chunk) - Alibaba Group Holding Limited is a principal shareholder, beneficially owning **71,941,287 Class A ordinary shares**, representing **8.7% of total shares** and **2.7% of voting power**[608](index=608&type=chunk)[615](index=615&type=chunk)[616](index=616&type=chunk) [Major Shareholders and Related Party Transactions](index=129&type=section&id=Item%207.%20Major%20Shareholders%20and%20Related%20Party%20Transactions) This section details ZTO's major shareholders, including founder Meisong Lai's controlling interest, and outlines significant related party transactions and investor rights agreements - The company has an investor rights agreement with Alibaba and Cainiao Network that provides them with a Right of First Offer, preemptive rights, and the right to designate one director to the board[625](index=625&type=chunk)[627](index=627&type=chunk)[628](index=628&type=chunk) - ZTO incurred transportation service fees of **RMB 331.3 million** in 2020 from Tonglu Tongze, a related party majority-owned by company employees[635](index=635&type=chunk) - The company purchased supplies worth **RMB 197.3 million** in 2020 from Shanghai Mingyu Barcode Technology Ltd., a company controlled by the chairman's brother[635](index=635&type=chunk) - In 2020, the company extended a three-year loan of **RMB 500.0 million** to Zhongkuai (Tonglu) Future City Industrial Development Co., Ltd, a company controlled by the chairman[637](index=637&type=chunk) [Financial Information](index=131&type=section&id=Item%208.%20Financial%20Information) This section addresses ZTO's ongoing securities class action lawsuits and its dividend policy, including a **US$0.25 per ADS** special dividend for 2020 - The company is defending against several putative securities class action lawsuits in the U.S. related to its October 2016 IPO. A motion to dismiss was granted in the New York Action in July 2019, and a subsequent motion for leave to amend was denied in March 2021[640](index=640&type=chunk)[645](index=645&type=chunk) - On March 16, 2021, the board approved a special dividend of **US$0.25 per ADS or share** for the year 2020[648](index=648&type=chunk) - The company does not have a formal dividend policy and intends to retain most future earnings to fund business development and growth[648](index=648&type=chunk) [Additional Information](index=134&type=section&id=Item%2010.%20Additional%20Information) This section details ZTO's corporate governance, including its dual-class share structure and anti-takeover provisions, alongside material tax considerations for its operations and U.S. ADS holders - The company's ordinary shares are divided into Class A (one vote per share) and Class B (ten votes per share). Class B shares are convertible into Class A shares but not vice-versa, and automatically convert upon transfer to a non-affiliate[653](index=653&type=chunk)[654](index=654&type=chunk) - The company's PRC subsidiaries are subject to a statutory **25% enterprise income tax**, but certain entities qualify for a preferential **15% rate** as High and New Technology Enterprises (HNTEs) or under the Western Regions Catalogue[952](index=952&type=chunk)[953](index=953&type=chunk) - The company does not believe it was a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes for the 2020 taxable year, but notes that the determination is factual and made annually, subject to changes in income, assets, and market capitalization[713](index=713&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=150&type=section&id=Item%2011.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) ZTO is exposed to foreign exchange, interest rate, and commodity price risks, with a **10% RMB appreciation** potentially decreasing USD-denominated assets by **RMB 835.0 million** - The primary market risks are foreign exchange, interest rate, and commodity (fuel) price risk[727](index=727&type=chunk)[730](index=730&type=chunk)[731](index=731&type=chunk) - As of December 31, 2020, the company held **RMB 8.3 billion** in U.S. dollar-denominated cash and investments. A hypothetical **10% appreciation of the RMB** against the USD would lead to a **RMB 835.0 million decrease** in the value of these assets[729](index=729&type=chunk) Part II [Use of Proceeds](index=154&type=section&id=Item%2014.%20Material%20Modifications%20to%20the%20Rights%20of%20Security%20Holders%20and%20Use%20of%20Proceeds) This section details the **US$1,436.4 million** net proceeds from ZTO's September 2020 Hong Kong offering, none of which had been used as of December 31, 2020 - The company raised **US$1,436.4 million** in net proceeds from its Hong Kong public offering in September 2020[740](index=740&type=chunk) - As of December 31, 2020, the company had not yet used any of the proceeds from the Hong Kong public offering[742](index=742&type=chunk) [Controls and Procedures](index=154&type=section&id=Item%2015.%20Controls%20and%20Procedures) Management and independent auditors concluded that ZTO's disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[743](index=743&type=chunk) - Management assessed internal control over financial reporting as effective as of December 31, 2020, based on the COSO 2013 framework[746](index=746&type=chunk) - The independent auditor, Deloitte, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2020[746](index=746&type=chunk)[747](index=747&type=chunk) [Purchases of Equity Securities by the Issuer](index=156&type=section&id=Item%2016E.%20Purchases%20of%20Equity%20Securities%20by%20the%20Issuer%20and%20Affiliated%20Purchasers) ZTO's share repurchase program, increased to **US$1 billion** and extended to June 2023, had repurchased **14,491,197 ADSs** for **US$321.7 million** by December 31, 2020 - The company's share repurchase program was increased from **US$500 million to US$1 billion** and extended through June 30, 2023[756](index=756&type=chunk) - As of December 31, 2020, a total of **14,491,197 ADSs** had been repurchased for **US$321.7 million** under the current program[756](index=756&type=chunk) Part III [Financial Statements](index=157&type=section&id=Item%2018.%20Financial%20Statements) This section presents ZTO Express's audited consolidated financial statements for 2018-2020, prepared under U.S. GAAP, including auditor's report, core statements, and detailed notes - The financial statements were audited by Deloitte Touche Tohmatsu Certified Public Accountants LLP, which issued an unqualified opinion on both the financial statements and the company's internal control over financial reporting[771](index=771&type=chunk)[772](index=772&type=chunk) - The company adopted the new lease accounting standard (ASC 842) on January 1, 2019, which resulted in the recognition of operating lease right-of-use assets of **RMB 844.3 million** and lease liabilities of **RMB 767.7 million** on the balance sheet[773](index=773&type=chunk)[892](index=892&type=chunk) - The notes to the financial statements provide detailed information on the company's VIE structure, revenue recognition policies, segment information (single segment), and related party transactions[817](index=817&type=chunk)[880](index=880&type=chunk)[990](index=990&type=chunk)

ZTO Express (Cayman) Inc. (NYSE:ZTO) Q4 2020 Earnings Conference Call March 17, 2021 8:30 PM ET Company Participants Sophie Li - Director of IR Meisong Lai - Director CEO Huiping Yan - CFO Conference Call Participants Thomas Chong - Jefferies Tianxiao Hou - TH Capital Ronald Keung - Goldman Sachs Operator Hello, and welcome to the ZTO Express Conference Call to Announce Fourth Quarter and Fiscal Year 2020 Financial Results. All participants will be in a listen-only mode. [Operator Instructions] After today' ...