ATRenew Breaks Even in 2023: Undervalued Opportunity?

Key Points:

• ATRenew reported its 4Q2022 and full-year earnings results.
• According to the non-GAAP accounting standards, the company has managed to break even for 2022.
• ATRenew resells second-hand goods, mostly electronics. This market has lots of growth potential. Even if an economic downturn happens, it is unlikely to have a severe effect on demand.
• ATRenew does not have a brilliant profit history. But RERE stock offers growth potential thanks to the industry’s future and the shares’ undervaluation.

Although the macroeconomic situation in China was complicated in 2022, ATRenew (NYSE: RERE) still managed to report a substantial net revenue rise. Although I prefer conservative and profitable businesses, I am optimistic about ATRenew’s business idea and its low stock valuations. Let me explain this in some more detail.

ATRenew’s earnings

ATRenew’s Non-GAAP EPS for the fourth quarter of 2022 was $0.02, just $0.01 less than expected. The sales for the quarter surged by 22.4% year-on-year totaling $432.2 million, beating the analysts’ expectations by $14.5 million.

ATRenew’s 2022 net GAAP results were negative. But the company’s full-year non-GAAP net profit was positive last year.

ATRenew’s quarterly earnings history (in a million renminbi)

Source: Prepared by the author according to ATRenew’s data

ATRenew’s quarterly earnings history (in a million renminbi)

Source: Prepared by the author according to ATRenew’s data

ATRenew’s annual earnings (in a million renminbi)

Source: Prepared according to ATRenew’s data

ATRenew’s annual earnings (in a million renminbis)

Source: Prepared by the author according to ATRenew’s data

The graph above suggests ATRenew’s revenues have been increasing since the company’s listing on the NYSE in 2021. The non-GAAP loss has declined and the company broke even for 2022.

The GAAP net result for 4Q2022 was negative due to impairment losses of RMB1,819.9 million and RMB206.9 million on goodwill and intangible assets, respectively. At the same time, there are no reasons to worry because the company’s cash position wasn’t affected. ATRenew’s 1P business grew by 30.4% for 2022 thanks to the company’s control of its supply chains.

During the post-earnings conference call, ATRenew’s CEO Mr. Kerry Xuefeng Chen, stressed the importance of new technologies for cost reduction. The company’s major operation centers in China already bring these cost benefits through automation. One of these is located in Dongguan.

In Q1 2023, ATRenew started partnering with a large mobile consumer electronics brand, which will help to improve RERE’s recycling and customer satisfaction standards.

Although the company remains conservative in opening new physical offline shops, ATRenew has increased its presence in major cities like Nanjing, Hangzhou, Xi’an, and Suzhou. According to the press conference, there is very good demand for the used items. So, the management is optimistic.

ATRenew’s financial indicators

ATRenew does not have a long history of high net profits, which conservative investors might not like. At the same time, the company is in a very good financial shape. The data below come from GuruFocus. Please have a close look at the company’s debt and cash ratios.

Source: GuruFocus

Source: GuruFocus

Source: GuruFocus

ATRenew’s liquidity allows it to pay for its operations and service its debt.

Another critical point is that the company’s cash indicators have improved throughout its history. The same can be said about its debt level. Another good sign for investors is the fact ATRenew buys back its stock. A struggling company cannot afford to do this.

ATRenew’s business model

ATRenew is considered to be the top second-hand consumer electronics platform of China. But the good thing is that the company does not solely focus on selling used laptops or smartphones. ATRenew has also moved to sell used luxury goods, including unopened premium alcohol bottles, jewelry, handbags, and watches. Diversification is just one benefit of this move.

A few decades ago, Chinese consumers started showing a clear interest in top foreign brands. But not everyone can buy a new luxury good from a premium-class boutique. The company can help here. Its customers can now buy second-hand goods from ATRenew’s online platform. Since the items are original brands, the quality is not worse than luxury items sold in boutiques. Yet, the items ATRenew sells are much cheaper. That is why I think there should be demand for these goods.

ATRenew can also potentially earn high margins. Some customers would resell their unneeded goods for hardly any money. Buyers, meanwhile that have been dreaming about prestigious brands would be happy to take this opportunity to buy these goods at a discount.

Another advantage of ATRenew’s business model is that it directly sells products to consumers. This allows the company to keep its costs relatively low.

ATRenew is primarily based in China.

Source: GuruFocus

The People’s Republic of China depends on the global economy’s well-being because China is an export-oriented economy. At the same time, ATRenew’s business does not rely on too many external factors, including, for example, foreign exchange rates. Moreover, China is still expanding rapidly and has many market opportunities for used electronics as can be seen from slide 10 of ATRenew’s earnings presentation below.

Source: ATRenew

Moreover, ATRenew sells pre-owned items that are usually bought by consumers with rather lower incomes. These products are so-called inferior goods. So, even if there is a recession, some consumers might switch to second-hand goods.

Valuations

RERE stock is trading relatively low, given the fact, its historical high was close to $17.50.

Data by YCharts

The shares are trading over and above the 52-week low of $1.52 but substantially below the one-year high of $4.49 per share. We cannot use the price-to-earnings (P/E) measure to judge the company’s valuations because RERE has been recording GAAP losses for a while. That is why I am now using the price-to-sales (P/S) ratio.

Data by YCharts

A good P/S is usually between 1 and 3. RERE’s P/S is currently standing at around 0.5 as I am writing this. Yes, ATRenew is not particularly profitable but it has managed to break even for the whole of 2022. That is why RERE stock is undervalued as far as its P/S is concerned.

Data by YCharts

The same is true of ATRenew’s price-to-book (P/B) ratio. A P/B should ideally be between 1 and 3, whilst ATRenew’s is around 1.1 right now. This also suggest undervaluation. Let us not forget that ATRenew’s financial position is sound.

Risks

Sure, there are always downside risks to any sound investment.

• The most obvious risk is that of a long-lasting crisis. Many equities will highly likely get much cheaper than they used to. But fortunately for ATRenew, second-hand products are inferior goods, which means the demand for these will likely increase if consumer incomes plunge. The massive reopening in China also seems to be a big positive.
• The fact ATRenew cannot boast a long profitability record might scare conservative investors. But the GAAP losses were primarily due to intangible equity impairments. The company has lots of cash and little debt.
• Some US-based investors might be concerned that ATRenew is a Chinese company because of the Chinese accounting standards and also the delisting threat. But there is no need to worry too much. In order to get listed on the NYSE, foreign companies should follow US regulations. Moreover, ATRenew is not on the top of list of the companies to be delisted since it has not faced any accusations from the SEC.

Conclusion

RERE stock is not too risky despite having plenty of growth potential. The shares are cheap, whilst the company operates in an industry with a bright future. The company’s business would not be badly affected even if an economic downturn happened, I think. Conservative investors would probably do well if they didn’t buy the stock. Yet, RERE is a good pick for a growth investor interested in Chinese businesses.