AiHuiShou International Co. Ltd. (RERE) Q1 2022 Earnings Call Transcript

AiHuiShou International Co. Ltd. (RERE)
Q1 2022 Earnings Call
May 24, 2022, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and good evening, ladies and gentlemen. Thank you for standing by, and welcome to ATRenew Inc. first quarter 2022 earnings conference call. [Operator instructions] Please note that this event is being recorded.

Now I'd like to 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. Hello, everyone, and welcome to ATRenew's first quarter 2022 earnings conference call. Speaking first today is Kerry Chen, our founder, chairman, and CEO. And he will be followed by Rex Chen, our CFO.

After that, we will open the call to questions from analysts. Our first quarter 2022 financial results were released earlier today. The earnings release and investor slides accompanying this call are available on our IR website at ir.atrenew.com. There will also be a transcript following this call for your convenience.

For today's agenda, Kerry will share his thoughts on 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. Please note that since Shanghai is under lockdown, management joins today's conference call via different lines in Shanghai. Kindly excuse us if there is any connectivity issue during the call.

Some of the information you will 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 ATRenew makes on this call are based on assumptions as of today and that ATRenew does not take any obligations to update our assumptions on these statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a 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.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

OK. [Foreign language]

Unknown speaker

Hello, everyone, and thank you for joining us on our first quarter earnings conference call.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

In the first quarter, we realized rapid growth during a very challenging period of time during the highly transmittable Omicron variant. GMV for the first quarter increased by 51.6% year over year to RMB 9.38 billion, and the total revenue increased by 45.7% year over year to RMB 2.21 billion, both exceeding our guidance. Starting in mid-March, we faced headwinds of the pandemic. Against this difficult backdrop and off-season of the spring festival, we are delighted to announce that we have extended our past quarter's strong performance into this quarter to achieve non-GAAP operating profit.

In addition, we recorded a positive cash flow from operating activities of RMB 120 million.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

As we navigate the pandemic challenges, I would like to address two issues in today's earnings call. First, how do we respond to the transitory difficulties caused by the pandemic? Second, what is the outlook for consumer demand in the longer term? And how can we seize opportunities in the post-pandemic circular economy?

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

On the first issue regarding the pandemic and our reaction, there are three characteristics of our business which I trust many of our audience today are familiar with. First, our online business constitutes a large proportion of our overall business. Specifically, PJT and Paipai marketplaces are both online training platforms and therefore experienced a limited impact from offline lockdown. AHS recycle, though characterized by offline stores, also received a large proportion of its orders online.

Taking the first quarter as an example, 58% of recycling orders were placed online through JD's app, AHS Recycle's app, and mini program. GMV for the orders fulfilled through our offline stores contributed 14.5% of total GMV in the first quarter. Second, our offline stores are located throughout China. As a result of our self-operated plus jointly operated strategy, AHS stores have expanded throughout the country with locations in 214 cities nationwide.

Therefore, temporary regional lockdowns will not cause operational interruptions on the group level. Third, our operation facilities are decentralized and function collaboratively. In addition to our six regional operation centers, we have rolled out 116 city-level operation stations throughout the country by the end of March 2022. This enhances the agility of our business and allows us to secure sources of supply and improves our ability to provide supply to merchants at convenient locations.

Our major operating centers and city-level operation stations function collaboratively to sort, supply, deliver products and allocate inspection orders with a high degree of efficiency. And this helped us mitigate the impact of lockdowns and logistics interruption on our operations.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

The regional lockdown in Shanghai since mid-March has dragged our business growth and its adverse impact extended into the second quarter. In the near term, when quantifying the impact, we anticipate such headwind to drag on 20% to 25% of our overall revenue in the second quarter. However, taking a holistic view, the pandemic will not fundamentally impair our business, thanks to the resilience of our business model as I mentioned earlier.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

Furthermore, we responded quickly to the COVID resurgence. All measures included introducing a work-from-home policy for employees in Shanghai and leveraged remote working tools to ensure productivity. We also budgeted for operating expenses through optimizing noncore business. We donated approximately RMB 1 million into supporting our employees and local communities by providing daily necessities and anti-COVID supplies.

Leveraging the preowned consumer electronics supply chain, we provided dedicated mobile devices for PCR testing registration to Yangpu district in Shanghai.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

Instead of being struck by the short-term volatilities caused by the pandemic, we take a long-term view of looking into the post-pandemic world, as well as the evolving circular economy amid economic cycles. The general belief is that the pandemic will eventually be brought under control. However, consumer spending is likely to grow at a slower pace for a certain period of time. This would lead to significant negative consequences for many industries.

Based on the precedent in Japan and Europe, the secondhand economy demonstrated resilience in the face of consumption slowdown and possesses the potential to flourish amid economic headwinds. We perceive opportunities from two angles. First, consumers' demand for cashback tends to increase under financial pressure, and they are more likely to recycle idle devices with high residual value. Second, consumers tend to opt for more optimistic -- excuse me, tend to opt for more economic solutions of purchasing high-quality preowned used devices.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

As such, we remain committed to four key business strategies to seize growth opportunities in the post-pandemic world. First, we will further implement our city-level service integration strategy and expand in more cities to gain broader market overage. Mobile phone recycling is a local service and needs to be close to consumers. Currently, the penetration rate is still at a very low level and has large growth potential.

We believe that our refined strategy through synergizing service offerings locally and the performance review system across each city will benefit the growth of recycling penetration rate and business scale. Statistically, among all the 22 cities that implemented the city-level service integration strategy in the first quarter, 16 of them exceeded the average growth rate, while the majority of these 16 cities exceeded by 30%. The city-level service integration model also noticeably improved new customer acquisition. By the end of the first quarter of 2022, registered merchants on PJT Marketplace surpassed 300,000, representing an increase of 39% year over year.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

Second, we have implemented a tiered store system to satisfy differentiated demand for recycling. The offering through our network of AiHuiShou is a good demonstration of online merge offline and one of our core competencies. As of the end of March, we had 1,446 offline stores across 240 cities in China. Among these offline stores, 598 are self-operated stores, 825 are franchise stores, and 23 are retail selection stores.

In order to adapt to rising consumer awareness of environmental protection and demand for cash back from categories other than cellphones, we are operating our tiered store system. Take stores in Beijing and Shanghai as an example. Firstly, we operate a large number of regular stores that efficiently recycle phones from neighboring communities. Then we add on or selectively transform some regular stores through a dozen iconic stores located in newly developed central business districts, offering multi-category recycling services such as on luxury goods and camera equipment.

By implementing a tiered store system and expanding service offerings, we meet customers' evolving demand for recycling, improve store economic returns without too much extra budgeting, create further growth opportunities and, in return, elevate the brand equity of AHS Recycle.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

Third, we will add more value to the industry chain as compliance guidelines for the electronics refurbishment market are further upgraded. In April 2022, the first guidelines for refurbishing preowned electronic devices in China was announced by the People Procuratorate Office in Shenzhen. This marks a leap forward for the industry by establishing compliance guidelines that lead to healthier growth as industry participants are able to adopt either officially launched or certified third-party parts and components during WeChat. Furthermore, we plan to roll out compliant refurbishment and repair services at scale, further expanding our margin along the value chain.

We expect a larger proportion of directly sourced goods to undergo a compliant refurbishment before retailing directly to consumers using the white label. We can further complete the closed loop from the supply side to the demand side. The guidelines are expected to lead us to a more prosperous future of the preowned electronic transaction and services industry via participant inclusion.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

As of now, we launched a screen replacement service for the on iPhone 12 lineup in PJT Marketplace and carried out the maintenance service in Donghua Operations Center since mid-April. The two-week trial program processed 4,000 phones, each bringing in a gross profit of roughly RMB 150. Besides screen replacement, we also provided other services, including battery replacement, exterior restoration and phone reconditioning. We anticipate conducting a compliant recondition 60,000 to 70,000 smart phones in the first half of 2022.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

Finally, we will accelerate the automation process to improve efficiency and manage costs. We are delighted that our investment in the automated inspection system has been proven worth it. We are pioneering realizing an automated streamline process from trash and junk detection, AI exterior scanning, x-ray components inspection to screen verification. Building on our automated operation experience in Chongzhou, our Donghua Operations Center is accelerating the initiation and testing of various automation modules.

The comprehensive automation operating system will be put into use with an estimated automation processing improvement of 60% compared with Chongzhou. We are a true believer in supply chain capability as a team. We also firmly believe efficiency wins, which is driven by technology and scale effects.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

To conclude my part, we responded quickly and effectively to the COVID-19 outbreak in 2022. Even though Omicron infection has surged today, we have more faith in navigating through the near-term challenges and are steadfast in our clear strategic road map.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

And more importantly, we firmly believe that circular economy in China is away from policy interruptions. And this business, when goes into a synchronizing trajectory, is a sustainable business. In the mid- to long term, we are committed to the clear core strategy, namely increase market penetration rate and maintain healthy growth through city-level service integration, extend business goal through tiered store management and high value reflecting across categories, capture more value through compliance refurbishment at scale, and further improve operational efficiency by accelerating the application of automation technology. As far as we implement this strategies effectively, we surely will be able to unlock the next wave of growth.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

With that, I will hand the call over to our CFO, Rex, to go over the financials.

Rex Chen -- Chief Financial Officer

Thanks, Kerry, and hello, everyone. We are very pleased to report that our first quarter revenue exceeded our previous guidance despite the macroeconomic headwinds. I will start by sharing some of our financial highlights before we go into a more detailed look at the numbers. Please note that all amounts are in RMB and all comparisons are on a year-over-year basis, unless otherwise stated.

In the first quarter of 2022, despite the fact that it was in OPEC  that we delivered 45.7% revenue growth to achieve total revenues of over RMB 2.2 billion, exceeding the high end of our previous guidance range provided in the fourth quarter earnings conference call. Total GMV grew by 51.6% to RMB 9.4 billion, driven by strong growth in both product sales GMV and online marketplace GMV, which was 57.1% and 50%, respectively. In this quarter, the commission rate of our third-party marketplaces was 4.1% at the group level, relatively stable compared to results of the first quarter 2021. Gross margin at the group level was 25.7% in the first quarter.

Gross margin for our 1P Business was 14.1%. In the first quarter, we meaningfully optimized cost structure compared with the same period last year. This is seen in GAAP fulfillment expenses, selling and marketing expenses, general and administrative expenses, as well as technology and content expenses. As such, we are delighted to report an operating margin of 7.2% in the non-GAAP measures.

Now, let's take a detailed look at the financials. In the first quarter, total revenues increased by 45.7% to RMB 2,206.5 million. Net product revenues increased by 45.7% to RMB 1,908.9 million, while net service revenues increased by 46% to RMB 297.6 million. Growth in net product revenues were driven by continued increases in the density of our AHS stores, our reinforced trading collaboration with JD.com, and our greater consumer mind share that benefited the growth of direct to consumer sales through Paipai Marketplace.

Growth in service revenues was primarily driven by growing transaction volumes and an increase in value-added services from our marketplaces, especially through expansion and delivery fees on PJT Marketplace in the first quarter of 2022. Next, turning to our operating expenses. To provide greater clarity on returns in our actual operating base expenses, we will also discuss our non-GAAP operating expenses, which better reflect the management's views or results of our 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.

Operating costs and expenses increased by 44.7% to RMB 2,352.5 million. Non-GAAP operating expenses, which exclude share-based compensation expenses and the amortization of intangible assets resulting from business acquisitions, increased by 43% to RMB 2,213.9 million. Merchandise costs increased by 49.7% to RMB 1,640 million. This is in line with the growth of our 1P product sales revenues.

Fulfillment expenses increased by 32.8% to RMB 296.2 million, excluding share-based compensation expenses, which we will refer to as SBC from hereon. Non-GAAP fulfillment expenses increased by 26.2% to RMB 251.5 million. In the non-GAAP measures, the increases were primarily due to, first, the increases in logistic expenses and operation center, and self-operated store-related expenses, which were in line with the increasing sales of preowned consumer electronics and additional 155 self-operated AHS stores compared with the first quarter 2021. And second, an increase in personnel costs in connection with the company's growing business.

So non-GAAP fulfillment expenses as a percentage of total revenues was 12.8%, consistent with that of 2021, and decreased 1.9% from that of the first quarter 2021. Selling and marketing expenses increased by 38.3% to RMB 307.8 million, excluding SBC expenses and amortization of intangible assets. Non-GAAP selling and marketing expenses increased by 41.2% to RMB 206.6 million, including non-GAAP measures, the increase was primarily due to, first, an increase in sales promotion and coupon expenses in connection with business development where we increased the investment into promoting Paipai by RMB 45 million year over year. For context, we started our 1P2C business through Paipai in the first quarter of 2021 and enlarged our investments in the following quarters.

And secondly, the growth of non-GAAP selling and marketing expenses were also due to an increase in personnel cost in connection with the company's growing business. So non-GAAP selling and marketing expenses as a percentage of total revenue was 9.4%, slightly lower than 9.7% in the first quarter of 2021. In light of our traditionally off peak season in the first quarter, we saved such expenditures in coupons on Paipai sales promotions and commission to JD.com. General and administrative expenses increased by 53.1% to RMB 45 million.

Excluding SBC expenses, non-GAAP G&A expenses decreased by 3.4% to RMB 28.4 million. Similar to the fourth quarter of 2021, the decrease in GAAP -- G&A expenses showed an improved cost efficiency in our middle and back offices. Technology and content expenses increased by 14.4% to RMB 63.5 million. Excluding SBC expenses and amortization of intangible assets, non-GAAP technology and content expenses increased by 6.5% to RMB 57.4 million.

And the non-GAAP measures increase was primarily due to the increase in operation center and automotive expansion system upgrade related expenses in connection with the components growing business and R&D expenses related to innovation projects. As a result, our non-GAAP operating income was RMB 3.9 million in the first quarter of 2022. Non-GAAP operating margin was 0.2% compared with negative 2.2% in the same period last year. As of March 31, 2022, cash and cash equivalents, short-term investments and funds receivable from third-party payment service providers totaled RMB 2.4 billion.

With stable and sufficient cash on hand, we're confident in sustainable business operation. As a recap, we announced a USD 100 million share repurchase program on December 28, 2021, out of the management's strong confidence in the company's solid fundamentals and growing momentum. As of March 31, we have repurchased over 4.7 million ADS in the overall market for a total cash consideration of USD 22 million. Now turning to outlook.

For second quarter of 2022, the company currently expects its total revenues to be between RMB 2,000 million to RMB 2,050 million. The highly transmissible Omicron might impose adverse impacts on the operations of our stores and facilities, as well as the transaction activities of merchants in 2022. Thus this forecast only reflects the company's current and preliminary views of the market and operational conditions, which are subject to change. This concludes our prepared remarks for today.

Operator, we are now ready to take questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] The first question comes from Wen Li of Goldman Sachs. Please go ahead.

Wen Li -- Goldman Sachs -- Analyst

[Foreign language] Thank you, management, for taking my question, and congratulations on the solid 1Q results. Can management share with us the COVID impact on supply chain and consumer demand across business lines, especially in Shanghai where the headquarter is located? And what are the key assumptions behind our second quarter guidance? So looking forward, what are our expectations on the second half of 2022? Thank you.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

During the quarter, the impacts of the pandemic were limited to several provincial capital cities, including Sichuan, Tianjin, Changchun and tier one cities such as Shanghai and Shenzhen, with a stronger impact on offline recycling business. We consider this quarter's results as only a cross-sectional view of the pandemic's overall influence on our business.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

From the perspective of our C2B recycling business, starting in mid-March, regional lockdowns posed short-term challenges for our business in Shanghai. To comply with the zero COVID policy, our Shanghai-based employees started to work from home and all offline stores in Shanghai were temporarily closed. Although our 1,400 AHS stores are located throughout the country, the most productive ones are in the 600 self-operated stores, mainly located in the first- and second-tier cities, where users have stronger recycling awareness and the unit price is high, but they are negatively affected by the lockdown. We have 102 stores in Shanghai, 89 in Beijing and 56 in Shenzhen, respectively.

At present, Shenzhen has returned to normal, but the control measures in Beijing and Shanghai are still continuing. That is to say, in the second quarter, we estimate that the operation of one-third of self-operated stores has been affected to varying degrees.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

For our B2B platform business, strict pandemic control policies disrupted our interactions with merchants. Although our operating centers and city-level operation stations are geographically dispersed and can support one another during lockdowns, which reduced some pressure on fulfillment, we still face significant difficulties in terms of operations and expanding local merchant coverage. In addition, soft consumer demand for new phones also affected the volume of supply of preowned devices for supply merchants, especially for the number of cellphones ordered shipped out during the first quarter.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

For the B2C retail business, although we faced headwinds, including the decline in consumer spending and recent logistics interruptions, we are optimistic about consumers' need for good value products, a particular virtue in shoppers' eyes during a recession. We also feel confident that in the mid to long term, compliant refurbishment at scale can increase the proportion of goods recycled from our service offerings that are still to go for D2C retail. This helps to include more dots to the industrial chain and realize the optimization of product quality, as well as profit from value-added services.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

We have also seen hopeful signs of a recovery. According to the Shanghai officials, starting June 1, pandemic controls will be downgraded to a regular level and a gradual recovery of work and life is expected. Although we are still facing challenges in the near term, we are very confident in our business model, the resilience and flexibility of our supply chain, and additional margin improvement from compliant refurbishment.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Operator

Thank you. The next question comes from Joyce Ju of Bank of America. Please go ahead.

Joyce Ju -- Bank of America Merrill Lynch -- Analyst

[Foreign language] I will translate by myself. I would like to ask how is the progress in the first quarter of our city-level service integration, as it was the strategic focus of the company mentioned for this year, but we are facing a new macro situation, which you see in challenging economy and also the risk of pandemic new wave. So we would like to know like if the management are going to like have any change or like an adjustment in terms of those service integration strategies or the launch of like new software nationwide.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language] OK. Translate.

Unknown speaker

Thank you. We will be even more meticulous when assessing market conditions. Considering lockdown restrictions are still in place in some parts of China, the impacts created by the pandemic are ongoing. Therefore, we will increase our focus on cost management, efficiency improvement and healthy cash flow this year.

And our goal to achieve a positive non-GAAP operating income for this year remains unchanged.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

In terms of store network expansion, we are targeting the same number, opening 200 to 300 new stores for this year, with a more disciplined approach, while prioritizing the opening of jointly operated stores. This enables us to expand our branded recycling network nationwide, sharing profits while handling risks together with local partners.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

On the third-party merchants and retail end, we continue to acquire new local customers through city-level service integration, enhancing the penetration rate of the secondhand market through the rollout of intracity business. Among the 16 cities where growth exceeded the nationwide average, we achieved high double-digit year-over-year growth of our C2B plus B2B business in Suzhou, Hefei, Kunming, and Shaodong. Growth momentum was especially strong in Shaodong, where we achieved about 120% year-over-year growth in January for C2B business, and almost 200% year-over-year growth in January for B2B business. These are our benchmarks for implementing the city-level service integration model in terms of sourcing supply and penetrating local markets.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

The pandemic remains a challenge for us. In April, the recurrence led to stricter controls in many regions across China. We faced interruptions in both connecting with merchants and providing platform services on the retail front. Growth temporarily slowed down in those pilot cities, but we saw GMV and other volumes in those cities demonstrated higher resilience compared with the national average.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

We pay more attention to our own operating efficiency. For sales and marketing expenses, we will further optimize our cost. Instead of spending on short-term promotions, we will pivot to the longer term by further investing in building the brand equity of AHS Recycle and acquiring greater consumer mind share by providing timely and quality services to our customers. In addition, we work well in controlling our back office fees, in particular, general and administration expenses.

We have kept these at a low level for four consecutive quarters by implementing our compact, but organized structurefor our mid and back offices.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

Macro headwinds and consumption slowdown are challenging issues to almost every industry. In the long run, what we see is a huge and underserved secondhand electronic transaction and service market. As we mentioned earlier, we believe in our core strategies of expanding the city-level service integration model to increase the penetration rate, using a tiered store strategy to offer differentiated services, continuing to improve cost efficiency by investing in automated quality inspection technology and seizing the chance to profit from the open policy window in the electronics refurbishment market.

Joyce Ju -- Bank of America Merrill Lynch -- Analyst

OK. Thank you.

Operator

[Operator instructions] The next question comes from Jin Yu of Guotai Junan International.

Jin Yu -- Guotai Junan Securities -- Analyst

[Foreign language] In the PR sharing, the management mentioned the new recycling policy of the industry. Are there any specific business plans to share with us?

Rex Chen -- Chief Financial Officer

OK. Thank you, Jin. So I will take this question. In Apple, since they issued the first guidelines for electronic product refurbishment, which for the first time clarified the boundary of engaging in compliance refurbishments, including the source of goods must be legal, the purpose of repairs to the stores, the function and tariffs, official accessories, also third-party accessories with quality assurance can be used such as batteries and screens of third-party brands.

Personal battery must be strictly clear. When recycling, products should be clearly marked as preowned or refurbished to avoid confusion. Quality warranty should be included. Traditionally, the repair and refurbishment industry had many holdbacks.

The refurbishment was mishandled by merchants as there were no relevant regulations. Merchants were worried about potential risks and they operate on a small scale. Meanwhile, mobile phone brand manufacturers control the supply of repairing components. Since they do not recognize the use of third-party components, the supply of high-quality goods suitable for 2C sales in the market is insufficient.

As a leading platform, ATRenew has always carried out operations cautiously to avoid selling risky products. And since it had little participation in refurbishment, it has always lacked that segment of the industry chain profit. We believe the guidelines for refurbishment can benefit the industry and the company. More merchants can conduct repair and refurbishment with confidence, which will help expand the scale of recycling and sales.

We also aim to save such opportunity and hail our plan. We're here to combine repair and refurbishment on a large scale and increase profits reasonably. Previously, our self-recycling products and third-party supplies were not repaired or refurbished. Hence, we only earned gross profit in service fees from testing and reselling.

Our value chain lacked maintenance and better analytics. Recently, we conducted our pilot project, which verified that by changing the screen and the battery, the gross profit per unit can be increased by 15%. Excluding the cost of the component, on average, a phone which has B2B selling price of RMB 1,600, after compliant refurbishment, can be sold on the B2C platform at around RMB 2,100. After deducting the component cost, the gross profit per unit increased by RMB 300, about 15%.

After deducting the labor cost and the platform fees, the net profit margin per unit is about 6%. By further carrying out compliant refurbishment in operation centers, we are confident to obtain high gross profit and service fees brought by such added value to the industry. With standardized refurbishment, we aim to increase the proportion of our recycled products that are suitable for D2C retail. Doing so can help us to achieve our closed group circular economy model and maximize the value of reused products.

In the past, any product sourced from users had various defects and cracks, but 100% of them were suitable for D2C retail if no repairs were done. We believe that in the future, combined with refurbishments and scale, we can further increase the proportion of sourcing products that are suitable for D2C retail so as to improve the gross profit on product sales. We have just begun to engage in refurbishment and there is a lot of room for growth. We shall gradually explore such as selecting some types of products to sell overseas after compliant refurbishment.

Thank you.

Operator

The next question is from Bonnie Liu of China Renaissance. Please go ahead.

Unknown speaker

[Foreign language] Thank you management for taking my question. We saw some [Audio gap] longer term? And if so, how are you planning to reduce the impact? Thank you.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

OK. [Foreign language]

Unknown speaker

I'll take this question. In the first quarter, especially since March, we see that OEMs are facing greater downward pressure on new phone shipments, and the replacement cycle is also expanding from about a year to more than 20 months now. But we do have several advantages against downside risk.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

The total addressable market of the secondhand consumer electronics is huge, and now we only have obtained some of it. Thus, we are poised to further expand our penetration rate. Besides, we believe that consumers demand for instant cash back increases as economic growth becomes flattish, and there are opportunities for converting more recycling orders.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

Secondly, the key brand we serve is still growing. The main model we recycle is Apple, which accounted for 45% of the total C2B plus B2B recycling transaction volume in 2021. Compared with other brands, Apple has maintained a higher growth rate of new device shipments. So our recycling fundamental is relatively stable.

This year, the pressure on new phone shipment is mainly from domestic brands. In this case, we work closely with JD.com to provide brands with trading solutions as a better promotion measure.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

[Foreign language]

Unknown speaker

Thirdly, we are also trying to deploy multi-category recycling beyond mobile phones, such as luxury goods, camera equipment and other high-value products to meet customers' varied demand for recycling. We believe that to carry out multi-category recycling, the most important things are brand trust, delivery scenarios, and quality inspection capabilities. AHS Recycle has a long-term accumulation of brand recognition, and we believe that multi-category is an extension of our recycling brand and services. Also, our national stores have set a good basis for fulfillment, and we do not have to budget for extra investment to handle the non-3C categories.

In terms of quality inspection, we aim to achieve it through self-build or collaboration with specialty retailers. As such, we trust online quotation platform line fulfillment makes the best combination of recycling services. Although new phone shipment flattened, we remain prudently optimistic about our business outlook. Thank you.

Operator

As there are no further questions at this time, I'd like to hand the conference back over to our management team 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. If you have any additional questions, please feel free to email us at [email protected].

Thank you.

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

Thank you.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Jeremy Ji -- Director of Corporate Development and Investor Relations

Kerry Chen -- Co-Founder, Chairman, and Chief Executive Officer

Unknown speaker

Rex Chen -- Chief Financial Officer

Wen Li -- Goldman Sachs -- Analyst

Joyce Ju -- Bank of America Merrill Lynch -- Analyst

Jin Yu -- Guotai Junan Securities -- Analyst

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