Good day. And welcome to the ZTO Third Quarter 2017 Earning Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note that this event is being recorded. I would now like to turn the conference over to Ms. Sophie Li, Investor Relations Director. Please go ahead.

Thank you, Operator. Hello, everyone, and thank you for joining us today. The company’s results and 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 Mr. James Guo, Chief Financial Officer. Mr. Lai will give a brief overview of the company’s business operations and highlights, followed by Mr. Guo, 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 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 filing with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement 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. Mr. Lai, please go ahead.

[Foreign Language]

Let me translate for Chairman. Hello, and thank you, everyone, for joining our call this morning. Our business continued to generate strong growth momentum. Parcel volume grew 39.4% year-over-year hitting 1.54 billion parcels, while revenues increased 33.6% year-over-year to RMB3.14 billion. Our adjusted net income surged during the quarter to RMB730 million, an increase of 33.5%. We continue to successfully support these healthy and sustainable growth of our business across our operational metrics, while improving service throughout our entire network. Looking ahead, we will continue to work with our network partners through our shared success system to improve our overall operating efficiency and enhanced service quality in order to consolidate our leading position in industry and generate value for our shareholders. With that, I will now turn the call over to James who will go over our financial results in more detail.

Thank you, Chairman. Our parcel volume growth during quarter outperformed the 28.4% industry average by 11 percentage points, demonstrating the continued steady increase of our market share when compared to the same period last year. During the third quarter, we continued to make solid progress in enhancing service quality. According to data compiled by the State Post Bureau, ZTO once again received one of the highest scores for customer satisfaction among the major express companies in China during the quarter. To further improve service quality and protect the interest of customers we strategically decided to raise our delivery service fees on October 10, 2017. This measure helps to align the interest of ZTO with our network partners, further enhance service quality, protect the interest of our customers and offset rising transportation, labor and raw material costs. I am confident that this will further stabilize our network and create favorable conditions for our long-term sustainable growth. We continue to strengthen our cost advantage by leveraging our economies of scale and implementing cost cutting initiatives. This will strengthen our operational efficiency and allowed us to meet growing market demand, particularly during China’s peak shopping season in the fourth quarter. As of September 30, 2017, we have installed a total of 41 automatic cross-belt sorting equipments and 30 sorting hubs across the country, an increase of 19 lines from the second quarter of 2017. In addition, we added more than 160 high capacity 15 meter to 17 meter long trucks to our self-owned fleet during the third quarter, which expands our transportation capacity and increases operational efficiency. This is further supported by an increased adoption rate of digital waybills which improved to 88% from 73% during the same period last year. These measures have not only strengthened our cost advantages, but also further…

Thank you. [Operator Instructions] Our first question comes from Baoying Zhai of Credit Suisse. Please go ahead.

[Foreign Language] Okay. So, I will translate my questions. So congratulations to the solid third quarter results if we exclude the FX loss this year and the government subsidies of last year. So my questions would be more focused on the guidance and the future strategy. My first question is regarding the guidance, we can see that the fourth quarter guidance actually is very conservative. I want to know more reasons behind this. First of all, that we are intentionally lowering the guidance so give some positive surprise such as we did in third quarter. And the second reason is that because of the ASP, because from the third-party data base we can see that the volume growth of ZTO is very strong at least 16 points higher than the industry growth. So is it because of the ASP. As we can see we have a new delivery fee policy which has started -- which is starting from the 1st of November to restrict the portion of big parcels. So how much the portion of the big parcel is now and how much its average weight now?

[Foreign Language]

Yeah. Let me do the translation for the Chairman. The Chairman has mentioned about several key points. First, we remained optimistic about our business prospects and the fundamental of the business in Q4. We are confident that our parcel volume growth rate will exceed the industry average growth rate in Q4. And he also mentioned that the number of heavy parcels with an average weight over 5 kilograms accounted for only a very small portions of our total parcel volumes in Q4 and the average weight of the parcel is continue to trend down in October and November at a single-digit rate. And lastly, he mentioned, that we have been -- always been a very conservative when issuing forward looking guidance.

[Foreign Language]

Yeah. The Chairman also added that due to our continued strategy of optimizing the parcel structure currently, the parcels with weigh over 5 kilograms accounted for only a very small portion of a total parcel volume. And for example, he mentioned that the average weight of parcels dropped to about 1.19 kilograms in Q3 from about 1.36 kilograms in the same period last year. And we believe that our new pricing policy is being well-implemented by our network partners and based on the October data our market share in terms of parcel volume increased amid to slow down of parcel volume growth in industry.

Our next question comes from Edward Xu of Morgan Stanley. Please go ahead.

[Foreign Language] Okay. Yeah. The question from Edward Xu from Morgan Stanley is about your ASP, because we see that the ASP decline has been narrowed in third quarter on a year-over-year basis versus the first quarter and second quarter, so I think this is a good sign. And given that you have recently asked for the price hike during the Singles’ Day, so what do we expect for fourth quarter for the ASP? And also what’s your view on the 2018 in terms of the ASP changes? Thank you.

[Foreign Language]

Our ASP was about RMB2.05 during the third quarter, down 4.2% on a year-over-year basis and actually the decline was narrowing on a sequential basis. ASP decline was due to a number of different reasons, for example, includes, first, the increase use of digital waybills and also the adoption rate of the digital waybills increase actually to 88% in Q3 this year from about 73% in the same period last year and that has led to a decrease in digital waybills revenue per parcel. And second, the continued optimization of our parcel structure. This has resulted in the average weight per parcel was dropping on a year-over-year basis, we just mentioned that, the average weight of the parcel has dropped from 1.36 kilograms in Q4 last -- Q3 last year to about 1.19 kilograms in Q3 this year, reducing our network transit fee per parcel by about 3%. And he also mentioned that the average revenue per parcel in the fourth quarter will be primarily affected by changes in parcel weight, our shipment route and the usage of digital waybills. And fee adjustments during the Singles’ Day period should positively affect our ASP but the period they are applicable is little too short to make a substantial impact in Q4. We believe that the overall price per parcel will stabilize and further industry consolidation will take place in 2018. We will maintain the flexibility to adjust network transit fees and waybill fees as the over price of our network partners gradually stabilizes and this should effectively balance the interest of ZTO and our network partners. We firmly believe that the stability and the profitability of our network partners are conducive to the long-term sustainable growth of the industry.

[Foreign Language]

Yes. Yeah. So the Chairman mentioned that the expected ASP in 2018 is expected to first stabilize and pick up gradually over time.

Okay. Thank you. [Foreign Language] My second question is regarding your unit cost. So we see that the unit cost saving on a year-on-year basis also narrowed in third quarter versus the previous quarters. So can you explain the reason and tell us what is the trend that would look like in the next few quarters and where are the areas that you can keep save your costs? Thank you.

[Foreign Language]

I will do the translation for the Chairman. So because of the scale of our network and the subsequent network effect and also our cost-cutting initiatives, our unit costs for the third quarter continued to decrease to about RMB1.31 per parcel, representing a 4% decrease from RMB1.36 per parcel during the same period last year. We believe that China’s express delivery industry still has significant growth potential in the coming years, as the scale of our business continues to grow and our cost-cutting initiative further take hold, our unit cost still has much room to fall over next few years. In terms of transportation cost controls, we have adopted a number of measures which are gradually paying off. First, we have implemented cost control measures on third-party transportation costs, example, we have increased a number of self-owned fleet to replace our third-party logistics vehicles and second, we have also optimized our transportation routes to reduce transportation distance, fuel consumptions and secondary transport fleet. We will continue to focus on replacing our small capacity vehicles with high capacity 15 meter to 17 meter long trailer trucks. As I mentioned earlier, one of the benefits of our self constructed sorting hub is that we can design and build sorting hubs to allow for bigger trucks to ship parcels between hubs according to our own shipment schedules. With this mind, we will continue to invest in building or expanding our own sorting hubs and third we also continue -- we also improve the performance appraisals of our sorting personnel and we will continue to increase investments in automated sorting equipments especially automated belt conveyors. We recently invested in dynamic weighing stations which can accurately weigh parcels as they move through the sorting process and these investments have significantly increase our sorting efficiency and reduced our labor costs. With respect to the impact of unit cost decline on price, price is essentially determined by the market and price changes depend on the relationship between market supply and demand, and this includes the matching of our network capacity with the market demands. As we mentioned earlier, we expect prices to stabilize next year and then gradually pick up over time, but there are still much -- there are still room for cost reduction which will generate more profits for our entire network given a constant price if there is no change in the price.

Our next question comes from Vivian Tao of Citibank. Please go ahead.

[Foreign Language] My first question is on the market share, if we look at ZTO’s quarterly market share, it was at 15.5% in first quarter and 15.3% in second quarter and then 15.2% in third quarter, so sequentially slightly down in the past few quarters, so just want to see what’s management view on this and also what’s management guidance on ZTO’s market share in fourth quarter and also in 2018? In addition to that India made out announcement today, the company mentioned ZTO handout 55.7 million parcels on Singles’ Day versus in the states of 331 million parcels that in tied 19.8% market share. So also I want to see what’s management opinion on this particular market share and also if there is any implication for the Singles’ Days volume for the next year?

[Foreign Language]

Okay. I will translate the Chairman’s answers to your questions, Vivian. First, he mentioned that the market share in terms of parcel volume in Q3 cannot be compared directly on a sequential basis. It is more meaningful to compare market share on year-over-year basis. Example, he mentioned, that our market share in third quarter 2016 only about 14% -- little over 14%, but we increased our market share to over 15.2% in this quarter. So that’s a very significant increase in market share. And we remain confident that our expected growth -- parcel volume growth will continue to well above industry growth. And second, he mentioned, that according to the data from the China State Post Bureau, 331 million parcels were collected by the Chinese postal and express delivery companies on Singles’ Day, up by about 31.5% year-over-year and our parcel volume on Singles’ Day was about 65.7 million, outperforming the industry average growth by more than 10 percentage points. We believe that our market share in terms of parcel volume also expanded on a year-over-year basis on a Singles’ Day. Maintaining high quality services during peak season requires a stable network, sufficient capacity, solid delivery capabilities and also strong execution and operational efficiency. We believe we will have more of a competitive advantage in these areas than our peers.

[Foreign Language] My second question is on the cost side. In the announcement there is item, the other cost which is actually mainly on the depreciation costs associated for the enterprise customers that increased by around 180%, actually that’s a not increase, I just want to find out what’s the reason behind that, also the associated revenue increase because of that cost increase?

Okay. To answer your question, let me answer your question, Vivian. Our -- that the -- revenue from our enterprise customers also increased significantly in Q3 this year. It’s up by over 100% on a year-over-year basis in revenue. And now key customers, I mean, key account customers contributed to about 10% of our total revenue in Q3 this year.

Okay. And do you have number for last year, James, the third quarter 2016, so if 10% for this year, right.

Yes. Last year the revenue from key account customers only accounted for less than 6% of our total revenue.

Okay. Got it. Thanks.

Our next question comes from Xin Yang of CICC. Please go ahead.

Okay. [Foreign Language] So I will do the translation on myself. My first question is, we saw that this year actually was up the delivery service fee as well as the charge for the transit fee for the line-haul costs and sorting costs, so did other players in the market also followed the same kind of strategy and what is the market share change after we adopted this kind of strategy and do you think this should be the turning point of the whole market in terms of the price? Thank you.

[Foreign Language]

Okay. Let me translate for the Chairman. The Chairman mentioned that the new pricing policy was well implemented during the Singles’ Day period and the purpose of the new pricing policy was meant to improve service quality and protect the interest of the customers and also ensure the how overall healthiness of the network partners within our ZTO networks. And he said, he makes no comments on the behavior of our peers with respect to whether they follow same after we raised the price during the Singles’ Day period. The Chairman believes that our market share in terms of parcel volume continue to expand during the Singles’ Day periods and he believe our expected growth during that periods was at least over 10 percentage points above the industry average.

And last one is, do you think this is turning point of the whole market price?

Oh! Yeah. And he says, China express delivery industry is now the most cost effective in the world and I believe that the price should stabilize in the coming year and then gradually picks up over time and that indicates a turning point in the industry.

Okay. [Foreign Language] So as I will translate myself. What is your expected view for the diversify side, we saw that SF has already entered into the inter-city market and also Whitehill has acquired international to do international ecommerce parcel. So what is your strategy for this kind of business?

[Foreign Language]

The Chairman mentioned that business diversification is the new direction in the express delivery industry in China and we already put in place our plans as we are committed to building out our ecosystem in several areas, including, the less than truckload business, cloud warehousing solutions, cross-border ecommerce delivery, accessory. We will provide an update to the shareholders once our plans are confirmed and we are ready to disclose those plans.

[Foreign Language]

And our next question is a follow-up from Baoying Zhai of Credit Suisse. Please go ahead.

[Foreign Language] First of all, so a follow-up with Double 11 situation, so how about implementation of the price hike especially for the franchisees. As third quarter, do you know how many franchisees actually did the price hike? And according to my channel track actually found that for some big franchisees is in Shanghai, they said that, they wouldn’t actually adjust down their prices even post Double 11, as third quarter, if you have know about this? Thanks.

[Foreign Language]

The purpose of our price adjustments was meant to further improve service quality, protecting interest of our customers and allow for the healthy and sustainable developments of our network partners. With that in mind, our pricing policy during the fourth quarter includes, one, increase in the last mile delivery fees in some regions; and two, increase in last mile delivery fees of parcels with a weight above 3 kilograms; and three, seasonal increase in network transit fees based on the parcel weight and locations. After the announcement of the increase in our delivery fees, our network partners adjusted their fees according to a specific market conditions and the ultimate purpose the fee increase was to better serve our customers and protect their interest so far, I believe the new policy has been well-received and executed by our network partners. The increase in network transit fee is only applicable during the China’s peak shopping season and will last until next year’s Spring Festival, and the network transit fees adjustment is only applicable during the period from November the 11th to November 25th. We will review the policy afterwards based on the market conditions before we make any further adjustments. Many of our network partners they continue to maintain a stable price after the Singles’ Day period.

[Foreign Language] Okay. I will translate my questions. So my second question is regarding the CapEx plan. So, James, could you please share about the CapEx plan so far and how is full year guidance this year and how the CapEx for next year? Thank you.

During the first nine months of 2017, our total CapEx was around RMB2 billion, including about RMB1.2 billion spending for land acquisition and sorting hub construction, and other RMB300 million spending for the purchase of self-owned vehicles and another RMB400 million for the acquisition of sorting hub facilities, including automated sorting equipments. We expect to spend about RMB1 billion in the fourth quarter of 2017. This is mostly related to the purchase of land and the construction of sorting hubs. And the CapEx for 2018 is expected to be no less than that for this year. That’s we believe…

[Foreign Language]

… it is critical. Yeah. So we believe it is critical to continue to expand our infrastructure capacity so that we have the capability to deal with a spike in market demands in the coming years.

[Foreign Language] breakdown?

We don’t have a breakdown at this point in time. We will provide the details later on.

Okay. Sure. Thank you.

Our next question comes from Nicky Ge of China Renaissance. Please go ahead.

[Foreign Language] China recently announced a very aggressive expansion plan and we wonder how the management will comment on that, how would China’s expansion impact our ZTO and other express players?

[Foreign Language]

The Chairman says that, it is not surprising that Alibaba has increased its investment in China, because losses they have become crucial to Alibaba’s business. We are a long-term strategic partner of Alibaba and both ZTO and China complement each other. If Alibaba’s business goes well, we will certainly have more business from Alibaba, similarly if we provide excellent services on Alibaba’s platform we will have stronger appeal to merchants and consumers.

[Foreign Language] What are our target automated 13 lines for the year end and for 2018?

[Foreign Language]

As of the end of the third quarter, we installed and operated a total of 41 automated sorting equipments in our sorting hubs, an increase of 19 lines from the previous quarters. Actually before the Singles’ Day period we already have 52 automated sorting equipments in store and put into operations in our sorting hubs. We plan to install and put into operations of a total of about 60 automated sorting equipments by the end of this year and this target it’s actually 10 lines more than what we expected to do at the beginning of the year.

[Foreign Language]

[Foreign Language]

This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Sophie Li for any closing remarks.

Thank you, Operator. In closing on behalf of the entire ZTO management team we’d like to thank you for your interest and participation in today’s call. If you require any further information or have any interest in visiting us in China, please let us know. Thank you for joining us today. This concludes the call. Thanks.

Thank you.

Thank you. [Foreign Language]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.