3Q24 results in line with our forecast

ZTO announced its 3Q24 results: Revenue rose 18% YoY to about Rmb10.68bn (largely flat QoQ); gross profit grew 23% YoY to around Rmb3.34bn (-8% QoQ); net profit attributable to shareholders grew 2% YoY to around Rmb2.4bn (-8% QoQ); and non-GAAP net profit rose 2% YoY to around Rmb2.39bn (-15% QoQ), in line with our expectations.

In 3Q24, parcel volume rose 16% YoY to about 8.72bn units, and market share (based on the new standard) rose 0.4ppt QoQ to 20.0%, due to the State Post Bureau's adjustment of the calculation standard of industry data and the firm's product mix adjustment.

Per parcel (unit) data: Revenue per parcel (excluding freight forwarding) rose 2% or Rmb0.02 YoY to Rmb1.20, mainly driven by the growth of parcel volume in reverse logistics and the increasing proportion of small parcels. Cost per parcel (excluding freight forwarding) was Rmb0.82 (largely flat YoY), with transportation cost per parcel down 10% or Rmb0.04 YoY to Rmb0.39 and sorting cost per parcel down 6% or Rmb0.02 YoY to Rmb0.25, mainly thanks to economies of scale brought by parcel volume growth and improved operational efficiency enabled by new technologies such as data monitoring and analysis and automation equipment. Non-GAAP net profit per parcel was Rmb0.27, down 12% or Rmb0.04 YoY and down 18% or Rmb0.06 QoQ. The firm revised its 2024 guidance and now expects its parcel volume to grow 11.6-12.3% in 2024, implying an average daily parcel volume of 92.33-92.88mn.

Trends to watch

Industry level: Demand has been improving YTD, and we suggest watching potential changes in competitive landscape in 2025. According to the State Post Bureau, industry parcel volume rose 20% YoY in 3Q24 and 24% YoY in October. We think express delivery demand may continue to improve this year, thanks to live-streaming e-commerce and the shift towards smaller parcels. We expect the demand to maintain double- digit growth in 2025. We believe regulators still attach importance to the high-quality development of the industry. However, we suggest paying attention to potential changes in regional competitive landscape in the slack season in 2025, given rising proportion of small parcels and price-sensitive merchants.

Company level: We expect ZTO's profit per parcel to remain stable YoY in 2024, but to come under pressure in 2025 due to price competition. The firm maintained stable per-parcel profit and overall profitability in 3Q24, despite falling industry ASP. We think this underscores its leading position in the industry. We expect the firm's per- parcel profit to remain stable YoY in 2024. Given potential changes in the industry's competitive landscape next year, we expect ZTO's per-parcel profit to be under pressure in 2025, although its market share may rise YoY.

Financials and valuation

We keep our 2024 earnings forecast largely unchanged. Given potential changes in the competitive landscape in 2025, we lower our 2025 earnings forecast 9% to about Rmb10.79bn. The stock is trading at 11.2x 2024e and 10.9x 2025e P/E. Maintain OUTPERFORM. Given the downward earnings forecast revision and valuation rollover to 2025, we cut our target price 7% to US$25.7 (14x 2024e and 14x 2025e P/E), offering 28.5% upside.

Risks

Parcel volume growth disappoints; competitive landscape deteriorates.