Overview
One of the most satisfying aspects of being an investment analyst is spotting the ways different sectors influence one another. This is particularly valuable in China, where industries are so intertwined that any other arrangement would fall short in capturing the forces moving stocks. And nowhere is this more apparent than in the country’s express delivery sector, which is an integral part of the enormous e-commerce ecosystem.
If you’re in China as you read this, it’s likely that a quarter of the things you own were bought on the Chinese equivalents of Amazon and Walmart.[1] More likely than not, your parcels were delivered by one of the top five express delivery companies in the country, which have all done well out of the e-commerce boom. The number of parcels delivered (express delivery volumes) has generally correlated with the rise in e-commerce sales (gross merchandise value, or GMV, in the following chart). But unlike in the US, where shares of FedEx and UPS rose on the back of rising demand during the pandemic, China’s express delivery couriers performed poorly in the stock market last year despite this growing propensity to shop online. Their stocks actually lost value: between 20 and almost 50 per cent. Why?
The answer lies in the average selling price (ASP) - how much couriers can charge on one piece of delivery. That figure has been in negative territory for over a decade because couriers have locked horns in a painful price war. The success of China’s e-commerce meant everybody in express delivery wanted a piece of the growing pie. The only year ASP did not lose any ground (‘growing’ at zero per cent) was 2022, when the regulator stepped in and forced a truce on the companies - with some help from zero-Covid lockdowns.
Less is more
What’s happening in express delivery reflects the changing habits of the Chinese consumer. Households are tightening their belts in a slowing, but still growing, economy - buying cheaper stuff online, but more of it (note how GMV growth has decelerated and slipped behind strong volume growth since 2019, as GDP growth slowed). This change corresponds with the rapid rise of value-for-money shopping platforms such as Pinduoduo, and Douyin - China’s version of TikTok where merchants can sell directly to consumers via livestreaming - indicating higher volumes and more business for couriers.
For this reason, express delivery investors increasingly need to understand China beyond the sector. Anything along the value chain - from consumers’ spending power to sentiment among e-commerce merchants - can swing couriers’ revenues from one quarter to the next. These forces are particularly acute in a slowing economy. Equally important are industry watchdogs. The recent appointment of a less interventionist regulator has reduced the possibility of the price war ending quickly. That’s why we remain cautious despite a mild rebound in share prices so far this year.
On the flip side, couriers’ experience suggests where silver linings in China might be found over the coming years. In theory, policymakers’ pivot from fast to quality growth should hasten consolidation in crowded industries. That may be hard to believe when it comes to express delivery, with the market share of the top five couriers stuck near 10 per cent or just above (at least three of them are hellbent on gaining a bigger slice at the cost of profitability). But just as the US market whittled down to three dominant players - UPS, FedEx, and United States Postal Service (USPS) - the force of competition should prove too much to bear for China’s weaker couriers and it is likely that they will either merge with their competitors or go out of business. Once we reach that turning point, it won’t be long before Chinese couriers start delivering for their investors.
[1] Official data shows that online sales made up 27 per cent of retail sales in 2023.
