Vaping Leader RLX Gets Doused by Latest Regulatory Wave

Key Takeaways:

• Shares of RLX and its peers fell sharply last month after China’s tobacco regulator announced a new ban on flavored vapes starting in May
• The group got a small boost earlier this month after the country’s market regulator announced new national standards for e-cigarettes

By Judy Yang

Life isn’t getting any easier lately for China’s vibrant field of vaping companies, which are facing a new tide of regulation at home. A rule from China’s State Tobacco Monopoly Administration set to take effect May 1 will bring new oversight for the sector, with a ban on flavored e-cigarettes among its most troublesome provisions – at least for vaping companies.

That’s looking problematic for leading vaping device maker RLX Technology RLX, whose shares plunged 36% the day the latest rule was announced on March 11. The company certainly wasn’t alone, with leading atomization equipment maker Smoore (6969.HK) also tumbling by 26% on the news, wiping out more than HK$20 billion ($2.5 billion) in market value in the process.

The companies and their investors have good reason to worry. Non-tobacco flavors now account for more than 90% of e-cigarette sales, while tobacco-flavors make up the rest. That shows the impact could be catastrophic if e-cigarettes can only be sold in tobacco flavors.

But the news hasn’t been all bad. Earlier this month, China’s market regulator approved a mandatory national standard for e-cigarettes effective Oct. 1. Among other things, the rule says 101 additives can be added in limited quantities, and can be sold and circulated on a national trading management platform.

That news, showing the country would support the industry’s orderly development, helped the companies recoup some of their earlier losses. RLX shares were an indicator for the group, gaining nearly 13% in the two trading days after that announcement. The company, whose compact stores and kiosks are a fixture in major cities like Shanghai, is taking things in stride as multiple regulators in its important home market craft a stance on the popular but also controversial product.

“Embrace the new era of normative development with full confidence,” RLX said on its WeChat account in April, addressing both of the latest regulatory developments. “The (new rules) are landmark events in the development of legalization and standardization of China’s e-cigarette industry. We will act in strict accordance with the law and regulations.”

China’s vaping industry has boomed over the past couple of years, taking advantage of its access to the world’s largest population of smokers. In its brief lifetime, the sector has already grown to one worth an estimated 8.3 billion yuan ($1.3 billion) in annual sales. 

What’s more, there’s still lots of room for growth. Penetration for the products among China’s 300 million smokers was just 1.5% in 2021, according to market research firm iiMedia Research. It added that rate is far below figures of 30% or higher for countries such as the U.S., U.K., and Japan.

RLX has emerged as one of the top players in the sector. Founded in 2018 and based in Beijing, the company’s cofounders came from DiDi Global and the former China division of Uber, which later merged into a single company, bringing a wealth of experience in new economy concepts.

RLX was China’s clear market leader in the first nine months of 2020 with a majority 62.6% of the market, according to data from market research firm CIC. The company ranked similarly in terms of brand awareness thanks to its strong marketing and expansive retail network.

Flaming out

RLX was founded at a time when vaping was booming in China, gaining traction as a chic, fashionable product among young smokers and many non-smokers as well, attracting both venture capital and private equity. RLX was a major beneficiary, raising several rounds of financing from big names like IDG Capital and Sequoia Capital.

It made a New York IPO in January 2021, and saw its shares surge 146% on their opening day from their $12 offering price, giving it a market cap of $45.8 billion. But those heady days are now a distant memory, following the regulatory tightening on its industry and broader investor concerns over U.S.-listed China stocks. At the stock’s latest close of $1.93, RLX is now worth just $3 billion.

Truth be told, the latest regulatory wave isn’t the first for China’s young vaping sector. In 2019 the country banned online e-cigarette sales, prompting major players to boost their offline store presence to keep growing. But the new measures could prove more challenging due to the huge popularity of flavored vapes, along with anecdotal evidence that many users may abandon their e-cigarettes if only tobacco flavors are available.

On the more positive side, the new legal framework represents China’s granting the industry the simple right to exist – something that can’t always be taken for granted. Hong Kong has banned e-cigarettes outright, and other Asian countries like Singapore, Thailand, and India, have taken tough approaches to the product.

In terms of finances, RLX looks strong but not spectacular. Its fourth quarter net revenue totaled 1.9 billion yuan ($290 million), up 17.7% year-on-year, according to its latest financial report released last month. It also posted a 494 million yuan profit for the period, reversing a 237 million yuan loss a year earlier. On a non-GAAP basis, its net income also rose 28% year-on-year to 537 million yuan.

To support its sagging shares, the company joined many of its U.S.-listed Chinese peers in announcing a sizable $500 million share buyback program back in December. The stock has lost more than 80% of its value over the last year, and is down about 50% so far this year. In addition to the regulatory concerns in China, the company has taken a hit over broader concerns about the potential that it could be forcibly delisted if the U.S. and China fail to reach an information-sharing agreement that the U.S. securities regulator is demanding.

All the regulatory noise has poured cold water on RLX’s price-to-earnings (P/E) ratio, which stands at a lowly 7.8. That’s far below Smoore’s P/E of 18.3 and a 17.2 ratio for Huabao (0336.HK), both of which are Hong Kong-traded and thus don’t face the U.S. delisting threat. That appears to show that the fact that RLX is listed in the U.S. could be weighing on the stock, which could translate to a good buying opportunity if you believe the U.S. and China will reach an information-sharing agreement.