RLX Technology Inc.

Moat: 1.5/5

Understandability: 3/5

Balance Sheet Health: 4/5

RLX Technology Inc. is a Chinese e-cigarette company, primarily engaged in manufacturing and selling vapor products. The company operates as a business-to-business and business-to-consumer player.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview RLX Technology Inc. (RLX) is a major player in the Chinese e-cigarette market. The company operates through the design, development, manufacture, and sale of electronic cigarettes. Here’s a breakdown of their business:

Revenues: RLX generates revenue primarily from sales of its branded e-cigarettes and related accessories. Its products are sold through various channels, including retail stores, distributors, and online platforms. The company is expanding through several geographic regions.
Geographic Focus: The company has a strong presence in China, as that is its primary market. The recent push towards international markets is an area that has high growth potential and the company seems to focus on it more, but is still in early stages of development.
Trends in Industry: The e-cigarette market is characterized by evolving regulations, particularly in China, where regulations can make sales growth extremely difficult. Moreover, the Chinese market is highly competitive and fragmented with several other players also providing similar products, which makes any company’s sustained competitiveness questionable. Consumers also regularly switch between brands based on their experiences and pricing making it difficult to create customer stickiness and brand loyalty.
Margins: The company’s margins are affected by several factors including the intense competition, regulations, input costs, and the cost of implementing new production technology.
Competitive Landscape: The market is characterized by intense competition among several e-cigarette manufacturers. As a result, the ability to command higher prices or establish a strong brand loyalty is significantly diminished. There are several regulatory issues in place as well making it even more difficult for any player to create sustainable advantage.
What makes the company different: RLX is trying to focus more on R&D and technology as well as building a brand name, with a long term vision and global expansion plans.

This is done by most Chinese brands and the company does not seem to have done anything unique than its competitors, hence not giving it a strong competitive advantage.

Moat Analysis RLX’s moat is currently weak, rated at 1.5/5, primarily due to the following:

Lack of Brand Strength: Although RLX has a brand, there is very little differentiation from other competitors in the market. Consumers often switch to other brands based on pricing and availability. The brand is therefore not a moat.
No Switching Costs: E-cigarettes are a consumer commodity where there is little or no switching cost. Customers can easily switch to other products if they see better options or availability.
Intangible Assets Though RLX tries to build up a brand name, it’s not been a proven long term competitive edge and has a lot of competition in its space. RLX’s business model of providing an intangible asset is more prone to damage as customers rarely look at anything more than its product and its price.
Lack of Differentiation: RLX is trying to improve the product and has a decent R&D budget. However, it will be very difficult for it to create any substantial competitive advantage against the many existing firms.
Limited pricing power: RLX, like many commodity producers, has very limited pricing power as there are many alternatives from competitors.
Regulatory Risks: New regulations or changes could directly affect the sales and margins of the company. This is a major risk, especially with the Chinese market which has a lot of regulatory unpredictability.

There is little to no competitive advantage that can help this company gain and retain market share, leading to very low moat.

Risks to the Moat and Business Resilience

Regulatory Changes: The regulatory landscape is the biggest risk for RLX. Changes in regulations can disrupt sales, restrict the types of products, and affect pricing. In addition, any tax changes can also affect profitability.
Competition: The e-cigarette market is competitive, and new companies with more innovative products can directly threaten the existing players and their financial positions. Also there is no brand loyalty from consumers.
Changing consumer preferences: Shifts in consumer preferences can significantly impact demand for e-cigarettes. The company should be nimble and adaptable to keep up with changing preferences and produce products that customers want.
Supply Chain Disruptions: Disruptions in the supply of raw materials or manufacturing capacity can drastically affect output and sales.

Business Resilience RLX is trying to mitigate risks by diversifying its product lines and distribution channels. However the company is fairly young and has limited experience and needs to develop more expertise and infrastructure. The company’s resilience is therefore limited and can be seriously impacted by any significant setbacks.

Financial Analysis

RLX has a relatively sound financial profile.

Strong Balance Sheet: The company has a good balance sheet and has low debt. It has high current assets and can meet its short-term financial obligations without problems. The company is conservative with its cash, and its cash position looks relatively healthy.
Profitability: The company has shown profitability for the past two years, but the margins have declined from 67.8 percent in 2019, to 38.3 percent in 2021. The net profits have fluctuated wildly showing poor overall sustainability.
Cash Flows: The company has positive cash flow and has been improving its cash position year over year.

While the company does possess cash, there’s no indication that it can be used to grow the company or make a worthwhile acquisition, as all of its recent revenue has come from its core operations and not by utilizing capital. The biggest weakness of its financials is its inability to maintain consistent profit margins. This would be the main issue that the company needs to solve going forward.

Overall, the company is financially well-balanced with no immediate financial threats, but still lacks the ability to use capital to increase growth.

Understandability Rating: 3 / 5

The business is relatively straightforward to understand, given the fact that the company sells e-cigarettes. However, understanding the complex regulatory environment in China and its effect on the company’s financials, as well as understanding the company’s ability to create a moat is very difficult and requires a deeper level of research.

Therefore, a 3 rating seems apt for RLX.

Balance Sheet Health Rating: 4 / 5 RLX boasts a healthy balance sheet, characterized by a strong cash position, low debt, and manageable liquidity. While it could improve its use of capital and manage cash more efficiently, it is well-positioned to withstand any short-term volatility and therefore scores a 4.