ATRenew: Pioneering Sustainability And Growth

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Investment Thesis

In an era of evolving consumer preferences and pressing environmental concerns, ATRenew Inc. (NYSE:RERE) has emerged as a critical player in the sustainable business practices of green and low-carbon operations and multi-category recycling. The article delves into the Q2 2023 performance of the company in terms of financial performance, growth, innovation, and environmental stewardship.

As ATRenew continues to forge its path in the electronics recycling and refurbishing industry, its journey is marked not only by impressive growth and innovation but also by a set of inherent risks. From market volatility and competitive pressures to supply chain uncertainties, geopolitical risk, and reliance on partnerships, these factors collectively form the backdrop against which ATRenew operates.

However, there is a potential for rerating in the second half of the year; as the company's performance is intricately tied to broader economic conditions, any shifts or developments in China's economy could profoundly influence ATRenew's market positioning.

Q2 Results Reflect Explosive Growth In Revenue & Profitability

ATRenew achieved impressive results in Q2, showcasing robust growth in revenue and profitability. With total revenues surging to RMB2,964 million ($409 million), marking a remarkable 38.1% YoY increase, the company exceeded its guidance projections and aligned with street forecasts. This notable rebound in the Q1 recycling business and resilient marketplace performance underscores the strength of their circular business model in the post-pandemic landscape.

The surge in 1P product revenue, soaring by 42.2% YoY to RMB2,637 million ($364 million) in Q2, was driven by the persistent trend of consumers embracing pre-owned products and trading old items for new ones despite stagnant consumption growth. Therefore, the successful sales of refurbished products further fueled this growth.

Platform service (3P) revenues rallied by 12.1% YoY to RMB327 million ($45 million) in Q2, elevating the overall take rate to 5.37%, a growth of 83 basis points. The platform business thrived despite the shift in strategic focus towards first-party businesses. Enhanced market penetration efforts by PJT Marketplace, optimizing online transaction scheduling and diversifying small business support drive user engagement and monetization capabilities.

In Q2 2023, ATRenew aims to evolve the B2C business model and launch new ventures grounded in user trust and the operational proficiency of large stores. The plan includes lowering merchant participation thresholds while ensuring stringent quality checks and a superior buyer experience through warehousing inspections. These upcoming initiatives signify the company's forward-looking approach, poised to sustain growth and adapt to evolving market dynamics.

Investor Presentation

From Losses To Gains Through Innovation & Efficiency

ATRenew showcases promising financial trends and operational advancements in its recent financial report. Adjusted income from operations demonstrated an even more impressive transformation, surging to RMB52.0 million ($7.2 million) from an adjusted loss of RMB42.3 million ($5.9 million) in the same period last year. This performance is emblematic of its strategic focus on optimizing the secondhand industry's value chain and operational efficiencies.

Key drivers behind this success are the implementation of cutting-edge AI and big data algorithms to enhance quality inspection systems, resulting in ongoing optimization of fulfillment costs. These measures are reflected in the notable expansion of the non-GAAP fulfilled gross margin to 12.7%, a recovery from the previous low point.

In terms of losses, the company has made substantial improvements, with loss from operations dropping to RMB61.0 million ($8.4 million) from RMB168.2 million ($23.2 million) in the comparable period of 2022.

Further gains are evidenced in the net loss figures. The company's net loss narrowed to RMB64.8 million from RMB125.3 million in the same period of 2022. Net income reached RMB36.4 million on an adjusted basis, a significant shift from the adjusted net loss of RMB13.2 million in the corresponding period last year.

ATRenew's performance has shown substantial growth in earnings per share. Basic and diluted net loss per ordinary share improved to RMB0.40 from RMB0.78 in 2022. Lastly, Adjusted basic and diluted net income per ordinary share turned positive at RMB0.22, reversing the negative RMB0.08 figure in the same period last year.

Investor Presentation

Redefining Profitability Through AI & Data Innovations

ATRenew has achieved sustained profitability by strategically utilizing cutting-edge AI and big data algorithms to enhance quality inspection systems and optimize fulfillment costs. Leveraging supply chain algorithms, the company efficiently matches orders with regional operation center capacities, warehouse allocations, and logistics solutions, streamlining decision-making and overall logistics expenditures.

Notably, the company's deployment of data algorithms has facilitated optimal order allocation, reducing the number of small city-level operation stations. Consequently, service fees, logistics expenses, packaging fees, and return losses decreased by RMB 17.6 million compared to the same period in 2022, resulting in a 3.7 percentage point reduction in non-GAAP fulfillment expenses as a percentage of total revenues.

Streamlined Efficiency Drives Margin Expansion

Gross margin at the group level stood at 21.5% in the second quarter, with the 1P business gross margin at 11.8%, and RERE has shown considerable progress in streamlined efficiency and improving margins.

Merchandise costs increased by 40.6% to RMB 2325.8 million, aligned with the growth in product sales revenues. Fulfillment expenses decreased by 2.3% to RMB 268.8 million; under non-GAAP measures, non-GAAP fulfillment expenses decreased by 2.2% to RMB 261.8 million. The reduction was driven by decreased logistics and operations center-related expenses, partially offset by increased personnel costs due to recycling activities.

Additionally, non-GAAP fulfillment expenses as a percentage of total revenues decreased to 8.8% from 12.5% in the same period last year. Selling and marketing expenses increased by 14.3% to RMB 335.3 million, and non-GAAP selling and marketing expenses increased by 28% to RMB 253.6 million. This growth was attributed to increased advertising expenses, promotional campaign costs, commission expenses, and office and travel-related expenses.

G&A expenses increased by 27.2% to RMB 57.5 million. Excluding share-based compensation (SBC) expenses, non-GAAP G&A expenses rose by 37.5% to RMB 39.6 million, primarily due to expected credit loss increases and professional services fees. Technology and content expenses decreased by 24.6% to RMB 45 million, and non-GAAP technology and content expenses decreased by 26.8% to RMB 38.8 million, partially due to reduced technological personnel costs as the platform matured.

As a result of these optimizations, the company achieved a non-GAAP operating income of RMB 52 million in the second quarter of 2023. ATRenew appears poised to sustain profitability by refining its algorithms, strategically allocating resources, and maintaining a lean operational structure while adapting to changing market dynamics and technological advancements.

Thriving Circular Model & Innovative Ventures

ATRenew exhibited post-pandemic resilience in its Q1 recycling business, displaying a robust circular business model. Notably, take rates surged by 83 basis points to reach 5.37%.

Despite a shift towards first-party endeavors, the platform business experienced sturdy growth. PJT Marketplace bolstered market penetration in Q2 by targeting local buyers and sellers and refining online transaction scheduling. This strategy enhanced user engagement and monetization potential.

Concurrently, the pipeline marketplace witnessed expansion in scale, profitability, and JD.com (JD) flow price strategy, extending premium supply chain aid to diverse small business owners. Rapid recovery was observed in recycling orders via JD channels, with the one-stop trading business registering a remarkable 116.9% YoY revenue growth in Q2. This growth extended beyond Apple products to popular Android models among JD customers.

The latter half of 2023 will witness a B2C model upgrade and a trust-based large-store operational venture. Lowered merchant participation thresholds will be coupled with stringent quality checks via warehousing inspections, ensuring quality and enhancing buyer experiences.

Additional investments were channeled into the leading brand, AHS Recycle, fostering circular consumption with broader consumer brand involvement. Collaborations with Cotton Times, CapitaLand, Winter Line, Freshippo, and Tencent Charity Center underscore the focus on brand synergies and promoting the recycling ethos.

Finally, a 1P model is employed for certain inventory items. Back-end privacy erasure and standardized quality assessments are conducted before distribution, eliminating the need for customer acquisition expenses and store-related overheads. Therefore, this streamlined approach simplifies the cost structure.

Powering Retail Revolution With Strategic Partnerships & Sustainable Practices

ATRenew is strategically positioning itself in the retail and e-commerce landscape, leveraging partnerships with industry leaders such as JD.com and Apple to enhance trading services and customer experiences. The company's focus on continuous innovation has improved user engagement, store services, and brand awareness within the luxury goods recycling sector.

ATRenew's good performance in driving user traffic is evident through its high-frequency household goods recycling services in communities. The AHS recycle app and WeChat mini-programs guide users to physical stores selling high-value residual products. The collaboration with JD.com also extended to popular Android models, expanding the company's market reach.

Investor Presentation

An integral milestone was the integration into Apple China's retail system, solidifying ATRenew as the second Apple trade-in service provider in Mainland China. Recycling supply chain support for iPhone trade-in and upgrade programs was established, streamlining the process for users through Apple Docs and flagship stores. Used devices are transferred to AHS, where data erasure and quality checks take place before distribution.

The partnership with Apple reflects shared values in product enhancement, user privacy, data security, and recycling. The streamlined 1P model adopted by ATRenew avoids customer acquisition costs and store expenses, simplifying the cost structure.

Finally, ATRenew's authorization to bid for and distribute Apple's phones marks a significant achievement. This collaboration secures high-quality supplies and enables the company to cater to mainstream customers in crucial scenarios, solidifying its supply chain capabilities, privacy protection measures, compliance standards, and corporate governance practices.

Elevating Consumer Electronics & Luxury Goods Recycling

ATRenew maintains a clear growth trajectory with a dual-pronged strategy. Firstly, the company aims to sustain growth in its core consumer electronics sector, notably in 1P recycling avenues like AHS recycle stores and the official website. This approach ensures superior user experiences, secures primary supply sources, and expands market presence.

Collaborative efforts with industry giants like JD.com and renowned brands like Apple (AAPL) enhance the trading experience within retail scenarios. Simultaneously, ATRenew strives for ongoing innovation, evident in the refined user encounters and service capacities of luxury goods recycling, bolstering the AHS recycle brand identity.

Significant headway has been made in user traffic, particularly through frequent household goods recycling services within communities. Leveraging platforms such as the AHS recycle app and WeChat mini programs, the company urges more patrons to explore physical stores, thereby increasing the sale of high-residual-value items.

In the realm of recycling, noteworthy year-on-year enhancements are seen in both storefronts and JD recycling channels. A vast network of 1,944 offline stores nationwide extends consumer reach, heightening satisfaction through competitive price quotations and services. Among these, the 1,462 standard stores emerge as pivotal conduits for sourcing quality devices. Users can initiate ATI service orders through Apple Docs or 45 flagship stores.

Investor Presentation

Noteworthy is Apple's distinctive recycling approach in China. Customers can engage through Apple, dispatching used devices, or opt for an in-person visit to Apple stores for on-site assessments, data erasure, and immediate payment. These dual processes amplify the user's flexibility and convenience.

Therefore, ATRenew's steadfast focus on advancing recycling avenues while fortifying key partnerships places it on a trajectory of sustained expansion and influence within the consumer electronics and recycling sectors.

ATRenew's Thriving Multi-Category Recycling: A Journey Beyond Boundaries

ATRenew is making significant strides in the multi-category recycling sector with promising growth in gross merchandise volume (GMV) and service capabilities. The company achieved remarkable progress in the latest quarter by surpassing RMB 200 million in GMV, excluding photography and video equipment. Notably, luxury goods and gold recycling transactions exhibited substantial growth, with transaction volumes surging by 60% and nearly 100%, respectively, compared to the preceding quarter.

The enhancement of store service capabilities has been a focal point. AHS has strategically established new iconic stores in first- and second-tier cities, offering competitive pricing quotations and introducing on-site quality inspections for luxury goods. This approach minimizes customer waiting times and enhances the overall service experience.

Furthermore, the expansion of standardized multi-category recycling services, backed by robust IT systems, has been extended to numerous existing agent stores. Impressively, the second quarter witnessed the successful fulfillment of multi-category recycling orders by 231 AHS stores.

In the branding arena, ATRenew has made notable investments in reinforcing its primary brand, AHS Recycle. This strategic move is complemented by a drive to promote circular consumption, which involves active collaboration with consumer brands.

Finally, AHS Recycle is effectively ingraining the recycling mindset through partnerships with esteemed brands like Cotton Times, CapitaLand, Winter Line, Freshippo, and Tencent Charity Center. The company's lead in forging synergies with consumer brands underscores its endeavor to shape a recycling-conscious society.

Elevating Refurbished Value Chains

ATRenew has strategically enhanced the secondhand industry's value chain through its RERE refurb-labeled products. The expansion of capabilities from the Dongguan Operations Center to various other operation centers across China, including Changzhou, Wuhan, Chengdu, and Tianjin, signifies the company's leads in optimizing operational efficiencies across major regional markets. This expansion is expected to bolster value-added capacity and cater to the growing demand for high-quality refurbished products such as tablets, laptops, smartwatches, and earphones.

Merchant users' transaction activities remained robust after successfully navigating pandemic challenges. The compliance refurbishment business and RERE refurb brand launch aligned with regulatory guidance resulted in RMB170 million in revenue from retaining RERE refurbished devices, a substantial 22% sequential increase. This strategy effectively met consumers' demand for premium secondhand devices.

In the second quarter, RERE achieved remarkable results, with total sales of refurbished products surpassing RMB 190 million, constituting 7.2% of 1P (first-party) product revenues. This quarter-on-quarter increase of 1.6% and year-over-year increase of 4.5% in this percentage underscore the company's successful efforts to penetrate the refurbished products market. By leveraging their reconditioning facilities for more 1P source products, RERE aims to augment the value brought to the industry chain by providing consistent quality products.

Securing official maintenance authorization from Huawei in July signifies a pivotal milestone, solidifying RERE's collaboration with prominent brand manufacturers. This move enhances the company's credibility and paves the way for deeper collaborations with phone brands and industrial associations. These partnerships are expected to foster compliance and robust development within the industry chain.

In the long term, ATRenew envisions a substantial increase in the proportion of private-label RERE refurb products in the 1P product revenue stream. With an ambitious target of reaching 30% or more, the company demonstrates a strong exertion towards innovation, value addition, and sustainability within the secondhand market.

Investor Presentation

Redefining Corporate Responsibility & Environmental Leadership

ATRenew's 2022 ESG Report signifies considerable progress towards sustainable operations and responsible corporate practices. The company's proactive measures towards green operations and energy conservation are evident in its impressive reduction of greenhouse gas emissions. The 18.9% decrease in greenhouse gas emission intensity per million RMB reflects the efficacy of its energy conservation efforts. This numerical value underscores the company's focus on environmental stewardship.

ATRenew's lead in a circular economy is apparent in its efforts to reuse packaging materials and engage in green electronic waste disposal. Reusing 18 tons of packaging fillers and recycling and reusing 36,000 packaging boxes contribute to reducing material waste. Additionally, dismantling 270,000 electronic devices in an environmentally friendly manner and reducing electronic product pollution by 43.2 tons demonstrate the company's dedication to responsible waste management.

Further, expanding the circular economy ecosystem through multi-category recycling services signifies ATRenew's advances in broadening its impact. Covering 63 stores in 14 cities by the end of 2022, this expansion promotes sustainable consumption patterns, making recycling more accessible.

Additionally, the growth of offline stores by 612 during the year showcases ATRenew's dedication to accessible recycling services, especially in mid to low-tier cities. The self-service recycling kiosks for pre-owned mobile phones empower partners and streamline the turnover of such devices, facilitating sustainable practices.

ATRenew's focus on quality control, adherence to industry standards, and empowerment of industry participants through specialized training are critical in ensuring a responsible and compliant pre-owned electronics industry. The issuance of 53 new intellectual property authorizations and 43 patents highlights the company's dedication to innovation while protecting intellectual property.

Notably, the ESG rating improvement and recognition from Morningstar Sustainalytics underscore ATRenew's efforts to enhance its sustainability profile. Achieving a rating of 17.6 out of 100 and being ranked fourth globally in the sector indicates the company's growing influence and positive trajectory.

ATRenew's emphasis on employee development and well-being fosters a responsible and caring corporate culture. The "Listener Program" and improvement in employee satisfaction reflect the company's commitment to engaging its workforce.

Finally, philanthropic efforts, including donations and support for education, exemplify ATRenew's dedication to giving back to society. The company contributes to social welfare by benefiting over 10,770 students through the "AHS Charity and Love · Digital Education Aid Program for Rural Children" program.

Navigating High-Tech Seas: ATRenew's Risks

1. Market Fluctuations and Demand: ATRenew's business heavily relies on the recycling, refurbishing, and resale of consumer electronics. Sudden changes in consumer demand for refurbished products or electronic devices could impact the company's revenues and profitability. Economic downturns or shifts in consumer preferences could lead to reduced demand for these services.

2. Competition: The electronics recycling and refurbishing industry is becoming increasingly competitive. ATRenew competes with both established players and new entrants in the market. If the company fails to differentiate itself, maintain quality standards, and keep up with innovation, it could lose market share to competitors.

3. Supply Chain Disruptions: ATRenew's operations depend on a stable supply of used electronics for recycling and refurbishing. Any disruptions in the supply chain, such as difficulties in sourcing used devices or components, could impact the company's ability to meet customer demand and fulfill orders.

4. Geopolitical Factors: ATRenew's operations are subject to geopolitical risks, including trade tensions, regulatory changes, and currency fluctuations. These factors can impact the company's supply chain, costs, and profitability.

5. Dependency on Partnerships: ATRenew's partnerships with companies like JD.com and Apple are crucial for its business growth. Any changes in these partnerships or disputes could affect the company's ability to access key distribution channels or supply sources.

Takeaway

In conclusion, ATRenew's Q2 2023 underscores the company's substantial revenue growth, non-GAAP operating profit records, and enhanced cost efficiencies through AI and data algorithms. Amid evolving consumer preferences and environmental concerns, ATRenew has solidified its role in sustainable practices and multi-category recycling.

The company is positioned for continued success with a strategic blend of innovation, partnerships with industry giants, and a focus on circular consumption. ATRenew's focus on sustainability, compliance, and responsible practices is evident in its impressive reduction of greenhouse gas emissions and efforts toward a circular economy.