China Government Promotes Green Economy; ATRENEW Stands Out As A Main Enabler (NYSE:RERE)

ATRenew Inc. (NYSE:RERE) is China’s largest pre-owned consumer electronics transaction and services platform. RERE concluded FY23 with revenue of RMB12,965.8 million (+31.4% YoY), marking continued impressive performance over the past three quarters. See my previous articles here, Q3’23: Another Strong Quarter With Strong Revenue Growth, Q2’23: Strong Revenue Growth And Improved Profitability, Q1’23: Well Positioned For Long-Term Growth In Multi-Category Recycling.

The market responded enthusiastically, with a trading volume of 16 million shares, notably higher than the average volume of 2 million shares, alongside a post-earnings-release surge of +27%

RERE reported strong Q4’23 and FY23 Performance

Revenue: Q4’23 revenue was RMB3,873.6 million (+29.9% YoY), consisting of product revenue of RMB3,522.5 million (+31.1% YoY), and service revenue of RMB351.1 million (+19.7% YoY). RERE’s revenue growth significantly outpaced the market growth (+10% YoY in FY23). Its revenue growth was driven by both its transaction volume growth and take rate improvement YoY. As of EOY’23, RERE’s footprint expanded to 1,819 AHS stores offline in 268 cities in China.

Op Loss: Q4’23 saw a significant improvement in profitability. Op Loss was RMB16.7 million as compared to Q4’22 Op Loss of RMB2,210.6 million.

China Government Promotes Green Economy, and RERE Stands Out as a Main Enabler

During the “Two Sessions” on February 23rd, the Central Commission for Financial and Economic Affairs (CCFEA) held its fourth meeting in Beijing. Xi Jinping emphasized the need to “promote a new round of large-scale equipment updates and encourage the replacement of old consumer goods to effectively reduce the overall logistics costs in society.” The implementation directions specifically mentioned “Promoting the renewal and technological transformation of various production and service equipment”, “Encouraging traditional consumer goods to be replaced with new ones, promoting the replacement of durable consumer goods”, and “Promoting large-scale recycling and reuse, strengthening the development of the “replacement + recycling” logistics system and new models.”

This direction aligns with RERE’s mission and is poised to stimulate increased demand for recycling, expediting RERE’s growth. Also it is not just boosting demand, but also gives us conviction that RERE operates in a favorable environment championed by China Government.

RERE Partnership With Apple Progressing Smoothly

RERE has two significant business partnerships. With Apple, RERE has rolled out recycling and trading services on Apple’s official website and at 47 flagship stores, making RMB300 million in Q4’23, an increase of 9x QoQ. RERE became Apple’s 3rd party trade-in partner in Q3’23, and apparently moved very quickly after launch. But I think this is just a starting point, RERE’s future opportunity associated with Apple Trade-in could be much bigger. According to SellCell’s phone users survey, 59% of iPhone users will trade in their old phones when buying a new phone.

RERE Multi Category Recycling Marked RMB1 billion for non-electronic products

RERE’s multi category recycling services expanded to 252 AHS stores in FY23. GMV for non-electronic products hit RMB1 billion watermark. As RERE continues to lead the green economy, multi category recycling demand will continue to grow.

Leveraging its strong online and offline channels, RERE’s expanding from customer electronics to multi-category in my opinion is the best way to grow. Second-hand luxury goods market is currently booming in China, and will continue to grow. One reason is that Millennials and Gen Z, who are core shoppers of secondhand merchandise, tend to seek more affordable luxury goods through channels like AiHuiShou.

RERE’s Stock Valuation and Investment Risks

RERE stock price has been bouncing between $1-$2. Considering its strong growth, favorable green economy policy in China, as well as its progress in partnership and multi category recycling, applying a multiple of 0.25x EV/Sales you will get to a target price of $2.5 (60% upside from current price). For comparison, RERE is currently traded at 0.12x EV/Sales, and 0.28x on average for all historical periods. 0.25x seems reasonable and conservative if we look at public comps: Newegg Commerce (NEGG) 0.3x EV/Sales, TrenDevice [BIT:TD] 0.3x EV/Sales, and Harris Technology [ASX:HT8] 0.3x EV/Sales. The valuation assumes RERE to continue delivering its fast-growing topline in FY24 (+25% YoY), improve profitability (breaking even in FY25), and maintain a similar capital structure going forward.

In terms of investment risks, I see less than what I have been talking about in prior quarters. At this point, economy rebound and policy favorability are both pretty clear in China. The remaining risks will be mainly competition – in an already crowded market, likely there will be new entrants because of government direction in growing recycling.