Used Phone Recycling Platform: Profitability Challenges Behind the Listing

Used Phone Recycling Platform: Profitability Challenges Behind the ListingThe release of new iPhones each year triggers a global wave of upgrades, which is not only a grand event for Apple fans but also brings significant market opportunities for the used phone recycling industry. As new iPhones gradually hit the market, consumers are starting to consider how to dispose of their old devices, making the used phone recycling sector the busiest time of year

Used Phone Recycling Platform: Profitability Challenges Behind the Listing

The release of new iPhones each year triggers a global wave of upgrades, which is not only a grand event for Apple fans but also brings significant market opportunities for the used phone recycling industry. As new iPhones gradually hit the market, consumers are starting to consider how to dispose of their old devices, making the used phone recycling sector the busiest time of year.

Unlike the practice of "letting old phones rot in drawers" a decade ago, the shorter upgrade cycle, higher purchase costs, and a more developed used phone trading industry have made "trade-in" a more common topic. The ability to safely and properly handle old phones and maximize their value is becoming two of the most important concerns for consumers when dealing with their old devices.

Diversified recycling channels, "trade-ins" are becoming increasingly popular

Generally speaking, apart from the "internal digestion" scheme of "giving it to family members," there are usually three channels for recycling used smartphones:

1. Trade-in programs by phone brands: Trade-in programs offered by phone brands are usually the most convenient option. This scheme is directly provided by major phone manufacturers. Consumers only need to follow the instructions to get their old phone appraised and deduct the value from the price of the new phone when purchasing a new phone. Taking Apple's trade-in program as an example, users can operate it online or offline at AppleStore: enter the model and condition of the old phone, and the system will automatically calculate a deduction amount, which can be directly used to offset the cost of the new phone. In addition to Apple, domestic phone brands such as Xiaomi and Huawei also provide recycling services. However, based on my experience, these brands have stricter inspection standards for recycling old phones than Apple's in-store implementation. Even with the same standards, Apple stores are usually "blind" to minor screen scratches and body scratches.

2. Used phone trading websites: Used phone trading websites are also relatively familiar. Because there are no middlemen to make a profit, used phone trading websites like Xianyu are usually the platforms with the highest retention rate for old phones. However, because the used phone platform is a direct transaction between users, this not only poses a challenge to the bargaining skills of both buyers and sellers, but also lacks the most protection.

3. Used phone recycling platforms: This is one of the most popular ways to dispose of old phones, and recycling channels are diverse, including Aihuishou, Zhuanzhuan, and Shanhuishou. Consumers use the App to get a quote for their phone, and the platform will collect it at their doorstep, and pay the recycling money on-site after inspection. Some platforms will also set up offline outlets to provide on-site appraisal and recycling services.

"Going public" doesn't necessarily mean "bigger and better"

In addition to the toC recycling business that directly connects with users, many recycling platforms also provide toB used phone recycling services for phone brands and e-commerce platforms. For example, AppleStore's trade-in program and JD.com's trade-in program are actually provided by Aihuishou. Backed by JD.com's massive recycling demand, in 2021, ATRenew Group (Aihuishou) also successfully went public on the New York Stock Exchange.

Similarly, in February 2024, Flashback Technology (Shanhuishou), which had received investment from Xiaomi, submitted an application to the Hong Kong Stock Exchange for listing, but failed to proceed due to various reasons. On September 17, 2024, Flashback Technology "re-entered" the Hong Kong Stock Exchange application. From the application documents, we also saw another side of "recycling platforms."

Does "going public" really mean "doing bigger and better" for recycling platforms? According to the listing application documents of Flashback Technology (Shanhuishou), its business model can be divided into two parts: recycling and sales. Recycling refers to Flashback Technology, as a recycling platform, collecting idle digital products from individual consumers and enterprises (distributors, retailers, operators). After processing by Flashback Technology, the recycled products will enter the sales section, and will be resold to individuals or merchants through its proprietary platform (Flashback Youpin) and self-operated stores on third-party e-commerce platforms.

According to the disclosed data, Flashback Technology's total value of purchased mobile phones (i.e., mobile phones "recycled" by Shanhuishou) in 2023 was approximately RMB985.4 million, of which 85.1% was "trade-in" purchases, while idle purchases and enterprise purchases accounted for 5.7% and 9.2% respectively. In the first half of 2024, the proportion of trade-in purchases reached 94.4%, while idle recycling and enterprise recycling accounted for only 1.8% and 3.8% respectively. Among them, over 90% of the recycling came from offline purchases, specifically trade-ins at stores.

But don't forget that the "purchasing" plus "sales" operating model means that the company cannot simply profit from "recycling." Moreover, Flashback Technology's business is highly dependent on cooperation with upstream purchasing partners, mainly obtaining used consumer electronics products through these partners' offline stores and online platforms. If the relationship with these partners breaks down, it may directly affect the stability of the company's sales supply chain, thereby having a significant adverse impact on business operations.

According to relevant documents, the gross profit margin of Flashback Technology fluctuated during the reporting period, mainly affected by changes in purchasing costs and selling prices. Due to intense market competition, the company has had to increase commissions paid to upstream purchasing partners to maintain market share. This increase in costs, coupled with macroeconomic uncertainties, has presented the company with significant challenges in improving its gross profit margin. In addition, the rapid launch of new mobile phones has also put pressure on costs. These factors have combined to lower the gross profit margin of Flashback Technology, negatively impacting its profitability.

The prospectus shows that Flashback Technology has continued to record net losses in recent years, and its net current liabilities and net liabilities have increased year by year. This is mainly due to the company's high investment in operations and procurement to gain market share, as well as redemption liabilities arising from preferred stock rights. If the company cannot improve its cash flow and earnings situation in the future, going public will not fundamentally solve Flashback Technology's financial pressure.

In fact, Flashback Technology is not the only recycling platform facing similar loss challenges. In Q2 2024, ATRenew (Wanwu Xinsheng) reported a loss per share of approximately RMB 0.19, also facing a problem of continuous losses, and the reasons for the losses are also highly similar: intense competition in the used phone recycling platform market has forced ATRenew to invest more resources in marketing and channels, thereby increasing costs. In addition, the purchase cost of used electronic products has been steadily rising, further squeezing overall profit margins.

Whether it's Aihuishou or Shanhuishou, their operating conditions reflect the common shortcomings of the used phone recycling industry, especially challenges in supply chain management, market competition, and profitability. How to maintain a healthy financial position while growing rapidly will be key to determining the future success of used phone recycling platforms.

Phone recycling is a "slow industry" with a long investment return cycle

Used phone recycling platforms are not without the possibility of success. The Flashback Technology prospectus states that according to data from Sullivan, the Chinese used consumer electronics market is expected to grow at a double-digit annual growth rate in the coming years, becoming one of the world's largest used device markets. This means that the market demand for used phone recycling platforms in China will continue to expand.

Second, used phone recycling platforms can improve operational efficiency and reduce costs through more efficient detection, grading, and pricing systems. They can also differentiate themselves from "P2P" used phone trading on used phone trading websites by using the company's inspection and grading system to provide endorsement for used products. In addition, used phone platforms can also be linked to other businesses to provide certain after-sales services for purchased used devices. This can not only improve the speed and accuracy of recycling, but also enhance the user experience, thereby enhancing the platform's competitiveness.

It's also important to note that expanding market influence and enriching after-sales services among used phone recycling platforms will inevitably affect profitability in the short-term. Despite the challenges facing the used phone recycling industry, its market prospects remain bright. Technological innovation, growing market demand, and policy support will be the three driving forces behind the industry's development, helping to propel the used phone recycling industry forward. After all, domestic consumers have a long tradition of "exchanging old phones for washbasins," and compared to letting phones "rot in drawers," letting phones shine in other people's hands is always the best choice.

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