ATRenew Starts the Year Off Strong, Braces for Covid Impact

Key Takeaways:

• ATRenew‘s revenue rose 45.7% in the first quarter to 2.2 billion yuan as both product and service revenues recorded strong gains  
• Company could benefit over the longer term from the rollout of China’s first guidelines for used electronics refurbishment by the city of Shenzhen in April

By Doug Young

Leading smartphone recycler ATRenew Inc. RERE has posted strong growth and a second consecutive operating profit on an adjusted basis in its latest quarterly report, with quarterly revenue up 45.7% year-on-year on strong product and service revenue gains. But its executives and the investment community were more focused on what lies ahead for the company, as strict Covid control measures look set to potentially push China into its first economic contraction since the start of the pandemic.

Signs of battening down the hatches in preparation for the Covid disruptions were present throughout ATRenew’s latest report. Those include tightening spending and increasing overall efficiency. It also forecast a drag on its revenue growth in the second quarter as the company is heavily affected by the lockdown in Shanghai where its headquarters and more than 100 stores are located.

At the same time, ATRenew was also looking past the temporary disruptions to a return to more normal conditions, including growing momentum for recycling as China seeks to reduce its carbon footprint and reduce waste and pollution. The country has pledged to reach peak carbon emissions by 2030 and go carbon neutral by 2060, and sees the circular economy of recycling and reuse as an important contributor to reaching those goals.

That bodes well for companies like ATRenew over the longer term, since aligning with government priorities is a crucial element to doing successful business in China, ensuring support for everything from setting up new facilities to getting the necessary business permits.

Perhaps such long-term investor optimism was behind a 16% rally for ATRenew’s shares in the two days after its results came out. Still, the stock has dropped around 50% year-to-date, as it and other U.S.-listed Chinese shares get hammered over broader concerns like a slowing Chinese economy and an ongoing tussle between the U.S. and Chinese securities regulators.

ATRenew reported its revenue strongly grew to 2.2 billion yuan ($328 million) year-on-year in the first quarter, even as the effects of China’s pandemic-control measures began to bite from the middle of March. Other major metrics were in-line, with gross merchandise volume (GMV) up 51.6% to 9.4 billion yuan, while the number of product transactions on its platform rose 31.3% to 8.4 million.

The strong growth, combined with greater efficiencies as the company builds up a model that emphasizes recycling and circulation at the city level, helped ATRenew to report adjusted net income from operations of 3.9 million yuan for the quarter. That marked its second straight quarter in the black on that basis, which excludes costs related to employee stock grants and amortization of intangible assets and deferred cost resulting from assets and business acquisitions. CEO and founder Chen Xuefeng, who also uses the English name Kerry, said the company is still targeting profitability on that basis for the entire year.

ATRenew’s first-quarter net loss widened to 161.4 million yuan from 94.8 million yuan a year earlier. But its cash reserves of 2.4 billion yuan at the end of March were nearly unchanged from the end of last year, showing the company was on relatively solid footing heading into a stormy second quarter. That storm has seen Shanghai completely locked down since April 1, bringing a huge part of economic activity in China’s largest city and commercial hub to a halt.

Beijing and other major cities are rolling out similar restrictive measures under China’s “zero Covid” policy, resulting in severe curtailing of economic activity. ATRenew is somewhat insulated from such measures due to a strong online component to its core business of facilitating trade in recycled electronics, most notably smartphones. But it also has a major brick-and-mortar store presence that is taking a hit with the forced closure of many shops and malls where those stores are located.

Slowing revenue growth

Having set the stage for the upcoming bumpy ride, we’ll spend the second half of this space looking at ATRenew’s exposure and response to the changing environment in the near-term, what it’s doing to prepare, and what might await in the further distance.

The Shanghai-based company set the stage by excusing listeners for any technical problems during its earnings call, explaining that its executives were all participating from their homes where most have been stuck and unable to leave since late March and early April.

“The pandemic remains a challenge for us,” Chen said on the call. “In April, the recurrence led to stricter controls in many regions across China. We faced interruptions in both connecting with merchants and providing platform services on their retail front.”

He added that pandemic-related headwinds would “drag on 20% to 25% of our overall revenue in the second quarter.” As a result, ATRenew forecast its second-quarter revenue would rise just 7% to 10% year-on-year to between 2 billion yuan and 2.05 billion yuan, marking a major slowdown from the 60.1% growth it recorded for all of last year.

But Chen noted on the call that the company has also seen recent “hopeful signs of recovery,” as Shanghai plans to end two months of complete lockdown with a widescale reopening on June 1.

The company appeared to be reining in spending in preparation for the hit. On a non-GAAP basis, its sales and marketing expenses grew by 41% in the latest quarter, roughly half the rate from 2021. Its quarterly technology and content expenses on a non-GAAP basis also increased by just 6.5% year-on-year, marking a significant slowdown from 51% in 2021.

Company management noted that their city-level recycling program, now operating in 22 cities across China, has helped it to avoid some disruptions by keeping the movement of goods limited to local areas – an important consideration due to frequent clampdowns on intercity travel. They also noted that China’s economic slowdown could play to ATRenew’s advantage, since consumers often scale back spending in such times by purchasing second-hand items instead of new ones.

Over the longer term, the company also drew attention to the mega-city of Shenzhen’s rollout of China’s first guidelines for the refurbishment of pre-owned electronic devices in April. Such standardization could help the industry to mature and become more trusted over the long-term, helping companies like ATRenew to gain more profits and consolidate their position. In anticipation of that day, the company also revealed it is trying to broaden its scope beyond its current smartphone focus to include a wider array of other used electronics like luxury goods and photographic equipment.

Despite all the headwinds, ATRenew actually looks relatively competitive compared with global recycling peers in terms of valuation. The company currently trades at a price-to-sales (P/S) ratio of 0.33, squarely between the ratios of 0.2 and 0.47 for used car specialists Carvana CVNA and Carmax KMX. It’s also not far from used clothing specialist Rent the Runway RENT, which trades at a P/S ratio of 0.47.