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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

(Mark One)

  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2021.

OR

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

OR

  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

For the transition period from                      to                     

Commission file number 001-37922

ZTO Express (Cayman) Inc.

(Exact name of Registrant as specified in its charter)

N/A

(Translation of Registrant’s name into English)

Cayman Islands

(Jurisdiction of incorporation or organization)

Building One, No. 1685 Huazhi Road,
Qingpu District, Shanghai, 201708
People’s Republic of China

(Address of principal executive offices)

Huiping Yan, Chief Financial Officer

Building One, No. 1685 Huazhi Road,
Qingpu District, Shanghai, 201708
People’s Republic of China
Phone: (86 21) 5980 4508
Email: hp.yan@zto.com

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of Each Exchange on Which Registered

American depositary shares, each representing one Class A ordinary share par value US$0.0001 per share

ZTO

New York Stock Exchange

Class A ordinary shares, par value US$0.0001 per share

2057

The Stock Exchange of Hong Kong Limited

Securities registered or to be registered pursuant to Section 12(g) of the Act

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

(Title of Class)

Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of December 31, 2021, there were 808,448,289 ordinary shares outstanding, par value $0.0001 per share, being the sum of 602,348,289 Class A ordinary shares and 206,100,000 Class B ordinary shares.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

  Yes     No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

  Yes     No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

  Yes     No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

  Yes     No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

Emerging growth company

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.   

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.   

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP

International Financial Reporting Standards as issued
by the International Accounting Standards Board

Other

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

  Item 17    Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

  Yes     No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

  Yes     No

TABLE OF CONTENTS

INTRODUCTION

1

FORWARD-LOOKING STATEMENTS

4

PART I

5

Explanatory Note

5

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

11

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

11

ITEM 3.

KEY INFORMATION

11

ITEM 4.

INFORMATION ON THE COMPANY

69

ITEM 4A.

UNRESOLVED STAFF COMMENTS

108

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

108

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

126

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

144

ITEM 8.

FINANCIAL INFORMATION

147

ITEM 9.

THE OFFER AND LISTING

149

ITEM 10.

ADDITIONAL INFORMATION

150

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

166

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

167

PART II

170

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

170

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

170

ITEM 15.

CONTROLS AND PROCEDURES

170

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

171

ITEM 16B.

CODE OF ETHICS

171

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

171

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

171

ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

171

ITEM 16F.

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

172

ITEM 16G.

CORPORATE GOVERNANCE

172

ITEM 16H.

MINE SAFETY DISCLOSURE

172

ITEM 16I.

DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

172

PART III

173

ITEM 17.

FINANCIAL STATEMENTS

173

ITEM 18.

FINANCIAL STATEMENTS

173

ITEM 19.

EXHIBITS

173

i

INTRODUCTION

ZTO Express (Cayman) Inc. is not a Chinese operating company but rather a Cayman Islands holding company with operations primarily conducted by its subsidiaries in China and through contractual arrangements with ZTO Express based in China. PRC laws and regulations restrict and impose conditions on foreign direct investment in companies involved in the provision of domestic mail delivery services. Therefore, we operate such business in China through ZTO Express and its subsidiaries, and rely on contractual arrangements among Shanghai Zhongtongji Network, ZTO Express and its shareholders to consolidate its financial results with ours under U.S. GAAP. These contractual arrangements enable us to exercise effective control over ZTO Express, receive the economic benefits that could potentially be significant to ZTO Express in consideration for the services provided by Shanghai Zhongtongji Network, and hold an exclusive option to purchase all or part of the equity interests in ZTO Express when and to the extent permitted by PRC law. Because of these contractual arrangements, we are the primary beneficiary of ZTO Express and hence consolidate its financial results with ours under U.S. GAAP. Revenues contributed by ZTO Express accounted for 97.1%, 94.1% and 97.7% of our total revenues for the fiscal years 2019, 2020 and 2021, respectively. As used in this annual report, “ZTO” refers to ZTO Express (Cayman) Inc., and “we,” “us,” “our company” or “our” refers to ZTO Express (Cayman) Inc., its subsidiaries, and, in the context of describing our operations and consolidated financial information, ZTO Express and its subsidiaries in China. Investors in our ADSs and/or Class A ordinary shares thus are not purchasing equity interest in ZTO Express but instead are purchasing equity interest in ZTO Express (Cayman) Inc., a Cayman Islands holding company.

Our corporate structure is subject to risks associated with our contractual arrangements with ZTO Express. The contractual arrangement is perceived as replicating foreign investment in China-based companies where PRC regulations prohibit direct foreign investment in the operating companies. ZTO and its investors may never have a direct ownership interest in ZTO Express or in the businesses that are conducted by ZTO Express or its subsidiaries. Uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements, and these contractual arrangements have not been tested in a court of law. If the PRC government finds that the agreements that establish the structure for operating our business do not comply with PRC laws and regulations, or if these regulations or their interpretations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. This may result in ZTO Express being deconsolidated, which would materially and adversely affect our operations, and our ADSs and/or Class A ordinary shares may decline significantly in value or become worthless. ZTO, our PRC subsidiaries, ZTO Express, and investors of ZTO face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with ZTO Express and, consequently, significantly affect the financial performance of ZTO Express and our company as a whole. The PRC regulatory authorities could disallow the contractual arrangement, which would likely result in a material adverse change in our operations, and our Class A ordinary shares or our ADSs may decline significantly in value or become worthless. For a detailed description of the risks associated with our corporate structure, please refer to risks disclosed under “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure.”

We face various legal and operational risks and uncertainties associated with being based in or having the majority of our operations in China and the complex and evolving PRC laws and regulations. For example, we face risks associated with regulatory approvals on offerings conducted overseas by and foreign investment in China-based issuers, the use of VIEs, anti-monopoly regulatory actions, and oversight on cybersecurity and data privacy, as well as the lack of PCAOB inspection on our auditors, which may impact our ability to conduct certain businesses, accept foreign investments, or list on a United States or other foreign exchange. These risks could result in a material adverse change in our operations and the value of our ADSs, significantly limit or completely hinder our ability to continue to offer securities to investors, or cause the value of such securities to significantly decline. For a detailed description of risks related to doing business in China, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China.”

1

Our ADSs may be delisted and our ADSs and shares prohibited from trading in the over-the-counter market under the Holding Foreign Companies Accountable Act, or the HFCAA, given the PCAOB is unable to inspect or fully investigate auditors located in China. On December 16, 2021, PCAOB issued the HFCAA Determination Report, according to which our auditor is subject to the determinations that the PCAOB is unable to inspect or investigate completely. Under the current law, delisting and prohibition from over-the-counter trading in the U.S. could take place in 2024. On June 22, 2021, the U.S. Senate passed a bill known as the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would decrease the number of non-inspection years from three years to two years, and thus, our ADS could be delisted from the exchange and prohibited from over-the-counter trading in the U.S. in 2023. If this happens, there is no certainty that we will be able to maintain our listing status on another non-U.S. exchange, such as Hong Kong Stock Exchange, and the impact on the market for our shares outside of the U.S. is uncertain. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China.”

ZTO Express (Cayman) Inc., our Cayman Islands holding company, or the Parent, may transfer cash to our wholly-owned Hong Kong subsidiaries (through intermediate holding companies in the British Virgin Islands), by making capital contributions or providing loans, and our Hong Kong subsidiaries may transfer cash to our PRC subsidiaries by making capital contributions or providing loans to them. Because the Parent and its subsidiaries control ZTO Express through contractual arrangements, they are not able to make direct capital contribution to ZTO Express. However, they may transfer cash to ZTO Express by loans or by making payment to ZTO Express for inter-group transactions. As of December 31, 2021, the Parent had made cumulative capital contribution of RMB15,080.5 million. In 2019, 2020 and 2021, no shareholder loan was provided by the Parent to our PRC subsidiaries. For the years ended December 31, 2019, 2020 and 2021, no dividends or distributions were made to the Parent by our subsidiaries. For the years ended December 31, 2019, 2020 and 2021, dividends of US$189.1 million, US$233.5 million and US$208.4 million were paid to shareholders of the Parent of record as of designated record dates. Historically, ZTO Express (Cayman) Inc. paid dividends to its shareholders primarily using proceeds from offshore financing activities. As ZTO Express (Cayman) Inc. is a Cayman Islands holding company with no material operations of its own, its ability to pay dividends may depend upon dividends paid by our PRC subsidiaries in the future. For more detailed discussion of how cash is transferred between ZTO, our subsidiaries and ZTO Express, see “Cash Transfers and Dividend Distribution” at the outset of Part I.

Unless otherwise indicated and except where the context otherwise requires, references in this annual report on Form 20-F to:

“ADSs” are to our American depositary shares, each of which represents one Class A ordinary share;
“ADRs” are to the American depositary receipts that evidence our ADSs;
“China” or the “PRC” are to the People’s Republic of China, excluding, for the purposes of this annual report only, Hong Kong, Macau and Taiwan;
“delivery service fees” are to service fees directly charged by network partners from parcel senders in connection with express delivery services rendered. The full delivery service fees collected by pickup outlets upfront from the senders typically comprise of (i) the pickup service fees; (ii) the network transit fees payable to the Company; and (iii) the last-mile delivery fees payable to the delivery outlets operated by other network partners;
“Hong Kong” or “HK” or “Hong Kong S.A.R.” are to the Hong Kong Special Administrative Region of the PRC;
“Hong Kong Listing Rules” are to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, as amended or supplemented from time to time;
“Hong Kong Stock Exchange” are to The Stock Exchange of Hong Kong Limited;

2

our “network partners” are to business partners that own and operate pickup and delivery outlets in our network and operate express delivery services under our “Zhongtong” or “ZTO” brand;
“network transit fees” are to fees payable by our network partners to us in connection with the services we provide to them, which mainly include parcel sorting and parcel line-haul transportation;
“New Retail” are to the continued integration of online and offline retail channels by large e-commerce platforms and various retail merchants to reduce customer acquisition costs and enhance customers' shopping experience;
“ordinary shares” are to our Class A and Class B ordinary shares, par value US$0.0001 per share;
our “parcel volume” in any given period are to the number of parcels collected by our network partners using our waybills in that period;
“RMB” or “Renminbi” are to the legal currency of China;
“SFO” are to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), as amended or supplemented from time to time;
“unit cost per parcel” are to the sum of cost of revenues and total operating expenses of the applicable period divided by our total parcel volume during the same period;
“US$,” “U.S. dollars,” “$,” or “dollars” are to the legal currency of the United States;
“ZTO” are to ZTO Express (Cayman) Inc.;
“ZTO Express” are to ZTO Express Co. Ltd. or, depending on the context, ZTO Express Co. Ltd. and its subsidiaries; and
“we,” “us,” “our company” or “our” are to ZTO Express (Cayman) Inc. and its subsidiaries, and, in the context of describing our operations and the consolidated financial information, its consolidated variable interest entity and the subsidiaries of the consolidated variable interest entity in China, including, but not limited to, ZTO Express. Depending on the context, references to “we” and “our” may also include the network partners within our network.

3

FORWARD-LOOKING STATEMENTS

This annual report on Form 20-F contains forward-looking statements that relate to our current expectations and views of future events. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigations Reform Act of 1995.

You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:

our goals and strategies;
our future business development, financial conditions and results of operations;
the expected growth of the express delivery industry in China;
our expectations regarding demand for and market acceptance of our services;
our expectations regarding our relationships with network partners, direct and end customers, suppliers and our other stakeholders;
competition in our industry; and
relevant government policies and regulations relating to our industry.

You should read this annual report and the documents that we refer to in this annual report and have filed as exhibits to this annual report completely and with the understanding that our actual future results may be materially different from what we expect. Other Sections of this annual report discuss factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.

Our reporting currency is the Renminbi, or RMB. This annual report contains translations of RMB and Hong Kong dollar amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise stated, all translations of RMB and Hong Kong dollars into U.S. dollars and from U.S. dollars into RMB in this annual report were made at a rate of RMB6.3726 to US$1.00 and HK$7.7996 to US$1.00, the respective exchange rates on December 30, 2021 set forth in the H.10 statistical release of the Federal Reserve Board. We make no representation that any RMB, Hong Kong dollar or U.S. dollar amounts referred to in this annual report could have been, or could be, converted into U.S. dollars, RMB or Hong Kong dollars, as the case may be, at any particular rate or at all.

4

PART I

EXPLANATORY NOTE

ZTO is a Cayman Islands holding company with no equity ownership in ZTO Express, its consolidated affiliated entity. We conduct our operations in China through (i) our PRC subsidiaries and (ii) ZTO Express, with which we have maintained contractual arrangements. Investors in our ADSs thus are not purchasing equity interest in ZTO Express in China but instead are purchasing equity interest in a Cayman Islands holding company. If the PRC government finds that the agreements that establish the structure for operating certain of our businesses do not comply with PRC laws and regulations, or if these regulations or their interpretations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. ZTO, our PRC subsidiaries, ZTO Express, and investors of ZTO face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with ZTO Express and, consequently, significantly affect the financial performance of ZTO Express and our company as a whole. The PRC regulatory authorities could disallow the VIE structure, which would likely result in a material adverse change in our operations, and our Class A ordinary shares or our ADSs may decline significantly in value.

PRC government’s authority in regulating our operations and its oversight and control over offerings conducted overseas by, and foreign investment in, China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. Implementation of industry-wide regulations in this nature may cause the value of such securities to significantly decline. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of our ADSs and ordinary shares.”

Risks and uncertainties arising from the legal system in China, including risks and uncertainties regarding the enforcement of laws and quickly evolving rules and regulations in China, could result in a material adverse change in our operations and the value of our Class A ordinary shares or ADSs. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”

Our Holding Company Structure and Contractual Arrangements

ZTO Express (Cayman) Inc. is a holding company with no material operations of its own. We conduct our operations primarily through our PRC subsidiaries and ZTO Express, our consolidated affiliated entity, and its subsidiaries. Our domestic mail delivery services in China have been conducted through ZTO Express in order to comply with the PRC laws and regulations, which prohibit or restrict control of companies involved in the provision of domestic mail delivery services. Revenues contributed by ZTO Express accounted for 97.1%, 94.1% and 97.7% of our total revenues for the fiscal years 2019, 2020 and 2021, respectively. Investors in our ADSs and/or Class A ordinary shares are not purchasing equity interest in ZTO Express in China but instead are purchasing equity interest in a holding company incorporated in the Cayman Islands.

5

The following chart illustrates our company’s organizational structure, including our principal subsidiaries and consolidated affiliated entities as of March 31, 2022:

Graphic

(1)

To the knowledge of our company, Meisong Lai, Jianfa Lai, Jilei Wang. Xiangliang Hu, Shunchang Zhang, Jianying Teng, Xuebing Shang, Baixi Lan and Jianchang Lai are beneficial owners of the shares of our company and hold 34.35%, 12.00%, 10.00%, 7.05%, 6.00%, 5.02%, 4.40%, 1.40% and 1.06% equity interests in ZTO Express Co., Ltd., respectively. Among them, Meisong Lai, Jianfa Lai, Jilei Wang are also directors of our company. The remaining 18.72% equity interest in ZTO Express Co., Ltd. are held by 34 other shareholders. None of these 34 shareholders hold more than 4.00% of the equity interest in ZTO Express Co., Ltd.

6

A series of contractual agreements, including voting rights proxy agreement, equity pledge agreement, exclusive call option agreement, powers of attorney, spouse consent letters and exclusive consulting and services agreement and its supplemental agreement, have been entered into by and among Shanghai Zhongtongji Network, our wholly owned subsidiary, ZTO Express, our consolidated affiliated entity, and the shareholders of ZTO Express. The following is a summary of the currently effective contractual arrangements:

(i) voting rights proxy agreement, pursuant to which each of the shareholders of ZTO Express irrevocably appointed Meisong Lai, Shanghai Zhongtongji Network’s designated person, as their attorney-in-fact to exercise all applicable shareholder rights, including, but not limited to: (i) calling for and attending shareholders meetings as the proxy of the shareholders; (ii) exercising voting rights and all other shareholder’s rights provided under PRC laws and the articles of association of ZTO Express, including but not limited to, selling, transferring, pledging or disposing all or a portion of the shares held by such shareholder or the assets of ZTO Express; (iii) voting on all matters submitted to shareholders meetings, including but not limited to, the election of directors and senior management officers who shall be appointed by shareholders; and (iv)exercising other voting rights granted to the shareholders by the articles of association of ZTO Express, as may be amended from time to time;

(ii) equity pledge agreement, pursuant to which each of the shareholders of ZTO Express pledged all of their equity interests in ZTO Express to guarantee their and ZTO Express’s performance of their obligations under the contractual arrangements, including the exclusive consulting and services agreement, its related agreements and the equity pledge agreement;

(iii) exclusive call option agreement, pursuant to which each of the shareholders of ZTO Express irrevocably granted Shanghai Zhongtongji Network an exclusive option to purchase, or have its designated entity or person to purchase, at its discretion, to the extent permitted under PRC law, all or part of the shareholders’ equity interests in ZTO Express;”

(iv) powers of attorney, pursuant to which the shareholders of ZTO Express each irrevocably appointed Shanghai Zhongtongji Network’s designated person, Meisong Lai, as the attorney-in-fact to exercise all of applicable shareholder’s voting and related rights with respect to such shareholder’s equity interests in ZTO Express;

(v) consent letter, pursuant to which each of the spouses of six key shareholders of ZTO Express unconditionally and irrevocably agreed that the spouse is aware of the abovementioned exclusive call option agreement, voting right proxy agreement, irrevocable powers of attorney, equity pledge agreement and the exclusive consulting and services agreement, and has read and understood the contractual arrangements; and

(vi) exclusive consulting and services agreement and its supplemental agreement, pursuant to which Shanghai Zhongtongji Network has the exclusive right to provide ZTO Express with the technical support and consulting services required by ZTO Express’s business. Shanghai Zhongtongji Network owns the exclusive intellectual property rights created as a result of the performance of this agreement. ZTO Express agrees to pay Shanghai Zhongtongji Network an annual service fee, at an amount equal to 100% of the net income of ZTO Express and its affiliates.

For more details of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure—Agreements that provide us effective control over ZTO Express” and “—Agreement that allows us to receive economic benefits from ZTO Express.”

7

However, the contractual arrangements may not be as effective as direct ownership in providing us with control over ZTO Express, and we may incur substantial costs to enforce the terms of the arrangements. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—We rely on contractual arrangements with our variable interest entity and its shareholders for a substantial portion of our business operations, which may not be as effective as direct ownership in providing operational control” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—The shareholders of our variable interest entity may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.”

There are also substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules regarding the status of the rights of ZTO with respect to its contractual arrangements with ZTO Express and its shareholders. The Circular on Seeking Public Comments on the Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Enterprises (Draft for Comment), or the Draft Overseas Securities Offering and Listing Measures, and the Circular on Seeking Public Comments on the Administrative Regulations of the State Council on the Overseas Issuance and Listing of Securities by Domestic Enterprises (Draft for Comment), or the Draft Overseas Securities Offering and Listing Regulations, were issued for public comments on December 24, 2021. However, it is uncertain whether the Draft Overseas Securities Offering and Listing Measures, the Draft Overseas Securities Offering and Listing Regulations or any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If we or ZTO Express are/is found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC government finds that the agreements that establish the structure for operating certain of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations,” “Item 3. Key Information—D. Risk Factors— Risks Related to Our Corporate Structure— Our current corporate structure and business operations may be affected by the PRC Foreign Investment Law,” “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us;” and “Item 3. Key Information—D. Risk Factors——Risks Related to Doing Business in China—The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of our ADSs and ordinary shares.”

Permissions Required from the PRC Authorities for Our Operations

We conduct our business primarily through our PRC subsidiaries, ZTO Express and its subsidiaries in China. Our operations in China are governed by PRC laws and regulations. As of the date of this annual report, our PRC subsidiaries, ZTO Express and its subsidiaries have obtained the requisite licenses and permits from the PRC government authorities that are material for the business operations of our holding company, ZTO Express and its subsidiaries in the PRC, including, among others, the Courier Service Operation Permit and Road Transportation Operation Permit. Given the uncertainties of interpretation and implementation of relevant laws and regulations and the enforcement practice by relevant government authorities, we may be required to obtain additional licenses, permits, filings or approvals for the functions and services of our platform in the future. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Any lack of requisite approvals, licenses or permits applicable to the business operation of us or our network partners may have a material and adverse impact on our business, financial condition and results of operations.”

8

Furthermore, in connection with issuance of securities to foreign investors, the PRC government has recently indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers. On July 6, 2021, the relevant PRC government authorities made public the Opinions on Strictly Scrutinizing Illegal Securities Activities in Accordance with the Law. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies. On December 24, 2021, the China Securities Regulatory Commission, or the CSRC published the Draft Overseas Securities Offering and Listing Measures and the Draft Overseas Securities Offering and Listing Regulations for public comments. Pursuant to the Draft Overseas Securities Offering and Listing Measures and the Draft Overseas Securities Offering and Listing Regulations, PRC domestic companies that directly or indirectly seek to offer or list their securities in an overseas stock exchange, including a PRC company limited by shares and an offshore company whose main business operations are in China and intends to offer securities or be listed in an overseas stock exchange based on its onshore equities, assets, earnings or other similar interests, are required to file with the CSRC within three business days after submitting their application documents to the regulator in the place of intended listing or offering. Failure to complete the filing under the Draft Overseas Securities Offering and Listing Measures and the Draft Overseas Securities Offering and Listing Regulations may subject the domestic company to a warning or a fine of one to ten million RMB. Under serious circumstances, the domestic company may be ordered to suspend its business or suspend its business pending rectification, or its permits or businesses licenses may be revoked. As of the date of this annual report, there is no schedule for the adoptions of such drafts, and it remains unclear whether the versions adopted will have any further material changes. There remain substantial uncertainties about how these drafts will be enacted, interpreted or implemented and how they will affect our operations and future overseas offerings.

As of the date of this annual report, we, our PRC subsidiaries and ZTO Express are not required to obtain any necessary approval or permission from the CSRC, the Cyberspace Administration of China, or the CAC or any other entity that is required to approve ZTO Express’ operations or required for us to offer securities to foreign investors under any currently effective PRC laws, regulations, and regulatory rules. However, if we had inadvertently concluded that such approvals were not required, or if applicable laws, regulations or interpretations change in a way that requires us to obtain such approval in the future, we may be unable to obtain such approvals in a timely manner, or at all, and such approvals may be rescinded even if obtained. Any such circumstance could subject us to penalties, including fines, suspension of business and revocation of required licenses, significantly limit or completely hinder our ability to continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China— The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of our ADSs and ordinary shares.”

The Holding Foreign Companies Accountable Act

The Holding Foreign Companies Accountable Act, or the HFCAA, was enacted on December 18, 2020. The HFCAA states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the Public Company Accounting Oversight Board (United States), or the PCAOB, for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange. Since our auditor is located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our auditor is not currently inspected by the PCAOB, which may impact our ability to remain listed on a United States or other foreign exchange. The related risks and uncertainties could cause the value of our ADSs to significantly decline. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China— The PCAOB is currently unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections over our auditor deprives our investors with the benefits of such inspections” and “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Our ADSs will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCAA, in 2024 if the PCAOB is unable to inspect or fully investigate auditors located in China, or in 2023 if proposed changes to the law are enacted. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.”

9

Cash Transfers and Dividend Distribution

ZTO Express (Cayman) Inc., our Cayman Islands holding company, or the Parent, may transfer cash to our wholly-owned Hong Kong subsidiaries (through intermediate holding companies in the British Virgin Islands), by making capital contributions or providing loans, and our Hong Kong subsidiaries may transfer cash to our PRC subsidiaries by making capital contributions or providing loans to them.

Because the Parent and its subsidiaries control ZTO Express through contractual arrangements, they are not able to make direct capital contribution to ZTO Express. However, they may transfer cash to ZTO Express by loans or by making payment to ZTO Express for inter-group transactions.

The following table sets forth the amount of the transfers for the periods presented.

Year Ended December 31,

    

2019

    

2020

    

2021

(RMB in millions)

Capital contributions and loans from parent to Cayman, BVI, and Hong Kong subsidiaries

 

1,901

 

10,011

 

1,250

Capital contributions from Hong Kong subsidiaries to PRC subsidiaries

 

1,819

 

6,041

 

3,671

Amounts received by subsidiaries from ZTO Express*

 

9,249

 

11,646

 

15,974

Note:

(1)

* The cash flows between the subsidiaries and ZTO Express included the following: transportation fees, service fees and rental expenses.

As of December 31, 2021, the Parent had made cumulative capital contribution of RMB15,080.5 million. In 2019, 2020 and 2021, no shareholder loan was provided by the Parent to our PRC subsidiaries.

For the years ended December 31, 2019, 2020 and 2021, no dividends or distributions were made to the Parent by our subsidiaries. For the years ended December 31, 2019, 2020 and 2021, dividends of US$189.1 million, US$233.5 million and US$208.4 million were paid to shareholders of the Parent of record as of designated record dates.

10

Historically, ZTO Express (Cayman) Inc. paid dividends to its shareholders primarily using proceeds from offshore financing activities. As ZTO Express (Cayman) Inc. is a Cayman Islands holding company with no material operations of its own, its ability to pay dividends may depend upon dividends paid by our PRC subsidiaries in the future. Our PRC subsidiaries in turn generate income from their own operations, and in addition enjoy all economic benefit and receive service fees from ZTO Express pursuant to the exclusive business cooperation agreement with ZTO Express. Under PRC law, each of our subsidiaries and ZTO Express in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, each of our subsidiaries and ZTO Express in China may allocate a portion of its after-tax profits based on PRC accounting standards to a surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by SAFE and declaration and payment of withholding tax. Additionally, if our PRC subsidiaries and ZTO Express incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends or make other distributions to us. Our PRC subsidiaries have not paid dividends and will not be able to pay dividends until it generates accumulated profits and meets the requirements for statutory reserve funds. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from loaning to or making additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business” and “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.” Except these regulatory requirements, there are not any other statutory restrictions and limitations on our ability to distribute earnings from our PRC subsidiaries to the parent company and U.S. investors or the ability of ZTO Express to settle amounts owned under the VIE agreements.

ITEM 1.          IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2.          OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.          KEY INFORMATION

A.          Our Selected Consolidated Financial Data

The following summary consolidated statements of comprehensive income data for the years ended December 31, 2019, 2020 and 2021, summary consolidated balance sheet data as of December 31, 2020 and 2021 and summary consolidated cash flow data for the years ended December 31, 2019, 2020 and 2021 have been derived from our audited consolidated financial statements included elsewhere in this annual report. The summary consolidated statements of comprehensive income data for the years ended December 31, 2017 and 2018, the summary consolidated balance sheet data as of December 31, 2017, 2018 and 2019 and the summary consolidated cash flow data for the years ended December 31, 2017 and 2018 have been derived from our audited consolidated financial statements that are not included in this annual report. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP.

11

You should read the summary consolidated financial information in conjunction with our consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. Our historical results are not necessarily indicative of our results expected for future periods.

Years Ended December 31,

2017

2018

2019

2020

2021

    

RMB

    

RMB

    

RMB

    

RMB

    

RMB

    

US$

(in thousands, except for share and per share data)

Selected Consolidated Comprehensive Income Data:

 

  

 

  

 

  

 

  

 

  

 

  

Revenues

 

13,060,073

 

17,604,451

 

22,109,946

 

25,214,290

 

30,405,839

 

4,771,340

Cost of revenues

 

(8,714,489)

 

(12,239,568)

 

(15,488,778)

 

(19,377,184)

 

(23,816,462)

 

(3,737,323)

Gross profit

 

4,345,584

 

5,364,883

 

6,621,168

 

5,837,106

 

6,589,377

 

1,034,017

Operating income (expenses):

 

  

 

  

 

  

 

 

 

Selling, general and Administrative

 

(780,517)

 

(1,210,717)

 

(1,546,227)

 

(1,663,712)

 

(1,875,869)

 

(294,365)

Other operating income, net

 

183,368

 

178,057

 

387,890

 

580,973

 

789,503

 

123,890

Total operating expenses

 

(597,149)

 

(1,032,660)

 

(1,158,337)

 

(1,082,739)

 

(1,086,366)

 

(170,475)

Income from operations

 

3,748,435

 

4,332,223

 

5,462,831

 

4,754,367

 

5,503,011

 

863,542

Other income (expenses):

 

  

 

  

 

  

 

 

 

Interest income

 

166,325

 

401,162

 

585,404

 

442,697

 

363,890

 

57,102

Interest expense

 

(15,668)

 

(780)

 

 

(35,307)

 

(126,503)

 

(19,851)

Loss from fair value changes of financial instruments

(877)

52,909

8,303

Gain on deemed disposal of equity method investments

 

 

 

 

 

 

Gain/(loss) on disposal of equity investees and subsidiary

 

 

562,637

 

(2,860)

 

1,086

 

2,357

 

370

Impairment of investment in equity investee

 

(30,000)

 

 

(56,026)

 

 

 

Unrealized gain from investment in equity investee

754,468

Foreign currency exchange gain (loss)

 

(48,149)

 

41,189

 

13,301

 

(127,180)

 

(56,467)

 

(8,861)

Income before income tax and share of loss in equity method investments

 

3,820,943

 

5,336,431

 

6,757,118

 

5,034,786

 

5,739,197

 

900,605

Income tax expense

 

(646,361)

 

(929,133)

 

(1,078,295)

 

(689,833)

 

(1,005,451)

 

(157,777)

Share of loss in equity method investments

 

(15,682)

 

(19,386)

 

(7,556)

 

(18,507)

 

(32,419)

 

(5,087)

Net Income

 

3,158,900

 

4,387,912

 

5,671,267

 

4,326,446

 

4,701,327

 

737,741

Net loss/(income) attributable to noncontrolling interests

 

763

 

(4,887)

 

2,878

 

(14,233)

 

53,500

 

8,395

Net income attributable to ZTO Express (Cayman) Inc.

 

3,159,663

 

4,383,025

 

5,674,145

 

4,312,213

 

4,754,827

 

746,136

Net income attributable to ordinary shareholders

 

3,159,663

 

4,383,025

 

5,674,145

 

4,312,213

 

4,754,827

 

746,136

Net earnings per share/ADS attributable to ordinary shareholders

 

  

 

  

 

  

 

 

 

Basic

 

4.41

 

5.83

 

7.24

 

5.42

 

5.80

 

0.91

Diluted

 

4.40

 

5.82

 

7.23

 

5.42

 

5.80

 

0.91

Weighted average shares used in calculating net earnings per ordinary share/ADS

 

  

 

  

 

  

 

 

 

Basic

 

717,138,526

 

751,814,077

 

784,007,583

 

796,097,532

 

819,961,265

 

819,961,265

Diluted

 

717,599,562

 

752,672,956

 

784,331,120

 

796,147,504

 

819,961,265

 

819,961,265

Other comprehensive income (loss), net of tax of nil:

 

  

 

  

 

  

 

 

 

Foreign currency translation adjustment

 

(590,545)

 

867,612

 

104,004

 

(771,291)

 

(146,533)

 

(22,994)

Comprehensive income attributable to ZTO Express (Cayman) Inc.

 

2,569,118

 

5,250,637

 

5,778,149

 

3,540,922

 

4,608,294

723,142

12

As of December 31,

2017

2018

2019

2020

2021

    

RMB

    

RMB

    

RMB

    

RMB

    

RMB

    

US$

(in thousands)

Selected Consolidated Balance Sheet Data:

 

  

 

  

 

  

 

  

 

  

 

  

Current assets:

 

  

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

 

5,425,024

 

4,622,554

 

5,270,204

 

14,212,778

 

9,721,225

 

1,525,472

Short-term investment

 

5,224,559

 

13,599,852

 

11,113,217

 

3,690,402

 

2,845,319

 

446,493

Advances to suppliers

 

263,574

 

337,874

 

438,272

 

589,042

 

667,855

 

104,801

Prepayments and other current assets

 

719,983

 

1,507,996

 

1,964,506

 

2,334,688

 

3,142,368

 

493,106

Non-current assets:

 

  

 

  

 

  

 

 

 

Property and equipment, net

 

6,473,010

 

9,035,704

 

12,470,632

 

18,565,161

 

24,929,897

 

3,912,045

Goodwill

 

4,241,541

 

4,241,541

 

4,241,541

 

4,241,541

 

4,241,541

 

665,590

Total assets

 

25,827,638

 

39,682,857

 

45,890,502

 

59,204,750

 

62,772,343

 

9,850,350

Liabilities and equity

 

  

 

  

 

  

 

 

Current liabilities:

 

  

 

  

 

  

 

 

Short-term bank borrowings

 

250,000

 

 

 

1,432,929

 

3,458,717

 

542,748

Other current liabilities

 

2,281,067

 

2,833,769

 

3,552,288

 

4,487,084

 

5,794,380

 

909,263

Total liabilities

 

4,386,321

 

5,413,308

 

7,487,105

 

10,105,052

 

13,844,762

 

2,172,544

Total liabilities and equity

 

25,827,638

 

39,682,857

 

45,890,502

 

59,204,750

 

62,772,343

 

9,850,350

Years Ended December 31,

2017

2018

2019

2020

2021

    

RMB

    

RMB

    

RMB

    

RMB

    

RMB

    

US$

(in thousands)

Selected Consolidated Cash Flow Data:

 

  

 

  

 

  

 

  

 

  

 

  

Net cash provided by operating activities

 

3,630,684

 

4,404,051

 

6,304,186

 

4,950,749

 

7,220,217

 

1,133,010

Net cash used in investing activities

 

(8,294,547)

 

(12,872,633)

 

(3,664,213)

 

(3,549,341)

 

(8,756,533)

 

(1,374,091)

Net cash provided by/(used in) financing activities

 

(1,061,558)

 

7,042,122

 

(1,982,306)

 

8,337,407

 

(2,903,985)

 

(455,699)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

(424,000)

 

275,680

 

(3,207)

 

(656,137)

 

(150,430)

 

(23,606)

Net increase/(decrease) in cash, cash equivalents and restricted cash

 

(6,149,421)

 

(1,150,780)

 

654,460

 

9,082,678

 

(4,590,731)

 

(720,386)

Cash, cash equivalents and restricted cash at beginning of year

 

11,923,155

 

5,773,734

 

4,622,954

 

5,277,414

 

14,360,092

 

2,253,412

Cash, cash equivalents and restricted cash at end of year

 

5,773,734

 

4,622,954

 

5,277,414

 

14,360,092

 

9,769,361

 

1,533,026

13

Financial Information Related to ZTO Express

The following table presents the condensed consolidating balance sheet data for ZTO Express and other entities as of the dates presented.

As of December 31, 2021

Consolidated

    

The Company

    

Subsidiaries

    

ZTO Express

    

Elimination

    

Total

RMB

(in thousands)

Assets

Current assets:

Cash and cash equivalents

 

621,034

 

8,169,249

 

930,942

 

 

9,721,225

Restricted cash

 

 

27,736

 

 

 

27,736

Accounts receivable, net

 

 

262,167

 

671,277

 

 

933,444

Financing receivables, net

 

 

133,541

 

977,920

 

 

1,111,461

Short-term investment

 

196,462

 

2,328,857

 

320,000

 

 

2,845,319

Inventories

 

 

52,747

 

30,214

 

 

82,961

Advances to suppliers

 

 

612,842

 

55,013

 

 

667,855

Prepayments and other current assets

 

 

1,218,172

 

1,924,196

 

 

3,142,368

Amounts due from related parties

 

2,692,898

 

96,288

 

440,190

 

(3,095,386)

 

133,990

Total current assets

 

3,510,394

 

12,901,599

 

5,349,752

 

(3,095,386)

 

18,666,359

Investments in equity investees

 

45,807,179

 

2,402,827

 

300,380

 

(44,779,938)

 

3,730,448

Property and equipment, net

 

 

19,063,363

 

5,866,534

 

 

24,929,897

Land use rights, net

 

 

4,141,241

 

1,194,308

 

 

5,335,549

Intangible assets, net

 

 

35,634

 

 

 

35,634

Operating lease right-of-use assets

 

 

26,407

 

870,831

 

 

897,238

Goodwill

 

 

84,430

 

4,157,111

 

 

4,241,541

Deferred tax assets

 

 

284,139

 

650,709

 

 

934,848

Long-term investment

 

 

1,214,500

 

 

 

1,214,500

Long-term financing receivables, net

 

 

295,953

 

1,117,003

 

 

1,412,956

Other non-current assets

 

 

377,643

 

384,630

 

 

762,273

Amounts due from related parties-non current

 

 

611,100

 

 

 

611,100

TOTAL ASSETS

 

49,317,573

 

41,438,836

 

19,891,258

 

(47,875,324)

 

62,772,343

Liabilities

 

 

 

 

 

  

Current liabilities

 

 

 

 

 

  

Short-term bank borrowings

 

637,260

 

 

2,821,457

 

 

3,458,717

Accounts payable

 

 

400,880

 

1,556,649

 

 

1,957,529

Notes payable

 

 

45,000

 

129,920

 

 

174,920

Advances from customers

 

 

12,752

 

1,213,797

 

 

1,226,549

Income tax payable

 

 

86,789

 

 

 

86,789

Amounts due to related parties

 

 

3,103,738

 

14,434

 

(3,095,386)

 

22,786

Operating lease liabilities, current

 

 

12,022

 

238,973

 

 

250,995

Acquisition consideration payables

 

 

22,942

 

 

 

22,942

Dividends payable

 

708

 

 

 

 

708

Other current liabilities

 

42,358

 

3,196,742

 

2,555,280

 

 

5,794,380

Total current liabilities

 

680,326

 

6,880,865

 

8,530,510

 

(3,095,386)

 

12,996,315

Non-current operating lease liabilities

 

 

22,351

 

533,740

 

 

556,091

Deferred tax liabilities

 

 

179,813

 

112,543

 

 

292,356

TOTAL LIABILITIES

 

680,326

 

7,083,029

 

9,176,793

 

(3,095,386)

 

13,844,762

14

As of December 31, 2020

Consolidated 

    

The Company

    

Subsidiaries

    

ZTO Express 

    

Elimination

    

Total

RMB

(in thousands)

Assets

Current assets:

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

 

3,443,624

 

9,992,429

 

776,725

 

 

14,212,778

Restricted cash

 

 

133,196

 

 

 

133,196

Accounts receivable, net

 

 

231,347

 

514,666

 

 

746,013

Financing receivables, net

 

 

150,673

 

341,486

 

 

492,159

Short-term investment

 

2,509,137

 

1,181,265

 

 

 

3,690,402

Inventories

 

 

10,295

 

42,775

 

 

53,070

Advances to suppliers

 

 

543,421

 

45,621

 

 

589,042

Prepayments and other current assets

 

13,013

 

1,168,598

 

1,153,077

 

 

2,334,688

Amounts due from related parties

 

4,993,853

 

643,079

 

34,034

 

(5,597,688)

 

73,278

Total current assets

 

10,959,627

 

14,054,303

 

2,908,384

 

(5,597,688)

 

22,324,626

Investments in equity investees

 

37,391,446

 

2,062,086

 

110,570

 

(36,339,639)

 

3,224,463

Property and equipment, net

 

 

12,540,008

 

6,025,153

 

 

18,565,161

Land use rights, net

 

 

3,221,824

 

1,138,849

 

 

4,360,673

Intangible assets, net

 

 

41,832

 

 

 

41,832

Operating lease right-of-use assets

 

 

41,275

 

834,984

 

 

876,259

Goodwill

 

 

84,430

 

4,157,111

 

 

4,241,541

Deferred tax assets

 

 

206,029

 

514,532

 

 

720,561

Long-term investment

 

652,500

 

1,189,500

 

 

 

1,842,000

Long-term financing receivables, net

 

 

185,350

 

1,784,990

 

 

1,970,340

Other non-current assets

 

 

437,838

 

99,456

 

 

537,294

Amounts due from related parties-non current

 

 

500,000

 

 

 

500,000

TOTAL ASSETS

 

49,003,573

 

34,564,475

 

17,574,029

 

(41,937,327)

 

59,204,750

Liabilities

 

  

 

  

 

  

 

  

 

  

Current liabilities

 

  

 

  

 

  

 

  

 

  

Short-term bank borrowings

 

 

 

1,432,929

 

 

1,432,929

Accounts payable

 

 

480,819

 

1,155,069

 

 

1,635,888

Notes payable

 

 

168,062

 

158,138

 

 

326,200

Advances from customers

 

 

50,739

 

1,068,927

 

 

1,119,666

Income tax payable

 

 

(202,098)

 

250,726

 

 

48,628

Amounts due to related parties

 

 

4,993,853

 

620,490

 

(5,597,688)

 

16,655

Operating lease liabilities, current

 

 

12,323

 

234,071

 

 

246,394

Acquisition consideration payables

 

 

22,942

 

 

 

22,942

Dividends payable

 

11,198

 

 

 

 

11,198

Other current liabilities

 

13,562

 

1,878,721

 

2,594,801

 

 

4,487,084

Total current liabilities

 

24,760

 

7,405,361

 

7,515,151

 

(5,597,688)

 

9,347,584

Non-current operating lease liabilities

 

 

34,354

 

468,127

 

 

502,481

Deferred tax liabilities

 

 

127,171

 

127,816

 

 

254,987

TOTAL LIABILITIES

 

24,760

 

7,566,886

 

8,111,094

 

(5,597,688)

 

10,105,052

The following table presents the condensed consolidating statements of operations for ZTO Express and other entities for the periods presented.

For the Year Ended December 31, 2021

Consolidated 

    

The Company

    

Subsidiaries

    

ZTO Express

    

Elimination

    

Total

RMB

(in thousands)

Revenue

 

 

15,651,997

 

29,721,135

 

(14,967,293)

 

30,405,839

Net income

 

4,754,827

 

3,653,565

 

1,237,524

 

(4,944,589)

 

4,701,327

15

    

For the Year Ended December 31, 2020

Consolidated

    

The Company

    

Subsidiaries

    

ZTO Express

    

Elimination

    

 Total

RMB

(in thousands)

Revenue

 

12,999,401

 

23,734,103

 

(11,519,214)

 

25,214,290

Net income

4,312,213

 

3,852,147

 

478,168

 

(4,316,082)

 

4,326,446

    

For the Year Ended December 31, 2019

Consolidated

    

The Company

    

Subsidiaries

    

ZTO Express

    

Elimination

    

Total

RMB

(in thousands)

Revenue

 

10,064,443

 

21,465,515

 

(9,420,012)

 

22,109,946

Net income

5,674,145

 

3,406,555

 

841,707

 

(5,595,961)

 

4,326,446

The following table presents condensed consolidating cash flow data for ZTO Express and other entities for the years ended presented.

    

For the Year Ended December 31, 2021

Consolidated

    

The Company

    

Subsidiaries

    

ZTO Express

    

Elimination

    

Total

RMB

(in thousands)

Net cash provided by operating activities

88,876

6,155,051

976,290

7,220,217

Net cash provided by/(used in) investing activities

1,679,330

 

(10,808,233)

 

(877,285)

 

1,249,655

 

(8,756,533)

Net cash (used in)/provided by financing activities

(4,518,056)

 

2,808,514

 

55,212

 

(1,249,655)

 

(2,903,985)

    

For the Year Ended December 31, 2020

Consolidated

    

The Company

    

Subsidiaries

    

ZTO Express

    

Elimination

    

Total

RMB

(in thousands)

Net cash provided by/(used in) operating activities

303,164

 

5,185,341

 

(537,756)

 

 

4,950,749

Net cash (used in)/provided by investing activities

(3,808,613)

 

(9,104,151)

 

(647,170)

 

10,010,593

 

(3,549,341)

Net cash provided by/(used in) financing activities

6,894,133

 

10,020,938

 

1,432,929

 

(10,010,593)

 

8,337,407

    

For the Year Ended December 31, 2019

Consolidated

    

The Company

    

Subsidiaries

    

ZTO Express

    

Elimination

    

Total

RMB

(in thousands)

Net cash provided by operating activities

433,172

 

4,087,296

 

1,783,718

 

 

6,304,186

Net cash provided by/(used in) investing activities

1,223,284

 

(4,957,929)

 

(1,831,001)

 

1,901,433

 

(3,664,213)

Net cash (used in)/provided by financing activities

(2,033,666)

 

1,952,793

 

 

(1,901,433)

 

(1,982,306)

B.          Capitalization and Indebtedness

Not applicable.

C.          Reasons for the Offer and Use of Proceeds

Not applicable.

16

D.          Risk Factors

SUMMARY OF RISK FACTORS

Investing in our Class A ordinary shares and/or ADSs involves significant risks. You should carefully consider all of the information in this annual report before making an investment in our Class A ordinary shares and/or ADSs. The following list summarizes some, but not all, of these risks.

Risks Related to Our Business and Industry

Our business and growth are highly dependent on the development of the e-commerce industry and the emergence of New Retail in China.
Our business operations have relied on, and are likely to continue to be significantly influenced by, certain third-party e-commerce platforms.
We face risks associated with our network partners and their employees and personnel.
We face intense competition, which could adversely affect our results of operations and market share.
Any service disruptions experienced by our sorting hubs or the outlets operated by our network partners may adversely affect our business operations.
Our technology systems are critical to our business operations and growth prospects, and failure to continue to improve, and effectively utilize, our technology systems or develop new technologies could harm our business operations, reputation and growth prospects.
We operate in a labor-intensive industry and an overall contraction in the availability of workers in the labor market or any labor unrest may negatively affect our business.
We engage outsourcing firms to provide personnel for our operations. We have limited control over these personnel and may be liable for violations of applicable PRC labor laws and regulations accordingly.
We face risks associated with parcels handled and transported through our network and risks associated with transportation.
Our past growth rates may not be indicative of our future growth, and if we are unable to manage our growth or execute our strategies effectively, our business and prospects may be materially and adversely affected.

17

Risks Related to Our Corporate Structure

ZTO is a Cayman Islands holding company with no equity ownership in our variable interest entities and we conduct our operations in China primarily through (i) our PRC subsidiaries and (ii) our variable interest entities, with which we have maintained contractual arrangements. Investors in our ADSs and/or Class A ordinary shares thus are not purchasing equity interest in our operating entities in China but instead are purchasing equity interest in a Cayman Islands holding company. If the PRC government finds that the agreements that establish the structure for operating our business do not comply with the PRC laws and regulations, or if these regulations or their interpretations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. Our holding company, our PRC subsidiaries, our variable interest entities, and investors of ZTO face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with our variable interest entities and, consequently, significantly affect the financial performance of our variable interest entities and our company as a whole.

Risks Related to Doing Business in China

Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.
PRC government’s significant authority in regulating our operations and its oversight and control over securities offerings conducted overseas by, and foreign investment in, China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. Implementation of industry-wide regulations in this nature may cause the value of such securities to significantly decline.
Risks and uncertainties arising from the legal system in China, including risks and uncertainties regarding the enforcement of laws and quickly evolving rules and regulations in China, could result in a material adverse change in our operations and the value of our ADSs.
We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business.
The PCAOB is currently unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections over our auditor deprives our investors with the benefits of such inspections.
Our ADSs will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCAA, in 2024 if the PCAOB is unable to inspect or fully investigate auditors located in China, or in 2023 if proposed changes to the law are enacted. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.

18

Risks Related to Our Shares and ADSs

We adopt different practices as to certain matters as compared with many other companies listed on the Hong Kong Stock Exchange.
The trading prices of our ADSs and Class A ordinary shares have been and are likely to continue to be volatile, which could result in substantial losses to holders of our Class A ordinary shares and/or ADSs.
Our dual-class share structure with different voting rights will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

Our business and growth are highly dependent on the development of the e-commerce industry and the emergence of New Retail in China.

We generate a significant portion of our parcel volume by serving end customers that conduct business on various e-commerce platforms in China, and our end customers rely on our services to fulfill orders placed by consumers on such platforms. In December 2021, more than 90% of our total parcel volume was attributable to e-commerce platforms. Our business and growth are therefore highly dependent on the viability and prospects of the e-commerce industry in China.

Any uncertainties relating to the growth, profitability and regulatory regime of the e-commerce industry in China could have a significant impact on us. The development of the e-commerce industry in China is affected by a number of factors, most of which are beyond our control. These factors include:

the growth of broadband and mobile internet penetration and usage in China;
the consumption power and disposable income of e-commerce consumers in China, as well as changes in demographics and consumer tastes and preferences;
the availability, reliability and security of e-commerce platforms;
the selection, price and popularity of products offered on e-commerce platforms;
the potential impact of the COVID-19 to our business operations and the economy in China and elsewhere generally;
the emergence of alternative channels or business models that better suit the needs of consumers in China;
the development of fulfillment, payment and other ancillary services associated with e-commerce;
the continued integration of online and offline retail channels by large e-commerce platforms and various retail merchants to reduce customer acquisition costs and enhance customers’ shopping experience (“New Retail”); and
changes in laws and regulations, as well as government policies, that govern the e-commerce industry in China.

19

The e-commerce industry is highly sensitive to changes in macroeconomic conditions, and e-commerce spending tends to decline during recessionary periods. Many factors beyond our control, including inflation and deflation, fluctuations in currency exchange rates, volatility of stock and property markets, interest rates, tax rates and other government policies and changes in unemployment rates can adversely affect consumer confidence and spending behavior on e-commerce platforms, which could in turn materially and adversely affect our growth and profitability. In addition, unfavorable changes in domestic and international politics, including military conflicts, political turmoil and social instability, may also adversely affect consumer confidence and spending, which could in turn negatively impact our growth and profitability.

Our business operations have relied on, and are likely to continue to be significantly influenced by, certain third-party e-commerce platforms.

Our business operations have relied on certain third-party e-commerce platforms, such as the Alibaba ecosystem, and we still expect to be significantly influenced by those third-party e-commerce platforms in the foreseeable future.

Although such third-party e-commerce platforms are not our direct customers, they have significant influence over how transactions take place on their e-commerce platforms, including how purchase orders are fulfilled by indicating to consumers the preferred express delivery companies for orders placed. For example, in order to maintain and foster our cooperation with Alibaba, we may have to accommodate the demands and requirements from various players in the Alibaba ecosystem, such as the adoption of digital waybills initiated by Cainiao Network, a central logistics information system and solutions provider affiliated with Alibaba. Such demands and requirements may increase the cost of our business or weaken our connection with our end customers.

Furthermore, in May 2018, Alibaba and Cainiao Network entered into a strategic transaction with us. Pursuant to the transaction terms, certain investors led by Alibaba and Cainiao Network invested US$1.38 billion in our company in exchange for approximately 10% of our equity interest at that time and obtained certain shareholder rights in our company. The transaction was completed in June 2018. Alibaba has also invested, and may invest in the future, in our competitors. Alibaba may encourage merchants on its platforms to choose certain other investees’ services over ours for business reasons. Alibaba may also build an in-house delivery network to serve its e-commerce platforms in the future. If either or both of these situations were to materialize, our business may be negatively impacted, and our results of operations may be materially and adversely affected.

We face risks associated with our network partners and their employees and personnel.

As of December 31, 2021, we had over 30,400 pickup/delivery outlets and over 5,700 direct network partners under our ZTO brand. We rely on these network partners to directly interact with and serve end customers. However, the interests of a network partner may not be entirely aligned with ours or with those of our other network partners at all times. We manage our business relationships with direct network partners through contractual agreements, which provide for performance incentives along with periodic evaluations. Our direct network partners may sub-contract part of their business to their cooperation partners, which we refer to as our indirect network partners. The sub-contracting to indirect network partners is subject to our consent. However, we may not be able to manage the network partners as effectively as if we had full ownership of them or operated their business directly. In particular, we do not enter into agreements with our indirect network partners and are therefore unable to exert a significant degree of influence over them.

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Our network partners and their employees have a significant number of direct interactions with our end customers, and their performance is directly associated with our brand. We do not directly supervise the employees of our network partners in providing services to end customers. Our existing network-wide service standards and periodic training to the personnel of our network partners may not be sufficient for us to effectively monitor, maintain and improve their service quality or their general conduct towards end-customers. In the event of any unsatisfactory performance or unlawful behavior by our network partners and/or their employees towards end-customers, we may experience service disruptions and our reputation may be materially and adversely affected. We may voluntarily, or upon the request of applicable authorities, conduct investigations on such event and adopt remediation/preventive measures. Such efforts may not be limited to the relevant parties, but applicable throughout our network, which could cause temporary diversion from the ordinary course of our and our network partners’ business. Furthermore, our network partners may fail to implement sufficient control over the pickup and delivery personnel who work at the outlets in connection with their conduct, such as proper collection and handling of parcels and delivery service fees, adherence to customer privacy standards and timely delivery of parcels. As a result, we or our network partners may suffer financial losses, incur liabilities and suffer reputational damage in the event of theft or late delivery of parcels, embezzlement of delivery service fees, mishandling of customer privacy, misconduct or unlawful behavior towards end-customers, or any other behavior that reflects adversely on our business and reputation.

Suspension or termination of a network partner’s services in a particular geographic area may result in a significant interruption or failure to provide services in the corresponding geographic area. A network partner may suspend or terminate its services voluntarily or involuntarily due to various reasons, including a disagreement or dispute with us, failure to make a profit, failure to obtain requisite approvals, failure to maintain licenses or permits or to comply with other governmental regulations, and events beyond our or its control, such as inclement weather, natural disasters, transportation interruptions or labor unrest or shortage. Due to the intense competition in China’s express delivery industry, our existing network partners may also choose to discontinue their cooperation with us and work with our competitors instead. We may not be able to promptly replace these network partners or find alternative ways to provide services in a timely, reliable and cost-effective manner, or at all. As a result of any service disruptions associated with our network partners, our customer satisfaction, reputation, operations and financial performance may be materially and adversely affected.

We face intense competition, which could adversely affect our results of operations and market share.

We operate in a highly competitive and consolidating industry. We compete primarily with leading domestic express delivery companies, including YTO Express, STO Express, Yunda Express, J&T Express, SF Express and the express delivery services provided by China Post such as EMS. We compete with them based on a number of factors, including network stability, business model, operational capabilities, infrastructure capacity, cost control and service quality. We have historically experienced a decline in the delivery service market prices and we may continue to face downward pricing pressure. If we and our network partners cannot effectively control our costs to remain competitive, our market share and revenue may decline. Additionally, if we have to subsidize our network partners to increase our network partners’ competitiveness, our gross margin may decline. Our competitors may attempt to gain market share by lowering their rates, especially during economic slowdowns or in key regional markets. Such rate reductions may limit our ability to maintain or increase our rates and operating margins and inhibit our ability to grow our business.

In addition, major e-commerce platforms, such as Alibaba, Pinduoduo and JD.com, may choose to build or further develop their respective in-house delivery capabilities to serve their logistics needs and compete with us, which may significantly affect our market share and total parcel volume. Furthermore, as we diversify our service offering and further expand our customer base, we may face competition from existing or new players in new sectors we choose to enter. In particular, we or our network partners may face competition from existing or new last-mile delivery service providers which may expand their service offerings to include express delivery or adopt a business model disruptive to our business and compete with our network partners for delivery personnel. Similarly, existing players in an adjacent or sub-market may choose to leverage their existing infrastructure and expand their services to serve our customers. If these players succeed in doing so, our market share may suffer and our business and financial performance may be significantly and adversely affected.

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Certain of our current and potential competitors, as well as international logistics operators with a presence in China, may have significantly greater resources, longer operating histories, larger customer bases and greater brand recognition than us. Other current and potential competitors may be acquired by, receive investment from, or enter into strategic relationships with, established and well-financed companies or investors which would help enhance their competitiveness. Moreover, competitors may adopt more aggressive pricing policies or devote greater resources to marketing and promotional campaigns than us. We may not be able to compete successfully against current or future competitors, and competitive pressures may have a material and adverse effect on our business, financial condition and results of operations.

Any service disruptions experienced by our sorting hubs or the outlets operated by our network partners may adversely affect our business operations.

Our daily operations rely heavily on the orderly performance of our sorting hubs and the pickup and delivery outlets operated by our network partners. Any service disruption at our sorting hubs or the pickup and delivery outlets as a result of a failure or disruption of the automated facilities, under-capacity during peak parcel volume periods, force majeure, third-party sabotage, disputes, employee delinquency or strike, government inspections or regulatory orders mandating service halt or temporary or permanent shutdown would adversely impact our business operations. For example, any ad hoc regulatory inspection by local authorities, such as environmental safety and security checks, on any of our facilities or our network partners’ service outlets may cause business disruptions and delay the processing and delivery of parcels. The outbreak of an epidemic, such as the recent outbreak of COVID-19, may also cause a significant disruption to our business. For instance, certain emergency measures implemented by the Chinese government in early 2020, mandated the temporary closure of our facilities, sorting hubs and service outlets. The severe flood in Henan province in July 2021 also caused temporary closure of our facilities, sorting hubs and service outlets in Henan province. If we are required by governmental authorities to implement changes to our facilities or relocate any of our facilities or our network partners’ service outlets, our and our network partners’ operating costs may increase as a result. In the event of service disruptions at our sorting hubs or outlets, parcel sorting or parcel pickup and delivery may be delayed, suspended or stopped. Such parcels would need to be redirected to other nearby sorting hubs or outlets, and such rerouting of parcels will likely increase risks of delay and delivery errors. At the same time, increased parcel sorting or pickup and delivery pressure on nearby sorting hubs or outlets may negatively impact their performance and result in adverse effects to our entire network. Any of the foregoing events may result in significant operational interruptions and slowdowns, customer complaints and reputational damage.

Our technology systems are critical to our business operations and growth prospects, and failure to continue to improve, and effectively utilize, our technology systems or develop new technologies could harm our business operations, reputation and growth prospects.

The satisfactory performance, reliability and availability of our technology systems is critical to our ability to deliver high-quality customer services. We rely on the Zhongtian system, our self-developed and centralized technology systems, which consists of our operational management system, our network management system, our settlement system, our finance system and other systems and mobile apps connecting our network partners to efficiently operate our network. These integrated systems support the smooth performance of certain key functions of our business, such as order tracking, fleet dispatch and management, route planning, and fee settlement. In addition, the maintenance and processing of various operating and financial data is essential to the day-to-day operation of our business and formulation of our strategies. Therefore, our business operations and growth prospects depend, in part, on our ability to maintain and make timely and cost-effective enhancements and upgrade to our technology systems and to introduce innovative additions to meet changing operational needs. Continued investment in information technology and equipment to enhance operational efficiency and reliability is part of our growth strategy. While we have significantly increased our spending on technology, such investment may not be sufficient to fully support our expanding business needs. Failure to maintain sufficient spending on technology systems could cause economic losses and put us at a disadvantage to our competitors. We can provide no assurance that we will be able to keep up with technological improvements or that technologies developed by others (including our competitors) will not render our services less competitive or attractive. Any issues impairing the functionality and effectiveness of our systems could result in unanticipated system disruptions, slower response time and impaired user experiences, as well as delays or inaccuracies in reporting operating and financial information.

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Any interruptions caused by telecommunications failures, computer viruses, hacking, or other attempts to harm our technology infrastructure could result in the unavailability or slowdown of our centralized system and significantly impact workflows throughout our entire network. We can provide no assurance that our current security mechanisms will be sufficient to protect our technology systems from any third-party intrusions, viruses or hacker attacks, information or data theft or other similar activities. Any such occurrences could disrupt our services, damage our reputation and harm our results of operations.

We operate in a labor-intensive industry and an overall contraction in the availability of workers in the labor market or any labor unrest may negatively affect our business.

Our business is labor-intensive. As of December 31, 2021, we had a total of 23,865 employees and over 57,000 outsourced personnel. A failure by us or our network partners to maintain a stable and dedicated workforce may result in disruption or delays in the services provided to end customers. We and our network partners often need to hire additional or temporary workers to handle the significant increase in parcel volume following special promotional events such as promotional campaigns on June 18, November 11 and December 12 of each year or during other peak seasons throughout the year. During these periods we have observed an increasingly competitive and tight labor market. In general, this has resulted in, and we expect will continue to result in, increased labor costs driven by higher salaries, social benefits and employee headcounts.

Further, we and our network partners compete with other companies in our industry as well as other labor-intensive industries for labor, and such competition may affect the overall stability of our workforce and the performance of our network. For example, emerging disruptive business models like intra-city delivery, which enables senders and recipients within the same city to achieve rapid point-to-point delivery; or omni-channel delivery, which fulfills the logistics demands for omni-channel retailers and consumers, are likely to compete for pickup and delivery personnel with our network partners and service outlets. Some of our network partners or outlets may be pressured to increase compensation and social welfare benefits for their employees, which may result in lower profitability and insufficient cashflow for our network partners or service outlets. If our network partners or service outlets are unable to offer competitive salaries and benefits, or pay their employees on time or in full, they may lose their personnel, resulting in insufficient delivery resources, disgruntled employees, and lower delivery service quality in certain parts of our network.

We and our network partners have been involved in labor disputes in the past, none of which either individually or in the aggregate, had a material adverse impact on us. We and our network partners expect to continue to be involved in labor disputes from time to time, including involvement in various legal or administrative proceedings related to such disputes. Any labor unrest directed against us or our network partners could directly or indirectly prevent or hinder our normal business operations, and, if not resolved in a timely manner, lead to delays in fulfilling our customer orders and decreases in our revenue. Historically, we have experienced an incident where an employee strike of one of our network partners caused a prolonged service suspension in a southern city of China, and we cannot assure you that similar incidents would not happen in the future. We and our network partners cannot predict or control any labor unrest, especially those involving labor not directly employed by us. Further, labor unrest may have a negative effect on general labor market conditions or result in changes to labor laws, which in turn could materially and adversely affect our business, financial condition and results of operations.

We engage outsourcing firms to provide personnel for our operations. We have limited control over these personnel and may be liable for violations of applicable PRC labor laws and regulations accordingly.

We engage outsourcing firms to provide a large number of personnel to work at our network facilities. As of December 31, 2021, over 57,000 outsourced personnel were active in our operations. We enter into agreements with outsourcing firms and do not have any direct contractual relationship with outsourced personnel, resulting in limited control over them. If any outsourced personnel fail to operate in accordance with instructions, policies and business guidelines set forth by outsourcing firms based on our requirements, our market reputation, brand image and results of operations could be materially and adversely affected.

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Our agreements with the outsourcing firms may provide that we are not liable to the outsourced personnel. However, if the outsourcing firms violate any relevant PRC labor laws, regulations or their employment agreements with the personnel, such personnel may file a claim against us as they provide their services at our network facilities. As a result, we may incur legal liability, and our market reputation, brand image as well as our business, financial condition and results of operations could be materially and adversely affected.

We face risks associated with parcels handled and transported through our network and risks associated with transportation.

We handle a large volume of parcels across our network, and face challenges with respect to the protection and inspection of these parcels. Parcels in our network may be stolen, damaged or lost for various reasons, and we and/or our network partners may face actual or alleged liability for such incidents. In addition, we may fail to detect unsafe or prohibited/restricted items. There have been incidents in the past where our network partners failed to strictly implement parcel screening procedures and allowed controlled items to be mailed through our network. Further, unsafe items processed and transported by us, such as flammables and explosives, toxic or corrosive items and radioactive materials, may damage other parcels in our network, injure their recipients, harm our personnel and result in property damage. Failure to prevent prohibited or restricted items from entering our network may result in administrative or criminal penalties as well as civil liability for personal injury and property damage.

The transportation of parcels involves inherent risks. We have a large number of vehicles and personnel involved in our transportation operations at all times, who are subject to risks associated with transportation safety, including transportation related injuries and losses. For example, our vehicles and personnel may be involved in traffic accidents from time to time, resulting in personal injury and loss or damage to parcels carried by them. In addition, frictions or disputes may occasionally arise from the direct interaction of our personnel with parcel senders and recipients, which may result in personal injury or property damage if such incidents escalate. The insurance policies carried by us may not fully cover the damages caused by transportation related injuries or losses.

Any of the foregoing could disrupt our services, cause us to incur substantial expenses and divert the time and attention of our management. We and our network partners may face claims and incur significant liabilities if found liable or partially liable for any injuries, damages or losses. Claims against us may exceed the amount of our insurance coverage or may not be covered by insurance at all. Government authorities may also impose significant fines on us or require us to adopt costly preventive measures. Furthermore, if our services are perceived to be unsafe by our end customers, e-commerce platforms and consumers, our business volume may be significantly reduced, and our business, financial condition and results of operations may be materially and adversely affected.

Our past growth rates may not be indicative of our future growth, and if we are unable to manage our growth or execute our strategies effectively, our business and prospects may be materially and adversely affected.

Our business has grown substantially in recent years, but our past growth rates may not be indicative of our future growth. Our revenue growth in recent years was partly attributable to business acquisition, such as the acquisition of China Oriental Express Co., Ltd. The acquired business of China Oriental Express Co., Ltd. provides freight forwarding services, and our revenue generated from such services amounted to RMB1,236.0 million, RMB1,862.7 million and RMB1,529.6 million (US$240.0 million) in 2019, 2020 and 2021, respectively, accounting for 5.6% ,7.4% and 5.0% of our total revenues during the same periods, respectively. We plan to further expand our network in response to increasing customer and consumer needs, but we may not succeed in doing so. Even if we are able to expand our network as planned, we may not be able to continue to integrate and optimize a larger network. In addition, as customer and consumer needs at both the national and regional levels are continuously changing, we may not be able to successfully anticipate or respond to such changes. For example, we may experience shortages in our delivery capacity if our expansion fails to accurately and timely match increased customer and consumer demand. Furthermore, our anticipated future growth will likely place significant demands on our management and operations. Our success in managing our growth will depend, to a significant degree, on the ability of our executive officers and other members of our senior management to carry out our strategies effectively, our ability to balance the interests between us and our network partners as well as among our network partners, and our ability to adapt, improve and develop our financial and management information systems, controls and procedures. In addition, we will likely have to successfully recruit, train and manage more employees and improve and expand our sales and marketing capabilities. If we are not able to manage our growth or execute our strategies effectively due to any of the foregoing reasons, our expansion may not be successful, and our business and prospects may be materially and adversely affected.

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Our long-term growth and competitiveness are highly dependent on our ability to control costs and maintain or raise prices.

To maintain competitive pricing and enhance our profit margins, we must continually control our costs. Effective cost-control measures have a direct impact on our financial condition and results of operations. We have adopted various cost control measures and will continue to add new ones as necessary and appropriate. For example, transportation costs can be reduced through the choice of appropriate vehicles and optimization of transportation routes, and labor costs can be reduced through automation. However, the measures we have adopted or will adopt in the future may not be as effective as expected in improving our financial condition and results of operations. We do not intend to compete with our competitors by introducing aggressive pricing policies, which we consider detrimental to our long-term growth. Delivery services fees charged by our network partners to parcel senders have declined over time, partially as a result of market competition. Our gross profit per parcel is also affected by a variety of other factors, such as a decline in the average weight of parcels handled by us, an increase in the adoption of digital waybills, which have a lower charge rate than traditional paper waybills, an increase in delivery services directly provided to certain enterprise customers, and changes in our operating model. For example, the direct shipping model, whereby some parcels are directly shipped by certain volume-qualified network partners to our destination sorting hubs without going through our origination sorting hubs, reduces overall delivery time and operating costs and also lowers our revenues. If we are not able to effectively control our cost and adjust the level of network transit fees based on operating costs and market conditions, our profitability and cash flow may be adversely affected.

We face challenges in diversifying our service offerings and expanding our customer base.

We intend to further diversify our service offerings and expand our customer base to increase the number of revenue sources in the future. New services or new types of customers may involve risks and challenges that we do not currently face. Such new initiatives may require us to devote significant financial and managerial resources and may not perform as well as expected. We may not be able to successfully address customer demand and preferences and our existing network and facilities may not be adaptable enough to accommodate new services or customers. For example, different service offerings will likely require different equipment specifications and service standards, which may require significant time and costs to implement. We may also be inexperienced with operating models and cost structures associated with new types of customers we may choose to pursue. In addition, we may not be able to provide services of sufficient quality, which may result in complaints or liability claims against us, all of which would harm our overall reputation and financial performance. We may also selectively invest in emerging business opportunities in adjacent logistics markets, such as less-than-truckload shipping, or leverage our existing network and infrastructure to directly engage in related businesses. We cannot assure you that such endeavors will be profitable or that we will be able to recoup our investments with respect to any new services or new types of customers in time or at all.

Damage to our brand image and corporate reputation could materially and adversely impact our business.

We believe our brand image and corporate reputation will play an increasingly important role in enhancing our competitiveness and maintaining our growth. Many factors, some of which are beyond our control, may negatively impact our brand image and corporate reputation if not properly managed. These factors include our ability to provide superior services to our end customers, successfully conduct marketing and promotional activities, manage relationships with and among network partners, manage complaints and negative publicity, and maintain a positive perception of our company, our peers and the express delivery industry in general. For instance, one of our business outlets in Chengdu, Sichuan province, was found to have transported puppies and kittens in inhumane way as part of pet blind box sales on e-commerce sites in May 2021, which caused damage to our brand image. Any actual or perceived deterioration of our service quality, which is based on an array of factors including customer satisfaction, number of complaints as well as number of accidents, may subject us to damages, including the loss of important customers. Any negative publicity against us or our peers may harm our corporate reputation and may result in changes to government policies and the regulatory environment. If we are unable to promote our brand image and protect our corporate reputation, we may not be able to maintain and grow our customer base and our business and our growth prospects may be adversely affected.

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Our business and the business of our network partners are subject to a broad range of PRC laws and regulations. If we or our network partners are deemed to be not in compliance with any of these laws and regulations, our business, reputation, financial condition and results of operations may be materially and adversely impacted.

Our business is subject to governmental supervision and regulation by the relevant PRC governmental authorities, including but not limited to the State Post Bureau and the Ministry of Transportation. Together, these governmental authorities promulgate and enforce regulations that cover many aspects of our day-to-day operations. See also “Item 4. Information on the Company—B. Business Overview—Regulation.” For example, the PRC Postal Law indicates that express delivery companies cannot engage in “posting and mail delivery business exclusively operated by postal enterprises.” However, PRC law does not provide a definition for “posting and mail delivery business exclusively operated by postal enterprises.” If the authorities define such term in the future and if the parcels that we deliver fall into the defined category, we may be considered in violation of such regulation. Further, certain of our network partners may commence express delivery services while still in the process of obtaining Courier Service Operation Permits, and since they use our brand in their businesses, we may be subject to fines or receive order of rectification as a result. Incidents like the foregoing ones may materially and adversely impact our business, reputation, financial condition and results of operations.

According to the Interim Regulations on Express Delivery, which were promulgated by the State Council on March 2, 2018, took effect on May 1, 2018 and were amended on March 2, 2019, we are subject to a revised set of requirements in operating our express delivery business, including but not limit to: (i) we are required to timely file records with the local postal administrations for opening express delivery terminal outlets; (ii) in case we intend to suspend operating express delivery services, we shall make public announcement in advance, submit a written notice to the postal administrative departments, return the Courier Service Operation Permit and make proper arrangement on undelivered express parcels; (iii) we shall not sell, reveal or illegally provide any client information and we shall take remedial measures and report to the local postal administrations in case any client information is revealed or may be revealed; (iv) we shall verify the identity of senders and register their identity information when receiving express parcels and shall not receive their express parcels where senders refuse to furnish identity information or furnish false identity information; (v) we shall refuse to accept the prohibited parcels and shall cease to sorting, transporting and delivering parcels which are suspected of containing prohibited items and shall promptly submit a report to governmental authorities and assist in investigations; (vi) we shall formulate our emergency plans, carry out emergency drills and exercises regularly and report emergencies to the local postal administrations; (vii) clients may claim compensation from us for any delay, missing, damage or shortage of express parcels handled by our network partners, since they use our trademark, corporate name and express waybill. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Express Delivery Services.” The operation of our express delivery service is subject to this regulation. Failure to comply with these regulations result in requirement to rectify, fines, suspension of business for remediation or revocation of Courier Service Operation Permit.

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Pursuant to the Administrative Provisions concerning the Running of Cargo Vehicles with Out-of-Gauge Goods, which were promulgated by the PRC Ministry of Transport on August 19, 2016, took effect on September 21, 2016 and amended on August 11, 2021, cargo vehicles running on public roads shall not carry cargo weighing more than the limits prescribed by this regulation and their dimensions shall not exceed those as set forth by the same regulation. The operation of our truck fleet is subject to this regulation.

We have not been required to modify or replace any of our trucks. While we expect to gradually reduce the number of non-complying trucks, the non-complying trucks may be banned and we may be required to modify noncomplying trucks or purchase new ones to replace them. Otherwise, we may be subject to additional penalties under this regulation if we continue to operate trucks that exceed the limits set forth in the regulation.

Pursuant to the PRC E-commerce Law, or the E-commerce Law, which was promulgated by Standing Committee of the National People’s Congress on August 31, 2018, took effect on January 1, 2019, we are subject to certain requirements in e-commerce business, including but not limit to, (i) in providing express logistics services for e-commerce activities, the providers thereof shall abide by laws and administrative regulations, and comply with the service standards and time limits they have promised; (ii) while handing over commodities to consignees, express logistics service providers shall remind consignees to examine the commodities immediately on the spot; in the event that the commodities are received by others for consignees, such express logistics service providers shall obtain the consent of consignees; and while senders handing over commodities to express logistics service providers, such express logistics service provider shall, in accordance with relevant laws and regulations, examine whether the postal articles are prohibited or restricted from express delivery in the presence of senders; and (iii) express logistics service providers are required to use environmental-friendly packaging materials in accordance with the relevant provisions in an effort to reduce the consumption of packaging materials and implement the recycling measures. While offering express logistics services, the providers thereof may agree to be entrusted by e-commerce operators to collect payments for goods on a commission basis. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Express Delivery Services.” The operation of our express delivery service is subject to this law. If we are found to be not compliant with the requirements, and we may be required to rectify. In order to adapt to the evolving e-commerce industry, which could have a significant impact on us, we may need to develop or upgrade existing business model. If our efforts to comply with laws and regulations concerning e-commerce business are unsuccessful, our business, financial condition and results of operation may be materially and adversely affected.

In addition, our network partners have full discretion over their daily operations and make localized decisions with respect to their facilities, vehicles and hiring and pricing decisions. Their operations are regulated by various PRC laws and regulations, including local administrative rulings, orders and policies that are pertinent to their localized express delivery business. For example, local regulations may specify the models or types of vehicles to be used in parcel pickup and delivery services or require the network partners to implement heightened parcel safety screening procedures, which could materially drive up the operating costs and delivery efficiency of the pickup and delivery outlets.

Existing and new laws and regulations may be enforced from time to time and substantial uncertainties exist regarding the interpretation and implementation of current and any future PRC laws and regulations applicable to us and/or our network partners. If the PRC government requires additional approvals or licenses, imposes additional restrictions on our or our network partners’ operations, or tightens enforcements of existing or new laws or regulations, it has the authority, among other things, to levy fines, confiscate income, revoke business licenses, and require us or our network partners to discontinue relevant business operations. Since our network partners use our brand in their businesses, if they are found to be noncompliant with PRC laws and regulations, our business, reputation, financial condition and results of operations may be materially and adversely impacted.

Any lack of requisite approvals, licenses or permits applicable to the business operation of us or our network partners may have a material and adverse impact on our business, financial condition and results of operations.

We and our network partners are required to hold a number of licenses and permits in connection with our business operation, including, but not limited to, the Courier Service Operation Permit and Road Transportation Operation Permit.

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Under PRC laws, an enterprise that operates and provides express delivery services must obtain a Courier Service Operation Permit listing out all the regions it and its branches are allowed to operate in. Such enterprise needs to make a filing with the relevant postal authority to update or renew its Courier Service Operation Permit to include any additional regions it plans to expand into. Our consolidated affiliated entities engaging in the express delivery services need to obtain the Courier Service Operation Permits, which based on our geographical coverage would cover the majority part of China. Our consolidated affiliated entities are required to timely make all required filings with the relevant postal authorities including to update or renew their Courier Service Operation Permits with respect to the regions they operate in.

Failure to make such filings may result in a correction order or fines. In addition, an enterprise engaging in road freight transportation is required to obtain a Road Transportation Operation Permit from the relevant county-level road transportation administrative bureau. Similarly, our network partners also need to obtain necessary licenses and permits to operate express delivery and transportation business. Failure to obtain such licenses and permits may result in suspension of operation, fines or other penalties by government authorities. In addition, companies that apply for the Courier Service Operation Permit are subject to certain service capability requirements. If any of our consolidated affiliated entities are found to obtain the Courier Service Operation Permits by improper means such as fraud or bribery, such entities may be subject to a fine ranging from RMB10,000 to RMB30,000, their Courier Service Operation Permits may be revoked by the postal administration department and they cannot re-apply to obtain the permit for a period of three years.

After obtaining the Courier Service Operation Permit, an enterprise is further required to maintain its express delivery service operations during the validity of such permit. Where the permit-holder does not operate any express delivery services for a period of time over six months without due grounds after obtaining the Courier Service Operation Permit, or suspends its business for more than six months without authorization, the postal administrative departments may cancel the Courier Service Operation Permit of such holder.

We are currently not aware of any such cancellation or notice of cancellation. If we become subject to such cancellation, our business, results of operations, financial condition and prospects could be adversely affected.

However, we cannot assure you that the relevant governmental authorities would not require us to obtain the approvals or take any other actions retrospectively in the future. If the relevant governmental authorities require us to obtain the approvals, we cannot assure you that we will be able to do so in a timely manner or at all. Additionally, we may not be able to renew Road Transportation Operation Permit of the relevant subsidiaries due to the lack of such prior approval.

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New laws and regulations may be enforced from time to time to require additional licenses and permits other than those we currently have. For instance, the E-commerce Law establishes additional standards in the express delivery industry. The PRC Foreign Investment Law, or the FIL which was promulgated on March 15, 2019 and came into force on January 1, 2020, replaced the trio of existing laws regulating foreign investment in China, together with their implementation rules and ancillary regulations. Further, the State Council also promulgated the Interim Regulations on Express Delivery on March 2, 2018. The Interim Regulations on Express Delivery, which took effect on May 1, 2018 and were amended on March 2, 2019, stipulate additional requirements and filing procedures for courier service operators in operating new express delivery terminal outlets. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Express Delivery Services.” As a result, substantial uncertainties exist regarding the interpretation and implementation of current and any future PRC laws and regulations applicable to our businesses. If the PRC government considers that we or our network partners were operating without the proper approvals, licenses or permits or promulgates new laws and regulations that require additional approvals or licenses or imposes additional restrictions on the operation of any part of our business, it has the authority, among other things, to levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these actions by the PRC government may have a material and adverse effect on our results of operations.

Any deficiencies in China’s telecommunication and Internet infrastructure could impair the functioning of our technology system and the operation of our business.

Our business depends on the performance and reliability of the telecommunication and internet infrastructure in China. The availability and reliability of our website, mobile applications, customer service hotline and technology systems depend on telecommunication carriers and other third-party providers for digital data transmission and storage capacity, including bandwidth and server storage, among other things. If we are unable to enter into and renew agreements with these providers on acceptable terms, or if any of our existing agreements with such providers are terminated as a result of our breach or otherwise, our ability to provide our services to our customers could be adversely affected. We have experienced service interruptions in the past due to service interruptions at the underlying external telecommunications service providers, such as Internet data centers and broadband carriers. Frequent service interruptions could frustrate customers and discourage them from using our services, which could cause us to lose customers and harm our operating results.

We may not be able to maintain our corporate culture, which has been a key to our success.

Since our inception, our corporate culture has been defined by our mission, vision and values, and we believe that our culture has been critical to our success. In particular, our corporate culture has helped us serve our customers, attract, retain and motivate employees and network partners, and create value for our shareholders. We face a number of challenges that may affect our ability to maintain our corporate culture, including:

failure to identify and promote people to leadership positions in our organization who share our culture, values and mission;
the increasing number and geographic diversity of our network partners;
competitive pressure to move in directions that may divert us from our mission and values;
the continued challenges resulting from a constantly evolving business environment;
potential pressure from public markets to focus on short-term results instead of long-term value creation; and
the increasing need to develop expertise in new areas of business that affect us.

If we are not able to maintain our corporate culture or if our culture fails to deliver the long-term results we expect to achieve, our business, financial condition, results of operations and prospects may be materially and adversely affected.

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Our business and results of operations may be materially and adversely affected if we are unable to provide high quality services to network partners and our end customers.

The success of our business largely depends on our ability to maintain and further enhance our service quality. We provide our network partners — our direct customers — with access to our line-haul transportation and sorting network. Together with our network partners, we provide complete door-to-door express delivery services to our end customers, which consist mainly of e-commerce merchants and other express delivery service users. If we or our network partners are unable to provide express delivery services in a timely, reliable, safe and secure manner, our reputation and customer loyalty could be negatively affected. If our customer service personnel fail to satisfy individual customer needs and respond effectively to customer complaints, we may lose potential or existing end customers and experience a decrease in customer orders, which could have a material adverse effect on our business, financial condition and results of operations.

We face risks associated with the financial services we provide to network partners.

We provide financial services to qualified network partners. A qualified network partner shall meet certain criteria set by us, such as having a legal and stable income or source of income and engaging in operation activities that are legal and meet the national industrial policies and requirements. Under PRC laws, an enterprise must obtain business licenses with corresponding business scope and/or approvals or filings from relevant governmental authorities related to operating and providing financial services, and the Company is compliant with the relevant laws and regulations in the PRC in all material aspects during the 2019, 2020 and 2021 with regard to the provision of such financial services. In connection with the financial services we provide to qualified network partners, we have obtained requisite business licenses and/or approvals under relevant PRC laws and regulations through various PRC subsidiaries. We entered into agreements with such qualified network partners and have committed and will continue to commit our own capital, which has had, and may continue to have, a negative impact on our cash flow. However, we cannot assure you that our consolidated affiliated entities have timely made all required filings with the relevant governmental authorities including to update or renew their business licenses, approvals or filings, and the failure may subject us to a correction order or fines.

The risk of payment defaults and other credit risks are inherent to our financial services business. We cannot assure you that our monitoring of credit risk issues is or will be sufficient to result in lower delinquencies. Furthermore, our ability to manage the quality of these loans and the associated credit risks will also impact the results of operations of our financial services business. A deterioration in the overall quality of our loan portfolio and the increasing exposure to credit risks may occur due to a variety of reasons, including factors beyond our control, such as a slowdown in the growth of the global or Chinese economy or a liquidity or credit crisis in the global or Chinese finance sector, which may materially and adversely affect our businesses, operations or liquidity of our network partners, or their ability to repay or roll over their debt. Any significant deterioration in the asset quality of our financial services business and significant increase in associated credit risks may materially and adversely affect our business, financial condition and results of operations.

Customer demand is difficult to forecast accurately, and we may fail to make accurate planning and spending decisions to match actual customer demand.

We make planning and spending decisions, including capacity expansion, procurement commitments, personnel hiring and other resource requirements based on our estimates of customer demand. The parcel volume we generate from end customers can vary significantly and unexpectedly, reducing our ability to accurately estimate future customer demand. In particular, we may potentially experience capacity and resource shortages in fulfilling customer orders following special promotional events such as promotional campaigns on June 18, November 11 and December 12 of each year or during other peak seasons throughout the year. Failure to meet customer demand in a timely fashion or at all may adversely affect our financial condition and results of operations.

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Our business depends on the continuing efforts of our management. If we lose their services, our business may be severely disrupted.

Our business operations depend on the continuing efforts of our management team, particularly members of our senior management named in this annual report. If one or several members of our management team were unable or unwilling to continue their employment with us, we may not be able to replace them in a timely manner, or at all. We may incur additional expenses to recruit and retain qualified replacements. In addition, our management may join a competitor or form a competing company. We can provide no assurance that we will be able to successfully enforce our contractual rights included in employment agreements with our management team, in particular in China, where almost all of these individuals reside. As a result, our business may be negatively affected due to the loss of one or more members of our management, and our financial condition and results of operations may be materially and adversely affected.

If we are unable to attract, train and retain qualified personnel, our business may be materially and adversely affected.

We intend to hire and retain additional qualified employees to support our business operations and planned expansion. Our future success depends to a significant extent on our ability to attract, train and retain qualified personnel, particularly management and operational personnel with expertise in the express delivery industry, the e-commerce industry or other areas we may choose to expand into. Our experienced mid-level managers are instrumental in executing our business plans, implementing our business strategies and supporting our business operations and growth, and we cannot assure you that we will be able to attract or retain these qualified personnel.

We have made, and may need to continue to make, substantial capital expenditures, and we will face risks that are inherent to such investments.

In order to implement our strategies and expansion plan, we made significant capital expenditures on the acquisition of land use rights, construction of facilities and upgrading of delivery infrastructure in connection with the growth of our business. We paid an aggregate of approximately RMB5.2 billion, RMB9.2 billion and RMB9.3 billion (US$1.5 billion) in 2019, 2020 and 2021, respectively, for the purchases of property and equipment and purchases of land use rights.

To facilitate our future expansion, including the entry into new sectors such as less-than-truckload business, we may need to continue to make substantial capital expenditures.

Significant capital expenditures are associated with certain inherent risks. We may not have the resources to fund such investment. Even if we have sufficient funding, assets that best suit our needs may not be available at reasonable prices or at all. For example, land resources may be scarce in an area that best fits our network expansion plan due to local zoning plans or other regulatory controls. In addition, we are likely to incur capital expenditures earlier than all of the anticipated benefits, and the return on these investments may be lower, or may be realized more slowly, than we expected. In addition, the carrying value of the related assets may be subject to impairment, which may adversely affect our financial condition and operating results.

Our results of operations are subject to seasonal fluctuations.

We experience seasonality in our business, mainly correlating to the seasonality patterns associated with e-commerce in China. For example, our customers generally record fewer purchase orders during national holidays in China, particularly during the Chinese New Year holiday season in the first quarter of each year. Furthermore, when e-commerce platforms hold special promotional campaigns, for example, on November 11 and December 12 of each year, we typically observe peaks of parcel volume immediately following these campaigns. Our financial condition and results of operations for future periods may continue to fluctuate. As a result, our results of operations and the trading price of our Class A ordinary shares and/or ADSs may fluctuate from time to time due to seasonality.

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Fluctuations in the price or availability of fuel and uncertainty in third-party transportation capacity may adversely affect our line-haul transportation costs and operational results.

Fuel costs and transportation expenses incurred in relation to the use of third-party transportation services represent 26%, 9% and 13% of our line-haul transportation costs in 2019, 2020 and 2021, respectively. The availability and price of fuel and third-party transportation capacity are subject to political, economic, and market factors that are outside of our control. In 2021, we continued to increase the use of self-owned and operated, cost-efficient high capacity trucks to replace third-party outsourced trucks, to further enhance transportation efficiency. In the event of a significant increase in fuel prices and third-party transportation service charges, our transportation expenses may rise, and our gross profit may decrease if we are unable to adopt effective cost control-measures or pass on incremental costs to our customers. As a result, our operating margin and the market price of our Class A ordinary shares and/or ADSs may be adversely affected.

We may not be able to obtain additional capital when desired, on favorable terms or at all.

We need to make continued investments in equipment, land, facilities and technological systems to remain competitive. Due to the unpredictable nature of the capital markets and our industry, we cannot assure you that we will be able to raise additional capital on terms favorable to us, or at all, if and when required, especially if we experience disappointing operating results. If adequate capital is not available to us as required, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our infrastructure or respond to competitive pressures could be significantly limited. If we cannot raise required capital when needed, we may be unable to meet the demands of existing and prospective customers, which would adversely affect our business, financial condition and results of operations. If we do raise additional funds through the issuance of equity or convertible debt securities, the ownership interests of our shareholders could be significantly diluted. These newly issued securities may have rights, preferences or privileges senior to those of existing shareholders.

Our income from equity investments is generally case based and non-recurring in nature, which could affect our financial results.

In 2019, we had unrealized gain from investment in equity investee of RMB754.5 million, which resulted from an observable price change in a follow-on offering by Cainiao Network in the fourth quarter of 2019. Gain on disposal of equity investees and unrealized gain from investment in equity investee are on a case by case basis and are generally non-recurring in nature. There is no guarantee that we will realize gains from our equity investments in the future, and there is no assurance that our investments will generate positive returns. Our financial results would be adversely affected if we fail to generate income from our equity investments or incur loss from such investments.

Our business and results of operations may be adversely affected if we are unable to integrate the businesses and assets we have acquired.

We may not be able to successfully integrate the businesses and assets we have acquired or to timely and effectively train and integrate the employees of the acquired network partners into our operations. As a result, our business and results of operations may be adversely affected.

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A severe or prolonged downturn in the Chinese or global economy could materially and adversely affect our business and our financial condition.

COVID-19 continues to have a severe and prolonged negative impact on the Chinese and the global economy. Even before the outbreak of COVID-19, the global macroeconomic environment faced numerous challenges. The growth rate of the Chinese economy has decreased since 2010. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies which have been adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China, even before 2021. Unrest, terrorist threats and the potential for war in the Middle East and elsewhere may increase market volatility across the globe. There have also been concerns about the relationship between China and other countries, including the surrounding Asian countries, which may potentially have negative economic effects. In particular, there is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global or Chinese economy may materially and adversely affect our business, results of operations and financial condition.

We have limited insurance coverage which could expose us to significant costs and business disruption.

We have limited insurance coverage. For example, we are not legally required to maintain insurance for parcel shipments. We do not maintain business interruption insurance or general third-party liability insurance, nor do we maintain key-man life insurance. We cannot assure you that our insurance coverage is sufficient to prevent us from any loss or that we will be able to successfully claim our losses under our current insurance policies on a timely basis, or at all. If we incur any loss that is not covered by our insurance policies, or the compensated amount is significantly less than our actual loss, our business, financial condition and results of operations could be materially and adversely affected.

We rely on certain key operating metrics to evaluate the performance of our business, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.

We rely on certain key operating metrics, such as parcel volume and unit cost per parcel, to evaluate the performance of our business. Our operating metrics may differ from estimates published by third parties or from similarly titled metrics used by our competitors due to differences in methodology and assumptions. We calculate these operating metrics using internal company data that has not been independently verified. For example, our parcel volume data is derived based on the number of parcels collected by our network partners using our waybills. If we discover material inaccuracies in the operating metrics we use, or if they are perceived to be inaccurate, our reputation may be harmed, and our evaluation methods and results may be impaired, which could negatively affect our business. If investors make investment decisions based on operating metrics we disclose that are inaccurate, we may also face potential lawsuits or disputes.

Our business is also subject to complex and evolving laws and regulations regarding cybersecurity, privacy, data protection and information security in China. Failure to protect confidential information of our end customers or consumers could damage our reputation and substantially harm our business and results of operations.

We have access to a large amount of confidential information in our day-to-day operations. Each waybill contains the names, addresses, phone numbers and other contact information of the sender and recipient of a parcel. The content of the parcel may also constitute or reveal confidential information. The proper use and protection of confidential information is essential to maintaining customer trust in us and our services.

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Our technology systems also process and store a significant amount of confidential information and data for the proper functioning of our network. Security breaches and hacker attacks on our system might result in a compromise to the technology that we use to protect confidential information. We may not be able to prevent third parties, especially hackers or other individuals or entities engaging in similar activities, from illegally obtaining confidential information in our possession. Such individuals or entities may engage in various other illegal activities using such information. Further, as parcels move through our network from pickup to delivery, a large number of personnel handle the flow of parcels and have access to significant amounts of confidential information. Some of these personnel may misappropriate the confidential information despite the security policies and measures we have implemented. In addition, most of the delivery and pickup personnel are not our employees, which makes it more difficult for us to implement sufficient and effective control over them.

Practices regarding the collection, use, storage, transmission and security of personal information have recently come under increased public scrutiny. On June 10, 2021, the Standing Committee of the National People’s Congress promulgated the PRC Data Security Law, or the Data Security Law, which took effect on September 1, 2021. The Data Security Law, among other things, provides for a security review procedure for the data activities that may affect national security. Furthermore, Measures for Cybersecurity Review, which was promulgated on April 13, 2020 and became effective on June 1, 2020, or the 2020 Measures, set forth the cybersecurity review mechanism for critical information infrastructure operators, and provided that critical information infrastructure operators who procure internet products and services that affect or may affect national security shall be subject to a cybersecurity review. On December 28, 2021, the Measures for Cybersecurity Review was promulgated, or the 2021 Measures, which took effect on February 15, 2022, and has replaced the 2020 Measures and further restated and expanded the applicable scope of the cybersecurity review. Pursuant to the 2021 Measures, critical information infrastructure operators that procure internet products and services, and network platform operators engaging in data processing activities, must be subject to the cybersecurity review under the 2021 Measures if their activities affect or may affect national security. The 2021 Measures further stipulate that the network platform operators holding over one m