Welcome to the ZTO Report Q2 2021 Unaudited Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please limit yourself to two questions each. Please note this event is being recorded. I would now like to turn the conference over to Sophie Li, Director of Capital Markets. Please go ahead. Thank you, operator. Hello, everyone, and thank you for joining us today. The conference results and investor relations presentation were released earlier today and are available on the company's IR website at ir.zto.com. On the call today from ZTO are Mr. Meisong Lai, Chairman and Chief Executive Officer, and Ms. Huiping Yan, Chief Financial Officer. Mr. Lai will give a brief overview of the company's business operations and highlights, followed by Ms. Yan who will go through the financials and guidance. They will both be available to answer your questions during the Q&A session that follows. I remind you that this call may contain forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations in the current market and operating operations, and relate to events that involve known or unknown risks, uncertainties and other factors. All of which are difficult to predict, and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statements. Further information regarding this and other risks, uncertainties, and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to agree, update any forward-looking statements as a result of new information, future events, or otherwise, except as required under law. It is now my pleasure to introduce Mr. Meisong Lai. Mr. Lai will read through his prepared remarks in their entirety in Chinese before I translate for him in English. Thank you. [Non-English content] Thank you Lai Dong. Now please allow me to translate first. Hello, everyone and thank you for joining us today. In the H1 of 2021, the express delivery industry demonstrated steady growth momentum. ZTO maintained a consistent strategy to balance among competing priorities of service quality, volume and earnings. By focusing on effective pricing and avoiding unnecessary loss-making volume, ZTO achieved 5.8 billion parcels and delivered an adjusted net income of RMB 1.3 billion. Meanwhile, our customer satisfaction scores ranked the top of the peer group, and our performance in total process timeliness and the 72-hour time definitiveness stood out among the Tongda operators. Network stability and network partners' confidence and willingness to invest in long-term growth are vital to growth and the longevity for a franchise model. It is even more critical at times of diminishing profits or even losses given prolonged and deep price competition. ZTO's shared success culture and long-term practice are highly aligned with the recent regulatory interventions aimed to ensure social stability. We have always relied on our operational efficiencies to deliver best-in-class quality of services and profitability while consistently empowering our partners to achieve win-wins. This is precisely the reason why consecutively for the past several years, ZTO was able to deliver increasing proportion of aggregate Tongda net profits ranging from 45% to as high as 80% with approximately 25%-27% volume share, all while maintaining a stable partner network. Policies supportive of health competition, sensible pricing, and fair game will undoubtedly help solidify ZTO's competitive advantage and allow us to pull further away from the competition. ZTO always focus on being our best self, setting our sights on the future, and strengthening our core competencies, including infrastructure. We have made further progress on network upgrade, last-mile expansion, and brand building during the Q2. First, we continue to implement initiatives to support or reform our partners' operations. Through a top-down and grade-by-grade approach, we enhance the transparency and fairness, boosted trust and confidence to improve network stability. Specifically, for example, we closed or absorbed those outlets that were no longer competitive. We identified outlets with growth potential or importance for strategic placement and established the goals for capacity expansion. With added financing support, digital diagnosis, pricing optimization, legal and financial advisory services, and equipment and technology upgrades, we ensure the capacity and capabilities for pickup and delivery operations that kept pace with transit and sorting expansion. In addition, consistent with the regulatory attention to the rights and interests of those in the front lines, we increased participation of direct payment of last-mile delivery fees to the couriers, extended coverage for couriers, group accidental and employers' liability insurance. We set up a RMB 100 million fund for courier care, and we improved the star level measurement matrix that promotes career growth. These proactive measures have not only tangibly improved sense of belonging, being safe, and achievement across grassroots communities, but also provided added protection against loss of growth by our network partners. Secondly, we raised the development of last-mile to a strategic level for ZTO's growth. Adhering to the shared success philosophy, we designed a partnership structure to promote the deeper integration at operational and ownership level with our network partners, aiming at building a last mile network with wide and deep coverage of urban and rural areas, while services, standards, and consistent images are maintained. At the end of the Q2, we have over 70,000 last mile posts with an increasing lead over our peers. These locations can cater towards diverse needs of our customers. As express delivery network becomes less layered and more streamlined, last mile network carries great possibilities that are beyond our imagination. While accelerating the expansion of the last mile posts, we improved store standardization and explored varied commerce opportunities, value-added and neighborhood services to enrich content and improve quality for better experiences and a higher competitive and value proposition for the store owners or operators. Third, we actively extended new product experimentation by collaboration and integration with our logistics ecosystem, drive to establish differentiation in brand awareness and value recognition. According to the objectives we set from the beginning of the year, we improved connectivity with emerging commerce platforms, particularly in areas of reverse logistics. We extended distinctive service category to cover fresh produce, wine and spirits, and specialty goods. We explored one-stop logistics service offerings to deliver comprehensive industrial solutions. At present, the time-definite service has been made available in nearly 100 cities with determinable routes, advanced phone alerts, and other customized fulfillment guarantees. These new initiatives are generally well received by our customers and test groups. The coaching business under our ecosystem has launched time-definite services across its newly formed nationwide network, where regional operation teams are being quickly assembled. We are further advancing and deploying resources to lay the foundation for a future capable of universal, inclusive, and well-integrated multi-products and services. We believe the express delivery industry will maintain a medium to high speed of growth in the next two to three years. The industry landscape has clearly been dividing not only in volume or quantity, but also in quality, such as overall operational strength and profitability. The very nature of express delivery, plus the partner network model, requires long-term accumulation of capabilities, including hard assets, deep know-how, and network coherence, in which the capabilities in all four segments of pickup, quotation, transportation, and delivery must continuously improve and stay in sync. Moreover, as volume continues to grow, the structure of the network must also evolve and become more agile so as to continue to generate cost productivity while maximizing scale advantage. With the approaching daily volume of 400 million or even 500 million parcels, ZTO will maintain its consistent and effective strategy by suitable expansion of its transit and sorting platform, reduce overall frequency of transit, and rely on digitization and data-driven decision-making to enhance connectivity and efficiency. Meanwhile, we pay close attention to the appropriate and in-time expansion of our network partners' capacity, last mile network development, and ZTO Express Plus commerce opportunities. We will steadily develop our ecosphere and build competitive advantages with comprehensive product and services that are differentiated for brand value and recognition. Now let's ask Huiping Yan to take us through results of our financial performance. Thank you, Sophie. Thank you, Chairman. Hello to everyone on the call. As I go through our financials, please note that unless specifically mentioned, all numbers quoted are in RMB, and percentage changes refer to year-over-year comparisons. Detailed analysis of our financial performance, unit economics, and cash flow are posted on our website, and I will go through some of the key points here. In the Q2, by executing our consistent strategies, we achieved profitable volume growth and grew parcel volume by 25.6% to RMB 5.8 billion, while attaining RMB 1.3 billion adjusted net income. Our leading market share was 21% for the quarter. Total revenue increased 14.4% to RMB 7.3 billion. ASP for the core express delivery business declined 5.9% or RMB 0.08, with approximately RMB 0.04 related to volume incentives and another RMB 0.04 from parcel weight drop. Average weight per parcel declined 8% to approximately 0.92 kilo. The cost of revenue increased 22% to RMB 5.7 billion. Overall unit cost of revenue for the core express delivery business increased 1.7% or RMB 0.01. More specifically, line haul transportation cost per parcel increased 10.2% to RMB 0.48. Unit sorting costs increased to 0.4% or RMB 0.01. Normalized for one-time benefits such as ETC toll road fee waivers, lower oil prices, and social welfare exemption we benefited last year during the COVID-19 outbreak, combined transportation and sorting costs per parcel generated positive productivity gain over last year still. Gross profit decreased 5.4% to RMB 1.7 billion. Gross profit margin rate decreased 4.8 points to 22.8% as a combined result of price decline, increased costs against the lower base due to one-time benefit during last year's COVID-19 outbreak. SG&A increased 26.1% to RMB 394 million from increases of compensation and benefits, office expenditures, depreciation, and write-offs of obsolete assets. Income from operations decreased 11.6% to RMB 1.5 billion. Associated margin rate declined 5.8 points to 19.9%, mainly driven by that 4.8 points decrease in gross margin. Adjusted net income decreased 12.5% to RMB 1.3 billion. Adjusted net income margin declined 5.3 points to 17.4%. Operating cash flow increased 54.3% to RMB 1.9 billion. CapEx outlay totaled RMB 2.2 billion. As we further strengthen our infrastructure in preparation of increasing demand for the core express business as well as resource planning for development of our ecosystem, our annual cash flow for CapEx is expected to be around RMB 9 billion-RMB 10 billion. Turning to business outlook. Based on the current market and operating conditions, the company maintains its previously stated annual guidance of 35%-40% increase year-over-year for the volume. Our annual parcel volume is estimated to be in the range of 22.95 billion-23.8 billion. These estimates represent our current and preliminary view and is subject to change. This concludes our prepared remarks. Operator, please open the lines for questions. Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Again, please limit yourself to two questions each. At this time, we will pause momentarily to assemble our roster. The first question comes from Ronald Keung with Goldman Sachs. Please go ahead. Thank you, Laizhong, Yanzhong, Sophie. [Non-English content] [Non-English content] Thank you management. I have two questions. First is on the competitive landscape and how we think about the H2, particularly as our full year parcel volume guidance would imply at least 27%-35% implied parcel growth for the H2. That would be faster than the Q2. Just want to hear as we balance profitability and growth, which we did very well in the Q2 as we currently expect based on the guidance, some faster growth in the H2. Would that be overall industry acceleration that we're expecting, or would that be any fine-tuning of our strategies in pricing and market share gains in the H2? My second question will be on our cost productivity. As Yanzhong talked about the positive productivity once we take out the one-off factors. On a unit cost perspective, particularly as we head into the H2, how do we see the room to further cut on our unit cost, particularly on sorting and trucking? Thank you. [Non-English content] I will translate the answer to the first question first, and then I will answer the second question. Our strategy maintains and the expectation for the H2 of the year's growth is stable and maintaining, or perhaps there is a chance of below Q2 growth. As we continue to seize opportunities and rely on our own capability to gain market share, we want to point out to you that Q4, typically in the past, the market share of us is below the second and the Q3. This is largely driven by seasonality. The second question, after excluding the one-time effect for the COVID-19 benefits. Q2's per parcel cost is positively better than. The productivity gain is still there. What we expect the H2, as we achieve a higher level of volume because of the seasonality and reaching closer to our optimal production level, the cost productivity will still be there. Our current estimate is around 5%-6% gain per parcel year-over-year. Thank you, Ronald. Great. Thank you, Laizhong and Huiping Yanzhong. The next question comes from Eric Zhong with Macquarie. Please go ahead. Thank you. Hello, this is Ellie calling from Macquarie. I have a question regards the management comments in the opening remark regarding the potential to opening up more channels towards the emerging e-commerce channels. I would assume that includes a lot of the short-form video channels. Could you provide some color in terms of the channel mix for the parcel volume? For these emerging channels, would it be more negative impact or positive towards the overall ASP trend, since they might have lower weight overall? That's one question. The second, just quickly on the recent regulatory overhead. We've seen governments issuing guidelines saying some price control in the last mile. Could we think we are now in a inflection point where the overall price war should be reaching more of a stabilizing stage? From now on or H2, we should be seeing at least on the competition side, it should be continued to ease from now on. Hey, Ellie. Thanks for your question. The first question, we have been expanding our penetration into all these new e-commerce channels, and typically what happens is as we take on these new parcel activities, we are usually represented as the largest share, some as high as 25% and above. Now, this entirety is still our attempt to enrich our product mix or to improve our product mix because we are typically traditionally relying more on the traditional e-commerce. With the new development and innovation taking place in the marketplace, we are keen in making these connections with new up-and-coming channels, and the results have been very positive. Now, still, I would say the total volume with respect to our core express business catered more towards e-commerce is still not large, but the trend is very promising. The second part of the question, regulatory intervention is indeed helping the stabilization of the entire express delivery operations. Price bottom is set because the sufferings typically is more felt at the last mile of the chain, i.e., the grassroots level of operators, and particularly so including couriers. What we believe the price stabilization is a continued trend. Again, as we mentioned, this is very consistent with ZTO's long-term practice in supporting our network partners. In some cases, we may even provide more support because we set our sights on the longer term. The ups and downs in the marketplace shapes the confidence and also the hope for the future. Yet at the same time, we believe it is critical for us to maintain confidence across the network where our network partners would be willing to invest. With our strong corporate earnings, we are willing to provide more support than the market practice. At the same time, maintaining the profitability, quality of services, as well as market share gain. Was there a follow-up, Ellie? Does that answer your question? Thank you. Thank you very much for the answer. Thank you very much. Thank you. The next question comes from Lin Chen with J.P. Morgan. Please go ahead. [Non-English content] I have two questions. The first question is that we notice that the company's market shares decline a little bit in 2Q. The price decline is actually the modest among players. My question is that whether it is a short-term change of strategy or more like a longer-term change of strategy? Is the company still committed to the 25% market share target in year 2022? My second question is about the social security payment. I understand that some employees have signed the contract with a third-party agent. I would like to know how many employees have signed this kind of contract. Since the government encourage the direct employment of employees, has the company any plan to transfer these employees into permanent accounts? What will be the impact on the cost? Thank you. [Non-English content] Allow me to transfer. Our consistent strategy is to achieve targeted profit goal, maintain high quality of services while growing volume and market share. The temporarily decline in market share for the quarter resulted from our emphasis on profitability without taking unnecessary losses. Also it's under the positive influence of the regulatory intervention, so that we can allow our network partners to be less burdened by price competition, maintaining stable operations and restore confidence for their future. Prolonged and intensified price competition in recent years has threatened the very survival of outlet operators and couriers. Their legitimate rights and interests are under siege because they often suffer the most. Raising attention to social stability, the relevant regulatory agencies have issued several policies and procedures this year intended to promote fairness and healthy growth of this industry. We have said earlier that this has been consistent with our long-term shared success philosophy as well as practice. ZTO is regarded as the industry leader to uphold government policy and help maintaining overall stability. Not only because our shared success philosophy and long-term practice is to achieve a win-win with our network partner, but also because we strive to achieve optimal balance among quality of services, volume growth, and profitability. We are being more prudent, pricing practice, and choose to let go of loss-making volume during the quarter. Our market share retreated slightly. Again, as the chairman mentioned earlier, it takes real competitive edge to win, and the express delivery business relies largely on scale and efficiency. We believe with a stable market operation and competition returning to sensibility, our competitive advantage will become even more apparent. We all have noticed the clear division in the market dynamics. Looking forward into an environment where growth is stable and also the market dynamic shifts could very well take place at any time. We are still hopeful, and we will continue to strive to achieve our goal in volume growth and market share gain. The second question relating to the social welfare. Indeed, our 100% compliance is being closely monitored as well as uphold, including the outsourced employees, outsourced labor force. Their social welfare are well established, and we welcome practical solutions or planning on even better support the grassroots communities to protect their rights and interest going forward. Did that answer your question or was there any follow-up? Mr. Chen? I'm good. Thank you very much. Laizhong and Yanzhong. Thank you. Thank you. Thank you. The next question, sure, comes from James Teo with Bloomberg. Please go ahead. [Non-English content] Hi. Maybe I'll translate my question. My question is regarding the ASP drop. There was an RMB 0.08 mention, of which RMB 0.04 was due to the lower parcel weight per parcel. I would like to know what is the reason and whether this trend would continue. Great. Thank you for your question. The RMB 0.04 decline relating to the parcel weight, we have actually observed that trend, and the reason being that e-commerce itself is also evolving, where particularly also because of the COVID-19, people learn to shop online, and they learn to shop more sporadically. Whenever there is a demand or need for a goods purchase, they would go online, and they would do the shopping. On one hand, we believe the efficiency and also the timeliness of express delivery business provided and supported that shopping behavior. We believe that decline is a trend, and it's a natural trend. Now, I think the concern might be, this is where I'm offering more explanation to your question. Concern may be that as the weight continue to decline, the price will continue to drop. Actually, we do have a minimum weight requirement, anything below that would be a flat rate. As we continue to observe how the weight changes, I believe the industry, in order to cover its fundamental cost, which is there, either heavier or lighter, will make necessary changes to the pricing structure. Hope that answers your question. Yes. Thank you. Thank you. The next question comes from Parash Jain with HSBC. Please go ahead. Thank you so much for taking my question. I was just wondering if you can talk about your CapEx guidance, where would we expect the H2 CapEx to be deployed? Also, if we can talk about the prospects of non-express businesses, where do you see the most opportunity, whether it's cross-border, whether it's freight forwarding? Would you approach organic growth strategy, or the focus would be to grow through acquisitions? Thank you. Thank you, Parash, for your question. The first part of the year, we deployed RMB 2.2 billion, and our plan for the whole year, on a cash outlay basis, is RMB 9 billion-RMB 10 billion. About 70% of these are towards acquisition of land use rights and development of our infrastructure, some of which are designed for comprehensive logistics service capabilities. That shall be the similar proportion going forward for the H2 of the year. As you know, the land use rights and development of facilities takes cycles, and there are pipelines that are visible to us, so the RMB 9 billion-RMB 10 billion is what we are currently estimating. The second part of question relates to our development of the ecosystem. You mentioned cross-border, as well as cold chain, that we have talked about in our prepared remarks, as well as those already operation for several years, including the Cloud Warehouse business, the freight LTL business. All these are, in its totality, coordinating and also addressing up-and-coming and evolving demand in the marketplace. Now, if you compare to the Western countries where large scale and also professional logistics service providers, they are very geared towards specialty services. For ZTO, because our express scale, unprecedented, and also in China market only, it has a better chance of evolving into specialized logistics services. That is why we have planned our entire ecosystems development to be that. The special requirements, for example, temperature control-needed rates, cross-border- as they continue to develop, are all a part of our overall strategy. The timing is most important. For example, international activities, while we do have delivery network developing in the Southeast Asia Pacific countries, their structure are also limited because of their size and because of their local e-commerce conditions. Across the board, going into Africa, going into Europe, we are currently in a stage of planning resources. It is a very staged approach, not necessarily immediately spending an investment across the board, because again, our philosophy and our practice in the past is prudent and profit-seeking. It's inevitable. The planning is there. All the ecosystems will need to be working together. The cloud warehouse business provides one solution where in-house processing and also delivery pickup are connected with our LTL business, with our express business, and now we are connecting cold chain business to it as well. It is from one focal point and adjacency, a combined holistic solution to be provided to our customers. Perfect. That's very, very clear, Ms Yan. If I can, Ms Yan, if I can squeeze one more question, you have addressed that in parts in earlier questions. When we talked about competition and consolidation, and there are moving parts where some of the provinces are trying to create a floor to ensure that the system is not stressed out. Does it mean that some of the rather subscale player, the consolidation may delay as a result of it because the stress on their cash flow may not be immense as a result? Another way to think about it is that it will give an opportunity to a better service provider like yourselves to gain market share as a result because competition will shift from price to the service quality. In that respect, how do you see the competition evolving outside Tongda players? Thank you. Sure. Very good question. As we mentioned that the growth of express delivery business rely largely on its infrastructure, and it takes years to accumulate. Not an immediate quick fuel by the capital or a largely concentrated customer base would mean that much in our scenario where we are indeed servicing the entire country, and the e-commerce platforms are also evolving with multi-channels. With all that, I believe the smaller players have been exiting the scene or are not able to sustain because they are lacking the operating efficiency and lacking the scale advantage or leverage. The M&A considerations in that regards, we believe the quality of service, the value of the brand, the customer base, all these taking into consideration on top of whether they are profitable or not, has always been our gauge in whether to consider M&A or other types of merge. In the past, I believe Chairman has described a very interesting analogy where we don't need to acquire the brand or acquire the entire business, but because of the operations on the ground, naturally gravitates to those that are with higher brand awareness, stability, as well as long-term prospects. We believe, in the current market dynamics, we are not willing to pay for a brand, even though at the operational level, there has been consolidation taking place. The smaller players, they need to grow. I think specifically with a company, perhaps starting with the letter J. Its growth is very unique, and its capital structure, the cash utilization and the pricing strategy approach is an anomaly in our understanding. Certainly, we will continue to simply focus on what we can do in growing our business with a long-term objective being maintained. I hope that answers your question. If not, we can certainly have. Absolutely. Thank you Absolutely. Thank you so much. Have a lovely day. Yeah. Sure. Thank you. Thank you so much. This concludes our question and answer session. I would like to turn the conference back over to Sophie Li for any closing remarks. Thank you, operator. In closing, on behalf of the entire ZTO management team, we'd like to thank you for your interest and participation in today's call. If you require any further information or have any interest in visiting us in China, please feel free to reach out to our capital markets department. Thank you for joining us today. This concludes the call. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.