Technology stock

RLX Technology Stock: Stock is Broken (NYSE:RLX)

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A few months ago, we recommended returning to RLX Technology Inc. (NYSE:NYSE: RLX) for an exchange. This trade quickly triggered a stop loss and became our worst recommendation in 2021. We had a solid year before this trade. Anyway, it is still a fast growing e-vapor enterprise manufacturer in China. This is the biggest problem. The huge stock sell-off has little to do with operations and everything to do with operations in China. There is a threat that China will nationalize vaping like it does tobacco. Second, China has cracked down tremendously on companies it sees as harmful to its people, and so vaping is certainly a public health target for China. These two major risks have caused the stock of this promising company to fall in recent months to $4. It’s pretty sad, honestly. The company just released its results this morning and the numbers were pretty strong. But management admits there are still unknowns about what China will do, which means the stock will suffer until there is more clarity.

This is the case of a good company, but a broken stock. He suffers for the aforementioned reasons. It’s a fairly speculative purchase. But the weird thing here is that in all the chaos of the stock chart, investors are losing sight of the fact that the company has positive earnings. This is unusual for a company whose stock has fallen 80%. We always love the operational design and the story of the company. It was founded by Kate Wang to help her father quit smoking. The company uses its own proprietary technology and product development system along with market research of adult nicotine users to develop e-vape products that are superior to the competition and then aggressively commercialize that technology. RLX sells its products to its target audience through an integrated offline distribution and retail model in China. Because for the moment the risk is entirely political. Don’t get me wrong, this could be a great investment if those risks dissipate. And that’s because the company is in growth mode.

Commenting on the quarter, Ms. Ying Wang (Kate Wang), Co-Founder, Chairman of the Board and Chief Executive Officer of RLX Technology, said:

“In the second quarter of 2021, our business continued to grow as we redouble our efforts to further improve the protection of minors and product security…. With our strategic focus on technology investment and brand building, we strive to make RELX a trusted brand for adult smokers with cutting-edge products, cutting-edge technologies and scientific advancements. In the future, we will further increase investment 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. . »

With the company taking a proactive approach to safety, this may help deflect negative attention from regulators, but that remains to be seen. But the sales growth continues. Net revenue increased 6.0% to $393.6 million from sequential Q2 2021. This increase is mainly due to an increase in net revenues from sales to offline distributors, mainly attributable to the expansion of the RLX distribution and retail network. Additionally, the company cut costs across the board, helping its already strong gross margin of 45% translate into positive earnings for the business.

On a GAAP basis, net income was $127.7 million, which is a nice turnaround from the first quarter losses. Additional adjusted net income was $100.9 million, representing a 6.8% increase over the first quarter. On a per share basis, this was $0.092 of profit on a GAAP basis compared to a loss of money in the first quarter. On an adjusted basis, the company earned $0.072 per share. The fact that the company has positive earnings is a huge positive considering the chaos shareholders have experienced. However, uncertainty may persist, as management noted in the release:

“The Company believes that the slowdown in second quarter sequential revenue growth is primarily due to external factors, including negative publicity about the e-vapor industry in the second half of the second quarter, coupled with the fact that the project new rules announced on March 22, 2021 had not been officially confirmed and no new implementation details had been revealed, which negatively impacted our sales Impacts of these external factors, as well as recent extreme weather conditions in several provinces of China and heightened social restrictions nationwide due to delta epidemics, may persist after the second quarter and be difficult to predict.”

This means that the stock is likely to stay broken until there is more clarity. COVID remains a challenge, but not knowing the impact of regulatory changes has made this stock difficult. For those with an iron stomach, this could prove to be one of the best speculative buys in the market, including the entire universe of Chinese equities which is currently almost untouchable. Clarity of upcoming trades will pave the way for buyers to revisit the stock. For now, we applaud management’s ability to cut costs and focus on the product. It can’t do much else, but for shareholders to see earnings being positive is a big win. For now, we suspect another quarter of pain to come as regulatory issues are resolved.