ATRenew Posts Market-Defying Growth As Partnerships With JD.com, Apple Advance

Key Takeaways:

• ATRenew posted strong revenue growth in the second quarter and predicted similar trends in the third, as it banks on rising demand from value-conscious consumers
• The recycling specialist is placing greater emphasis on its higher-margin businesses, which it is pursuing partly through growing ties with partners Apple and JD.com

By Doug Young

The latest financial report from recycling specialist ATRenew Inc. RERE shows continued progress on several fronts, including improving margins as it emphasizes more profitable businesses and tweaks a major partnership with global smartphone giant Apple AAPL.

At the more macro level, the report’s highlights include the company’s significant deepening of ties with longtime e-commerce partner JD.com JD through a major new multiyear agreement. That pairing, along with the Apple tie-up launched last year, are rapidly emerging as key partnerships for ATRenew as China aggressively rolls out new policies to achieve its twin goals of boosting consumption and promoting the circular economy.

While other Chinese companies have reported slowing revenue growth as China’s economy slows, ATRenew has bucked that trend by maintaining strong double-digit gains by syncing with government priorities and catering to increasingly value-conscious consumers. It forecast that growth would continue into the third quarter as more Chinese cities roll out new programs aimed at boosting consumption through increasingly popular trade-in programs.

“We have witnessed a significant shift in consumer behavior with trade-ins becoming a more mainstream choice for consumers seeking to upgrade their electronic products,” said ATRenew founder and Chairman Kerry Chen on the company’s earnings call last week. “Looking ahead to the second half of the year, we anticipate that national policies promoting consumer product trade-ins will provide greater certainty for the industry.”

ATRenew reported its revenue grew 27.4% in the second quarter to 3.78 billion yuan ($530 million), slightly topping the high end of its previous guidance range. It predicted the figure would continue growing at a similar rate of between 22% and 25% in the third quarter, potentially topping the 4 billion yuan mark just a year after passing 3 billion yuan.

The big majority of the company’s revenue, about 90%, comes from product sales, which grew 29% during the quarter year-on-year, with the rest coming from services.

The company has been honing its operations in the last two years to focus on the most profitable businesses of product refurbishment and directly selling to consumers. Both of those offer higher margins than simpler trading in smartphones, electronics and other products with middlemen buyers and agents. It announced that revenue from its direct-selling business more than doubled in the second quarter, rising 125% year-on-year to 960 million yuan, accounting for about a quarter of its total.

The company also posted strong gains for its two-year-old non-electronics recycling business, which includes such categories as designer bags, gold and even vintage liquors. Transaction value for that part of the business reached 900 million yuan in the second quarter, ahead of 600 million yuan in the previous quarter and up by nearly 400% year-on-year.

The company’s non-GAAP operating margin improved by 0.7 percentage points to 2.5%, helping to lift its adjusted net profit to a record 80.5 million yuan from 36.4 million yuan year-on-year. It lost money on a net basis, though the loss narrowed to 10.7 million yuan from 64.8 million yuan a year earlier.

Growing JD ties

Despite the broadly upbeat report, ATRenew’s shares fell 11.3% the day it announced its results, though they pared some of those losses in the following days. The bigger story is a broader rally for the company’s shares, which are up about 35% so far this year, outpacing a far smaller 4% gain for the broader iShares MSCI China ETF.

The stock trades at valuations levels comparable with its global recycling peers, though most of those stocks look relatively undervalued. Its price-to-sales (P/S) ratio currently stands at 0.31, which trails the 0.49 for The RealReal REAL but leads the 0.14 for Rent the Runway RENT. All those numbers are well behind the 2.79 P/S for used car trader Carvana CVNA, showing the kind of valuations the other companies could someday fetch.

Next, we’ll turn to the new JD.com tie-up, and also look at some of the other developments mentioned earlier. ATRenew is a longtime partner of JD.com, and the latter is a major ATRenew stakeholder with 34% of its shares. ATRenew said the pair signed a new agreement in May running through the end of 2027 that will see them “continue to cooperate in the second-hand business by integrating resources and leveraging their respective strengths.”

That’s quite significant, since JD.com is one of China’s top online electronics sellers and has recently ramped up its drive to promote used electronics in sync with the government’s latest priorities. As that happens, the value of ATRenew’s products traded through JD.com’s various platforms doubled in May from a year earlier, and also grew by a similar amount during the June 18 shopping festival, a major online event.

At the same time, ATRenew has been tweaking its other major partnership for iPhone recycling with Apple, which dates back to last year. The company said the partnership had the potential to add up to 1.5 billion yuan to its annual revenue, but it got off to a shaky start due to low margins. Over the past year, however, ATRenew has been tweaking the program and said it achieved the important milestone of a positive gross margin for the business in the second quarter.

More broadly, ATRenew said a growing number of Chinese cities are rolling out programs to encourage trade-ins of used electronics, following the central government’s release of an action plan in March for such large-scale trade-ins of consumer goods. The southern metropolis of Shenzhen rolled out a program in July to encourage smartphone trade-ins, and Chen said other cities are now crafting their own phone-specific subsidies at the local level.

“In the second half of the year, we expect more cities to introduce similar subsidies, further promoting the effective recycling of items, electronic products within the circular economy,” he said.

As it continued to sharpen its focus on its most profitable business lines, and continued efforts to improve efficiency through more automation of its inspection processes and recycling at the city level, ATRenew’s operating loss narrowed sharply 5.6 million yuan in the second quarter from 61 million yuan a year earlier. While the company operates profitably on a non-GAAP basis, it could soon also operate profitably on a GAAP basis as well if current trends continue, representing another symbolic milestone for its profitability metrics.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.