RLX Technology Inc.

RLX Details

RLX Technology Inc. (NYSE: RLX) manufactures and commercializes e-vapor products for adults in the People's Republic of China. The firm distributes its goods through online advertisement and “branded store plus” retail shops explicitly designed for China's e-vapor industry. In addition, RLX develops its e-vapor products by leveraging its technology and product development capabilities. 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 share, with each ADS representing one Class A ordinary share.

Class-action Lawsuits: RLX was hit by multiple security litigation complaints in June 2021, alleging that its IPO registration statement deliberately understated the risks related to 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 published draft regulations for e-cigarettes and new tobacco products similar to those for traditional tobacco products. The complainants contend that investors were unable to correctly assess the value of the shares offered in the IPO without knowing these facts, resulting in huge losses to them.

Q1FY21 Results: The company reported a sharp uptick of 48.19% in net revenues to CNY 2.40 billion in Q1FY21 (ended March 31, 2021) compared to CNY 1.62 billion in Q4FY20, primarily due to an increase in its distribution and retail network. However, the company reported an increase in losses to CNY 267.03 million in Q1FY21 vs. CNY 236.75 million in Q4FY20, primarily due to a significant increase in general and administrative expenses. As of March 31, 2021, the company’s cash and cash equivalents (including short-term investments) amounted to CNY 12.55 billion, with no outstanding debt.

Key Risks: The company’s purchases from Shenzhen Smoore Technology Limited, one of the key contract manufacturers for RLX, accounted for 78% of the total purchased amount, and the corresponding accounts payable due to it represent 83% of the total accounts and notes payable as of December 31, 2020. In addition, the aforementioned class-action lawsuits also constitute significant legal risks, though 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 CNY 2.85 billion and its non-GAAP net income to exceed CNY 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 by 33.04% in the past three months and is currently trading close to the lower band of the 52-week range of USD 5.99 to USD 35.00. The stock is currently trading below its 50 DMA levels, and its RSI Index is 21.41. We have valued the stock using the Price/Sales-based relative valuation methodology and arrived at a target price of USD 7.13. Considering the company’s robust track record, market dominance, robust topline, ongoing lawsuits, and other associated risks, we recommend a “Speculative Buy” rating on the stock at the current price of USD 6.08, down 4.40% as of July 20, 2021, 3:29 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.