Despite the global economic slowdown caused by the COVID-19 pandemic, the past year saw the highest-ever IPO activity. According to FactSet data, 2020 witnessed a record 494 IPOs, which raised approximately $174 billion, representing a 150% increase versus 2019. Of this, there were 35 IPOs by Chinese companies in the U.S., the second-most on record, raising a total of $13.5 billion, up from $3.5 billion in the previous year.

The IPO momentum has continued this year, with  China-based vaping products specialist RLX Technology (RLX) making its debut on the U.S. stock market in January.

As a leading e-cigarette brand, the company engages in  key activities in the e-vapor industry, from scientific research, technology and product development, supply chain management, to offline distribution.

So, let’s take a closer look at the factors that could influence RLX’s performance in the near term:

Solid Debut

RLX raised $1.4 billion from a  listing of  116.5 million American depositary shares (ADS). The company, which is backed by Sequoia Capital China, priced the shares at $12 each, which was well above its target range of $8 to $10 per share. RLX plans  to use approximately  30% of the capital raised for research and development, and 25% to  improve its retail sales and distribution, and its supply chain efforts. The stock opened at $22.34 per ADS on January 22,   rising to close the session at $29.51. However, the stock has since lost 21.7%.

Robust Financials

Since its inception in 2018, RLX has launched five series of closed-system rechargeable e-vapor products with various value-added features. It  earned 2.2 billion yuan ($324.2 million) in the first nine months of 2020, up 93% from the comparable period last year. In addition, , RLX is already profitable and the company generated net income of $16 million in the first through the third quarter of 2020, rising 12.3% year-over-year.

Underlying Market

The vaping industry has boomed in China after the country banned online sales of e-cigarettes a year ago. According to RLX’s IPO prospectus, the company is the “No. 1 branded e-vapor company in China.” Also, RLX controlled 62.6% of the country’s market during the first three quarters of 2020. It  should be noted, however,  that vaping products have only  a 1.2% penetration rate in China, compared with 32.4% in the U.S.

Macro Uncertainty

Former President Trump signed an executive order last month that forced U.S. stock exchanges to delist some Chinese companies and banned U.S. citizens from investing in these companies. In addition,  the U.S. Congress passed a law that could potentially kick Chinese companies off U.S. exchanges in  2022  if they do not comply with U.S. auditing requirements. President Biden has inherited a tense and messy relationship with China from his predecessor, and investors don’t expect him to act quickly on this restriction.

POWR Ratings Indicate Bleak Prospects 

RLX has an overall rating of D, which equates to Sell in our POWR Ratings system.

The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, RLX has a D grade for Sentiment, in line with the weak analyst confidence.

RLX has a C grade for Value, which is consistent with the stock’s significantly higher-than-industry forward p/e ratio (303.08 vs 22.91).

In addition,  RLX has a D grade for Stability, indicating that the stock is much more volatile than  its peers.

Beyond what I stated above, we also have given RLX grades for Growth, Momentum, Quality, and Industry. Get all the RLX ratings here.

Of the 61 stocks in the B-rated  Consumer Goods Industry, RXL is ranked #57.

Click here to access RXL’s ratings for Momentum, Stability, Sentiment and Quality.

Better than RXL: Click Here to learn about top-rated Consumer Goods Industry stocks.

Bottom Line

RLX marks the first major U.S. listing this year by a China-based company. A strong IPO market, coupled with the overall bullish domestic market, worked in RLX’s favor. As a result,  political skirmishes between the world’s largest two economies did not dissuade investors from betting on the stock. However, RLX sells its vaping products exclusively in China and still has immense potential to grow in the untapped domestic market. But it is too early to bet on RLX’s bright future because it is still a young company whose prospects are poised to increase as China’s penetration rates improve and  political tensions  with the U.S.  ease.

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RLX shares were trading at $24.68 per share on Thursday afternoon, up $2.25 (+10.03%). Year-to-date, RLX has declined -16.37%, versus a 4.01% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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