RLX, China’s largest e-cigarette company makes its public market debut on the NYSE
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.