By Michael Kim

NYSE:RERE

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Ahead of 1Q24 earnings to be released pre-market open on Monday, May 20, 2024, we are updating our model to reflect first quarter seasonality and the challenging macroeconomic backdrop in China. More specifically, our 1Q24 adjusted EPS estimate remains unchanged at $0.05, as slightly lower revenue assumptions for the quarter were not meaningful enough to move the EPS needle. That said, our full year estimate edges down by a couple of pennies from $0.25 to $0.23 reflecting flatter revenue and margin trajectories for the remainder of the year. Looking out to 2025, our adjusted EPS estimate remains unchanged at $0.38, as does our $4.00 DCF-derived price target.

For the quarter, we now forecast total net revenue to come in at RMB 3,562 (still within management’s prior guidance range of RMB 3,550 to RMB 3,650) or $493 million. Our modestly lower forecast reflects three key drivers:

? First, ATRenew’s (NYSE:RERE) revenues are typically lowest in the first quarter of the year given the Lunar New Year holiday in China.

? Second, macroeconomic conditions remained somewhat mixed in China during the quarter. While GDP data from select provinces ticked higher, the forward outlook remains uncertain in light of lingering concerns around consumer demand/confidence and deflationary risks.

? Third, 4Q23 volumes and revenues were somewhat skewed by cell phone upgrades from both Apple and Huawei during the quarter, which drove a step-up in trade-in volumes.

Looking ahead, we still expect quarterly and annual revenue growth of ~25% through 2025 reflecting rising transaction volumes and GMVs for AHS Recycle, as well as higher take rates on average across the B2B and B2C platforms, as integration of ATRenew’s value-added services continues to ramp up.

Turning to margins, we modestly dialed back our 1Q24 assumptions primarily reflecting lower revenues and stepped-up advertising expenses around the Lunar New Year. For the full year, we now forecast ATRenew’s adjusted operating margin to come in at 2.5%, then trend higher to 3.5% in 2025.

Key margin expansion drivers include: 1) rising operating leverage reflecting further operation center upgrades; 2) an ongoing focus on driving a more efficient cost structure; 3) increasingly monetizing value-added and advanced logistics services; and 4) a step up in higher-margin refurbishing activity.

Stepping back, we remain optimistic that ATRenew’s differentiated pre-owned consumer electronics transactions and services platform in China will continue to drive outsized growth in transaction volumes, sales, fees, and profits over the long run.