Good day and welcome to the ZTO Conference Call and Webcast. 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 note this event is being recorded. I would now like to turn the conference over to Sophie Li, IR 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 Ms. Huiping Yan, Chief Financial Officer. Mr. Lai will give a brief overview of the company's business operations and highlights, followed by Mrs. 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 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 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.

Hello and thank you everyone for joining our call today. We met our goal for 2018 and achieved a solid performance results. Parcel volume increased by 37.1% year-over-year to reach RMB 8.52 billion as we increased our leading position in China's express delivery industry with the market share of 16.8%. Meanwhile, our industry leading service quality and high levels of customer satisfaction allowed us to achieve adjusted net income of RMB 4.2 billion during the year, an increase of 30.1% from 2017. To cap [ph] on 2018, firstly, we closely monitored micro environment and industry trend, maintained a healthy pace of growth as competition intensified. We focused on sustainable long-term growth and implemented network policies that are effective in incentivizing profitable incremental parcel volume growth. Secondly, we continue to build out and upgrade our sorting infrastructure and long haul transportation capacity and efficiency. By the end of 2018, we owned and operated over 4,500 transportation trucks, including 2,800 high capacity vehicles, which accounted for 62% of our total trucks. Despite increasing operating costs, such as labor and fuel costs, our combined transportation and sorting hub cost per parcel is decreased by RMB 0.11 in 2018. As a result of steady improvement of our operating efficiency. Certainly, we implemented various corporate initiatives to establish pick-up and delivery fee standards aiming to strengthen stability enhanced profitability of our network partners through increasing compensation levels of our delivery personnel. At the end of 2018, we had 30,100 pick-up and delivery outlets and 4,500 direct network partners. The unofficial count, there were approximately over 300,000 frontline personnel working under the ZTO brand in 2018, cultivating their entrepreneurial spirit and pro-activity is one of the most important cornerstones of ZTO's brand value. Lastly, our ecosystem continues to take shape. Expanding from our core express delivery…

Thank you. Hello everyone on the call. As I review our financial results, please note that unless specifically noted all numbers quoted are in RMB and percentages changes refers to year-over-year comparisons. In summary, our parcel volume increased by 34.7% and 37.1% for the fourth quarter and full year respectively to reach 8.52 billion parcels for the full year and the associated market share in China's express delivery industry increased to 16.8%. Adjusted net income was RMB1.29 billion for the fourth quarter which came in at the high end of our guidance for the quarter and our full year adjusted net income was RMB4.2 billion, which grew 30.1%. Let's now go over the fourth quarter financial results. Revenues increased 29.9% to RMB5.63 billion, mainly driven by 29.4% increase in revenue from express delivery services, with a 34.7% increase in parcel volumes and were partially offset by a decrease in unit price per parcel or ASP, which is largely due to incremental volume incentives. ASP for express delivery services decreased by RMB0.09 or 4.3% as a net results of RMB0.03 increase for weight per parcel increase, RMB0.02 decrease in waybill use, RMB0.10 decrease due to impact from incremental volume incentives. Revenue from the freight forwarding business increased by 45.6% to RMB392.5 million compared to the same period last year. We started consolidating freight forwarding or COE business in the fourth quarter of 2017. Revenues from sales of accessories increased to RMB252.8 million, mainly due to an increase in sales of thermal paper used for printing of digital waybills. Electronic waybill utilizations rose to 99.6% versus 93% last year. The cost of revenues increased by 36.9% to RMB4.08 billion from RMB2.98 billion last year. Now let's take a closer look into cost of revenues. Line haul transportation cost was RMB1.95 billion. An…

[Operator instructions] Your first question comes from Baoying Zhai from Citi. Please go ahead.

Hi, Ms. Li, Ms. Yan and Sophie, good morning. My first question is regarding the cost. So from this 4Q 2018 results we see there is some pressure on cost reduction. The unit transportation cost only down 4%, unit sorting costs is flat. I understand the peak season was part of the reasons, but compared with last year peak season reduction degrades, it's still a little bit later, what are the reasons behind? And what's the guidance for 2019 cost reduction, which we will do, in the past we had cost advantage compared with our peers. Now going forward our reduction degree maybe less than our peers, because their cost base is much higher but his would narrow the gap the advantage gap between us and our peers in terms of costs. So how would we react to this? My second question is on ASP, 4Q 2018 ASP was pretty good, is this because of the narrowed subsidies to franchisees during peak season and is there a guidance for 2019 ASP? Moreover from our general check we noticed that the press war this year started earlier and much more intensive and were more reactive to this press war this year too. Can you share with us our press spreadsheet this year? Thank you.

Thank you, Baoying, for your question. I will answer the cost related question first, and then Chairman, Lai will address your pricing strategy question. Yes, so your observation is accurate that our fourth quarter overall operating costs decrease was less than expected. There were few detailed reasons if I may first to comment. One, there were a 3% increase in the personal weight, when compared to the same period last year. We didn't control especially during the peak season for bulky and heavier parcel to come through our system, compared to some of our other competitors. Second, the volume of parcels during the peak season increased and cost per unit increased relatively. So - and then also certainly the price of third-party transportation services increased year-over-year, especially during the Single's Day and in Double 12. Now for line-haul transportation, we have improved the reliance on our self-owned and operated vehicles. And we have more in the pipeline to be added. As I mentioned earlier route planning still currently are done on a semi-automated basis. There are a lot of judgment costs. And as we improve with more technology driven tools with greater visibility and quicker response, the line-haul route planning will become another greater productivity generator going forward. The third-party costs, if I may further explain, during the peak season, we do rely on increased portion of our transportation on third-party. Because during the normal time, our usage of those third parties were low, because of our increased self-owned operations. So their bargaining ability for peak season price became higher. In that sense, there was also an impact on our overall line-haul costs reduction, which is below our expectations. Second, relating to our sorting hub cost, the unit costs remained stable at RMB0.38 for the same period last year compared. So there is no gain or no increase. Now the hike in labor costs as I mentioned earlier did impact, but we also found improvement opportunities in the number of temporary hiring that we should do. Now this is not a standalone issue. When we look at the integrated installation of our sorting and automation capabilities going forward this issue will be greatly addressed. So you have also asked about what our expectations for next year. Overall, we have anticipated the greater installed base to further improve the utilization. Large small sorting machines, as well as dynamic weighing machines will all become well integrated as a part of the solution - total solution to our overall cost reduction. Currently we expect in 2019 there is an at least 5% productivity gain for our line-haul plus sorting hub cost in 2019. Hope that answers your question. Now Lai will address your pricing strategy inquiry.

So for our pricing strategy first of all if you look at volume, we have accelerated our growth target to exceed market average by 15 percentage points at least. Because we realize and firmly believe scale is our first priority, which is very important to express delivery businesses. We do believe that the pricing sensitivity is a tool that is used to adjust volume in a highly competitive and increasing market environment. Our strategy still remains that we will maintain a level of profitability or a level of profit. Our goal with the pricing is to properly manage existing volumes and incremental volumes. As you may have done your channel checks, there are price adjustments necessary and were done during the first and the second months of the year to stimulate further volume increases. As higher concentration of the market taking place, we are anticipating price movement, but we will never initiate price competition. Our goal is to improve our market share by 2 percentage points and that is all predicated on maintaining quality of services, as well as reaching our targeted profit goal, pricing again will be properly managed as we have done in 2018. However, with a heightened focus on gaining market share and accelerated growth. Thank you for your questions.

Thank you. Your next question comes from [indiscernible] from China Renaissance. Please go ahead.

My first question is that our - whether management can provide outlook for the market competition for year and what is our market share target in for years? And my second question is about the CapEx this year and also do we have any M&A plans? Thank you.

China's express delivery industry still in the medium to high speed growth stage with parcel volume growing incrementally every year, in 2018 was a 10 billion growth. In addition, e-commerce expected to continue gradually penetrate further. With this in mind, we are expanding our service offering to cover more industries and regions, including rural areas. Our goal this year is to maintain our profit target and service quality, while growing our parcel volume more than 15 percentage points higher than industry average. And we raised our parcel volume growth target for the year, because we are confident in our ability and readiness to achieve this goal. Going forward, we will increase the parcel volume and expect to reach 25% of the market share by year 2022.

And Nicky, you have a second question regarding our use of capital and the M&A - any M&A plan. Yes, the company has a very strong cash generation capability that's generated RMB4.2 billion - RMB4.4 billion from operating costs in 2018. And for 2018 total capital expenditure was approximately RMB4 billion, which included roughly RMB2.4 billion for land acquisitions in sorting hub construction, approximately RMB775 million were used to purchase of self-owned vehicles and about RMB700 million for acquisition of sorting hub equipment and facilities installations. We expect to spend another - we expect to increase our spending for 2019 to a level of RMB6 billion to RMB8 billion. It's a 10% to 15% of which will be on truck purchases, 15% to 20% on automation and the rest on land acquisition and sorting hub construction. Our CapEx plan is of course closely being monitored with the development of our overall market as well as our operational requirements. Our future capital expenditure plan will be very much geared towards matching the demand on the volume as well as planning ahead for our capacity increases in meeting the incoming volume. As we have discussed in prior conversations, we do expect a longer term growth in our industry, albeit being 20%. But yet on a huge base, we do believe investment and scale advantage will continue to be a critical competitive considerations for ZTO. Our past track record has proven that early investment is important especially in self-owned land, self-owned facilities, which provides a huge advantage compared to rented costs and which are largely relied on some of our other competitors. Investment in infrastructure and coupled with our volume growth will become an important advantage going forward. M&A you've asked that question, as a normal corporate activities we will continue to look at ways and opportunities to increase our market penetration as well as support some of our ecosystem businesses that are underway, that are either in startup stage or in ramp up stage. As of now there are no definitive plans that we are able to communicate. Thank you.

Thank you. Your next question comes from Edward Xu from Morgan Stanley. Please go ahead.

Let me just translate my two questions. First is that, how do you see the market landscape for this year, especially how do you cooperate with Alibaba in China, especially given Ali's recent investment in STO [ph] it looks like the Ali has invested in most of the Tongdas payers, so what's implication from that? And second question is regarding your market share, because you give the target of at least 15% growth above the market and probably gain market share by a 2 percentage point, so how do you achieve that, would you do it through pricing or what's your strategy in achieving this goal? Thank you.

Thank you, Edward. Let me first address the question of Alibaba's investment. Yes, we have consistently communicated that the industry, the express delivery industry is a critical or the logistic experience is a critical element to Alibaba's overall customer satisfaction. And on the other hand for this industry overall, there is still plenty of opportunities to improve efficiencies and increase productivity. And Ali has a very strong technological advantage and capabilities through Cainiao as we have seen in the past have provided great support to all the players in the express delivery industry to help us reduce cost and increase scale and improve productivity. So we see this further acquisition of further penetration into the express delivery industry as positive. Because in addition if we look into the future, the huge volume that is coming in, not just from Alibaba, from the overall Chinese economic development from online shopping or new e-tailing all these require strengthened capability, as well as improved productivity for the industry as a whole and we believe Alibaba and Cainiao will play an important role. We as part of the industry will benefit from a further support and further investment by Alibaba into this industry.

We have mentioned that there are five initiatives or strategic sets that we are focusing on in 2019. First, most importantly improve and maintain our quality of services and provide greater satisfaction to our customers so as to enhance our brand. Two, we will improve and invest last mile capabilities and especially focusing on improving the earnings quality or earnings capability by our front-line couriers to provide greater competitive advantage for them. Thirdly, we are expanding our business reach and coverage to include rural area of services and specifically last mile delivery our cooperation with Cainiao Post is part of that initiative. Fourth, we will continue to invest in our infrastructure as proven beneficial for us and greater advantage on a cost and productivity will be realized. And fourthly improving our ability to manage our business with greater visibility, greater response through digitized process management and so as to reduce costs, find issues and solve problems. Looking back in the past, we had lesser from a resource standpoint from our scale standpoint, but we were able to surpass and outperform. Today we are with greater resources and our team are in better shape in executing. So we believe that as we accelerate our growth target going forward the 25% market share achievement by year 2022 is very much attainable and we are confident to reach that and even surpass that goal.

Thank you. Next one.

Thank you. Your next question comes from Steve [indiscernible]. Please go ahead.

[Foreign Language]

Hi, we can't hear you, Steven.

Pardon, this is the operator, we appear to have lost Steven, I'll just see if we can get him on the line for you one moment. Your next question comes from Eric Zong at Macquarie.

So I have three questions. First of all I want to ask about KA account business. How is the revenue share for the fourth quarter last year and also the volume growth for the first quarter? And how is the gross profit trend looks like for the first quarter as well? And so my second question is about the direct shipment. So what's the volume contribution to the overall business? And my third question is on Cainiao Post. So, I would like to ask more about the management view and Cainiao Post impact on ZTO's last mile delivery in the longer term. Thank you.

Thank you, Eric for your question. Let me answer the first two questions, regarding KA account and direct route. First of all revenues generated by our key accounts where about RMB730 million accounting for about 13% of our total revenues, it's up about 81% from the same quarter last year. They accounted for about 8.1% of our total parcel volumes, which does increase 119% from last year. The gross margin were flat with compared to last quarter is at approximately 50%. Revenue generated from key accounts is about 11%, while parcel volume accounted for 6.3% in 2018 as a whole. Gross margin remained flat. KA accounts are normally large enterprise clients such as Ali Pay which they have higher bargaining power and higher requirements for service qualities throughout the nation. KA volume has been increasing rapidly, we do have - we did form our specific special department to receive such demand from our KA clients. And going forward the profitability of these KA accounts will remain stable. And the second question relating to the direct shipment. Parcel volume for our direct shipment business accounted for about 5% of our total volumes during fourth quarter. The direct shipment business currently accounted for about 6% of total routes and we do not expect the parcel volume from direct shipment to change significantly in 2019. Going forward as volume come through, we may see the direct shipment businesses to increase, because it does overall provide greater timeliness, as well as greater cost advantage. And then Mr. Lai will address the Cainiao Post question.

Cainiao Post is a total solution to reduce overall delivery cost for the industry. In addition our consumers have increased their need and demand and they have developed new preferences from door to door services in the past to self-pick up on their own leisure time. And so we believe these two key points are important going forward in meeting the market demand. Cainiao alliance is consisted of all express delivery Tongdas companies. ZTO as one of the shareholders have been fully engaged and supportive of this overall initiative. We believe in 2019 our activity level will increase Cainiao Post development and increase will continue.

Okay, operator.

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

Thank you, operator. In closing on behalf of the entire ZTO management team, I'd like to thank you for your interest and participating 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.