What happened

Shares of ZTO Express (NYSE:ZTO) were pulling back today after the Chinese logistics company reported its third-quarter earnings results. The company posted strong top-line growth in its third-quarter report, but nonetheless saw profits decline due to increased competition weighing on prices.

As of 12:36 p.m. EST, the stock was down 7.7%.

A man delivering a package.

Image source: Getty Images.

So what

ZTO, which is backed by Alibaba Group Holding, said revenue rose 26.1% to $977.8 million, topping estimates at $949.8 million, on a 51.2% increase in parcel volume to 4.6 billion.

Despite the strong revenue growth, gross profit in the period actually fell 13% to $204.9 million as gross margin compressed from 30.3% all the way to 21%. Management blamed the falling gross margin on a "competition-led" 18.4% decline in average selling prices in its core express delivery category. 

That led to an 11.2% decline in adjusted EBITDA to $246.8 million, and adjusted earnings per American depositary share (ADS) falling from $0.25 to $0.23, matching estimates.

CFO Huiping Yan defended the company in spite of the decline in profits, saying, "Impacted by competition that remained fierce during the period, ZTO's adjusted net income was RMB1.2 billion and the 8.2% decrease was relatively moderate given an 18.4% price decline which was at the low end of the market range of price decline." 

ZTO also touted its recent secondary listing in Hong Kong and it now has more than $3 billion in cash ready to deploy to expand its logistics infrastructure.

Now what

Management maintained its guidance for the full year, calling for parcel volume growth of 33.7% to 40.3% and for a 1.7% to 9.3% decline in adjusted net income, or $730 million to $790 million. 

While ZTO looks like one of the companies primed to capitalize on the boom in Chinese e-commerce, investors should keep an eye on prices as well as competition from JD.com and others, and shouldn't ignore the decline in profits.

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