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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 efficiency which was impacted by regulatory adjustments. There is an absence of meaningful quick-term catalysts for RLX Technologies, as the company’s recovery path is anticipated to be extended. As a result, I am of the view that a Neutral or Hold rating for RLX is acceptable.
Organization Description
RLX refers to itself as “a major branded e-vapor enterprise 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 company operations in China.
The company’s crucial corporate milestones and items are detailed in the charts under.
RLX Technology’s Corporate Milestones
RLX’s Q1 2023 Earnings Presentation
RLX’s Positioning In The E-Cigarettes Market Worth Chain
RLX’s Q1 2023 Earnings Presentation
RLX Technology’s Item Line-up
RLX’s Q1 2023 Earnings Presentation
Share Cost Correction And Valuation De-rating Following Q1 2023 Benefits Announcement
RLX Technologies revealed the company’s monetary efficiency for the initially quarter of this year final week on Wednesday May well 17, 2023. RLX has suffered from a important pullback in its stock price tag and a meaningful de-rating of its valuation multiples immediately after its most current quarterly final results release.
The company’s share price tag dropped by -17% from $two.44 as of May well 17, 2023 to $two.03 at the finish of the May well 25, 2023 trading day. RLX Technology’s final performed stock price tag was also -34% decrease than its 52-week higher of $three.06 recorded throughout intra-day trading on December five, 2022.
RLX’s consensus forward subsequent twelve months’ Enterprise Worth-to-Income several de-rated from six.32 occasions on the May well 17 trading day to four.77 occasions as of May well 25 primarily based on valuation information sourced from S&P Capital IQ. Through the similar time period, the stock’s trailing P/B several compressed from 1.41 occasions to 1.18 occasions.
In the subsequent section, I clarify why I feel that RLX Technology’s current share price tag weakness is justified.
Regulatory Alterations Have Hurt RLX’s Q1 2023 Monetary Efficiency
As indicated in the chart under, the e-cigarettes marketplace 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 adjustments for the Chinese e-cigarettes sector have had a adverse effect on RLX Technologies company as evidenced by its poor Q1 2023 monetary final results.
Income for RLX fell by -89% YoY and -44% QoQ to RMB189 million in the initially quarter of this year.
With China’s e-cigarettes sector becoming regulated, 1 of the crucial adjustments is that flavored e-cigarettes are no longer permitted to be sold in the nation. This indicates that regulated organizations such as RLX Technologies are losing marketplace share to illegal sellers which nonetheless distribute flavored e-cigarettes. At the company’s Q1 2023 final results contact on May well 17, 2023, RLX acknowledged that “enticing flavored, but unsafe and illegal items triggered customers to shift additional gradually than anticipated to our GB (“Guo Biao” in Chinese referring to China’s national typical) items.”
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 described 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 initially introduced on November 1 final year, RLX’s gross margin had begun to contract in the final quarter of 2022. With Q1 2023 getting the initially complete quarter for which the excise tax is in impact, RLX Technology’s gross margin took a substantial hit and fell to much less than half of what it was for Q3 2022.
Points Will not Be The Exact same Once more In A Regulated Atmosphere
The existing sell-side analysts’ consensus monetary projections for RLX Technologies recommend that the enterprise will need to have substantially additional time to recover to the sales and profitability levels that it accomplished in the previous.
Prior to the regulation of China’s e-cigarettes marketplace, 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 best 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 attaining 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 initially quarter final results briefing that “the adverse effect of illegal items is nonetheless lingering, as it will take some time for the marketplace to digest inventories.” This implies that a swift income recovery for RLX Technologies is much less probably.
On the other hand, an optimization of RLX Technology’s income mix by escalating income contribution from new greater-margin items (e.g. chewing gum) will not be completely realized in the close to term. At its most current quarter final results contact, RLX emphasized that the majority of new items are at the “pilot” phase with “minimal income contribution.”
In a nutshell, RLX Technology’s best 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 price tag trends downwards.
Closing Thoughts
My rating for RLX is a Hold. RLX Technology’s monetary efficiency is anticipated to steadily strengthen in subsequent quarters, as competitors from illegal cigarettes grow to be much less of a headwind more than time and the enterprise optimizes its sales mix by launching new higher-margin solution offerings in the future. On the flip side, RLX will locate it difficult to get its best line and gross profit margin back to pre-regulation levels in FY 2021, so a substantial constructive re-rating of RLX’s shares in the quick term is much less probable. As such, a Hold rating for RLX Technologies is warranted.
