ATRenew polishes recycling credentials to record first profit

The recycling specialist has been profitable on a non-GAAP basis for the last two years, but made its first GAAP net profit in last year’s fourth quarter

Key Takeaways:

• ATRenew’s revenue rose 30% in the fourth quarter, as its non-GAAP operating margin improved by 0.9 percentage points on growing efficiencies
• The company’s iPhone recycling collaboration with Apple generated an additional 300 million yuan in revenue during the fourth quarter

By Doug Young

There’s nothing like a first-ever profit to get investors excited, especially when you’re one of China’s few companies that continues to log strong growth despite the nation’s slowing economy.

That was the bottom line for investors, who sharply boosted shares of ATRenew Inc. (RERE.US) after the recycling specialist announced its first-ever quarterly net profit since going public in 2021. The stock soared pre-market and closed 27% higher the day of the announcement last Tuesday, and continued to rise the next day. The jump shows investors may be “rediscovering” a company whose shares were previously sagging and, even after the latest gains, are still down nearly 90% from their IPO price from nearly three years ago.

ATRenew has spent much of the time since its listing laying a foundation to become a diversified recycling specialist, expanding beyond its original focus on iPhones to other electronics and also consumer products like luxury goods. At the same time, it has been building up its original iPhone recycling business, which took a major step forward last year through a direct collaboration with Apple.

The company has also been honing its operations by doing more of its own direct recycling, cutting out costly middlemen, and doing more refurbishment that carries higher margins than simple trading. It has also taken steps to improve its operating efficiency through greater automation and by recycling more at the city – rather than national – level.

Those measures helped ATRenew to boost its non-GAAP operating margin to 2.1% during the fourth quarter from 1.2% a year earlier. With that improvement, ATRenew achieved its first-ever quarterly net profit of 2.8 million yuan ($389,000) for the three months through December. That ended nearly three years of losses since its June 2021 IPO, including a 2.15 billion yuan loss in the fourth quarter of 2022.

The company has been profitable on a non-GAAP basis for most of the last two years, which excludes costs related to employee stock compensation, amortization and impairment. It continued that trend with a record fourth-quarter non-GAAP net profit of 91 million yuan, quadruple the 22.5 million non-GAAP profit a year earlier.

“2023 was also a year of consolidation and efficiency. We further solidified our second-hand supply chain capabilities, providing more valuable services on our platforms. At the same time, we were also more disciplined at the pace of our expansion and investments in new initiatives,” said ATRenew Chairman Kerry Chen. “Looking ahead, we aim to expand to lower-value item recycling while promoting the recycle-and-reuse of more idle goods.”

ATRenew achieved the profit milestone as its revenue continued to post strong growth, even as many other Chinese companies’ growth has stalled with the nation’s slowing economy. Its revenue rose about 30% year-on-year in the fourth-quarter to 3.87 billion yuan, with product revenue accounting for about 90% of the total. The remainder comes from revenue for services, which rose about 20% to 351 million yuan. It forecast its revenue would grow at a similar rate of about 25% in the current first quarter.

Syncing with government priorities

ATRenew has continued to post strong growth in no small part by syncing strongly with government priorities, a key component to doing successful business in China. As recently as February, President Xi Jinping stressed the importance of the “circular economy” by calling for more recycling of consumer goods and equipment at a meeting of the Communist Party’s Central Commission for Financial and Economic Affairs.

The southern boomtown of Shenzhen, where many of China’s market-oriented reforms are often piloted, is also in the process of creating standards to promote more recycling, and ATRenew has been a major participant in that program.

The recycling drive is also getting a lift from China’s slowing economy, which is making consumers more value conscious. “During 2022 and 2023, we saw a shift in consumer behavior,” said Chen. “Our users’ focus transitioned from consumption upgrades to an emphasis on value for money. During this transformation, we noticed a swift rise in user demand for trade-ins and recycling in exchange for cash.”

A key driver for the company’s growth has been its collaboration with Apple, which began last June. ATRenew said the collaboration, which allows consumers to trade in their iPhones over Apple’s website and through its 47 Chinese Apple Stores, generated 300 million yuan in revenue in the fourth quarter. That was in line with previous company guidance saying the program could generate an additional 1 billion yuan in revenue per year.

CFO Rex Chen noted on the company’s earnings call that the collaboration is still a work in progress, saying its gross profit margin is still “below an ideal level,” and that the company will make tweaks to “strike a balance between profitability and growth.” He also noted that the program led to a big jump in inventory, which rose by 345 million yuan during the quarter to reach 1 billion yuan. But he added the rise had a relatively small impact on ATRenew’s cash flow.

Outside of iPhones, ATRenew has also been ramping up its non-electronics business, which it launched last year and now classifies as its “multi-category” business. It said that business, which includes recycled luxury goods, vintage liquors and gold, was available at 252 of its 1,819 offline stores by the end of last year, and generated more than 1 billion yuan in gross merchandise value (GMV) during all of last year.

The company is also eying the global market by providing its automated inspection technology to partners outside Mainland China. It has existing relationships with partners in Hong Kong and Japan, and said it began working with another overseas partner in Sweden last October.

Even after the big jump in its stock price, ATRenew’s shares still trade at a relatively low price-to-sales (P/S) ratio of 0.20. That’s ahead of the 0.08 for clothing recycler Rent the Runway (RENT.US), but below the 0.62 for The RealReal (REAL.US) and the 1.42 for car trader Carvana (CVNA.US). While the big stock jump after its latest results is just an initial reaction, it could also mark the start of a rediscovery of this neglected ticker that really does seem well positioned to profit from favorable conditions in its home China market, combined with its own growing recycling expertise.

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