RLX Technology Inc.

RLX Details

RLX Technology Inc. (NYSE: RLX) develops and sells e-vapor products for adults through online advertising and "branded store plus" retail stores tailored explicitly to China's e-vapor market. RLX also uses its technology and product development talents to build its e-vapor products. Its product portfolio includes RELX Classic, RELX Alpha, RELX i, RELX Infinity, RELX Phantom. The company's American Depositary Shares (ADS) were listed on the NYSE on January 22, 2021, at an IPO price of USD 12.00 per ADS, with each ADS representing one Class A ordinary share.

Class-Action Lawsuits: During June-July 2021, RLX was hit with multiple security litigation complaints alleging that its IPO registration statement purposefully understated the risks associated with China's standardization of e-cigarettes to bring them in line with traditional cigarette rules. On March 22, 2021, China's Ministry of Industry and Information Technology issued draught regulations for e-cigarettes and new tobacco products similar to traditional ones. The complainants claim that investors could not correctly assess the value of the shares offered in the IPO without knowing these facts, resulting in massive losses.

Q1FY21 Results: The company's net revenues increased 48.19% to RMB 2.40 billion in Q1FY21 (ended March 31, 2021) from RMB 1.62 billion in Q4FY20, owing primarily to an expansion of its distribution and retail network. However, the company's losses increased to RMB 267.03 million in Q1FY21 from RMB 236.76 million in Q4FY20, owing primarily to an increase in general and administrative expenses. The company's cash and cash equivalents totaled RMB 12.55 billion as of March 31, 2021, with no outstanding debt.

Key Risks: As of December 31, 2020, the company's purchases from Shenzhen Smoore Technology Limited, one of its vital contract manufacturers, accounted for 78% of the total purchased amount, and the corresponding accounts payable due to it accounted for 83% of the total accounts and notes payable. In addition, the class-action lawsuit also constitutes significant legal risks. However, the strength of the basis of these lawsuits is not very clear as the company had quite extensively listed the risks in its IPO filings, noting how China's new e-cigarette restrictions might have a 'material and adverse effect' on its business. Further, the outcome of China's new vaping regulations and the protracted frictions between the US and China over Chinese listings in the US also constitute substantial political and regulatory risks.

Outlook: For Q2FY21, the company expects its net revenues to be more than RMB 2.85 billion and its non-GAAP net income to exceed RMB 720 million. RLX also stated that it estimates its gross margin to remain stable.

Valuation Methodology: Price/Sales Multiple Based Relative Valuation

(Analysis by Kalkine Group)

• % Premium/(Discount) is based on our assessment of the company's FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

RLX Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: RLX's share price has fallen 79.22% in the past six months and is currently trading close to the lower band of the 52-week range of USD 4.05 to USD 35.00. The stock is currently trading below its 50 DMA levels, and its RSI Index is 28.04. We have valued the stock using the Price/Sales Per Share-based relative valuation methodology and arrived at a target price of USD 5.47. Considering the company's track record, market dominance, robust topline, ongoing lawsuit, and other associated risks, we recommend a "Speculative Buy" rating on the stock at the current price of USD 4.58, up 2.69% as of August 09, 2021, 3:24 PM ET.

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.