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China's Parcel Industry Still In High-Growth Mode Despite Macro Backdrop


Major Chinese parcel and courier companies reported strong revenue growth continuing from the first quarter into May, despite a worsening economic outlook for the country as a whole.

China's official GDP annual growth numbers slipped from a high of 6.8 percent in the first quarter of 2018 to 6.4 percent in the first quarter of 2019. Those numbers are engineered by the government and widely distrusted by the financial community — what are the odds of a large, dynamic economy posting exactly the same GDP growth number three quarters in a row? — but, it should be noted, even the juiced statistics fell below government forecasts.

Surveys of business leaders in China tell a different story: the manufacturing Purchasing Managers' Index (PMI) is at 50.2, maintaining positive sentiment by a razor's edge. Business confidence in May fell back into negative territory, 49.4, after spending two months above 50.

Despite the uncertainty and risk around the U.S. – China trade war, parcel companies like Yunda, STO Express, YTO Express, and SF Holding are benefiting from secular tailwinds like e-commerce growth and large investments from private capital. Unlike the two U.S. parcel giants, UPS and FedEx, the Chinese couriers are relatively young companies, about twenty years old.

Even more fascinating is the fact that three of those companies, Yunda, STO, and YTO, were founded by entrepreneurs from the same rural county, Tonglu, in China's eastern province of Zhejiang.

STO Express, the oldest, was founded in 1993 in Hangzhou by Nie Tengfei — its headquarters are now in Shanghai — to pay for the debts from a failed architectural firm. The company started by offering an overnight courier service from Hangzhou to Shanghai, competing against the China Post, which took three days to deliver on the same route. Now STO has more than 14,000 employees and posted first quarter revenues of CNY 4.5 billion (equivalent to $655 million), up 55 percent year over year.

Tengfei's younger brother, Nie Tengyun, founded Yunda in 1998. For the first quarter of 2019, Yunda reported revenues of CNY 6.68 billion, equivalent to about $970 million, up 151 percent year-over-year. In 2018, Yunda moved nearly 7 billion parcels, taking a 13.7 percent share of China's parcel industry, the second-largest company in the space.

Yu Weijiao, another Tonglu native, founded YTO Express in 2000. YTO took in CNY 6.44 billion, equivalent to about $937 million, in first quarter revenues in 2019. YTO is now also headquartered in Shanghai, operates more than 20,000 delivery vehicles, and ships freight through 76 airports with a fleet of 12 aircraft.

Alibaba Group Holding Ltd. (NYSE: BABA), China's e-commerce giant that posts in excess of $56 billion in annual sales, owns substantial stakes in several major kuaidi (express delivery and logistics companies). In March, Alibaba paid $693 million for a 14 percent stake in STO Express, which complemented the positions it already held in YTO Express, Best Logistics, and ZTO Express.

Alibaba's private equity fund recently sold off some of its YTO Express stock, acquired in 2015, and is no longer in the top five shareholders of that business. In May 2018, Alibaba led a consortium of investors to buy about a 10% stake of ZTO Express for $1.38 billion.

Many of Alibaba's logistics investments are channeled through the Cainaio Smart Logistics Network, a joint venture launched with eight other companies in 2013. Alibaba bought a 51% stake of Cainaio in 2017, one of China's largest private companies, a deal that took Cainaio to a $20.1 billion valuation, according to Pitchbook.

The growth of these kuaidi is supported by a Chinese e-commerce and shipping environment that has been on fire. In 2018, more than 50 billion parcels were handled by express delivery companies in China, supporting an e-commerce sector that has reached $1 trillion in sales. According to China's State Post Bureau, the number of parcels handled by the industry has increased by 10 billion every year for the past three years. Automation and an increasing use of big data have led the young industry to rapidly shift from a labor-intensive model to a tech-intensive one.

E-commerce has penetrated the Chinese retail industry deeper than it has in the United States: e-commerce accounts for about 19 percent of China's retail sales, while Statista estimates that e-commerce will account for 11.1% of the United States' retail sales in 2019.

The dichotomy between the wealthy, populous east coast of China and its relatively undeveloped rural hinterland to the west and north has likely helped e-commerce take a growing share of the retail economy. Instead of competing against a mature brick-and-mortar supply chain (like Walmart's in the United States), e-commerce is connecting buyers and sellers in China who have never before been able to do business together.

One of ZTO Express' recent announcements put the industry's growth story in perspective. In the month of May, ZTO moved 1 billion parcels.

"Parcel volume of 1 billion is equivalent to the industry's total parcel volume in 2006 or our total parcel volume in 2013, which is a significant achievement," Lai Meisong, founder and chief executive officer of ZTO, told Xinhua.

Image Sourced From Pixabay

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