RLX Technologies: Current Share Price tag Correction Is Justified (NYSE:RLX)
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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 economic overall performance which was impacted by regulatory adjustments. There is an absence of meaningful brief-term catalysts for RLX Technologies, as the company’s recovery path is anticipated to be lengthy. Thus, I am of the view that a Neutral or Hold rating for RLX is acceptable.
Firm Description
RLX refers to itself as “a top branded e-vapor organization in China” in the company’s media releases. As highlighted in the company’s FAQs web page on its investor relations web site, RLX Technologies was established in January 2018 and it only conducts its business enterprise operations in China.
The company’s crucial corporate milestones and goods are detailed in the charts beneath.
RLX Technology’s Corporate Milestones
RLX’s Q1 2023 Earnings Presentation
RLX’s Positioning In The E-Cigarettes Business Worth Chain
RLX’s Q1 2023 Earnings Presentation
RLX Technology’s Item Line-up
RLX’s Q1 2023 Earnings Presentation
Share Price tag Correction And Valuation De-rating Following Q1 2023 Benefits Announcement
RLX Technologies revealed the company’s economic overall performance 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 cost and a meaningful de-rating of its valuation multiples right after its most current quarterly benefits release.
The company’s share cost 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 completed stock cost was also -34% reduce than its 52-week higher of $three.06 recorded for the duration of 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 identical 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 consider that RLX Technology’s current share cost weakness is justified.
Regulatory Modifications Have Hurt RLX’s Q1 2023 Monetary Efficiency
As indicated in the chart beneath, the e-cigarettes industry in China started to be regulated beginning in October 2022, and the Chinese regulatory authorities initiated an excise tax for e-cigarettes due to the fact 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 business have had a unfavorable effect on RLX Technologies business enterprise as evidenced by its poor Q1 2023 economic benefits.
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 business becoming regulated, a single of the crucial adjustments is that flavored e-cigarettes are no longer permitted to be sold in the nation. This indicates that regulated corporations such as RLX Technologies are losing industry share to illegal sellers which nonetheless distribute flavored e-cigarettes. At the company’s Q1 2023 benefits contact on May well 17, 2023, RLX acknowledged that “enticing flavored, but unsafe and illegal goods triggered customers to shift extra gradually than anticipated to our GB (“Guo Biao” in Chinese referring to China’s national common) goods.”
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. Offered 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 significantly less than half of what it was for Q3 2022.
Factors Will not Be The Identical Once again In A Regulated Atmosphere
The existing sell-side analysts’ consensus economic projections for RLX Technologies recommend that the organization will require considerably extra time to recover to the sales and profitability levels that it accomplished in the previous.
Prior to the regulation of China’s e-cigarettes industry, RLX’s fiscal 2021 income and gross margin had been RMB8,521 million and 43.1%, respectively. As a comparison, the consensus FY 2023, FY 2024, and FY 2025 top rated 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 economic forecasts point to RLX Technologies reaching 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 benefits briefing that “the unfavorable effect of illegal goods is nonetheless lingering, as it will take some time for the industry to digest inventories.” This implies that a swift income recovery for RLX Technologies is significantly less most likely.
On the other hand, an optimization of RLX Technology’s income mix by escalating income contribution from new larger-margin goods (e.g. chewing gum) will not be completely realized in the close to term. At its most current quarter benefits contact, RLX emphasized that the majority of new goods are at the “pilot” phase with “minimal income contribution.”
In a nutshell, RLX Technology’s top rated line and profit margins will naturally be reduce in a regulated atmosphere for e-cigarettes, so it is inevitable that RLX is assigned a valuation discount and its share cost trends downwards.
Closing Thoughts
My rating for RLX is a Hold. RLX Technology’s economic overall performance is anticipated to progressively enhance in subsequent quarters, as competitors from illegal cigarettes come to be significantly less of a headwind more than time and the organization optimizes its sales mix by launching new higher-margin item offerings in the future. On the flip side, RLX will obtain it really hard to get its top rated line and gross profit margin back to pre-regulation levels in FY 2021, so a substantial optimistic re-rating of RLX’s shares in the brief term is significantly less probable. As such, a Hold rating for RLX Technologies is warranted.
