Private Label Expansion And AI Productivity Gains Will Transform Long Term Profit Potential

Catalysts

About ZKH Group

ZKH Group operates a professional one stop MRO procurement platform serving industrial and manufacturing customers.

What are the underlying business or industry changes driving this perspective?

• Rapid expansion of the product catalog to more than 19 million sellable SKUs and onboarding of over 1,200 mainly OEM suppliers deepens ZKH's role in consolidating fragmented MRO sourcing. This can support higher customer stickiness and future revenue growth.
• Private label GMV growth of 16.7% year over year and a plan to lift private label contribution from around 8% of GMV to approximately 30% increases exposure to higher margin products. This can support gross margin and earnings improvement if executed as planned.
• AI tools, including the Expert Linglong large model and AI Smart Workbench, are already processing 45 business process scenarios and have lifted customer service productivity by 42% and procurement productivity by 52%. This can support further operating expense ratio reduction and margin expansion.
• AI driven recommendation and classification engines, such as ProductRecom Agent that generated over RMB 100 million in incremental sales since late 2024 and lifted automated product classification from 11% to 31%, can support higher conversion, faster SKU onboarding and ultimately revenue and gross profit growth.
• Specialization in professional and industrial grade MRO categories, including a chemical product line supported by 13 specialized warehouses and in house last mile delivery, positions ZKH to capture more complex, higher value spend. This can support GMV mix improvement and potentially higher net margins.
• Early traction in serving Chinese manufacturers abroad across markets such as Thailand, Malaysia, Indonesia and Mexico, with management expecting the overseas business to reach breakeven in 2026, can add a new growth vector with improving earnings contribution over time.

Assumptions

This narrative explores a more optimistic perspective on ZKH Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming ZKH Group's revenue will grow by 16.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -2.0% today to 4.1% in 3 years time.
• The bullish analysts expect earnings to reach CN¥569.4 million (and earnings per share of CN¥3.02) by about January 2029, up from CN¥-173.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CN¥184.2 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 16.3x on those 2029 earnings, up from -22.5x today. This future PE is lower than the current PE for the US Trade Distributors industry at 21.7x.
• The bullish analysts expect the number of shares outstanding to grow by 1.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.93%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The business is only just approaching breakeven after several years of losses, with adjusted net loss at RMB 14.1 million in the third quarter of 2025 and a history of losses from RMB 910 million in 2021 to RMB 160 million in 2024. If expense ratios stop improving or cost reductions become harder to achieve, the company could struggle to reach or sustain profitability, which would weigh on net margins and earnings.
• GMV in the third quarter of 2025 was RMB 2.62b, which is a 2.3% year over year decline, and total revenue of RMB 2.33b has only returned to roughly prior year levels. If this pattern of slow revenue recovery and GMV pressure persists while the company continues to invest in AI, product capabilities and overseas expansion, revenue growth and future earnings could be weaker than hoped.
• Gross margin on a revenue basis sits at 16.8% for the quarter, only slightly different from 17% a year earlier, and part of the margin story relies on expanding private label contribution from around 8% of GMV to approximately 30%. If customers do not adopt private label products at the expected pace or if procurement savings slow, gross margin and overall earnings could fall short of expectations.
• The company is leaning heavily on AI tools such as Expert Linglong, ProductRecom Agent and the AI Smart Workbench to improve productivity and drive incremental sales. If the long term impact of AI on customer behavior, pricing power or cost savings is less favorable than current management expectations, the expected benefits to operating expenses, revenue and net margins may not fully materialize.
• Management is pursuing overseas expansion, including serving Chinese manufacturers in markets such as Thailand, Malaysia, Indonesia and Mexico and developing business in the US and Europe, while only expecting the overseas segment to reach breakeven in 2026. If international operations face regulatory hurdles, local competition or slower customer uptake, this could drag on consolidated revenue growth and delay improvements in overall earnings and margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for ZKH Group is $6.11, which represents up to two standard deviations above the consensus price target of $4.46. This valuation is based on what can be assumed as the expectations of ZKH Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $6.11, and the most bearish reporting a price target of just $3.72.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be CN¥13.8 billion, earnings will come to CN¥569.4 million, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of $3.49, the analyst price target of $6.11 is 42.8% 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.