ATRenew: Expecting Boosted Demand And Margin Expansion

seekingalpha08-26

RERE reported Q2-24 results with strong topline growth and improved margins.ATRenew is positioned well for continued growth, driven by the notable consumption downgrade trend in China.Maintain a buy ...

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Leszek Kobusinski/iStock Editorial via Getty Images ATRenew Inc. (NYSE:RERE) operates China's largest pre-owned consumer electronics transaction and services platform. It owns AHS Recycle (C2B), PJT Marketplace (B2B), and Paipai Marketplace (B2C), and an international business AHS DEVICE. Its mission is stated as \"to give a second life to all idle goods\" (through recycle, refurbish, and reuse).   Company presentation RERE reported strong Q2 2024 results. Revenue reached RMB3,776.7 million (+27.4% YoY) driven by sales growth of pre-owned consumer electronics. GAAP Op Loss was RMB5.6 million, and non-GAAP Op Income was RMB94.1 million (US$12.9 million), as compared to RMB52.0 million in Q2'23. Margin improvement was driven by sales and marketing (7.5% as a % of revenue, vs 8.6% in Q2'23), fulfillment cost (8.5%, vs 8.8% PY) and Tech and Contents (1.2%, vs 1.3% PY). I maintain a buy recommendation for RERE, supported by 1) strong demand in pre-owned market due to consumption downgrade in China; 2) margin improvement benefiting from cost efficiencies, particularly in Sales and Marketing, fulfillment, and technology; 3) growth through RERE's strategic partnership with JD.com. China's government has been actively promoting trade-ins through subsidies across various industries, aiming to stimulate the secondary market and raise awareness of sustainable consumption. The consumption downgrade in China, especially in first-tier cities such as Shanghai, Beijing, Guangzhou, and Shenzhen, has become a notable trend as consumers face economic pressures or prioritize savings over discretionary spending. As shown in Figure 1, the retail sales in June for these four first-tier cities saw a significant decline as compared to May, and the drop was more severe than the national average. This trend supports the growing demand for pre-owned goods, positioning RERE well for continued growth. Figure 1 YoY growth rate of retail sales in first-tier cities drop in June Wind, Tianfeng Securities Research Institute If we look at 32 cities in China, only 7 cities (Hefei, Chongqing, Wenzhou, Jinan, Xuzhou, Nanning, and Nanjing) showed positive trends (consumption upgrades) in H1-24. The remaining 25 cities experienced varying levels of consumption downgrades. Figure 2 Consumption Upgrading/Downgrading in Cities in H1-24 City Data Group Consumption downgrade will substantially boost the pre-owned electronics market as more and more price-conscious consumers look for affordable alternatives. Instead of purchasing new electronics, they turn to pre-owned devices, leading to a robust secondary market. RERE, with its expertise in refurbishing and reselling electronics at scale, is well-positioned to benefit from this growing demand. In Q2'24, RERE achieved a material improvement in Op Margins YoY and QoQ. This demonstrated RERE's effective control of operational efficiencies, which are attributed to high sales volumes, revenue diversification, technological advancements, and economies of scale. As shown in Figure 3, RERE's cost to serve narrowed from 31% in Q4'21 to 21% in Q2'24, a significant improvement of 10 ppts in the last three years. With RERE's scale and leading position in China, coupled with the consumption shift to affordable products, I expect RERE to turn profitable soon. Figure 3 RERE Gross margin% and Op margin% Q4'21 - Q2'24 Capital IQCapital IQ According to RERE's announcement on May 31, a three-year partnering agreement with JD.com established their comprehensive partnership including integrating resources, cooperating on user traffic, tech support, and logistics, etc. It's worth mentioning that in H1-24, recycling value and sales through JD.com grew over 50% YoY. I am positive that this partnership will be a key driver of RERE’s future growth. Company website RERE is currently traded at $2.48, as compared to 52-wk high/low at $3.02/$1.01. My base case valuation is 11x 2025E $0.30 EPS, translating to a target price of $3.3 (+33% upside from current price). $0.30 EPS is based on 2025E revenue growth of +26% and Op margin improvement of +130 bps YoY. 11x P/E is half of the trading multiple of RERE's close comp AO World plc (LSE:AO), which is currently traded at 22x NTM forward P/E. Conclusion RERE as a sector leader in China will likely be a main beneficiary of the ongoing consumption downgrade trends, and thereby maintain or accelerate its revenue growth. Its continued efforts in margin expansion will lead to profitability in near team. Investors should feel excited about its strong business outlook and over 30% stock price upside in 12 months.  In terms of investment risks, although consumption downgrade favors the secondary market in the short term, a prolonged economic downturn in China could eventually pressure the supply of electronics. In addition, investors should also be aware that the competitive landscape is expected to intensify with new entrants entering the market, driven by subsidies from the Chinese government.","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/2462997022"}