ZTO EXPRESS(ZTO) - 2023 Q4 - Annual Report

FORM 20-F Filing Information General Filing Details This document is an Annual Report on Form 20-F for the fiscal year ended December 31, 2023, filed by ZTO Express (Cayman) Inc - The filing is an Annual Report on Form 20-F for the fiscal year ended December 31, 2023[2] - ZTO Express (Cayman) Inc. is registered with commission file number 001-37922[3] - The company's principal executive offices are located in Qingpu District, Shanghai, People's Republic of China[3] Securities Registration and Issuer Status The company has securities registered on the NYSE and HKEX and is classified as a well-known seasoned issuer and large accelerated filer Securities Registered Pursuant to Section 12(b) of the Act | Title of each class | Trading Symbol(s) | Name of Each Exchange on Which Registered | |:---|:---|:---| | American depositary shares, each representing one Class A ordinary share par value US$0.0001 per share | ZTO | New York Stock Exchange | | Class A ordinary shares, par value US$0.0001 per share | 2057 | The Stock Exchange of Hong Kong Limited | - As of December 31, 2023, there were 812,866,663 ordinary shares outstanding, comprising 606,766,663 Class A ordinary shares and 206,100,000 Class B ordinary shares[5] - The registrant is a well-known seasoned issuer and a large accelerated filer, and has filed all required reports under the Securities Exchange Act of 1934[5] Introduction Company Structure and Operational Overview ZTO is a Cayman holding company operating in China via subsidiaries and a VIE due to PRC foreign investment restrictions - ZTO Express (Cayman) Inc. is a Cayman Islands holding company, not a Chinese operating company[8] - Operations in China are conducted through subsidiaries and contractual arrangements with ZTO Express Co., Ltd. (VIE) due to PRC foreign investment restrictions in domestic mail delivery services[8] ZTO Express Revenue Contribution to Total Revenues | Fiscal Year | Revenue Contribution (%) | |:---|:---| | 2021 | 97.7 | | 2022 | 90.4 | | 2023 | 81.4 | Risks Associated with Corporate Structure and PRC Operations The company's VIE structure faces significant legal and operational risks from evolving PRC laws and potential government actions - The contractual arrangement with ZTO Express is subject to risks due to uncertainties in the PRC legal system and potential changes in regulations, which could limit enforceability[9] - If PRC government finds the VIE structure non-compliant, ZTO could face severe penalties, be forced to relinquish interests, or ZTO Express could be deconsolidated, materially affecting operations and share value[9] - The company faces legal and operational risks from complex and evolving PRC laws, including those on foreign investment, VIEs, anti-monopoly, cybersecurity, and data privacy, which may impact business, foreign investments, or listing status[9] Cash Transfers and Dividend Distribution Cash is transferred to PRC subsidiaries via loans or contributions, while dividends depend on PRC distributions and are subject to legal restrictions - ZTO transfers cash to Hong Kong subsidiaries (via BVI) through capital contributions or loans, and Hong Kong subsidiaries transfer to PRC subsidiaries similarly[10] - Direct capital contributions to ZTO Express are not possible; cash is transferred via loans or payments for inter-group transactions[10] Dividends Paid by ZTO to Shareholders | Year Ended December 31 | Dividends Paid (US$ millions) | |:---|:---| | 2021 | 208.4 | | 2022 | 202.3 | | 2023 | 299.3 | Definitions This section defines key terms used in the report, including ADSs, PRC, VIE, network partners, and financial metrics - Key terms defined include 'ADSs' (American depositary shares), 'China' or 'PRC' (People's Republic of China excluding Hong Kong, Macau, Taiwan), and 'VIE' (ZTO Express Co., Ltd., whose financial results are consolidated under U.S. GAAP)[11][13] - Operational terms such as 'delivery service fees' (fees collected by pickup outlets), 'network partners' (business partners operating outlets), 'network transit fees' (fees payable to ZTO by partners), and 'parcel volume' (number of parcels collected) are clarified[11] - 'Unit cost per parcel' is defined as the sum of cost of revenues and total operating expenses divided by total parcel volume[11] Forward-Looking Statements Disclaimer and Scope This section contains forward-looking statements involving risks and uncertainties, made under the 'safe harbor' provisions of U.S. law - The report contains forward-looking statements under the 'safe harbor' provisions of the U.S. Private Securities Litigation Reform Act of 1995[15] - These statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially[15] - Forward-looking statements relate to goals, strategies, future business development, financial conditions, industry growth, market acceptance, relationships with stakeholders, competition, and government policies[16] Part I Explanatory Note This note details ZTO's Cayman holding company structure, its reliance on a VIE in China, and the associated risks and cash flow mechanisms - ZTO is a Cayman Islands holding company with no equity ownership in ZTO Express, its consolidated affiliated entity, conducting operations through PRC subsidiaries and ZTO Express via contractual arrangements[20][22] - Revenues contributed by ZTO Express accounted for 97.7%, 90.4%, and 81.4% of total revenues for fiscal years 2021, 2022, and 2023, respectively[22] - The company faces significant risks from potential PRC government actions regarding the VIE structure, regulatory oversight, and evolving legal systems, which could materially affect operations and share value[20][21][29] Our Holding Company Structure and Contractual Arrangements ZTO uses contractual arrangements to control its VIE, ZTO Express, to comply with PRC foreign investment restrictions in domestic mail delivery - ZTO operates domestic mail delivery services through ZTO Express (VIE) to comply with PRC laws restricting foreign control[22] - Key contractual arrangements include voting rights proxy, equity pledge, exclusive call option, and exclusive consulting and services agreements, allowing ZTO to direct VIE activities and consolidate financials[27] - The exclusive consulting and services agreement mandates ZTO Express to pay Shanghai Zhongtongji Network (ZTO's PRC subsidiary) an annual service fee equal to 100% of its net income[27] Permissions Required from the PRC Authorities for Our Operations ZTO's PRC entities hold material operating licenses, but legal uncertainties may require additional future approvals - PRC subsidiaries, ZTO Express, and its subsidiaries have obtained material requisite licenses and permits, including Courier Service Operation Permit and Road Transportation Operation Permit[30] - Uncertainties in interpretation and implementation of PRC laws may necessitate additional licenses or approvals in the future[30] Permissions Required from the PRC Authorities for Overseas Financing Activities New CSRC regulations require PRC domestic companies like ZTO to complete filing procedures for overseas securities offerings and listings - CSRC's Trial Administrative Measures (effective March 31, 2023) require PRC domestic companies to file with CSRC for overseas securities offerings and listings, including follow-on offerings[31] - Existing overseas-listed issuers like ZTO are not required to make immediate filings but must comply for future offerings and material corporate events[31] - Non-compliance with these measures could result in CSRC sanctions, fines, operational limitations, restrictions on dividend payments, and adverse effects on business and share price[31] The Holding Foreign Companies Accountable Act (HFCAA) The HFCAA poses delisting risks if auditors are not inspected by the PCAOB, though the immediate threat was removed in December 2022 - The HFCAA mandates delisting if the SEC determines audit reports are from firms not inspected by the PCAOB for two consecutive years[32] - ZTO was listed as a Commission-Identified Issuer in May 2022, but the PCAOB vacated its non-inspection determination for mainland China and Hong Kong in December 2022[33] - Future PCAOB determinations of non-inspection could lead to ZTO being identified as a Commission-Identified Issuer again, potentially resulting in trading prohibition and adverse effects on investment value[34] Cash Transfers and Dividend Distribution Cash is transferred to PRC entities via loans or contributions, while future dividends depend on PRC subsidiary earnings and are subject to restrictions - ZTO transfers cash to Hong Kong subsidiaries (via BVI) through capital contributions or loans, and Hong Kong subsidiaries transfer to PRC subsidiaries similarly[35] - Cash transfers to ZTO Express (VIE) are made via loans or payments for inter-group transactions, not direct capital contributions[35] Cash Transfers (RMB in millions) | Category | 2021 | 2022 | 2023 | |:---|:---|:---|:---| | Capital contributions and loans from Parent to Cayman, BVI, and Hong Kong subsidiaries, and collection of loans from Cayman, BVI, and Hong Kong subsidiaries to Parent | 1,250 | 2,580 | (1,561) | | Capital contributions from Hong Kong subsidiaries to PRC subsidiaries | 3,671 | 2,282 | 840 | | Amounts received by subsidiaries of Parent from ZTO Express | 15,974 | 20,739 | 17,986 | - For 2021, 2022, and 2023, no shareholder loans were provided by ZTO to PRC subsidiaries, and no dividends were made to ZTO by its subsidiaries; ZTO paid dividends of US$208.4 million, US$202.3 million, and US$299.3 million to its shareholders[38] - PRC subsidiaries are required to set aside at least 10% of after-tax profits to statutory reserve funds until 50% of registered capital is reached; these funds are not distributable as cash dividends[39] Item 3. Key Information This section provides key financial data and outlines significant risk factors related to the company's business, VIE structure, and PRC operations - The section presents summary consolidated financial data for 2021, 2022, and 2023, prepared in accordance with U.S. GAAP[42] - Key risk categories include those related to business and industry (e.g., e-commerce dependency, competition, service disruptions), corporate structure (VIE enforceability), doing business in China (regulatory oversight, legal system uncertainties, PCAOB inspections), and shares/ADSs (volatility, dual-class structure, short-seller attacks)[60][61][63][64][65][66][67][68][70][71] A. Our Selected Consolidated Financial Data This section presents ZTO's selected consolidated financial data for fiscal years 2021-2023, prepared under U.S. GAAP Selected Consolidated Comprehensive Income Data (RMB in thousands) | Indicator | 2021 | 2022 | 2023 | 2023 (US$) | |:---|:---|:---|:---|:---| | Revenues | 30,405,839 | 35,376,996 | 38,418,915 | 5,411,191 | | Cost of revenues | (23,816,462) | (26,337,721) | (26,756,389) | (3,768,559) | | Gross profit | 6,589,377 | 9,039,275 | 11,662,526 | 1,642,632 | | Income from operations | 5,503,011 | 7,736,481 | 10,007,924 | 1,409,586 | | Net Income | 4,701,327 | 6,658,966 | 8,754,457 | 1,233,040 | | Net income attributable to ZTO Express (Cayman) Inc. | 4,754,827 | 6,809,056 | 8,749,004 | 1,232,272 | | Basic EPS (RMB) | 5.80 | 8.41 | 10.83 | 1.53 | | Diluted EPS (RMB) | 5.80 | 8.36 | 10.60 | 1.49 | Selected Consolidated Balance Sheet Data (RMB in thousands) | Indicator | 2021 | 2022 | 2023 | 2023 (US$) | |:---|:---|:---|:---|:---| | Cash and cash equivalents | 9,721,225 | 11,692,773 | 12,333,884 | 1,737,191 | | Short-term investment | 2,845,319 | 5,753,483 | 7,454,633 | 1,049,963 | | Property and equipment, net | 24,929,897 | 28,813,204 | 32,181,025 | 4,532,603 | | Total assets | 62,772,343 | 78,523,586 | 88,465,221 | 12,460,066 | | Short-term bank borrowings | 3,458,717 | 5,394,423 | 7,765,990 | 1,093,817 | | Total liabilities | 13,844,762 | 24,051,116 | 28,184,813 | 3,969,748 | | Total Equity | 48,927,581 | 54,472,470 | 60,280,408 | 8,490,318 | Selected Consolidated Cash Flow Data (RMB in thousands) | Indicator | 2021 | 2022 | 2023 | 2023 (US$) | |:---|:---|:---|:---|:---| | Net cash provided by operating activities | 7,220,217 | 11,479,308 | 13,360,967 | 1,881,851 | | Net cash used in investing activities | (8,756,533) | (16,041,890) | (12,252,751) | (1,725,762) | | Net cash (used in) / provided by financing activities | (2,903,985) | 7,058,202 | (769,836) | (108,429) | | Net increase/(decrease) in cash, cash equivalents and restricted cash | (4,590,731) | 2,833,726 | 448,223 | 63,131 | D. Risk Factors This section details significant risks facing ZTO, categorized by business, corporate structure, PRC operations, and shares/ADSs - Business and growth are highly dependent on the development of the e-commerce industry in China, with over 90% of parcel volume attributable to e-commerce platforms in December 2023[61][72] - Intense competition from domestic express delivery companies (e.g., YTO, STO, Yunda, SF Express) and potential in-house delivery networks of major e-commerce platforms could adversely affect market share and profitability[81][82] - The VIE structure, necessary due to PRC foreign investment restrictions in domestic mail delivery, poses risks of severe penalties or relinquishment of interests if PRC government regulations change or are interpreted differently[63][189][191] - Uncertainties in PRC laws and regulations, including those on cybersecurity, data privacy, and overseas listings (e.g., CSRC filing requirements, HFCAA), could significantly limit operations, capital raising, and the value of ADSs[65][66][70][145][148][153] - The dual-class share structure grants Mr. Meisong Lai (founder) 77.7% of aggregate voting power as of March 31, 2024, limiting other shareholders' influence on corporate matters[71][271] Summary of Risk Factors This section provides a high-level overview of significant risks, categorized into business, corporate structure, PRC operations, and shares/ADSs - Business risks include high dependency on China's e-commerce, reliance on third-party e-commerce platforms, risks with network partners, intense competition, service disruptions, technology system failures, labor-intensive operations, and risks associated with parcel handling and transportation[61][62] - Corporate structure risks center on ZTO's Cayman Islands holding company status and reliance on VIE contractual arrangements, which may not be as effective as direct ownership and are subject to PRC government scrutiny[63] - Risks related to doing business in China include changes in economic/political conditions, significant government oversight, legal system uncertainties, limitations on dividend distribution from PRC subsidiaries, and the inability of PCAOB to inspect auditors, potentially leading to delisting under HFCAA[64][65][66][67][68][70] - Risks related to shares and ADSs involve volatile trading prices, the dual-class share structure limiting shareholder influence, and the company being a 'controlled company' under NYSE rules[71] Risks Related to Our Business and Industry This section details risks inherent to ZTO's business, including e-commerce reliance, intense competition, and operational challenges - Over 90% of ZTO's parcel volume in December 2023 was attributable to e-commerce platforms, making its business highly dependent on the e-commerce industry's development and regulatory environment in China[72] - ZTO faces intense competition from leading domestic express delivery companies (e.g., YTO, STO, Yunda, J&T, SF Express, JD Logistics, China Post) and potential in-house delivery networks of major e-commerce platforms, leading to pricing pressure and potential market share decline[81][82] - Service disruptions at sorting hubs or network partner outlets due to automation failures, under-capacity, force majeure, disputes, or regulatory orders can adversely impact operations, customer satisfaction, and reputation[86] - The company's technology systems (Zhongtian system) are critical; failure to improve or effectively utilize them, or to develop new technologies, could harm business operations and growth prospects[87][88] - The business is labor-intensive, with 23,554 employees and over 63,000 outsourced personnel as of December 31, 2023; labor market contraction or unrest could negatively affect operations and increase costs[92][95][130] - Compliance with a broad range of PRC laws and regulations (e.g., Postal Law, E-commerce Law, Cybersecurity, Data Protection) is crucial; non-compliance could lead to penalties and business disruptions[106][107][108][109][111][112][113][114][116][118][120][145][148][150][151][152][153] - Significant capital expenditures are required for infrastructure expansion, totaling RMB6.7 billion (US$0.9 billion) in 2023, with inherent risks of funding, asset availability, and return on investment[132] Risks Related to Our Corporate Structure This section outlines significant risks associated with ZTO's Variable Interest Entity (VIE) structure in China - ZTO operates domestic mail delivery services through ZTO Express (VIE) due to PRC laws prohibiting foreign investment in this sector[189] - The contractual arrangements with the VIE, which allow ZTO to direct its activities and receive economic benefits, are subject to significant risks of non-compliance with PRC regulations or changes in legal interpretations[191][194] - Potential PRC government actions could include revoking licenses, imposing fines, restricting operations, requiring restructuring (e.g., terminating VIE agreements), or limiting capital raising, which would severely damage ZTO's business and financial condition[192] - Shareholders of the VIE may have conflicts of interest with ZTO, potentially breaching contractual obligations or acting against ZTO's best interests, which would necessitate reliance on uncertain PRC legal proceedings[199][200] - New PRC laws, such as the Foreign Investment Law and Overseas Listing Trial Measures, introduce uncertainties that could affect ZTO's corporate structure, business operations, and future capital raising activities[202][203][204][205] - Contractual arrangements may be scrutinized by PRC tax authorities, potentially leading to additional tax liabilities for ZTO or the VIE through transfer pricing adjustments[206][207] - Loss of ability to use and benefit from material assets held by the VIE due to bankruptcy, dissolution, or liquidation proceedings could materially and adversely affect ZTO's business[208][209] Risks Related to Doing Business in China This section outlines extensive risks of operating in China, including economic, political, legal, and regulatory uncertainties - Substantially all of ZTO's assets and operations are in China, making its business highly susceptible to changes in China's economic, political, and social conditions or government policies[210][211][212] - The PRC government's significant oversight and discretion over business operations, coupled with evolving laws, could lead to interventions or material adverse changes in ZTO's operations[213][214][215][216] - New CSRC regulations (Overseas Listing Trial Measures) and other PRC government authorities' approvals/filings are required for offshore offerings and future capital raising, with uncertainties regarding approval timelines and potential sanctions[217][218][221][222] - ZTO relies on dividends from PRC subsidiaries for cash requirements, but PRC regulations on profit distribution, statutory reserves, and currency conversion can limit the ability to repatriate funds[224][225][226][227][229][230][234][235] - Fluctuations in exchange rates between Renminbi and U.S. dollars can materially affect ZTO's revenues, earnings, and the value of ADSs, with limited hedging options available in China[231][232][233] - Potential classification as a PRC resident enterprise for tax purposes could result in a 25% enterprise income tax on global income and withholding taxes on dividends/gains for non-PRC shareholders[249][250][251] - The HFCAA poses a risk of delisting from U.S. exchanges if the PCAOB is unable to inspect ZTO's auditor for two consecutive years, despite the PCAOB vacating its prior determination in December 2022[264][265][266] Risks Related to Our Shares and ADSs This section addresses risks specific to ZTO's listed securities, including price volatility and the dual-class share structure - Trading prices of ZTO's ADSs and Class A ordinary shares are volatile, influenced by broad market factors, industry performance, and company-specific events, potentially leading to substantial losses for investors[267][268] - The dual-class share structure, with Mr. Meisong Lai holding 77.7% of aggregate voting power as of March 31, 2024, limits other shareholders' ability to influence corporate matters[269][270][271] - As a 'controlled company' under NYSE rules, ZTO may rely on exemptions from certain corporate governance requirements, potentially affording less protection to shareholders[272][273] - Short-seller allegations, even if unsubstantiated, can lead to significant resource expenditure for investigation and defense, negative publicity, and adverse impacts on market price[274][275][276] - Conversion of convertible senior notes (US$1 billion due 2027) may dilute existing shareholders' ownership interests and encourage short selling, affecting share prices[281][282] - The amount, timing, and distribution of dividends are at the board's discretion, and future dividends depend on operations, cash flow, and PRC regulatory restrictions[285][286] - Enforceability of civil liabilities and judgments obtained against ZTO or its directors/officers in U.S. or Hong Kong courts may be limited due to the company's Cayman Islands incorporation and primary operations in China[290][291][295] Item 4. Information on the Company This section provides a comprehensive overview of ZTO Express, detailing its history, business operations, network, and corporate structure - ZTO Express commenced express delivery services in January 2009, evolving into a Cayman Islands holding company (ZTO) in April 2015 to facilitate financing and offshore listing[319][321] - The company operates through a Variable Interest Entity (VIE), ZTO Express Co., Ltd., due to PRC foreign ownership restrictions in mail delivery services, with contractual arrangements ensuring effective control[322][324] - ZTO is a leading express delivery company in China, with an extensive network comprising 99 sorting hubs, over 3,900 line-haul routes, and approximately 6,000 direct network partners[329] - The company's service offerings include domestic express delivery, enterprise services, ancillary services (Cash-on-Delivery), and international express services[331] - ZTO leverages its proprietary 'Zhongtian system' as a technology backbone for operational management, network management, settlement, finance, and data analytics[365][366][367][368] - The company is subject to a broad range of PRC laws and regulations covering foreign investment, express delivery services, road transportation, cybersecurity, overseas listing, employment, and foreign exchange[389][390][392][393][394][395][396][397][398][399][400][401][402][403][405][406][408][409][410][411][412][413][415][416][417][418][419][420][422][423][424][426][427][428][429][431][433][434][435][436][437][438][439][440][441][442][443][444][445][446][447][448][449][450][451][452][453][454][456][457][458][460][461][462][463][464][465][466][467][468][469][470][471][472][473][475][476][477] Item 4A. Unresolved Staff Comments There are no unresolved staff comments to report Item 5. Operating and Financial Review and Prospects This section analyzes ZTO's financial condition and results, highlighting key performance drivers, liquidity, and capital resources - ZTO's operating results are significantly influenced by demand from China's e-commerce industry, market conditions, the operating leverage of its network partner model, and continuous investments in infrastructure, technology, and personnel[494][495][496][497] Key Financial Highlights (RMB in thousands) | Indicator | 2022 | 2023 | Change (%) | |:---|:---|:---|:---| | Revenues | 35,376,996 | 38,418,915 | 8.6 | | Cost of revenues | (26,337,721) | (26,756,389) | 1.6 | | Gross profit | 9,039,275 | 11,662,526 | 29.0 | | Income from operations | 7,736,481 | 10,007,924 | 29.4 | | Net Income attributable to ZTO Express (Cayman) Inc. | 6,809,056 | 8,749,004 | 28.5 | - Revenues increased by 8.6% to RMB38.4 billion in 2023, driven by a 23.8% increase in parcel volume to 30,202 million, partially offset by an 11.3% decrease in unit price per parcel[514] - Gross profit increased by 29.0% to RMB11.7 billion in 2023, with gross profit margin rising to 30.4% from 25.6% in 2022, primarily due to parcel volume growth and 18.0% unit cost productivity gain[518] - Net cash provided by operating activities was RMB13.4 billion (US$1.9 billion) in 2023, while net cash used in investing activities was RMB12.3 billion (US$1.7 billion)[542][549][550][552] - Material cash requirements as of December 31, 2023, include RMB4.6 billion (US$647.0 million) in capital commitments and RMB7.8 billion (US$1.1 billion) in short-term bank borrowings[555][556][557] A. Operating Results This section analyzes ZTO's operating performance, detailing revenue and cost drivers and providing a comparative analysis for 2023 versus 2022 - Revenues are primarily driven by parcel volume and network transit fees, with express delivery services accounting for 92.4% of total revenues in 2023[501] Revenue Breakdown (RMB in thousands) | Category | 2021 | % | 2022 | % | 2023 | % | |:---|:---|:---|:---|:---|:---|:---| | Express delivery services | 27,450,922 | 90.3 | 32,575,698 | 92.1 | 35,488,060 | 92.4 | | Freight forwarding services | 1,529,601 | 5.0 | 1,212,677 | 3.4 | 906,802 | 2.4 | | Sale of accessories | 1,231,283 | 4.0 | 1,384,674 | 3.9 | 1,876,624 | 4.9 | | Others | 194,033 | 0.7 | 203,947 | 0.6 | 147,429 | 0.3 | | Total revenues | 30,405,839 | 100.0 | 35,376,996 | 100.0 | 38,418,915 | 100.0 | - Annual parcel volume increased from 22,289 million in 2021 to 30,202 million in 2023, reflecting market share growth[502] Cost of Revenues Breakdown (RMB in thousands) | Category | 2021 | % | 2022 | % | 2023 | % | |:---|:---|:---|:---|:---|:---|:---| | Line-haul transportation cost | 11,487,810 | 37.8 | 12,480,170 | 35.3 | 13,591,627 | 35.4 | | Sorting hub cost | 6,774,595 | 22.3 | 7,845,491 | 22.2 | 8,253,522 | 21.5 | | Freight forwarding cost | 1,326,557 | 4.4 | 1,137,140 | 3.2 | 854,533 | 2.2 | | Cost of accessories sold | 349,647 | 1.1 | 463,448 | 1.3 | 513,391 | 1.3 | | Other costs | 3,877,853 | 12.7 | 4,411,472 | 12.4 | 3,543,316 | 9.2 | | Total cost of revenues | 23,816,462 | 78.3 | 26,337,721 | 74.4 | 26,756,389 | 69.6 | - Gross profit increased by 29.0% to RMB11.7 billion in 2023, with gross profit margin improving to 30.4% from 25.6% in 2022, driven by parcel volume growth and cost productivity gains[518] - Income tax expense increased by 18.7% to RMB1,938.6 million in 2023, with an effective tax rate of 18.1% (down from 19.7% in 2022) due to an income tax refund for 'Key Software Enterprise' status[522] - Net income increased to RMB8,754.5 million (US$1,233.0 million) in 2023 from RMB6,659.0 million in 2022[523] B. Liquidity and Capital Resources ZTO's liquidity is sourced from operations and financing, with significant cash requirements for capital expenditures and debt obligations - Principal liquidity sources are cash flows from operating activities and financing activities, including HK$11.1 billion (US$1.4 billion) from Hong Kong listing in 2020 and US$1 billion from convertible senior notes in 2022[542][543][544] Cash, Cash Equivalents and Restricted Cash (RMB in thousands) | Year Ended December 31 | Amount | |:---|:---| | 2021 | 9,769,361 | | 2022 | 12,603,087 | | 2023 | 13,051,310 | - As of December 31, 2023, cash, cash equivalents, restricted cash, and short-term investments totaled RMB20.5 billion (US$2.9 billion), with 91.8% held by PRC entities and 85.4% denominated in Renminbi[545] - Material cash requirements as of December 31, 2023, include RMB4.6 billion (US$647.0 million) in capital commitments, RMB714.9 million (US$100.7 million) in operating lease liabilities, and RMB7.8 billion (US$1.1 billion) in short-term bank borrowings[555][556][557] - The company has US$1 billion in convertible senior notes due 2027, with holders having a repurchase right on September 2, 2025[558] - ZTO's ability to pay dividends relies on distributions from PRC subsidiaries, which are subject to PRC accounting standards, statutory reserve requirements, and withholding taxes[561] Item 6. Directors, Senior Management and Employees This section provides information on ZTO's directors, executive officers, compensation, board practices, and employee details - The board of directors consists of ten directors, including founder Meisong Lai (Chairman and CEO), Jilei Wang (Director and VP of Infrastructure Management), Hongqun Hu (Director and COO), and Huiping Yan (CFO)[566][575] - For 2023, aggregate cash compensation to executive officers and directors was approximately RMB100.3 million (US$14.1 million)[582] - ZTO has two share incentive plans (2016 and 2024) and an Employee Shareholding Platform to grant awards to employees, directors, and consultants[583][588][592][596][600] - The company has three board committees: Audit, Compensation, and Nominating and Corporate Governance, with independent directors meeting NYSE requirements[604][605][607][608] - As of December 31, 2023, ZTO had 23,554 employees and over 63,000 outsourced workers, with a functional breakdown including sorting (33.4%), transportation (15.3%), and management/administration (18.6%)[617] - Mr. Meisong Lai beneficially owns 26.0% of total ordinary shares and holds 77.7% of the aggregate voting power as of March 31, 2024, due to the dual-class share structure[622] Item 7. Major Shareholders and Related Party Transactions This section details ZTO's major shareholders and various related party transactions, including agreements with Alibaba and Cainiao Network - Major shareholders include Zto Lms Holding Limited (controlled by Meisong Lai), Alibaba Group Holding Limited, Jianfa Lai and Zto Ljf Holding Limited, and Zto Wjl Holding Limited[622] - Contractual arrangements with the VIE (ZTO Express) and its shareholders are in place to ensure ZTO's effective control and economic benefits, as detailed in Item 4.C[631] - Investor Rights Agreement with Alibaba ZT Investment Limited and Cainiao Smart Logistics Investment Limited grants them rights such as right of first offer, preemptive rights, and restrictions on transfers of company securities[636][637][638] - ZTO incurred RMB330.2 million (US$46.5 million) for purchases of supplies from Shanghai Mingyu Barcode Technology Ltd. (controlled by chairman's brother) in 2023[645] - Transactions with ZTO LTL (equity investee) in 2023 included RMB862.9 million (US$121.5 million) in transportation service fees paid and RMB45.9 million (US$6.5 million) in property leasing income derived[647] - A RMB500.0 million loan to Zhongkuai (Tonglu) Future City Industrial Development Co., Ltd. (controlled by chairman and CEO) was extended for 36 months at a 5% annualized interest rate in December 2023[648] Item 8. Financial Information This section confirms the inclusion of financial statements and addresses legal proceedings and dividend policy - ZTO's consolidated financial statements are appended as part of this annual report[651] - Most putative securities class action lawsuits against the company and its directors/officers were voluntarily dismissed in 2021, with one case resulting in a judgment in favor of the defendants[653] - A semi-annual cash dividend policy, effective 2024, was approved on March 19, 2024, aiming to distribute no less than 40% of distributable profit annually[655] - The board of directors approved a cash dividend of US$0.62 per ADS and ordinary share for fiscal year 2023, payable to holders of record as of April 10, 2024[285][655] - Dividend distributions are subject to board discretion, Cayman Islands law, and PRC regulations restricting dividend payments from PRC subsidiaries[656] Item 9. The Offer and Listing This section provides details on ZTO's securities listings on the New York Stock Exchange and the Hong Kong Stock Exchange - ZTO's ADSs have been listed on the NYSE under the symbol 'ZTO' since October 27, 2016[325][658][660] - ZTO's Class A ordinary shares have been listed on the Hong Kong Stock Exchange under the stock code '2057' since September 29, 2020[326][659][660] Item 10. Additional Information This section provides supplementary information on corporate governance, material contracts, exchange controls, and tax considerations - ZTO's ordinary shares are divided into Class A (one vote per share) and Class B (ten votes per share), with Class B convertible to Class A under specific conditions[663][664][666] - Dividends can be declared from profits or share premium, provided the company can pay its debts[665] - Key differences in corporate law between Cayman Islands and U.S. (Delaware) include merger procedures, shareholder suit rights, director fiduciary duties, and provisions for shareholder action by written consent[683][684][690][694][696][697] - PRC tax considerations include potential classification as a 'resident enterprise' (25% global income tax), withholding tax on dividends (10% standard), and tax on indirect transfers of equity interests[711][712][714] - U.S. federal income tax considerations for U.S. Holders include dividend taxation, capital gains/losses on disposition, and potential Passive Foreign Investment Company (PFIC) status, which could lead to significantly increased tax liabilities[718][723][726][727][728][733][734][736] Item 11. Quantitative and Qualitative Disclosures About Market Risk This section discusses ZTO's exposure to foreign exchange, interest rate, and commodity price risks - ZTO's primary market risks are foreign exchange risk, interest rate risk, and commodity price risk[742] - Foreign exchange risk primarily stems from RMB/USD fluctuations, affecting the value of U.S. dollar-denominated assets and conversions; as of December 31, 2023, RMB2.7 billion in cash and investments were denominated in U.S. dollars[743][744][745] - Interest rate risk relates to interest income from bank deposits and costs of floating-rate borrowings, though the company has not been exposed to material risks[746] - Commodity price risk is mainly associated with fuel prices for line-haul transportation; significant increases could raise transportation expenses and reduce gross profits[749] Item 12. Description of Securities Other Than Equity Securities This section focuses on the American Depositary Shares (ADSs) and associated fees for holders - ADS holders may be charged US$5.00 per 100 ADSs for issuance, delivery, reduction, cancellation, or surrender[750] - Additional charges include US$1.50 per ADR for transfers, up to US$0.05 per ADS for cash distributions, and up to US$0.05 per ADS per calendar year for depositary services[751] - The depositary (JPMorgan Chase Bank, N.A.) may deduct fees for foreign currency conversions and is reimbursed by ZTO for certain ADR program expenses[752][753] - For the year ended December 31, 2023, ZTO received a reimbursement of US$5.3 million from the depositary[754] Part II Item 13. Defaults, Dividend Arrearages and Delinquencies There are no defaults, dividend arrearages, or delinquencies to report for the period Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds There have been no material modifications to the rights of security holders, and the section on use of proceeds is not applicable Item 15. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of December 31, 2023[757] - Management assessed and concluded that internal control over financial reporting was effective as of December 31, 2023, based on the COSO 2013 framework[759] - Deloitte Touche Tohmatsu Certified Public Accountants LLP audited and issued an unqualified opinion on the effectiveness of internal control over financial reporting as of December 31, 2023[760] - There were no material changes in internal control over financial reporting during the period covered by this annual report[761] Item 16A. Audit Committee Financial Expert Herman Yu, an independent director, has been determined to qualify as an 'audit committee financial expert' - Herman Yu, an independent director and audit committee member, is designated as an 'audit committee financial expert'[762] Item 16B. Code of Ethics ZTO adopted a code of business conduct and ethics in October 2016, applicable to all directors, officers, and employees - A code of business conduct and ethics, applicable to directors, officers, and employees, was adopted in October 2016[763] - The code is available on the company's website at http://ir.zto.com[763](index=763&type=chunk) Item 16C. Principal Accountant Fees and Services This section details fees paid to Deloitte for professional services, which are pre-approved by the audit committee Principal Accountant Fees (RMB in thousands) | Category | 2022 | 2023 | |:---|:---|:---| | Audit fees and audit-related fees | 18,840 | 18,640 | | All other fees | 944 | 920 | - The audit committee pre-approves all audit and other services provided by Deloitte Touche Tohmatsu Certified Public Accountants LLP[766] Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers ZTO has an ongoing US$2 billion share repurchase program extended through June 30, 2025 - ZTO has a share repurchase program, initially for US$500 million, extended and increased to US$2 billion through June 30, 2025[768] - As of December 31, 2023, 42,501,325 ADSs were repurchased for US$1,063.0 million, at a weighted average price of US$25.01 per ADS[768] ADS Repurchases in 2023 | Period | Total Number of ADSs Purchased | Average Price Paid per ADS (US$) | |:---|:---|:---| | February 2023 | 1,224,100 | 24.80 | | March 2023 | 466,100 | 23.98 | | June 2023 | 222,782 | 25.01 | | July 2023 | 1,710,599 | 24.92 | | August 2023 | 75,148 | 24.04 | | November 2023 | 2,242,347 | 22.30 | | Total | 58,126,700 | N/A | Item 16G. Corporate Governance As a foreign private issuer, ZTO may follow home country corporate governance practices, which can differ from NYSE standards - ZTO, as a Cayman Islands company and foreign private issuer, follows home country corporate governance practices, which may differ from NYSE standards[771] - The company elected to adopt its 2024 Share Incentive Plan without shareholder approval, following home country practice, which may afford less protection to shareholders[771] Item 16K. Cybersecurity ZTO has implemented robust cybersecurity risk management processes overseen by the board, with no material incidents reported - ZTO has robust processes for assessing, identifying, and managing cybersecurity risks, integrated into its overall enterprise risk management system[773] - A comprehensive cybersecurity threat defense system is in place, covering network, host, and application security, with capabilities for threat defense, monitoring, analysis, and response[774] - The board of directors oversees cybersecurity risk management, receiving quarterly updates from the CEO, CFO, and cybersecurity officer[776][777] - As of the report date, no material cybersecurity incidents or threats have affected or are reasonably likely to materially affect the company's business, strategy, results, or financial condition[775] Part III Item 17. Financial Statements The company has elected to provide financial statements pursuant to Item 18 Item 18. Financial Statements This section presents the audited consolidated financial statements of ZTO for fiscal years 2021-2023, prepared under U.S. GAAP - The consolidated financial statements for the years ended December 31, 2021, 2022, and 2023 are included, prepared in accordance with U.S. GAAP[790] - Deloitte Touche Tohmatsu Certified Public Accountants LLP issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting[790][791] - Key financial statements include Consolidated Balance Sheets, Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in Shareholders' Equity, and Consolidated Statements of Cash Flows[787] - Notes to the financial statements detail significant accounting policies, including principles of consolidation (VIE structure), fair value measurements, revenue recognition, and income taxes[830][831][861][867][875][879][880][885][887][891][903][906][912][914] - The VIE contributed 81.4% of consolidated revenues in 2023 and accounted for 35.7% of consolidated assets and 58.5% of consolidated liabilities as of December 31, 2023[848] - As of December 31, 2023, the aggregate amount of capital and statutory reserves restricted in PRC entities, not available for distribution, was RMB32,867,325 thousand[1017]