ATRenew: Anticipating Boosted Demand And Margin Growth (RERE)

ATRenew Inc. (NYSE:RERE) operates China’s largest pre-owned client electronics transaction and companies platform. It owns AHS Recycle (C2B), PJT Market (B2B), and Paipai Market (B2C), and a world enterprise AHS DEVICE. Its mission is said as “to provide a second life to all idle items” (by way of recycle, refurbish, and reuse).

RERE reported robust Q2 2024 outcomes. Income reached RMB3,776.7 million (+27.4% YoY) pushed by gross sales development of pre-owned client electronics. GAAP Op Loss was RMB5.6 million, and non-GAAP Op Earnings was RMB94.1 million (US$12.9 million), as in comparison with RMB52.0 million in Q2’23. Margin enchancment was pushed by gross sales and advertising (7.5% as a % of income, vs 8.6% in Q2’23), success value (8.5%, vs 8.8% PY) and Tech and Contents (1.2%, vs 1.3% PY).

I preserve a purchase suggestion for RERE, supported by 1) robust demand in pre-owned market attributable to consumption downgrade in China; 2) margin enchancment benefiting from value efficiencies, significantly in Gross sales and Advertising, success, and know-how; 3) development by way of RERE’s strategic partnership with JD.com.

China’s authorities has been actively selling trade-ins by way of subsidies throughout varied industries, aiming to stimulate the secondary market and lift consciousness of sustainable consumption. The consumption downgrade in China, particularly in first-tier cities similar to Shanghai, Beijing, Guangzhou, and Shenzhen, has turn into a notable development as customers face financial pressures or prioritize financial savings over discretionary spending. As proven in Determine 1, the retail gross sales in June for these 4 first-tier cities noticed a big decline as in comparison with Could, and the drop was extra extreme than the nationwide common. This development helps the rising demand for pre-owned items, positioning RERE properly for continued development.

Determine 1 YoY development charge of retail gross sales in first-tier cities drop in June

If we take a look at 32 cities in China, solely 7 cities (Hefei, Chongqing, Wenzhou, Jinan, Xuzhou, Nanning, and Nanjing) confirmed optimistic developments (consumption upgrades) in H1-24. The remaining 25 cities skilled various ranges of consumption downgrades.

Determine 2 Consumption Upgrading/Downgrading in Cities in H1-24

Consumption downgrade will considerably increase the pre-owned electronics market as an increasing number of price-conscious customers search for inexpensive alternate options. As a substitute of buying new electronics, they flip to pre-owned gadgets, resulting in a strong secondary market. RERE, with its experience in refurbishing and reselling electronics at scale, is well-positioned to profit from this rising demand.

In Q2’24, RERE achieved a fabric enchancment in Op Margins YoY and QoQ. This demonstrated RERE’s efficient management of operational efficiencies, that are attributed to excessive gross sales volumes, income diversification, technological developments, and economies of scale. As proven in Determine 3, RERE’s value to serve narrowed from 31% in This autumn’21 to 21% in Q2’24, a big enchancment of 10 ppts within the final three years. With RERE’s scale and main place in China, coupled with the consumption shift to inexpensive merchandise, I count on RERE to show worthwhile quickly.

Determine 3 RERE Gross margin% and Op margin% This autumn’21 – Q2’24

In accordance with RERE’s announcement on Could 31, a three-year partnering settlement with JD.com established their complete partnership together with integrating sources, cooperating on consumer visitors, tech help, and logistics, and many others. It is value mentioning that in H1-24, recycling worth and gross sales by way of JD.com grew over 50% YoY. I’m optimistic that this partnership shall be a key driver of RERE’s future development.

RERE is at present traded at $2.48, as in comparison with 52-wk excessive/low at $3.02/$1.01. My base case valuation is 11x 2025E $0.30 EPS, translating to a goal worth of $3.3 (+33% upside from present worth). $0.30 EPS relies on 2025E income development of +26% and Op margin enchancment of +130 bps YoY. 11x P/E is half of the buying and selling a number of of RERE’s shut comp AO World plc (LSE:AO), which is at present traded at 22x NTM ahead P/E.

Conclusion

RERE as a sector chief in China will doubtless be a most important beneficiary of the continuing consumption downgrade developments, and thereby preserve or speed up its income development. Its continued efforts in margin growth will result in profitability in close to staff. Traders ought to really feel enthusiastic about its robust enterprise outlook and over 30% inventory worth upside in 12 months.

When it comes to funding dangers, though consumption downgrade favors the secondary market within the quick time period, a chronic financial downturn in China may ultimately stress the provision of electronics. As well as, buyers must also remember that the aggressive panorama is predicted to accentuate with new entrants coming into the market, pushed by subsidies from the Chinese language authorities.