RLX puffs out signs of new life, as investors remain wary

China’s leading vaping company said its revenue nearly tripled in the first quarter, though the figure remains well below levels from before a 2021 regulatory clampdown

Key Takeaways:

• RLX’s revenue tripled in the first quarter and the company returned to profitability, as it recovers from a regulatory clampdown
• The company said its recent international expansion is “progressing well,” as it seeks to diversify beyond its home China market

By Doug Young

After nearly being snuffed out by a cloud of new government oversight, leading vaping company RLX Technology Inc. (RLX.US) is showing signs of new life as the regulatory air clears in a new environment at home.

The company reported huge year-on-year jumps in both revenue and profit during this year’s first quarter, as it also embarked on an international expansion to hedge against overreliance on China and seek new growth opportunities. Its latest revenue is still less than a third of where it was before the regulatory clampdown. But, hey, you have to start somewhere.

“Despite challenges posed by regulatory changes across various regions, we continue to identify opportunities and leverage our core strengths to prudently enter potential markets,” said RLX Chairman and CEO Wang Ying, who also uses the name Kate. “Domestically, we are encouraged by the positive impact of China’s recent regulatory crackdown on illegal products, but much progress remains to be made.”

Investors appeared to agree with Wang about the need for more progress. RLX’s stock fell 5.1% on Friday after the latest report’s release. What’s more, the shares are only up by 18% from a low in late January, well behind a rally that has seen the broader iShares MSCI China ETF (MCHI.US) rally more than 30% over that period.

RLX’s stock is also valued quite low compared with its peers, trading at a current price-to-earnings (P/E) ratio of just 11. By comparison, domestic rivals Smoore International (6969.HK) and Huabao International (0336.HK; 300741.SZ) both trade much higher at P/E ratios of 28 and 34, respectively. RLX’s heavy reliance on the China vaping market could be partly responsible for its low valuation – something it’s working to fix with its new globalization push.

The company paved the way for that global expansion in November with its termination of a non-compete clause with its distribution network Relx Inc. It made numerous references to the global market’s potential in its latest earnings report and on its call, though it declined to give any specifics beyond saying it has entered new markets in North and Southeast Asia.

Last year the company also received a Test Facility Certificate from European Technologies, an international certification body, hinting at potential future aspirations in the European market.

“Our operations in Southeast and North Asia are running smoothly, and our international expansion is progressing well,” Wang said on the earnings call. “We plan to expand into additional regions … Our recent launch of new e-liquid products in Southeast Asia has been well received, showing promising initial results.”

RLX and its peers experienced their near brush with death after China rolled out new regulations in 2021 that banned most of their existing products at that time. The industry regulator, which has strong ties to China’s tobacco monopoly, added a 36% sales tax on vaping products the next year. On top of everything else, it also banned the sale of flavored vapes that were popular with young users, restricting vape makers to tobacco-flavored products.

Illegal product clampdown

Last but not least, RLX and others that adhered to the new regulations were challenged by a flood of illegal products into the market that flouted the new restrictions. RLX executives said that problem has begun to ease lately with a wave of government clampdowns on illegal products, pointing to specific shutdowns of illegal operations in Zhejiang and Gansu provinces.

“We are encouraged by Chinese authorities’ announcement of another round of special actions to crack down on illicit products in March,” said Wang. “We are pleased to see China’s regulatory authorities tackling these serious issues, though there is still a long way to go.”

Next, we’ll zoom in on RLX’s latest financials that show just how far the company has come since the regulatory clampdown, but also how its business still has a long way to go to return to earlier levels. Reflecting the uphill battle it faces, RLX’s stock last traded at just $2.04, well below the $12 it fetched at the time of its 2021 IPO and a tiny fraction of its all-time high of $30 when vaping was all the rage in China and around the world.

The company reported revenue of 551.6 million yuan ($76 million) in the first quarter, nearly triple the 188.9 million yuan in the year-ago quarter, but less than a third of the 1.71 billion yuan it posted in the first quarter of 2021 before the crackdown.

The company also seems to have a good handle on its costs, with its operating expenses roughly halving to 194.4 million yuan from 418.9 million yuan a year earlier. That included a 38% decline in selling expenses, and a more than 50% drop in R&D expenses, as well as sharply lower general and administrative expenses due to reduced employee stock-based compensation costs.

All the new regulation, especially the new sales tax, have taken a big toll on RLX’s margins, which may be one reason why investors haven’t embraced the stock more since its business began to rebound. Its latest quarterly gross margin stood at 25.9%, an improvement from 24.2% a year earlier but about half the levels closer to 50% during the pre-crackdown era.

The bottom line was that RLX posted a net profit of 132.6 million yuan in the first quarter, reversing 56.3 million yuan loss a year earlier.

While stock buyers still aren’t convinced about RLX’s comeback, the analyst community is more positive. The company still attracts coverage from some top U.S. and Chinese brokerages, with analysts from Citi, CICC and Citic Securities all participating in the earnings call. And all four analysts surveyed by Yahoo Finance rate the company either a “buy” or “strong buy.” They do expect its growth to slow a bit during the rest of the year, however, with the four predicting revenue to rise 67% for the year.

At the end of the day, the stock really does look a bit undervalued when one considers the company has stabilized and both profits and revenues are growing again, even if its margins are unlikely to ever return to pre-crackdown levels. Observers will undoubtedly be watching to see how the globalization campaign progresses through the year. Strong progress in that direction could help provide some upside to the stock.

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