ATRenew Stock: Company fundamentals are improving, risks remain

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Company Overview

ATRenew Inc. (“ATRenew”) (NYSE: RERE), founded in 2011, operates a technology-driven second-hand consumer electronics transaction and service platform in China under the brand ATRenew, which stands for “All Things Renew”. RERE has end-to-end online and offline capabilities, including AHS Recycle (C2B), PJT Marketplace (B2B) and Paipai Marketplace (B2C), and has a total of more than 1,000 stores in more than 200 cities in China.

AHS Recycle: A C2B recycling platform that recycles phones from multiple channels, including online, exchange, and offline AHS stores. PJT Marketplace: a B2B platform that allows merchants to exchange used devices. Paipai Marketplace: A B2C platform that sells premium used devices under POP and consignment models.

Financial T4-21

RERE’s performance in Q4-21 proved its monetization capabilities thanks to its rapidly evolving ecosystem with its C2B2C closed-loop supply chain. Q4-21 represented a critical milestone in profitability as the first break-even quarter (non-GAAP operating income of $1.5 million in Q4-21). On an annual basis, the RERE operating loss was $16.2 million (-1.3% of revenue) in FY21, compared to an operating loss of $22.7 million. dollars (-3.0% of revenue) in FY20. Q4-21 saw a much higher growth rate in RERE’s commission-based services revenue (78.3% YoY versus 43.9% YoY in Product revenue). As the service revenue mix continues to grow, this will further contribute to RERE’s profitability.

Revenue reported by RERE: $382 million in Q4-21, +48.2% year-on-year; FY21 $1,221m, +60.1% YoY.

GMV: Q4-21 $1.6B, +50.7% YoY; FY21 $5.1 billion, +65.8% YoY.

Number of consumer products traded: Q4-21 9.1m, +26.4% YoY; FY21 31.2m, +32.2% YoY.

Operating loss: Q4-21 – $19.8 million, FY21 – $140.5 million

Non-GAAP operating profit/loss: Q4-21 +$1.5M, FY21 -$16.2M

1. C2B2C business strategy forms a unique supply and demand flywheel to drive RERE’s continued growth

On the supply side, RERE has an omnichannel supply network, including a website, mobile app, mobile mini-programs, AHS stores and kiosks. RERE is also a partner of JD.com (NASDAQ: JD) through their “one-stop trade-in” services since 2019.

On the demand side, RERE serves a wide range of buyers and offers a wide range of devices through PJT Marketplace and Paipai Marketplace.

RERE’s presence through various supply and demand channels allows RERE to evolve and also helps RERE develop its expertise in inspection, grading and pricing. The C2B2C business strategy will continue to fuel RERE’s long-term growth. In a highly competitive environment with two market leaders (Xianyu and Zhuanzhuan), RERE’s strategy represents a solid path to gain market share and solidify its differentiated value.

2. Proprietary technology continues to drive RERE operations efficiency through automation and big data capabilities

RERE’s flywheel requires efficient operation on many fronts, such as inspection, grading and pricing, etc. As of March 31, 2021, RERE operated 7 centralized operation centers, including a fully automated center in Changzhou and 23 city-level operation stations equipped with proprietary data-driven processing technologies. Big data and artificial intelligence play a crucial role in the daily operation of RERE’s AHS stores. Some examples as follows.

The RERE Ops center in Changzhou has adopted “Matrix 2.0” – multi-system and multi-device automation. The 2nd generation of Matrix could reduce labor efforts by 85%, labor costs by 83% and QA costs by 20%, and improve the efficiency of the 18% quality assurance.

RERE recently invented Photo Box 3.0, which integrates AI and is able to inspect up to 30 kinds of mobile phone appearance defects in just 20 seconds. This photo box can achieve 99% inspection accuracy with 90% less inspection time. In H1 2022, RERE will continue to implement the automated inspection strategy.

RERE’s Q4-21 breakeven signaled a quick win in business growth and operational efficiency. As RERE continues to analyze thousands of phone models, millions of transactions, and millions of purchase behaviors of consumers and small merchants, RERE will be able to further optimize its operation and take advantage of big data. /AI to maximize consumer surplus by better matching supply and demand. .

3. RERE’s expansion at the city level will further strengthen its C2B2C strategy and increase its added value, as evidenced by its participation rate

At the end of 2021, RERE covers 214 cities, with 1,308 stores. Its supply and demand flywheel will continue to accelerate alongside its city-level expansion, and its bargaining power will also increase among traders. According to the latest earnings release, the overall take rate was 4.8%, up 20 basis points sequentially. Specifically, PJT market participation rate was 4.5%, +60 bps YoY, with additional inspection and customer service charges; Paipai’s acceptance rate was 5.4%, +120 basis points year-on-year due to an increase in the acceptance rate of its consignment business. Looking at the entire value chain, there are a variety of value-added services that RERE can offer, such as maintenance services, supply chain finance services, etc.

Investment risks

There are several risks that investors should take into account when making their investment decisions.

First, RERE’s access to online traffic relies primarily on partners such as JD.com, and its own ability to acquire online traffic appears limited compared to competitors such as Xianyu and Zhuanzhuan. According to the MAU 2021 first quarter statistics of second-hand electronics e-commerce applications, Xianyu MAU was 5.7 million and Zhuanzhuan MAU was 1.5 million. In contrast, Aihuishou and Paipai had 0.5M and 0.3 MAU respectively.

Second, RERE’s C2B2C remains a capital-intensive strategy, so RERE will need to balance its speed of expansion with its free cash flow.

Finally, like other Chinese companies listed on US markets (NASDAQ Golden Dragon China Index fell 67% TTM), RERE has been haemorrhaging the market since its IPO in June 2021. Although RERE is clearly undervalued, it is difficult to predict how long it will take to recover. Business fundamentals will become more exciting, but investor confidence needs to be rebuilt.