ATRenew: Taking Proactive Steps Integrating ESG into Circular Economy

China, which currently is a huge energy consumer, has committed to achieving peak greenhouse gas emissions by 2030 and advancing towards complete carbon neutrality by 2060. These ambitious objectives have ignited a surge in the Chinese market for recycling and trading pre-owned electronics, which aligns to the concept of environmental, social, and governance (ESG) well. And China's slowing economic growth as well as consumers' willingness to tighten their expenditure also give rise to such-call circular economy. ATRenew (RERE: NYSE), China's largest second-hand 3C (Cameras, Computers, Cell phones) e-commerce platform, has emerged as a prominent beneficiary of both these pivotal trends, as its annual revenue nearly doubled over the past three years, reaching 2022. 

Among the expanding roster of major Chinese enterprises that have embraced ESG principles as core tenets of their corporate ethos, ATRenew stands out alongside tech giants such as Alibaba (BABA: NYSE; 9988: HK), Tencent (0700: HK), and short-video platform Douyin under ByteDance. The company is particularly noteworthy for its proactive integration of ESG strategies within its internal operations, establishing a leadership position within the industry.

ATRenew revenue surges in Q2 

ATRenew unveiled its unaudited Q2 financial results on August 23, 2023, revealing a remarkable achievement of a record-high non-GAAP quarterly operating earnings totaling CNY 51.98 million (USD 7.14 million).

As per the disclosed financial report, RERE's revenue in the second quarter of 2023 soared to CNY 2,963.7 million (USD 408.7 million), marking a substantial year-over-year growth of 38.1%, albeit accompanied by a marginal dip in the number of consumer products transacted, which stood at 7.7 million. Impressively, the operating loss contracted to CNY 61.0 million from CNY 168.2 million in the second quarter of 2022. Notably, the company achieved a record high non-GAAP operating profit margin, surging from -2 percent during the same period last year to 1.8 percent in the second quarter.

Furthermore, during the second quarter, RERE's fulfillment expenses, measured as a percentage of total revenues using non-GAAP metrics, reduced to 8.8 percent from 9.1 percent in the prior quarter, in accordance with ATRenew’s disclosure. 

In terms of revenue structure, the company's revenue derived from 1P products exhibited robust growth, surging by 42.2% year over year to reach CNY 26.37 billion in the second quarter. This substantial increase was primarily propelled by the sustained surge in the "old-for-new" and pre-owned product sales trend, even in the face of a plateaued consumption growth trajectory. Concurrently, revenue generated from 3P services reached CNY 330 million, reflecting a notable year-over-year increase of 12.1%.

The recycling pioneer’s commitment to ESG and green future

Known as the pioneering overseas-listed mainland firm regarding ESG, ATRenew also made its voice heard in promoting China's eco-conscious transition. On June 20, 2023, ATRenew released its third annual ESG report, underscoring its unwavering commitment to environmental sustainability and responsible business practices. 

In the environmental dimension, ATRenew has been resolute in its pursuit of eco-friendliness. Originally specializing in smartphone recycling, the company has progressively expanded its scope to encompass all consumer electronics and select products, for example, bags and watches. As indicated in the report, the company cut the intensity of greenhouse gas emission emissions by 18.9% from 2021 to about 0.3 tons of CO2 equivalent per million-yuan last year — the third year in a row with decreased carbon emissions. This basically means that the company has been producing less greenhouse gas to generate every 1 million yuan in revenue. Also, the company recycled and oversaw the responsible recycling and green disposal of approximately 270,000 units of outdated or dilapidated electronic devices during the past year, effectively curtailing e-waste by a substantial 43.2 tons through environmentally friendly dismantling practices. 

In its ongoing commitment to sustainability, ATRenew undertook measures such as reusing 18 tons of packaging fillers for business-to-business parcels and recycling and repurposing 36,000 packaging boxes for business-to-consumer (B2C) orders. ATRenew further reinforces its environmental stance by mandating its suppliers to adopt a systematic approach to classify, recycle, and reuse metal materials at the culmination of dismantling processes.

 However, ATRenew's story it's not just all about the "E" in ESG, but also about the social and "governance" elements that round out the concept.

In terms of its commitment to social responsibility, ATRenew acquired higher-level of certification, underscoring its dedication to ensuring high standards in its operations. Furthermore, the company displayed its philanthropic spirit by contributing a cumulative sum of CNY 1 million to various charitable initiatives during the reporting period. The company’s unwavering commitment to fostering talent was also proved in its robust recruitment and training efforts, which included specialized training sessions benefiting over 8,000 merchants affiliated with PJT Marketplace.

It is worth noting that ATRenew, through co-branded collaborations, is jointly advocating for a sustainable circular consumption model with more consumer brands. These collaborations involve influential names include PurCotton (Chinese: 全棉时代), CapitalLand, WonderLab, Freshippo (Chinese: 盒马鲜生), ChocDay (Chinese: 每日黑巧), and Tencent Charity, collectively driving forward the agenda of environmentally conscious consumerism. 

ATRenew also made commendable progress in improving its corporate governance practices, a facet often viewed as a key vulnerability for Chinese enterprises, which are often known for their inequality, corruption, fraud, and short-term profit target. Demonstrating proactive measures to rectify this, the company took deliberate steps to diversify its board of directors. As of June 2023, the board comprised an impressive 37.5% of independent directors, contributing to a well-rounded and impartial decision-making process. Additionally, the inclusion of 25% female directors underscores ATRenew's commitment to gender diversity within its leadership structure, further enhancing its governance credentials.

The company has also made notable advancements in fortifying its risk and incident management capabilities. It has established a Risk Management Committee (RMC), the senior management of which manages and supervises the implementation of the risk management and internal control systems, and also, makes pre-warning to each risk discovered. According to its disclosed ESG report, in 2022, a total of 11 RMC meetings were held to discuss 34 risk issues, and the company carried out 4 audits for anti-fraud investigation, inventory and procurement management, with a defect rectification completion rate of nearly 90%.

Bottom line

ATRenew received a ESG risk score of 17.6 (the lower score the better) from Sustainalytics, which means the company is at "low risk" of facing ESG-related problems, ranking 4th out of 85 online and direct retail companies rated globally by Morningstar; though it is near the middle of the pack for the broader retail sector in terms of its ESG-related risk.

However, this should have been a piece of news to boost the stock price, nevertheless, it has not changed the situation of RERE's stocks being undervalued. ATRenew shares have lost near 85% of their value since the company went public in 2021. As of press time, it closed at USD 2.11 apiece, with a market cap of USD 471 million and a price-to-sales (P/S) ratio of just 0.34.  

This is not that "sustainable". Indeed, amidst the dynamic competitive landscape confronting Chinese second-hand market players, the pressures emanating from formidable competitors like Xianyu, Zhuanzhuan, and Paipai should not be underestimated or overlooked. But we positively believe that, once the company proves it can generate sustainable profits while ticking all the right ESG boxes, investors may start to give it a strong second look.