ZTO Express (ZTO) shifted the strategic focus to profitable growth in 1Q24, enabling it to deliver core net profit of RMB1.9bn (+23% YoY), representing 19% of our full-year forecast (run rate in 1Q23: 17.6%), which is better than our expectation. Looking forward, ZTO maintains the 15-18% parcel volume growth target in 2024E (same as previous guidance), despite a higher industry growth forecast of 15-20% by the Company (previously 10%). We like ZTO's decisive change to profitable growth strategy. We continue to expect ZTO to generate free cash flow over the coming years to support its semi-annual dividend and buyback programs. We have left our earnings forecast unchanged. Our TP for ZTO US/2057 HK is unchanged at US$38.50/HK$303, based on 24x 2024E P/E, equivalent to the historical average. Maintain BUY.
Key highlights in 1Q24 results:
Core net profit grew 23% YoY. Reported net income in 1Q24 dropped 15% YoY to RMB1.4bn, due to an impairment of RMB478mn as the tender offer for Cainiao's shares was below ZTO's carrying amount. Excluding the one- off items, the adjusted net profit grew 23% YoY to RMB1.9bn. The decent earnings growth was driven by (1) 10% YoY revenue growth, (2) 2.1ppt YoY gross margin expansion to 30.1%, and (3) a 1.6x YoY increase in net finance income.
Parcel volume +14% YoY to 7.2bn units, 11ppt below the industry (+25% YoY). This is the first time since early 2021 that ZTO has delivered below-industry growth as ZTO shifted its focus to quality growth. Market share in 1Q24 dropped 4.1ppt YoY to 19.3%.
ASP -3% YoY, most resilient among major peers. Parcel delivery ASP in 1Q24 only dropped RMB0.04/unit YoY to RMB1.36/unit. The decrease was much less than that of YTO (-9%), STO (-13%) and Yunda (-24%).
Unit cost -5% YoY to RMB0.94/parcel. Unit cost of transportation decreased RMB0.04 (or -7% YoY) to RMB0.46/unit, helped by economies of scale and improved load rate. Unit cost of sorting hubs decreased 5% YoY to RMB0.30/unit, due to the continued standardization in operating procedures and an increase in automation level.
Unit gross margin +4% YoY to RMB0.42/parcel. Gross margin expanded 2.1ppt YoY to 30.1%.
Major risk factors: (1) a prolonged price war; (2) a slowdown in online retail sales; and (3) increases in fuel costs.