Q2 2022 ZTO Express (Cayman) Inc Earnings Call
Good day and welcome to the T O Express second quarter financial results 2022 conference call.
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I would now like to turn the conference over to Sophie Li. Please go ahead.
Thank you operator, Hello, everyone and thank you for joining us today, the company's results in the invest.
You released presentation were released earlier today and are available on the company's IR.
That's right.
On the call today.
Mr Mesa, Lai, Chairman and Chief Executive Officer.
Steve Financial Officer.
Mr. Lai will give a brief overview of that.
Hi, Hello, Thanks, Yan, who will go through the financials and guidance.
Both be available to answer your question Jeremy in the Q&A session that follows.
I remind you that this call may contain forward looking statements made under the safe Harbor provisions of the private Securities Litigation Reform Act of 90 95.
Such statements are based on management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks.
Uncertainties and other factors.
All of which are difficult to predict and many of which are beyond the company's control.
This may cause the company's actual results performance or achievements to differ materially from those in the forward looking statements.
Further information regarding this and other risks uncertainties and factors is included in the company.
Filing with the U S Securities and Exchange Commission.
The company does not undertake any obligation to update any forward looking statement as a result of the new information.
And Ben or otherwise.
As required under law.
It is now my pleasure to introduce Mr. Mesa line, Mr. Lai will read through his prepared remarks in their entirety in Chinese before I translate for him in English.
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Hello, everyone and thank you for joining us today.
Quarter of 2020 to be still delivered a powerful body of $6 2 billion, which increased by seven 5%.
We have a market share by two percentage points to 23%.
<unk>.
The adjusted net income grew 38, 2% to $1 76 billion.
Alright, and then make impact and a weaker economic outcome.
We also delivered a strong performance in both market share and profit.
Well its objectively the mass production.
We actively responded.
I would call a stabilizing in a growing economy without compromising safety.
Being among the first to big deal accretion.
Actively adapting our strategy to seize market opportunities.
Our balanced approach to parcel volume growth and profit expansion.
We are actively advancing our long term strategy.
Firstly, we continue to focus on expanding our market share through a comprehensive.
For taking.
Taking advantage of early redemption of population.
Uninterrupted parcel volume in Kobe affected regions any calls that were granted the nation and our reputation with improved customer stickiness.
Second.
Well that reached inside an in depth analysis provided by our digital platform to discover execution flaw that underpins, our low or negative gross problem.
We ask them to cultivate.
Against that the effectiveness of pricing gotcha to stimulate incremental volume.
Third we aligned our resources to where they're reasons demand Boston market.
This new business.
Like sample inquiries that reviewed out up to his door third customer.
The average time definitely its product offerings.
And in house that were for humans capability in specialized products and services.
At the same time were improved.
For the royalty by implementing process management.
First.
We come back to its thorough reviews of customer accounts and eliminated unjustifiable loss, making contract in accordance with the principles of granting fair and transparent policy on that.
We're partners and outlets.
Second we can further enhance our real time data monitoring and analytics of car and the pricing of flooding centers in our line haul Rob.
Allowed us to optimize rod and shapes up plenty in a timely manner, which improved resource allocation around automation and the transportation equipment as well as human resources.
Third we furthered implementation.
Centralization in operating procedures across all sorting center.
Ooh clearer definition of job responsibilities and the standardized operating protocols.
Able to better align compensation and incentive.
Labor productivity.
Fourth we continued our effort with the layer up our network by reducing the number of stops a pass on that.
No.
And.
All is to process parcel aggregation for enabling destination segregation at earlier stages of sortation are examples to achieve improved capacity.
Cost efficiency across our entire network.
Stepping into the second half of the year well, we just.
Production.
We will continue to focus on high quality growth.
I don't know, Pat and Jeff will lead to Wisconsin differentiated capability.
The man the following work priority.
First continue to improve the efficiency of our regenerative platform.
Well standardized every staff.
Allegation that allows tracking naphthalene ending valuation are there to improve the utilization of resources.
Second further implement partner network management and must ensure that carriers have access to food market pricing associated with incremental volume. So that they are incentivized to acquire a new customer.
We can assist sovereign network partners to install capacity that meets all sides of men.
We can lend overcapacity to health network partners and share their work load and enhance their ability to sort of find out what that is that all interim destination.
Third accelerate the development of last mile preference and the consolidated lost now resources to partner with you.
Okay.
We will continue to improve our service quality.
Refined and personalize the customer demand.
Ooh customer loyalty.
Or.
Further refine TPI and <unk> group, we word and they recommend mechanism for quality of service it well.
We will tackle root causes for this call.
He is also all these stages off the call with me.
Central station and fully believe aiming to improve timeline is and minimizing problem, including top redemption.
This trend in human capital development by talent attracting.
Lending and fast attack promotion for a broad range of functions or.
Yeah.
What about I'm sure our talent reserves are sufficient to support our business around the world.
Further emphasize performance evaluation of Harbor probing show General managers, and the Sweating center managers, I'm very lower Arista wrenching elimination framework.
That's something you have to expand the business it implies your logistic segments within our ecosystem.
L T O clock warehousing, the national poaching and too.
Supported by that won't be in summer, we aim to develop cross selling.
So on technology integration and sharing of managerial knowhow.
Establish standalone competitive.
<unk> by each of the segments.
Pennsylvania, just to pitch that are built around comprehensive logistics services.
Even though these short term I'll look at sphere with uncertainties due to the pandemic and other external factors.
The buildings that meet the long term. These are just to industry in Switzerland and have great market potential.
We believe that long longer term positive prospect and room for upside our students.
CTO is consistent strategy is to achieve continued.
Market share expansion and profit target.
Maintaining a high quality of service and customer satisfaction.
Our track record has proven out.
Hum.
Good afternoon.
For example, fairly as pet parents and the alignment of interest among all of our network partner.
I mean opinions are planning growth in parcel volume and the profit.
And yours duration, though technology and information system and exact vacation.
And that's something that we're diversified the largest ticket orderly manner.
Looking ahead, we are focused to harbor mission with the strong sense of urgency.
That will be left behind if we don't go out well.
Well do the best we can.
This moment has opportunity.
Portland and cover all of our network partners and accelerate the wide anyhow, if I were competitive.
Oh, that's tough for me to take us through the financials.
Yeah.
Your line is open.
Yeah.
Hello to everyone on the call.
Anthony go through our financials. Please note that unless specifically mentioned all numbers quoted are in RMB and city changes refer to year over year comparisons.
Detailed analysis of our financial performance unit economics, and cash flow are posted on our website and I'll go through some of the highlights here.
In the second quarter, despite the headwind caused by.
By Covid outbreak Z T O delivered solid growth results parcel volume increased seven 5% to $6 2 billion advancing the quarterly market share by two points to 23%.
The adjusted net income grew 38, 2% to $1 76 billion.
Total revenue increased 18, 2% to $8 7 billion.
S P for our core express delivery business increased 10, 5% or 13 cents.
Normalized competitive environment supported and helped maintain our second half 2021 price increases. In addition, our internal efforts to optimize customer base is Omar Jama I'll pay more for.
Yeah.
Sure.
No.
Operator can you check if everybody is found.
Okay.
Yes, you May proceed.
Thank you.
Okay.
I'll just repeat the last sentence. In addition, our internal effort to optimize customer base is also generating meaningful results.
Total cost of revenue was 6.5 billion, which increased 14, 2%.
Overall unit cost of revenue for our core express delivery business increased six 2% or six cents.
More specifically line haul transportation costs per parcel increased 2% to 49.
As a combined result of searching fuel cost and lower than expected volume offset by cost productivity gain through usage of high capacity trailer trucks improved low rate and better route planning.
We estimate that the negative impact from fuel cost hike was four cents per parcel for the quarter.
Unit sorting cost increased nine 1% to 30 cents even.
And by increased labor salary and higher depreciation and amortization costs associated with a higher installed base of automation equipment.
Gross profit increased 31, 6% to $2 2 billion, given increased volume and a S. P against the relatively stable cost structure.
Gross profit margin rate increased two six points to 25, 4%.
SG&A expense as a percentage of revenue dropped 0.1, 0.253% demonstrating a lean corporate cost structure.
Income from operations increased 36, 4% to 2 billion and associated margin grew 3.1 point to 22, 9%.
Operating cash flow grew 95, 7% to $3 8 billion.
Capital expenditure penetrate totaled one 5 billion.
Being an increasingly integral part of the economic revitalization and daily likelihood the express delivery industry has shown strong resilience through all locked down and facing economic uncertainty.
We believe that the industry's long term growth potential and value prospects remain strong.
Brian enhancing core capabilities calibrating revenue mix and refining cost management.
<unk> continues its consistent strategy to achieve sustainable high quality growth.
Furthermore, with continued efforts on developing integrated logistic ecosystem, we aim at providing comprehensive logistics services to meet diversified and tailored demands.
<unk> synergy and enhancing our leading position.
Based on current market and operating conditions.
Company maintains its previously stated annual volume guidance, which is in the range of $24 $96 billion to $25 86 billion, representing a 12% to 16% increase year over year.
These percentage increase estimate.
Meaningfully above anticipated industry average reflects company's commitment to further our growth strategy and confidence in our ability to deliver despite macro uncertainties that still exist in the marketplace.
These estimates represent management's current and preliminary view, which are subject to change.
This concludes our prepared remarks operator, please open the call for questions. Thank you.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw from the question queue. Please press Star then two.
Please limit yourself to one question and one follow up at this time, we will pause momentarily to assemble our roster.
My first question comes from Blue shoe instead of you. Please go ahead.
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Well actually that they hold on to what teaches them not wait either halt in Sheboygan G. A T shirt now let me translate my question. Thanks for taking my question. My first question is regarding to a service operation you. According to the latest the local Covid measures that were announced last night you lifted the close off management in some.
Region. It also mentioned that the logistics the ecommerce and other enterprises, a shout resume operation in an orderly manner could the management Congress share more color on the England Taishan details for example to start to start with what region whether it require.
Here's the all access pass the house should we anticipate the overall recovery pace.
And the well would be a parcel volume and return back to normal and our what would be a parcel of all the impacts during the prior seven day service suspension period.
And my second question is regarding to the E. S. P trend so the the whole industry.
Oh, well S. P. A were relatively stable this year, even during the slow season and aside from trail our previous mentioned from our internal our customer base.
Optimization and a what do you think there are some like extra no.
Factors.
Behind that such as policy of high field.
I feel price they called me the resurgence or some other factors and going forward, how do we foresee E S.
I S T a.
The tender in the third and fourth quarter or even in a longer period and or do you see any short term price pressure from the reason to domestic fuel price job and be a service or assumption in England and Meanwhile, some of our peers to slightly increase the D. I S. T E N.
July and a waste instant what what was the logic behind that and whether we would follow their steps going further and thank you very much.
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Okay.
Thank you for your question well first of all relating to you are indeed started the 11th of this month.
There are locked down and it's gradually resuming however for express delivery businesses, we need to.
Coordinated with the government's inspection because it is a concerted effort across all our industry as well as logistics.
Some of our outlets have already started.
Our packaging so it's a good indication that things will return to normal I E.
<unk> represents about 10% of our total volume so it's about six to 7 million packages a day.
Now the question regarding pricing.
<unk> has always had a level of premium against all the other tender pricing. So we think that it has something to do with the recent price increases and all prices already slightly higher so we are not.
Preparing or anticipating any changes at this moment.
Second half of the year Oh are we think that the overall theme is stabilizing.
For the pricing.
Typically in the industry.
There is a.
Normal.
Variation from month to month for example from September .
Timber from August to September Theres about six to seven point increase in it from.
September to October .
So on and so forth all the way through November .
November and the increase in volume demand and its associated also with the price gradual increase.
So overall for the second half of the year, we think the prices will go up slightly for that fourth quarter third to fourth quarter, Oh, well hike up about 20 points or so.
Stabilizing our increases.
And then finally and I got into it.
If I may supplement with a longer term or the industry is.
With significant growth potential and because it is indeed part of the day to day lives.
It's varied.
Right.
Varied channels of E Commerce development for example video streaming and all that so we think that the overall pricing will continue to stabilize and being the such a low starting point for express delivery is associated largely with e-commerce costs being the largest.
Sure.
Going forward, we think the.
Upper.
Increases it sounds very much likely.
Okay.
I'm trying to figure out kind of shed light on him.
Thank you.
Our next question comes from chain.
Hubertus.
T H capital. Please go ahead.
That's meso soccer Hall oven downloaded in Tibet unit tissue will come and say that Gee do the margin.
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Do you see you go but I hope it didn't sound like they'll be down going up like it seemed to me cheap enough of my time on the Thames Yoshi bushel cheaper than to say that we wouldn't see that now.
What's your thinking about.
The first one is I saw the margin in second quarter. It was really good much better than you know oh the quarters in the last year. So our early this year.
Management did you gave the guidance for the full year, our Tulsa to so I would like to hear more about the margin trends.
Well the second half of 2022, that's number one number two is oh.
Among all the parcels, what's the push them from our e-commerce and as we grow into new business. So maybe E. Commerce portion is going to be less than before and also for the among e-commerce, how what's the portion.
Oh, you know from the new platform of such lexical okay. Okay. That's all my question. Thank you.
Yeah.
Okay.
Thank you Tien tsin.
Let me try to I'm not using the questions first question relating to the margin why are the good reasons for the margin increase as we stated earlier that the price for first of all we are able to.
Thing the price that was increased from the past year.
And because of the competitive environment is stabilizing and for the second half of the year, we think because the price hike was started.
Started.
In second half of last year or the relative ASP increases will be tapering off.
That leads to the comment on profit.
In the second half of the year, rather than the first half of the year, the peso, but pension will be a slower certainly because of the base.
And then if I made comment in a bit more on the the qualification of behind your question. Although I don't think I can give you the specific numbers.
The revenue increases driven by S. P. We've explained but I think most importantly is what we're doing on the cost side the cost side of initiatives are including addressing specific loss, making transactions improving our mix and are advancing our.
Volumes, so that we could utilize all all of our improved utilization of our capacities.
All of these are intact and in place and with the labor cost increases we have automation we have.
Better route planning so that the transportation costs will also be reduced and I think it's about if you recall, we had addressed the overall cost.
Productivity gain it really is associated with our total.
Sort of a delayering or shortening the distance from package flow for packaged flows so in other words, reducing the number of.
Sortation or a particular package as it go through all the stages of the transit. So these are structural improvements that will give us longer term price.
Productivity gains.
And third quarter fourth quarter the businesses. So far what we have observed a is still relatively stable. So that answers. Your first question second part relating to the.
Commerce as a proportion of our total business it.
It has been stable in I speak you'll being the largest player in the express delivery industry. We have maintained a high level of market presence and that applies the same two existing traditional or new.
Commerce into the e-commerce space. So our proportion is consistent with our total market presence.
Okay. Thank you.
Thank you.
Our next question comes from Colin Lee son, with Morgan Stanley . Please go ahead.
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Let's say SAP and you take out that way.
So me and Oh, you got somebody asked him about what actually so I'll translate for myself I have two questions. The first question is about capex and and and daily capacity. So a person already has throw down on anything that's good volume growth do you have any adjustment or new guidance on the full year of Capex.
And also what's the daily handling capacity by the end of the year and my second question is about our cost. So we have seen that if we exclude the impact from from inflation actually in the second quarter unit cost optimization has continued so I wonder.
Is there any guidance Oh I'm on cost efficiency improvement in the second half of the year. Thank you.
Yeah.
Oh.
So it's about how do you think.
So Oh, let me answer the question for the Capex and indeed, the then our goal and target for growth is significantly above the industry average and because we are a it's reflected in our strategy and we believe that growing volume.
Growing our market share is crucial for considering the nature of our business right. It is a scale driven business. So our capex spending although with that said is very much a managed against the demand and what we have anticipated. The overall growth we don't want to over.
Invest ahead of the time too much but yet we don't want to stay behind because we are with our focus growing our volume. So the current Capex go Ah is still kept somewhere around 9 billion Oh, we're not a we're not we're not going to exceed that and then I think the likelihood is probably some.
We're around $6 billion to $7 billion, but we want to make sure that we capture the market opportunities. So there's a range is pretty wide. However, it is I'm gonna be managed closely.
The second part of the question is are indeed, we have put in a lot of effort in addressing our cost productivity gang are with that also considering the second half of the year the seasonality the volume changes, we we think that the the.
But the cost will continue to have a have leverage.
So, yes, Tim timber from it.
What switch depend on chat opinion can deeply time charter them very useful we shut down.
Junior and somebody in N woman.
So anytime soon.
Peter.
China and sharpen your net liquidity so yeah. So it turns out we called me something.
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Women kill you with it.
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You Ain't going to choose why bother P D C.
The shopping journey.
So that would be all C timken, who you are.
We shot you tissue.
So let me a further translate for the chairman Ah is consistent to what I have just described.
And relative to the first half of the year because the volume is below our expectation our scale leverage is not necessarily fully demonstrated we indeed have significant capacity preparedness.
And in the second half as the volume for the whole industry, which as anticipated a higher than first half we think our scale leverage will further demonstrate and the cost per unit will decrease.
Thank you very much.
Our next.
Western comes from Thomas Chong with Jefferies. Please go ahead.
So I'll just I'll I'll take that one each home so what if he would what's one gigabit.
But as you said one woman.
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Yeah. It will come in that are that you said.
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At.
Given me a margin tissue Adobe that doesn't sound to me.
What's your thoughts on this agenda.
You got a little cheat.
Got you.
Oh, sure fungible, but our market share.
Kind of all of them, but it all demand.
Percentage point.
The amount of shares that you got.
So many of them until you see the market share that kind of consciousness.
Do you want to talk about those.
Oh, Thanks management for taking my questions Oh, we have seen a very impressive.
Our earnings.
Second quarter.
Just wanted to get some color about investment strategies.
How should we think about that you might have been in new administrative boring forward and with that.
Second.
We use some of our earnings to invest for the future and then my second question is about market share occupancy that we have increased our market share by two percentage points. During the quarter just wanted to get some color about our long term target in terms of the market share gain story. Thank you.
Okay.
Okay.
Thank you for your question and then the first question relating to our our investment there.
And I I think I understand that you're referring to both our new products within our corporate core businesses as well as the investment perhaps in our ecosystem now I'll I'll just answer to those two areas of our investment strategy. The first part we think that to differentiate.
Ourselves from the rest of Katanga, we are and we have been investing in time and energy in developing differentiated products to.
Allow consumers all customers to have a different experience and also allowing them to me at two to receive individualized services for their diversified needs.
And our capability of fulfilling these ah.
Commitment are requiring investment. So indeed that is part of our strategy and plan, although the volume as of now is not significant so we are.
Carefully and we are prudent in our investing on those part of the new capability development.
And the second part to our ecosystem the ecosystem.
If you look back to our past our approach has always been.
Rather.
It's a it's a extension of our existing capabilities and resources because our goal is to fully utilize or a double and triple our usage of our existing investment and existing resources. So the growth of our ecosystem is.
Also a very coordinated and it has its own pace a way if you referring to invest in new initiatives that could add to our.
Our existing capabilities or capability, there that I'm missing then it refers to our normal M&A businesses. So yes, we will continue to look and we will continue to see based on the opportunities that are there for us to expand our comprehensive capabilities and then we all.
Look inward to say what do we have what we don't have so that's all part of the normal M&A, but we're not saying that we will be deviating from our traditional our.
Stablish way of investment discipline.
Our market share long longer term goal.
As we had anticipated the overall potential in the industry.
Gross prospects, but we think that we are in a very good position to reach 30, or even 40% of the overall market in the next five to 10 years.
Again, that's a very loose range. However, as we mentioned it is a scaled business our scale leverage is important.
And as the demand is there as the growth potential is there we have the best competitive advantage. We are in the better our most favorable favorable position to achieve a higher market share and that is indeed, what we are trying to achieve.
Hope that answers your question.
Oh, yes. Thank you.
Our next question comes from Frank look well Blah Blah capital. Please go ahead.
Uh huh.
So on your question of appliances in the World.
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Jonathan.
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Thank God for mattresses art joined because it sometimes it doesn't always happen.
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Typical reinforces why am I, saying that sounds good.
So two questions from my first relates to treat them in a more of a longer term industry partial Fordham MTA ask Ralph talk out in the Sun.
My name is Melissa to D C.
I see that you do have a dual listing.
This thing on the screen.
Thank you.
Yeah.
Yeah.
So yeah.
Woman Deavila, how does this how much fishing some go quite deep in terms of the.
This was on top of it changed at all.
The only change Huntington.
Obviously, there's the longtime he signs you can glean from the shot show.
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Uh huh.
Let's see.
Please how you shouldn't need.
It appears that some of them.
Oh, no I'm not sure Uh Huh Uh huh.
Let me translate for chairman the first question in the next two to three years.
The growth of the industry. So we are we remain confident in the entire industries and longer term growth because the potential is a deep and the ability to expand is.
Still very strong, particularly speaking.
The the penetration into rural agriculture, as well as manufacturing opportunities are just starting to.
Present itself. So we expect the industry will continue to grow, especially when you have big concentration in the top players continue to increase the scale and the leverage will further support and propel the growth of the healthy growth of this.
Industry.
The second part of the question relating to a dual primary listing including in the U S and Hong Kong are we we have been researching and I think the company has no hurdle.
It's so therefore, it is an option for us to achieve such in due time.
Oh sure.
Once you sort of hold off each other quite well that's in Macau.
Oh, that's a girl.
John does that kind of I don't want you to actually get the dishwasher.
I was with all your trousers economy started things off on a methodology.
She was on the car park.
Yeah, Chuck so teachers, who can diesel.
So youll soon.
So they're either Cushing chooses.
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Chisel.
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So you.
Can you just shed some soup.
Right.
Let me translate our overall view is that this industry pricing will be stabilizing and slightly and gradually increase it is.
And by its nature and the current development trend.
The players.
As the market share becomes more and more concentrated in other words the pricing power. It will be there we believe the pricing going higher and increasing Ah is a very much likely has a high probability of increasing.
Oh this is here.
Thank you.
If you'd like to ask a question. Please press Star then one.
Our next question comes from Lin Chen with JP Morgan. Please go ahead.
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Sushi.
But.
Relative who really do.
Relative to the other industry peers technology has always been our core pas.
Competency or core focus of our business, we have invested consistently and are among the point that we invest the largest amount and also weird. The most innovative there are many.
Occasion application of the technology uses are.
It originated from each yield this year, we will continue to strive for it is competitive.
Integer is development.
For example to the initiatives include one expanding our technology empowerment and extend that capability to our outlets helping them.
Carrying out more online and real time management of their operations.
During their policy, making financial analysis are all done with digitized solutions. So the and also it includes the end of the line management capabilities all the way extending to the careers are the second part which is also a very effective.
Initiative that is generating significant results for us that is the the what we call. It a dampening, meaning we are focusing more on a real time more frequent more but.
In time.
The ability to the data and so that we could find issues and problems as soon as we can and our resolve them.
As soon as we can and this extends to our across extensible to across our operations all the segments, including the sortation the transportation the route planning the labor.
Sensation, our labor productivity and so on and so forth and this will further our ability to gain.
Productivity she in all front.
That that is what we are.
I don't think we want to try to compare with.
All the other players because each has a different starting point in each has different resources and capabilities as well because they are doing well and then some of them are what we are able to learn from and some are that we are able to.
Let's see better.
Sure.
Oh sure Sheila torches you Angela.
This concludes our question and answer session I would like to turn the conference back over to Mr. Wei Ping Yang for any closing remarks.
Thank you again for joining us for the call and we look forward to speaking with you further if you have any more questions.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.