2Q24 results in line with our expectations

YTO Express announced its 1H24 results: Revenue rose 21% YoY to Rmb32.565bn, attributable net profit rose 7% YoY to Rmb1.988bn, and recurring net profit rose 6% YoY to Rmb1.898bn. Attributable net profit of express delivery business rose 13% YoY to Rmb2.097bn in 1H24. Revenue per parcel fell Rmb0.09 YoY to Rmb2.68 in 1H24. Per-parcel cost fell Rmb0.05 YoY to Rmb2.40 in 1H24, with spending on per-parcel for express delivery services falling Rmb0.02 to Rmb1.27 and per-parcel transport and center operation costs falling Rmb0.06 to Rmb0.71. In 1H24, Per-parcel attributable net profit dropped Rmb0.03 to Rmb0.16, with net profit per parcel for delivery business growing Rmb0.02 to Rmb0.17.

In 2Q24, revenue rose 22% YoY to Rmb17.137bn, and attributable net profit rose 9% YoY to Rmb1.044bn. Attributable net profit of the express delivery business grew 15% YoY to Rmb1.104bn in 2Q24, in line with our expectations (we estimate attributable net profit from non-express delivery business at around -Rmb60mn). In 2Q24, the firm's parcel volume grew 24% YoY to 6.6bn parcels (the YoY growth was 2.8ppt higher than the average industry growth), and its market share was 15.3% (under the new standards of the China State Post Bureau). In 2Q24, the firm’s revenue per parcel fell Rmb0.17 QoQ and Rmb0.05 YoY to Rmb2.60, net profit per parcel dropped Rmb0.02 YoY and Rmb0.01 QoQ to Rmb0.16, and net profit per parcel for delivery business fell Rmb0.01 YoY and Rmb0.01 QoQ to Rmb0.17.

Trends to watch

Industry: Express delivery demand data continued to improve; parcel volume growth may continue to exceed expectations. According to the China State Post Bureau, parcel volume in the express delivery industry rose 21.3% YoY in 2Q24. We expect express delivery demand to continue improving driven by the development of live-streaming e-commerce, small- sized parcels, and returned parcels. We expect full-year growth to exceed 15% in 2024. However, there is limited downside potential in per- parcel pricing. The industry's capex peak has passed, with manageable competition. On August 22, the China State Post Bureau held a meeting in Shanghai, proposing to resolutely prevent vicious competition. We believe regulators will continue to focus on high-quality development, and see　limited downside potential in industry prices and opportunities for cost optimization in 2024.

We expect earnings per parcel to stabilize, and the firm to continue improving service quality and promoting internationalization. The firm has utilized artificial intelligence (AI) technologies to enhance its digital transformation and fortify its nationwide network. Its service capabilities have continued to improve. In 1H24, the proportion of delayed parcels dropped by around 23% YoY, and the customer complaint rate decreased by 4% YoY. Additionally, the firm is actively pursuing internationalization, with international express delivery services covering more than 150 countries and regions and flight routes exceeding 140. We expect the firm's per-parcel earnings to stabilize in 2024 as its parcel volume grows and services improve.

Financials and valuation

We keep our 2024 and 2025 earnings forecasts unchanged at Rmb4.375bn and Rmb4.944bn. The stock is trading at 12x 2024e and 11x 2025e P/E. We maintain OUTPERFORM and our TP of Rmb21.05, implying 17x 2024e and 15x 2025e P/E, offering 39% upside.

Risks

Parcel volume growth disappoints; competition intensifies.