ATRenew Reported Excellent 2023 Results But The Stock Is Undervalued (NYSE:RERE)

ATRenew Inc. (NYSE:RERE), a Chinese online merchant, recently reported very good 2023 earnings results. Afterward, the RERE stock price gained in pre-market trade. However, the shares are down somewhat since the date of my previous article’s release due to the Chinese stock market’s decline and the poor health of the Chinese economy. At the same time, thanks to the company’s business model, a recession is a great chance to make big gains. Potential investors may wish to take this opportunity to buy this undervalued stock.

My previous article on ATRenew

In my previous article on ATRenew, I covered its Q3 2023 earnings and assigned a Buy rating. The earnings were much better compared to the previous period, both in terms of sales and net profits. The management’s outlook was also highly optimistic.

However, the stock price has decreased significantly since that article’s publication. In my opinion, this is due to the overall decline of the Chinese stock market. Moreover, shares of large corporations like Alibaba Group Holding Limited (BABA), JD.com, Inc. (JD), and Baidu, Inc. (BIDU) have low stock betas. In other words, these are less volatile compared to smaller companies’ stocks, like ATRenew’s. At the same time, this temporary weakness could be used as a great opportunity for less conservative investors to buy RERE shares.

ATRenew’s earnings results

Below, I have prepared ATRenew’s earnings summary.

Q4 2023

• Total net revenues increased by 29.9% to RMB 3,873.6 million, or $545.6 million, compared to RMB 2,981.2 million in 4Q 2022.
• Loss from operations totaled RMB 16.7 million, or $2.4 million, compared to a loss from operations of RMB 2,210.6 million in 4Q 2022. Non-GAAP income from operations was RMB 81.6 million, or $11.5 million, compared to RMB 34.6 million in 4Q 2022.
• The number of consumer products transacted totaled 8.5 million, versus 7.5 million in 4Q 2022.

Full-year 2023

• Total net revenues increased by 31.4% to RMB 12,965.8 million, or $1,826.2 million, compared to RMB 9,869.4 million in 2022.
• Losses from operations totaled RMB 173.3 million, or $24.4 million, versus RMB 2,623.7 million in 2022. Non-GAAP income from operations totaled RMB 251.7 million, or $35.5 million, compared to RMB 6.9 million in 2022.
• The number of consumer products transacted totaled 32.3 million, versus 32.0 million in 2022.

Even if you look at this earnings summary, you will clearly see that the company has made some substantial progress.

Now, let us take a look at ATRenew’s earnings and sales track records.

Below is a table summarizing the key quarterly figures.

I have also prepared graphs showing the quarterly sales and income data.

This cannot be easily seen on the graph, but GAAP net income has finally turned positive.

Non-GAAP net profit has also been improving for a while. Particularly good progress was made in Q4 2023.

Very interesting is the fact that all pieces of earnings data have improved. The most notable improvement, in my view, is the fact that the GAAP net profit has finally turned positive.

The annual GAAP net profit for the full year 2023 was also positive, while revenues improved substantially.

Time Period	2021	2022	2023
Revenue	7780	9870	12966
GAAP net profit	-817	-2468	156
Non-GAAP net profit	-169	51	225

Click to enlarge

Source: Prepared by the author based on ATRenew’s data.

In other words, the earnings improvements were indeed substantial.

The management’s comments and outlook

The management noted that ATRenew’s profit and sales growth significantly outpaced the secondhand industry and the consumer sector as a whole.

According to Mr. Kerry Xuefeng Chen, Founder, Chairman, and Chief Executive Officer of ATRenew, the fact that the company prioritizes self-operated businesses that provide better services and user experience has yielded great results. ATRenew’s 1P transaction volume rose by 50% year-over-year in 2023. As concerns to third-party platform businesses, ATRenew adjusted their development strategy and improved the merchant ecosystem and service capabilities. The general platform take rate rose by 92 basis points, totaling 5.39% in 2023. The number of registered merchants on the PJT marketplace totaled 596,000, a 46.2% increase compared to the previous year. This should facilitate further business growth.

ATRenew improved their secondhand supply chain capabilities. At the same time, the company was disciplined, while expanding and investing in new initiatives. This capital discipline also allowed the company to increase its cash holdings. I will comment on this later on in this article.

The company’s strategic priorities are effective customer acquisition scenarios on the recycling front, improving supply chain capabilities, increasing efficiency through technology, and being agile in getting new traffic opportunities and attracting new customers.

As concerns to the management’s outlook, for Q1 2024, ATRenew expects its total revenues to total between RMB 3,550.0 million and RMB 3,650.0 million, representing a rise of 23.6% to 27.1% year-over-year. Interestingly, in Q4 2023, ATRenew beat expectations. So, I would not be surprised if the company’s Q1 2024 results turned out even better than forecast.

Fundamentals and valuations

ATRenew is also financially stable. Its debt level is low, while its cash reserves are high. The debt-to-equity ratio is extremely low, currently standing at less than 0.50 (1 781 618 000/ 3 711 461 000 = 0,48). The cash and cash equivalents rose from RMB 1 703 626 000 in 2022 to RMB 1 978 696 000 in 2023. The current ratio, meanwhile, is RMB 4 526 719 000/RMB 1 691 465 000 = 2.68, a very reasonable indicator, indeed.

Only profitability margins are not so great. However, the earnings results have improved, and the company has finally recorded a positive GAAP net profit.

ATRenew’s valuation ratios are very low compared to the sector’s medians. This is especially true of the company’s price-to-sales (P/S) and price-to-cash flow (P/CF) ratios. Even the P/E non-GAAP ratio is lower than the sector’s median of 14.68.

If the company’s earnings keep improving, we will most probably see sound profit margins, while ATRenew’s stock should appreciate substantially.

Upside risks

To start with, the company operates in the second-hand industry, mostly electronics. That means that it sells inferior goods. This means that the demand for these rises during economic downturns when consumers’ incomes fall. Right now, economic growth in China is slowing down. So, it is likely the demand for the products ATRenew sells will rise further.

Moreover, as reported by the management, China’s government seeks to encourage recycling. Some consumers are also getting cautious about the environment and aim to buy second-hand goods to reduce the environmental impact that excessive production and consumption have. So, this would further enhance ATRenew’s sales.

Then, thanks to ATRenew’s growing earnings and sales but falling stock price, the company seems to be good value for money.

Downside risks

The risks are clear. To start with, it is not a large corporation with an impeccable profit track record. Therefore, conservative investors seeking to benefit from China’s economic recovery might prefer to buy the country’s stock index ETFs or invest in larger companies like Alibaba or Baidu instead. However, stocks like RERE provide much more growth potential. The shares are highly undervalued despite some sound improvements. However, smaller companies are sometimes ignored by the general market just because they are less known to the public.

Conclusion

Despite the excellent improvements in both profits and revenues, ATRenew Inc. stock is still trading substantially below the levels seen a year ago. In my view, this is due to the general decline of the Chinese stock market and the fact that ATRenew is a relatively small business with a volatile stock. But in my opinion, this too shall pass. Investors should eventually see the improving business fundamentals. The Chinese government’s and consumers’ positive attitudes towards recycling should also play a positive role in ATRenew’s business success.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.