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Why RLX Technology Stock Sank on Wednesday

By Evan Niu, CFA - Updated Jun 2, 2021 at 12:13PM

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The Chinese vaping specialist reports first-quarter results as regulatory fears linger.

What happened

Shares of RLX Technology (RLX 2.10%) sank by as much as 10% today after the company reported first-quarter earnings. As of 11:30 a.m. EDT, the stock was still down 8%.

So what

Revenue in the first quarter increased 48% to $366.1 million, which resulted in adjusted net income of $93.2 million, or $0.06 per American depositary share (ADS). The Chinese consumer discretionary company, which sells vaping products in China, attributed the growth to higher sales to offline distributors. Gross margin expanded to 42.9%, and RLX Technology finished the quarter with $2.2 billion in cash on its balance sheet. Most of that cash was raised in RLX's IPO in January.

Man vaping while reading on a tablet.

Image source: Getty Images.

"2021 began, on a solid note, with strong growth in key performance metrics of our business," CEO Kate Wang said in a statement. "Specifically, our expansion in distribution network fueled a strong sequential growth, further demonstrating sustained user demand for our e-vapor product portfolio."

Now what

Guidance for the second quarter calls for revenue of at least 2.85 billion yuan ($446.6 million based on current exchange rates) and adjusted net income of 720 million yuan ($112.8 million based on current exchange rates). Gross margin is expected to "remain steady."

Investors may be rattled by ongoing uncertainties on the regulatory front. The Chinese government has proposed new rules that could regulate vaping products similarly to traditional tobacco offerings. There are concerns that the move could hurt the industry's growth, and RLX is the market leader for these products.

Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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