Investing In Automation And AI Will Reduce Costs And Improve Profitability

Key Takeaways

• Focus on quality service and market share expansion is expected to drive parcel volume and revenue growth above industry averages.
  
• Investment in technology and collaborative strategies should improve efficiency, brand recognition, and profit margins.
  
• Intense price competition, consumer sensitivity, and operational costs pressure net margins, while policy changes impact liquidity and long-term financial stability.

Catalysts

Provides express delivery and other value-added logistics services in the People's Republic of China.

• ZTO Express is focusing on quality service improvements and market share expansion, aiming for a 20-24% parcel volume growth in 2025 compared to the industry average of 15%, which is expected to lead to increased revenue.
  
• The development of differentiated products and services in collaboration with e-commerce platforms is anticipated to enhance brand recognition and customer satisfaction, potentially boosting average selling prices (ASP) and improving profit margins.
  
• Investments in technology, such as automation and AI-powered processes, are expected to reduce sorting and transportation costs by at least $0.03 per parcel, positively impacting net margins.
  
• The company plans to empower its network partners with fair cost-sharing mechanisms and profit-sharing, which is expected to improve market penetration and volume growth in retail parcels, contributing to higher revenues and stable earnings.
  
• ZTO is integrating new technologies like autonomous driving vehicles to cut last-mile delivery costs, aiming to significantly reduce operational expenses, thereby increasing profitability.

ZTO Express (Cayman) Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ZTO Express (Cayman)'s revenue will grow by 7.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.5% today to 23.4% in 3 years time.
• Analysts expect earnings to reach CN¥12.3 billion (and earnings per share of CN¥14.57) by about March 2028, up from CN¥8.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CN¥10.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.3x on those 2028 earnings, up from 14.2x today. This future PE is lower than the current PE for the US Logistics industry at 20.4x.
• Analysts expect the number of shares outstanding to decline by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.65%, as per the Simply Wall St company report.

ZTO Express (Cayman) Future Earnings Per Share Growth

Risks

• Intense price competition and consumer price sensitivity exert downward pressure on logistics pricing, impacting revenue growth and net margins.
  
• The trend of consumption downgrades in the market environment presents risks to sustaining revenue growth and achieving higher market share.
  
• High growth in lower-value parcels due to frequent e-commerce promotions could reduce average revenue per parcel, affecting overall earnings.
  
• Operational cost pressures may increase due to investments in enhancing pickup and delivery infrastructure, potentially impacting net margins.
  
• Despite anticipated growth, declines in operating cash flow due to policy changes and advance payments in reverse logistics may affect liquidity and long-term financial stability.

Valuation

• The analysts have a consensus price target of $26.4 for ZTO Express (Cayman) based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $34.53, and the most bearish reporting a price target of just $20.25.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥52.3 billion, earnings will come to CN¥12.3 billion, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $21.3, the analyst price target of $26.4 is 19.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.