IPO-bound recycling specialist could be valued higher than U.S. stalwart eBay on potential for its services business and international expansion

Key points:

  • AiHuiShou has strong growth potential due to its positioning as a trusted middleman facilitating the sale of used electronics
  • Company could be valued strongly due to big growth for its service offerings and international expansion potential

By Doug Young

“Let the buyer beware,” is a common English saying that especially applies to used goods. When it comes to expensive items, like cars and electronics, buyers are often reluctant to buy such used goods for fear of ending up with a lemon. And when that happens, good luck getting your money back if you bought the item from an individual seller on the internet.

The potential for solving those kinds of buyers’ dilemmas is the big attraction behind used goods specialist AiHuiShou International Co. Ltd., which has just filed for a New York IPO. The fact of the matter is that many people already buy used cars, PCs and smartphones to save some money. But many others might make such purchases if they felt more confident about not ending up with a dud, which is where AiHuiShou is trying to provide assurances.

The company has a number of other attractive elements as well, including its potential to act as a channel for selling millions of used Chinese electronics into less developed markets. Another major attraction is its growing services business, including providing inspections and repair services for used devices to make them ready for resale.

All that said, let’s delve into the nuts and bolts of AiHuiShou’s IPO prospectus, which was filed last Friday in New York. The company, whose name means “Love Recycling” in Chinese, has given a $100 million figure for its fundraising target. But a Reuters report in April indicates its aspirations could be quite a bit bigger, citing sources saying it is targeting between $500 million and $1 billion.

That same Reuters report says the company is looking for a valuation of $4 billion to $5 billion, so we may as well begin by looking at that factor. Before we do that we should note that the usual price-to-earnings (PE) comparisons are impossible to use here since AiHuiShou is currently losing money, a decade after its founding as a used phone seller.

The company’s losses have been steadily narrowing since 2019, and in this year’s first quarter the figure shrank by about half to 94.8 million yuan ($15 million) from 186 million yuan for the same period of 2020. At the same time, its revenue growth has been accelerating and the figure more than doubled to 1.5 billion yuan in the first three months of 2021 from a year earlier.

One of the best comparables in this instance could be C2C stalwart eBay, which also lets individuals trade products with other consumers on its platform. eBay had a price-to-sales (P/S) ratio of 4 based on its sales for 2020. The same ratio for AiHuiShou would give it a value of about $3 billion.

But AiHuiShou really does look like a more-interesting prospect than eBay due to its location in China and much faster sales growth. The Chinese company also has a business model with a large and growing component from services that could easily become its big bread winner in the future. Accordingly, a valuation in the $4 billion to $6 billion range seems easily possible.

Service Proposition

We’ll spend the rest of this review looking at two of AiHuiShou’s facets that seem to set it apart from companies like eBay, namely the big potential of its services operation and also its big potential for international expansion.

From the service perspective, AiHuiShou is a relatively unique online marketplace proposition, due to its concurrent operation of a network of brick-and-mortar stores and service centers. Specifically, the company runs a network of seven centralized operation centers and 23 city-level operation stations.

Those are complemented by a network of more than 700 offline stores and 1,500 self-serve kiosks, some provided through a partnership with local smartphone giant Xiaomi. Its major backers also include e-commerce giant JD.com, which owns 34.7% of AiHuiShou.

“This standardized processing creates widely accepted benchmarks for quality and pricing in the industry,” the company’s prospectus says. It notes that such centers can also help sellers with functions like data transfers, as well as data erasing to make sure the ultimate new buyer doesn’t end up with access to all of your photos, phone numbers and other personal data.

Within its total revenue pie, revenue from services has growing many-fold since AiHuiShou began building up that part of the business a few years ago. The figure reached 203 million yuan in this year’s first quarter, nearly triple the figure from a year earlier, accounting for 13.5% of total revenue during the latest three-month period. By comparison, services revenue was just 5.1% of the company’s total in all 2019.

The other interesting slice of AiHuiShou’s story is its potential to funnel the millions of products that cross its platforms each year into overseas markets, particularly ones at similar level of development or lower to China where something like a 5- or 6-year-old iPhone might still have some value.

The company cites a research report saying 538 million new consumer electronic devices were sold in China last year – more than the U.S. and Europe combined. It further estimates there were about 2.6 billion electronic devices in China that still had some value last year, even though many of those weren’t actually being used.

The company, which is easily China’s largest electronics reseller with about 7% of the market, said it sees channeling some of those products to international markets in Southeast Asia, Latin America and Africa as an important growth driver. It would do that by working with local wireless carriers and device resellers, eliminating the need to set up complex local networks.

The bottom line is that this company looks well-positioned in quite a number of ways to emerge as a major global player providing online and offline goods and services for buyers and sellers of used electronics. It could also benefit through tie-ups with big electronics brands to showcase its recycling nature, which looks likely to emerge as a major selling point as environmental protection, itself, becomes an increasingly strong selling point.

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