RLX TECHNOLOGY(RLX.US)：1Q BELOW CONSENSUS; 3Q TO BE A KEY QUARTER FOR TRANSITION

Regulatory headwind and sporadic COVID outbreaks have put RLX’s 1Q22 results below market expectation, as a result of a 29% and a 7.7pp decline YoY in revenue and gross margins, respectively. Persistent drags such as 1) provisions made for SKUs (mainly fruit-flavors) that could be impacted by the sales ban starting from Sep 2022, 2) sales mix that gravitated towards lower margins cartridges and 3) penalty to suppliers owing to order cancellation convince us that RLX’s margins trajectory likely to be under pressure in the near term. Earnings outlook remains relatively fluid, in our view, considering also the magnitude of sell-through, pricing and sales mix change that could compound and undermine our full-year forecast accuracy. For now, we assume 2Q sales momentum to meaningfully revive to RMB2.2bn (1H22: RMB3.9bn) on the gradual re-opening of Shenzhen retailers and pent-up/ front-loaded demand for flavored cartridges. 3Q will be the key transition quarter when we expect minimal net profit contribution. Depending on new product approval, we are hopeful of seeing sales to pick up sequentially in 4Q. The dynamic near term outlook has put us to refocus on the industry’s long term development with a more consolidated competitive landscape and a higher degree of regulatory compliance. We remain Buy-rated.
Earnings revision. We cut 38.4%/ 48.9% of our 2022E/ 23E revenue forecasts to reflect a soft 1Q and hence more realistic sales impact from the new regulation, followed by a 2.6ppt/ 3.4ppt cut in gross margins of the same period, respectively.
License application. RLX has initiated an application in compliance with the licensing requirements under the administrative measures.Approximately 48k licenses will be granted, per management estimate, and that should sufficiently cover the number of applications at the initial stage.
Product reformulation. RLX has developed cartridges and devices that are compliant to the new national standards and has submitted them to the State Tobacco Monopoly Administration for technical review.
Valuation. Following our earnings changes, our revised TP of US$2.47 is based on an updated 14.0x (from 17.0x) end-22E P/E, which still represents 1sd below the average valuation since March 2021, as we attempt to take into account the perplexed sentiment amid the current tightening on the e- cigar industry. We maintain BUY.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。