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ZTO‘s reverse logistics parcel volume grew 80% year on year in the second quarter of 2026, helping drive overall parcel volume growth of 6.5%, ahead of industry growth of 4.2%. Management lowered 2026 parcel volume growth guidance to 6%-10% from 10%-13%.

Why it matters: We anticipate higher mix of reverse logistics parcels and further cost savings from intelligent routing and automation to increase unit gross profit to CNY 0.38 by 2030. The favorable mix boosted ZTO's unit gross profit to CNY 0.36 in the quarter from CNY 0.30 a year earlier. We see reverse logistics as an increasingly important earnings growth driver for ZTO. Despite pricing pressure, reverse logistics parcel generates much higher absolute unit profit than the bread-and-butter e-commerce parcels. We trim our 2026-28 EBIT estimates by 1%-3% on a weaker volume outlook and pricing pressure in reverse logistics but leave our midcycle EBIT largely intact, as we model weaker revenue growth offset by operating leverage and technology-driven cost efficiency.

The bottom line: We maintain our fair value estimates for narrow-moat ZTO at USD 23.00 per ADS and HKD 180.40 per share. We view shares as fully valued, as the market has largely priced in the benefits of anti-involution policies in improving industry pricing discipline and profitability. While the strong growth of reverse logistics offers an opportunity for long-term earnings expansion, uncertainty around fuel costs and rising social insurance expenses could offset part of these gains.

Key stats: Combined unit transportation and sorting cost per parcel fell CNY 0.02 year on year to CNY 0.56 in the quarter, with transportation absorbing a CNY 0.02 diesel headwind on a 24% fuel price increase. Adjusting for fuel, the underlying cost decline was closer to CNY 0.04, or 7%.

Our fair value estimate is USD 23.00 per ADS or HKD 180.40 per share.

The express delivery industry in China should continue to consolidate in the very long term, given the current oversupply situation. We think competition is intense, though moderately improved. The government rolled out the anti-involution policy such that ZTO’s peers can no longer adopt aggressive price cuts to gain share. We expect unit express revenue to rise by 3.4% per year over the next five years due to reduced volume incentives, partly offset by competition, lighter and smaller parcel sizes, and the return of cost savings to customers. We expect a higher mix of higher-priced reverse logistics parcels to offset some of the impact of intense price competition in the low-price e-commerce parcels market. We assume revenue will rise by a 9.5% CAGR over the next five years.

We forecast recurring EBIT margin to rise from 19.6% to 20.0% over the next five years. We expect recurring EBIT to grow 10% annually over the next five years.

Cost advantage is the key moat source in express delivery. We think ZTO Express has a narrow moat, thanks to its highest parcel volume market share, lowest unit express delivery costs, and the highest adjusted EBIT and net profit share in 2024 among the Tongdas.

ZTO’s cost advantage is manifested in its lowest unit cost in express delivery—excluding delivery cost that is not reported by ZTO but is reported by its A-shares peers for apple-to-apple comparison purposes—among Tongdas—since 2018. In 2024, unit costs in the express delivery segment were CNY 0.68 at ZTO, compared with CNY 0.72 at STO, CNY 0.71 at YTO, and CNY 0.70 at Yunda. ZTO’s volume share was 19.4%, 4.2% higher than YTO, the second-largest Tongda player, in 2024. While ZTO's cost and market share advantages appear modest, we note that this is due to its peers’ strategy of lowering unit prices to gain volume share. ZTO’s unit gross profit in the segment was CNY 0.35, higher than the CNY 0.13 to CNY 0.19 range reported by its competitors. ZTO captured 61% of net profit and 51% of adjusted EBIT share among Tongdas in 2024, while YTO held just 13%. This underscores customers’ strong willingness to pay a premium for ZTO's higher-priced services, reflecting its brand strength.

We think the cost advantage and healthy profitability will allow ZTO to increase its volume share and maintain its leadership in volume share and cost advantage in the coming decade.

We refrain from awarding a wide moat rating to ZTO. Although J&T Express’ acquisition of Best’s express business was not very successful, we think potential mergers and acquisitions, and subsequently, successful integration, could potentially rival ZTO’s leadership. More than 70 mergers and acquisitions have been completed or announced by the global top 10 integrated logistics service providers over the past 10 years as of 2023, per Frost & Sullivan. Based on China’s market concentration definition in the antitrust regulations and 2024 volume share, we think there is room for two players to merge and exceed ZTO’s 2024 volume share.

J&T Express’ entrance into China’s relatively fragmented express delivery market in 2019 has been somewhat successful, in our opinion, leading to our confidence that ZTO doesn’t have a wide moat. J&T launched a price war to amass volume and network density in the express delivery market. Riding on the rapid rise in e-commerce parcel volume from Pinduoduo, the new entrant quickly increased its scale by securing approximately 80% of its parcel volume from PDD as reported in January 2021, according to iResearch. J&T Express successfully grabbed market share via an aggressive price war in the China express delivery segment in 2020 to 2021, with prices 30%-50% lower than peers on average in many areas, Sina News reported. J&T also completed acquiring Best in November 2021. As such, J&T’s volume share in China rose from 2.5% in 2020 to 11.3% in 2024. Its EBIT in China turned positive in 2024.

E-commerce parcel volume and average parcel weight grow faster than expected, supporting revenue growth and buffering the profitability of ZTO.

Successful expansion of higher-value services such as reverse logistics, and key business-to-consumer solutions increases wallet share with large merchants and enhances profitability.

Successful cost structure reductions at the network outlet layer translate into lower headquarters subsidies, expanding ZTO's margin capture.

A rising mix of low-margin economic express delivery business leads to faster-than-expected margin compression.

A relaxation of anti-involution enforcement on pricing may return the industry to price-led share competition, eroding margins and profitability.

Consolidation among express delivery peers strengthens competitors' network density and bargaining power, eroding ZTO's market leadership and scale advantages.