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ATRenew (NYSE: RERE) has released third-quarter unaudited results. These show a further rise in revenues (29% up YonY), a reduced loss from operations, and a move from an adjusted loss to a profit. These details from the business itself should at least perk our interest. 

The move to profit, by that adjusted measure, is easily enough explained. There's an overhead to doing anything and revenues and value add must be high enough to cover those. So, assuming that the costs of operations stay static (not an assumption we are making here, just a piece of logic) then each additional piece of business covers its own costs and makes a contribution to covering that overhead. The sweet spot for a business is when marginal business adds nothing to overhead - that already being covered - and so marginal value ad flows through directly to the bottom line. 

ATRenew isn't there yet as there is still that operating loss. But we are seeing the business beginning to get there. Sales volume and margins are growing into funding that overhead base that is. Once they do so fully it's reasonable to expect a significant net profit margin. 

It's also worth looking at these two points:  

Total Gross Merchandise Volume ("GMV[2]") increased by 14.5% to RMB9.5 billion from RMB8.3 billion in the third quarter of 2021. GMV for product sales increased by 31.6% to RMB2.5 billion from RMB1.9 billion in the third quarter of 2021. GMV for online marketplaces increased by 9.4% to RMB7.0 billion from RMB6.4 billion in the third quarter of 2021.

A number of consumer products transacted[3] increased by 5.1% to 8.3 million from 7.9 million in the third quarter of 2021.

Gross volume increased by less than margin gains. The volume of products by less than either of those. This means that margins are increasing upon each piece of business and also that each transaction is of higher value. That's the only way we can gain higher overall turnover and also margin on a smaller increase in pieces transacted. This is good - higher margin businesses are, obviously, better businesses to be invested in. 

For more details of the accounts do read the linked release. 

The other things we want to know about a business are first, is it in the right business line? Secondly, what's the economic background like where it's trying to do business?  

For ATRenew that first is that it's in the circular economy of taking used electronics out of circulation, repairing or reforming, and then putting back into circulation again. At the most basic level of course this is a good idea - better to reuse something than recycle it. But with electronics this is even more so. Much too much of consumer electronics is replaced on the fashion cycle, leaving a good deal of kit entirely usable and worthwhile, but just not entirely wanted by the original owners. As I once described this elsewhere:

ATRenew (NYSE: RERE) is a pre-owned consumer electronics transactions and services platform in China. Building their own ecosystem in fact, taking in used equipment, inspecting, grading then pricing it, then putting it back out into the market for further use. This is clearly something that could make money - we see many people doing so in our own markets. It's also something that meets modern objectives of creating that circular economy and thereby meets with political applause in the Chinese market.

There's an importance to this in China. The economy there is guided and doing those things which meet with the guidance is a good business line to be in. So, that's good for ATRenew. Over and above those numbers which are moving in the right direction.

Then we need to move on to the second, which is the general economic conditions inside that economy. It's possible to have the most lovely business idea and line but if more general economic conditions are bad it can become overwhelming. This means that we need to think about the Chinese macro economy as well as this specific business line. 

The disruptions of covid have obviously had an effect. But there's something else there, which is that the Chinese construction industry has been very worrying. The size of it, given the size of the whole economy, means that the debt overhang has been a considerable worry about the future of the economy. Certainly, a badly managed cooling of that sector could lead to very much slower growth in the near future. Just in these last few days, we've had the announcement that it's likely to all be resolved by a government-backed debt-for-equity swap. Along with funding to make sure construction is completed and so on. That is, there's unlikely to be any significant loss of consumer spending power as a result of problems in the construction sector. 

That's not directly linked to ATRenew - which is why we refer to it as the macroeconomic background. But it will influence more general business conditions - for the better, of course, sorting that problem is a good thing. 

It's also possible to think about international economics, the Xi-Biden meeting, the restrictions on the export of high-end US tech, and so on but that's all not going to impact upon a company like ATRenew which works almost exclusively within the domestic economy. Only in so far as those more general issues have an effect upon the economy as a whole. 

So, in summary, we have a business in an interesting area of the economy, turning around pre-used electronics. This is obviously a growth area. We can also see that it's in line with the more general management of the economy, that desire for circularity. The Chinese economy more generally seems to be sorting its way out of the most likely macroeconomic problem, that construction sector. Then, at the corporate level, we have the numbers moving in the right direction. Not there yet - it's not making a net profit - but margins are moving in the right direction, overheads are getting closer to being covered, and so on. We could if we held marginal costs flat (ie, the costs of handling each new piece of kit don't rise) build a model in which real net income is right around the corner. 

ATRenew is an interesting business both in itself and as a part of what is still the fastest-growing large economy on the planet. It's definitely worth a close look.

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