China's Biggest Vape-Maker Reports Drag on Growth as Regulatory Uncertainty Swirls

China’s biggest vaping company reported a dramatic drop in growth of both revenue and profit in the second quarter as regulatory uncertainty continues to dog the sector.

RLX Technology Inc. posted revenue of 2.5 billion yuan ($391 million), up 6% on the previous quarter, according to unaudited financial results released Friday. The company said its revenue increase was primarily due to sales to offline distributors as the firm has expanded its brick-and-mortar retail footprint.

But that was down from revenue growth of 48.2% in quarter one. The slowdown was “due primarily due to external factors including the negative publicity on the e-vapor industry in the latter half of the second quarter,” as well as the lack of clarity on how a new regulatory regime announced in March will be implemented, the company said in an accompanying statement.

“The draft new rules announced on March 22, 2021 [have] not been formally confirmed and no new implementation details had been revealed, which had an adverse impact on our sales,” the firm said, referring to an announcement from China’s Ministry of Industry and Information Technology that e-cigarettes and other new types of tobacco products would soon be regulated “in reference” to the rules for cigarettes.

RLX, which does business under the brand name RELX, said its gross profit increased by 3.8% to 1.14 billion yuan, up from 1.10 billion yuan in the first quarter of 2021. That was down from a 59.1% increase last quarter.

Recent extreme weather and tightened social restrictions due to new coronavirus outbreaks could be a further drag on sales, the firm said.

Income from operations was 979.3 million yuan, swinging into the black from a loss of 111.9 million yuan in the first quarter.

Kate Wang, RLX chairperson and CEO said the firm had “increased efforts to improve underage protection and product safety” in the second quarter.

Protecting minors has been at the center of concerns about China’s flourishing e-cigarette industry, which benefited from a hands-off approach by market regulators until two rounds of regulation in November 2019 and July 2020. The first was on sales to minors, while the second was a blitz on “covert online sales.” Parents and guardians were banned from encouraging kids to vape by an amendment to China’s Law on the Protection of Minors, which came into effect at the start of June.

Confidence in e-cigarette stocks was rattled early this month when a report from the state-run Xinhua News Agency criticized associated firms for continuing to sell their products to under-18s. It came as jittery investors continued to scrutinize state media for signals about which sector regulators will target next as part of an ongoing crackdown that triggered a $1 trillion global sell-off last month.

“With our strategic focus on technology investment and brand building, we strive to make RELX a trusted brand for adult smokers with state-of-the-art products, industry-leading technologies and scientific advances,” Wang said in a statement. “Going forward, we will further enhance investments in scientific research, strengthen our distribution and retail network, and improve our supply chain and production capabilities, to create more value for our users and shareholders alike.”

China’s vaping industry has been in flux as it awaits clarity on a proposed amendment to China’s tobacco law that would give the State Tobacco Monopoly Administration jurisdiction over it. That could mean costly red tape, new taxes or, most dramatically, wholesale nationalization.

According to the World Health Organization, e-cigarettes are particularly dangerous to children and adolescents. Nicotine, a highly addictive drug present in most vapes, can have “deleterious impacts” on the development of minors’ brains, the organization said in a recent report on the global vape industry. Adolescents who use e-cigarettes are more than twice as likely to become cigarette smokers, it said.

Shares of RLX in New York were up slightly in pre-market trade on Friday. The stock has had about 80% of its value wiped off since the start of the year.

Contact reporter Flynn Murphy (flynnmurphy@caixin.com) and editor Heather Mowbray (heathermowbray@caixin.com)

Download our app to receive breaking news alerts and read the news on the go.

Get our weekly free Must-Read newsletter.