ZTO EXPRESS(ZTO) - 2024 Q2 - Quarterly Report

FINANCIAL HIGHLIGHTS Summary of Financial Highlights ZTO Express reported 10.5% revenue growth and 13.6% gross profit increase in H1 2024, alongside a 3.2% net income decrease, but 13.0% adjusted net income growth and higher adjusted EPS | Metric | H1 2023 (RMB in thousands) | H1 2024 (RMB in thousands) | Change (%) | | :--------------------------------------- | :------------------------- | :------------------------- | :--------- | | Revenues | 18,723,563 | 20,685,970 | 10.5% | | Cost of Revenues | (12,895,730) | (14,063,408) | 9.1% | | Gross Profit | 5,827,833 | 6,622,562 | 13.6% | | Net income | 4,195,034 | 4,061,744 | (3.2)% | | Net income attributable to ordinary shareholders | 4,211,540 | 4,037,848 | (4.1)% | | Non-GAAP Financial Measures: | | | | | EBITDA | 6,761,106 | 7,034,205 | 4.0% | | Adjusted EBITDA | 7,016,846 | 8,000,042 | 14.0% | | Adjusted net income | 4,450,774 | 5,029,768 | 13.0% | | Adjusted net income attributable to ordinary shareholders | 4,467,280 | 5,005,872 | 12.1% | | Adjusted basic and diluted earnings per ADS attributable to ordinary shareholders (Basic) | 5.52 | 6.21 | 12.5% | | Adjusted basic and diluted earnings per ADS attributable to ordinary shareholders (Diluted) | 5.40 | 6.06 | 12.2% | Non-GAAP Financial Measures The company uses non-GAAP metrics like EBITDA and adjusted net income to evaluate performance and identify business trends, acknowledging their limitations and the necessity of considering them alongside GAAP results - Non-GAAP metrics (EBITDA, Adjusted EBITDA, Adjusted Net Income, Adjusted EPS for ADS) are used to assess operating performance and for financial/operational decision-making[10] - These metrics help identify underlying business trends by excluding certain expenses and non-recurring items, enhancing understanding of past performance and future prospects[11] - Non-GAAP financial measures are not defined by US GAAP, have limitations as analytical tools, and should not be considered in isolation or as substitutes for net income or other performance measures[12] Reconciliation of GAAP and Non-GAAP Results The report details the reconciliation of GAAP net income to adjusted net income, EBITDA, and adjusted EBITDA, as well as GAAP net income attributable to ordinary shareholders to adjusted net income attributable to ordinary shareholders, with key adjustments including share-based compensation, impairment of equity investments, and disposal gains/losses | Metric | H1 2023 (RMB in thousands) | H1 2024 (RMB in thousands) | | :---------------------------------------------------------------- | :------------------------- | :------------------------- | | Net income | 4,195,034 | 4,061,744 | | Add: Share-based compensation expense | 254,976 | 305,155 | | Add: Impairment of investment in equity investees | – | 672,816 | | Add: Loss/(Gain) on disposal of equity investees and subsidiaries, net of income taxes | 764 | (9,947) | | Adjusted net income | 4,450,774 | 5,029,768 | | Net income | 4,195,034 | 4,061,744 | | Add: Depreciation | 1,322,968 | 1,473,049 | | Add: Amortization | 68,584 | 68,325 | | Add: Interest expenses | 143,928 | 199,771 | | Add: Income tax expenses | 1,030,592 | 1,231,316 | | EBITDA | 6,761,106 | 7,034,205 | | Add: Share-based compensation expense | 254,976 | 305,155 | | Add: Impairment of investment in equity investees | – | 672,816 | | Add: Loss/(Gain) on disposal of equity investees and subsidiaries | 764 | (12,134) | | Adjusted EBITDA | 7,016,846 | 8,000,042 | | Metric | H1 2023 (RMB in thousands) | H1 2024 (RMB in thousands) | | :---------------------------------------------------------------- | :------------------------- | :------------------------- | | Net income attributable to ordinary shareholders | 4,211,540 | 4,037,848 | | Add: Share-based compensation expense | 254,976 | 305,155 | | Add: Impairment of investment in equity investees | – | 672,816 | | Add: Loss/(Gain) on disposal of equity investees and subsidiaries, net of income taxes | 764 | (9,947) | | Adjusted net income attributable to ordinary shareholders | 4,467,280 | 5,005,872 | | Weighted average shares used in calculating net earnings per ordinary share/ADS (Basic) | 808,916,820 | 805,806,731 | | Weighted average shares used in calculating net earnings per ordinary share/ADS (Diluted) | 840,125,888 | 838,836,131 | | Net earnings per share/ADS attributable to ordinary shareholders (Basic) | 5.21 | 5.01 | | Net earnings per share/ADS attributable to ordinary shareholders (Diluted) | 5.10 | 4.90 | | Adjusted net earnings per share/ADS attributable to ordinary shareholders (Basic) | 5.52 | 6.21 | | Adjusted net earnings per share/ADS attributable to ordinary shareholders (Diluted) | 5.40 | 6.06 | BUSINESS REVIEW AND OUTLOOK Business Review during the Reporting Period ZTO Express achieved robust financial and operational performance in H1 2024, with 10.5% revenue growth to RMB 20.686 billion, driven by increased online consumption and a strategic shift towards high-value customers amidst intense competition - H1 2024 saw robust financial and operational performance, with continuous improvements in operating efficiency and a focus on profitable growth amidst intense industry competition[18] - Revenue increased by 10.5% to RMB 20.686 billion, primarily due to increased express delivery demand from higher online consumption penetration and a structural shift towards high-value customers[18] Core Express Delivery Business The core express delivery business generates most revenue by providing parcel sorting and line-haul transportation to network partners and direct express services to enterprise clients, with network transit fees based on fixed waybill amounts and variable amounts tied to parcel weight and route distance - The majority of revenue is derived from express delivery services provided to network partners (parcel sorting and line-haul transportation) and direct express services to enterprise customers[19] - Network transit fees are priced based on operating costs, market conditions, competition, and service quality, primarily consisting of a fixed waybill amount per parcel and a variable amount based on parcel weight and route distance[20] - Network partners have full discretion in pricing delivery service fees charged to senders, which have historically decreased due to lower unit operating costs and market competition[21] Ecosystem of Integrated Solutions ZTO Express aims to become an integrated logistics service provider, expanding beyond its core express business into less-than-truckload, cross-border, warehousing, air freight, cold chain, and commercial solutions to capture diverse market demands - The goal is to become an integrated logistics service provider, expanding beyond core express delivery into less-than-truckload, cross-border, warehousing, air freight, cold chain, and commercial solutions to capture diversified demands[22] - Services include less-than-truckload logistics focused on heavy cargo, international express services in Southeast Asia and Africa, cross-border services including freight forwarding, and integrated logistics solutions for warehousing, distribution, and transportation[22] Logistics Network and Infrastructure ZTO Express operates a highly scalable network partner model covering 99% of China's cities and counties, supported by 96 sorting centers, 515 automated sorting lines, and over 3,800 line-haul routes served by approximately 10,000 self-owned trucks, with ongoing infrastructure investments to boost capacity and efficiency - The network covers 99% of China's cities and counties, with over 6,000 direct network partners, more than 31,000 pick-up/delivery outlets, and over 110,000 last-mile stations[23] - Logistics infrastructure includes 96 sorting centers, 515 automated sorting lines, and over 3,800 line-haul routes, served by approximately 10,000 self-owned line-haul trucks[25] - Continuous investment in logistics infrastructure, such as sorting centers and the line-haul fleet, aims to enhance parcel handling capacity, accommodate peak volumes, and improve operational efficiency[26] Technology Infrastructure The proprietary 'Zhongtian System' is the technological backbone for efficient network operations and delivery services, encompassing hundreds of modules across all business scenarios, utilizing algorithms for real-time monitoring, order dispatch, and dynamic resource adjustment to optimize scheduling, enhance fulfillment rates, and reduce operating costs - The proprietary "Zhongtian System" is the technological backbone for efficient management of complex network operations and delivery services, comprising hundreds of modules covering all business and operational scenarios[27] - It utilizes proprietary algorithms for real-time monitoring, order dispatch, and forecasting, supporting high-throughput processing of over 100 million orders daily and dynamically adjusting resource allocation to optimize transit time and cost[28] - Ongoing digitalization and intelligent operational optimization have improved scheduling, enhanced order fulfillment rates, and reduced operating costs, leading to a decrease in unit costs for sorting and transportation in H1 2024[29] Environment, Social and Governance (ESG) ZTO Express is committed to sustainable development by reducing delivery costs, supporting industry growth, and enhancing corporate governance, focusing on 'green' express services, safety, economic development, and social value creation, with annual ESG reports since 2019 - Actively committed to sustainable development by reducing delivery costs, supporting related industry development, and continuously improving corporate governance, including compliance operations and risk control[31] - Actively building a broad ecosystem, aiming to transform into an integrated logistics provider to help reduce logistics costs for society as a whole[31] - Proactively fulfilling social responsibilities, such as developing "green" express services, ensuring safety, contributing to economic development, and creating more value for society, with annual ESG reports published since 2019[31][32] Important Events after the Reporting Period As of the announcement date, no material events significantly impacting the Group occurred after the reporting period, beyond those already disclosed - As of the date of this announcement, no material events significantly impacting the Group occurred after the reporting period[33] Business Outlook ZTO Express is confident in China's express industry growth, upholding a shared success philosophy, and building competitive advantages through infrastructure and efficient utilization, projecting 15% to 18% parcel volume growth to 34.73 billion to 35.64 billion parcels in 2024 - Confident in the growth prospects of China's express delivery industry, adhering to a shared success philosophy, and focusing on infrastructure development and its efficient utilization to build competitive advantages[34] - Practical improvements in digitalization and data-driven processes will continue to enhance ZTO's competitive edge; an altruistic service philosophy will drive business growth and greater national and social responsibility[35] | Metric | 2024 Guidance | YoY Change | | :---------------- | :-------------------- | :--------- | | Parcel Volume | 34.73 billion to 35.64 billion | 15% to 18% | FINANCIAL PERFORMANCE ANALYSIS Revenues Total revenues for H1 2024 increased 10.5% to RMB 20.686 billion, primarily driven by 10.7% growth in express delivery services revenue and a significant 27.4% increase in accessories sales and other income | Revenue Stream | H1 2023 (RMB in thousands) | H1 2024 (RMB in thousands) | % of Total Revenues (2024) | | :------------------------ | :------------------------- | :------------------------- | :------------------------- | | Express delivery services | 17,387,187 | 19,116,095 | 92.4% | | Freight forwarding services | 431,597 | 435,989 | 2.1% | | Sale of accessories | 836,616 | 1,065,484 | 5.2% | | Others | 68,163 | 68,402 | 0.3% | | Total revenues | 18,723,563 | 20,685,970 | 100% | Core Express Delivery Business Revenue Core express delivery business revenue grew 10.7% to RMB 20.250 billion in H1 2024, fueled by an 11.8% increase in parcel volume and stable average parcel price, with network transit fees accounting for 88.3% of total express service revenue and KA customer revenue rising 26.2% - Core express delivery business revenue increased by 10.7% to RMB 20.250 billion, driven by an 11.8% increase in parcel volume and a stable average parcel price[39] - Network transit fees accounted for 88.3% of total express delivery service revenue; KA customer revenue (including direct sales organization delivery fees) grew by 26.2% due to the expansion of high-value platform customers[39] Freight Forwarding Services Revenue Freight forwarding services revenue increased 1.0% in H1 2024, primarily from the acquired business of China Eastern Express Co., Ltd - Freight forwarding services revenue increased by 1.0% in H1 2024, primarily through the acquired business of China Eastern Express Co., Ltd[40] Sale of Accessories and Others Revenue Revenue from sales of accessories (mainly thermal paper for e-waybills) and other income (primarily financing services) collectively increased 27.4% in H1 2024 - Revenue from sales of accessories (primarily thermal paper for e-waybills) and other income (primarily financing services) increased by 27.4% in H1 2024[41] Cost of Revenues Total cost of revenues increased 9.1% to RMB 14.0634 billion in H1 2024; line-haul transportation costs rose 4.3% but unit costs decreased 6.7% due to economies of scale, while sorting hub operating costs increased 11.3% from labor and depreciation, and other costs grew 20.1% due to high-value enterprise client services | Cost Component | H1 2023 (RMB in thousands) | H1 2024 (RMB in thousands) | % of Revenues (2024) | | :-------------------------- | :------------------------- | :------------------------- | :------------------- | | Line-haul transportation cost | 6,381,652 | 6,654,616 | 32.2% | | Sorting hub operating cost | 3,948,037 | 4,395,871 | 21.3% | | Freight forwarding cost | 405,244 | 405,106 | 2.0% | | Cost of accessories sold | 234,128 | 293,140 | 1.4% | | Other costs | 1,926,669 | 2,314,675 | 11.1% | | Total cost of revenues | 12,895,730 | 14,063,408 | 68.0% | - Line-haul transportation cost increased by 4.3%, but unit transportation cost decreased by 6.7% (or 3 cents), primarily due to economies of scale, optimized line-haul route planning, and improved load utilization[43] - Sorting hub operating cost increased by 11.3%, mainly comprising an increase of RMB 223.4 million in labor-related costs and RMB 155.0 million in depreciation and amortization costs related to automated equipment and facility upgrades[43] - Other costs increased by 20.1% to RMB 2.3147 billion, primarily driven by an increase of RMB 462.6 million in costs for serving high-value enterprise customers[43] Gross Profit Gross profit increased 13.6% to RMB 6.6226 billion in H1 2024, with the gross margin improving from 31.1% in the prior year period to 32.0% - Gross profit increased by 13.6% to RMB 6.6226 billion[44] - Gross margin improved from 31.1% in H1 2023 to 32.0% in H1 2024[44] Operating Expenses Total operating expenses increased 14.2% to RMB 1.1407 billion in H1 2024, primarily due to higher selling, general, and administrative expenses - Total operating expenses increased by 14.2% to RMB 1.1407 billion[45] Selling, General and Administrative Expenses Selling, general, and administrative expenses increased 15.4% to RMB 1.4896 billion, driven by higher headquarters facility expenses, increased payroll and welfare benefits, and depreciation and amortization costs related to administrative equipment and facilities - Selling, general and administrative expenses increased by 15.4% to RMB 1.4896 billion[46] - Key growth factors include an increase of RMB 78.4 million in headquarters facility expenses, RMB 70.0 million in payroll and welfare benefits, and RMB 31.6 million in depreciation and amortization costs related to administrative equipment and facilities[46] Other Operating Income, Net Other operating income, net, increased 19.3% to RMB 349.0 million, primarily from government subsidies and tax refunds (RMB 266.1 million) and rental and other income (RMB 82.9 million) - Other operating income, net, increased by 19.3% to RMB 349.0 million[47] - Primarily composed of government subsidies and tax refunds (RMB 266.1 million) and rental and other income (RMB 82.9 million)[47] Income from Operations Income from operations increased 13.5% to RMB 5.4819 billion in H1 2024, with the operating margin improving from 25.8% in the prior year period to 26.5% - Income from operations increased by 13.5% to RMB 5.4819 billion[48] - Operating margin improved from 25.8% in the prior year period to 26.5%[48] Other Income and Expense The company experienced significant changes in other income and expenses, including a substantial increase in interest income, higher interest expenses, reduced gains from fair value changes of financial instruments, and a large impairment of equity investments Interest Income and Expense Interest income increased 105.8% to RMB 533.1 million in H1 2024, while interest expense rose 38.8% to RMB 199.8 million - Interest income increased by 105.8% to RMB 533.1 million[49] - Interest expense increased by 38.8% to RMB 199.8 million[49] Gain from Fair Value Changes of Financial Instruments Gain from fair value changes of financial instruments significantly decreased to RMB 97.6 million in H1 2024, compared to RMB 207.2 million in the prior year period - Gain from fair value changes of financial instruments decreased significantly from RMB 207.2 million in H1 2023 to RMB 97.6 million in H1 2024[50] Impairment of Investment in Equity Investee An impairment of investment in equity investees of RMB 672.8 million was recorded in H1 2024, primarily due to a 479.9 million impairment from Cainiao Smart Logistics Network Limited's offer price being below book value and a 192.9 million impairment provision for Zhejiang Yizhan Network Technology Co., Ltd - An impairment of investment in equity investees of RMB 672.8 million was recorded in H1 2024[51] - This primarily includes a 479.9 million impairment due to Cainiao's offer price being below book value and a 192.9 million impairment provision for the investment in Zhejiang Yizhan[51] Foreign Currency Exchange Gain Foreign currency exchange gain decreased 71.0% to RMB 20.6 million in H1 2024, primarily due to the appreciation of RMB against US dollar-denominated bank deposits in China - Foreign currency exchange gain decreased by 71.0% to RMB 20.6 million[52] - This was primarily due to the appreciation of RMB against US dollar-denominated bank deposits in China[52] Income Tax Expense Income tax expense increased 19.5% to RMB 1.2313 billion in H1 2024, with the overall income tax rate rising by 3.6 percentage points, mainly due to withholding tax accrual for planned dividends (RMB 98.0 million) and non-deductible impairment losses on investments in Cainiao (RMB 479.9 million) and Yizhan (RMB 192.9 million) - Income tax expense increased by 19.5% to RMB 1.2313 billion, with the overall income tax rate rising by 3.6 percentage points[53] - This was primarily due to the withholding tax accrual for planned dividends (RMB 98.0 million) and non-deductible impairment losses on investments in Cainiao (RMB 479.9 million) and Yizhan (RMB 192.9 million)[53] Net Income Net income for H1 2024 decreased 3.2% to RMB 4.1 billion from RMB 4.2 billion in H1 2023, impacted by the aforementioned factors - Net income decreased by 3.2% from RMB 4.2 billion in H1 2023 to RMB 4.1 billion in H1 2024[54] FINANCIAL POSITION AND LIQUIDITY Future Plans for Material Investments or Capital Asset As of June 30, 2024, the company had no detailed future plans for material investments or capital assets - As of June 30, 2024, the company had no detailed future plans for material investments or capital assets[55] Gearing Ratio As of June 30, 2024, the gearing ratio increased from 31.9% on December 31, 2023, to 33.1%, calculated as total liabilities divided by total assets - The gearing ratio increased from 31.9% as of December 31, 2023, to 33.1% as of June 30, 2024[56] Liquidity and Capital Resources The company's primary liquidity sources are cash flows from operating and financing activities; as of June 30, 2024, total cash, cash equivalents, restricted cash, and short-term investments amounted to RMB 20.4632 billion, with outstanding bank borrowings of RMB 10.3908 billion at a 1.8% weighted average interest rate, and management believes current liquidity is sufficient for the next 12 months, but may seek additional financing for future expansion and acquisitions - Primary liquidity sources are cash flows from operating and financing activities[57] | Metric | As of June 30, 2024 (RMB in thousands) | | :-------------------------- | :----------------------------------- | | Cash and cash equivalents | 10,542,131 | | Restricted cash | 22,253 | | Short-term investments | 9,898,796 | | Total Liquid Assets | 20,463,180 | - As of June 30, 2024, the principal amount of outstanding bank borrowings was RMB 10.3908 billion (December 31, 2023: RMB 7.7660 billion), with a weighted average interest rate of 1.8%[58] - Management believes existing cash and cash equivalents and anticipated operating cash flows are sufficient to meet operational activities, capital expenditures, and other obligations for at least the next 12 months, but may enhance liquidity or increase cash reserves through additional financing activities for future expansion and acquisitions[59] Significant Investments The company did not make or hold any significant investments in H1 2024 - The company did not make or hold any significant investments in H1 2024[60] Material Acquisitions and Disposals During the reporting period, the company did not undertake any material acquisitions or disposals of subsidiaries, associates, or joint ventures - During the reporting period, the company did not undertake any material acquisitions or disposals of subsidiaries, associates, or joint ventures[61] Pledge of Assets As of June 30, 2024, the Group had not pledged any assets - As of June 30, 2024, the Group had not pledged any assets[62] Foreign Exchange Risk The company's revenues, expenses, assets, and liabilities are primarily denominated in RMB, limiting direct foreign exchange risk; however, RMB-to-USD exchange rate fluctuations could impact ADS value and conversion amounts, with RMB appreciation negatively affecting the RMB 4.7433 billion in USD-denominated liquid assets as of June 30, 2024 - The company's revenues, expenses, assets, and liabilities are primarily denominated in RMB, limiting direct foreign exchange risk[63] - Fluctuations in the exchange rate between RMB and US dollars could affect the value of ADSs and the amount of US dollars converted from RMB for operations or RMB converted from US dollars for dividend payments[65] - As of June 30, 2024, the company held RMB 4.7433 billion in cash and cash equivalents, restricted cash, and short-term investments denominated in US dollars; a 10% appreciation of RMB against the US dollar would result in a decrease of RMB 431.2 million in these assets[66] Interest Rate Risk The company's interest rate risk primarily relates to interest income from interest-bearing bank deposits, and it neither currently faces nor anticipates significant interest rate fluctuation risks, nor has it used derivative financial instruments to manage interest rate exposure - Interest rate risk primarily relates to interest income generated from interest-bearing bank deposits[67] - The company has not and does not expect to face significant interest rate fluctuation risks in the future, nor has it used derivative financial instruments to manage interest rate exposure[67] Contingent Liabilities As of June 30, 2024, the company had no material contingent liabilities - As of June 30, 2024, the company had no material contingent liabilities[68] Capital Expenditures and Capital Commitment Capital expenditures for H1 2024 totaled approximately RMB 3.0 billion (H1 2023: RMB 4.5 billion), primarily for property and equipment, land use rights, and expanding the self-owned truck fleet and upgrading facilities; as of June 30, 2024, total capital commitments were RMB 4.4 billion for office buildings, sorting centers, and warehouse facilities, to be funded by existing cash and other financing - Capital expenditures for H1 2024 totaled approximately RMB 3.0 billion (H1 2023: RMB 4.5 billion), primarily for the acquisition of property and equipment, land use rights, and expanding the self-owned truck fleet and upgrading equipment and facilities[69] - As of June 30, 2024, total capital commitments amounted to RMB 4.4 billion, mainly related to commitments for the construction of office buildings, sorting centers, and warehouse facilities[70] - The company plans to fund future capital expenditures using existing cash balances and other financing methods[69] EMPLOYEES AND REMUNERATION Employee Breakdown and Compensation As of June 30, 2024, ZTO Express had 23,906 employees, with sorting personnel (31.8%) and operation support & customer service (27.0%) being the largest functional areas, and total employee compensation costs (excluding share-based compensation) increased to RMB 1.7178 billion in H1 2024 | Functional Area | Number of Employees (June 30, 2024) | % of Total | | :-------------------------- | :---------------------------------- | :--------- | | Sorting | 7,608 | 31.8% | | Transportation | 3,578 | 15.0% | | Management and Administration | 4,569 | 19.1% | | Operation Support & Customer Service | 6,460 | 27.0% | | Technology and Engineering | 1,327 | 5.6% | | Sales and Marketing | 364 | 1.5% | | Total | 23,906 | 100.0% | - Total employee compensation costs (excluding share-based compensation) for H1 2024 were RMB 1.7178 billion, up from RMB 1.5764 billion in H1 2023[72] - As of June 30, 2024, the company's workforce also included over 60,000 outsourced workers[71] Employee Benefits and Agreements The company participates in statutory employee benefit plans in China, including social insurance funds and housing provident funds, and maintains good working relationships with employees, with no material labor disputes during the reporting period - The company participates in statutory employee benefit plans in China, including pension, medical insurance, unemployment insurance, work-related injury insurance, and maternity insurance, as well as housing provident funds[73] - Standard labor agreements are signed with employees, and confidentiality and non-competition agreements are signed with key employees, with non-competition periods typically two years post-termination, during which the company pays a percentage of pre-termination salary[74] - The company maintains good working relationships with its employees, with no material labor disputes during the reporting period[75] Training and Development ZTO Express continuously invests in employee training and education programs, providing formal comprehensive company-level and departmental training for new hires, supplemented by on-the-job training, and regularly offers development programs to ensure policy and procedure compliance - Continuous investment in employee training and education programs provides formal and comprehensive company-level and departmental training for new employees, supplemented by on-the-job training[76] Share Incentive Plans The company operates the 2016 Plan and a cash incentive plan through ZTO ES; in March 2024, the Board approved and adopted the 2024 Plan, which does not involve issuing new company shares, with further details available in the company's annual report for the year ended December 31, 2023 - The company operates the 2016 Plan and a cash incentive plan implemented through ZTO ES[77] - In March 2024, the Board approved and adopted the 2024 Plan, which does not involve the issuance of new company shares[77] CORPORATE GOVERNANCE Compliance with CG Code ZTO Express complied with all provisions of the Corporate Governance Code in H1 2024, except for the combined roles of Chairman and CEO held by Mr. Lai Meisong, an arrangement the Board believes ensures leadership consistency and strategic planning effectiveness, with a review of separation to be conducted when appropriate - The company complied with all code provisions of the Corporate Governance Code in H1 2024, except for the roles of Chairman and Chief Executive Officer not being separate, both held by Mr. Lai Meisong[78][79] - The Board believes this arrangement ensures consistent leadership and effective strategic planning for the Group and will continue to review the appropriateness of separating the roles of Chairman and Chief Executive Officer at an opportune time[79][80] Compliance with the Model Code The company adopted a Securities Dealing Code for Management, with terms no less exacting than the Model Code, and all directors and relevant employees confirmed compliance during the reporting period, with Mr. Wang Jilei's Rule 10b5-1 trading plan being exempted - The company has adopted a Securities Dealing Code for Management, with terms no less exacting than those set out in the Model Code[81] - All directors and relevant employees confirmed compliance with the code during the reporting period; Mr. Wang Jilei's Rule 10b5-1 trading plan was exempted[82] Audit Committee The Audit Committee, comprising two independent non-executive directors (Mr. Yu Hando and Mr. Huang Qin Charles) and one non-executive director (Mr. Liu Xing), oversees accounting and financial reporting processes and financial statement audits; Mr. Yu Hando chairs as an 'audit committee financial expert,' and the committee reviewed H1 2024 unaudited interim results, discussing accounting policies, internal controls, and financial reporting with management and auditors - The Audit Committee consists of two independent non-executive directors (Mr. Yu Hando and Mr. Huang Qin Charles) and one non-executive director (Mr. Liu Xing), with Mr. Yu Hando serving as Chairman and qualifying as an "audit committee financial expert"[83] - The Audit Committee is responsible for overseeing the accounting and financial reporting processes and the audit of the company's financial statements[83] - The committee reviewed the unaudited interim results for H1 2024 and discussed accounting policies, internal controls, and financial reporting matters with management and the independent auditors[84] OTHER INFORMATION Purchase, Sale or Redemption of the Company's Listed Securities Neither the company nor its subsidiaries purchased, sold, or redeemed any of the company's listed securities on the HKEX or NYSE in H1 2024, and as of June 30, 2024, the company held no treasury shares - Neither the company nor any of its subsidiaries purchased, sold, or redeemed any of the company's listed securities on the HKEX or NYSE during H1 2024[85] - As of June 30, 2024, the company did not hold any treasury shares[85] Interim Dividend The Board approved an interim dividend of US$0.35 per ADS and ordinary share for H1 2024, representing a 40% payout ratio, with a record date of September 10, 2024, and expected payment dates of October 10, 2024, for ordinary shareholders and October 17, 2024, for ADS holders - The Board approved an interim dividend of US$0.35 per ADS and ordinary share for H1 2024[86] - This dividend represents a 40% payout ratio[86] - The record date for the dividend is September 10, 2024; ordinary shareholders are expected to receive the dividend on October 10, 2024, and ADS holders on October 17, 2024[86] Use of Proceeds from the Notes Offering In August 2022, the company completed a US$1.0 billion convertible senior notes offering, yielding approximately US$930.3 million net proceeds after capping call option costs; as of June 30, 2024, all net proceeds were utilized as planned, with US$282.1 million for logistics operations, US$7.0 million for logistics ecosystem investments, and US$641.2 million for working capital and general corporate purposes - In August 2022, the company completed a US$1.0 billion convertible senior notes offering, with net proceeds of approximately US$930.3 million after deducting capping call option costs[88][89] - As of June 30, 2024, all net proceeds from the notes offering have been utilized as planned[90] | Use of Proceeds | Amount Utilized (US$ in millions) | | :------------------------------------ | :-------------------------------- | | Enhancement of logistics operations | 282.1 | | Investment in logistics ecosystem | 7.0 | | Working capital and general corporate purposes | 641.2 | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets As of June 30, 2024, total assets increased to RMB 91.1038 billion from RMB 88.4652 billion on December 31, 2023; total liabilities rose to RMB 30.1299 billion from RMB 28.1848 billion, and total equity grew to RMB 60.9739 billion from RMB 60.2804 billion | Metric | As of Dec 31, 2023 (RMB in thousands) | As of June 30, 2024 (RMB in thousands) | | :-------------------------------- | :------------------------------------ | :----------------------------------- | | Total current assets | 26,953,548 | 27,937,389 | | Investments in equity investees | 3,455,119 | 2,095,453 | | Property and equipment, net | 32,181,025 | 33,180,203 | | Long-term investment | 12,170,881 | 14,034,434 | | TOTAL ASSETS | 88,465,221 | 91,103,798 | | Total current liabilities | 20,061,184 | 22,089,069 | | Convertible senior notes | 7,029,550 | 7,216,538 | | TOTAL LIABILITIES | 28,184,813 | 30,129,924 | | ZTO Express (Cayman) Inc. shareholders' equity | 59,801,745 | 60,426,679 | | Non-controlling interests | 478,663 | 547,195 | | Total Equity | 60,280,408 | 60,973,874 | Condensed Consolidated Statements of Comprehensive Income The comprehensive income statement shows H1 2024 net income at RMB 4.0617 billion, down from RMB 4.1950 billion in H1 2023, with total comprehensive income attributable to ZTO Express (Cayman) Inc. also decreasing from RMB 4.0696 billion to RMB 3.9203 billion | Metric | H1 2023 (RMB in thousands) | H1 2024 (RMB in thousands) | | :------------------------------------------------ | :------------------------- | :------------------------- | | Revenues | 18,723,563 | 20,685,970 | | Cost of revenues | (12,895,730) | (14,063,408) | | Gross profit | 5,827,833 | 6,622,562 | | Income from operations | 4,829,217 | 5,481,898 | | Income before income tax and share of gain in equity method investments | 5,221,679 | 5,272,687 | | Income tax expense | (1,030,592) | (1,231,316) | | Net income | 4,195,034 | 4,061,744 | | Net income attributable to ZTO Express (Cayman) Inc. | 4,211,540 | 4,037,848 | | Foreign currency translation adjustment | (141,897) | (117,560) | | Comprehensive income attributable to ZTO Express (Cayman) Inc. | 4,069,643 | 3,920,288 | Condensed Consolidated Statements of Changes in Shareholders' Equity This statement details changes in shareholders' equity, including net income, foreign currency translation adjustments, share-based compensation, non-controlling interest acquisitions/disposals, capital contributions, share repurchases, and dividend distributions, with total equity increasing from RMB 60.2804 billion on January 1, 2024, to RMB 60.9739 billion on June 30, 2024 - Total equity increased from RMB 60.2804 billion as of January 1, 2024, to RMB 60.9739 billion as of June 30, 2024[99] | Metric (H1 2024) | RMB in thousands | | :------------------------------------------------ | :----------------- | | Balance at January 1, 2024 | 60,280,408 | | Net income | 4,061,744 | | Foreign currency translation adjustments | (117,560) | | Share-based compensation and ordinary shares issued | 305,155 | | Acquisition of non-controlling interests of subsidiaries | (3) | | Decrease of non-controlling interests from disposal of subsidiaries | (2,630) | | Capital contribution from non-controlling interest holders | 47,276 | | Distribution of dividends | (3,600,516) | | Balance at June 30, 2024 | 60,973,874 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities decreased to RMB 5.5111 billion in H1 2024 from RMB 6.4996 billion in H1 2023; net cash used in investing activities decreased to RMB 7.0449 billion, and net cash used in financing activities also decreased to RMB 973.5 million, with cash, cash equivalents, and restricted cash at period-end increasing to RMB 10.5791 billion | Cash Flow Activity | H1 2023 (RMB in thousands) | H1 2024 (RMB in thousands) | | :------------------------------------ | :------------------------- | :------------------------- | | Net cash provided by operating activities | 6,499,578 | 5,511,115 | | Net cash used in investing activities | (9,408,160) | (7,044,941) | | Net cash used in financing activities | (1,133,723) | (973,492) | | Effect of exchange rate changes | 95,934 | 35,077 | | Net change in cash, cash equivalents and restricted cash | (3,946,371) | (2,472,241) | | Cash, cash equivalents and restricted cash at end of period | 8,656,716 | 10,579,069 | - Total cash, cash equivalents, and restricted cash at period-end amounted to RMB 10.5791 billion[103] NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Organization and Principal Activities ZTO Express (Cayman) Inc. and its Group primarily engage in express delivery services in China through a nationwide network partner model, having been incorporated in the Cayman Islands on April 8, 2015 - ZTO Express (Cayman) Inc. and its Group primarily engage in express delivery services in China through a nationwide network partner model[106] - The company was incorporated in the Cayman Islands on April 8, 2015[106] Summary of Significant Accounting Policies The condensed consolidated financial statements are prepared in accordance with US GAAP interim financial information requirements, with certain disclosures condensed or omitted per Regulation S-X, maintaining consistency with prior audited financial statements, and interim results do not necessarily indicate full-year performance Basis of Presentation The condensed consolidated financial statements are prepared under US GAAP interim financial information requirements, with certain disclosures condensed or omitted, based on prior fiscal year audited statements, and interim results do not necessarily predict full-year performance - The financial statements are prepared in accordance with US GAAP interim financial information requirements, with certain information and footnote disclosures condensed or omitted[107] - Accounting policies are consistent with the audited financial statements of the prior fiscal year, and interim operating results do not necessarily indicate results for the full year or any future period[107] Principles of Consolidation The condensed consolidated financial statements include the company, its subsidiaries, and variable interest entities (VIEs); the Group consolidates VIEs when it is the primary beneficiary, possessing the ability to direct economic performance and bearing significant losses or enjoying significant benefits, though Chinese law restricts VIEs from transferring certain net assets to the Group - The condensed consolidated financial statements include the company, its subsidiaries, and variable interest entities (VIEs)[108] - The Group consolidates VIEs when it is the primary beneficiary, meaning it has the power to direct the activities that most significantly impact the VIE's economic performance and has the obligation to absorb the VIE's potential significant losses or the right to receive its potential significant benefits[109] - Relevant Chinese laws and regulations restrict VIEs from transferring a portion of their net assets (equivalent to statutory reserves and share capital balances) to the Group in the form of loans, advances, or cash dividends[111] Use of Estimates Financial statement preparation requires management to make estimates and assumptions that affect reported asset and liability amounts and period revenues and expenses, with actual results potentially differing from these estimates - The preparation of financial statements requires management to make estimates and assumptions, and actual results may differ from these estimates[112] Convenience Translation Financial amounts are primarily denominated in RMB, with US dollar translations provided for convenience using the June 28, 2024, Federal Reserve H.10 noon buying rate (US$1.00 = RMB 7.2672), which does not imply RMB convertibility at this rate - Financial amounts are primarily denominated in RMB; US dollar translations are included in periodic reports for the convenience of readers outside China, using the noon buying rate of US$1.00 = RMB 7.2672 on June 28, 2024, as published in the Federal Reserve Board's H.10 statistical release[113] - This translation does not imply that RMB could be converted into US dollars at this rate on June 30, 2024, or at any other rate, or realized or settled in US dollars[113] Revenue Recognition Revenue disaggregation indicates express delivery services as the primary revenue source, with contract assets (billed and unbilled in-transit parcel receivables) and contract liabilities (advances and deferred revenue) being immaterial as of December 31, 2023, and June 30, 2024 | Revenue Stream | H1 2023 (RMB) | H1 2024 (RMB) | % (2024) | | :------------------------ | :------------ | :------------ | :------- | | Express delivery services | 17,387,187 | 19,116,095 | 92.4 | | Freight forwarding services | 431,597 | 435,989 | 2.1 | | Sale of accessories | 836,616 | 1,065,484 | 5.2 | | Others | 68,163 | 68,402 | 0.3 | | Total revenues | 18,723,563 | 20,685,970 | 100.0 | - Contract assets (billed and unbilled in-transit parcel receivables) and contract liabilities (advances and deferred revenue) were not material as of December 31, 2023, and June 30, 2024[115] Income Taxes Income taxes are accounted for using the asset and liability method, recognizing deferred income taxes for temporary differences and offsetting deferred tax assets with a valuation allowance when realization is unlikely; uncertain tax positions are recognized only when probable of being sustained upon examination, and interim tax provisions are based on the estimated annual effective tax rate - Income taxes are accounted for using the asset and liability method, recognizing deferred income taxes for temporary differences and offsetting deferred tax assets with a valuation allowance when realization is unlikely[116] - The tax benefit from an uncertain tax position is recognized only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities; interim tax provisions are based on the estimated annual effective tax rate[116][117] Earnings Per Share Basic earnings per share is calculated by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding, while diluted earnings per share includes the potential dilutive effect of convertible senior notes; the dual-class share structure has no impact on EPS calculation as Class A and Class B ordinary shares have identical dividend rights - Basic earnings per share is calculated by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period[118] - Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares[119] - Class A and Class B ordinary shares have identical dividend rights, so the dual-class share structure has no impact on the calculation of earnings per share[120] Accounts Receivable, Net As of June 30, 2024, gross accounts receivable increased to RMB 738.1 million from RMB 613.5 million on December 31, 2023, with an allowance for credit losses of RMB 50.3 million, and the majority (RMB 606.7 million) were aged within six months | Metric | As of Dec 31, 2023 (RMB) | As of June 30, 2024 (RMB) | | :-------------------------- | :----------------------- | :---------------------- | | Accounts receivable, gross | 613,541 | 738,088 | | Less: Allowance for credit losses | (40,983) | (50,296) | | Total | 572,558 | 687,792 | | Aging (based on invoice date) | As of Dec 31, 2023 (RMB) | As of June 30, 2024 (RMB) | | :-------------------------- | :----------------------- | :---------------------- | | Within 6 months | 450,769 | 606,696 | | Between 6 months and 1 year | 57,615 | 38,209 | | Between 1 year and 2 years | 49,726 | 36,948 | | More than 2 years | 55,431 | 56,235 | | Accounts receivable, gross | 613,541 | 738,088 | Property and Equipment, Net As of June 30, 2024, property and equipment, net, increased to RMB 33.1802 billion from RMB 32.1810 billion on December 31, 2023, with depreciation expense of RMB 1.4730 billion and impairment charges of RMB 22.6 million related to property and equipment held for disposal in H1 2024 | Component | As of Dec 31, 2023 (RMB in thousands) | As of June 30, 2024 (RMB in thousands) | | :-------------------------------- | :------------------------------------ | :----------------------------------- | | Buildings | 21,731,960 | 22,312,557 | | Machinery and equipment | 8,861,939 | 9,389,627 | | Vehicles | 5,642,905 | 5,531,688 | | Construction in progress | 4,929,745 | 5,998,150 | | Accumulated depreciation | (10,916,806) | (12,121,695) | | Property and equipment, net | 32,181,025 | 33,180,203 | - Depreciation expense for H1 2024 was RMB 1.4730 billion (H1 2023: RMB 1.3230 billion)[123] - Impairment charges of RMB 22.6 million related to property and equipment held for disposal were recognized in H1 2024[124] Accounts Payable As of June 30, 2024, total accounts payable decreased to RMB 2.2003 billion from RMB 2.5570 billion on December 31, 2023, with the majority (RMB 2.1897 billion) aged within six months | Aging (based on invoice date) | As of Dec 31, 2023 (RMB) | As of June 30, 2024 (RMB) | | :-------------------------- | :----------------------- | :---------------------- | | Within 6 months | 2,548,617 | 2,189,748 | | Between 6 months and 1 year | 4,789 | 7,654 | | Between 1 year and 2 years | 1,366 | 1,441 | | More than 2 years | 2,238 | 1,472 | | Total | 2,557,010 | 2,200,315 | Income Tax Income tax expense for H1 2024 was RMB 1.2313 billion, resulting in an effective tax rate of 23.35% (H1 2023: 19.74%), comprising current tax expenses of RMB 1.3199 billion and deferred tax benefits of RMB 88.6 million | Component | H1 2023 (RMB in thousands) | H1 2024 (RMB in thousands) | | :------------------ | :------------------------- | :------------------------- | | Current tax expenses | 1,159,643 | 1,319,902 | | Deferred tax | (129,051) | (88,586) | | Total | 1,030,592 | 1,231,316 | - The effective tax rate for H1 2024 was 23.35%, higher than 19.74% in H1 2023[127] Share-Based Compensation The company operates an employee shareholding platform through ZTO ES and has the 2016 and 2024 share incentive plans; total share-based compensation expense for H1 2024 was RMB 305.2 million, including grants of ordinary share units, restricted share units, and share options Employee Share Holding Platform The employee shareholding platform, established in June 2016 via ZTO ES and limited partnerships, has issued 16.0 million ordinary shares; in March 2024, 6,027,415 ordinary share units (representing 1,205,483 company ordinary shares) were granted to certain executives and employees, resulting in RMB 183.2 million in share-based compensation expense - The employee shareholding platform was established in June 2016 through ZTO ES and limited partnerships, and 16.0 million ordinary shares have been issued to ZTO ES[128][129] - In March 2024, 6,027,415 ordinary share units (representing 1,205,483 company ordinary shares) were granted to certain executives and employees, resulting in RMB 183.2 million of share-based compensation expense[130] 2016 Share Incentive Plan The 2016 Share Incentive Plan, amended in September 2016, initially allowed for 3.0 million shares and annual increases; since May 1, 2023, the plan's limit has been capped at 21.0 million shares, with future awards to be satisfied by existing shares, not new issuances - The 2016 Share Incentive Plan, amended in September 2016, initially allowed for the issuance of 3.0 million shares and annual increases; since May 1, 2023, the plan's limit has been capped at 21.0 million shares[131][132] - Awards under the 2016 Plan will be satisfied by the company's existing shares, with no new shares to be issued[132] Restricted Share Units In March 2024, 743,366 Restricted Share Units (RSUs) were granted under the 2016 Plan, vesting immediately upon grant, resulting in RMB 113.0 million of share-based compensation expense in H1 2024 - In March 2024, 743,366 Restricted Share Units (RSUs) were granted under the 2016 Plan, vesting immediately upon grant[133] - This resulted in RMB 113.0 million of share-based compensation expense in H1 2024[133] 2024 Share Incentive Plan The 2024 Share Incentive Plan, approved by the Board in March 2024, authorizes up to 30.0 million Class A ordinary shares for awards to directors, employees, and consultants - The 2024 Share Incentive Plan, approved by the Board in March 2024, authorizes up to 30.0 million Class A ordinary shares for awards to directors, employees, and consultants[134] Share Options On March 22, 2024, 916,200 share options were granted under the 2024 Plan with an exercise price of US$21.88, vesting 33%, 33%, and 34% on the first, second, and third anniversaries of the grant date, respectively; the weighted average grant-date fair value was US$6.7 per share, leading to RMB 9.024 million in share-based compensation expense in H1 2024 - On March 22, 2024, 916,200 share options were granted under the 2024 Plan with an exercise price of US$21.88[135] - The options will vest 33%, 33%, and 34% on the first, second, and third anniversaries of the grant date, respectively, with a contractual term of ten years[135] - The weighted average grant-date fair value was US$6.7 per share, resulting in RMB 9.024 million of share-based compensation expense in H1 2024[136][137] Earnings Per Share Basic earnings per share for H1 2024 was RMB 5.01, and diluted earnings per share was RMB 4.90, with the calculation including the dilutive effect of convertible senior notes; all outstanding share options were anti-dilutive and thus excluded from diluted EPS calculation | Metric | H1 2023 (RMB) | H1 2024 (RMB) | | :------------------------------------------------ | :------------ | :------------ | | Net income attributable to ordinary shareholders – basic | 4,211,540 | 4,037,848 | | Plus: Interest expense of convertible senior notes | 73,406 | 74,977 | | Net income attributable to ordinary shareholders – diluted | 4,284,946 | 4,112,825 | | Weight average ordinary shares outstanding – basic | 808,916,820 | 805,806,731 | | Plus: Dilutive effect of convertible senior notes | 31,209,068 | 33,029,400 | | Weight average ordinary shares outstanding – diluted | 840,125,888 | 838,836,131 | | Earnings per share – basic | 5.21 | 5.01 | | Earnings per share – diluted | 5.10 | 4.90 | - All outstanding share options were anti-dilutive in H1 2024 and thus excluded from the diluted earnings per share calculation[140] Related Party Transactions The company engages in various transactions with related parties, including equity investees and entities controlled by the Chairman's brother or the Chairman, involving transportation revenue, service fees, material purchases, rental income, and interest income; amounts due to related parties primarily include payables for transportation and material purchases, while amounts due from related parties include receivables and loans | Transaction Type | H1 2023 (RMB in thousands) | H1 2024 (RMB in thousands) | | :---------------------------------------------------------------- | :------------------------- | :------------------------- | | Revenues: | | | | Transportation revenue from ZTO Cloud Warehouse Technology Co., Ltd. and its subsidiaries | 281,841 | 79,969 | | Express delivery service revenue from Tonglu Antong Management LLP and its subsidiaries | 108,331 | – | | Others | 22,920 | 31,385 | | Total Revenues from Related Parties | 413,092 | 111,354 | | Cost of revenues: | | | | Transportation service fees paid to ZTO Supply Chain Management Co., Ltd. and its subsidiaries | 539,484 | 366,360 | | Purchases of supplies from Shanghai Mingyu Barcode Technology Ltd. | 164,332 | 161,415 | | Others | 93,388 | 80,787 | | Total Cost of Revenues from Related Parties | 798,204 | 608,562 | | Other operating income: | | | | Rental income from ZTO Cloud Warehouse Technology Co., Ltd. and its subsidiaries | 27,374 | 39,948 | | Rental income from ZTO Supply Chain Management Co., Ltd. and its subsidiaries | 28,675 | 26,501 | | Others | 1,446 | 2,190 | | Total Other Operating Income from Related Parties | 57,495 | 68,639 | | Other income: | | | | Interest Income derived from Zhongkuai (Tonglu) Future City Industrial Development Co., Ltd | 16,982 | 10,928 | | Others | 5,515 | 4,645 | | Total Other Income from Related Parties | 22,497 | 15,573 | | Amounts Due To Related Parties | As of Dec 31, 2023 (RMB) | As of June 30, 2024 (RMB) | | :---------------------------------------------------------------- | :----------------------- | :---------------------- | | Shanghai Mingyu Barcode Technology Ltd. | 28,924 | 30,290 | | ZTO Supply Chain Management Co., Ltd. and its subsidiaries | 149,495 | 86,727 | | Zhongtong Yunleng Network Technology (Zhejiang) Co., LTD and its subsidiaries | 14,988 | 15,041 | | ZTO Cloud Warehouse Technology Co., Ltd. and its subsidiaries | 16,415 | 12,952 | | Others | 24,861 | 9,436 | | Total | 234,683 | 154,446 | | Amounts Due From Related Parties (Current) | As of Dec 31, 2023 (RMB) | As of June 30, 2024 (RMB) | | :---------------------------------------------------------------- | :----------------------- | :---------------------- | | ZTO Cloud Warehouse Technology Co., Ltd. and its subsidiaries | 72,377 | 75,906 | | ZTO Supply Chain Management Co., Ltd. | 69,881 | 5,664 | | Zhejiang Tongyu Intelligent Industry Development Co., Ltd. | — | 84,700 | | Others | 5,809 | 3,768 | | Total | 148,067 | 170,038 | | Amounts Due From Related Parties (Non-Current) | As of Dec 31, 2023 (RMB) | As of June 30, 2024 (RMB) | | :---------------------------------------------------------------- | :----------------------- | :---------------------- | | Zhongkuai (Tonglu) Future City Industrial Development Co., Ltd | 502,083 | 514,583 | | Zhejiang Tongyu Intelligent Industry Development Co., Ltd. | 82,180 | — | | Total | **5