ZTO Express: A Mixed Quarter (NYSE:ZTO)

Elevator Pitch

ZTO Express (Cayman) Inc.’s (NYSE:ZTO) [2057:HK] stock is deserving of a Hold investment rating.

In my prior article for ZTO published on August 23, 2022, I did a review of the company’s financial results for the second quarter of this year. With my latest write-up, I assess how ZTO Express performed in the recent Q3 2022.

I think that ZTO Express had a mixed quarter. The company’s third quarter earnings beat saw a boost from a substantial increase in interest income. In the recent quarter, ZTO Express managed costs well and benefited from higher ASPs (Average Selling Prices), but its market share contraction and slower volume growth weren’t encouraging. In addition, I deem ZTO Express’ valuations to be reasonably fair. As such, I leave my Hold rating for ZTO unchanged.

Headline Financial Numbers For ZTO Appeared To Be Good

ZTO announced the company’s recent third quarter earnings on Monday, November 21, 2022 after trading hours, and its headline financial figures were pretty decent.

In USD terms, the actual Q3 2022 non-GAAP earnings per share or EPS for ZTO Express was $0.33, which was +21% ahead of the sell-side’s consensus bottom line projection of $0.27. This also suggests that ZTO’s Q3 2022 non-GAAP EPS rose by +50% YoY as compared to its Q3 2021 non-GAAP EPS of $0.22.

If one evaluates ZTO Express’ headline numbers in local currency terms, the company also did reasonably well.

Operating income for ZTO grew by +60% YoY from RMB1,360 million in the third quarter of 2021 to RMB2,175 million for the third quarter of 2022. ZTO Express’ operating profit had accelerated in the recent quarter; the company’s YoY operating income growth rates for Q2 2022 and Q3 2021 were relatively more modest at +36% and +16%, respectively. Based on consensus data taken from S&P Capital IQ, ZTO’s Q3 2022 operating profit turned out to be +16% higher than the analysts’ projection of RMB1,867 million.

Also, assuming one sticks to GAAP accounting rules and ignores the company’s non-GAAP adjustments, ZTO’s GAAP net income also expanded by +66% YoY to RMB1,935 million, which was also +23% above the market’s consensus estimate of RMB1,568 million as per S&P Capital IQ data.

But it is insufficient to just rely on headline numbers as a measure of ZTO Express’ performance for the third quarter of 2022. It is important to note that ZTO’s Q3 bottom line growth benefited from a +77% jump in interest income (a non-operating factor) to RMB162 million for the recent quarter. In the next section, I delve deeper into ZTO’s key metrics in the most recent quarter.

ZTO Had A Mixed Performance Based On A Review Of Key Metrics

In my opinion, ZTO Express’ Q3 2022 performance wasn’t as good as what its headline operating profit and net income numbers imply. In fact, I view ZTO’s third quarter performance as mixed following my evaluation of its key metrics.

On the positive side of things, ZTO saw an improvement in pricing, and its key expenses on a per unit basis didn’t increase.

As highlighted in its Q3 2022 financial results presentation slides, ZTO Express’ parcel average selling price or ASP grew by +10% YoY to RMB1.36 in the third quarter of the current year. This was much better than ZTO’s -7% YoY ASP decline for Q3 2021, and roughly par with the company’s +11% YoY ASP increase in Q2 2022. This suggests that price competition between ZTO and its rivals has become less intense.

Separately, ZTO’s sorting expenses per unit and transportation expenses per unit were RMB0.30 and RMB0.49, respectively for Q3 2022 which remain unchanged from Q2 2022. It was impressive that ZTO Express managed its expenses well despite inflationary cost pressures.

On the negative side of things, ZTO’s volume growth and market share metrics weren’t as good as what I would have hoped for.

ZTO Express’ volume growth slowed from +23% YoY in the third quarter of 2021 to +12% for the most recent quarter. It is clear that China’s COVID-zero policy and the weak economic growth in the country had affected demand for delivery services in a negative way.

It is also noteworthy that ZTO’s market share contracted by -90 basis points QoQ from 23.0% for Q2 2022 to 22.1% in Q3 2022. While I discussed about lower competitive intensity being a positive contributor for ZTO Express’ pricing in the recent quarter, more favorable pricing for ZTO in Q3 might have come at the expense of ceding some market share to competitors.

Valuations Are Fair

As per S&P Capital IQ’s valuation data, ZTO Express trades at a consensus forward next twelve months’ normalized P/E multiple of 16.2 times.

The stock’s forward P/E valuation metric is aligned with its bottom line growth and ROEs. The sell-side analysts see ZTO achieving ROEs of 12.8% and 13.8% for FY 2022 and FY 2023, respectively, based on consensus data sourced from S&P Capital IQ. ZTO is expected to grow its normalized EPS by a two-year CAGR of +21.3% for the FY 2022-2023 period.

A mid-teens forward P/E ratio for ZTO appears to be fair, taking into account its future ROEs in the low-teens percentage range and its earnings CAGR at the low-twenties percentage level.

Closing Thoughts

My investment rating for ZTO Express stays as a Hold. ZTO’s Q3 2022 performance was mixed, and its stock is fairly priced by the market.