ZTO Express Stock: Chinese FedEx Could Surge on China Trade Deal

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ZTO Express Will Likely Surge on China Trade Deal

At this point, it’s unclear when a U.S.-China trade deal will materialize, as rhetoric continues to fly between the world’s two biggest economies.

The situation could escalate, putting more at stake for both countries before a deal is agreed upon. The aftermath has been far more devastating on Chinese stocks, as shown on the chart comparing the S&P 500 to the Shanghai Composite Index.

Chart courtesy of StockCharts.com

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But while there are concerns, there has also been some overdone selling capitulation in many Chinese large-cap stocks.

Consider the case of ZTO Express (Cayman) Inc. (NYSE:ZTO), a top-tier Chinese parcel delivery company that is partly owned by Alibaba Group Holding Limited (NYSE:BABA).

Even with a trade war, consumers and companies continue to transact in China. U.S.-China trade doesn’t simply come to a screeching halt.

Tens of billions of parcels are shipped annually in China, which makes the delivery market highly lucrative.

ZTO Express is the best of breed in China, since the delivery market is fragmented and there is no United Parcel Service, Inc. (NYSE:UPS) or FedEx Corporation (NYSE:FDX) to worry about. ZTO Express serves 95% of China.

ZTO has a market cap of around $12.8 billion, which is a much lower valuation than those of FedEx and UPS—$58.2 billion and $99.5 billion, respectively.

ZTO stock is down 21% over the past three months, well below the comparative moves in FedEx and UPS.

As a delivery and supply chain management company, ZTO Express uses innovative technologies including robots, hardware, and software.

On the chart, ZTO Express stock is drifting just above some major technical support at around $15.00, followed by $13.00–$14.00 representing the downside risk.

As far as its potential goes, ZTO stock could easily rally back above $20.00 (and much higher if the trade war ended). This gives traders a decent entry point.

Chart courtesy of StockCharts.com

My Bull Case for ZTO Stock

ZTO Express has steadily increased its revenue, earnings, and gross margins.

Revenue grew in three straight years, tripling from $632.6 million in 2014 to $1.9 billion in 2017.

Fiscal Year Revenue (Millions) Growth
2014 $632.6
2015 $968.0 53%
2016 $1,470 52%
2017 $1,930 31.4%

(Source: “ZTO Express (Cayman) Inc. ADR,” MarketWatch, last accessed October 15, 2018.)

Looking ahead, ZTO Express is estimated to ramp up revenue growth by 34.1% to $2.6 billion, followed by 25.4% to $3.2 billion—or as much as $3.5 billion—in 2019. (Source: “ZTO Express (Cayman) Inc. (ZTO),” Yahoo! Finance, last accessed October 15, 2018.)

These past and projected revenue growth rates for ZTO Express are outstanding.

The company also generates positive and growing earnings before interest, taxes, depreciation, and amortization (EBITDA), with growth from 2015 to 2017.

Fiscal Year EBITDA (Millions) Growth
2014 $106.1
2015 $261.0 146%
2016 $456.5 74.9%
2017 $605.1 32.7%

(Source: MarketWatch, op cit.)

After all of its expenses are accounted for, ZTO Express makes decent money, with earnings jumping from $0.09 per diluted share in 2014 to $0.65 per diluted share in 2017.

Fiscal Year Diluted Earnings Per Share Growth
2014 $0.09
2015 $0.28 214.1%
2016 $0.44 56.2%
2017 $0.65 49%

(Source: MarketWatch, op cit.)

Earnings are expected to rise to $0.81 per diluted share in 2018 and as high as $1.12 per diluted share in 2019. (Source: Yahoo! Finance, op cit.)

ZTO Express also generates positive free cash flow (FCF), with growth in 2015 and 2017.

Fiscal Year Free Cash Flow (Millions) Growth
2014 $73.4
2015 $170.4 132%
2016 $88.1 -48.3%
2017 $156.6 77.9%

(Source: MarketWatch, op cit.)

Analyst Take

My take on ZTO Express stock is bullish. Sure, there will likely be more short-term pain, but the strong fundamentals and growth make ZTO stock an intriguing special-situation stock.

Given the massive delivery market in China and the likelihood of a trade deal with the U.S., ZTO Express could eventually return some strong capital appreciation.