RLX Technology, the parent of China's popular e-cigarette brand RLEX, went public on the New York Stock Exchange last Friday. Its share price rose by up to 145.92% in the intraday, driving the company's market cap to more than $40 billion at its peak.
The eye-catching debut brought the vaping company, which was hit by Chinese regulators, back into the spotlight.
Out of consideration for the health of minors, the State Tobacco Monopoly Administration (STMA) and the State Administration for Market Regulation (SAMR) issued a joint notice on Nov.1, 2019, requiring manufacturers and sellers to shut down websites related to the marketing and sale of vaping products.
The strict policy severely impacted the e-cig industry, which relied heavily on online promotions at that time. Numerous vaping firms fell into tremendous losses or even went bankrupt after the promulgation of the ban, and RLEX was no exception. Its net loss widened to 50 million yuan ($7.73 million) in Q4 2019, while the previous three quarters were profitable, as recorded in the company's prospectus.
To conserve the business, RELX completely withdrew from online channels and turned to brick-and-mortar stores. The move led to an increase in RELX's operating costs and a decline in gross margin, from 44.7% in 2018 to 37.5% by the end of 2019, but was able to stabilize the company, as the offline distribution and retail networks becomes its main sales channels. RELX said that offerings can come at more flexible prices, thereby generating sufficient profit to its over-5,000 partnering retailers and some 100,000 other retail outlets nationwide.
The fast-growing vaping company booked a net revenue of over 2.20 billion yuan ($340.28 million) in the first three quarters of 2020, almost doubling the 1.14 billion yuan the same period in 2019. In terms of net income, it reached 109 million yuan ($16.86 million) in the first three quarters of 2020, up from 97 million yuan ($15 million) in the same period last year.
Citing data from China Insights Consultancy (CIC), RELX said there were approximately 286.7 million smokers in China in 2019, making it the world's largest tobacco market. However, it should be noted that the penetration rate of e-cigarettes in China remains quite low, from 0.4% in 2016 to 1.2% in 2019, at about 3.4 million users.
Nevertheless, it's a fast growing market and accounted for $1.5 billion in 2019 by retail sales value, and is expected to reach $11.3 billion just in three years, said RELX, which claimed itself to be the No.1 branded e-vape company on the market with about 63% share, at 17 months old.
Although China has a huge market to be explored, for RELX and other manufacturers, the sword of Damocles has not been eliminated. While preventing people from being addicted to it, at present the Chinese regulators have surprisingly not categorized e-cigarettes as tobacco products, so consumers only have to pay 13% value-added tax. Meanwhile for traditional cigarettes, the tax rate can be as high as 56%. Known as a "cash printing machine," the tobacco industry, one of China's largest taxpayer, is entirely under national control. Tax revenue from cigarettes reported by the monopoly amounted to 842 billion yuan ($130.24 billion) in 2016, representing almost 6.5% of China's fiscal revenue, according to the World Health Organization.
If e-cigarettes grab more business from the conventional cigarettes monopolized by the Chinese government, then these new forces are most likely to usher in more regulations and higher tax rates, which will directly affect profitability.
The rapid growth of RELX also benefits from China's highly integrated e-cigarette supply chain. China's e-cigarette industry accounts for nearly 90% of global production, according to the Research Report on China's Electronic Cigarette Industry, 2018-2022. The industry was initially driven by exports and has gradually been accepted by the domestic market in recent years. Data for the first three fiscal quarters of 2019 showed that domestic sales increased by 175%.