Company posted its first quarterly non-GAAP operating profits since going public, but its shares still fell amid broader investor concerns about U.S.-listed Chinese stocks

Key Takeaways:

  • ATRenew reported its revenue rose 48.2% in last year’s fourth quarter, as it posted its first quarterly non-GAAP operating profit since listing in the U.S. last year
  • Company is boosting efficiency by doing more recycling at the city level, with a pilot localization program begun in two cities early last year now expanded to 22 cities

By Doug Young

Electronics recycling specialist ATRenew (RERE.US) has just given investors a taste of “profit lite” with its latest financial report showing it earned its first quarterly operating profit on an adjusted basis since going public last June. But it seems those same investors are hungrier for the real thing.

Shares of the company, whose technology-driven platform sees it collect, test and resell millions of smartphones, PCs and other gadgets, initially rose 9% in pre-market trading but later sank by 6.4% after it released its latest quarterly financial report last Thursday showing the profit milestone. The stock continued to be weak the next day.

In fact, ATRenew’s decline was relatively modest compared to some other big Chinese tech names over those two days. E-commerce giant JD.com’s (JD.US; 9618.HK) shares lost 23% over the two trading days, while the suffering Uber-like DiDi Global (DIDI.US) lost half of its value. And the broader Nasdaq Golden Dragon China Index was down around 20%.

But if timing is everything, ATRenew was definitely the victim of bad timing here. That’s because it released its report the same day the U.S. securities regulator issued a separate announcement with far wider implications for the nearly 300 Chinese firms now listed in the U.S. In that announcement it named five such Chinese companies – which didn’t include ATRenew – that could get delisted if the U.S. and China fail to agree on a way to share financial data on the larger group of U.S.-listed Chinese firms.

So, it seems everything is relative and there are things you just can’t control, which is a lesson that all of the U.S.-listed Chinese companies have learned lately. But at least for ATRenew, which formerly went by the name AiHuiShou, the bottom line is one place where it’s squarely focused.

The company posted a 9.7 million yuan ($1.5 million) adjusted net profit in the quarter, excluding costs related to employee stock grants and amortization of intangible assets, representing its first profit in any form since its IPO last June. Here we should note the company was profitable on a similar basis in the fourth quarter of 2020 before the listing, though it slipped back into the red. Perhaps more importantly, founder and CEO Kerry Chen hinted that investors can look forward to more-sustainable profits in the coming quarters.

“We are confident in maintaining this (profitability) going forward with sufficient capital and a clear strategy, we are on the fast track of healthy and sustainable growth trajectory,” Chen said on the company’s earnings call following release of the results. CFO Rex Chen was more direct, saying the company aimed “at achieving operating profit throughout 2022 in the non-GAAP measures.”

As if to drive home the message, ATRenew revealed its cash pile was nearly unchanged at the end of last year, with 2.4 billion yuan in its coffers versus 2.5 billion yuan at the end of September. That shows it’s hardly the type of cash-burning machine that is far more common among the many Chinese high-tech companies that have listed in New York and Hong Kong these last few years.

On a net basis, the company is still squarely in the red, posting a 103.6 million yuan net loss in the fourth quarter, widening from an 82.9 million yuan loss a year earlier.

Syncing with the government  

In writing about ATRenew, we’ve often emphasized how one of the company’s greatest assets is its syncing with government priorities as China focuses on cleaning up its polluted environment and lowering its carbon emissions to achieve carbon neutrality by 2060.

Such government synching is critical to doing successful business in China, greasing the wheels for everything from receiving new operating licenses to getting extra support from the country’s massive web of state-owned businesses. Environmental protection has found a special place on the government agenda lately, which was on display in numerous remarks made at the National People’s Congress, the annual meeting of China’s top legislature, which wrapped up earlier this month.

In this year’s Government Work Report, Premier Li Keqiang emphasized China’s commitment to improve the environment, and pointed out the need to step up waste reduction and boost recycling. “We will improve policies to support environmental protection industries in conserving water and energy and recycling waste and used materials,” Li said, echoing similar goals for second-hand commodities outlined by China’s state planner in 2021 for the country’s latest Five Year Plan.

Going Local with City Level Model

Within its own shop, ATRenew also gave some updates on its recent drive to do more business at the city level, which it has quickly discovered is far more efficient and profitable than trying to create national marketplaces for its recycled products. It said it has now expanded a pilot program begun in two cities last year to 22 cities across China.

ATRenew launched the model with an aim of more rapidly tapping into a market whose circulation of consumer electronic devices is highest in the world. It believes operating a full recycling chain – from sourcing, inspection, to reselling – at the city level will lead to faster recycling and sales of used devices. The company has since been able to raise its local penetration rate to over 50% in some cities, with its B2B gross merchandise value (GMV) up over 100% in 12 cities during the latest quarter.

The company is aiming to rev up that program to cover 50 cities by the end of this year, and to reach 100 over the next three to four years. As it aggressively builds up that part of the business, including a strong focus on brick-and-mortar stores alongside its traditional online strength, ATRenew is aiming to triple its gross merchandise volume (GMV) of goods passing through its system to more than 100 billion yuan by 2025 from 32 billion yuan last year.

As that happens, presumably its revenue growth will continue to accelerate. That growth is already quite respectable, rising 48.2% to 2.4 billion yuan in the fourth quarter, its latest report showed. It said it expects to maintain a similar growth rate in the current quarter, predicting its revenue will rise 42% to 45% for the three months to March to between 2.15 billion yuan and 2.2 billion yuan.

We’ll close with our usual look at how ATRenew stacks up against its peers in valuation terms, though here we should note such figures can change on a daily business due to all the recent stock volatility. The company’s price-to-sales (P/S) ratio is relatively low at 0.75. Carvana (CVNA.US), a U.S. peer that performs similar functions for used cars, trades double that with a P/S ratio of 1.5, while recycled clothing specialist Rent the Runway (RENT.US) trades at an even higher P/S of 1.8.

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