ATRenew Sees Better Times Ahead in Evolving Role as 'Recycler for All Seasons'

Key Takeaways:

• ATRenew forecast 30% year-on-year revenue growth in the current quarter, as its business starts to rebound from a sharp slowdown caused by China’s strict Covid control measures
• Company detailed promising early results for its move into luxury goods and photography equipment recycling, and unveiled its first move abroad with a Japanese tie-up

By Doug Young

Smartphone recycler ATRenew Inc. RERE is dipping its toe in several interesting new areas, including used luxury goods and even gold, as well as expanding outside China, in a bid to leverage its name that has become locally synonymous with professional recycling. But first it needs to make it through a difficult patch that it and many others have encountered under China’s strict “zero Covid” policy that has led to widespread business disruptions in recent months.

Signs that those disruptions are starting to fade were on display in the company’s latest quarterly results announced last week, as ATRenew said its revenue growth started to accelerate strongly following a two-month lockdown in its hometown of Shanghai that ended in June. That lockdown, along with similar measures across China to control the spread of the highly contagious Covid Omicron variant, forced ATRenew to close a third of its self-operated recycling stores around China in April and May, the company revealed in its latest quarterly results.

Investors seemed to be focused on the future rather than the latest difficult quarter, bidding up the company’s shares by nearly 20% the day it announced its results last Wednesday. The shares have given back most of that since then, though they are still up about 2% from pre-announcement levels.

All U.S.-listed Chinese stocks experienced a brief rally at the end of last week after the U.S. and Chinese securities regulators announced a landmark information-sharing agreement that would allow the U.S. to inspect China-based audit records for U.S.-listed Chinese firms like ATRenew. The company is one of more than 200 such U.S.-listed Chinese firms that faced potential delisting if the two regulators failed to reach an agreement.

The agreement should help investors return their focus to individual company fundamentals, rather than treating all Chinese companies the same due to the delisting threat. That could work to the advantage of companies like ATRenew, which really does have a very positive story to tell in helping China to achieve its aggressive carbon-reduction goals through greater use of recycling that is a central part of the so-called “circular economy.”

With all that background in mind, we’ll return to the company’s latest results that really do show how big a blow most of China’s consumer-facing companies took in the second quarter. ATRenew managed to post 14.9% revenue growth for the quarter by bringing in 2.15 billion yuan ($313 million), beating its previous guidance for around 2 billion yuan. But the growth rate was just a third of the 46% growth it reported in the first quarter and even higher growth rates last year.

In response to the tough business climate, the company aggressively controlled costs, with overall operating costs down 2.2% year-on-year. Spending was down in nearly every category, helping the company to boost its non-GAAP operating margin to negative 2% from negative 2.7% a year earlier.

The company experienced a small setback as it reported an adjusted net loss from operations during the quarter, ending a two-quarter streak of profitability on that basis. On the bottom line, the quarter’s GAAP loss narrowed significantly from last year’s 506 million yuan to 125 million yuan. Its adjusted net loss of 13.2 million yuan for the quarter was also sharply narrower than the 59.7 million yuan loss a year earlier.

The more efficient operations also helped ATRenew to operate on a positive cash-flow basis, allowing it to boost its cash to 2.6 billion yuan at the end of June from 2.4 billion yuan at the end of last year. So clearly the company won’t be facing a cash crunch anytime soon.

Accelerating growth

With all the gloom and doom out of the way, we’ll spend the rest of this space look at the near-term future that looks quite a bit more promising, as well as the longer-term future that also holds out some interesting new initiatives.

In the near-term, ATRenew said that things were quickly returning to more normal conditions following the end of the Shanghai lockdown on June 1. Accordingly, it forecast it would post revenue of 2.5 billion yuan to 2.55 billion yuan in the current third quarter, which would represent about 30% growth from the 1.96 billion yuan it posted a year earlier.

That said, perhaps the most interesting element of the company’s latest report is its longer-term visions for improving efficiencies and its broader reach. Part of that involves a program launched last year to do more recycling at the city-level, which is more efficient and thus a higher-margin business. But a newer and equally intriguing initiative involves leveraging its name as a recycling specialist to diversify beyond the smartphones that are at the heart of its current business.

“AHS Recycle has become a consumer go-to destination,” said CEO Chen Xuefeng, who also uses the English name Kerry, on the investor call after the results announcement. “Now, we are confident about category expansion after testing the water. On one hand, we see the underserved need for categories other than electronics during a period of flattening economic growth when consumers become prudent buyers.”

To meet that demand, ATRenew has recently moved into recycling luxury goods, photography equipment and even gold in some of its stores across China. Chen revealed that the company’s refurbished luxury goods business launched earlier this year grew 50% sequentially each month between June and August in its Shanghai stores where it is being trialed. Meantime, a photographic equipment recycling program piloted by six stores in Beijing and Tianjin helped each of those stores boost its monthly transaction value by 300,000 yuan in the second quarter.

In another similar initiative to expand its reach, the company also announced it has formed a new partnership with a major Japanese recycling specialist. That tie-up saw the Japanese partner install an ATRenew automated phone recycling machine at one of its Tokyo stores, with the company now seeking other similar partnerships in North America, Europe and South Korea.

At the end of the day, ATRenew still looks a bit like a diamond in the rough, at least based on its latest valuation. Despite briefly reaching a four-month high after the latest results announcement, the company’s stock still trades at a relatively modest price-to-sales (P/S) ratio of just 0.63. That’s about half the P/S ratio of 1.49 times for used clothing company Rent the Runway RENT and 1.28 for Chinese auto refurbishing specialist Uxin UXIN, though its ahead of the even lower 0.22 times for U.S. car refurbisher Carvana CVNA.