ATRenew's Quarterly Earnings Hit Record Highs, Maintain Buy

seekingalpha08-21

ATRenew reported strong earnings results for Q2 2024, with total net revenues increasing by 27.4% year-over-year.The company's balance sheet remains strong, with sustainable sales growth and ...

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To summarize, the company’s earnings results were much better compared to the same period a year ago. Even though the stock is trading near the 52-week highs, it is cheap compared to its first days of trading after the IPO that took place on 18 June 2021. Let me explain why RERE still remains an attractive buy. Previous article about ATRenew My previous analysis of ATRenew mentioned the company’s undervaluation and sound improvements. Previously, I wrote an article about ATRenew Q1 2024 earnings. These showed a 27.1% rise in total net revenues compared to the same period a year ago. During the conference call, ATRenew's management was optimistic about its growth potential, citing increased recycling opportunities and growing demand for second-hand goods. The management was right. The second quarter of 2024 was also highly successful for ATRenew. The company’s sales growth seems to be sustainable, the operating losses decrease, and the company’s balance sheet is strong. Now, let’s dig in some more details. Quarterly earnings report As I have mentioned before, the earnings results were much better than the ones reported for the same period a year ago. Here is a summary:  ATRenew’s total net revenues increased by 27.4% to RMB 3,776.7 million or $519.7 million, from RMB 2,963.7 million in 2Q 2023. The loss from operations, meanwhile, was only RMB 5.6 million or $0.8 million, versus RMB 61 million in 2Q 2023. The non-GAAP adjusted income from operations totaled RMB 94.1 million or $12.9 million, versus RMB 52 million in 2Q 2023. The net loss was RMB 10.7 million or $1.5 million, versus RMB 64.8 million in the same period a year ago. Non-GAAP adjusted net income totaled RMB 80.5 million or $11.1 million, versus RMB 36.4 million in the same period a year ago. The number of consumer products transacted was a whopping 8.4 million versus 7.7 million in 2Q 2023.  Particularly important is the fact that the company’s earnings figures, especially the sales numbers, keep improving sustainably every quarter at a sound pace. Below, I have prepared a table and diagrams showing ATRenew’s progress. 2Q 2024 was no exception, indeed. ATRenew's quarterly earnings (in million RMB) Prepared by the author based on Seeking Alpha's dataThe table and the graphs hint at some seasonality in ATRenew’s operations. In other words, ATRenew performs the best during fourth quarters. However, we can clearly see that there is a very strong growth trend in the company’s sales. Prepared by the author based on ATRenew's dataThe GAAP net profit, meanwhile, is in line with the previous quarters after 4Q 2022. Prepared by the author based on ATRenew's dataHowever, the non-GAAP net profit is near the highs reached for the very successful 4Q 2023. Prepared by the author based on ATRenew's dataAlso quite good was the company’s balance sheet published for 2Q 2024. Although ATRenew’s shareholders’ equity decreased somewhat compared to 4Q 2023, the total liabilities decreased substantially. I will talk more about the company’s debt and liquidity fundamentals later in this article.   ATRenew The market outlook and management's comments In this section, I will talk about the management’s outlook. ATRenew’s CEO, Mr. Kerry Xuefeng Chen, said that in 2Q 2024,the company surpassed the high end of its guidance. That was due to the fact that order volume related to product revenues increased substantially year over year. The management has also noted a significant shift in consumer behavior. Trade-ins have become a more common choice for consumers looking to upgrade their electronic products. ATRenew’s recycling service brand, AHS Recycle, is gaining recognition in the market for second-hand products. On 31 May 2024 the company announced the renewal of its business contract with JD.com (JD) for a term from 1 June 2024 to 31 December 2027. JD and ATRenew will keep co-operating in the second-hand business by integrating resources and leveraging their respective strengths. They will also co-operate in areas including user traffic, technology support, and logistics. Together, the two companies aim to provide high quality second-hand goods at competitive prices, thus improving consumer experiences in the second-hand market. The CEO is also positive about the Chinese government’s support of consumer product trade-ins, which will provide greater certainty for the industry ATRenew operates in. Mr. Rex Chen, ATRenew’s CFO, said, that in 2Q 2024, the company’s retail business was accountable for a higher proportion of ATRenew’s product revenues. The CFO also noted ATRenew’s greater cost efficiency and better profitability numbers as a result. The cost savings were due to optimizations of pricing mechanisms for major phone brands' official trade-in programs. That is why adjusted income from operations was higher than RMB 94 million, which marked a new quarterly record. Moreover, during 2Q 2024, the management raised the size of the company’s ongoing share buyback program from $20 million to $50 million, which is a clear sign of ATRenew’s stable cash position. As of 30 June 2024, ATRenew had repurchased a total of 3,278,531 ADSs for about $8 million under this share repurchase program. As mentioned above, the total sales rose by 27.4% to RMB 3776.7 million, or $519.7 million, from RMB 2963.7 million in the same period of 2023. Of these, net product revenues rose by 29.0% to RMB 3,401.8 million or $468.1 million, from RMB 2,636.7 million in the same period of 2023. This rise was mainly due to an increase in the sales of second-hand consumer electronics, both via ATRenew's online and offline channels. Net service revenues also contributed to the total sales rise, increasing by 14.6% to RMB 374.9 million or $51.6 million, versus RMB 327 million in the same period of 2023. This rise was mostly due to a rise in service sales generated from PJT Marketplace and multi-category recycling business. From this, we can clearly see that both ATRenew’s product and service divisions perform well. As concerns ATRenew’s third quarter of 2024 outlook, the company expects its total sales to be between RMB 3970 million and RMB 4070 million, a rise of 21.9% to 25.0% year-over-year. It seems likely ATRenew will even exceed market expectations because the company has a good track record of overperformance. Fundamental indicators and valuations As promised above, I will now discuss the company’s debt and liquidity position as well as its valuation indicators. To start with, ATRenew’s net debt number is negative at -$208.36 million. This means that the company can easily meet its debt obligations, while also having some cash on hand. Then, the current ratio (current assets/current liabilities) is a whopping 2.97, which suggests the company can use its current assets almost three times to pay its short-term liabilities. The debt-to-equity ratio is just about 16%. This means ATRenew’s debt is negligible compared to its shareholders’ equity (total assets minus total liabilities), which again hints at the company’s low debt load.   Seeking AlphaIn spite of the fact ATRenew does not have a sound profit track record, it is a financially stable company with excellent liquidity indicators. Now, let us have a look at the company’s valuations. Let us start with RERE’s stock price history. Even though it is currently trading just below its 52-week highs, it is nowhere near the levels seen in the first days of trading after ATRenew’s 2021 IPO. Data by YChartsWhen RERE stock got listed on the stock exchange, it traded for about $15 per share. Now it is trading below $3. Data by YChartsNow let us have a look at the company’s valuation ratios. Although, according to GAAP accounting standards, the company is not profitable, if we look at the non-GAAP P/E ratios, we will see that the company is not particularly expensive. Its FY1 non-GAAP ratio is just below 11. The price-to-free cash flow ratio is not high either, just over 18. As concerns ATRenew’s P/S and P/B ratios, these suggest the company is highly undervalued. While the company’s P/S is substantially below 1, at 0.36, that is, ATRenew’s P/B is just over 1.   Seeking AlphaUpside factors First of all, ATRenew is the market leader in terms of both gross merchandise value (GMV) and the amount of pre-owned consumer electronics devices transacted by merchants and consumers. Moreover, according to recent research, rising numbers of new electronic devices entering the market create plenty of recycling opportunities, especially given the fact that more than 50% of discarded cell phones are left idle by consumers. Given the fact, the percentage of consumers acquiring new phones via carrier trade-in programs remains substantially lower in China than in the US, there is plenty of growth potential for this industry in China. The country’s government promotes the circular economy concept. Quite recently, China’s State Council introduced a plan to promote widespread equipment renewals and trade-ins of consumer goods. ATRenew would be here to gain, given the company’s differentiated store network and state-of-the-art trade-in solutions with JD.com and Apple (AAPL). It can keep gaining market share and educating consumers, as pre-owned transaction preferences shift. The company can increase its additional brand partnerships, similar to current relationships with Apple and Huawei. As I have mentioned before, the company has plenty of liquidity, which can also help it fund its growth. ATRenew can finance its R&D initiatives, with a focus on technology, upgrade operations centers with automated inspection facilities, inform consumers about the circular economy as well as recycle-and-reuse lifestyles and expand its offline store footprint via new store openings and existing location upgrades. Risks Indeed, some conservative US-based investors would rather buy shares of large American corporations. Moreover, ATRenew does not have a brilliant profit track record. However, it is financially sound. It has a negative net debt and can afford to buy back its shares. So, from that point of view, it is safe but I appreciate some investors prefer to buy so-called “blue chip” stocks. RERE is not a “blue chip” but rather a growth stock with plenty of upside potential. Finally, a global recession can cause most stocks to depreciate substantially. RERE might not be an exception. However, as a business, ATRenew is sustainable thanks to its low debt load and sound business model. RERE is not expensive either if we compare the current stock price to the one during the stock’s first days of trading. Conclusion  Once again, ATRenew reported a sound set of results. Its revenues keep increasing at a sustainable pace. The company is also financially stable, has plenty of cash and has a low debt load. At the same time, RERE stock is not overvalued. It is trading far below its all-time highs and it is not expensive relative to its valuation ratios. Even though the company does not have a sound track record, it has a strong business model and has sound growth potential. RERE stock is a buy, in my opinion.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2461846259"}