Executive Summary / Key Takeaways

• Profitability inflection is imminent: After four quarters of painful optimization that slashed losses from RMB 910 million in 2021 to just RMB 14 million in Q3 2025, ZKH achieved monthly breakeven in September and is on track for quarterly profitability in Q4 2025, marking a fundamental transformation from a cash-burning growth story to a disciplined, AI-driven industrial platform.

• AI is not a feature but the business model: The proprietary Expert Linglarge AI suite and ProductRecom Agent have already generated over RMB 100 million in incremental sales while boosting customer service productivity 42% and procurement productivity 52%, creating a self-reinforcing cycle where AI drives both revenue growth and margin expansion simultaneously.

• Private label strategy unlocks margin leverage: With private label GMV growing 16.7% year-over-year and contributing 8.2% of total GMV, management's target to reach 30% represents a structural shift toward higher-margin products that could expand gross margins by 200-300 basis points over the next 2-3 years, directly addressing the core profitability constraint.

• International expansion offers asymmetric upside: The overseas business, expected to breakeven in 2026, provides a second growth engine with minimal near-term investment risk, as ZKH leverages existing Chinese multinational relationships in Southeast Asia and Mexico while methodically building a long-term presence in the U.S. and Europe.

• Competitive moats are strengthening despite scale disadvantages: While JD MRO (JD) and Alibaba 1688 (BABA) dominate through ecosystem breadth, ZKH's specialization in industrial-grade MRO categories like chemicals and spare parts, combined with its AI-driven supply chain integration, is driving 48% growth in transacting customers and improving take rates, suggesting market share gains in the most profitable segments of the MRO market.

Setting the Scene: The MRO Platform That Learned to Scale Smarter

ZKH Group Limited, founded in 1998 in Shanghai, began as a traditional distributor of chemicals and industrial MRO products, building its foundation through disciplined cash flow management and infrastructure investment. For two decades, the company methodically constructed a one-stop procurement platform serving China's manufacturing sector, specializing in the complex, high-touch categories that generalist e-commerce players avoided—spare parts, chemicals, and manufactured goods. This early focus on industrial-grade products, rather than commoditized office supplies, created a sticky customer base but also meant ZKH bore the full cost of building specialized supply chains, including 13 chemical warehouses (three for hazardous materials) and an in-house distribution fleet.

The company's history reveals a pattern of strategic patience followed by aggressive investment. After establishing its core capabilities, ZKH entered a heavy investment phase from 2021-2024, deliberately sacrificing profitability to scale its platform, expand product breadth, and build technological infrastructure. This period produced staggering losses—RMB 910 million in 2021, RMB 630 million in 2022, RMB 290 million in 2023, and RMB 160 million in 2024—but also created the foundation for today's transformation. The investment cycle peaked in early 2024, triggering nearly four quarters of proactive business optimization that management describes as largely complete by Q3 2025.

This optimization was not mere cost-cutting but a fundamental restructuring of the business model. The company reduced operating expenses 14% year-over-year to RMB 420 million while simultaneously expanding its product catalog by 2.3 million SKUs and onboarding 1,200 new OEM suppliers. This apparent contradiction—growing the business while shrinking costs—illustrates the core thesis: ZKH's AI integration has reached a tipping point where technology drives efficiency faster than headcount-driven growth. The result is a leaner, more scalable platform positioned to capture the $176 billion Chinese MRO market that is digitizing at an accelerating pace.

Technology, Products, and Strategic Differentiation: The AI Flywheel

ZKH's technological transformation centers on Expert Linglong, a proprietary AI large model and intelligent agent suite launched in November 2025 specifically designed for the MRO industry vertical. This is not a generic chatbot bolted onto an e-commerce platform; it is a purpose-built system that automates 45 distinct business processes, from order creation to invoice issuance, with single-prompt execution. The economic impact is immediate and measurable: customer service productivity increased 42% year-over-year, measured by orders processed per employee, while procurement productivity jumped 52%. These are not incremental improvements but step-function changes in operational leverage.

The ProductRecom Agent exemplifies how AI directly drives revenue growth. Since its Q4 2024 launch, it has generated over RMB 100 million in incremental sales by improving product recommendation accuracy in complex industrial procurement scenarios. Consider the practical application: processing a 300-line customer inquiry traditionally required three hours of expert manual work; Expert Linglong completes the same task in 30 seconds with 98% accuracy. This capability transforms ZKH from a passive marketplace into an active solution provider, enabling it to capture business that would otherwise require dedicated procurement teams. The AI Smart Workbench has boosted the platform's automated product classification rate from 11% to 31% since the start of 2025, reducing manual intervention and improving matching accuracy while cutting operational costs.

Private label products represent the second pillar of ZKH's differentiation strategy. The company launched over 600 new private label SKUs in Q3 2025 across security equipment, personal protective equipment, tools, and material handling, driving 16.7% GMV growth that outpaced the overall business. Private label contribution reached 8.2% of total GMV, and management's explicit target of 30% signals a deliberate shift toward higher-margin, proprietary products. Private label items typically deliver gross margins 500-800 basis points higher than third-party products, providing a clear path to offset the platform's current 16.8% gross margin pressure from competitive pricing. The strategy exploits a gap in the market: while JD MRO and Alibaba 1688 focus on breadth and price, ZKH is building a portfolio of industrial-grade products where quality and specification matter more than absolute lowest cost.

The chemical product line demonstrates ZKH's ability to dominate specialized categories. Achieving double-digit GMV growth in Q3 2025, this segment benefits from dedicated infrastructure and expertise that generalist competitors cannot easily replicate. The company's 13 specialized chemical warehouses and hazardous materials handling capabilities create regulatory and operational moats that translate into pricing power and customer lock-in. This specialization is why ZKH can grow transacting customers 48% year-over-year while maintaining gross margin stability, even as larger competitors leverage scale to pressure pricing in commoditized categories.

Financial Performance & Segment Dynamics: Evidence of a Working Transformation

Q3 2025 results provide compelling evidence that ZKH's strategic reset is delivering. Total GMV of RMB 2.62 billion declined 2.3% year-over-year, a modest headwind that masks underlying strength: the number of transacting customers exceeded 70,000, a new quarterly high representing 48% growth from 47,800 in Q3 2024. More importantly, average weekday order value surged from RMB 37 million in July to RMB 52 million in November—a 40% improvement that indicates not just customer acquisition but deepening wallet share. This divergence between flat GMV and soaring customer metrics signals successful optimization: ZKH is shedding low-margin, low-value transactions while expanding its presence with high-value customers.

Revenue grew 2.1% year-over-year to RMB 2.33 billion, but the quality of that revenue improved dramatically. Gross margin on a GMV basis expanded 41.5 basis points to 14.9%, driven by optimized procurement costs and higher private label contribution. The marketplace take rate rose 47.5 basis points to 13.1%, demonstrating pricing power in the platform segment. Meanwhile, product sales gross margin on the ZKH Platform increased 11.2 basis points to 16.2%, and the GBB Platform saw a 223.8 basis point improvement to 7.7%. These margin gains are not accidental; they are the direct result of AI-driven efficiency and strategic SKU rationalization.

The profit trajectory tells the most important story. Adjusted net loss plummeted 78% year-over-year to just RMB 14 million, with the adjusted net loss margin improving to 0.6% from 2.9% in Q3 2024. Operating loss narrowed 69.3% to RMB 32.3 million, with margin improving 323 basis points to negative 1.4%. This improvement came while the company generated RMB 105.5 million in operating cash flow, a dramatic reversal from the RMB 160.5 million cash burn in Q3 2024. The cash generation was driven by both narrower losses and improved working capital management, including accounts receivable and payable optimization.

The balance sheet provides strategic flexibility. With RMB 1.9 billion in cash and a new $50 million share repurchase program authorized in June 2025, ZKH can fund its AI development and international expansion while returning capital to shareholders. The company's debt-to-equity ratio of 0.17 and current ratio of 1.85 indicate a conservative capital structure that can support the planned GMV growth of 15-20% annually without requiring external financing.

Outlook, Management Guidance, and Execution Risk

Management's guidance is unusually specific and confident for a Chinese industrial company navigating economic headwinds. The company expects to achieve quarterly profitability in Q4 2025, a milestone that would validate the entire optimization strategy. This forecast is not based on hopeful assumptions but on observable momentum: the positive trend in average weekday order value is expected to continue through year-end, and the 48% growth in transacting customers provides a growing base to leverage fixed costs.

The 15-20% annual GMV growth target is ambitious but achievable. It implies a return to top-line expansion after the optimization-induced pause in 2025, driven by three factors: continued customer acquisition in the domestic market, private label expansion improving unit economics, and international business contributing incremental volume. Management is "pretty certain" about this range, suggesting they have high visibility into customer pipelines and market demand. The key execution risk is whether the AI infrastructure can scale without degradation in service quality as transaction volumes grow.

Private label's path from 8% to 30% of GMV represents the single largest margin expansion opportunity. At 30% penetration, assuming private label gross margins of 22-25% versus 15% for third-party products, ZKH could add 200-300 basis points to overall gross margins. This would translate directly to operating leverage, potentially pushing operating margins into positive territory even before accounting for further AI-driven productivity gains. The risk is that private label expansion requires significant upfront investment in product development, supplier relationships, and inventory management, which could pressure cash flow in the near term.

International expansion provides optionality with controlled risk. The strategy of serving Chinese multinationals in Southeast Asia and Mexico requires minimal incremental investment because it leverages existing supplier relationships and product catalogs. This "follow the customer" approach generated double-digit GMV growth in Q3 2025 while carrying "pretty limited" investment risk. The U.S. and European markets represent a "mid- to long-term play" where ZKH is deliberately controlling investment pace due to longer product certification and market entry timelines. This disciplined approach avoids the cash burn that plagued many Chinese companies' overseas expansions, but it also means the international upside will materialize gradually rather than suddenly.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is competitive pressure from JD MRO and Alibaba 1688, which command 20-30% market share in B2B e-commerce through ecosystem lock-in and scale advantages. While ZKH's specialization provides differentiation, JD's potential IPO in late 2025 could intensify competition by providing capital for aggressive pricing and logistics expansion. If JD MRO or Alibaba decide to aggressively target ZKH's core chemical and spare parts categories, they could force margin compression that delays or prevents profitability. The mitigating factor is ZKH's AI-driven efficiency: a 42% productivity gain in customer service creates cost flexibility that pure-scale players cannot easily match.

Economic sensitivity to China's manufacturing cycle represents a second key risk. ZKH's customer base is concentrated in industrial sectors that are vulnerable to slowdowns in fixed asset investment. While the company grew customers 48% in Q3 2025, a severe manufacturing downturn could reverse this trend, particularly among SME customers who represent a growing but less stable segment. The company's RMB 1.9 billion cash position provides a buffer, but sustained economic weakness could test the durability of the 15-20% growth target.

Supply chain dependencies create operational risk. The company's reliance on OEM suppliers for private label products and its specialized chemical warehousing infrastructure expose it to disruptions from regulatory changes, environmental incidents, or supplier concentration. While ZKH onboarded 1,200 new suppliers in Q3 2025, reducing single-source risk, any disruption in key product categories could impact customer fulfillment and damage the platform's reputation. This risk is amplified in international markets where ZKH lacks established supplier networks and must navigate complex certification requirements.

Technology execution risk is elevated given the centrality of Expert Linglong to the investment thesis. If the AI system's accuracy degrades at scale or fails to deliver promised productivity gains, the entire optimization strategy could unravel. The 31% automated classification rate, while improved from 11%, still leaves 69% of products requiring manual intervention, suggesting significant room for error. Competitors like JD and Alibaba are investing heavily in their own AI capabilities, and their scale advantages could allow them to close the technology gap faster than ZKH can widen it.

Competitive Context: Specialized Depth vs. Scale Breadth

ZKH operates in a bifurcated competitive landscape where it must defend against both e-commerce giants and specialized niche players. JD MRO, with its parent's RMB 250.6 billion revenue base and 11.4% retail growth, leverages a logistics network and customer acquisition engine that ZKH cannot match in scale. However, JD's gross margin of 9.5% is 730 basis points lower than ZKH's 16.8%, reflecting its focus on commoditized products and price competition. ZKH's specialization in industrial-grade MRO categories creates a defensible niche where expertise and service quality matter more than absolute price, allowing it to maintain premium margins despite smaller scale.

Alibaba's 1688 platform presents a different challenge. With its 41.2% gross margin and dominant B2B marketplace position, Alibaba can subsidize MRO operations with profits from other segments. However, 1688's transactional model lacks ZKH's integrated supply chain capabilities, particularly in hazardous materials handling and last-mile delivery for industrial customers. ZKH's 13 specialized chemical warehouses and in-house fleet create operational moats that Alibaba would need years and substantial capital to replicate. The fact that ZKH grew transacting customers 48% while Alibaba's domestic commerce grew at a mid-single-digit pace suggests ZKH is gaining share in the most valuable customer segments.

Among specialized competitors, EHSY and Xinfangsheng represent regional threats but lack ZKH's technological sophistication. EHSY's deep product expertise and global sourcing capabilities make it a formidable competitor in specific categories, but its private company status likely limits R&D investment in AI. Xinfangsheng's warehouse automation improves efficiency but lacks the AI-driven intelligence layer that ZKH is building. ZKH's 52% procurement productivity gain and 42% customer service improvement are metrics that traditional distributors cannot achieve through automation alone, creating a widening competitive moat.

The competitive landscape has "really stabilized" according to management, with ZKH's advantages becoming "increasingly marked." This stabilization reflects a market maturation where customers increasingly value integrated solutions over pure price competition. ZKH's ability to acquire "lots and lots of SMEs" while improving margins demonstrates that its supply chain enhancements are creating network effects: more customers attract more suppliers, which improves product selection and pricing, which in turn attracts more customers. This flywheel is accelerating with AI, which can match customers to products and suppliers more efficiently than manual processes ever could.

Valuation Context: Pricing a Transformation in Progress

At $3.24 per share, ZKH trades at a market capitalization of $527.4 million and an enterprise value of $339.7 million, reflecting a market that remains skeptical of the company's ability to achieve sustained profitability. The price-to-sales ratio of 0.25x is well below the 0.24x of profitable JD and the 2.59x of Alibaba, suggesting the market values ZKH as a distressed asset rather than a transforming growth company. This valuation gap creates potential upside if the company delivers on its Q4 2025 profitability promise.

For an unprofitable company in transition, traditional earnings multiples are meaningless. More relevant metrics include the enterprise value-to-revenue multiple of 0.16x, which is exceptionally low for a company targeting 15-20% growth. The company's RMB 1.9 billion cash position ($269 million USD equivalent) represents 51% of its market capitalization, providing substantial downside protection and funding for strategic initiatives without dilution.

Comparing ZKH to profitable peers highlights both the opportunity and the risk. JD trades at 9.83x earnings with a 3.34% dividend yield, reflecting mature profitability but slower growth. Alibaba commands 21.03x earnings with a 2.52x EV/revenue multiple, premium valuations that require sustained growth and margin expansion. ZKH's negative 5.75% ROE and negative 1.97% profit margin place it in a different category entirely, but the trajectory matters more than the absolute level. The 78% reduction in adjusted net loss and the achievement of positive operating cash flow suggest ZKH is following a path similar to JD's early profitability journey, albeit in a more specialized market.

The key valuation question is whether ZKH deserves a premium for its AI capabilities and specialized market position. If the company achieves quarterly profitability in Q4 2025 and sustains 15-20% GMV growth, a re-rating to 0.5-0.7x sales would be reasonable, implying 100-180% upside from current levels. The private label expansion to 30% of GMV could drive gross margins toward 20%, making an EV/revenue multiple of 1.0x achievable within 2-3 years if execution remains strong. The international business breakeven in 2026 provides a free option on a second growth engine that is not currently valued by the market.

Conclusion: A Specialized Platform at the Tipping Point

ZKH Group has engineered a remarkable transformation from a loss-heavy growth-at-all-costs model to an AI-driven, profitability-approaching platform that is gaining share in China's specialized MRO market. The company's Q3 2025 results provide clear evidence that the four-quarter optimization cycle has succeeded: losses have been cut by 78%, cash flow has turned positive, and customer growth is accelerating at 48% year-over-year. The imminent achievement of quarterly profitability in Q4 2025 would validate the entire strategy and likely trigger a significant re-rating of the stock.

The core investment thesis rests on three interlocking pillars: AI-driven productivity gains that create sustainable cost advantages, private label expansion that structurally improves margins, and international growth that provides a second act with limited investment risk. Expert Linglong is not merely a technology feature but a fundamental reshaping of MRO procurement economics, enabling ZKH to process complex inquiries in seconds rather than hours while improving accuracy. The private label trajectory from 8% to 30% of GMV represents the clearest path to margin expansion, potentially adding 200-300 basis points to gross margins over the next two years. The overseas business, expected to breakeven in 2026, offers asymmetric upside through a capital-efficient "follow the customer" strategy.

Competitive positioning is strengthening despite scale disadvantages. While JD MRO and Alibaba 1688 dominate through ecosystem breadth, ZKH's specialization in industrial-grade categories like chemicals and spare parts, combined with its integrated supply chain and AI capabilities, is driving superior customer acquisition and margin stability. The 48% growth in transacting customers and 47.5 basis point improvement in marketplace take rate demonstrate that ZKH is winning in the most profitable segments of the market.

The primary risks to the thesis are competitive pressure from better-capitalized rivals, economic sensitivity to China's manufacturing cycle, and execution risk in scaling AI systems. However, ZKH's RMB 1.9 billion cash position and conservative debt levels provide substantial resilience, while the 78% reduction in losses demonstrates management's ability to navigate challenging environments.

For investors, the critical variables to monitor are Q4 2025 profitability delivery, private label GMV penetration progress, and international business momentum. If ZKH executes on these fronts, the current valuation of 0.25x sales and 0.16x EV/revenue represents a compelling entry point for a company that is transitioning from a specialized distributor to an AI-enabled industrial platform. The stock is pricing in a distressed narrative that is rapidly becoming outdated as ZKH demonstrates that focused specialization, powered by artificial intelligence, can compete effectively against scale in the digitizing Chinese MRO market.