RERE - ATRenew Reports Sound Q2 2023 Earnings - More Growth Likely Ahead

2023-08-24 10:18:01 ET

Summary

• ATRenew's 2Q 2023 earnings show substantial improvement compared to the same period last year.
• The company's total net revenues grew by 38.1% and loss from operations narrowed down.
• The circular economy concept and falling consumer incomes can further stimulate ATRenew's business growth.

ATRenew (RERE) has just reported its 2Q 2023 earnings . The results were substantially better compared to the same period a year ago. As I have mentioned in my previous articles on ATRenew, the company is improving its revenues and EPS figures. However, improving financials is not the only positive factor investors are facing right now. The circular economy concept as well as falling consumer incomes can be further growth stimuli for RERE's business.

Quarterly earnings

Here is ATRenew's recent earnings summary :

• The company's total net revenues increased by 38.1% to RMB2,963.7 million or US$408.7 million compared to RMB2,145.7 million for the same period a year ago.
• Loss from operations, meanwhile, decreased to RMB61.0 million or US$8.4 million compared to RMB168.2 million for the same period of 2022. Adjusted income from operations (non-GAAP) totaled RMB52.0 million or US$7.2 million, compared to an adjusted loss from operations (non-GAAP) of RMB42.3 million 2Q 2022.
• Net quarterly loss totaled RMB 64.8 million or US$8.9 million, as opposed to a net loss of RMB125.3 million for 2Q 2022. Adjusted net income or non-GAAP profit was RMB36.4 million or US$5.0 million, compared to an adjusted net loss of RMB13.2 million for 2Q 2022.
• Number of consumer products transacted totaled 7.7 million, a small decrease compared to 7.8 million in the second quarter of 2022.

In order to judge if the results were really good, I prepared a table below in order to compare the recent quarterly earnings to the ones reported for the previous periods.

Source: Prepared by the author based on ATRenew's data

Since 3Q 2022 the revenue and non-GAAP net profit have been clearly improving. Unfortunately, the GAAP net profit figure is not positive just yet. But I personally believe that it is quite temporary. The results are getting much better compared to where they were in 2022 and especially 2021.

The revenue graph is in a clear upward trend.

The quarterly GAAP net figures in 2023 seem to be much better than they were in 2021 and 2022. The 4Q 2022 was a one-off. I explained why ATRenew recorded such a net loss in my other article .

But ATRenew's non-GAAP net profit history is even better. It has been positive since 3Q 2022. The non-GAAP net profit graph also seems to be in a clear upward trend.

The management's outlook and business developments

Let me discuss the management's results comments and outlook. Kerry Xuefeng Chen, ATRenew's CEO, noted that the company's performance exceeded the management's guidance. Mr. Chen is pleased about the fact that in the second quarter of 2023, total net revenues increased by 38.1% year over year totaling RMB2,963.7 million. In the view of the CEO, that is due to the company's circular economy business model. I will explain this concept later on in my article.

The CEO also noted the company's key advantages are its self-operated business and consumer electronics recycling and transaction services. The management aims to promote ATRenew's brand nationally and collaborate more closely with e-commerce platforms and electronics brands. This will obviously increase the company's sales. ATRenew already cooperates with JD.com.

Much of ATRenew's success can be attributed to the improvements of the company's automation technologies and big data algorithms. These made inspection and logistics more efficient, which also contributed to the company's cost-cutting.

As concerns the management's outlook for the third quarter of 2023, ATRenew expects its total revenues to total between RMB3,150.0 million and RMB3,250.0 million.

At the end of last year, ATRenew extended its existing share repurchase program. Under this program, the company may buy back its stock worth up to US$100 million. The twelve-month buyback period started at the end of 2022, with all other terms unchanged. During the second quarter of 2023, they bought back 2,289,309 American depositary shares or ADSs at an average price of US$2.81 per share. US$6.4 million was spent on that. But as of 30 2023, ATRenew had repurchased a total of 12,264,772 ADSs for almost US$44.4 million under this share repurchase program so far this year.

Bullish factors for ATRenew

To start with, the concept of a circular economy is getting very popular in China. In other words, the government considers recycling to be important for the country's well-being. The Chinese government made the circular economy concept a priority in 2021. It was included in a five-year plan, whilst the society is being encouraged to recycle and reuse products to save water and energy as well as cut greenhouse gas emissions. ATRenew does precisely that. If many consumers buy used smartphones, there will be less need to produce more mobiles. Obviously, this will be better for the environment. According to the National Development and Reform Commission (NDRC), China's top economic planner, buying a second-hand smartphone can decrease carbon emissions by at least 25 kilograms , compared with buying a new phone. Environmental awareness is also becoming popular among consumers. So, the niche ATRenew is in seems to have a bright future.

Valuations

ATRenew is not particularly profitable right now. But Seeking Alpha has used a number of metrics to judge ATRenew's valuations. In short, the company is highly undervalued. Its valuation grade is A*.

The only criterion where RERE does not excel is P/E Non-GAAP. But I believe that it is temporary because the company's profit indicators are improving.

ATRenew's valuations

The stock seems to be trading quite low also because in the first several days after its IPO it used to be worth more than $15 per share. Right now it is lingering just above the $2 mark. So, it looks like there are plenty of upsides from the current levels.

Risks

Some skeptical investors might wonder if ATRenew's stock is a good asset to buy now when the Chinese economy is slowing down. Some analysts might also say that ATRenew will be vulnerable to any economic downturns because it is not a profitable business. But paradoxically, the worse the economy does, the better it is for ATRenew. As I have mentioned before, ATRenew does not only operate in the used smartphones market. It also collects and resells second-hand luxury goods. During economic downturns, people tend to choose cheaper alternatives to the products they want to buy. This is particularly true of smartphones and exclusive accessories. So, the demand for these second-hand items should rise, whilst ATRenew is highly likely to become profitable.

Conclusion

ATRenew reported very good earnings results. The company even exceeded its guidance. RERE shares are trading very low, whilst there are further growth stimuli. The first one is that of the circular economy concept and the fact that it is getting popular. The second one is that of a likely recession ahead. Used goods are inferior products that people buy when their incomes fall. This seems to be happening right now. But ATRenew will be here to gain. If everything goes well, I forecast that ATRenew will become profitable in the next several quarters.

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