Emerging Asia And Global Reduced Risk Trends Will Expand E-Vapor

Key Takeaways

• RLX's international expansion and product innovation are set to drive industry-leading growth, margin expansion, and strong pricing power as rivals struggle.
  
• Efficient operations and sector consolidation should boost cash flow, enabling RLX to pursue acquisitions, buybacks, and dividends, enhancing shareholder value.
  
• Escalating global regulations, price compression, and ESG pressures are constraining RLX's growth prospects, profitability, and potential to attract investors and maintain valuation.

Catalysts

Through its subsidiaries, develops, manufactures, and sells e-vapor products in the People's Republic of China and internationally.

• Analyst consensus expects RLX's international expansion to drive solid revenue growth, but management's commentary and rapid execution suggest that RLX could achieve outpaced global market share gains, especially as regulatory clarity and channel localization empower faster rollouts and superior local adoption-potentially resulting in sustained double-digit revenue growth for several years as competitors falter.
  
• While consensus highlights product innovation and cost reductions from new high-volume devices, RLX's advanced in-house R&D and accelerated product cycles position it to set industry standards in next-generation e-vapor, enabling not only margin expansion through premiumization but also outsized pricing power, which could drive both gross margins and earnings far above peer averages.
  
• The accelerating global shift from combustible cigarettes to reduced-risk alternatives continues to expand RLX's total addressable market, and RLX is uniquely placed to capture outsized share of this migration given its strong brand and distribution, potentially leading to multi-year compounding revenue and net income gains.
  
• RLX's highly efficient operations, including a negative cash conversion cycle and continually improving working capital management, significantly enhance free cash flow generation, which can support more aggressive share buybacks, special dividends, or strategic acquisitions-directly raising earnings per share and shareholder value beyond market expectations.
  
• Consolidation in the global vaping sector, driven by stricter regulation and capital requirements, is expected to eliminate many subscale competitors; RLX's operational agility, compliance track record, and robust balance sheet make it likely to acquire competitors and retail footprints at attractive valuations, materially boosting both revenue growth and operating margins over the next several years.

RLX Technology Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on RLX Technology compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming RLX Technology's revenue will grow by 30.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 23.9% today to 23.5% in 3 years time.
• The bullish analysts expect earnings to reach CN¥1.4 billion (and earnings per share of CN¥1.09) by about August 2028, up from CN¥642.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 31.2x on those 2028 earnings, up from 30.5x today. This future PE is greater than the current PE for the US Tobacco industry at 30.5x.
• Analysts expect the number of shares outstanding to decline by 0.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.76%, as per the Simply Wall St company report.

RLX Technology Future Earnings Per Share Growth

Risks

• RLX's addressable market faces ongoing contraction from global regulatory crackdowns and heightened health scrutiny on nicotine products, with recent outright bans in key countries such as Mexico, Vietnam, and Kazakhstan and restrictions like the upcoming disposable e-vapor bans in the United Kingdom and New Zealand, all of which are likely to severely limit future revenue growth.
  
• Intensifying regulatory actions, such as heavier excise taxes in Spain and the proliferation of stricter product standards and compliance requirements across markets, risk significantly increasing operating expenses and reducing long-term net margins as RLX must frequently adapt its products and supply chains.
  
• The dominance of illegal products in China's domestic e-vapor market, combined with only modest legal market growth under the current regulatory regime, signals RLX may face persistent revenue headwinds and limited capacity for volume expansion in its primary market.
  
• The rapid emergence of big puff devices is shifting industry consumption toward higher e-liquid volumes at lower per milliliter prices, leading to an industry-wide drop in dollar value despite higher physical usage, which compresses RLX's average selling prices and puts downward pressure on profit margins and earnings.
  
• Increasing ESG mandates and anti-vaping activism globally are driving institutional divestment from nicotine and tobacco product makers, potentially reducing RLX's access to capital and market valuation, thereby limiting the company's ability to secure favorable investor support and maintain strong share price multiples over the long term.

Valuation

• The assumed bullish price target for RLX Technology is $4.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of RLX Technology's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $4.0, and the most bearish reporting a price target of just $2.26.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be CN¥5.9 billion, earnings will come to CN¥1.4 billion, and it would be trading on a PE ratio of 31.2x, assuming you use a discount rate of 7.8%.
• Given the current share price of $2.24, the bullish analyst price target of $4.0 is 44.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.