Good day, and welcome to the ZTO Express Third Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Sophie Li. 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 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.

[Foreign Language]

Thank you, Chairman, Lai. [Interpreted] Hello, everyone. Thank you for joining today's conference call. For the third quarter of 2023, ZTO's parcel volume was 7.52 billion, which increased by 18.1% and expanded our market share to 22.4%. We maintained our industry-leading service quality and achieved an adjusted net profit of CNY 2.34 billion, representing a 25% year-over-year growth. In the third quarter, China's express delivery industry maintained relative figure and grew its volume by 16.7% year-over-year. At the same time, low price for volume trade-off became rampant. Facing disruptive price competition, ZTO adhered to its consistent strategy of maintaining a high level of service quality, achieving targeted earnings while advancing our market presence. The company shored up defenses and exercised discipline around no loss-making volumes and put our main focus on firming up network stability and long-term competitiveness. The following are some of our key initiatives. Firstly, we placed a great deal of emphasis on end-to-end time business by enhancing digitization tools to initiate interferences needed to manage operating processes. Quality standards for each of the key steps throughout the flow of package ensured quick discovery of root causes to defects, resulting in improved end-to-end timeliness and overall customer satisfaction. At the beginning of August, severe weather brought flood in the city of Zhuozhou and suspended the operations of our Jingnan center for nearly 1 month, causing property damages and loss of packages. Facing natural disasters, we actively coordinated major nodes and modified routes to divert parcels to minimize negative impact on overall service quality across our network. ZTO's end-to-end timeliness returned to the top of the industry in September. Secondly, while steadily improving service quality, we continuously seek optimal balance between improving timeliness and reducing costs. Cost efficiency gain in the third quarter once again exceeded expectations. A further…

Thank you, Chairman. Thank you, Sophie. Hello to everyone on the call. Allow me to take us through the financials and then guidance. Please note that unless specifically mentioned, all numbers I will be quoting are in RMB and percentage changes refer to year-over-year comparisons. Detailed financials of our performance, unit economics and cash flow are posted on our website, and I'll go through some of the highlights here. In the third quarter, ZTO maintained profitable growth, thanks to sound execution of our consistent corporate strategies. Parcel volume increased 18.1% to 7.5 billion and our adjusted net income grew 25% to CNY 2.3 billion, while we maintained high quality of services and customer satisfaction. Total revenue increased 1.5% to CNY 9.1 billion. ASP for the core express delivery business decreased 13.5% or CNY 0.19, mainly driven by mix shift impact from the decrease in the proportion of KA volume, increase in volume incentives and lower average weight per parcel. We cranked up incentives to the extent necessary to protect existing market share as we faced radical price competition during the quarter. Our quarterly market share rose slightly by 0.3 points to 22.4%. Total cost of revenue was CNY 6.4 billion, which decreased 2%. Combined unit cost of sorting and transportation decreased 11% or CNY 0.09, benefiting largely from economies of scale. In addition, unit cost of line haul transportation decreased 11.4% to CNY 0.43, driven by more effective route planning in conjunction with low rate improvements without negatively impacting timeliness. Decreases in fuel prices also helped. And the decrease of 10.4% to CNY 0.25 for unit sorting costs came from the increase in level of automation as well as labor efficiency gains achieved through standardization in operating procedures and optimization of performance metrics. Gross profit increased 10.7% to CNY 2.7…

[Operator Instructions] And our first question comes from Qianlei Fan of Morgan Stanley.

[Foreign Language] [Interpreted] Congratulations on very solid results despite industry competition pressure. I have 2 questions. The first one is about the competition strategy. We noted that the company, year-to-date, has achieved a very balanced growth in terms of profitability and market share gain. But we do notice that the market, the competition strategy from peers may have changed. Some of them seems to be quite difficult in terms of profitability in their third quarter results, but some of them also reiterated that next year, their priority will be more share gain in terms of profitability. So the question is what's the competition strategy from our company in the first quarter of this year and into 2024? Do we still think the target that profit growth to be faster than volume growth and our market share will continue to grow versus peers is achievable? My second question is about dividend payout. So we do notice that the CapEx has decreased on a year-on-year basis and free cash flow remains very healthy. We did mention that we have the intention to increase the dividend payout to reward our shareholders. Do we have a higher visibility on the dividend payout for our full year or after our full year results next year?

[Foreign Language]

Now let me first answer -- translate the first question for Chairman. [Interpreted] The first question relates to the competitive outlook. We've always focused on our long-term growth because we understand that express delivery business, the industry in nature, it's a long-term marathon instead of a short sprint. ZTO has consistently focused on our 3 aspects of the corporate strategy. We maintained the principle that we don't do loss-making businesses. So consistently in the past, we have been able to adhere to our 3-pronged approach, which is conditioned upon quality of services and targeted earnings goal achieved, we will improve our market share. So that still stays the same as consistent going forward. Now given market dynamic changes, however, we always believe the strength of quality of services and capacity to deliver such high-quality of services will continue to draw our customers and draw market share and timeliness and customer satisfaction and also the brand awareness will continue to be our focus going forward. And we believe, from a strategic standpoint, that we'll further expand our goal. Again, market share will remain. Now you mentioned specifically profit, volume and market share development. It's always going to be a balance, and we still believe we are confident to achieve the goal that we set. The second part of the question, I'll answer that. The business is operating in its optimal and continue to go up to the higher -- increase in the higher level. So the CapEx spending for our core express delivery businesses is pretty much set. So as we look into developing our comprehensive logistic capabilities, there might be some investment cycles come through. But now what -- we are looking at it being gradual and not all of a sudden, right? So it's a matter of time for us to raise our dividend payout ratio because it is our clear objective to return capital -- return the investment to our shareholders.

The next question comes from Ronald Keung of Goldman Sachs.

[Foreign Language] Let me translate it in English. [Interpreted] I think in terms of the current competitive landscape, while it's been quite concerning but we've actually done really well and earnings have grown healthily and we also generated free cash flow. So this outperformance versus peers means, how should we think about the landscape from here? If we could capture very healthy earnings and cash flow, should this actually strengthen our position into the longer term? So are we trending well even in this competitive environment? And how do we see the outlook for 2024 as a result and our strategy? And my second question is about our Southbound Connect potential. We see some of the limited trading volume in our Hong Kong shares might have later than expected Southbound Connect. Are there any proactive steps that management could take in expediting this Southbound Connect potential?

[Foreign Language]

Thank you, Ronald. So let me translate for Chairman for the answers. [Interpreted] As far as competitive landscape, we think the long-term trajectory is continuing to stabilize. As you can see that the number in the marketplace, about 8 or 9, we don't think there are major changes. However, the diversification, I should say, the bifurcation, is becoming more and more apparent where you have advantage in cost, efficiency and quality of services. Those will eventually win more market share and increase market presence. In the past, we've always focused on all 3, and those continue to be our focus. And relatively speaking, however, as we see that development of e-commerce, the overall profit is meeting resistance because of the price competition. So offering more diverse product and services, for example, increase the non-e-commerce packages, also servicing more of the reverse logistics or return packages will help us improve the earnings of our network outlets as well as our couriers. So focusing on those areas, improving the network stability, at the same time, improving our overall capability of serving, not just e-commerce packages, but including a higher percentage of non-e-commerce packages will help us deter or offset some of the impact from the e-commerce concentration. So in other words, we do believe out of the 3, relatively speaking, we will focus in that regard more of the enriched product offering and varied revenue structure so that it could propel us forward into the future where we maintain a high level of quality of earnings and, at the same time, increasing our market share. The second question relates to the strategy of going into the [Foreign Language]. We think that we will continue to maintain high quality of operations. And that is really the key, increasing our volume of trading of liquidity. This is somewhat more determined by some of the metrics or measurement. The company has been included in the stock inspection scope of the Stock Connect. The adjustment window for the Stock Connect is in March and September each year. And according to the policy measurements during the measurement period, we must meet certain standards of trading volume and so on and so forth. And we believe, we have a -- based on current information, we have a high probability of being entered or admitted into the connect by next year in March.

The next question comes from Aaron Luo of UBS.

[Foreign Language] Let me translate myself first. [Interpreted] Congrats for the solid Q3 earnings. And I got 2 questions. One is about our capacity utilization. As you mentioned earlier, we achieved the peak daily volume in Double 11 to around like 160 million parcels. And I'm a bit curious to what is our ideal capacity utilization rate. And what's our, like, CapEx expenditure plan going forward, like, in the next couple of years? And the second question is more about our long-term strategy to focus more on the mid- to high-end parcels, like Mr. Lai mentioned earlier, the business parcels or the individual parcels. So what's the development so far? And what kind of expectation we should have, like, the volume share kind of goal, like, to what percentage going forward?

[Foreign Language]

[Interpreted] Okay. The first question relates to our optimum capacity. We've always focused on infrastructure development, and we are one of the players -- amongst all the industry players, we are the one with the highest level of self-owned facilities and also transportation fleet. And we have currently, after the Double 11, achieved over 100 million a day level, and that is the current most optimum capacity because that is where our cost is the most effective or efficient. We have, throughout the years, invested and built infrastructure in -- across the whole country, especially in the key major nodes or major cities across the nation. Compared to the past, this year, our CapEx spending is going to come in below CNY 7 billion. And for next year, we'll be somewhere below CNY 6 billion, we believe. Some of our facilities do require upgrades and some have a Phase 2 or Phase 3 that could be easily developed to double the capacity. So actual investment will most definitely taper down. The third question relate to our diversified product offerings. The current year, our standardized packages, the increase in its volume has way surpassed much faster than our regular express packages. So we do believe we have built up a momentum to increase, within express delivery, a time-definite product; and outside, focusing on developing more of the non-e-commerce packages. We do see this as a key initiative, because it could help us improve the quality of earnings by our network partner and also couriers as we ensure the couriers receive the market front-end pricing instead of the same pricing given for regular express delivery packages so that they are more motivated to work for themselves to improve their customer connection and also improve quality of services. We have made it a mandate and put measurements around the 2-door pickup so that they are more timely and they are more responsive. In this overall approach, without disclosing the specific percentages, we do believe -- we do want to have this varied product offering. And at the same time, it could come back and help us improve the overall earnings and also quality of earnings for all the players, including us and also the network partners and couriers.

The next question comes from [indiscernible] of CICC.

[Foreign Language] Let me translate for myself. So I have 2 questions. The first one is about reverse logistics for e-commerce parcels. Because we know this kind of business requires higher service quality and will generate higher returns, so can you share with us our volume in terms of this kind of business and our future strategy? And the second one is about our last-mile facilities such as Tuxi parcel supermarket that Mr. Lai mentioned in his speech. So can you share with us, as current state, how many of these facilities are there you have built? And is there any target for us in the future. And also, it would be very helpful if you can share with us the benefits of these -- the benefits to our accrual, again, in their operation?

[Foreign Language]

[Interpreted] The first question is with regards to the reverse logistics packages. Nowadays, if we look at the combined volume of all major players or major platforms of e-commerce, the return volume is somewhat every day around 10 million. So the increase in these -- the proportion of these packages really rely on -- or is dependent on how fast we can respond to pick up and how well the service is provided. It's because we saw this significant volume in the marketplace, we have started to pay more attention and tried to improve our ability to respond. For example, the 2-hour average pickup time window, we are developing capabilities to pick up even faster within -- in shorter than the 2 hours. So we think that the continued focus and also the exercise or training of our capacity or capabilities to pick up on a more timely basis has helped us to improve the development of our -- that side of the capability. And we have seen the increase in the reverse business' volume at a very promising and fast pace. The second part regarding the last-mile development, we currently have over 10,000 locations under the brand of Tuxi Plus, and our target is to grow even more. And the benefit is really severalfold. First of all, as we could allow our couriers to receive the market price, in other words, they are working for themselves, and they are, not only able to improve their sales or improve their earnings, but they could also be motivated to provide better services and develop better connectivity with the customers, with their customers. The key benefit for the industry, as a whole, is that we could indeed utilize the last-mile post or presence to help the entire industry to reduce the delivery…

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]