How This Firm Could Dominate China Deliveries With Alibaba's Help
https://www.investors.com/research/the-new-america/china-zto-alibaba-ecommerce/
ALLISON GATLIN8:57 AM ET
ZTO Express (ZTO) made what many analysts agree was a bold prediction during its last earnings call — it said it would beat the average growth rate of its peers in the China delivery market by at least 10 percentage points.
How bold was that prediction? For one, China's package deliveries already were accelerating by double digits — up more than 30% a year in the first quarter, in fact. On top of that, Chief Executive Lai Meisong acknowledges the firm didn't achieve its expected 10% lead in volume growth over the industry in the first quarter.
Don't misunderstand, things were good for ZTO. During the quarter, a boom in China's e-commerce helped its sales jump 35.6% to $565.1 million. Adjusted earnings soared 70% to 17 cents per American depository share. And, ZTO delivered nearly 1.6 billion packages as its parcel volume grew 36% year over year.
Still, the broader Chinese delivery market grew 30.7%, leaving the company little more than halfway toward its goal. ZTO's dreams of making its own splash little more than a year after going public in October 2016 seemed a bit too ambitious.
"However, if we look at the third month in March, and also looking into the April month, we are confident that we are able to attain the goal that we set for ourselves," Meisong said in the May 9 call. "Specifically, in March the average of the market increase (in volume) was 30% and for us it was 43%."
Help From Alibaba, Location
On May 29, ZTO solidified a deal that could help keep it over that lofty benchmark. Chinese internet giant Alibaba (BABA) and its logistics arm Cainiao Network said they would invest $1.38 billion in the company in exchange for a 10% stake.
Shares of ZTO soared nearly 8% that day. ZTO shares began forming a flat base with a buy point at 21.80 and broke out in heavy volume on July 16. Since then, shares have retreated 2.4% from that entry. But the stock remains an IPO Leader and listed on IBD's Leaderboard.
Location helps. China is the world's biggest express delivery market. In 2015, couriers in China delivered 20.7 billion packages, bringing in a collective $45 billion in sales. In the U.S., package delivery sales came to $86 billion, even though it delivered just 13.5 billion packages.
"Express (delivery) only takes up around 80% of total revenue for international peers, yet is almost the single most important revenue source for Chinese companies," China Renaissance analyst Nicky Ge wrote in a May 2017 analysis of the market.
At the time, Ge liked ZTO for its "efficient operation and balanced network with market share gain potential." To the latter point, in the first quarter of 2018, ZTO had north of 16% of the market in terms of parcel volume, putting it at the top of its class.
Leading The Pack
ZTO leads IBD's 15-company Transportation-Logistics industry group with a market cap of $15.3 billion. Its closest competitors, Expeditors International of Washington (EXPD) and C.H. Robinson Worldwide (CHRW), trail at $12.9 billion and $12.5 billion, respectively.
Other competitors include Yunda Express, YTO Express and Best Express, Goldman Sachs analyst Ronald Keung said in a July 11 report to clients. Yunda has nearly 15% of the market with YTO and Best trailing at 13.5% and 10.5% apiece, he estimated.
"We estimate that in April, the top two express players by volume (Yunda and ZTO) had more than 30% market share of the entire express delivery market in China," he said. "In May, Alibaba and Cainiao announced their investment in ZTO on top of their investment stakes in YTO and Best."
Keung doesn't expect that investment to put ZTO markedly above its competitors in terms of parcel volume. But he does expect Alibaba and ZTO to realize some synergies.
By 2020, he sees ZTO and Best capturing 17.1% and 12% of the total market, respectively.
ZTO And 'New Retail'
Alibaba Executive Chairman Jack Ma coined the phase "New Retail" in 2016. The firm envisions an operating target of 1 billion packages delivered per day — nearly nine times today's volume.
"The increase in e-commerce as a whole is benefiting the entire express delivery industry," Meisong said on the company's earnings call.
But this plan will be in vain without the support of its partners, Morgan Stanley analyst Edward Xu said in a recent report.
"Given ZTO's market leadership and strong track record, we think a strategic investment to strengthen the partnership appears to be positive for two sides," he said. Ma believes "pure e-commerce platforms will disappear someday, replaced by more integrated omnichannel retail," Xu wrote.
Both Alibaba and rival JD.com (JD) are trying to wrangle the logistics of the "New Retail" era.
ZTO Improvements
Meanwhile, ZTO is investing heavily it its own infrastructure. As of March 31, it had 59 sets of automatic sorting equipment in service across China.
In the first quarter, the company retired older vehicles and added more than 100 high-quality long-haul trailer trucks to its fleet. Further, the firm says since 2016 it's become less reliant on less cost-effective outside transportation services.
Xu raised his assumptions for the company's market share to 17%, 18.5% and 20% for 2018-20. He also upped his price target on the stock by 34% to 26.20. He acknowledged ZTO shares have risen on the news of Alibaba's investment, but sees room for more upside.
"We see more sustainable long-term growth for ZTO without considering further market share gains," he said.
Xu went on to say: "We now factor in this positive impact in our bull-case scenario with higher revenue growth in 2021-25, as well as higher terminal growth rate at 4% vs. 3% previously."