Termination Of Noncompete With Relx Inc Will Drive Future Success

Key Takeaways

• International expansion and tailored local strategies are driving revenue growth by meeting consumer demand and improving market share in new regions.
  
• Product innovation in high-power, dual mesh technology reduces costs and boosts satisfaction, supporting revenue growth and profitability through increased sales volumes.
  
• Regulatory uncertainties and industry shifts create challenges that threaten revenue, margins, and sales, while non-GAAP reliance affects clarity of financial performance.

Catalysts

Engages in the manufacture and sale of e-vapor products in the People's Republic of China and internationally.

• The termination of the noncompete agreement with Relx Inc. has allowed RLX Technology to expand internationally, which is expected to continue driving revenue growth as the company penetrates new markets and optimizes its strategies for diverse regional needs.
  
• The company's strategic initiatives to tailor products and distribution channels to meet local preferences have been successful, as demonstrated by the positive reception of new product launches in Southeast Asia. This localized approach is anticipated to improve earnings and market share by aligning products closely with consumer demand in different regions.
  
• The ongoing product innovation cycle, notably the shift to high-power, high-volume products with dual mesh technology, is likely to reduce costs and enhance user satisfaction. This product evolution should support revenue growth and profitability through improved sales volumes and price adjustments.
  
• Effective management of regulatory challenges abroad positions RLX Technology to capitalize on regulatory shifts to maintain competitiveness, supporting both revenue growth and operating margins by ensuring compliance while still satisfying market demand.
  
• The company's commitment to returning value to shareholders through share repurchase programs and dividends, supported by a strong cash position and stable cash flow, is expected to improve earnings per share and investor confidence over time.

RLX Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming RLX Technology's revenue will grow by 23.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.6% today to 24.4% in 3 years time.
• Analysts expect earnings to reach CN¥1.1 billion (and earnings per share of CN¥1.09) by about March 2028, up from CN¥551.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥1.4 billion in earnings, and the most bearish expecting CN¥852 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.7x on those 2028 earnings, down from 32.9x today. This future PE is greater than the current PE for the US Tobacco industry at 16.5x.
• Analysts expect the number of shares outstanding to decline by 1.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.08%, as per the Simply Wall St company report.

RLX Technology Future Earnings Per Share Growth

Risks

• The company faces regulatory uncertainties in several international markets, which can create obstacles for operations and market entry, potentially impacting revenue growth and margins.
  
• Political instability and regulatory environments in potential expansion regions such as Southeast Asia and Europe pose challenges that could delay approvals and complicate market operations, affecting future revenues.
  
• The transition to high-power e-vapor products may lead to a prolonged period of decreased average selling prices, which could pressure revenue and margin growth.
  
• The ongoing reliance on non-GAAP financial measures and adjustments for stock-based compensation in their profitability metrics may obscure actual financial performance, affecting investor perception and earnings clarity.
  
• The industry shift away from disposable products due to environmental regulations may impact the product lineup and require significant adaptation, which could disrupt sales and profitability if not managed effectively.

Valuation

• The analysts have a consensus price target of $2.89 for RLX Technology based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $3.97, and the most bearish reporting a price target of just $2.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥4.6 billion, earnings will come to CN¥1.1 billion, and it would be trading on a PE ratio of 27.7x, assuming you use a discount rate of 7.1%.
• Given the current share price of $1.97, the analyst price target of $2.89 is 31.8% 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.