RLX, China’s largest e-cigarette company makes its public market debut on the NYSE – The Average Joe
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    RLX, China’s largest e-cigarette company makes its public market debut on the NYSE

    victorlei

    January 26, 2021

    Vaping has many side effects, amongst them is a potential loss of returns.

    On Jan. 22, RLX, China’s largest e-cigarette company, had its debut on the New York Stock Exchange — doubling on its first day of trading.

    Addiction “without” consequences

    Founded in 2018, RLX rapidly grew to a $35b business on the popularity of vaping — capturing 63% of the Chinese e-cigarette (vaping) market. In the first 9 months of 2020:

    • Sales grew 93% to $324m USD compared to the previous year.
    • Became profitable in its first year with an average profit margin of 6.7% in the past 2 years.

    Despite China banning the sale of online e-cigarettes in 2019, RLX continued to grow. RLX primarily sells its products to 110 offline distributors, who supplies retail outlets across China.

    Warning: Vaping can lead to serious regulations

    China is the largest vaping market with over 300m smokers and the market is expected to grow exponentially over the next few years…

    • According to research firm CIC, the Chinese vaping market is expected to grow from $1.5b in 2019 to $11.3b in 2023.
    • 1.2% of Chinese smokers use vapes vs. 32.4% in the US.

    But don’t let the growth deceive you. Vape companies have struggled to expand internationally with e-cigarettes sales banned in 41 countries including India, Brazil and Australia. Over the past 2 years, youth vaping and health concerns became major issues and e-cigarette companies were to blame.

    Juul, the largest e-cigarette maker in the US, saw its value fall 73% within 2 years — from $38b in 2018 to $10b in 2020. Altria, the maker of Marlboro, saw an $11.2b write-down on its investment in Juul.

    For investors… Balancing the risks and growth opportunities

    If China were to regulate or ban the sale of e-cigarettes — as many countries have done — an entire industry could be shut down overnight. These regulations could come in the form of:

    • Sales ban — which could destroy the company.
    • Health disclosures — which would impact public perception and slow growth.
    • Restrictions on marketing — which would limit their marketing reach and slow growth.

    Investing in Chinese companies carries another risk — these companies have fewer financial reporting requirements that could lead to fraud.

    For e-cigarette companies to succeed, they’ll have to convince health boards that the benefits of e-cigarette outweigh the costs — mainly helping smokers quit. They’ll also have to fend off lobbyists from tobacco companies who compete directly with e-cigarettes companies.

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