RLX Technology’s Earnings Fail to Mask the Downturn: How Can Leading Companies Break Through in the

As we bid farewell to the era of reckless growth, the e-cigarette industry is undergoing painful transitions as it enters the second half.

From early April to May 19, the stock performance of RELX's parent company, Fog Core Technology, has been lackluster, which is closely related to its recently disclosed quarterly report: In the first quarter of 2023, the company's total revenue was 189 million yuan, a year-on-year decline of 89%, with a net loss of 56.3 million yuan.

“The decline in e-cigarette companies' performance is a normal market phenomenon. After experiencing reckless growth, the industry is returning to rationality,” said Wang Peng, a researcher at the Beijing Academy of Social Sciences and director of the Digital Economy Research Institute at Nanchang University of Technology. From a long-term perspective, the e-cigarette industry has entered its second half, and large-scale enterprises are expected to return to the mean after experiencing growing pains.

Core financial data of leading companies continues to decline

As an early leader in the e-cigarette market, every move of RELX's parent company, Fog Core Technology, attracts significant attention.

Its latest financial report shows that in the first quarter of 2023, net revenue was 189 million yuan, down 89% from 1.7145 billion yuan in the same period of 2022; net loss was 56.3 million yuan, while net profit in the same period of 2022 was 687.1 million yuan; non-GAAP net profit was 183.6 million yuan, compared to 361.8 million yuan in the same period of 2022.

“We experienced a very challenging first quarter, as the shift of users towards products that comply with national standards due to illegal flavored products led to a decline in our total revenue to 188.9 million yuan. Our gross margin decreased because we were fully impacted by the new consumption tax in the first quarter,” explained Lu Chao, CFO of Fog Core Technology.

In fact, this financial report continues the downward trend seen in its 2022 financial report. Data shows that as of December 31, 2022, the company's annual profit was 1.441 billion yuan, a year-on-year decrease of 28.82%; total revenue was 5.333 billion yuan, a year-on-year decrease of 37.42%; basic earnings per share were 1.092 yuan, a year-on-year decrease of 24.43%.

The decline from the early glory of being the “first e-cigarette stock” is related to the new e-cigarette regulations implemented in 2022. Starting from October 1, 2022, entities engaged in the production and operation of e-cigarettes must obtain a tobacco monopoly license. At that time, all fruit-flavored e-cigarettes were to be removed from shelves, and a national unified e-cigarette trading management platform would only provide national standard tobacco-flavored e-cigarettes and devices with child locks.

Wang Peng, a researcher at the Beijing Academy of Social Sciences and director of the Digital Economy Research Institute at Nanchang University of Technology, stated in an interview that the decline in e-cigarette companies' performance is due to multiple factors, reflecting that the entire industry is returning to rationality. Especially in the previous disordered operating state, there was little distinction among user demographics, leading to some misleading phenomena among teenagers.

After losing fruit flavors, leading companies face the impact of illegal products

“Since the fruit flavors were removed, I haven't really vaped RELX anymore,” said e-cigarette enthusiast Feng Hua. He started using e-cigarettes with various fruit flavors and stocked up when he heard they would be removed, but after finishing them, he stopped buying e-cigarettes intentionally.

Many consumers like Feng Hua share similar experiences. According to the aforementioned national standards for e-cigarettes: all fruit-flavored e-cigarettes will be removed from shelves, only national standard tobacco-flavored e-cigarettes and devices with child locks will be provided; entities engaged in the production and operation of e-cigarettes must obtain a tobacco monopoly license; advertising for e-cigarettes is prohibited in public media or public places, public transport, and outdoors.

“The gradual implementation of e-cigarette regulatory policies has actually brought new hope to the industry,” said financial commentator Wang Chikun. The strengthening of regulation indicates that the industry is maturing. As the e-cigarette market gradually becomes standardized, self-regulation in the e-cigarette market will also gradually take shape, and relevant laws and regulations will clarify the responsibilities and obligations of enterprises.

However, it is unexpectedly challenging for leading companies like RELX to face the impact of illegal products after losing their core fruit-flavored product line.

Wang Ying, co-founder and CEO of Fog Core Technology, stated that although the company is working hard to develop a diverse range of new products to meet various user needs, the widespread presence of illegal products poses short-term challenges to our sales and disrupts the recovery pace of the entire industry.

Fortunately, market corrections are also taking place simultaneously. In April 2023, Shanghai issued its first criminal penalties for the illegal sale of e-cigarette products, with Chen, who was selling fruit-flavored e-cigarettes despite the ban, sentenced to three years in prison, suspended for three years, and fined 90,000 yuan. Data shows that since the beginning of 2023, over 100 illegal e-cigarette cases have been investigated in Shanghai alone, involving over 29 million yuan, with 108 individuals involved.

The e-cigarette industry chain is in a period of transformative growing pains

Looking at the entire e-cigarette industry, the growing pains of transformation are not limited to just Fog Core Technology.

SMOORE International's Q1 2023 report shows that the company achieved revenue of 2.527 billion yuan, a year-on-year increase of 11.9%; adjusted net profit was 306 million yuan, a year-on-year decline of 44.8%.

In its announcement, it stated that in Q1 2023, revenue from the mainland China market was approximately 15.5 million yuan, a year-on-year decrease of about 97.7%, mainly due to external environmental impacts, leading to a significant decline in demand for electronic vapor products in the mainland China market.

The "2022 E-cigarette Industry Export Blue Book" indicates that in terms of market size, the global e-cigarette market is expected to exceed 108 billion USD in 2022, with the overseas e-cigarette market expected to maintain a growth rate of 35%, surpassing 100 billion USD in total scale. Therefore, some companies have begun to shift their focus to overseas markets.

On March 10, the E-cigarette Special Committee's ECCC overseas exhibition team officially launched its Latin America station, aiming to help member companies reduce costs and increase efficiency, opening up more international new markets to promote the prosperous development of the e-cigarette industry. The first stop in Paraguay officially started on March 10 local time, with 26 member companies participating.

“From both policy and market perspectives, China's e-cigarette industry has passed its rapid development phase. The industry development dividends have disappeared, and the market not only faces fierce competition with peers but also with the traditional cigarette market, while also needing to pay attention to regulatory policies. The era of easy profits for e-cigarette companies is over; they must now think creatively about operations,” said Wang Chikun.

Wang Peng also mentioned that for e-cigarette companies, the era of easy profits through simple branding is long gone, but this also means that the entire industry is returning to normal. Although there are certain difficulties in investigating small-scale illegal products, the overall trend of the industry will not change, and there is still a possibility for larger enterprises to return to the mean.