Daisy-Daisy/iStock by way of Getty Pictures
Elevator Pitch
I award a Hold investment rating to RLX Technologies Inc.’s (NYSE:RLX) stock. The current correction in RLX’s shares is fair, taking into account its weak Q1 2023 monetary functionality which was impacted by regulatory modifications. There is an absence of meaningful brief-term catalysts for RLX Technologies, as the company’s recovery path is anticipated to be extended. Thus, I am of the view that a Neutral or Hold rating for RLX is proper.
Corporation Description
RLX refers to itself as “a major branded e-vapor firm in China” in the company’s media releases. As highlighted in the company’s FAQs web page on its investor relations site, RLX Technologies was established in January 2018 and it only conducts its organization operations in China.
The company’s essential corporate milestones and goods are detailed in the charts beneath.
RLX Technology’s Corporate Milestones
RLX’s Q1 2023 Earnings Presentation
RLX’s Positioning In The E-Cigarettes Business Worth Chain
RLX’s Q1 2023 Earnings Presentation
RLX Technology’s Solution Line-up
RLX’s Q1 2023 Earnings Presentation
Share Cost Correction And Valuation De-rating Following Q1 2023 Final results Announcement
RLX Technologies revealed the company’s monetary functionality for the initial quarter of this year final week on Wednesday May possibly 17, 2023. RLX has suffered from a important pullback in its stock value and a meaningful de-rating of its valuation multiples right after its most current quarterly outcomes release.
The company’s share value dropped by -17% from $two.44 as of May possibly 17, 2023 to $two.03 at the finish of the May possibly 25, 2023 trading day. RLX Technology’s final accomplished stock value was also -34% decrease than its 52-week higher of $three.06 recorded for the duration of intra-day trading on December five, 2022.
RLX’s consensus forward subsequent twelve months’ Enterprise Worth-to-Income several de-rated from six.32 instances on the May possibly 17 trading day to four.77 instances as of May possibly 25 primarily based on valuation information sourced from S&P Capital IQ. For the duration of the identical time period, the stock’s trailing P/B several compressed from 1.41 instances to 1.18 instances.
In the subsequent section, I clarify why I feel that RLX Technology’s current share value weakness is justified.
Regulatory Adjustments Have Hurt RLX’s Q1 2023 Economic Overall performance
As indicated in the chart beneath, the e-cigarettes market place in China started to be regulated beginning in October 2022, and the Chinese regulatory authorities initiated an excise tax for e-cigarettes because November final year.
Current Regulatory Developments For The Chinese E-Cigarettes Market place
RLX’s Q1 2023 Earnings Presentation
The current regulatory modifications for the Chinese e-cigarettes business have had a adverse effect on RLX Technologies organization as evidenced by its poor Q1 2023 monetary outcomes.
Income for RLX fell by -89% YoY and -44% QoQ to RMB189 million in the initial quarter of this year.
With China’s e-cigarettes business becoming regulated, one particular of the essential modifications is that flavored e-cigarettes are no longer permitted to be sold in the nation. This indicates that regulated corporations such as RLX Technologies are losing market place share to illegal sellers which nonetheless distribute flavored e-cigarettes. At the company’s Q1 2023 outcomes contact on May possibly 17, 2023, RLX acknowledged that “enticing flavored, but unsafe and illegal goods triggered customers to shift extra gradually than anticipated to our GB (“Guo Biao” in Chinese referring to China’s national common) goods.”
RLX Technology’s profitability also took a hit from the current regulatory developments. RLX’s normalized net profit attributable to shareholders suffered from a -26% QoQ lower and a -52% YoY drop in Q1 2023. The company’s bottom line for the current quarter was adversely impacted by the gross margin contraction resulting from the new excise tax pointed out above.
RLX Technology’s profitability at the gross profit level had weakened for two consecutive quarters, as its gross margin decreased from 50.% in Q3 2022 to 43.six% and 24.two% for Q4 2022 and Q1 2023, respectively. Provided that the excise tax on e-cigarettes was initial introduced on November 1 final year, RLX’s gross margin had begun to contract in the final quarter of 2022. With Q1 2023 becoming the initial complete quarter for which the excise tax is in impact, RLX Technology’s gross margin took a substantial hit and fell to significantly less than half of what it was for Q3 2022.
Factors Will not Be The Identical Once more In A Regulated Atmosphere
The existing sell-side analysts’ consensus monetary projections for RLX Technologies recommend that the firm will need to have substantially extra time to recover to the sales and profitability levels that it accomplished in the previous.
Prior to the regulation of China’s e-cigarettes market place, RLX’s fiscal 2021 income and gross margin have been RMB8,521 million and 43.1%, respectively. As a comparison, the consensus FY 2023, FY 2024, and FY 2025 top rated line estimates for RLX are RMB2,599 million, RMB4,455 million, and RMB6,331 million, respectively as per S&P Capital IQ information. Separately, the market’s consensus monetary forecasts point to RLX Technologies reaching gross margins of 29.7%, 32.four%, and 36.% for FY 2023, FY 2024, and FY 2025, respectively.
In other words, RLX Technology’s sales and gross profitability are not anticipated to get back to pre-regulation levels inside the subsequent 3 years.
RLX admitted at its initial quarter outcomes briefing that “the adverse effect of illegal goods is nonetheless lingering, as it will take some time for the market place to digest inventories.” This implies that a swift income recovery for RLX Technologies is significantly less probably.
On the other hand, an optimization of RLX Technology’s income mix by escalating income contribution from new larger-margin goods (e.g. chewing gum) will not be completely realized in the close to term. At its most current quarter outcomes contact, RLX emphasized that the majority of new goods are at the “pilot” phase with “minimal income contribution.”
In a nutshell, RLX Technology’s top rated line and profit margins will naturally be decrease in a regulated atmosphere for e-cigarettes, so it is inevitable that RLX is assigned a valuation discount and its share value trends downwards.
Closing Thoughts
My rating for RLX is a Hold. RLX Technology’s monetary functionality is anticipated to steadily increase in subsequent quarters, as competitors from illegal cigarettes grow to be significantly less of a headwind more than time and the firm optimizes its sales mix by launching new higher-margin item offerings in the future. On the flip side, RLX will uncover it challenging to get its top rated line and gross profit margin back to pre-regulation levels in FY 2021, so a substantial optimistic re-rating of RLX’s shares in the brief term is significantly less probable. As such, a Hold rating for RLX Technologies is warranted.
