China’s express and parcel market is probably vast and certainly opaque. Under significant influence of the state it has been characterised by a huge number of small, local providers and a few large national companies. One of the largest of these is ZTO Express, which has announced the imminent offering of Depositary Receipts (ADRs) on the New York Stock Exchange to the sum of US$1.5bn. This appears to be in great part driven by investors wishes to access greater liquidity for their investment in the company. Shareholders include British, Hong Kong and American private equity organisations.
ZTO Express claims a market share of 14.3% in the domestic express market, with the company having a revenue of US$916m in 2015. This year, the sector will move 27.9m parcels and is expected to see a compound annual growth rate of 23.7%, based on research by the Chinese government. The market has already seen a rise from 3.7bn items in 2011 to 20.7bn in 2015.
ZTO is highly profitable with a net income of US$200m, a margin of 21.9%. In terms of size it is second only to YTO Express whose market-share is only half-a-percent greater and who appear to have grown less quickly than ZTO Express.
The nature of ZTO Express’ business model is known as the ‘Network Partner’ model, essentially a customer order capture and logistics hub operation which relies on last-mile delivery from the many small courier companies across China, called ‘Tongda Operators’. It is to be suspected that whilst ZTO and others may well be investing heavily in new advanced sortation and consolidation hubs, the smaller couriers that it relies on may not be so sophisticated.
The nature of the express market in China is slightly different to that in the west. The e-commerce market is enormous in China, with the cost of contract logistics at a local level often making conventional retailing less competitive. This has triggered an e-commerce boom spearheaded by Alibaba which is a key customer for ZTO and its rival JD.com which has developed its own in-house logistics capabilities. According to ZTO, e-commerce transactions account for around 70% of all parcel traffic although parcels per head and fee per parcel are much less.
What strikes any outsider comparing ZTO Express to Western express companies is its profitability. At over 20% its profit margin is enormous. Presumably this is driven by the ability to access a very low cost base of ‘Tongda’ providers, however it also suggests quite a benign environment in terms of competition.
On 24th October 2016 Ti will be publishing its own research into express and small parcels markets across the world. The report will include bespoke market size and forecast data and analysis on a global, regional and country level split further into international and domestic markets. To pre-order today, with a special 20% discount, click here.
Source: Transport Intelligence, October 19, 2016
Author: Thomas Cullen
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