ATRenew Inc. (NYSE: FLY) is China’s largest used consumer electronics transaction and service platform. As of 09/30/2022, RERE has 1,804 stores (599 1P stores, 1,189 3P markets and 16 Paipai Selection) in 256 cities.
My previous article “ATRenew Expanding In non-electronics categories in 2Q22 provides new imaginative space,” released after RERE’s 2Q12 and 2Q22 earnings discussed its growth potential by expanding into new categories. RERE’s share price fell from $3 .06 to $1.65 over the last three months. RERE is now trading at 0.2x total enterprise value/NTM revenue and 0.7x P/B. I see great values for a sector leader with high double-digit year-over-year revenue growth and decreasing operating losses.
Q3-22 Financial results
Revenue: RMB 2.54 billion, +29.2% YoY; Operating loss: -110 million RMB, against -150.5 million PY; Non-GAAP operating income: RMB 11 million vs. PY -28.5 million; Total GMV: RMB 9.5 billion, +14.5% YoY.
RERE revenue growth accelerated from 15% in Q2-22 to 29% in Q3-22. On a QoQ basis, revenues increased by 18%.
Another thing to mention is that RERE’s operating margin improved by 333 bps YoY and 350 bps QoQ. Operating expenses as a % of revenue were down 595 bps YoY and 262 bps QoQ. The improvement demonstrates RERE’s efforts to achieve operational efficiencies and economies of scale. I am positive on RERE’s ability to bridge the yield gap over the next few quarters.
RERE operates the largest used consumer electronics transaction and service platform and continues to drive business scale and efficiency through automation
RERE manages B2 C2B2C closed supply chain and our automation technologies. One thing that sets RERE apart from other competitors is its investment and commitment to drive business scale and efficiency through automation. In order to create more value (or transfer more value) to consumers, RERE should try its best to expand its top line while reducing its operating costs. RERE did this through automation and I think it was the right investment. The following figure shows the most recent start-up of an automated operations center in southern China, which has demonstrated improvements in transmission performance, quality inspection capabilities, and storage capacity compared to an existing operations center such as the Changzhou Operations Center.
The success of automation and management efficiencies will ultimately be reflected in RERE’s operating margins.
The used consumer electronics market will grow to RMB 885 billion in 2025 (over 30% CAGR ’21-’25) and is expected to accelerate further as technology advances
According to iyiou.com, the used consumer electronics market will grow from RMB 406 billion in 2021 to RMB 885 billion in 2025 (over 30% CAGR ’21-’25). Growth is driven by strong supply.
According to GlobalData, China’s consumer electronics segment will reach $28 billion in 2021, and China is among the world’s top consumers of consumer electronics. I expect the growth of consumer electronics to accelerate in the future as consumers will need more new devices with the development of 5G, social media, AI, IoT and ultimately the Metaverse.
Also, the second-hand market penetration of general consumer electronics is currently low (3.7% in 2020 according to China Investment Corporation, CIC) and has plenty of room for growth. The following figure shows that on average, consumers in China upgrade their smartphones every 16 to 18 months. However, consumer electronics have commercial value over much longer periods. For example, an iPhone has a trade-in value of up to seven years, and an Android phone has a trade-in value of up to three to four years.
The growing Gen Z population and rising spending will continue to drive future RERE growth
I think RERE’s business model will continue to gain strength from the demand side, especially from Gen Z. According to iyiou.com, consumers aged 14-40 have ~61.8% pre-owned penetration. The following figure shows the breakdown of monthly income and % consumption by category. 3C electronics shows significant penetration for consumers with different monthly incomes.
I expect the younger generations of Gen Z to also be active adopters in the future, which will lead to incremental growth on the demand side.
In addition, as RERE launched new categories such as luxury goods and gold, consumers with higher income (eg RMB 20,000 above) are likely to further increase their spending in second-hand categories.
RERE is an attractive stock given that 1) RERE is a leader in a huge and growing used electronics market with significant drivers on both the supply and demand sides, and 2) RERE is making the right investment to expand your business profit and improve your bottom line through automation.