An Unstoppable Trend: Prospective Expansion Of ZTO Express After The Second IPO (NYSE:ZTO) | Seeking Alpha

2022-09-23 23:39:38 By : Ms. JoJo XU

According to 36Kr, ZTO Express acquired supermarkets in Tuxi, a tech firm providing technology and infrastructure support, with a tangible benefit to express delivery firms noticeable from December 28, 2020. This has helped ZTO Express to reduce hands-on procedures by integrating with intelligent operations. Additionally, new investments are driving ZTO Express to excel in business development.

As it gradually recovers from COVID-19, ZTO Express has invested in new equipment and technology to improve business informatization and operational intelligence. By the end of 2020, this express firm owned 30,000 service network stations, 90 transfer centers and over 3,400 transit lines, which covers 91.3% of villages and towns in China.

Upon its establishment, ZTO Express raised about USD 1.53 billion in three funding rounds. The latest fundraising was from Alibaba's logistics arm, Cainiao. This is a logistics platform that collaborated with ZTO Express in 2018 and holds 25% of the express firm's shares. As Cainiao is a leading enterprise in the express industry, they are actively seeking innovation and updating the industry with new technology. E-commerce platforms are classic examples of the express delivery industry's transformation.

In the express delivery industry, e-commerce has a high penetration rate and promotes the development of leading firms. At present, China's Internet users number approximately 900 million. In June 2020, there were around 750 million online shoppers. From 2019 to 2024, sales volumes were expected to increase from USD 63.4 billion to 158.4 billion, as more investors began to enter the market. Corresponding to this future trend, ZTO Express finished its second Initial Public Offering (IPO) on Hong Kong Exchanges and Clearing Limited (HKEX) in September 2020. This action helped the express firm raise another USD 1.25 billion. Compared with its first IPO on the New York Stock Exchange (NYSE) in October 2016, the fund reduced by USD 150 million, along with lower shares of 27.1 million units. Nevertheless, veering from the first to the second IPO, the express firms' market value grew from USD 12.1 million to USD 23.9 million.

For the past five years, the overall logistics industry accumulated investments of around USD 4.28 billion in China. During this period, because of the rapid high penetration rate of online shopping and technological innovations, such as smart lockers, the flow of investment reached its climax in 2018, accounting for USD 1.68 billion.

In 2019, the logistics industry had been gradually saturated from years of rapid development. Subsequently, its growth speed was slower and social investments were reduced. In terms of the growth rate, it dropped by 0.5% to 5.9% from last year.

However, extending to this year, e-commerce was not destroyed as much as brick-and-mortar businesses due to COVID-19. The pandemic increased demands on online shopping as people are becoming more compliant with social distancing rules. Furthermore, the emergence of intelligent logistics created a more convenient and satisfying shopping experience – one that has attracted more investors. Simultaneously, many express firms also seek innovative strategies and effective approaches to maximize delivery efficiency. For instance, ZTO Express continuously strives for developing new software to improve its retail technology while cooperating with the Chinese Academy of Sciences.

Due to the devastating aftermath of COVID-19, the express delivery industry decreased the average selling price (ASP) from February to November 2020. This trend indicates the occurrence of a price war. Under this circumstance, express firms' profitability is expected to go down while they will encounter challenges of raising capital in the future competitive market. In regards to raising capital, there are two primary factors: available funds and capital expenditures.

Firstly, ZTO Express overshadowed other top players by owning the highest amount of available funds in 3Q 2020. This advantage resulted from its exceptional ability to raise funds after the first IPO. To consider in detail, ZTO Express had raised around USD 2.83 billion as a top-ranking enterprise by the end of 2020. Also, 45.94% of these funds raised from the second IPO, further accelerating its development.

Secondly, major express firms started spending capital expenditures from 1Q 2020, as they had gradually recovered from COVID-19. Why are ZTO Express and SF Express leading players? Due to their cumulative investments. These two express delivery firms spent USD 1.1 billion and USD 1.14 billion in capital expenditures respectively. Moreover, benefiting from their achievements, they will further improve production capacity and capital optimization in the future. Despite investing in some supporting tech firms like Tuxi, ZTO Express will invest in transfer centers and heavy assets, such as field construction and automation equipment.

Since ZTO Express' first IPO, its market capitalization has consistently increased, with an average yearly growth rate of 30% for the last four years. Additionally, in September 2020, its second IPO further increased its market values. By the end of 2020, it reached USD 24.37 billion, following the trend of popularizing e-commerce and the thriving logistics industry, express firms will experience a dramatic growth – likely lasting until 2025. Meanwhile, benefiting from the ongoing e-commerce trend and outstanding ability to raise capital, ZTO express is expected to expand its market capitalization within the next five years.

In our previous article on Seeking Alpha, we called out ZTO as an undervalued stock. We remain bullish on the company's business model and market potential.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.