Eight analysts have increased their EPS estimates for this Chinese internet company in the past 30 days.
ZTO Express (Cayman) Inc. (ZTO)
From Cabot Emerging Markets Investor
China’s internet and e-commerce industries, both of which continue to show explosive growth and scalability, are quite amazing. According to the China Internet Network Information Center, China’s internet users breached 900 million in December and there are 610 million online shoppers, 592 million of whom use mobile phones to shop.
Obviously, when thinking of the Chinese Internet business, most minds go right to the big players like Alibaba or Tencent. But one of the key cogs in the industry’s continued boom is ZTO Express (Cayman) Inc. (ZTO), which is a cash machine that’s grabbing market share from rivals and scaling up deliveries, revenues and earnings at a rapid clip.
Based in Shanghai, ZTO has grown its market share for China delivery services from 7% in 2011 to over 17% last year. During this same period, its parcel deliveries have grown at a compounded annual rate of 63%. And it’s reinvested heavily, building cash flow that has allowed it to build out a gigantic network of 83 hubs and 30,000 service outlets.
As the firm has gotten bigger, that growth has slowed a bit, but not much—in the third quarter (the most recent report available), the number of parcel deliveries increased 37% to 8.5 billion.
ZTO’s unit costs are declining from deliveries to traditional merchants, e-commerce sites and online sellers through a proprietary tracking system, a state-of-the-art transportation management system and more than 5,000 trucks, as well as hundreds of business partners.
ZTO’s reach now covers more than 96% of China’s cities and is a key player in the success of the country’s e-commerce giants. And realizing how key ZTO is, some of those giants have stepped up to the plate—in the middle of last year, Alibaba led a consortium of firms that invested $1.4 billion in ZTO in exchange for a 10% stake.
Back to the overall industry, China’s online retail market was approximately $1.1 trillion last year. And according to Forrester, a leading market research firm, even with the country’s growth slowing, the value of that market will compound 8.5% a year over the next three years, hitting $1.8 trillion by 2022. Indeed, only 38% of China’s population currently shops online, yet tens of millions are joining the middle class each year.
And this isn’t just a China story either, as ZTO also serves foreign customers through partnerships with many international express delivery companies.
In the third quarter, ZTO posted a 48% increase in earnings on a 35% increase in sales. And ZTO’s board has also authorized a new $500 million share repurchase program that will run through early 2020. Analysts see U.S.-dollar based earnings up around 20% both this year and next.
Despite these impressive growth and profit numbers, ZTO stock currently trades at only 19 times trailing earnings, or roughly in line with the S&P 500. In fact, the stock currently isn’t much above its IPO price from back in October 2017.
Recently, though, ZTO stock is showing signs of life, rallying back toward its mid-2018 high on solid volume. The next big update will come out next Tuesday, March 12, when Q4 earnings results will be released.
In short, ZTO is a well-managed, fast-growing transportation company set to generate huge profits despite China’s slowdown. With shares undervalued, expect the stock to edge up and then move higher when a formal trade agreement with the U.S. is announced. BUY A HALF.
Carl Delfeld, Cabot Emerging Markets Investor, www.cabotwealth.com, 978-745-5532, March 7, 2019