ATRenew Feeds On National Recycling Campaign, Strong JD.com Ties

Key Takeaways:

• ATRenew posted strong first-quarter revenue growth and predicted similar gains in the second quarter as China steps up a recent recycling campaign
• The company’s stock has more than doubled from an early February low, part of a broader recent rally for U.S.-listed Chinese companies

By Doug Young

There’s nothing like a government push to get your business flowing, especially when one of your key stakeholders – which just happens to be one of China’s top e-commerce companies – decides to fully embrace Beijing’s latest campaign to boost recycling.

Those were some of the key themes coming from ATRenew Inc. (NYSE:RERE), one of China’s leading recyclers, which on Monday reported continued strong revenue growth in the first quarter, even as many Chinese companies stumble in the current climate of economic uncertainty. The company also reported improving margins as it hones its automation testing centers to boost its efficiency. It slipped back into the red after reporting its first net profit since its 2021 IPO in the previous quarter, though it remained profitable on a non-GAAP basis.

China’s climate of uncertainty as the economy slows after years of breakneck growth is actually working to ATRenew’s advantage. The company said it is seeing growing numbers of consumers trade in old electronics and other items like gold and luxury goods for cash, keeping it well-stocked with merchandise to feed its operation. At the same time, value-conscious consumers are also increasingly open to buying recycled goods instead of new ones, especially if they come from major vendors like ATRenew.

“Driven by the action plans at China’s national and municipal levels, large-scale trade-in of consumer products has become an important way to promote domestic demand,” said founder and Chairman Kerry Chen in the company’s latest results announcement. “We have observed increased user enthusiasm for trading in used consumer products, with users placing more trust in our recycling and fulfillment capabilities.”

From a policy perspective, this year got off to a strong start when President Xi Jinping called for more recycling of consumer goods and equipment at a meeting of the Communist Party’s Central Commission for Financial and Economic Affairs in February. As often happens in China, those words quickly turned into action a month later when China’s State Council, the country’s cabinet, released an action plan to promote large scale trade-ins of consumer goods. Following that, local governments have been quick to follow with their own municipal action plans, showing how the central government’s priorities often filter down the food chain.

Local governments aren’t the only ones acting, as China’s major corporate citizens also embrace the call to action. One of those is e-commerce giant JD.com (NASDAQ:JD), which counts electronics as one of its largest product areas, and is also one of ATRenew’s major stakeholders, with 34% of its shares and two places on the company’s board.

Chen said JD.com has begun paying “greater attention to the second-hand use business,” and announced its own plan to promote consumer electronic product trade-ins, including a 3 billion yuan ($415 million) subsidy program in the next 3 years. He noted that as JD.com’s “exclusive used consumer electronic supply chain partner,” ATRenew is directly benefiting from the e-commerce company’s stepped-up recycling focus. That helped the transaction value of recycled products through JD.com’s trade-in program jump 43% year-on-year in this year’s first quarter.

Stock Rally

Investors weren’t particularly impressed with the latest results, at least not on the day of the announcement, with ATRenew’s stock down 4.2% in Monday trade. But the much bigger story is a rally that has seen the stock more than double from a low in early February, rising from a close of $1.03 on Feb. 5 to its Monday close of $2.71. That jump has been part of a broader rally for U.S.-listed Chinese stocks that has seen the iShares MSCI China ETF rise more than 30% from a low in late January, though some shares have risen more than others.

Even after its rally, ATRenew’s stock still trades at a relatively low price-to-sales (P/S) ratio of 0.34, and a price-to-earnings (P/E) ratio of 8 based on analyst forecasts for this year. Its ratio is slightly behind used clothing seller Rent the Runway’s (NASDAQ:RENT) P/S of 0.41, and also trails the 0.81 for The Realreal (NASDAQ:REAL).

ATRenew’s recent big share gains could indicate some major investors are discovering the stock, and the company currently counts such big names as Morgan Stanley and UBS as major stakeholders, each with 1.3% of its shares. Blackrock also holds 0.4%, according to Yahoo Finance.

ATRenew continued to leverage its major partnerships with JD.com and Apple (NASDAQ:AAPL), whose iPhones make up a major portion of its business, to log 27% revenue growth in the first quarter, as the figure rose to 3.65 billion yuan from 2.87 billion yuan a year earlier. It said growth would continue at the same rate in the second quarter, up about 26% year-on-year at the midpoint of its forecast range of 3.67 billion yuan to 3.77 billion yuan.

Among its major initiatives, the company made strong gains for its refurbishment business that offers higher margins than simply buying and reselling recycled products. It said its revenue from refurbished devices reached 282 million yuan in the first quarter, accounting for about 8.5% of its total product revenue. That marked a steady improvement from last year’s third quarter, when the figure totaled about 200 million yuan, representing 6.8% of product revenue.

The company has also been trying to build itself into a multi-category recycling specialist over the last two years, offering not only electronics, but also other products like luxury bags, gold and even vintage liquors. It said the transaction value for that part of its business quadrupled year-on-year in the first quarter to 600 million yuan. Chen also noted that 18% of people who recycled luxury products through the company came back for its other product recycling services within the next 30 days.

ATRenew is also raising its efficiency bar through a number of other steps, including cutting out middlemen, doing more recycling at the city level instead of nationally, and automating its inspection processes to reduce labor costs and cut down on human errors.

Such efforts helped the company to boost its non-GAAP operating margin to 2.2% in the first quarter from 1.5% a year earlier. It remained profitable on an adjusted non-GAAP basis, which excludes costs related to employee stock compensation and amortization. It reported a non-GAAP net profit of 20.7 million yuan in its latest quarter, down from a 50.1 million yuan profit a year earlier. On the company’s earnings call, CFO Rex Chen pointed out that the company was negatively affected by a one-time factor after it subscribed to IPO shares that later declined from an “ecosystem enterprise.”

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