ZTO EXPRESS(ZTO) - 2020 Q4 - Annual Report

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