GF SEC: The express delivery industry presents a dual market structure with the middle and lower end as the mainstream. Joining the network to create the ultimate cost-effectiveness.

GF Securities released a research report stating that the Chinese express delivery industry presents a dual market structure with the main focus on the mid-to-low end, supplemented by the mid-to-high end. In order to meet the ultimate cost-effective delivery needs of e-commerce customers, the mid-to-low end track continues to refine the supply form of franchise networks, forming a moat in which in-house capital investment and out-of-network asset management are integrated. In-house assets are in the late stage of the capital cycle, with the supply-demand situation reversing. It is expected that it will take 4 years for supply and demand to rebalance, achieving peak capacity utilization by 2025. The industry's profit center is also expected to gradually move from fluctuations towards stability. Chinese express delivery industry: A dual market with the mid-to-low end as mainstream, franchise networks creating ultimate cost-effectiveness. The Chinese express delivery industry presents a dual market structure with the mid-to-low end as the main focus and the mid-to-high end as the supplement. In order to meet the ultimate cost-effective delivery needs of e-commerce customers, the mid-to-low end track continues to refine the supply form of franchise networks, forming a moat with in-house asset investment and out-of-network asset management. In-house assets: End of the capital cycle, supply-demand situation reversed. The in-house direct-operated assets of franchise express delivery companies mainly consist of land, factories, equipment, and vehicle fleets. The head office has been driving reinvestment since 2017 and reached its peak in 2021. Leading express delivery companies have essentially completed direct operation and automation transformation, and the industry has entered a period of climbing production capacity. Against a backdrop of strong demand growth, it is expected to take 4 years for supply and demand to rebalance, achieving peak capacity utilization by 2025, and the industry's profit center is expected to gradually move from fluctuations towards stability. Out-of-network assets: Optimization of networks in progress, with long-term potential. The out-of-network assets of franchise express delivery companies consist of thousands of primary franchisees and tens of thousands of secondary outlets. The franchise network not only determines the service and timeliness quality of the last 100 kilometers but also affects the overall operational cost of the network. Leading companies such as ZTO actively invest in and manage network assets, exploring cost-reduction measures such as direct dispatch from outlets (reducing the number of transshipments and shortening the fulfillment distance, optimizing mainline transport routes) and direct delivery from outlets (reducing delivery workloads for delivery personnel and improving end delivery efficiency). Out-of-network network optimization is expected to follow the trend of in-house automation, further opening up possibilities for industry cost reduction and product differentiation. Investment recommendations: Long-term recommendation of leading companies with a strong track record, short-term focus on stocks with marginal reversal. Looking ahead, the express delivery industry is in a stage of supply-demand reversal development, with both industry and company capital expenditures peaking, and ecommerce platform transformations on the demand side driving the trend towards smaller items, demonstrating the industry's resilience in business volume growth. Investment directions in the e-commerce express delivery industry can be divided into long and short-term logic. In terms of the long-term logic, under the support of supply-demand reversal, companies are focusing more on building out-of-network assets, driving income differentiation and improving single ticket profitability. Long-term logic recommends ZTO Express (02057.HK/ZTO.N) and YTO Express Group (600233.SH); in the short term, the slowdown in price wars is a trend, with the rapid decrease in single ticket costs due to network repairs, leading express delivery brands are showing a marginal reversal in single ticket profitability as they continue to gain market share. The future performance recovery is worth paying attention to. Short-term recommendations include Yunda Holding (002120.SZ) and STO Express Co., Ltd. (002468.SZ). Risk warning: Industry demand growth below expectations, deterioration of industry price competition, instability in the operation of franchise networks, uncertain policy impacts, pressure from macroeconomic environment, etc.