ATRenew - Q1 2024

Transcript

Operator (participant)

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to ATRENEW Inc.'s first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. We will be hosting a question-and-answer session after management's prepared remarks. Please note, today's event is being recorded. I will now turn the call over to the first speaker today, Mr. Jeremy Ji, Director of Corporate Development and Investor Relations of the company. Please go ahead, sir.

Jeremy Ji (Director of Corporate Development and Investor Relations)

Thank you, Joe. Hello, everyone, and welcome to ATRenew's first quarter 2024 earnings conference call. Speaking first today is Kerry Chen, our Founder, Chairman, and CEO, and he'll be followed by Rex Chen, our CFO. After that, we'll open the call to questions from analysts. The first quarter 2024 financial results were released earlier today. The earnings release and investor slides accompanying this call are available at our IR website, ir.atrenew.com. There will also be a transcript following this call for your convenience. For today's agenda, Kerry will share his thoughts of our quarterly performance and business strategy, followed by Rex, who will address the financial highlights. Both Kerry and Rex will join the Q&A session. Let me cover the safe harbor statements.

Some of the information you hear during our discussion today will consist of forward-looking statements, and I refer you to our safe harbor statements in the earnings press release. Any forward-looking statements that management makes on this call today are based on assumptions as of today, and that ATRenew does not take any obligations to upgrade our assumptions on these statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings press release, which contains the reconciliation of non-GAAP measures to GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB, and all comparisons are on a year-over-year basis. I'd now like to turn the call over to Kerry for business and strategy updates.

Speaker 7

Hello, everyone, and welcome to ATRenew's first quarter 2024 earnings conference call. We are very pleased to share with you our recent developments, pivotal growth drivers, and business strategy. Hello, everyone, and welcome to ATRenew's first quarter 2024 earnings conference call. We are very pleased to share with you our recent developments, pivotal growth drivers, and business strategy. Hello, everyone, and welcome to ATRenew's first quarter 2024 earnings conference call. We are very pleased to share with you our recent developments, pivotal growth drivers, and business strategy.

Strategically, we remain committed to our core development principles, which focus on developing recycling scenarios and supply chain capabilities. On sourcing used products, we continue to leverage effective user conversion scenarios to secure first-hand, high-quality supplies through JD.com, Apple's official trade-in program, and our offline AHS Recycle stores.

...We acquire customers and build our brand through these scenarios. On the supply chain, we enhance operational efficiency through our next level automated quality inspection systems. With compliant refurbishment, we also improve product standardization and customer access to more ample choices of like new electronic products.

Kerry Chen (Founder, Chairman and CEO)

回收场景是爱回收EP业务的壁垒。就三个主要来源来看，第一，京东零售场景的以旧换新渗透率进一步提升，二手业务在京东受到的关注度持续提升。在国务院印发大规模消费品以旧换新行动方案的通知以来，我们看到一些城市推出了地方层面的行动方案，品牌厂商也积极发起补贴计划，推广以旧换新。京东发起了一项落实手机3C数码产品以旧换新的专项扶持计划，整合30亿元，30亿元人民币加码以旧换新补贴，目标未来三年通过以旧换新撬动新品销售超1,000亿元。在该项目的落实过程中，京东联合手机3C独家回收合作伙伴爱回收，共同加强端到端的供应链能力建设，持续优化以旧换新的服务流程和用户体验。一季度，京东来源的以旧换新的回收额同比增长43%。在京东的大力支持下，我们将共同加强战略联动。

Speaker 7

Occupying these precise recycling scenarios fortifies the competitive edge of our 1P business. Firstly, JD.com continues to bring strong momentum to the growth of our product revenues. As JD pays greater attention to the second-hand goods business, our recycling and trading business penetrated further to JD's new product sales business. In addition, in March 2024, China's State Council released an action plan to promote large scale trade-ins of consumer goods, and municipal action plans followed. Brand manufacturers are also enthusiastically participating by offering trade-in promotions. JD has announced the launch of a dedicated plan promoting trade-in for consumer electronic products, which include a CNY 3 billion subsidy. The goal is to drive new product sales exceeding CNY 100 billion in the next three years.

To implement this initiative, JD has partnered with AHS Recycle, its exclusive used consumer electronics supply chain partner, to enhance end-to-end solutions and continuously optimize the service process and user experience related to trade-in. In the first quarter of 2024, the growth recycling transaction value of trade-in products sourced from JD.com increased by 43% year-on-year. Together with JD.com, we will continue to strengthen strategic cooperation.

Kerry Chen (Founder, Chairman and CEO)

第二，在苹果官方回收的场景中，我们为苹果中国区官网以及线下47家Apple Store零售店的用户提供有竞争力的报价，并通过苹果店员为用户提供简洁优雅的回收体验。用户参与换购升级设备还能省一笔，一举三得。由于苹果官方渠道特殊的报价机制和一些市场因素，去年第四季度的运营对于毛利率产生了一些负面影响。但从今年开始，我们优化了回收报价策略。我们相信苹果在主流市场和用户心中的位置无可替代，我们将持续优化服务，通过成本可控的优质货源获取路径，以及对热门型号更有利的、更高效的销售能力，获取稳健的经营利润。

Speaker 7

For trade-ins originating from Apple's official program, we serve Apple's customers with competitive, competitive offers through Apple's official website and 47 Apple stores in mainland China. At these flagship retail stores, Apple staff provide hassle-free trade-in services. Customers pay a smaller amount of money when buying a new device, if they choose to trade in. It's a joyful way to upgrade electronic products.

Due to Apple's unique pricing mechanism and some market factors, in the fourth quarter of 2023, it had a negative impact on our gross profit margin. However, since 2024, we have optimized our front-end bidding strategy. Our approach is rooted in Apple's predominant customer mind share, especially in major cities in China. Looking ahead, we remain committed to optimizing our services by, first, obtaining high quality products through more disciplined sourcing costs, and second, improving sales efficiency for popular models. We believe these measures can ensure stable operating profits for the Apple business.

Kerry Chen (Founder, Chairman and CEO)

第三，在爱回收门店端，我们在一二线城市开设自营门店，以回收为主，销售为辅，抓住一二线城市主流用户的回收变现需求，在三到五线城市开设联营加盟标准门店，以销售为主，回收为辅，抓住下沉市场对于高品质二手产品的购买需求。简单来说，一二线城市回收为主，三五线城市销售为主。一季度，一季度末，我们的自营门店711间，联营标准门店557间，门店业绩与2023年同期相比，均有质量，均实现有质量的增长，巩固了二手手机3C业务大盘的一手货源获取能力。自营门店和联营标准门店始终是我们核心的服务用户，完成回收交付，确保用户体验持续提升的场景，也是主要的贡献门店端收入和运营利润的场景。...

对于与线下零售商、零售门店合作的店中店业态，今年我们对于这个业务形态进行了调整，转为激励大商家模式或者上门回收，上门方式进行回收。店中店的调整减少了我们的门店总量，但对我们的收入和利润的影响非常有限。

Speaker 7

Third, we further leverage our offline stores. We have opened self-operated stores in first- and second-tier cities that mainly focus on recycling and standard jointly operated stores in a broader mass market, with a focus on retailing as well as recycling. As of the end of March, we had 711 self-operated AHS stores and 557 standard jointly operated AHS stores. Both store formats have achieved quality growth compared to the same period in 2023. These standard stores ensure primary sources of product supply, and they are crucial user touchpoints as we provide recycling and trading services with a premium user experience. In addition, they generate revenue and operating profit at a store level.

In contrast, for the shop-in-shop format that opens in offline retail scenarios, we have made some adjustments, migrating them to PJT sellers or using doorstep collection. The adjustment of shop-in-shop format has reduced the total number of our stores, but its impact on our revenue and profit is limited.

Kerry Chen (Founder, Chairman and CEO)

我们的多品类回收战略，促进了门店的经济模型的进一步的优化，让我们能开出更多的主力门店，提升门店效率和利润。自从多品类战略于2022年上线以来，非3C品类的回收额保持高速的季度环比增长，更好地满足了消费者在当前时期处置闲置消费品，实现有效的回收变现的需求。今年以来，我们看到这样的需求还在显著增长，以一季度为例，多品类回收业务及二手箱包、腕表、黄金首饰、名酒等商品的回收额，回收交易额达CNY 6亿元，为2023年同期的4倍以上。

Speaker 7

Our multi-category recycling strategy uplifts our store economics, allowing us to open more stores, especially those with higher sales per square meter and better profitability. Since the introduction of the multi-category strategy in 2022, the transaction value of non-electronic categories has grown rapidly quarter-over-quarter. As such, strategy meets consumers' needs nimbly to dispose of idle goods, convert them into cash at hand in the current economic cycle. Since the beginning of this year, we have seen a significant surge in such user demand. For instance, the transaction value of our multi-category recycling business, including second-hand bags and watches, gold, jewelry and fine liquor, quadrupled year-over-year to CNY 600 million in the first quarter of 2024.

Kerry Chen (Founder, Chairman and CEO)

并且我们的多品类回收业务本身是盈利的，发生在门店的多品类回收已以平台业务模式开展，不仅模式轻，没有库存和资金风险，还为平均每家门店带来CNY 7,000的额外增量利润。作为一项亮眼的增量业务，多品类回收业务生长于用户对于爱回收品牌的信任，强有力的门店前端履约能力，以及二手标准能力的基础上之上，是爱回收过去10年能力积累的体现。再看品类交叉复购的数据，以奢侈品为例。奢侈品回收的成交用户中，18%的用户在30天之内会完成其他品类的回收。我们相信拉长时间来看，转化率还会更高。从用户满意度方面来看，我们的黄金回收业务因为价格透明、渠道正规，有信任度，用户NPS净推荐值在所有品类中位列第一。我们期待多品类回收业务在已有的门店网络中进一步开展，并助力我们新门店的进一步开设。我们相信多品类业务在2024年的交易规模将继续实现快速增长。

Speaker 7

At this, at the same time, the multi-category recycling business itself is profitable. Conducted under a platform business model, it not only has a light structure without the risk of inventory and price decline, but also brings an additional profit of CNY 7,000 per month to each store. As a remarkable incremental business, multi-category recycling growth on the foundation of users trust in the Aihuishou brand and strong performance of existing stores and our capability of establishing industry standards in the pre-owned sector. It is a reflection of the accumulated capabilities of Aihuishou over the past decade. Looking at cross-category orders, 18% of users who completed an order to recycle luxury products came back for other product recycling services within 30 days. We believe that the conversion rate can be further enhanced if we extend the time frame.

In terms of user satisfaction, our gold recycling business ranks first in all categories, with a top NPS promoter score due to transparent pricing, legitimate channels, and trusted brands. We look forward to expanding the multi-category recycling within our existing store networks and further promoting the opening of new stores. We are confident that the GMV of our multi-category recycling business will continue to achieve scalable growth this year.

...

Kerry Chen (Founder, Chairman and CEO)

Next, let's look at our supply chain capabilities, which are mainly reflected in 1P through compliant refurbishment, elevating the standardization level of products. The overall business, through quality inspection automation at the operation centers, elevates fulfillment efficiency. In this year's first quarter product revenues, the revenues from compliant refurbishment reached CNY 280 million, accounting for a further increased proportion of the 1P business. We further optimized the operational processes of compliant refurbishment, based on the rich base of second-hand members. In the process of comparing and selecting goods, we identified devices that meet consumer demands, where the acceptable grade level has potential for improvement. Then, in our self-operated stores and third-party overall 1P revenues, the proportion of To C business in sales revenues increased to 24.5%.

Speaker 7

Now, let's take a look at our supply chain capability from two aspects. Firstly, 1P business improves product standardization through compliance refurbishment. Secondly, the overall enhances fulfillment efficiency through quality inspection automation in the operation centers. During the first quarter, our robust supply chain capabilities yielded solid results. Mostly, the revenue from refurbished devices sales was CNY 208.82 million, further increasing its share in our 1P business. We have made additional improvements to our operational processes, expanded access to a wider range of product sources, and identified devices that are both popular among users and have the potential for improved quality. Adding to our retail offerings through AHS stores and AHS websites, the total retail sales revenue as a percentage of 1P product revenues jumped to 24.5%.

Kerry Chen (Founder, Chairman and CEO)

在运营效率层面，一季度的 non-GAAP 的履约费用率为 8.3%，较 2023 年同期费用率下降了 0.8 个百分点。主要得益于运营一年以来，华南自动化运营中心效率的持续打磨提升。non-GAAP 的销售费用率为 6.1%，同比下降了 1.4 个百分点，主要得益于苹果官方回收业务没有营销费用规模占比的提升，降低了自营业务的平均推广费用率。在平台业务层面，数字化客户管理工具加强应用，平台业务的客户关系维护和推广费用得到了有效的节约。

Speaker 7

In terms of operational efficiency, our non-GAAP fulfillment expense as a percentage of revenue for the first quarter was 8.3%, a decrease of 0.8 percentage points from the same period of 2023. This was mainly due to cost efficiency improvements at our Southern China Dongguan Automated Operation Center over the past year. Our non-GAAP selling and marketing expenses as a percentage of revenue was 6.1%, a year-over-year decrease of 1.4 percentage points. The reduction in promotional expenses is mainly due to the growth of our trading business with Apple, which operates independently of our marketing efforts. For our platform business, we are gradually increasing the utilization of digital customer management tools. This approach helps us to reduce expenses associated with customer relationship management and promotional expenses on the platform.

Kerry Chen (Founder, Chairman and CEO)

展望长期，我们将坚定地耕耘好二手手机3C这个基本盘，通过多品类回收战略，提升用户的体验和认知，探索，并且探索更高频、更刚需的服务场景，解决用户更多回收服务的痛点，建立用户心中的回收第一品牌，长期打造消费者端循环经济的一站式解决方案。

Speaker 7

In the long term, we are committed to reinforcing the foundation of pre-owned smartphones and consumer electronics business. Through a multi-category recycling strategy, we aim to improve user experience and increase brand awareness for AHS Recycle. We will focus on addressing user pain points in recycling services by exploring more high-frequency and essential recycling scenarios, aiming to establish ourselves as the top-of-mind brand in consumers' minds. Ultimately, our goal is to create one-stop circular consumption solution for consumers.

Kerry Chen (Founder, Chairman and CEO)

首先，持续加强回收端的场景覆盖和渗透率的提升，提升用户对于回收和以旧换新的认知。中国每年有4亿台的手机、平板、笔记本以及其他数码产品的出货量，因为渗透率，回收渗透率低，仍然有使用价值的旧机闲置量还在增长。在场景渗透中，我们将以旧换新业务能力更好地嵌入电商和品牌的新机销售场景，共同服务用户的回收换新需求，以实现长期的业务规模增长。

Speaker 7

First, we will cover more recycling scenarios, improve the penetration rate, and raise user awareness of recycling and trade-in. Due to low recycling rate, the 400 million units of new smartphones, tablets, laptops, and other consumer electronics that are shipped in China annually indicate a growing supply of idle devices with use value. As part of our ongoing efforts, we integrate our trading services into new product sales scenarios on e-commerce and brand official platforms. By doing so, we cater to users demand for product renewal and realize sustained growth in the long term.

Kerry Chen (Founder, Chairman and CEO)

第二，在当前消费环境下，抓住用户线上线下二手购买需求增长的发展机会。...

我们一季度3P业务的To C零售收入，通过拍拍严选京东渠道、直播新媒体渠道、爱回收门店以及爱回收官网渠道，取得了超过80%的同比增长。商家端对于零售高品质二手商品的需求同样旺盛。对此，我们基于拍拍堂的商家服务能力，探索更多的线下机会点，比如通过新机零售商家分散下沉的零售触点，铺开我们的零售货源，进一步提升我们自营货源的To C销售占比。

Speaker 7

Second, seize the opportunity in the current consumer environment with an increasing demand for used products online and offline. In the first quarter, we achieved over 80% year-over-year 1P to C sales growth through Paipai and on JD.com, live streaming platforms, AHS stores, and official websites. Meanwhile, as business owners need for ready for retail products increases, we explore more opportunities based on the existing B2B service capabilities. For instance, the dispersed retail touchpoints of new phone retailers can help us expand our sales channels and increase the proportion of To C sales from our self-operated supply.

Kerry Chen (Founder, Chairman and CEO)

第三点，在端到端的供应链能力基础上，进一步发挥合规翻新业务的价值的产出，提升货品的等级，以内部能力建设，锁定更多的适合合规翻新整备的机器，进行更多品牌商品型号的功能和外观的标准化提升。在销售层面，既支持To C销售，也丰富了拍拍堂的To B销售的优质货源供给，综合提升合规翻新业务对于主营业务毛利率的贡献。长期以产品加供应链获得更多的市场份额。

Speaker 7

Third, leverage compliant refurbishment capabilities to enhance the grade of one key recycled products. We anticipate organic growth in the proportion of compliant refurbishment income within our product revenues. By building more in-house capabilities, we expand the coverage of product categories, brands, models and functions, et cetera. On the sales side, we open the supply of those products to support both B2C sales and enrich the high quality supply to business owners on PJT Marketplace. Overall, this shall contribute to improving the gross profit margin of our 1P business. In the long term, we aim to gain more market share through a combination of scenarios and supply chain capabilities.

Kerry Chen (Founder, Chairman and CEO)

以上将是我们的长期可持续发展的有效路径。

Speaker 7

In conclusion, we are confident in our strategic path for effective and long-term sustainable development.

Kerry Chen (Founder, Chairman and CEO)

下面请公司的CFO Rex介绍一下财务情况。

Speaker 7

Now, I'd like to turn the call over to our CFO, Rex, for financial update.

Rex Chen (CFO)

Okay. Hello, everyone. We are pleased to report another profitable quarter under the GAAP measures. Our revenues set once again reached the top end of our guidance. Now, let's take a detailed look at the financials. Please note that all amounts are in RMB, and all comparisons are year-over-year basis, unless otherwise stated. In the first quarter, total revenues increased by 27.1% to RMB 3,601 million, primarily driven by the strong growth in net product revenues. Net product revenues increased by 28.5% to RMB 3,309.8 million, while net service revenues was RMB 341.3 million, representing an increase of 15.1%.

Growth in net product revenues was primarily driven by an increase in the recycling channel expansion and the sales of pre-owned consumer electronics through both online and offline channels, of which sales of 1P refurbished devices totaled CNY 282.4 million, representing a year-on-year increase of 94.8%. The increase in service revenues was primarily due to an increase in service revenues generated from PJT marketplaces and our multi-category recycling businesses. The overall transaction value of marketplaces increased consistently with service revenues, and the take rate of our marketplaces was 5.41% in the first quarter of 2024. Now, let's discuss our operating expenses. To provide greater clarity on trends in our actual operating based expenses, we will also discuss our non-GAAP operating expenses, which better reflect how management views our results of operations.

The reconciliations of GAAP and non-GAAP results are available in our earnings release and the corresponding Form 6-K furnished with the SEC. Merchandise costs increased by 30.9% to CNY 2,947.8 million, in line with the growth in product sales. Gross margin at the group level was 19.3% in the first quarter. Gross margin for our 1P business was 10.9%. Fulfillment expenses increased by 15.3% to CNY 309.8 million, excluding share-based compensation expenses, which we will refer to as SBC from here on. Non-GAAP fulfillment expenses increased by 16.3% to CNY 303.4 million.

Under the non-GAAP measures, this increase was primarily due to an increase in personnel cost expenses, as we conducted more recycling and transaction activities compared with the same period of last year. Non-GAAP fulfillment expenses as a percentage of total revenues decreased to 8.3% from 9.1%. Selling and marketing expenses increased by 7.5% to CNY 321.3 million. Excluding SBC expenses and amortization of intangible assets and the deferred cost resulting from assets and business acquisitions, non-GAAP selling and marketing expenses increased by 3.6% to CNY 224.5 million, primarily due to an increase in expenses related to marketing activities. Non-GAAP selling and marketing expenses as a percentage of total revenues decreased to 6.1% from 7.5%.

General and administrative expenses decreased by 3.4% to CNY 33.8 million. Excluding SBC expenses, non-GAAP G&A expenses increased by 1.2% to CNY 58.1 million, primarily due to an increase in office-related expenses. Non-GAAP G&A expenses as a percentage of total revenues decreased to 1.6% from 2%. Technology and content expenses increased by 5.9% to CNY 52.2 million, excluding SBC expenses and amortization of intangible assets and the deferred cost resulting from assets and business acquisitions. Non-GAAP technology and content expenses increased by 7.6% to CNY 45.5 million. The increase was primarily due to an increase in personnel expenses in connection with the ongoing upgrade of the company's operation center and systems.

Non-GAAP technology and content expenses as a percentage of total revenues decreased to 1.2% from 1.5%. As a result, our non-GAAP operating income was CNY 80.2 million in the first quarter of 2024, representing a significant increase of 80.6% year-on-year. Non-GAAP operating profit margin was 2.2% compared to 1.5% in the first quarter of 2023. As of March 31, 2024, cash and cash equivalents, restricted cash, short-term investments, and funds receivable from third-party payment service providers totaled CNY 2.6 billion. Our strong cash position safeguards our sustainable growth outlook. Now turning to the business outlook for the second quarter of 2024.

We anticipate total revenues to be between CNY 3,670 million and CNY 3,770 million, representing an increase of 23.8%-27.2% year-over-year. Please note that this forecast only reflects our current and preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks. Operator, we are now ready to take questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. When asking the question, please state your question in Chinese first, then repeat your question in English for the convenience of everyone in the call. At this time, we will pause momentarily to assemble our roster. The first question comes from Joyce Ju with Bank of America. Please go ahead.

Joyce Ju (VP)

大家晚上好，那也恭喜公司这个季度报了一个非常不错的业绩，然后也非常感谢管理层接受我的提问。我的第一个问题是，我们现在最近也看到国家，还有各个地方政府，也印发了推动大规模消费品以及换新的各种行动方案，那我们也了解，就是说可能这方面的政策推动可能为公司后续会带来一些成长的推动。可不可以请管理层对这些有力的政策，对我们的未来的收入的一些增长，包括对我们这个整个销售额的这个增长，它的这个贡献，然后它的这个增长路径都做一些这个分析和解读，特别是能不能给我们就是量化一下，这个可能具体的影 响规模是多大？然后第二个问题是，我们今年也给出了我们2024年的一个收入的指引，那想了解一下，在我们2024年的这个收入指引当中，我们爱回收自己的渠道，京东，然后苹果将分别...

我们现在预计是一个怎么样的增长贡献，我们的这个当中的assumption是什么？然后我们平台服务在2024年的话，平台服务收入在2024年我们又应该怎么样去预测，会有一个怎么样的增速的情况。然后我翻译一下自己的问题吧。Good evening, management. Congrats on the solid results.

My first question is, we have seen this year the national and local governments have issued action plans to promote large-scale replacement and trading of consumer products, which could potentially benefit growth of the Aihuishou. Could management help us understand the potential impact on sales and revenue, especially some quantitative color? Secondly, we note there are multiple growth drivers contributing to the company's 2024 revenue guidance. Could management walk us through the key drivers of the guidance? What's the growth assumptions behind each of the driver and, such as Aihuishou phone channel, JD.com and Apple, respectively? Also, what will be the growth outlook for the service revenue in 2024? Many thanks.

Kerry Chen (Founder, Chairman and CEO)

...

非常感谢提问。我们认为，2024年我们的收入的主要增长动力，仍然来自于收入贡献占比达90%的自营业务1P业务。其中，在主营的1P业务，回收业务的层面，我们预计2024年全年仍然有显著超出消费大盘的同比增速，主要有以下三点。第一点，首先我们主要来自于受到用户信赖的爱回收门店，在核心商圈的线下触达。2024年，我们会继续更多的经营门店的开设，提升门店的服务和产出。第二点，在京东主站精准的这个新品零售场景，结合京东和品牌对以旧换新的专项补贴投入，进一步地鼓励消费者参与回收，提升我们目前个位数的京东渠道的以旧换新服务的渗透率。第三点，通过与一些领先的消费品品牌的协同合作，以旧换新，为用户增加权益，提升爱回收小程序的活跃度和到店的转化率，转化更多的用户到二手手机、3C回收和多品类的回收业务上。通过以上的三个场景，源源不断地为我们带来优质的回收和以旧换新的这个货源。在苹果官网和旗舰店的这个回收场景中，我们今年会平衡回收报价与货源的获取，预计全年实现约CNY 1 billion的这个收入增量。在平台业务方面，我们进一步地提升拍机堂行业货源中心的能力，开放我们的平台的能力，提升零售端的解决方案。为拍机堂所服务的60万家行业商家、附近连锁以及附近门店，打通自营二手优品的这个零售销路。通过为行业商家创造更多价值的方式，也实现平台服务收入的健康增长。好，谢谢。

Speaker 7

Thank you for the question. We believe that our primary growth driver in 2024 will continue to be our self-operated business, which contributes approximately 90% of our total revenues. Domestically, we expect the annual growth rate of our core self-operated business to significantly outpace the broader consumer market in 2024. This is for a few reasons. First and foremost, our growth is fueled by our consumer trusted AHS stores, which are strategically located in malls within prime commercial areas.

We continue our growth with dozens of new self-operated store openings in 2024, while improving the services and output of our stores. Second, we are boosting our recycling penetration rate, which is currently in the low single digits, through precise recycling scenarios integrated into new product sales on JD.com, supported by trading subsidies from the platform and brands. Third, by collaborating with a series of premium high-frequency consumer brands, we bring more benefits to our users. We are upgrading the AHS mini program, which offers richer and more day-to-day scenarios for users to visit our stores and try our secondhand consumer electronics and multi-category recycling services. These scenarios consistently provide us with high quality product sources. In our collaboration with Apple's official trade-in program, we balance the pricing mechanism and target models at the recycling end.

In the full year 2024, we anticipate the product revenue coming from Apple trade-in program to increase by approximately CNY 1 billion. For our open platform business, we have enhanced the full service offerings for over 600,000 merchants, including professional business owners, electronic product franchisees, and mom-and-pop store owners on PJT Marketplace. These enhancements include empowering our users with retail business solutions and ample sources of retail supply, which consolidates our one-stop high-quality secondhand products. By generating additional value for both merchants and the industry, we are driving healthy growth in service revenues. Thank you. Thank you.

Operator (participant)

Was there a follow-up, Ms. Ju? Okay, the next question comes from Jiajing Chen with CICC. Please go ahead.

Jiajing Chen (Equity Research Assistant)

公司再次达成，就是业绩啊，也感谢管理层接受我的提问。啊，我这里有三个小问题，那第一个小问题是，能不能请公司分享一下长期的利润目标，以及具体怎么样去实现？那第二个小问题呢是，我们看到公司这两个季度的整体毛利率和EP的毛利率呢，都是有一些承压的，就请问我们之后要怎么去看未来的一个毛利率的趋势？第三个小问题是，管理层对目前这个综合的现金储备情况会有一些评价吗？对，我大概这些问题我翻译一下。Ah, let me translate myself. Congratulations for achieving solid growth for the Q1 results.

I have three questions. The first question is, what is the company's long-term profit goals and, what's the path to achieve that? The second question is: we saw some pressure on the overall gross profit margin and one key gross profit margin. So how do you view the trend of the GP margin in the future? The third question is, what's your comment on the cash position? That's all my question. Thank you.

Rex Chen (CFO)

... Okay, thank you. So I'm Rex. I will take your questions. To answer the first question about gross profit and operating profit. First of all, we prioritize the evaluation of the net GAAP operating profit and margin, which has been improving over the past quarters. We are currently in the educational stage of consumer recycling mentality, which adjusts the prices of the recycling side. So the relative costs of markup, coupons at the recycling end are included in our merchandise costs, which affects the gross profits of our product revenues. But we will comprehensively balance our sales and marketing expenses in order to improve our operating profits. The promotion of 1P recycling affects our cost instead of expenses, and it's common characteristics of the secondhand recycling industry.

Looking specifically at the first quarter, the overall gross profit margin was 19.3%, an increase of 0.6% from the fourth quarter, when gross profit margin was 10.9%, an increase of 0.3% from the fourth quarter. Excluding the negative impact of sales of overseas inventories, the gross profit margin of our core recycling business has increased steadily, with a quarter-over-quarter increase of 1.6%. In the medium to long term, the path to improving our net GAAP operating profit margin mainly comes from three aspects. First, compliance refurbishment. We improve product standardization through our supply chain to gain more profits. The gross profit margin of compliant refurbished products has remained stable above 20% for several consecutive quarters.

Second, increase the proportion of retail sales revenue as we have established end-to-end coverage. For online channels, JD.com supports reasonable product standards, adjustments on Paipai, and we list more products with a broader price range to meet buyers' demand. For offline channels, retail sales through our offline stores rapidly increased by 21% compared with the previous quarter. As more consumers from medium to low-tier cities are happy to visit our stores, not only for recycling, but also as for buying used products. Third, the scale effect further advanced the efficiency of our operating expenses through the amplification of transaction volume, and comprehensively brings an increase in the GAAP operating profit margins. In the first quarter of 2024, there was another loss in the income from operations below the operating income.

Looking at the full year of 2024, we expect a limited impact on our net income. Regarding this particular other loss, in Q4 2023, we subscribed to shares of Ecosystem Enterprises, Hong Kong IPO share. Impacted by market conditions, its stock price experienced a downward pressure in Q1, resulting in a loss in our other losses. To answer your second question, in terms of net cash, at the end of March, we prepared CNY 294.5 million of inventory in advance to meet users' purchasing needs during the second quarter. We sold the majority of them and received payment in the second quarter. As a result, it appears to be a timing difference. In addition, regarding Apple trading businesses, we have 45 payable days, as mentioned last quarter.

Thanks to our efficient secondhand consumer electronics turnover capabilities, this business has a limited impact on our cash flow. If we extend the time horizon, our operating cash flow will be consistent with the steady growth of our net GAAP operating profit. Thank you.

Operator (participant)

Yajing, do you have a follow-up question?

Jiajing Chen (Equity Research Assistant)

No, I don't. Thank you.

Operator (participant)

Thank you. The next question comes from Michael Kim with Zacks Small-Cap Research. Please go ahead.

Michael Kim (Senior Analyst)

Great. Good morning or good evening, everyone. Thanks for taking my questions. First, just in terms of capital management, be curious if you could provide some perspective on CapEx needs going forward, particularly as it relates to plans to continue to upgrade your operation centers and open new offices. And then second, just kind of stepping back, what's the plan to increase shareholder return, particularly as it relates to share repurchases? Thanks.

Rex Chen (CFO)

Okay, thank you for your questions. We invest in our operation capabilities instead of investing heavily into assets. So our business is in a light asset model. Regarding our CapEx, we expect 100,000 RMB per new store opening. For stores with multi-category recycling offerings, the CapEx per store will be a little bit higher. For joint operated stores, the CapEx are handled by our local partners. On the processing end, as part of our long-term development strategy, we continue to enhance the automated inspection and grading capabilities of our regional operation centers. The existing operation centers in Dongguan and Changzhou have incurred approximately RMB 30 million, each in CapEx for automation upgrades. Currently, these two operating centers support 40% of the quality inspection demand for secondhand consumer electronics nationwide.

During daily operations, they maintain flexibility in capacity utilization without operating at full capacity. Regarding corporate finance activities, in March, we announced a twelve-month buyback plan to purchase up to $20 million of our ADSs, in consultation with our board of directors. In the long run, we will also consider distributing dividends at the end of this year, depending on our profitability. We'll closely monitor efficient capital deployment into our operations and remain committed to developing our scenarios plus supply chain capabilities. We'll remain open to innovative investments that support our core business development and adhere to profit-driven strategies that deliver sustainable value to our shareholders and users. Thank you.

Operator (participant)

Mr. Kim, do you have a follow-up question?

Michael Kim (Senior Analyst)

Nope, that was it. Thanks for taking my question.

Operator (participant)

As there are no further questions at this time, I'd like to hand the conference back to management for closing remarks.

Jeremy Ji (Director of Corporate Development and Investor Relations)

Thank you. Thank you all again for joining us. A replay of today's call will be available on our website shortly, followed by a transcript when ready. If you have any additional questions, please feel free to email us at [email protected]. Have a good day.