RLX Technology Inc.

RLX Details

RLX Technology Inc. (NYSE: RLX) is engaged in manufacturing and commercializing e-vapor products for adult individuals in the People’s Republic of China (PRC). The company sells its products through offline distribution and branded store plus retail model tailored to China’s e-vapor market. RLX leverages its proprietary technology and product development capabilities to develop superior e-vapor products. Each of the company’s American Depositary Shares (ADS) represents 1 Class A ordinary shares. American Depositary Shares of the company listed on NYSE on January 22, 2021, at an issue price of USD 12 per share. As of June 16, 2021, its market capitalization stood at USD 14.68 billion.

Q1FY21 Results: The company reported a massive increase of 48.19% in net revenues to CNY 2,398.49 million in Q1FY21 (ending March 31, 2021) compared to CNY 1,618.45 million in Q4FY20 (ending December 31, 2020), primarily due to the expansion of distribution and retail network. The company's gross profit increased to CNY 1,104.07 million in Q1FY21 compared to CNY 694.13 million in Q4FY20. However, the company reported a loss of CNY 267.02 million in Q1FY21 compared to the loss incurred of CNY 236.74 million in Q4FY20, primarily due to an increase in general and administrative expenses. As of March 31, 2021, the company stood at the cash and cash equivalents of CNY 1,113.98 million with no outstanding debt.

Key Risks: The company’s purchases from Shenzhen Smoore Technology Limited, one of the key contract manufacturers of RLX, accounted for 78% of the total purchased amount and the corresponding accounts payable due to it represents 83% of the total accounts and notes payable as of December 31, 2020. Further, prolonged frictions between the US and China, and the recent passage of a bill in the US that could lead to the delisting of some Chinese companies from the country’s exchanges (in case the US authorities are unable to satisfactorily audit the company for three consecutive years) expose the stock to significant political and regulatory risks. Though a solution to the standoff could be negotiated in the medium term (before the earliest possible delistings begin in 2024), the companies that might not be able to fulfill the revised standards are at risk. Another significant threat is a potential industry-wide crackdown by China's tobacco authority.

Outlook: For Q2FY21, the company expects its net revenues to be more than CNY 2,850 million and estimate its non-GAAP net income to exceed CNY 720 million. The company also 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

Stock Recommendation: RLX’s share price has decreased by 47.95% in the past three months and is currently trading at a lower end of the 52-week range of USD 7.89 to USD 35.00. We have valued the stock using the Price/Sales based relative valuation methodology and arrived at a target price of USD 11.24. On the technical chart, the next support level is USD 8.20. Considering the company’s robust track record, market dominance, robust topline, expansion in the distribution network, and associated risks, we recommend a “Speculative Buy” rating on the stock at the closing price of USD 9.40, up by 0.53% as of June 16, 2021.

*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 or if the price closes below the support level.