Global Regulatory Crackdowns Will Shrink Vaping Markets

Key Takeaways

• Global regulatory crackdowns and shifting consumer trends threaten to erode RLX's core market, stifling both sales growth and product demand.
  
• Heavy reliance on China and structural industry pricing pressures risk compressing margins and undermining financial stability, even as volumes increase.
  
• Strong adaptability, operational efficiency, and global diversification position RLX to sustain revenue and margin growth while regulatory shifts favor compliant market leaders.

Catalysts

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

• The rapid increase in global regulation and taxation of nicotine products, including outright bans on e-vapor products in key markets such as Mexico, Vietnam, Kazakhstan, the United Kingdom, and New Zealand, is expected to substantially shrink RLX Technology's addressable market and depress revenue growth for the foreseeable future.
  
• Shifting consumer preferences towards healthier lifestyles and the declining social acceptance of both tobacco and nicotine use are likely to erode demand for vaping products, reducing long-term sales, and hindering RLX's ability to grow earnings.
  
• The ongoing shift to big puff products, which offer a much lower consumption expense per milliliter and a lower average selling price, is resulting in rising e-liquid consumption but stagnating industry dollar growth, leading to structural pressure on RLX's top-line revenue even as volumes expand.
  
• RLX's heavy dependence on the Chinese market exposes the company to material risk from sudden regulatory tightening or the expansion of state-owned competitors, which could result in abrupt margin compression and volatile earnings.
  
• Escalating R&D and compliance costs driven by regulatory demands are likely to outpace revenue growth in the long term, reducing net profit margins and diminishing the company's ability to reinvest for future expansion.

RLX Technology Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on RLX Technology compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming RLX Technology's revenue will grow by 21.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 23.9% today to 17.6% in 3 years time.
• The bearish analysts expect earnings to reach CN¥837.7 million (and earnings per share of CN¥0.71) by about June 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 bearish analyst cohort, the company would need to trade at a PE ratio of 29.2x on those 2028 earnings, down from 29.6x today. This future PE is greater than the current PE for the US Tobacco industry at 21.1x.
• 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 7.71%, as per the Simply Wall St company report.

RLX Technology Future Earnings Per Share Growth

Risks

• RLX Technology's demonstrated ability to adapt rapidly to evolving regulation and user trends, such as the swift development and rollout of big puff products, indicates strong in-house R&D and supply chain capabilities that can help sustain revenue and earnings even as the environment changes.
  
• The company's strategic global expansion and diversification have driven a 47% year-over-year increase in net revenues, with international markets improving revenue mix and gross profit margin, reducing overdependence on the Chinese market and underpinning long-term revenue and margin growth.
  
• RLX's operational efficiencies, including robust inventory management and a negative cash conversion cycle, have enhanced working capital efficiency and helped sustain strong operating cash inflow, positioning the company for resilient earnings and net profit margin improvements.
  
• The strengthening of regulatory frameworks in various markets is expected to favor well-capitalized, compliant leaders like RLX, as smaller competitors struggle to keep pace, providing RLX with a competitive moat that can support sustained market share and revenue growth.
  
• Ongoing investment in localized product development, channel strategies, and rapid market response allows RLX to capture incremental share and capitalize on the long-term global shift from combustible tobacco to vaping, thus securing future revenue growth and stable profit margins despite near-term headwinds.

Valuation

• The assumed bearish price target for RLX Technology is $2.25, which represents the lowest 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 more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $3.98, and the most bearish reporting a price target of just $2.25.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥4.8 billion, earnings will come to CN¥837.7 million, and it would be trading on a PE ratio of 29.2x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $2.17, the bearish analyst price target of $2.25 is 3.5% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.