ZTO Express (Cayman) Stock

ZTO Express (Cayman) Inc. operates as an express delivery company in the People's Republic of China (the PRC or China). The company through its network and together with its network partners, provides domestic and international express delivery services supplemented by other value-added services. The company has developed an extensive and reliable delivery network in China.

As of December 31, 2022, the company’s network infrastructure consisted of 98 sorting hubs with 458 automation lines, over 3,750 line-haul routes serviced by over 11,000 self-owned line-haul vehicles, and approximate 5,900 direct network partners operating over 31,000 pickup/delivery outlets and over 80,000 last-mile posts. The company’s network covers over 99% of cities and counties in China.

Service Offerings

The company mainly provides express deliveries in China of parcels weighing under 50 kilograms with expected delivery time ranging from 24 to 72 hours. The company’s delivery time has improved over time.

The company provides domestic express services, including intra-city delivery, inter-city delivery, customized one-stop express delivery solution for key accounts, cash-on-delivery service, alternative address pick-up and delivery, proof-of-delivery collection, parcel interception service, reverse logistics, and other services, as well as Hong Kong/Taiwan door-to-door express services. It offers international express services to the key overseas markets in cooperation with business partners.

Other Logistics Services

Building on its core express delivery business, the company strives to become an integrated logistics service provider. The company is expanding its service offerings with a goal to build an ecosystem featuring express delivery, less-than-truckload, cross-border, warehousing, aviation, commerce and more. For example, the company provides less-than-truckload (LTL) logistics services with a focus on heavy cargo and international express delivery services in Southeast Asia, Africa and other countries; it also provides customers with integrated logistics solutions for warehousing, distribution and transportation. Furthermore, the company provides freight forwarding services through the acquired business of China Oriental Express Co., Ltd. and its subsidiaries, which is a major freight forwarding and international logistics services provider in Hong Kong and Shenzhen. Furthermore, the company is also expanding into air cargo business.

Network and Infrastructure

The company’s network consists of its directly operated core sorting hubs and line-haul transportation network; and network partner-operated outlets, as well as last-mile posts, across China.

Sorting Hubs

The company’s sorting hubs are connected by the line-haul transportation network it operates. Each sorting hub collects parcels from outlets within its coverage area, sorts parcels according to their destination and dispatches them to the appropriate destination sorting hub. As of December 31, 2022, the company operated 87 sorting hubs and its business partners operated 11 sorting hubs.

The sorting hubs operated by the company’s business partners are located in remote areas in China and it works closely with independent third-party owners to effectively operate those hubs. In addition to the sorting hubs, its network partners also operate sorting facilities in certain remote areas in China.

65 of the sorting hubs operated by the company are located on premises it owns, for 36 of which it also leases additional areas, and 22 of the sorting hubs operated by it are located on leased premises. The company plans to make long-term investments in land and facilities on self-owned premises to support the stability of its operations. From time to time, the company also provides temporary warehousing services to certain key account customers to store their products close to their target demographics.

The company has continuously adopted new technology solutions in automation hardware and software to enhance the efficiency of its operations. For example, the company adopted telescopic conveyor belts for loading and unloading trucks in 2015, as well as fully integrated dynamic-weighing machines capable of measuring the dimensions and weight of parcels simultaneously at a high speed without having to stop the flow of packages. In addition, the company works with technology companies and academic institutions to customize and upgrade existing design concepts. For example, the company successfully collaborated with the Chinese Academy of Sciences in the Academy’s development of several variations of automated sorting equipment since 2015. The company has also developed and continuously re-engineered sophisticated software (including data-enabled algorithm, real-time analytics and recalibration) to support high-speed sorting in order to ensure fast and reliable package data capturing and dispatch, and to reduce sorting errors and costs of re-work. In particular, the company utilizes an image-based learning algorithm in its safety inspection of packages to recognize prohibited illegal items during its inspection process and to reduce human error.

Line-Haul Transportation Network

The company connects its sorting hubs with approximately 3,750 well-planned line-haul routes. The company’s line-haul transportation network is serviced primarily by its own fleet, and certain independent third-party vehicles. The company controls the route planning and vehicle dispatch of its entire line-haul transportation network.

As of December 31, 2022, the company owned fleet consisted of over 11,000 trucks, of which approximately 9,700 are high capacity 15 to 17-meter-long trailer models. The company also contracts other independent third-party transportation companies to fulfil additional capacity needs, most of which are single trip transportation when it foresees a low return trip truckload. The company carefully reviews the operating history, fleet condition, reliability and other comprehensive criteria of the bidders to select only suitable providers.

The company has established a systematic data and technology driven program to optimize trailer designs to reduce costs, as well as enable digital tracking for real-time analytics of its vehicles. Further, the company also helped develop improved vehicle parts and patented trailer designs. For example, the company’s proprietary patented design of curved aluminum trailer is not only lighter but also more aerodynamic compared with traditional square-shaped steel containers. The higher capacity of these trailers (145m3 rather than 127m3) and lighter weight (6,700kg/ea rather than 9,000kg/ea) contributes to the increased fuel economy of the company’s trailers and further contributes to the reduction in transportation cost.

The company assesses incoming volume (including maximum stress level) and simulated route planning (including road conditions) to inform its choice between deploying its own line-haul resources or supplementing capacity with third-party transportation services. The company combines the programming interface of third-party map applications with its big data of parcel traffic and volume to feed its intelligent service routing algorithm to model the rate and direction of parcel flow, dynamically predict future capacity demands, and make adjustments in allocation of personnel and transport resources.

Pickup and Delivery Outlets and Last-Mile Posts

The pickup and delivery outlets are all operated by the company’s network partners and are not owned by it. The company’s network partners primarily provide pickup and last-mile delivery services through the outlets managed by them, although certain larger outlets also have regional sorting and dispatching capabilities. Each outlet has its own designated geographical scope of operation and can generally only take orders originating within that area. The company’s network partners also generally arrange the transportation between pickup/delivery outlets and its sorting hubs. As of December 31, 2022, the company’s network had over 31,000 pickup and delivery outlets nationwide, covering over 99% of China’s cities and counties.

The company has encouraged its network partners to invest early and secure physical presence with last-mile capabilities and consumer access by establishing last-mile posts. The company has over 80,000 last mile posts across China. A last mile post is on average a 35-60 square meter space located near residential areas or office buildings or on university campuses where the couriers can leave delivery packages for recipients to pick up instead of delivering in person.

Network Partner Model

The company’s network partners own and operate the pickup and delivery outlets under its brand and form an important part of its network system.

As of December 31, 2022, the company had approximately 5,900 network partners with whom it has directly entered into agreements prescribing the terms and conditions of their operations of pickup and delivery outlets under its brand. The company refers to such network partners as its direct network partners. The company’s network partners pay it network transit fees for the express delivery services it provides to them. The network transit fees that the company charges its network partners for the express delivery services it provides to them primarily consist of a fixed amount for a waybill attached to each parcel and a variable amount per parcel for sorting and line-haul transportation based on parcel weight and route distance. The company has the right to impose monetary penalties on its direct network partners for failure to adhere to the terms of the agreements. A direct network partner is also required to place a deposit with the company as a performance guarantee. The company has authorized its direct network partners to conduct their express delivery business exclusively under its Zhongtong or ZTO brand and mandate the unified application of its logos on outlets, personnel uniforms, transportation vehicles and packaging materials.

Each of the company’s direct network partners is authorized by it to operate within a designated area, the size of which ranges from a township to an entire province. Depending on the size of, and the business volume in, their respective authorized areas, many of the company’s direct network partners subcontract a portion of their business to third parties with its consent.

The company’s Zhongtian system provides the technological infrastructure for the management of its network partners. The Zhongtian system consists of the company’s operational management system, network management system, settlement system, finance system and other integrated systems and mobile apps connecting its network partners. In particular, the company’s Zhongtian system tracks each delivery order and calculates the network transit fees payable to it, and the last-mile delivery fees payable to its direct network partners and, where applicable, its indirect network partners. Starting from May 2018, the company uses Alipay, in addition to bank cards, to handle the settlement of payments from its network partners to it and among its direct network partners. All of the company’s direct network partners may use Alipay accounts or bank cards through its Zhongtian system to settle network transit fees, waybill fees or last-mile delivery fees with it. The company requires direct network partners to make prepayments from their respective Zhongtian accounts to its ZTO Alipay account or bank account through its Zhongtian system. The company’s direct network partners’ Zhongtian accounts reflect the prepayment balance, which will be debited upon each settlement of payment. The prepaid amount is used to settle network transit fees and waybill fees from the company’s network partners to it and settle last-mile delivery fee from it to direct network partners.

All of the company’s direct network partners and most of its indirect network partners work with it exclusively. A small number of the company’s indirect network partners may process packages for other express delivery companies. This is typically limited to situations where an outlet is located in a remote or isolated area or newly established markets. Such exceptions to the company’s exclusivity requirement are necessary in order to support the outlet’s start-up volume.

The company controls the qualification of new network partners and it provides extensive ongoing training to its network partners. The company also periodically reviews the performance of its network partners on parcel volume, local market share, service quality and parcel safety/security scores. The company considers the conditions and forecast of the local market to set guidance for those indicators. The company also sets guidance and review the performance of certain pickup and delivery outlets with large parcel volume. For its direct network partners at the provincial level, the company provides fee discounts to those who significantly outperform the performance targets that it sets.

Under the agreement with the company, the network partner also has the right to unilaterally terminate the agreement within seven days from the date of execution of the agreement with notice to it; provided that, if the network partner has started to use its network resources, has begun to provide services to customers, or has exercised other major rights under the agreement, the network partner shall not terminate the agreement accordingly. The network partner’s major rights under the agreement are entitlements to the following products or services provided by it: electronic documents or software in relation to enterprise management system; guidance on the use of express delivery networks, business operation model and employee training; sufficient, continuous and quality-guaranteed material supply; advertising support; and network transit service.

The company provides its network partners latitude in their pricing decisions. The company also provides financial services to qualified network partners. The company selects qualified network partners based on certain criteria set by it, such as having legal and stable income or source of income and engaging in operation activities that are legal and meet the national industrial policies and requirements. To provide such financial services, the company enters into relevant agreements with qualified network partners under which the material terms (e.g. loan amount, maturity date, guarantee or pledge and event of default (as applicable)) of such financial services are stipulated. The company has obtained the requisite business licenses and/or approvals under relevant PRC laws and regulations in order to provide such financial services to qualified network partners.

Customers

The company’s direct customers are its direct network partners, who, along with its indirect partners, own and operate pickup and delivery outlets. The company provides its direct network partners with access to its line-haul transportation and sorting network, which form the infrastructure of their and its indirect partners’ express delivery services. In addition, the company directly serves some enterprise customers, including vertical e-commerce and traditional merchants, in connection with the delivery of their products to consumers.

Together with its network partners, the company mainly serves e-commerce merchants and other express service users as its end customers. A significant portion of its end customers are merchants on China’s e-commerce platforms. The company’s enterprise customers are typically larger, nationwide brands with customized requirements for express delivery services. For certain enterprise customers, the company provides direct pickup services without going through the pickup outlets of its network partners. The company collects the full amount of delivery service fees from its enterprise customers and pays a portion of these fees to the delivery outlets of its network partners for last-mile delivery services provided by them.

Customer Service

The company’s high-quality customer service enhances its customer loyalty and brand image. The company’s network partners directly interact with its end customers, and it provides ongoing training and conduct regular performance reviews to ensure they provide quality customer services.

The company also operates a call center network providing real-time assistance during business hours, seven days a week. The company’s automated system continues to respond to inquiries outside of business hours and forwards complicated inquiries to its live call center representatives for further handling during business hours. The company’s call center network is localized with branch offices in over 32 provinces in China with mostly local hires to leverage their local knowledge. All branches can be reached via a unified number and use a centralized call system and database. The company’s call system automatically directs incoming calls to the local branch near the caller’s location for localized handling. The company has over 700 call center representatives who adhere to the same customer service standards nationwide and their local knowledge adds to its customer service effectiveness. The company provides regular trainings to its representatives and periodically review callers’ level of satisfaction with the service they received from it.

Intellectual Property

As of December 31, 2022, the company owned over 200 computer software copyrights in China for various aspects of its operations, maintained over 600 trademark registrations and over 200 patents inside China. As of December 31, 2022, the company had registered nine domain names, including zto.cn, among others.

Competition

The company competes primarily with leading domestic express delivery companies, including YTO Express, STO Express, Yunda Express, J&T Express, SF Express, JD Logistics and the express delivery services provided by China Post, such as EMS.

History

ZTO Express (Cayman) Inc. was founded in 2002. The company was incorporated under the laws of Cayman Islands in 2015.