ZTO 中通快递

Operator

Good evening, and welcome to the ZTO's Fourth Quarter Full Year Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to hand the conference over to Ms. Sophie Li. Please go ahead.

Sophie Li

Thank you, operator. Hello, everyone, and thank you for joining us today. The company's results and the Investor Relations presentation were released earlier today and are available on the company's IR website at ir.zto.com. On the call today from ZTO are Mr. Meisong Lai, Chairman and Chief Executive Officer; and Mr. James Guo, Chief Financial Officer. Mr. Lai will give a brief overview of the company's business operations and highlights followed by Mr. Guo, who will go through the financials and guidance. They will both be available to answer your questions during 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 1995. 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, which 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’s 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 new information, future events or otherwise, except as required under law. It is now my pleasure to introduce Mr. Meisong Lai. Mr. Lai will read through his prepared remarks in their entirety in Chinese before I translate for him in English. Mr. Lai, please go ahead.

Meisong Lai

[Foreign Language] Okay, now let me translate for Chairman. Hello, and thank you everyone for joining our call this morning. Our business maintained strong growth momentum during the fourth quarter of 2017. Parcel volume grew 35.8% to 2.02 billion parcels, outperforming the industry average of 24.3% by more than 10 percentage points. Total revenue during the quarter was RMB4.3 billion, up 35.7% year-over-year. Looking at the full year 2017, parcel volume grew 38.3% to 6.22 billion parcels, significantly faster than the industry average of 28.1%. According to data released by the State Post Bureau, we once again ranked among the top three major express delivery companies in China for customer satisfaction in 2017. We are optimistic about the long-term growth prospects of the express delivery industry in China. As China enters a new retail era and with e-commerce continuing to grow, industry-wide parcel volume is estimated to reach 70 billion parcels by 2020, which is creating enormous growth opportunities for a large-scale express delivery company such as ZTO. The recent enactment of a series of industry-specific policies such as the 13th 5-year plan for the development of express delivery and the approval of the provisional regulations on express delivery by the government will create a favorable environment for the development of the express delivery industry. We will seize these opportunities by solidifying and better utilizing our competitive advantages to maintain profitability and extend our leadership position in terms of parcel volume among the top tier players. Our focus is on achieving sustainable and profitable growth. As we head into 2018, we will continue to strategically devote sources towards key areas of our business. First, we will continue implementing our responsibility model centered around sorting hubs. This means delegating authority coupled with accountability to better integrate existing resources, incentivizing local management for higher parcel volume growth and the accounting operating efficiencies. Second, we will increase our on-the-ground operational visibility and the reliability of our data to enable us to make better business decisions and benchmark our initiatives. With more effective decision-making, we will be able to engage and empower our network partners to improve their operating efficiency and maintain network stability. Third, we will continue to invest in our infrastructure such as sorting automation and the transport route optimization in order to better capture growing demand and adapt to a rapidly changing market environment. Last but not least, we will continue to focus on improving service quality and ensure increased brand recognition and customer satisfaction. Our market share in terms of parcel volume increased to 15.5% in 2017 from 14.4% last year, a significant increase compared to that in 2016 and in line with our growth target for 2017. I am confident in our ability to carefully balance growth with service quality and profitability as we usher in a new era in the express delivery industry. With that, I will now turn the call over to James, who will go over our financial results in more detail.

James Guo

Thank you, Chairman. Our parcel volume during the quarter outperformed a 24.3% industry average by 11.5 percentage points, increasing 35.8% year-over-year. Such strong growth demonstrates our market leadership and the effectiveness of our strategy. During the fourth quarter, we continued to make solid progress in enhancing service quality. According to data released by the State Post Bureau, ZTO once again received one of the highest scores for customer satisfaction among the major express companies in China during the quarter. We acquired China Oriental Express during the quarter, which will allow us to provide services beyond express delivery such as freight forwarding and other international logistic services as well as increase our exposure outside China and further differentiate ourselves from our competitors. As of December 31, 2017, we have installed a total of 58 automatic sorting equipments at 43 sorting hubs across the country, an increase of 17 lines from the third quarter of 2017. In addition, we added more than 400 high, 15 to 17-meter long trucks to our self-owned fleet during the fourth quarter, which expands our transport capacity and increases transportation efficiency. These measures have not only strengthened our cost advantages and helped us to expand the size and scale of our network capacity but also further reduced our unit operating cost year-over-year. Our net income included a reduced income tax attributable to one of our subsidiaries during the quarter as it became qualified as a High and New Technology Enterprise. This subsidiary recognized RMB285.9 million tax credit for 2017, which improved our bottom line for the year by about RMB0.45 per parcel. This translated into an increase in net profit per parcel from about RMB0.46 in 2016 to about RMB0.51 in 2017. Please note that all amounts are in RMB, unless specifically mentioned. All percentage refers to the changes from prior measuring unless otherwise specified. Our parcel volume during the quarter increased by about 35.8% to approximately 2.02 billion. Our number of self-owned trucks increased to over 3,600 as of December 31, 2017, from about 3,250 as of September 30, 2017. The use of more self-owned high capacity trucks has enabled us to enhance transportation efficiency continuously and reduce unit transportation costs as we further increase our economies of scale. Revenues increased by 35.7% to RMB4.33 billion, primarily due to strong growth in parcel volumes and revenues from major enterprise customers. The acquisition of China Oriental Express on October 1, 2017, also contributed about RMB270 million in revenue during the quarter. Cost of revenues increased to RMB2.98, an increase 46.7%, primarily due to increase in line-haul transportation, sorting hub operations and accessories costs. This also includes RMB260.4 million in freight forwarding cost from the newly acquired China Oriental Express during the quarter. Going into further detail. Line-haul transportation costs increased 22.6% to RMB1.51 billion. The increase was in line with the growth in parcel volume and was primarily due to increased cost associated with our self-owned fleet, which include fuel, tolls, drivers' compensation, depreciation and maintenance expenses and outsourced transportation services. As a percentage of revenues, line-haul transportation costs accounted for 35%, a decrease from 38.6% in the same period last year mainly because of one economies of scale, second increased use of self-owned more cost efficient, higher-capacity trailer trucks in place of third-party trucks; and three, increased truck utilization through optimized route planning and increased backhaul transportation. Sorting hub operating costs grow 34.2% to RMB768.6 billion, primarily due to increases in labor costs on wage hikes and additional headcounts during China's peak online shopping season and also depreciation and amortization costs and rental and related utility costs. As a percentage of revenues, sorting hub operating costs accounted for about 17.7%, a decrease from 18% in the same period last year, mainly due to economies of scale and improved operating efficiency as a result of the increased use of automation in our sorting facilities. Cost of accessories increased 31.6% to RMB127.7 billion, which was inline with growth in our revenue from the sale of accessories, which includes thermal paper for digital waybill printing, portable bar code readers and ZTO-branded packaging materials and uniforms. Other costs increased about 69.6% to RMB309.6 million, primarily due to an increase in dispatching costs associated with serving larger enterprise customers. Gross profit rose 16.5% to RMB1,353,000,000 and gross margin decreased to about 31.3% when compared to the same period last year. The decrease in gross margin was mainly due to the consolidation of China Oriental Express, the increased cost of serving enterprise customers, both of which have relatively lower gross margins than serving smaller customers and an increase in labor cost in our sorting hubs during China's peak online shopping season. Total operating expenses decreased 31.1% to RMB127.5 million. Taking a closer look, we see that SG&A expenses increased by about 13% to RMB222.5 million, primarily due to a one-off – due to a fixed asset disposal loss when we upgraded sorting hub equipments and facilities. If we exclude the impact from the acquisition of China Oriental Express, our operating margin remained stable at about 30.1% compared to [indiscernible] during the same period last year. Income from operations was RMB1.226 billion, an increase of 25.6% from the same quarter last year. In the fourth quarter, that income rose to RMB1.122 million compared with RMB739.8 during the same period last year. Basic and diluted per ADS was RMB1.72, and RMB1.71 respectively, which were both at RMB1.04 during the same period last year. Adjusted net income surged to RMB1,265,000,000, a significant increase from RMB740.1 million during the same period last year. EBITDA was RMB1.381 billion compared with $1.98 million during the same period last year. Adjusted EBITDA was RMB1.424 billion, an increase from RMB1.98 billion during the same period. Net cash provided by operating activities was RMB1.372 billion compared with $1.183 billion during the same period last year. As of December 31, 2017, the company had approximately RMB10.65 billion in cash and cash equivalents and short term investments, a decrease from about RMB11.3 billion at the end of last year. Going forward we will issue quarterly guidance on parcel volume and adjusted net income rather than revenues. As Chairman Lai mentioned earlier, our strategic focus in 2018 will be on increasing our market share while achieving profitable growth. providing guidance on parcel volume and adjusted net income is directly in line with these strategic objectives. We also use these two objectives – these three metrics, among others, to measure management performance and make major business decisions. Therefore, we believe the guidance on those two metrics provides more meaningful information to investors for them to make investment decisions. Now turning to guidance, for the first quarter of 2018, we expect revenues parcel volume to be in the range between RMB1.504 billion to RMB1.527 million, representing a year-over-year growth rate about 28% to 30% in volume and adjusted net income will be in the range of about RMB617 million to RMB700 million, representing a year-over-year of 33.1% to 39.1%. This estimates represent management's current and preliminary view, which is subject to change. This concludes our prepared remarks. Before we open the call up for Q&A, I would like to remind everyone, so pleased limit themselves to only one questions. Operator, we are now ready to begin the Q&A section. Thank you.

Operator

Thank you. We will now begin the Q&A session. [Operator Instructions] Your first question comes from Baoying Zhai from Credit Suisse. Please go ahead.

Baoying Zhai

[Foreign Language] So due to just one question, my question will be focused on the ASP. Excluding the acquisition, I can see the ASP in fourth quarter for express delivery services was down 7% year-on-year and Q-on-Q, we also see a small drop. This is different from the euro seasonality in the past years. Mr. Lai, can you share the reasons behind that? And to be specific, first of all, so how much of the decrease is caused by the increase of subsidies in fourth quarter of 2017? Second, how much this is caused by the average wage decrease? And on regarding the average wage decrease, I want to be more specific. So how much is caused by the fast rise of [indiscernible] in fourth quarter? And how much is due to our proactive small arising parcel strategy? And based on the analysis on fourth quarter ASP, so what's our outlook for 2018? Thank you so much.

Meisong Lai

[Foreign Language]

Baoying Zhai

[Foreign Language]

Meisong Lai

[Foreign Language]

Baoying Zhai

[Foreign Language]

James Guo

So, yeah, this is James. I am going to do the translation for the Chairman to answer your questions. First of all, the Chairman pointed out that we have always been focusing on three key metrics namely market share, profitability and service quality rather than ASP to make major business decisions. And that's why we changed our quarterly guidance from revenues to parcel volume and non-GAAP net profit this time. And second, the ASP declined for a number of reasons. First, there was an increase in the proportion of parcels shipped by our network partners and the pickup location directly to the sorting hubs and the destination in Q4. That means the parcels were shipped without going through ZTO's origin sorting hub first, and this arrangement resulted in a decline in our transit fees, thus, reducing our ASP in the period. But in the meantime, this arrangement also reduced our sorting and transportation costs. And second, the increased use of digital waybills because the adoption rate of digital waybills increased to about 93% in Q4 2017 to about – from about 78% the same period last year, and this also resulted in a decrease in waybill revenue per parcel; and third, a decrease in the average weight per parcel, which decreased to about 1.15 kilograms in Q4 2017 from about 1.23 kilograms same period last year, and this resulted in a year-over-year decrease in the network transit fee per parcel as well. And last but not least is an increase in subsidies payable to the network partners during the peak season. As the proportion of parcels under the direct shipment arrangement, as described by the Chairman, is expected to increase in the future and also the corresponding changes in the pricing model, our future ASPs will not be comparable to those in the past. And this is very important to know. And second, about the questions for [indiscernible]. The Chairman pointed out that [indiscernible] contribution to parcel volume gradually increased in Q4 017. But pink door-door have a substantial impact on our parcel weight, and there's no difference in our pricing policy per parcels coming from pink door-door. Looking forward, Chairman says that he believes that the price charge of our network partners to the customers will stabilize as the industry further consolidates in 2018.

Meisong Lai

[Foreign Language]

James Guo

Okay, so, the Chairman also added the direct shipment arrangement that he described just now. It's a new operational strategy. We leverage that strategy to further utilize our transportation capacity, and he believes there's huge growth potential for the express delivery industry in China over the next few years. By using this direct shipment model, we can – that enable us to capture the growing demands for express delivery in the market. And this new arrangement not only reduces the transit frequency and now our sorting hubs but also improve the transportation efficiencies of our fleet and improve transportation efficiencies as well – reduce our transportation cost as well.

Baoying Zhai

[Foreign Language]

Operator

Thank you. Your next question comes from Eric Zong with Macquarie. Please go ahead.

Eric Zong

[Foreign Language] So I have two questions. First question is like what is your expectation on the key accounts' profit margin trend in 2018 based on the first quarter trends so far? So – and where – and also, do you think the competition level will continue to rise for the New Year? And also, what's your targeted revenue mix from the key accounts in 2018? Then, my second question is what's your most recent strategy to support your franchisees and any measures that you are planning to take in 2018? So where you increased your subsidies provided to those franchisees with weaker profitability?

Meisong Lai

[Foreign Language]

Eric Zong

[Foreign Language]

Meisong Lai

[Foreign Language]

Eric Zong

[Foreign Language]

James Guo

I am going to translate for the Chairman. There are actually two questions; one is about the key accounts. To answer the first question, in Q4 2017, our revenue from enterprise customers was approximately about RMB400 million, accounting for about 10% of our revenues, up by about 69% from the same period last year. The cost for serving enterprise customers includes last-mile delivery fees. So the gross margin of serving those larger customers is lower than, therefore, our regular express delivery business. And increasing the number of enterprise customers will help us to expand our market share while achieving decent profits. The second question is about our support to the network partners. We have always been incrementing a fair and transparent policies across our network. Our commitment to support our network partners remains unchanged over time. We will continue to balance the interest of the key stakeholders in our network and fine-tune our policies we created in order to maintain the stability of our networks. For example, the Chairman said we set standards for different network partners for last-mile delivery fees and different types of incentives payable to the network partners to support their growth, and we also have differentiating delivery fee system based on the locations and the size of the network partners in different regions. And network stability is one of our key differentiations from our rivals. So looking forward, we'll continue to improve the stability of our networks to gain market share over time.

Meisong Lai

[Foreign Language]

James Guo

Okay, the Chairman also added that our KA, our key accounts strategy is meant to meet the evolving needs of our growing customer base, in particular larger accounts. And he points out that, today, we see more and more larger companies or merchants with a daily parcel volume over a 1,000 parcels per day.

Eric Zong

[Foreign Language]

Operator

Thank you. Your next question comes from Nicky Ge from China Renaissance. Please go ahead.

Nicky Ge

[Foreign Language] What is the management's outlook for the quarterly gross margin for this year considering we have multiple factors kind of impact the gross margin?

James Guo

Okay, we don’t think gross margin is an accepted measure of the company's profitability, and we believe, for example, gross profit per parcel, it’s a better indicator. And that’s why as you can tell from our guidance, going forward, we're going to change the guidance from revenue to parcel volume and adjusted net income. So for the reasons for the decline in gross margin in Q4 last year, there are a few reasons behind that decline. The most important one is the increase in cost serving key account companies, key account enterprises, which reduced our gross margin by about 4 percentage points. Second, the acquisition of the China Oriental Express business further reduce our gross margin by about 1.8 percentage points, okay. And the good news is the decline in gross margin was partially offset by improved transportation efficiency. So that explains why our gross margin dropped from about 36.4% to 31.8% in Q4 2017. I would like to draw your attention to the fact that, again, gross margin is not the best metrics to measure our profitability.

Nicky Ge

Okay, good deal.

Operator

Thank you. Your next question comes from Edward Xu from Morgan Stanley. Please go ahead.

Edward Xu

[Foreign Language]

James Guo

Would you like to translate to English first, Edward?

Edward Xu

Yeah, I can translate, thank you. So my question is regarding the enterprise clients. So because I think the – in terms of this ASP and the unit cost, the two trends has been distorted by the significant increase of the enterprise clients' portion. So is there any way that you can break down or just exclude the contribution for these enterprise clients and so that we can see more apple-to-apple comparison of both ASP and the unit cost? And also, what is your guidance for the future proportion for the enterprise clients? Thank you.

James Guo

Yeah, so, as the Chairman mentioned earlier, our key account strategy will help us to expand our market share while achieving decent profits. In Q4 last year, the KA business, the key account business, reduced our gross margin by about 4.2 percentage points, 4.2 percentage points, and that translates into a reduction in our gross profit per parcel by about RMB0.04 per parcel. So that's the impact of the key account business on our financial – on our P&Ls in Q4 2017. But again, not all the cost of serving key accounts are identifiable directly. For example, there are a whole bunch of sorting costs or transportation costs there included in the total operating costs, which are difficult to separate for key account customers. So that means total cost for serving key accounts is not fully loaded costs. But going forward, we think the key account business has strategic value for the company because it helps to not only expand our market share in terms of parcel volume, but also further utilize our transportation capacity to increase our operating efficiency.

Meisong Lai

[Foreign Language]

James Guo

So the Chairman added that, as he mentioned earlier, we have been always focusing on three key metrics, including our market share, our profitability and service quality. For market share, as we continue to scale up the business, that will bring economies of scale and further reduce our unit operating costs. For profitability, our key principle is we're going to gain market share while maintaining stable profitability of our business. And he also says that doing an express delivery business is like running a marathon. It's a long journey, and service quality is key to ensure stickiness of our customers and loyalty of our customers. And we're going to gain market share without sacrificing our service qualities. So key account strategy is key to the future development and long-term sustainable growth of ZTO Express in the long run.

Operator

Thank you. Your next question is from Xin Yang from CICC. Please go ahead.

Xin Yang

[Foreign Language] So my question is regarding the automatic sorting. What is the automatic sorting lines in total now currently in 2017? And what is your target for 2018? And what is your estimate of the cost cutting by automatic sorting? Thank you.

Meisong Lai

[Foreign Language]

James Guo

Yeah, okay, so to answer your question, Yang Xin, as of the end of Q4 last year, we installed, and also have put into operations of – a total of 58 automated sorting equipments in our sorting hubs, an increase of about 17 lines from the previous quarter. And we expect to install 10 more, I would say 10 more than what we expected to do at the beginning of the year. In 2018, we plan to install around 20 to 30 automatic sorting equipments by the end of the year, and in the meantime, we're going to install 15 more automated sorting equipments for bulkier parcels. This is something new. We have never done this before. And in the meantime, we also will add about 51 dynamic weighing equipments in our sorting hubs for 2018. In last December, about 40% of our parcel volumes were processed using automatic sorting equipments.

Meisong Lai

[Foreign Language]

James Guo

Yes, the Chairman also added that we're going to step up investments in automation at the sorting hubs in 2018. As I mentioned earlier, we are going to add more automated sorting equipment for bulkier parcels and also add more dynamic weighing machines in 2018. And he also says that there is a ramp up for those automated sorting equipments. So not all the automated sorting equipment are being fully utilized and – or not utilized at full capacity last year. Some of the sorting hubs, their scale is not large enough to fully utilize automated sorting equipment. For example, if the parcel volume was about 700,000 to 800,000 per day – per year and the automated sorting equipment will be more fully utilized.

Xin Yang

[Foreign Language] about the labor cost increase…

James Guo

Yeah, the labor cost in our sorting hubs increased by about RMB140 million because of the headcount addition and also rising wages to cope with a spike in the demand for parcel volume delivery during the online shopping season.

Xin Yang

Okay, okay, give us your guidance about the wage increase for example for each individual workers in your sorting hub.

James Guo

Won't provide any guidance on any cost items. Again, we – like as we pointed out earlier, our focus of making – the focus on making major business decisions include three key metrics the Chairman pointed out earlier. One is market share. Second is overall profitability of the business, and third is service quality. So we don't provide any guidance on any separate cost items at this point in time.

Xin Yang

Okay, thank you very much.

Operator

Thank you. Your next question comes from Calvin Wong from JPMorgan. Please go ahead.

Calvin Wong

[Foreign Language]

Sophie Li

Calvin, would you like to translate your questions?

Calvin Wong

Sure, I am sorry. Yeah, so my question is still more related on the cost side, and looking at the cost side, I was excluding the new acquisition of the freight forwarding company. The sorting hub per parcel cost was, I think, the area where it was a bit higher than expected. So I just wanted to check on whether there were any one-off items included in here apart from sort of the normal seasonality impact that we would usually see that affected this. And a quick second question is related to the special dividend that was announced. Do we have any thoughts on implementation of a more stable dividend policy or dividends going forward? Thank you.

James Guo

Okay, yeah, so let me answer your questions about cost structure. There's no one-off cost items in past Q4 that we like to – that will have – make a huge difference in terms of operating costs. As I mentioned earlier, because of the increase in KA business, the costs related to serving key account enterprises has reduced our gross margin about 4.2 percentage points, and that's the biggest impact on our operating cost as well. So other than that, we don't see there's any unusual cost items in the past Q4 that has led to a very significant decline in our gross margin.

Meisong Lai

[Foreign Language]

James Guo

First, this dividend distribution is a special dividend approved by the Board of Directors. Our board has the complete discretion on whether to distribute dividend in the future or not. The board will consider such factors as our future operations, earnings, capital requirements and surplus financial conditions, contract flow restrictions and the impact on shareholders, including our employees in determining our future dividend policy. Over the past two years, ZTO has demonstrated its ability to generate high growth in revenues and earnings. We have ample cash on our balance sheet for investment when needed. Leveraging our strong cash position, the company has continued to seize market opportunities and bought back some of the shares to reward our shareholders in the past several quarters. After our IPO a year ago, long-term shareholders, many of those shareholders are our employees, they maintained a very strong confidence in the company's growth prospects, and they wish to continue holding our shares. This special dividend will benefit many of these long-term shareholders by helping them improve their quality of life. The company's profit and cash flows are expect to – are expected to grow continuously in the future as the business continue to evolve. And this special dividend will not have any negative impact on our financial condition.

Calvin Wong

Great, thank you.

Operator

Thank you. Your next question comes from Vivian Tao from Citi. Please go ahead.

Vivian Tao

[Foreign Language] So my question is still a follow-up questions on the key accounts. Can the management please provide a little bit more details on the associated costs? What exactly are those costs associated with the key account growth? And the follow-up question on that, we have seen that the key account – with the expansion of key account revenue, the margin has been high in fourth quarter. However, based on the guidance we provided for the first quarter, adjusting that income growth actually is higher than the volume growth guidance. So would you please give us a little bit of explanation on the guidance? Is – are we expecting that margin will actually stabilize in first quarter? Or maybe actually the higher net profit growth in the first quarter mainly comes from one-off items? Thank you.

Meisong Lai

[Foreign Language]

James Guo

Okay, first on key accounts. The Chairman believes that the revenue contribution from key account customers will remain at about 10% of our total revenue over time. And as he points out earlier, our key account strategies goal is to improve or expand our market share while ensuring overall profitability of the business. To explain the pricing model of key account customer, also the cost structure of the key account customers, let me give you an example. So for key account clients, we collect the full amount of delivery fee from the merchants directly. For example, we collect RMB6 per parcel from the merchants directly, and we do the first-mile pickup on our own without using our network partners. Because of this, we have to pay a last-mile delivery fee to the last-mile delivery outlets. So let's say, we have to pay RMB1.5 per parcel to the last-mile guys for last-mile delivery. And because of this, the cost of serving key account customers increased because in the past while we use our network partners to do express delivery services, we don't collect the full amount of delivery fees from the merchants. We only collect about RMB2.2 per parcel from our network partners. But this time, we collect the full amount of fee so that revenue of key account customer increase and cost broadly because we also have to pay the last-mile fee. The cost of serving key account customers also increase as well. And that explains why the cost of serving key account customers increased significantly. And about the guidance, in order to allow – the Chairman – on top of that, the Chairman also explained, in 2018, we will front load a lot of the capacity to our service outlets and our network partners through direct shipment arrangements. So that's why we don't think the gross margin or – is directly comparable or the ASP is directly comparable going forward versus the past. And in terms of the guidance, in order to do a like-for-like comparisons, in adjusted net profits, we need to take into account two factors, one is the tax impact, the tax credit that we enjoy starting from 2017; and the second factor we need to consider is the government subsidies that we receive from the government. For example, in Q1 2017, we received about 94 million subsidies from the government, but for the first quarter of 2018, we estimate to – we expect to receive about 68 million maximum only. So we need to take into account the differences in subsidies that we're going to receive from the government to do a like-for-like comparison in adjusted net incomes. If we strip out those two – the impacts from those two factors, the non-GAAP net income for the first quarter 2018 will have been increasing in the range of about 28% to 34% on a year-over-year basis. And that concludes my answers.

Operator

Thank you.

James Guo

I think…

Operator

This concludes our Q&A session. I would now like to hand the conference back over to Ms. Sophie Li for any closing remarks.

Sophie Li

Thank you, operator. In closing on behalf of the entire ZTO management team, we’d like to thank you for your interest and participation in today’s call. If you require any further information or have any interest in visiting us in China, please let us know. Thank you for joining us today. This concludes the call. Thank you.

James Guo

Thank you.