ATRenew Expanding Into Non-Electronic Categories In Q2 2022 (NYSE:RERE)

Headquartered in Shanghai, ATRenew Inc. (NYSE:RERE) operates a leading technology-driven pre-owned consumer electronics transactions and services platform in China under the brand ATRenew. ATRenew is China’s No.1 Pre-owned Consumer Electronics Transactions and Services Platform. Since its inception in 2011, ATRenew has been on a mission to provide a second life to all idle goods, addressing the environmental impact of pre-owned consumer electronics by facilitating recycling and trade-in services and distributing the devices to prolong their lifecycle. ATRenew’s open platform integrates C2B, B2B, and B2C capabilities to empower its online and offline services. Through its end-to-end coverage of the entire value chain and its proprietary inspection, grading, and pricing technologies, ATRenew sets the standard for China’s pre-owned consumer electronics industry. See more details in my previous articles, ATRenew, Business Fundamentals Improving, but Some Risks Remain, and ATRenew Saw Early Wins of City-Level Strategy Despite an Expected Soft Q2.

Q2-22 Financials

Shanghai, August 24, 2022, RERE announced its unaudited financial results for the second quarter ended June 30, 2022. Despite the challenges posed by the COVID-19 resurgence in China’s several biggest cities, ATRenew’s quarterly revenue beat its guidance in the previous quarter. Following the earnings release, RERE’s stock price climbed by 21% on August 24, New York Time. Here are the Highlights according to their earnings release.

· Total net revenues grew by 14.9% to RMB2,145.7 million (US$320.3 million) from RMB1,867.7 million in the second quarter of 2021.

· Loss from operations was RMB168.2 million (US$25.1 million), compared to RMB507.3 million in the second quarter of 2021. Adjusted loss from operations (non-GAAP) was RMB42.3 million (US$6.3 million) compared to an adjusted loss from operations of RMB51.0 million in the second quarter of 2021.

· Total Gross Merchandise Volume (“GMV”) increased by 10.3% to RMB8.6 billion from RMB7.8 billion in the second quarter of 2021. GMV for product sales increased by 15.8% to RMB2.2 billion from RMB1.9 billion in the second quarter of 2021. GMV for online marketplaces increased by 8.5% to RMB6.4 billion from RMB5.9 billion in the second quarter of 2021.

· The Number of consumer products transacted remained flat at 7.8 million compared to the second quarter of 2021.

· Cash inflow from operating activities during the Q2-22 quarter totaled RMB280 million, which is healthy and proved ATRenew’s business model’s sustainability.

· Cash and cash equivalents, short-term investments, and funds receivable from third-party payment service providers totaled RMB2.6 billion as of June 30, 2022. The sufficient cash on hand paves the way for sustainable growth in the future.

In Q2-22, RERE piloted category expansion in terms of recycling in several selected cities. The total monthly recycling value of luxury goods in Shanghai continued to grow at 50% sequentially. In addition, six of its pilot stores in Beijing and Tianjin increased the monthly transaction value by RMB300,000 per store.

ATRenew kept investing in its city-level strategy. As of June 30, 2022, ATRenew has 1,629 stores and 1,800+self-service kiosks in 241 cities in China. It also has eight centralized operation centers in Changzhou (automated), Dongguan (automated), Wuhan, Chengdu, Tianjin, Xi’an, Shenyang, and Hong Kong, and 23 self-operated city-level operation stations. This high coverage and convenient offline customer touch points build a great moat for ATRenew’s competitive advantage.

•ATRenew’s Q2-22 quarterly revenue beat the guidance, despite the challenges posed by the COVID-19 resurgence in China.

During the second quarter, ATRenew faced unprecedented challenges to its operations in the most complex external environment since the pandemic first occurred at the beginning of 2020. In April and May this year, the covid control measures in Shanghai and Beijing resulted in a temporary suspension of one-third of ATRenew’s self-operated AHS stores. ATRenew’s physical stores had to suspend operation or implement strict covid prevention measures, which put consumers off. The control measures also resulted in interruptions in door-to-door recycling and logistics.

However, despite the challenges posed by the COVID-19 resurgence in China, ATRenew’s total net revenues increased by 14.9% year-on-year to 2.15 billion in the second quarter of 2022, exceeding the high end of its revenue guidance, which demonstrated the overall resilience of the circular economy.

In my opinion, this is achieved by three main initiatives:

Firstly, on distribution, ATRenew continued to lean into the retailing of its self-sourced premium products on Paipai Marketplace, where the GMV for the 1PtoC segment increased by 32% year-over-year despite a challenging environment in the second quarter.

Secondly, ATRenew increased the overall take rate by adjusting the rules for charging logistics fees from PJT Marketplace users and optimized its platform regulations and inventory management for Paipai Marketplace. As a result, the overall take rate of its marketplaces grew slightly to 4.54% in the second quarter, representing an increase of 39 basis points sequentially.

Thirdly, ATRenew reacted swiftly to the quarter’s challenges and managed its operating expenses prudently.

•ATRenew expanding into non-electronic categories in Q2-22 provides new imaginary space.

“AHS Recycle” is a high-quality brand that is scarce in the recycling industry. The brand is quite capable of expanding its service scope.

In the second quarter, ATRenew selected over 30 stores in Shanghai and Beijing as pilot stores to open for high-value products such as luxury goods, photographic equipment, and gold. From June to August, the total monthly recycling value of luxury goods in Shanghai continued to grow at 50% sequentially. In addition, six of its pilot stores in Beijing and Tianjin increased the monthly transaction value by RMB300,000 per store.

Traditionally, there are many pain points for luxury goods recycling. The consignment merchants tend to cut prices as the market lacks transparency. Consumers have trust issues when recycling by mail. The door-to-door recycling model has higher labor costs.

ATRenew innovatively offers the “to-store recycling + to-station inspection” model. It allows consumers to get a price estimate online, go to a nearby physical store for a condition check, and get authenticity verification at a local inspection station. ATRenew provides a more user-friendly customer experience. According to its earnings call, over 85% of the consumers who accepted the recycling price were willing to try this model.

ATRenew is now even confident in category expansion after testing the water. On one hand, the under-served need for categories other than electronics during a period of flattening economic growth and when consumers become prudent buyers. On the other hand, AHS Recycle, the brand name, is a valuable asset while not limiting the product category to mobile phones and ATRenew’s nationwide AHS stores are premium consumer touch points.

Through recycling more categories, ATRenew broadened its business horizon and improved both user retention and repurchases.

I believe that two factors contribute to the core competency and the competitive moat of ATRenew’s multi-category recycling business. The first is the brand of AHS Recycle, which has been cultivating customers over the past eleven years, so it is now a widely recognized brand among Chinese consumers. AHS Recycle has become consumers’ go-to destination. This provided strong consumer mindshare and ATRenew’s ability to cross-sell. The second factor is ATRenew’s nationwide network of over 1,600 offline AHS stores – this network is a valuable infrastructure for the company to reach, serve and build trust with consumers.

From a financial point of view, luxury goods recycling is an emerging business, and its market size may be slightly smaller than that of mobile phone recycling, but the value chain is even opaque, yet more profitable than mobile phones, while the existing solutions are relatively poor. Multi-category recycling mainly brings about an increase in repurchases and an increase in average revenue per user.

•ATRenew is a dedicated ESG leader in China, increasing its awareness as the No.1 recycling brand

Firstly, ATRenew published its 2021 Environmental, Social, and Governance report in June. In this annual ESG report, ATRenew disclosed its contribution of 464,000 metric tons of greenhouse gas emission reductions through the reuse of pre-owned mobile phones in 2021. This is equivalent to the annual carbon sink of 2.3 million mu of city forests. On average, recycling and reusing a smartphone contributes 30.4 kilograms of GHG (greenhouse gas) emission reduction. In the time of a scorcher across the globe, this really improves the brand reputation of ATRenew’s contribution to the environment.

Secondly, as compliant refurbishment capacity ramps up, ATRenew expects further widening of the profit margin of the value chain. In April, the People’s Procuratorate of Shenzhen published the Criminal Compliance Guidelines for Intellectual Property Rights in the Electronics Refurbishment Industry. Under the compliant refurbishment guidelines, ATRenew provided more high-quality products to consumers through its value-added refurbishment services, further improving its margins. During the first half of 2022, ATRenew performed value-added refurbishment services on around 70,000 devices. As it expands its capabilities and 1P sources of supply that are suitable for refurbishment, ATRenew expects 75,000 orders, which will generate a GMV of RMB130 million in the third quarter, each increasing by over 80% compared with the second quarter. ATRenew expects a 15% gross margin – the same as it anticipated during the previous earnings call.

The refurbishment market is huge. Data from Counterpoint shows that the global refurbished smartphone market is growing at an average annual rate of 17%, compared with 3% for the new phone market. In 2019, the global refurbished smartphone market sold a total of 137 million units, which is equivalent to 1 refurbished mobile phone for every 9 mobile phones sold. In the United States, 1 in 5 people use refurbished machines, and one-third of refurbished machines come from officially certified channels. According to Persistence Market Research analysis, the global refurbished and used mobile phones market is projected to be valued at US$ 143.8 Bn by 2031. The adoption of refurbished and used mobile phones has been increasing due to improvements in the methods of repairing smartphones, grading, collection, and online/offline selling. The largest refurbishment market is in China. ATRenew, as a top player, has good opportunities in this market.

• ATRenew outlook in Q3-22

For the third quarter of 2022, the company currently expects its total revenues to be between RMB2,500 million and RMB2,550 million, a 16.5%-18.8 increase over Q2-22.

This year, Apple’s (AAPL) iPhone 14 series is expected to be launched on September 7, 2022, which is one week earlier than iPhone 13 lineup debut last year. From ATRenew’s experience, such an earlier launch could bring an increase in 1P revenue of RMB30 million in the third quarter. Apple is the main brand in ATRenew’s service coverage, accounting for over 40% of its GMV, which contributed the base for ATRenew.

I think the impact of the pandemic will be transitory. In the long term, compared with other consumer industries that face more significant challenges from macro-environmental changes, they thought the second-hand electronics transaction and service industry was a huge yet under-served market.

Investment Risks

There are a couple of risks associated with RERE.

First and foremost, China’s mainland is still sticking with the “zero-COVID” policy. The local governments may undertake covid control measures when covid gets serious, which will impede ATRenew’s business like what happened in Q2.

Secondly, on August 26, Federal Reserve Chair Jerome Powell signaled the US central bank is likely to keep raising interest rates and leave them elevated for a while to stamp out inflation, and he pushed back against any idea that the Fed would soon reverse course. Powell says higher US interest rates are likely for some time, and restoring inflation to the 2% target is the central bank’s “overarching focus right now,” even though consumers and businesses will feel economic pain. Following this news, Dow plunged 1008.38 points, and RERE also fell 8.77%.

Conclusion

ATRenew is an ESG leader in China and a tier-1 player in the pre-owned Consumer Electronics market. Despite the challenges posed by the COVID-19 resurgence in China, its business demonstrated the resilience of the recycling economy. ATRenew is also expanding its business to non-electronic categories and gets evidence of success, which is also highly probable to grow into its second curve.

On August 26, The U.S. and China arrived at a deal to allow American authorities to inspect the audits of U.S.-listed firms based in China and Hong Kong, a landmark agreement that represents a first step toward avoiding further delistings from New York exchanges. This is good news for all China Concept companies, including RERE. Affected by this positive news, the Nasdaq China Golden Dragon Index closed up more than 6%, the largest one-day increase in more than two months. The total market value of Chinese concept stocks recently reached 1.127 trillion US dollars, an increase of 66.5 billion US dollars overnight.

If you like ESG or China Concept stocks, you should add RERE to your watching list for further consideration.