Rebounding RLX Plots Course Beyond China

Key Takeaways:

• RLX’s third quarter revenue rose 52%, as its gross margin rose more than 3 percentage points to 27.2% following a regulatory crackdown in 2021
• A year after expanding beyond its China base, international business accounted for more than half of the vaping company’s revenues in the third quarter

By Edith Terry

Vaping may not be as hazardous to your health as smoking, but it was quite the damper for RLX Technology Inc. RLX when the company was doused by a massive wave of new regulation in 2021 in its home China market. Now, three years later, the company may finally be turning a corner, capitalizing on a globalization strategy where it’s finding success using a combination of strong brand recognition and its own deep pockets.

Non-China business in five countries in East Asia, Southeast Asia and Oceania accounted for more than half of the company’s revenues in the third quarter, said Sam Tsang, RLX’s head of capital markets, on the company’s earnings call after the release of its third-quarter results last week.

That’s quite a feat when one considers the company only posted its first international sales of 228.5 million yuan starting last year, when that category made up 17% of revenues for the year. The company is also considering additional markets in 2025, either in the Middle East or Central America, Tsang added.

“Based on our internal estimates, we are currently the number one brand in three out of five countries in terms of revenue from the closed system e-vapor category,” he said. “We are also one of the leading brands in the remaining two countries. We also sell products to affiliates that sell to their overseas distributors.”

Its strong overall performance for the quarter was enough to catch the attention of investors, who bid up RLX’s shares by 9.3% in the five days after the quarterly report’s release. And in a show of confidence about its prospects, the company announced it would pay a dividend in December.

RLX’s main metrics were all quite hot in the latest quarter. Its revenue rose 52% year-on-year to 756.3 million yuan, marking a sixth consecutive quarter of growth. With revenue of 1.9 billion yuan in the first nine months of this year, RLX is already well ahead of the 1.5 billion yuan it generated for all of last year, though it’s still well off the 8.5 billion yuan it clocked during its heyday in 2021.

That was the year China abruptly banned online sales of vaping devices, followed by a subsequent ban on flavored vapes that appealed to the youth market and imposition of a 36% sales tax on all vaping products.

The company’s gross margin also rose to 27.2% in the latest quarter from 24.1% a year earlier. Its quarterly net income for the third quarter fell slightly year-on-year to 169.4 million yuan. But its non-GAAP profit, which excludes some non-operational factors like stock-based employee compensation, rose 30% year-on-year to 261.9 million yuan.

Tsang’s disclosure that more than half of RLX’s revenue came from outside China means the company got less than 378 million yuan from the domestic market during the period. That shows the domestic market is still suffering, since RLX recorded 498.9 million yuan in revenues in the third quarter of 2023, most of that probably from China.

Rebuilding China Business

The company has previously said it is still rebuilding its China business under the tighter post-crackdown restrictions. It has also complained that it faces competition from illegal products that may, for example, still use flavorings favored by many users.

On the earnings call, Tsang said retail outlets in China had declined from 50,000 in the pre-crackdown era to just 10,000, and reiterated that the flood of illegal products had taken down sales for the compliant industry by 80% to 90%. But he added that sales for products at a range of price points had started stabilizing this year.

RLX has been somewhat late jumping onto the export bandwagon. China produces as much as 95% of the world’s vaping products, but 90% of those are exported. Grand View Research estimated the China e-cigarette and vape market was worth $2.27 billion in 2023, equal to just 9% of the $24.6 billion in global sales that year estimated by data aggregator Statista. RLX competitors like Ispire Technology ISPR and Smoore International (6969.HK) both derive significant revenues from selling to markets outside China.

RLX’s sales were all in China until late 2023. It joined forces with the government in China to combat illegal products that were a big factor in depressing sales, with its Golden Shield program helping to intercept 60 million fake cartridges in 2023. CEO Wang Ying, who also uses the name Kate, said on the earnings call that between 80% and 90% of products sold in China were illegal. While the counterfeit problem may be easing this year, RLX isn’t waiting for the market to rebound and instead is diversifying geographically to fortify its business.

To kick off its global drive, it announced $25 million in equity investments in two companies in Northeast Asia and Southeast Asia last December. So far it has yet to enter the large but similarly tricky U.S. market, which has engaged in its own regulatory crackdowns and is also clamping down on a flood of illegal vaping devices.

RLX has spent millions of dollars on U.S. Food and Drug Administration-required studies since 2020 but has yet to receive approval for its devices. While it has not revealed which specific markets it has entered or is targeting, it has distribution in Indonesia, which has a smoking population of 61.4 million – far more than 28.3 million in the U.S. though tiny compared to China’s 300 million smokers.

While estimates of prospects for the global vaping market vary widely, most agree it is growing by double digits. RLX CEO Wang concurred, saying the international industry should experience annual growth in the teens percentage range over the next few years as more adult smokers transition from cigarettes to vaping products.

Despite all the beating it’s taken over the last three years, RLX’s price-to-sales (P/S) ratio of 8.81 is still far ahead of Ispire’s 3.06, probably due to the fact that Ispire is losing money and its revenue is falling.

Ispire also reported last week that its revenue declined by 9% year-on-year to $39.3 million in the three months to September, while its net loss widened to $5.6 million from $1.3 million. One thing Ispire shares with RLX is its search for new markets, as it tries to expand beyond the U.S. where its sales plunged by more than half in the latest quarter to $8.1 million. That just goes to show that the U.S. and China may be the world’s two largest economies, but they’re hardly friendly to vaping companies.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.