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Elevator Pitch
My rating for ZTO Express (Cayman) Inc. (ZTO) (2057:HK) shares is a Hold. I previously reviewed ZTO Express’ Q3 2022 financials and operating performance with my earlier November 23, 2022 write-up.
After reviewing ZTO’s weaker 2023 financial outlook and taking into consideration the company’s recent stock price outperformance and current PEG ratio, I continue to award a Hold rating to ZTO Express.
The Market’s Expectations Regarding ZTO’s 2023 Outlook
The sell-side sees ZTO Express doing reasonably well in 2023, but they don’t anticipate that the company’s financial results this year will be as good as what it achieved in the previous year.
ZTO Express’s topline growth in RMB or local currency terms is projected to moderate from +20.6% for fiscal 2021 and +17.4% for FY 2022 to +15.8% in the current year, based on consensus numbers sourced from S&P Capital IQ. It is worthy of note that the consensus FY 2023 revenue estimate for ZTO was lowered by -2.5% from RMB42,372 million as of mid-November 2022 to RMB41,308 million as of February 8, 2023.
Analysts also forecast that ZTO’s non-GAAP adjusted net profit growth (in RMB terms) will slow from +35.2% in FY 2022 to +21.0% for FY 2023. Similarly, the market expects ZTO Express’s normalized EPS to grow at a slower rate of +21.2% in the current fiscal year, as compared to the company’s non-GAAP EPS increase of +37.0% for FY 2022.
ZTO’s weaker topline and bottom line growth projections for 2023 are likely driven by expectations of volume expansion being offset by price declines, as detailed in the subsequent two sections of the article.
Volume Expansion
According to a January 28, 2023 news article published by Chinese state media Global Times, “parcels collected” and “packages delivered” in China grew by +5% YoY and +10% YoY, respectively during the 2023 Lunar New Year holiday. Looking forward, the State Post Bureau of China is forecasting a +7% growth for the Chinese parcel delivery industry in this year as per a China Daily news commentary released on January 18, 2023.
ZTO Express is in a good position to record faster volume growth as compared to the industry. ZTO stressed in its Q3 2022 earnings press release that the company “is confident to achieve at least one percentage point increase in its market share” in full-year 2022. The company has gained 14.5 percentage points of market share in the past decade, and it boasts a 22.1% share of the Chinese express delivery market as of September 30, 2022. It is reasonable to assume that ZTO Express can continue to increase its volume share of China’s express delivery industry in 2023 and beyond, judging by the company’s track record and management commentary.
But it is highly probable that ZTO Express’ revenue growth slows in FY 2023, as the increase in the company’s delivery volume might be negated by lower prices, as I will discuss in the next section.
Price Declines
BofA (BAC) Securities recently issued a new research report (not publicly available) titled “Key Takeaways From China Express Delivery Expert Call” on February 6, 2023. This BofA report cited an industry expert outlining his expectations for “more price competition” as Chinese express delivery companies are likely to “prioritize gaining market shares after full re-opening.”
Specifically, the industry expert interviewed by BofA predicted that China’s express delivery market could potentially witness an average selling price or ASP reduction of around RMB0.10-0.20 in the February-March 2023 period. This is pretty significant, as ZTO Express’ own ASP has already decreased from RMB1.45 in the first quarter of 2022 to RMB1.36 for Q3 2022.
Notably, ZTO Express acknowledged at the company’s Q3 2022 results briefing in late-November last year that “the increase in volume in next year will be the target of everybody’s focus,” even though “industry growth had slowed down.” ZTO’s management comments at the most recent quarterly earnings call appear to be consistent with the industry expert’s views. It is likely that Chinese express delivery companies will be willing to use price cuts as a means of gaining volume share, and this will most probably hurt ZTO’s revenue (price multiplied by volume) and earnings in 2023.
Recent Stock Price Outperformance Has Priced In Reopening Tailwinds
As per Seeking Alpha price data, ZTO Express’ shares have risen by +22.8% following the publication of my prior article on November 23, 2022. In this time frame, the S&P 500 (SP500) only increased slightly by +2.9%. The good share price performance for ZTO in the past few months is largely driven by optimism relating to China’s reopening.
Also, ZTO’s shares seem to be fairly valued now. The stock is currently trading at 19.2 times consensus forward next twelve months’ normalized P/E based on S&P Capital IQ’s valuation data. The consensus 2023 normalized EPS growth rate for ZTO Express is +21.2%. This implies that ZTO Express’ current PEG (Price Earnings to Growth) ratio is approximately 0.9 times. With a PEG ratio of 1 being indicative of fair valuation, the potential upside for ZTO’s stock doesn’t seem to be significant.
Concluding Thoughts
ZTO Express (Cayman) Inc. shares aren’t undervalued, taking into account its recent stock price performance and current PEG valuation. Given that ZTO’s topline and bottom line growth are expected to moderate this year, I don’t see a reason to be bullish on the company’s shares. As such, I maintain my Hold rating for ZTO Express (Cayman) Inc.
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