RLX stabilizes as air clears in new regulatory environment

Burned by a wave of regulation in China over the last two years, the e-cigarette maker says it’s hoping to find new growth overseas

Key Takeaways:

• RLX Technology’s revenue totaled 428 million yuan in the third quarter, up slightly from the previous quarter, while its profit fell 15% over that period
• The company terminated its non-compete agreement with Relx on Nov. 10, paving the way for it to expand its e-cigarette business outside China

By Ken Lo

The last two years have been rough for China’s once-vibrant vaping industry.

First the government introduced sweeping new measures for the sector in 2021, placing it under the supervision of China’s state tobacco monopoly that is also a major competitor. Then the industry got slapped with a 36% sales tax a year ago. The regulatory noose sharply reduced both profits and revenues for most players, including industry leader RLX Technology Inc. (RLX.US), whose situation finally began to stabilize in the third quarter, according to its latest financial report.

RLX said its revenue reached 428 million yuan ($59 million) during the quarter, down 59% year-on-year but up 13.2% from the previous quarter. The improvement partly reflected the company’s expanding portfolio of products that comply with new regulations. But the company’s quarterly net profit tumbled 65.8% year-on-year to 173 million yuan, and was also down 15% from the previous quarter, indicating that the environment remains shrouded in uncertainty.

RLX Technology’s third-quarter gross margin was 24.7%, a far cry from last year’s 50%, which came before the addition of the new high sales tax. In addition, total operating expenses for the third quarter were 145 million yuan, again much higher than the 47.2 million yuan in the second quarter and 56.8 million yuan in the year-ago quarter. The company cited changes in its share-based compensation expenses for the big change.

Roller coaster ride

RLX listed in the U.S. in early 2021, selling its American depositary shares (ADSs) for $12 each. The price rose as high as $29.51, but has been stuck in the doldrums since the regulatory wave began, falling as low as $1.39 in the past six months. Another Hong Kong-listed e-cigarette company, Smoore International (6969.HK), has gone on a similar ride, taking its shares as high as HK$84.50 in early 2021 at the height of China’s vaping craze, only to crash and burn to their latest close of around HK$7.

Since the crackdown began, investors have worried that Beijing intended to snuff out the vaping industry altogether, weighing on companies’ shares. But the outlook is starting to brighten as the new legislative framework removes regulatory uncertainty by providing the industry with a legal, albeit limited, path forward that should allow the strongest operators to survive.

The transition is being slowed by a lack of consumer awareness of the new regulations, creating challenges for compliant operators as they try to educate consumers about the advantages of using compliant products, and avoiding illicit ones. RLX Chairman Wang Ying said that only 40% of consumers primarily use e-cigarettes that comply with national standards, while another 17% have tried compliant products, citing a survey by Shanghai Jiao Tong University on the company’s earnings call. She added she believes that consumer education is crucial to the industry, but that it will take some time and effort.

In addition to all the other new rules, the Chinese government last year banned the sale of flavored vapes other than tobacco, and launched a campaign to tackle the illegal sale of e-cigarettes to minors. That has led many companies to restructure their product portfolios to avoid running afoul of the new regulations. In response, RLX has expanded its offerings to include 17 different compliant tobacco flavors, up from just two in October last year.

In terms of cartridge filters, RLX so far offers five unique ranges of compatible devices at different price points, up from two ranges a year ago, including Phantom and Phantom Pro. It introduced a new product with adjustable power last month at a more affordable price than the Phantom Pro.

Challenging business environment

In addition to facing a challenging operating environment, vaping companies in China still also face stiff competition, both from compliant and illegal products. In its latest quarterly update, Smoore said its revenue from China fell 85.6% year-on-year during the third quarter, dragging down its overall revenue by about 10.3% year-on-year.

In the face of such challenges at home, some larger companies have begun to explore overseas markets. To open up that potential route, RLX terminated its existing non-compete agreement with its distribution network Relx Inc. earlier this month, paving the way for it to enter other markets in the coming year. The company recently received a Test Facility Certificate from European Technologies, an international certification body, becoming the first e-cigarette brand in China to obtain such certification. That could bring it more exposure and credibility if and when it tries to take its products overseas.

RLX Technology has a trailing price-to-earning (P/E) ratio of nearly 200 times due to its low profits, much higher than 21 times for Smoore. That indicates investors may still have some confidence in the company despite its recent challenges, hoping, perhaps, that it will find success overseas and gradually claw back a bigger share of the Chinese vaping market.

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