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mid-cap

Speculative Bet on This Chinese Vapor Stock – RLX

Nov 09, 2021 | Team Kalkine
Speculative Bet on This Chinese Vapor Stock – RLX

RLX Technology Inc.

RLX Details

RLX Technology Inc. (NYSE: RLX) operates as an e-vapor company in China, engaged in developing e-vapor products. RLX creates e-vapor products by combining proprietary technology, product development expertise, and understanding adult smokers' needs. It sells its products using a "branded store plus" retail strategy customized to China's e-vapor market. 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. 

Latest News:

  • Changes In the Audit Committee: On October 05, 2021, RLX stated that Ms. Ying (Kate) Wang had resigned as a member of the company's audit committee to assist the company in meeting the necessary NYSE listing requirements for audit committee independence. As a result, the Audit Committee will now be wholly made up of independent directors, Ms. Zhenjing Zhu and Mr. Youmin Xi.
  • Stepping Towards Sustainability Through Innovation: On September 9, 2021, RLX launched its Pods Recycling project. It plans to invest RMB 20 million in China to recycle e-liquid pods and turn them into cement. The initiative will begin in September in Beijing and then spread to ten Chinese cities by February 2022.

H1FY21 Results:

  • Surge in Topline: The company reported YoY growth of 3.57x in net revenues to RMB 4.94 billion in H1FY21 (ended June 30, 2021) from RMB 1.08 billion in H1FY20, attributable to the expansion of distribution and retail networks.
  • Growth in Profitability: RLX reported a sharp uptick in its net income to RMB 557.28 million in H1FY21 vs. RMB 100.81 million in H1FY20.
  • Cash and Debt Position: As of June 30, 2021, the company's cash and cash equivalents (including short-term bank deposits and investments) amounted to RMB 12.37 billion, with no outstanding debt.

Key Risks:

  • Regulatory Risk: Moreover, the Chinese authorities' recent crackdown on its US-listed businesses and the consequent possibility of stricter rules could dent the company's operations. This is after the 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 cannot satisfactorily audit the company for three consecutive years). These constitute significant political and regulatory risks for the firm.

Valuation Methodology: Price/Sales Per Share Multiple Based Relative Valuation

(Analysis by Kalkine Group)

  • % Premium/(Discount) is based on our assessment of the company's NTM 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 80.65% in the past nine months and is currently trading close to the lower band of the 52-week range of USD 3.70 to USD 35.00. The stock is currently trading below its 50 and 200 DMA levels, and its RSI Index is at 36.52. We have valued the stock using the Price/Sales-based relative valuation methodology and arrived at a target price of USD 5.34.

Considering the company's track record, market dominance, robust financials, and other associated risks, we recommend a "Speculative Buy" rating on the stock at the current price of USD 4.27, down 2.40% as of November 08, 2021, 2:45 PM ET.

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

* All forecasted figures and industry information have been taken from REFINITIV.

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