What happened

Shares of Chinese express delivery service ZTO Express (NYSE:ZTO) fell sharply at the start of trading on Wall Street on May 21, losing as much as 12% of their value in the first half hour of the day. The reason for the drop was the company's release of earnings on May 20, after the market close.

So what

ZTO Express' first-quarter results were pretty bad, with revenue off by about 14% year over year. Gross profit fell 35%, and net income declined a touch over 45%. Adjusted earnings per American depository share was $0.12, a decline of 33% from the same quarter in 2019. Investors were clearly displeased with the business downturn.   

A delivery truck driver unloading boxes from the back of the truck

Image source: Getty Images.

China was the first country that had to deal with COVID-19, and it did so by essentially shuttering vast swaths of the giant Asian nation to slow the virus' spread. That, obviously, had an impact on ZTO. However, the real problem was lower pricing (off nearly 20% per parcel) due to competitive pressures, not volume. The company highlighted that volume, aided by e-commerce-related shipping, had increased nearly 5% year over year.

While that's a positive, CFO Huiping Yan noted that increasing demand would require the company to "recalibrate capacity investment and output efficiencies while navigating through a highly competitive landscape." That suggests a future that includes higher costs. So, even if ZTO can regain pricing strength in the face of ongoing competition, rising costs might eat into any benefit. If it can't raise prices, meanwhile, it could be left dealing with rising costs and falling pricing.  

Now what

It would be easy to suggest that COVID-19 was the big problem ZTO faced in the first quarter, and that the worst has now passed. However, that doesn't appear to be the case, here, even though management did make sure to highlight the coronavirus at multiple points in its earnings release.

What long-term investors will really want to focus on is the fact that competition will remain a material ongoing concern for ZTO as it looks to expand its business. While the long-term future for express shipping in China is probably good, investors should brace themselves for continued volatility at ZTO as it fights to solidify and expand its position in the market. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.