By Michael Kim
NYSE:RERE
READ THE FULL RERE RESEARCH REPORT
We are initiating coverage of ATRenew Inc. (NYSE:RERE) with a 12-month price target of $4.00, translating into sizeable upside from the stock’s current price. ATRenew is the largest pre-owned consumer electronics transactions and services platform in China, with a focus on mobile phones, laptops, and tablets, as well as luxury goods and household products.
Our investment thesis revolves around ATRenew’s:
1. Differentiated Business Model: ATRenew’s unique business model revolves around three key complementary elements: a) efficiently sourcing pre-owned consumer electronics devices for resale through AHS Recycle’s online platform and offline stores referred to as the company’s Consumer-to-Business (C2B) supply chain; b) integrated marketplace platforms focused on facilitating transactions across Business-to-Business (B2B) and Business-to-Consumer (B2C) channels; and c) proprietary inspection, grading, and pricing technologies. ATRenew’s holistic platform model drives financial and operational efficiencies compared to traditional pre-owned transactions that typically involve various intermediaries, thereby compromising timelines and related economics.
Moreover, ATRenew remains the market share leader in terms of both Gross Merchandise Value (GMV) and the number of pre-owned consumer electronics devices transacted by merchants and consumers, with market shares continuing to roll up. Finally, a key differentiating factor for ATRenew is the company’s eight operations centers that house proprietary inspection/testing, grading, pricing, and data security functions.
2. Multi-Pronged Growth Story: Focusing on the supply side, steady growth in the number of new devices entering the market paves the way for accelerating recycling/trade-in opportunities, particularly as more than 50% of discarded cell phones are left idle by consumers according to recent research. Year-over-year growth in new cell phone shipments in China turned positive in the fourth quarter of 2023 (following 10 consecutive negative quarters), and upgrade frequencies remain stable, as consumers increasingly gravitate toward next generation products coming to market. Notably, the percentage of consumers acquiring new phones via carrier trade-in programs remains meaningfully lower in China compared to the U.S. That said, we look for ATRenew to increasingly leverage the company’s differentiated store network and state-of-the-art trade-in solutions with JD.com and Apple to continue to gain market share and educate consumers, as pre-owned transaction preferences shift.
Turning to demand, we see several powerful enablers driving higher pre-owned transaction activity including a softer than expected economic recovery in China. During periods of economic stress, price sensitivity tends to intensify as consumers adjust to shifting financial realities. Moreover, average selling prices for new phones continue to trend higher, thereby disincentivizing increasingly price-sensitive customers, and stimulating demand for pre-owned devices.
Incremental demand drivers likely include: a) low penetration rates for pre-owned consumer electronics devices, which implies considerable growth potential as consumer behaviors evolve and online transaction platforms increasingly emerge; b) the standardization of inspection, grading, pricing, data security, and logistics practices; and c) a step up in recycling and trade-in activity reflecting government initiatives to promote a Circular Economy. More recently, China’s State Council introduced a plan to promote widespread equipment renewals and trade-ins of consumer goods.
ATRenew remains the market share leader across the pre-owned consumer electronics transaction landscape and well-positioned to continue to gain share, we believe. We look for the company to continue to consolidate market share driven by plans to open ~200 new offline stores per year, broadening recycling capabilities of existing stores beyond consumer electronics, entering into additional brand partnerships similar to current relationships with Apple and Huawei, and more fully leveraging social media platforms.
3. Accelerating Financial Performance: We are introducing 2024 and 2025 adjusted EPS estimates of $0.25 and $0.38, respectively, implying ~90% year-over-year growth this year followed by 50%+ growth in 2025. Key modeling inputs include outsized growth across product (1P markups on proprietarily-sourced devices) and service (3P B2B and B2C platform fees) revenues, as well as material margin expansion. Focusing on the top line, we forecast revenue growth to hold steady in the 25%-30% range through 2025 reflecting accelerating transaction volumes and Average Selling Prices (ASPs) on the product side combined with higher take rates on the services side, as uptake of ATRenew’s value-added capabilities continues to ramp up. Furthermore, we look for operating income margins to meaningfully widen driven by the aforementioned upswing in take rates on top of rising operating leverage, as the platform scales, with operational costs per device continuing to decline.
4. Strong Capital Base to Fund Growth + Capital Return: With RMB 2.9 billion ($402 million) of liquid assets as of December 31, 2023, combined with strong cash flow generation, ATRenew maintains ample liquidity to continue to fund growth and return capital to shareholders. Targeted capital expenditures include: 1) ongoing R&D initiatives, with a focus on technology; 2) upgrading operations centers with automated inspection facilities; 3) wider educational efforts focused on the circular economy and recycle-and-reuse lifestyles; and 4) further expanding and enhancing ATRenew’s offline store footprint via new store openings and existing location upgrades. That said, the company’s asset-light business model and high inventory turnover reduce the need for hefty/extended capital outlays, and in turn provide flexibility to enhance shareholder returns via buybacks. The Board of Directors recently reupped the company’s $20 million share repurchase authorization, with management remaining active on the buyback front.
5. Attractive Valuation, with Plenty of Upside: Given ATRenew’s unique end-to-end business model and long-term growth potential, the current stage in the company’s lifecycle, and the lack of truly comparable stocks, we value RERE shares based on our DCF model which points to a fair value of $4.00. Furthermore, our analysis of peer valuation multiples supports our DCF-based price target. At a high level, despite what we believe to be conservative inputs/assumptions, our valuation work suggests a wide disconnect between ATRenew’s fundamentals and the stock’s current price. The current discrepancy seemingly offers investors an attractive entry point as awareness and appreciation of the company’s business model, competitive positioning, and growth prospects increasingly emerges.
Our report provides a deep dive into ATRenew’s unique business model (including overviews of the company’s C2B, B2B, and B2C businesses), key growth drivers, and our financial model. In addition, we introduce the senior management team and walk through our valuation work including our DCF model assumptions and relative multiple analysis.The final section summarizes what we believe to be key investment risks specific to the macroenomic backdrop, circular economy uptake, and competitive and regulatory landscapes in China, as well as ATRenew’s strategic partnerships.
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