Good day. Welcome to the ZTO Express third quarter financial results conference call on November 17, 2021. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Sophie Li, Director of Capital Markets. Please go ahead.
Thank you, operator. Hello everyone, and thank you for joining us today. The company's results in the investor relations presentation were released earlier today and are available on the company's IR website at ir.zto.com. On the call today from ZTO are Mr. Meisong Lai, Chairman and Chief Executive Officer, and Ms. Huiping Yan, Chief Financial Officer. Mr. Lai will give a brief overview of the company's business operations and highlights, followed by Ms. Yan, who will go through the financials and guidance. They will both be available to answer your questions during the Q&A session that follows. I remind you that this call may contain forward-looking statements made under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
Such statements are based on management's current expectations and the current market and operating conditions, and relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict, and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding this and other risks, uncertainties, and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events, or otherwise, except as required under law. It is now my pleasure to introduce Mr. Meisong Lai. Mr. Lai will read through his prepared remarks in their entirety in Chinese before I translate for him in English. Meisong, please.
[Non-English content]
[Non-English content]
Thank you, Chairman. Now please allow me to translate first. Hello everyone, and thank you for joining us today. In the third quarter of 2021, ZTO completed 5.7 billion parcels and grew volume 23.3% to secure 20.8% market share. Since second quarter this year, we paid more attention to the quality of our volume growth by focusing on profitable parcels, continued to drive for cost productivity, and we achieved RMB 1.15 billion of net income. On a comparable apples-to-apples basis, our net income increased 13.7% year-over-year. Steady and fast development of the express delivery industry has relied on the long term guidance and support by relevant government agencies. Market-driven healthy competition has benefited from continuous regulatory attention. Radically low price approach not only disrupts market order, but also hinders sustainable growth.
Constructive macro steering provided assurance to a sustained growth and development of the industry. In an orderly competitive environment, ZTO put more emphasis on profitability while maintaining quality of services, increasing market share, and maintaining smooth operations throughout the network. Looking at the industry dynamics, second and third tier express delivery companies have all but exited, and the top group are dividing with clearer distinctions. Competition has been cooling off and returning to sensibility, and it is hopeful that industry pricing will gradually stabilize by 2022. At the same time, we have observed deceleration in the growth of e-commerce. The thesis in front of ZTO is how we can maintain our industry lead and growth, and particularly achieve the transformation from quantity to quality.
Our consistent strategy is to maintain high quality of customer services and achieve targeted profits while expanding our market share. At different stages of our business development, our emphasis and execution must be coherent to achieve intended balance among the three priorities. On capacity and infrastructure development, because the nature of express delivery business is scale and efficiency driven, we will continue to expand our capacity investments so as to improve capability across all four stages of parcel flow, meeting increased volume demands. In the meantime, we will support and collaborate with our network partners to develop their capability, reduce number of sortations, improve efficiency, and achieve integrated three-layer throughput that is direct parcel flow between origination and destination sorting centers or outlets.
We shall accelerate the development of our last mile post network, expand and penetrate into wider range of localized commercial opportunities so as to improve connectivity with consumers and customers, all the while of reducing last mile costs. On profitability and business development.
Adhering to proper cost coverage and effective resource allocation, we will design our network policy with precision, transparency, and fairness, so as to increase network partners' earnings, hence promote trust and confidence. Meanwhile, we will pay attention to the evolving needs of our customers and expand our products and services with resource-supported fulfillment guarantee. We will speed up the development of ecosystem businesses such as inter-city trucking, cloud warehouse to provide comprehensive, customized or individualized solutions to our clients' needs, improving brand value and the reputation. On operations and network management, we will rely on information technology to improve operational efficiency. Digitization and data analytics will ensure efficiency improvements throughout the entire process. We will pay close attention to team building and develop comprehensive. Our core teams of managers and operators are becoming younger and technology-savvy.
We will deepen our management reach for the network, including the quick end delivery end. We will support stability and development of our network partner by providing support from varied aspects, including simplified regulations and a shift towards positive enforcement versus heavy fines. Our policies will be fair and transparent, which will help instill a sense of belonging and achievement. Challenges and opportunities go hand in hand. Express delivery business will continue to grow at a medium to high speed, which presents tremendous potential. We remain confident on the long-term growth prospects of this industry. Being the best of ourselves, executing diligently and well, we believe we can significantly extend our corporate earnings while attaining greater volume and higher market share by relying on superb capacity, operational excellence and efficient network synergies. Now let's have Ms. Yan to take us through our financial results.
Thank you, Chairman. Thank you, Sophie, and hello to everyone on the call. As I go through our financials, please note that unless specifically mentioned, all numbers quoted are in RMB and percentage changes refer to year-over-year comparisons. Detailed analysis of our financial performance, unit economics and cash flow are posted on our website, and I'll go through some of the key highlights here. In the third quarter, ZTO achieved profitable volume growth. We grew parcel volume by 23.3% to 5.7 billion, secured a leading market share at 20.8%, and widened our profit lead with RMB 1.15 billion adjusted net income. Normalized for the one-time 2019 income tax refund received in 2020 for a wholly owned subsidiary, adjusted net income increased 13.7% on a comparable basis.
Total revenue increased 11.3% to RMB 7.4 billion. ASP for the core express delivery business declined 7.2% or RMB 0.09, which consisted of approximately RMB 0.05 decrease due to normal parcel weight drop and RMB 0.04 related to normal volume incentive. Average weight per parcel declined 5.8% to approximately 0.98 kg. The cost of revenue was RMB 5.8 billion, which increased 10.9%, a much lower rate against 23.3% volume growth. Overall, unit cost of revenue for the core express delivery business decreased 7.3% or RMB 0.07. More specifically, line haul transportation costs per parcel decreased 5.9% to RMB 0.50, and unit sorting costs decreased 2% to RMB 0.29.
Gross profit increased 12.7% to RMB 1.6 billion as a combined result of increased volume, decreased ASP, partially offset by unit cost efficiency. Gross profit margin rate increased 0.2 points to 21.2%. SG&A increased 4.2% to RMB 389 million, driven by increase in compensation and benefits and office expenditures. SG&A expense as a percentage of revenue dropped 0.3 points to 5.3%. Net other operating income mainly consisted of tax rebates, government subsidies, including RMB 20 million this quarter for charitable donation made to Zhengzhou Red Cross to aid the recovery from heavy flooding in Henan province. Income from operations increased 16.4% to RMB 1.4 billion.
Associated margin rate increased 0.8 points to 18.4%. Operating cash flow grew 20.7% to RMB 1.8 billion, as capital expenditure totaled RMB 2.6 billion. As we go into the final stages of our current investment cycle, the level of capital spending is expected to level off and begin to decrease. As Chairman Lai explained earlier that we intend to recalibrate our strategy priorities to achieve quality growth. We expect net income growth will exceed meaningfully over revenue growth, accordingly driving stronger cash generation and enable us to resume cash flow position within two years. Now turning to our guidance. Based on current market conditions, the company revises its annual guidance.
Parcel volume for 2021 is expected to be in the range of 22.2 billion- 22.7 billion, representing a 30.6% to 33.5% increase. These new estimates represent the company's current view, which are subject to change. This concludes our prepared remarks. Operator, please open the lines for questions. Thank you.
We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. In the interest of time, please limit yourself to two questions. Also, please translate your questions and ask in both English as well as Chinese. At this time, we will pause momentarily to assemble our roster. Our first question will come from Thomas Chong with Jefferies. Please go ahead.
[Non-English content]. T ranslate your questions. Thanks, management, for taking my questions. I have a question regarding the competitive landscape after we have been seeing J&T and BEST M&A deal. Given that the combined company would be bigger going forward, I just want to get a sense about would there be any change in terms of our strategy with the new player or I would put it this way on a combined bigger company challenge our position. [Non-English content]. My second question is about the earlier management comments with regard to earnings growth to be faster than revenue growth. Just want to get a sense about how this would translate into ASP, cost per parcel as well as the volume trend over the next couple of years. Any qualitative color would be great. Thank you.
[Non-English content]
Thank you, Chairman. I will first translate and I'll supplement answers. First of all, as you clearly pointed out the market dynamics is becoming much clearer to us. Very specifically, the top players are gaining more on not only volume concentration, but also profitability. Secondly, the entrance or the likelihood of new entrants similar to J&T is unlikely. The fact that the two combined together, this is the part that I supplement, the J&T and BEST combination. Now, first of all, theoretically the integration will present some challenges. Two, we don't believe this is a clear one plus one greater or equal two type of scenario. These two businesses are very different from the rest, profitability-wise, infrastructure-wise. So we think for them to successfully complete their integration, it will take some time, it will take patience from capital.
At the same time, the rest of the top players will continue to leverage on their own strengths and perhaps even taking advantage of some of the fallout of the volume that may be not able to be consumed or absorbed by the integration. In the meantime, the entire market is also going to grow. Even though we did observe slowdown in the e-commerce development. In terms of the second part of the question, very specifically, we talked about the earnings growth will be expanding much faster than the revenue growth. Now talking about ASP that you specifically asked. This quarter, our ASP decline is driven by the normal development of the market or of the packages.
Also, if I may explain a little bit more on the normal volume incentives, this policy has been in place for many years, where every year incremental volume will receive a small incentive. So as we grow our businesses, there will be some volume driven ASP impact. Now with that said, as we grow our volume even faster and as our market competition start to become more sensible, price will start to stabilize in starting as early as next year. We believe ASP increases will come soon. Cost per parcel, we have been gaining on cost efficiencies.
Going forward, we also are going to develop what we mentioned, the tri-layer integrated throughput will fundamentally change our operational cost structure and deliver much greater cost efficiencies. That is with these understanding, we presented our confidence that the earnings growth will be at a much faster pace than the revenue growth. For 2021, we expected our overall adjusted net income to grow no less than 30% compared to last year. For next year, the growth will also be no less or even slightly higher than this year's net income growth. Hope that answers your question.
[Non-English content]. Thank you.
Our next question will come from Jianxin Lu with CICC. Please go ahead.
[Non-English content]
Thank you, management, for taking my question. I have two questions. First is about CapEx guidance. As you mentioned just now, for the next year, we will see CapEx will be taper or start to decrease. I want to know about the exact guidance about CapEx next year. The second one is about VAT super deduction. How do we expect that to forecast for next year? Thank you.
Thank you for your question. First of all, the capital spending. Our spending is largely towards acquisition of land use rights. About 70% of those are land use rights and facility constructions. About 15% relates to our transportation capabilities, large vehicles or replacement of those. Then the rest will be for other infrastructure, including technology and so on and so forth. This structure has been the case, has remained as such for the past few years. Now, the larger portion of the investment that goes towards land use rights and also facility construction are not just for our express core businesses. We are intending to utilize and maximize the utilization of these facilities for our ecosystem development, including, for example, LTL business, cloud warehouse business, as well as cold chain business that just came online.
Capital spending for this year is around total RMB 9 billion, and then we think next year will be no more than RMB 9 billion, perhaps even reducing in that total. Second question, the VAT super deduction. As it expires, we think that by the end of this year, the super deduction policy will go away and that's the end of that positive impact.
Okay. Thank you.
Thank you. You're welcome.
Our next question will come from Ellie Jiang with Macquarie. Please go ahead.
Let me translate myself. Thanks, management, for taking my questions. As we see, ASP continues to climb back positively for the industry. How do we think about the overall industry pricing trends in 2022? The second question is the potential impact on our fourth quarter operations with regards to the recent electricity shortage and COVID impact. Thank you.
If you look into the structure of the ASP, you'll notice that some of the peers included the delivery fee in their ASP. On an apples to apples comparison basis, ZTO ASP in that regard also increased. For next year, we think that we will be in sync with the market. As we talked about earlier, the total price competition has become more and more sensible, and specifically for what we call incremental delivery fee of RMB 0.10 that was pretty widely implemented by the industry. The ASP increase is mainly driven by that. On a comparative basis, if we included the delivery fee, our ASP would also increase accordingly.
Your second question relate to the power shortage as well as some of the impact on the regional outbreak of COVID. We have a significantly large network, and also in the meantime, we have very specific on-the-ground team working diligently on addressing some of the risks and issues that brought about by the COVID. So far there hasn't been any significant issues, and we, with the strength of large network, impact here and there are minimal without causing systemic issues. Hope that answers your question.
Very clear. Thank you.
Thank you.
Thank you very much.
Our next question will come from Baoying Zhai with UBS. Please go ahead.
[Non-English content]. My question is quite simple, just to confirm the fourth quarter earnings guidance is no less than 30% year-on-year growth. How about next year?
Thank you for your question. Yes, it's based on our current view. Yes, we are already very much into this quarter. We expect our earnings growth for this quarter to be no less than 30%. This is a trend that has been slowly establishing since the second quarter when we refocused our business priorities to achieve greater quality growth, driving out not profitable volume going after the profitable one. Next year, consistent with our strategy this year, the earnings growth will be no less than the revenue growth, and we think a 30%-35% range is a safe bet.
[Non-English content]
Our next question will come from Yaya Zhang with PH Capital. Please go ahead.
Hi management, thanks for taking my question. My question is mainly about your market share. Firstly, can you comment about the overall performance during the Double 11 Shopping Festival? We know the consumption demand may be a little weak this year while the demand also tends to be more diverse to different platforms. Can we assume those are the positive impacts for ZTO to capture the market share? My second question is about the competition and market share. We know J&T is buying back China's express delivery business. Can you comment about the impact of the acquisition? Will it change the whole competitive landscape in China's express industry? Let me translate myself. [Non-English content].
[Non-English content]
Uh, let me translate for Chairman. The Double 11 that we just experienced, some of the figures from November 1st to the 14th c umulative order reached 1.22 billion. Cumulated volume was 1.19 billion. During the peak days, order volume reached 180 million. The daily pickup volume reached 130 million. The delivery volume reached 110 million. Across the whole globe, if you may, we are the only company that achieved all three metrics over 100 million. Specifically also the quality of services in the days on the third to the tenth, according to Cainiao's indices, we are number one, not only among the Tongda but across the entire industry. These figures represent or are evident to the fact that we have significant advantages in terms of infrastructure, operational excellence, network stability, capability, as well as our financial strength.
With that, if I may lead into the question that you asked about the joint or the M&A activity that took place. Before J&T entered into the marketplace, we have a plan of growing our market share consistently to reach 25% goal in the next two to three years. With J&T coming in, and particularly its business model, i.e. low cost, low price driven and loss making, it did disturb our pace in achieving consistent market share gain. Also with the attention and interference, or intervention, I should say, positively speaking, from the government official to address the front-line operators' interests in protection of their rights.
We have shifted our execution level of strategy to focus more on profitable volume, and that is why we didn't let go of the price, we didn't go after loss-making volume, and then at the same time, wasn't able to obtain that six to seven point that was gotten by J&T due to its low price approach. Normalized wise going forward, we believe the quality focused growth will allow us to again rely on our significantly better competitive advantage and gaining the share that is coming through through organic and inorganic growth. One point to make is that we are able to see the consolidation that is taking place in the market dynamics. Going forward, the stronger, i.e.
Capacity-wise, capability-wise, and the financial strength-wise, those larger ones and leaders will continue to pull away from the rest. We are expecting the number of players to gradually reduce as the bigger ones get bigger and get stronger and more profitable. I hope that answers your question.
Yeah, very clear. Thank you.
Thank you.
Our next question will come from Peter Chen with Green Court Capital. Please go ahead.
[Non-English content]
First of all, the question is. Go ahead. The question first of all for those that are English speaking on the line, the question regards to our ecosystem. Really it's asking the core business is developing quite well and what's happening in the ecosystem arena, what are our second growth trajectory, where do they come from? The Chairman mentioned that the growth plan of our ecosystem has been long in place since 2015. We recognize that the future competition of the businesses or the industry will be on a comprehensive level, comprehensive meaning not just the express delivery business, which currently is largely dependent on e-commerce packages. Since 2015, we started to grow out of the current core businesses, the international business, the LTL business, less than truckload, i.e., and the cloud warehouse business, which provides in warehouse processing as well as integrated delivery services.
These are natural extensions of our core businesses because as we invest utilizing capital in our infrastructure, we began to shift from solely invest for express business to investment for comprehensive logistic capabilities. Hence currently we have all these nine altogether ecosystems, separate segments developing at different stages, all are able to utilize the resources, either it's hard physical resources or assets, as well as customers, market, products and services.
As we build our comprehensive smart logistics parks, we are seeing that the product and services goods are aggregating and redistributed in a much more efficient way because we are closer to each other, the facilities are able to serve on a more responsive basis, and the utilization of our resource and investment, or in some cases, multiple uses, and also at the same time, driving synergies across business segments is the way that we go about developing our ecosystem. As we said earlier, they are developing at different stages, based on the needs of our customers and becoming more problem solving and solutioning. Going forward, we will have one by one these businesses coming online and contributing greater share of our total economics in the next five to 10 years.
[Non-English content]
Thank you.
Our next question will come from Tian Hao with CH Capital. Please go ahead.
[Non-English content]. In the last more than 20 years, the express industry, you know, grow together with China's e-commerce. However at today's stage, the high growth from e-commerce is that, you know, it's over. If we are looking for the new additions and the new growth drivers for the express industry, we must looking for somewhere else. Particularly like same city deliver grocery, you know community grocery shopping or you know overseas services. For the overseas services, we also notice the supply chain issue across the border. I, you know, I think, you know I would like to hear management make some comments, so for ZTO, what are the new growth drivers you know in addition to e-commerce will be next year, what will be the focus you know of ZTO in 2020? [Non-English content] .
[Non-English content]
The growth indeed for the e-commerce business in China has on a rate basis slowed down, but it indeed has the fast 50%-60% annual growth is a thing of the past, but still it has already established huge base. Going forward it will be a stable growth, but not 40%, 50%. With that said, together with the new and up and coming format of commerce in China, we think the total express delivery industry this year, of course we think that it's very likely to go over 100 billion or even reach 110 billion volume.
In the next few years at a medium to high speed of growth, it will likely reach RMB 200 billion, and it's very likely the case. That means express delivery business itself still has plenty of room to grow. The key factors that we need to consider about express business is, first of all, scale. Scale leverage is determined by its distribution or by its density. At 60 million-70 million packages per day, ZTO certainly is one of the top performers. Second factors to consider is its wide coverage. What you mentioned, going overseas and expanding our business horizon, including the air transports and all that, is all part of our comprehensive logistics capability development plan. The government is also promoting the two entrances and one exit, right?
This relates to going deeper into the rural, going deeper into the country, going into the factories, and then the going outward is to international. As we on one hand building our capabilities, developing our infrastructure, we are going to follow, when the right time comes, the businesses that are going overseas. Currently, we already have businesses expanding in the Southeast Asia countries as well as African countries in terms of resource planning as well as collaboration with some of the already local players. Going forward, this network of operations will continue to expand. Hence, we are able to achieve and reach our mission to become the world-leading comprehensive logistics service provider. Tian?
Thank you. It's really clear. Thank you, Yan .
Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Ms. Yan, CFO, for any closing remarks.
Thank you everyone for joining us today. We are looking forward to share with you some of our renewed thoughts about how we go about the next stage of our business development. Once again, thank you for your long-term support and trust in ZTO. We'll speak to you soon.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.