 Good day, fellow investors. Let's continue with our China growth stock analysis. And this time we'll discuss ZTO Express. Alibaba just invested 10% 1.3 billion into the company. So you would invest in this company at the same price Alibaba just invested an equity investment. So Alibaba sees a lot of potential here. Let's see what the stock is about. It's an express delivery company, logistics company in China. So let's see what it is about, what is the valuation, what is the expected growth rate and what would be an undervalued or overvalued price for the company. As I said, ZTO is a nationwide express delivery company in China and has built the infrastructure really early with the highest capital expenditure among peer players in the past five years. So securing land use rights, constructing two unique designs. So first player advantage, ZTO, they say they have it. The online growth retail sales is 20% over the last years. 39% has been over the last six, seven years and it's expected to grow at 20% up till 2020. This bodes well for all the companies in the delivery sector, which ZTOs makes part of it. It's very interesting that ZTO earned market share since 2011 from 7.6% to 15.5% so they doubled their market share but there are a lot of competitors, YTO, STO, BEST, etc. Something to keep in mind because competition is tricky with these growth stocks. The milestones, normal companies started with venture capital investments, Sequoia Capital invested in 2013, now 2018 as I said 10% strategic equity investment of 1.48 billion on the market cap of around 13 billion, if I'm not mistaken now, by Alibaba and their subsidiary now consolidated, Kainia. What is distinctive with them? They have the network delivery network but they have network partners for the pickup and the last mile delivery. This network partnering system is what is growing in China and is gaining more and more market share so only 14% of distributors have direct models without the network partners for the last and first mile. Nationwide web growing so 98% country level city coverage, 83 sorting hubs, 29,500 service outlets. The growth has been staggering, the market has been growing at 20 something percent, they are growing at 15 percentage points higher, 41% year-of-year parcel volume, operating profit 30% net income up 108% and 35% margin. Staggering margin is such a high competitive environment like deliveries so this margin is what I would say okay this is the biggest risk, if this margin starts contracting then ZTO might be in trouble. However as long as there is the 20% market growth tailwind it's hard to miss the growth rate. As I said the margins are extremely high, adjusted net margins are 26%, always have been there around and above 20% so very very strong. The cash flows are there, positive cash flows, capital expenditures are relatively fat which is good as a company is scaling, the cash and cash equivalents are growing and Alibaba's investments certainly helps. As I always like to listen to the story of the management their goal is from the conference goal to grow their parcel volume faster than the industry by an average of 10 percentage points each year so hence they should grow from around the expected growth, market 20% they will grow 40% if the market slows down to 17 they will grow 27 that's something to imply in the models. The guidance higher growth 45 to 48% growth really amazing. They will actively continue to expand signed contracts to develop sorting capabilities, automation, automation, dynamic weighing machines etc etc to make everything faster. On competition this is very important they did notice that with a large outbound outbound volume the competition is increasing and that's very very important because as the competition increases there is there is slow a slowdown you can see very big trouble in pricing and lower margins. However they say they also notice that some of the smaller express delivery companies are falling behind in terms of additional scale and they will lose their competitiveness and most likely lose out their market share and fade out so that's something very interesting. The new companies also using them that's an IPO we'll discuss that into the recent IPOs pin duo duo so that represents 30% of the total volume. When I put all this into my models if ZTO grows at 20% over the next five years and I put the price earnings ratio of 10 in 2023 we're not far now especially the forward price earnings ratio then the value of the company is 8.66 the current stock price is 16 so that's extremely overvalued. To justify the current stock price the company should grow earnings at 0.25% growth of earnings over the next five years and have a valuation of 15 in 2023 this is possible I'm not saying it's not possible so then the present value at an expected 15% discount rate would be 15.53 compared to the price of around 16 so that would make it fairly priced 25% growth and a valuation of 15. Is that possible I think it is? Is the negative scenario possible also if there is more trade wars a contraction into the buying power of the Chinese consumer then all those pricing power the pricing power that all those delivery companies for now have and I'm going to analyze a little bit more of them to see what's going on and what's the real value behind this then all that pricing power will become a pricing disadvantage and all those margins might shrink extremely fast and then you can forget the 25% growth you're just hoping the company survives and that's something that will be there that will be cyclicality they are investing with every normal business when you invest so much there will come a time when okay you have idle capacity and that cost that puts down margin so nothing can it can be linear as it is so I also approach that from of course a conservative perspective so I don't expect ZTO to grow linearly over the next 10 years to 20-30% there will be ups and downs so it is a company to follow if you want to be exposed to that sector for now it's a little bit overvalued if it hits 9 what is always possible with Chinese stocks that go up and down like crazy then I'll take another look and see how it fits and compare it to all the other Chinese companies we are looking to you in the next video