By Michael Kim

NYSE:RERE

READ THE FULL RERE RESEARCH REPORT

Pre-market open on 5/20/24, ATRenew (NYSE:RERE) reported 1Q24 earnings results. On a GAAP basis, RERE reported a net loss of $12.9 million for 1Q24, or ($0.05) per ADS. That said, excluding non-cash share-based compensation and intangible assets amortization expenses, adjusted EPS came in at $0.01, shy of our $0.05 estimate. Relative to our model, while both product and services revenue came in above expectations, the EPS miss was mostly a function of higher expenses and less favorable non-operating trends. The quarter included a non-recurring $5.7 million unrealized loss related to holdings of a strategic ecosystem enterprise that went public during the quarter.

We highlight the following key takeaways:

1. Revenue opportunity – casting a wider net: Despite flattening demand for new consumer electronics devices more broadly in China, management remains focused on enhancing recycling penetration rates by increasingly tapping into complementary products and sales channels in order to promote revenue growth sustainability. Indeed, senior officials anticipate total revenues for 2Q24 to be in the range of RMB 3,670 million and RMB 3,770 million, implying year-over-year growth of 24% to 27%.

From a product perspective, ATRenew continues to expand product recycling categories beyond consumer electronics, with a focus on luxury goods (bags, watches, jewelry) given accelerating demand trends. In 1Q24, the transaction value for non-electronics products reached RMB 600 million, up 4x compared to the year-ago quarter. Stepping back, broader product offerings enhance store sales and profitability, all else equal.

Next, ATRenew continues to further monetize partnerships with e-commerce sites by integrating trade-in services at the point-of-sale for new products. ATRenew serves as the exclusive partner of JD.com for consumer electronics trade-in transactions, with the gross market value of trade-in products sourced from JD.com rising by 43% on a year-over-year basis in 1Q24.

Finally, the regulatory backdrop remains favorable, with state and local governments continuing to introduce initiatives to stimulate recycling activity. In March of this year, China’s State Council published an action plan to further promote trade-in activity including subsidies to e-commerce sites and cell phone manufacturers.

2. Ongoing margin expansion: Our model assumes RERE’s adjusted operating income margin continues to trend higher reflecting several key drivers:

? First, management remains focused on expense management and improving profitability, and we look for rising economies of scale as transaction volumes and revenues continue to build.