Lilit Amirkhanian/iStock via Getty Images
Lilit Amirkhanian/iStock via Getty Images
I rate RLX Technology Inc. (NYSE:RLX) shares as a Hold.
My previous November 1, 2023, update was focused on the read-throughs from the Q3 2023 results of RLX Technology's contract manufacturer. For the current article, I review RLX's Q4 2023 earnings and assess the company's business prospects.
I have decided to upgrade my rating for RLX from a Sell to a Hold, taking into account its good expense management (reflected in its better-than-expected Q4 earnings), and its decent potential FY 2024 buyback yield of 5.3%.
But my opinion is that RLX Technology isn't deserving of a Buy rating. The company' FY 2024 outlook is murky considering that there are still challenges for its Mainland Chinese business relating to new product approval and competition from illegal products, and that RLX is still in the early days of its foreign markets expansion.
On March 15, 2024, prior to trading hours, RLX Technology issued the company's results announcement for the fourth quarter of 2023. RLX's latest quarterly financial performance turned out to be way better than what the analysts had anticipated earlier.
RLX's revenue jumped by +53% YoY from RMB340.0 million for Q4 2022 to RMB520.5 million in Q4 2023, and this was also equivalent to a +22% increase on QoQ terms. The company's actual Q4 2023 sales exceeded the market's consensus top line estimate of RMB478.0 million (source: S&P Capital IQ) by +9%.
RLX Technology indicated in its Q4 2023 results announcement that the company's "international expansion in Southeast and North Asia" was the main driver of the substantial growth in its top line for the recent quarter. At the company's latest fourth quarter earnings briefing, RLX also noted that its venture into "North and Southeast Asia in late 2023" has "shown promising progress."
The company's normalized net profit rose by +115% QoQ and +73% YoY to RMB432.6 million for the final quarter of last year. This represented a +184% earnings beat for RLX Technology in Q4 2023, as the sell side's consensus bottom line projection was much lower at RMB152.5 million as per S&P Capital IQ data.
The largest expense item for RLX is general & administrative or G&A costs. RLX Technology's G&A costs as a percentage of its sales decreased from 9.8% for Q3 2023 to 1.9% in Q4 2023 as disclosed in its recent quarterly earnings presentation slides. Also, the company highlighted at its Q4 2023 earnings call that its "stringent cost control" led to a "49% decrease in full-year total salaries and welfare benefits" for 2023. In other words, RLX's expense optimization actions have allowed it to report above-expectations Q4 2023 net income.
In a nutshell, RLX Technology's results beat for the fourth quarter of last year was largely attributable to new market entry and expense management.
In the next section, I evaluate RLX's 2024 outlook.
RLX didn't offer specific quantitative guidance for FY 2024. But a review of the company's management comments suggests that its prospects for the current year might be mixed.
One thing to note is that RLX Technology's entry into new geographical markets is likely to boost its top line, but the profit contribution of these new foreign (non-China) business operations might not be that substantial.
At its most recent Q4 2023 results briefing, RLX revealed that it "plans to expand to more Asian markets" this year, but it cautioned that "it is premature to share specific margin targets" for its international businesses. It is reasonable to assume that it will take some time for RLX Technology's businesses in foreign markets to be profitable in a meaningful way considering the initial fixed costs associated with new market entry.
Another point worthy of attention is that RLX's Mainland Chinese business could be still under pressure for the near term. RLX Technology didn't disclose its revenue mix by geographical markets in its Q4 2023 results announcement, but it has mentioned that the entry into new geographical markets (rather than the Mainland Chinese market's performance) was the most important reason for the company's robust revenue expansion in the fourth quarter of the prior year.
An analyst asked at the fourth quarter earnings call if "the approval process for new products (in Mainland China) has accelerated." In response, RLX's management noted that it has (emphasis added):
"continuously applied for new approvals for cartridges and devices as new products must undergo several rounds of reviews to ensure they meet the national standard requirements."
Separately, RLX Technology stressed at its recent quarterly earnings briefing that it is (emphasis added):
"well positioned to see opportunities in China's legal e-vapor market, especially once enforcement against illicit products becomes more effective."
In my view, the company's domestic operations might underperform due to the continued threat from illicit e-cigarette products and slower-than-expected regulatory approvals for new product offerings.
On the flip side, it is relevant to note that RLX Technology has indicated that it "will remain focused on optimizing operating efficiency and profitability" in 2024 at its latest quarterly earnings briefing.
In summary, RLX's FY 2024 outlook is murky. On one hand, the company's cost management efforts, which drove its Q4 2023 earnings beat, might continue to provide support for its profitability this year. On the other hand, there is uncertainty over the profitability of RLX Technology's new foreign businesses and the performance of its Mainland Chinese business.
RLX Technology distributed $112 million (including $98.5 million of share buybacks) of its excess capital to its shareholders via both dividends and share repurchases last year, which translated into a 3.9% shareholder yield (buybacks and dividends divided by market capitalization).
The company's historical dividends have been modest (about $13.5 million for FY 2023), so I will focus on share buybacks in analyzing RLX's future shareholder capital return.
Looking ahead, RLX is extending the expiry of its $500 million buyback plan, which was initiated at the end of 2021, by an additional two years, to December 31, 2025. RLX Technology has approximately $304.5 million remaining from its current buyback authorization as of December 31, 2023. Assuming the company completes its buyback plan by spending around $152 million on buybacks each year for both 2024 and 2025, this is equivalent to a 5.3% buyback yield.
I am of the view that RLX's forward buyback yield of 5.3% is reasonably good, but not particularly attractive. As a comparison, there are other U.S.-listed Chinese companies boasting much higher buyback yields. For example, Chinese fintech business Qifu Technology (QFIN) offers a potential forward buyback yield in the low-teens percentage range, as I highlighted in a recent March 15, 2024 write-up.
I think that RLX Technology Inc.'s above-expectations fourth quarter results indicate that the company has done well in controlling costs. On the flip side, there is uncertainty regarding RLX Technology's future financial performance, after assessing the outlook for both its domestic and international businesses. As such, I have a Hold rating for RLX.