Deppon Is Finally Going Public After Three Years. How Is Its Freight Business Different From SF Express's?

The line between the two is blurring.

On December 22, Deppon Logistics at last got the paperwork from the China Securities Regulatory Commission clearing it to issue shares on the Shanghai Stock Exchange.

Barring surprises, Deppon will start trading on the A-share market early next year, ending a long and twisting road to an IPO.

Since YTO took over a listed shell on the A-share market in late October last year, the "four Tong and one Da" couriers (YTO, ZTO, STO, Best Express and Yunda) and SF Express have gone public one after another to raise money. Apart from ZTO and Best Express, which listed in the United States, all of them reached the A-share market through reverse mergers. Once Deppon lists, every major company in China's courier industry will be a public company.

Deppon was in fact the first of them to start the process. It filed its prospectus in June 2015, ran straight into that summer's market crash, and then waited out the CSRC's suspension of IPO reviews. By the time reviews resumed, the queue moved and the approval arrived, two and a half years had gone by.

The prospectus Deppon filed this March says it will issue shares at a valuation of 20.1 billion yuan and raise 2.988 billion yuan. One quirk of the A-share market is that almost any newly listed company hits the daily limit-up for several days running. Among the courier companies already trading there, STO and SF Express hold the records at 13 and 11 straight limit-up days; YTO had the fewest at 5, and Yunda had 7.

If Deppon does as well as Yunda, seven limit-up days would put its market value at 39.169 billion yuan — fifth in the industry.

Deppon gets compared to these companies constantly, but it is not in the same business. A few years ago, if what you wanted to ship was too heavy or too bulky, a courier from one of the other firms would simply tell you to go find Deppon.

Both send someone to your door, but Deppon and the couriers are in different businesses

Picture a move across Beijing: from Huixin Xijie on the North Third Ring Road to the Shuangjing subway station on the East Third Ring, a 13.4-kilometer drive. Say you don't have much — about 12 boxes, around 150 kilograms, enough to fill a Jinbei van 70 to 80 percent full.

For that move, 58.com's moving service costs roughly a quarter more than Deppon: 90 yuan per ton-kilometer against 70 yuan.

Almost nobody picks Deppon anyway, because 58.com loads your things and drives straight to your new home to unload — an hour or two, start to finish. Deppon is cheaper, but its trucks route through a transfer hub, so it can't promise same-day delivery.

Send those same boxes door to door from Beijing to Shanghai, though — more than 1,000 kilometers, ten times the distance — and Deppon's fee is less than twice what the 58.com move would have cost. That works out to 1.8 yuan per ton-kilometer.

The reason is that a moving service like 58.com ties up a truck and at least one driver for half a day no matter how little it carries.

A Deppon truck, once it has picked up a shipment, goes to a transfer center much like an ordinary courier's. Staff sort the goods, load them onto trucks of different sizes carrying anywhere from a few tons to several dozen, and send them off to other cities.

As with ordinary courier delivery, packing different customers' goods into one truck for the long haul is what brings the cost down.

The industry calls this less-than-truckload freight — a carpool for cargo. The principle matches courier delivery, except in the sorting: courier sorting centers generally run conveyor lines, while Deppon's generally run on forklifts.

Because the whole operation is built for big shipments, Deppon is also a good deal cheaper than other companies on heavy goods.

Courier companies, meanwhile, usually pay their couriers by the parcel, which gives them no reason to take on anything oversized.

Deppon has been moving large goods since 1996 and is used to handling outsized packages — which is exactly where its advantage lies today. To consumers, Deppon has become the company you call for big items: cheaper and faster. But consumers are not its main customers.

Deppon's average shipment weighs 220 kilograms — it is small-lot freight for companies

At the beginning, less-than-truckload customers were mostly businesses. Think of it as courier delivery for companies.

In logistics, less-than-truckload is defined against full-truckload; the Chinese term means, literally, "scattered load." One is a single truck carrying goods for one client; the other is a truckful of odd lots that on their own would never fill a truck.

Lin Mu, who runs a warehousing and logistics business, told QDaily that shipments measured in tons generally go to dedicated-route logistics firms. Those firms either run their own fleets or subcontract, and they specialize in traffic between two fixed points — Shanghai to Shandong, say, or Shanghai to Zhejiang.

Lin Mu's example: 40 tons of goods from Shanghai to Guangrao, Shandong, costs 8,000 yuan as a full truckload, excluding loading and unloading. For the same distance and the same weight, Deppon would charge close to 30,000 yuan.

The gap comes from the two business models, Lin Mu added: point-to-point heavy haulage is a wholesale business, while Deppon is more like retail for odd lots.

Moving a full truckload is cheaper. But much of the time, a company doesn't have a full truckload to move.

Serving exactly that need is Deppon's business: a carpool for freight.

Every day, in cities across the country, Deppon runs scheduled highway services on fixed timetables and fixed routes, loading odd lots from different companies onto one truck bound for the same place. Its prospectus shows that in 2016 the average Deppon shipment weighed 220 kilograms and cost 304.76 yuan.

A business conducted on the highway: Deppon keeps more than 10,000 trucks of every kind

Deppon's network runs on road transport, and it owns 10,200 trucks. To keep breakdowns down, it buys only vehicles less than five years old, and it buys a different brand — modified to its own specifications — for each of its freight product lines.

Deppon currently splits its freight business into three products:

• Precision Truck Express: for distances over 480 kilometers, faster and more expensive, using heavy tractor units from Volvo, Scania, Mercedes-Benz and the like;
• City Freight: for distances under 480 kilometers, faster and more expensive, using 6.5- to 9.6-meter trucks from Foton, Qingling, Dongfeng and Jiefang;
• Standard Road Freight: long and short hauls both, slower and cheaper, using heavy container semi-trailers from CIMC, Huajun and Yongxuan. Its price per ton-kilometer is about two-thirds that of Precision Truck Express.

All three move goods between cities. What you see more often inside a city are small trucks in Deppon's livery running between the distribution outlets and pickup or delivery addresses — Iveco, Jinbei, Isuzu, JMC, all of them under 6.5 meters.

Between those outlets — a big city district may have several — and the transfer center, of which each city has one, run the "shuttle" trucks, 6.5 to 9.6 meters long.

Deppon bought those 10,200 vehicles itself, but still more of its trucks come from outside partners. In 2016 the split between the two was 2 to 3.

Deppon was once the SF Express of freight, built on outlets it ran itself

In the courier market, the Tongda companies pushed into new territory fast on franchising and low prices. SF Express took the opposite route, running everything itself to keep control of prices and service.

Deppon is the SF Express of the freight world. From 2009 it ran its own operation — building its own outlets, buying its own trucks, hiring full-time drivers — and it now has 5,320 company-run outlets. Both companies have also spent heavily to rebuild their fleets and their management systems.

That is where Deppon means to put its IPO money: into the customer experience and service. The prospectus says the 2.988 billion yuan will go mainly toward building company-run outlets, buying less-than-truckload vehicles, buying courier vehicles and equipment, and building a single integrated information platform.

A QDaily reporter visiting Deppon's headquarters watched more than ten employees in its digital monitoring room switch camera feeds on a wall-sized screen from the computers in front of them. Employees with higher clearance can call up charts of the day's operating data — daily shipment revenue, how full a warehouse or transfer center is running.

Deppon says the live monitoring is there to catch operating mistakes and fix them quickly, while the capacity figures and other numbers tell managers how the day is going so they can adjust — speeding up delivery downstream, for instance, when a transfer center starts filling up.

Starting last year, to get into new markets faster, Deppon began outsourcing large numbers of its township- and village-level outlets. The arrangement is the same one the Tongda companies use: Deppon handles the trunk-line haul, and the franchisee handles pickup and delivery at the last-mile station.

Deppon calls its franchisees a "partner" system, and it has moved quickly. Franchising opened in August 2015 and ended that year with 905 outlets; by the end of 2016 there were 5,190. But franchisees carried only 4.88 percent of shipment volume in 2016 — most of it still went through Deppon's own outlets. The franchisees have got Deppon into new markets fast, in other words, but the business has not grown as fast as the outlet count.

But freight isn't courier delivery — even the biggest player holds only 1.02% of the market

A report by Guojin Securities puts China's less-than-truckload market at 1.04 trillion yuan in 2016. But the barrier to entry is low, which breeds enormous numbers of small, scattered firms, and this loose market has no dominant company.

By iyiou.com's count, the top 10 companies in less-than-truckload freight together hold just 3.35 percent of the market, and Deppon, the biggest earner among them, holds 1.02 percent.

Because these companies offer much the same service, they compete mainly on price, and margins suffer for it.

Between 2015 and 2016, the average price of Deppon's Standard Road Freight fell from 0.92 yuan per ton-kilometer to 0.84 yuan. Precision Truck Express, its largest source of revenue, saw its average selling price drop 5.93 percent, which cost it 390 million yuan in revenue.

Courier delivery, by comparison, is growing faster and is more concentrated. State Post Bureau figures put the industry's 2016 revenue at 397.44 billion yuan, with the top five companies taking most of the market and SF Express alone taking 14.46 percent.

To keep growing, Deppon started calling itself a courier company

In freight, Deppon is several times the size of its nearest rival, but its growth is slowing.

And freight simply earns less than courier delivery:

In 2013, Deppon moved into the courier market.

Growth across logistics was slowing at the time, but courier delivery, pulled along by e-commerce, had grown nearly twentyfold in a decade.

To set itself apart, Deppon built its courier business around big parcels as well, billing itself as "China's best-value heavy-parcel courier" and aiming at shipments between 1.5 and 30 kilograms.

Deppon's courier business has grown fast, but what it carries is not what the other couriers carry. Its old image has held it back on the way in, too: people think of Deppon as the service for big things.

The average Deppon courier shipment now weighs 10 kilograms, and its average price per order is correspondingly higher than SF Express's.

The prospectus shows that Deppon's courier business lost money two years in a row before turning a profit in 2016, with its share of total revenue rising from 4.69 percent to 24.09 percent.

And while the margin on the core less-than-truckload business was falling, the courier business — much smaller in revenue — grew its margin by more than 190 percent.

Now the couriers are all doing freight, and the line between the two is no longer clear

A freight company can do courier work, and a courier can do freight. The two operations look alike: odd lots collected, hauled to the same destination, then broken out for delivery. The difference is the size of what's in the truck.

Just as Deppon was entering the courier market, the couriers were eyeing Deppon's.

In April 2014, less than a year after Deppon's move, SF Express launched a general freight service aimed mainly at parcels over 20 kilograms. It carried its courier standards straight over: guaranteed pickup and delivery times, door-to-door service, delivery to your door, storage, cash on delivery, declared-value insurance.

A business that both trims costs and binds customers closer soon drew the other couriers in as well.

Courier companies are getting into freight too

2012

Best Express bought Quanjitong and launched Best Freight. In 2016, with revenue of 1.6 billion yuan, it ranked 12th among less-than-truckload companies by revenue

April 2014

SF Express began accepting parcels over 20 kilograms, and the business then grew at a compound annual rate of 199.3%; by 2016, with revenue of 2.34 billion yuan, it ranked 7th among less-than-truckload companies

August 2016

ZTO began operating 14 freight distribution centers

March 2017

YTO Freight entered trial operation

October 2017

Yunda opened a freight business

January 2018

STO is due to start running a freight business

Guojin Securities' analysis is that the courier market competes on delivery speed and on the build-out of last-mile outlets — a higher wall than hauling big items as less-than-truckload freight.

To reach more individual customers, the couriers had already built out trunk lines, transfer centers and outlets. Across the whole supply chain, pushing from individual customers toward business customers turns out to be more workable than going the other way.

So it is easier for a courier to enter the freight market than for a freight company to enter courier delivery. Training a team to handle freight is more practical than opening outlets from scratch, and it takes less time.

On this trend, Deppon's business and the couriers' will keep converging.

When QDaily visited Deppon's headquarters, the executive giving the company introduction called Deppon a courier company, not a logistics company. "That's also going to be the focus of our messaging from here on — Deppon Express."

But to protect its edge in big shipments, most of the money Deppon is raising still goes to freight: more than 57 percent to less-than-truckload vehicles, about 19.8 percent to the vehicles and equipment courier work needs.

To get into the already-crowded courier market faster, Deppon has also stepped up franchising; its outlet count grew 473.48 percent in 2016.

It has eased up on how fast customers have to pay, too. Over the three years from 2014 to 2016, Deppon's accounts receivable rose 359 percent, and their share of total assets went from 8.52 percent to 21 percent.

Three years ago SF Express's receivables ratio was far higher than Deppon's. Now it is the other way around: SF's receivables fell from 17.78 percent of total assets in 2014 to 10.33 percent in 2016.

Three years ago, courier delivery and logistics each had their own territory. SF Express took the orders from the customers most willing to pay; the Tongda companies used franchising to reach a bigger market at a lower operating cost; Deppon moved big freight.

Now the line between freight and courier delivery keeps blurring. SF Express and YTO both want to carry big items; Deppon does courier work, and has joined China Eastern Airlines' mixed-ownership reform to add air capacity and speed its deliveries up. The competition will only get harder.

As Deppon chairman Cui Weixing told China Entrepreneur this July: "If we can't get courier delivery right, I'm afraid we won't hold our ground in the freight market either."

Charts by Xiuxia Feng and Fangyi Gong

Cover image: Visual Hunt