Stricter Vaping Regulations And Chinese Risks Will Diminish Value

Key Takeaways

• Heightened global regulation and health trends threaten both RLX's addressable market and long-term revenue potential, with rising compliance burdens squeezing profitability.
  
• Heavy reliance on China and unproven overseas expansion exposes RLX to ongoing concentration risk and limits prospects for future growth if international efforts falter.
  
• Strategic international expansion, regulatory-driven market share gains, diversification into new nicotine segments, and disciplined financial management position RLX for sustained growth and increased shareholder value.

Catalysts

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

• Global movements toward heightened health awareness and anti-tobacco sentiment, including rising education on the risks of all nicotine products, are likely to intensify regulatory scrutiny and reduce the long-term addressable market for RLX's core offerings, ultimately risking sustained revenue contraction as fewer consumers adopt vaping or oral nicotine products.
  
• Governments worldwide-including key overseas growth markets targeted by RLX-are expected to introduce stricter regulations, advertising bans, and higher excise taxes on vaping and nicotine delivery systems, imposing sharply increasing compliance costs and cutting into both volume growth and net margins over the coming years.
  
• RLX's significant dependency on the Chinese market exposes it to elevated risk from unpredictable regulatory action and ongoing crackdowns on e-cigarettes, which may directly result in sharp declines in domestic revenues and ongoing profitability challenges if legal sales are restricted or burdensome standards implemented.
  
• The company's push into overseas markets has not yet demonstrated substantial organic growth or successful geographic diversification, meaning any failure to secure and grow market share internationally will lead to enduring revenue concentration risk and limit future earnings expansion, particularly if domestic market conditions worsen.
  
• Fast-moving shifts in consumer preferences away from nicotine and towards wellness products, as well as increased competition from illicit producers and technological disruption, threaten future top-line growth and could drive margin compression as RLX is forced to further invest in R&D and compliance just to maintain current levels of profitability.

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 19.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 24.9% today to 17.0% in 3 years time.
• The bearish analysts expect earnings to reach CN¥843.8 million (and earnings per share of CN¥0.72) by about August 2028, up from CN¥726.8 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 30.0x on those 2028 earnings, up from 28.6x today. This future PE is lower than the current PE for the US Tobacco industry at 34.9x.
• Analysts expect the number of shares outstanding to decline by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.8%, as per the Simply Wall St company report.

RLX Technology Future Earnings Per Share Growth

Risks

• RLX delivered a 40 percent year-over-year increase in net revenues during the second quarter, driven by strong international expansion and new market entry, which indicates growing topline potential even in a changing regulatory landscape.
  
• The company is actively diversifying its product portfolio beyond e-vapor into modern oral nicotine segments, and positive distributor feedback for new prototypes could further broaden its addressable market and reduce single-category risk, supporting future revenue growth.
  
• Stringent regulatory enforcement is shrinking the illegal and gray markets both domestically and overseas, shifting market share toward compliant companies like RLX, which is likely to result in improved revenue and market share as regulatory clarity increases.
  
• The successful acquisition and integration of a leading European e-vapor company expands RLX's retail capabilities and operational footprint in Europe, setting the stage for future international revenue diversification and supporting gross and net margin improvement through localized operations.
  
• Consistent positive operating profits, growing cash flows, and ongoing shareholder returns-including dividend payments and share buybacks-highlight strong financial discipline and the potential for sustained earnings growth and shareholder value creation.

Valuation

• The assumed bearish price target for RLX Technology is $2.34, 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 $4.01, and the most bearish reporting a price target of just $2.34.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥5.0 billion, earnings will come to CN¥843.8 million, and it would be trading on a PE ratio of 30.0x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $2.38, the bearish analyst price target of $2.34 is 2.0% lower. 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.