RELX Technology (NYSE: RLX) had a strong IPO debut, gaining a whopping 146% on it’s first day of trading Friday, January 22, 2021. RLX is the largest chinese vaping firm with a commanding 62.6% market share. The company which was initially targeted at $8-10 was later priced at $12.00/share. RLX finished its impressive first day of trading at $29.51/share on huge volume, posting 95,762,062 shares traded. The market cap of the company based on its closing shares price is now a whopping $45.838 billion which means a lot of future expectations are built into the price. The IPO raised $1.4 billion through the sale of 116.5 million shares. This represented 7.5% of the 1.55 billion outstanding shares. The Chinese vaping company is growing very fast and booked revenue of $341 million in the first 3 quarters of 2020 which was $176 million or over double the same period. So RLX had a fantastic start, but investors want to know what’s next, and what catalysts will continue to propel the stock higher. They also want to know what the implications are to the rest of the sector?
Strong Financial Performance Leading Up to IPO
The company posted a $16.0 mil net profit for the 9 month period ending Sept 30th, 2020 which works out to an EPS of $.011. They have gross margins of 37.9%, but they were down from the prior year as they switched their business model from online sales to offline distributors. Revenues for the 9 month period were $318 million which was essentially double the 9 month period from the previous year. What is interesting is that in 2018 they were spending only 1.5% of sales on R&D expenses and now they are running at 4.1%. In the use of proceeds the company plans on using 30% of the proceeds for R&D. That is likely to be a monster increase as a percentage of sales. Given the CEO’s historical focus on innovation investors can be assured that this essentially means that there are going to be some new product announcements in the near future now that they are public. It’s also conceivable that they expand their brand with new products.
Burgeoning Chinese Market
Launched in 2018, RLX, a leading maker of e-cigarettes in China, currently only sells its e-vapour products in China although information on their website mentions their product is available in at least 13 countries including Canada, the U.K., Indonesia, South Korea and Russia. The company has launched five series of closed-system rechargeable e-vapour products with various value-added features under its RELX brand. RLX primarily sells its products to offline distributors, which supply its products to retail outlets across China.
According to a report by research firm China Insights Consultancy (CIC), the Chinese vaping market boasted a retail sales value of $1.5bn in 2019, and is expected to reach $11.3bn in 2023, representing a compound annual growth rate (CAGR) of 65.9 percent. There were approximately 286.7 million adult users of combustible tobacco products in China in 2019, making China the world’s largest potential market for e-vapour products. To put that number into perspective, there are only 34.1m tobacco users in the United States, nearly an 8:1 ratio.
RLX’s revenues soared from 132.6 million yuan (RMB) in 2018 to RMB 1.55 billion in 2019. Revenues increased from RMB 1.14 billion in the nine months ended September 30, 2019, to RMB 2.2 billion in the nine months ended September 30, 2020.
RLX reported net income of 108.6 million Chinese yuan ($16 million) for the nine months ended Sept. 30, up from net income of 98 million yuan. Revenue nearly doubled to 2.2 billion yuan, according to the company’s prospectus. It had 661 employees as of Sept. 30.
As of September 30, 2020, RELX Technology partnered with 110 authorized distributors to supply their products to over 5,000 Branded Partner Stores and over 100,000 other retail outlets nationwide, covering over 250 cities in China.
Majority CEO Ownership
Ying (Kate) Wang, previously the former head of Uber China, is RLX’s co-founder and CEO, and holds 90% voting power now that the offering is complete. There are 1,553,315,570 shares outstanding after the offering of 116,500,000 shares. The director as a group owns 843,107,560 (58.7%). Some of their key investors appear to be business associates of Ms. Wang who in a couple instances is the sole director of the investment entity. Deep Technology Linkage Fund L.P and Sequoia Capital China are the other institutional investors with a combined 15.6% ownership of the company. Ms. Yang will retain 90% voting control of the company. Some investors may be turned off by such a high level of controls but Ms. Yang won the prestigious “New Age Innovation Brand Award 2018” and her team was named “The Most Socially Responsible Entrepreneur Award 2018.”
“We have pioneered an integrated offline distribution and ‘branded store plus’ retail model tailored to China’s e-vapour market. Under this model, we identify and leverage a variety of distribution and retail channels that allow our products to reach adult smokers in a more effective manner.” – Ying (Kate) Wang
Use of IPO Capital
According to a Capital.com article, RLX plans on using the IPO raised capital for the following:
- 30% will go towards the development of products and technologies and scientific research.
- 25% for enhancement of distribution and retail networks along with the improvement of supply chain capabilities.
- 20% for general corporate purposes and working capital.
Needless to say, $1.4B can go a long way and with this amount of cash in hand, it opens the doors to growth and opportunity. This includes the possibility of making some key acquisitions in the sector.
Publicly Traded VAPE Stocks to Watch
The vaping sector is still in its infancy within the public space. Research reveals the majority of the U.S. vaping market is just one arm of a large public entity, predominantly in the big tobacco sector. When we looked for related vaping companies that were publicly traded, we found 5 worth mentioning — Kaival Brands Innovations Group (OTCQB:KAVL), Turning Point Brands (NYSE:TPB), Altria (NYSE:MO), Philip Morris (NYSE:PM), British American Tobacco (NYSE:BTI).
In the states, JUUL is the most familiar brand name in the vaping/e-cig world. JUUL is a private company that has been under significant pressure this past year due to a multitude of lawsuits. As of July 22, 2020, there were 758 Juul lawsuits from around the United States combined in multidistrict litigation (MDL), MDL-2913. A majority of the lawsuits claim Juul’s marketing targets minors, and the company denies this. The only way for investors to own a piece of JUUL is to invest in Atria (NYSE:MO) who own a minority stake in the company.
Turning Point Brands (NYSE:TPB) has a variety of businesses in the tobacco and marijuana spaces. Their NewGen division, which sells vaping and e-cigarette products will now be in the spotlight. NewGen makes up nearly half the company’s sales and its results have been booming in recent quarters. For those that do not want to expose themselves into a vape only company, Turning Point has other businesses such as the Zig-Zag line of rolling papers that are benefiting greatly as marijuana legislation has greatly increased demand for the product.
Philip Morris and British American Tobacco are industry giants that simply hedged their tobacco product business by carrying a line of vaping products similar to how beverage company giants like Coca-Cola (NYSE:KO) and Pepsi (NASDAQ:PEP) will invest in and carry a sports drink, tea or energy drink product line. As hot as the vapor sector could be, we anticipate very little share price impact due to the amount of exposure these tobacco focused businesses have in this segment of their overall business.
Kaival Brands Innovations (OTCQB:KAVL),seems to be the only true vape/e-cig focused company to realistically compare to RELX Technology. RLX took the IPO route, while Kaival is taking the reverse merger route through an Over the Counter public shell company, then qualifying for a future NASDAQ up listing where they just announced these exact intentions days ago. Arguably, there are many similarities between these companies including market penetration, sales growth and product assortment.
Kaival brands is the exclusive global distributor of products manufactured by Bidi Vapor, LLC. Bidi Vapor’s primary offering, the Bidi® Stick, is the fastest-growing closed system vaping product in the U.S. The tamper-resistant Bidi® Stick is also the only vape product on the market with an ecologically friendly, mass-recycling program. The company also recently launched the Bidi® Pouch by Bidi Vapor, a tobacco-free nicotine pouch. Management estimates that fiscal 2021 revenues will be in the range of $400 million to $450 million.
Based on Goldman Sachs’ Equity Research Report through December 26, 2020 on the Nielsen data for total nicotine volumes (see graphic above), the Bidi® Stick by Bidi Vapor was the largest disposable electronic nicotine delivery system (“ENDS”) offering in the U.S. based on retail sales for the last 12-week period after realizing a 907.9% increase in sales during the same period ended December 26, resulting in 27.9% market share in calendar fourth quarter. While RELX Technology currently has a 62.6% market share with $341 million in revenue the first 3 quarters of 2020, Kaival Brands sales projections of approximately $450 million for fiscal year 2021 puts them in the same ballpark.
When we compare market caps, there is a dramatic difference between the two emerging vaping companies which leads us to ask ourselves, is RELX Tech overvalued by having a now $45.8B valuation or is Kaival Brands significantly undervalued with a market cap of just north of $200M. While RELX markets to about 287 million adult Chinese tobacco users, Kaival’s U.S. market of 34.1M users according to the CDC website, is just ⅛ the size of its Chinese peer’s. Although there is a disparity in size and number in a few metrics, it doesn’t justify RLX being valued 202 times that of KAVL.
Investors fear Kaival management may wish to reverse split the company to meet NASDAQ price requirements, but Friday’s investor frenzy should substantiate a valuation increase once the market gets wind of undervalued secondary companies in the vape space.
On Friday RLX stock roughly traded about $2.4 billion dollars which is a very good prognostic indicator of the health of the sector. Ms. Wang is very much a visionary and it’s very likely that there are some new product launches in the pipeline that will hit the tape soon. RLX has applied for over 20 patents and it is expected that these new innovations will be announced soon. Their revenue growth is exponential and their margins are over 35%. All indications have shown that they are on an exponential growth curve. Although it’s not likely based on Ms. Wang’s history, growth through acquisition has got to be a consideration to justify their valuation. If the growth through acquisition is a consideration KAVL seems poised to be the most logical choice given its comparable revenues and revenue growth to KAVL. If investors like this growing industry they have to own both RLX and KAVL because the entire sector rises as RLX rises, but the stock price of KAVL stock is so undervalued it’s reasonable to expect investors to play catchup on the valuation. Perhaps the safest play is to make a sector bet, and overweight KAVL and underweight RLX because if RLX goes up so will the stock of KAVL. If RLX goes down, KAVL stock should actually go up to correct for the incredible disparity in market capitalization.
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Disclosure: Insider Financial and its owners do not have a position in the stocks posted and have posted this article for free without editorial input. This article was written by a guest contributor and solely reflects his opinions.