ZTO Express: The FedEx of China?
Singles’ Day, a one-day online shopping extravaganza in China, was on November 11, and what began as an idea in a Chinese university back in 1993 has grown to become the most significant retail day of the year, easily overshadowing Black Friday and Cyber Monday combined.
Alibaba Group Holding Limited (NYSE:BABA) recorded $17.8 billion in sales on Singles’ Day in 2016. In 2017, it recorded sales of more than $25.0 billion. (Source: “Alibaba’s Singles’ Day Goes Global With Record $25 Billion in Sales,” Bloomberg, November 12, 2017.)
In fact, over 26 billion parcels are shipped in China annually, and someone has to deliver them.
China’s parcel delivery segment was fragmented, but it has seen some market leaders surface due to the massive growth of online sales.
One of the top parcel movers in China is ZTO Express (Cayman) Inc (ADR) (NYSE:ZTO), with almost $12.8 billion in market cap. It is the largest non-state parcel mover in the country. The company serves an astounding 96% of the country, and it ships internationally.
ZTO Express is a major adopter of technologies in its supply chain management and delivery solutions, including robots, hardware, and software.
Remember, there is no United Parcel Service, Inc. (NYSE:UPS) or FedEx Corporation (NYSE:FDX) in China, and I doubt they will be able to operate there unless it’s via a joint venture. That means a company like ZTO Express can flourish.
ZTO Express stock has been on a nice rally, delivering a 49% gain year-to-date, easily outperforming the S&P 500, along with the 17% move by FedEx and 1.42% decline by UPS.
But, while ZTO stock is approaching its high of $18.45 set in October 2016, the stock just broke out on massive tailwinds from China’s online spending madness.
As long as Chinese consumers continue to spend and shop online, ZTO Express will grow and expand its dominance in the country’s delivery market.
The Bull Case for ZTO Stock
Just take a look at the revenue growth.
Revenues grew 55% in 2015, followed by an even better 61% jump to $9.79 billion in 2016. Along the way, gross margins expanded from 29% in 2014 to 35% in 2016.
The revenue growth rate is expected to moderate to 29.5% and 27.49% in 2017 and 2018. (Source: “ZTO Express (Cayman) Inc. (ZTO),” Yahoo! Finance, last accessed November 10, 2017.)
The decline is not a surprise, given that this generally occurs as companies grow their revenue base.
Now take a look at the comparative revenue growth rates between ZTO Express, FedEx, and UPS; you’ll see the superior growth for ZTO stock.
Revenue Growth Comparisons
ZTO Express is also profitable, with earnings growing from $406,000 in 2014 to almost $2.1 million, or $0.44 per diluted share, in 2016. The positive trend is expected to continue, with a consensus $0.62 and $0.81 per diluted share in 2017 and 2018, respectively.
The balance sheet has $1.6 billion in net cash and strong working capital, which will enable ZTO Express to invest in technologies and expand via acquisitions.
The fundamentals support a bull case for ZTO stock that could drive long-term price appreciation through the acceleration of online spending.
The one-year stock price chart displays a bullish rounding bottom supported by a strengthening relative strength indicator (RSI) and bullish moving average convergence/divergence (MACD).
Chart courtesy of StockCharts.com
ZTO stock staged a recent breakout at around $16.00, which began with a bullish golden cross in May. Price support is found down around $13.50.
The key for ZTO Express is to drive up its earnings growth rate, which, coupled with its strong revenue growth, could afford long-term investors some great returns.