Shares in the first major Chinese IPO in the United States this year should start trading today, offering access to the international market for vaping products.
RLX Technology is raising US$1.4 billion by selling shares at US$12, according to Reuters, above its initial target range of US$8 to US$10.
The shares are due to start trading on the New York Stock Exchange today under the ticker RLX.
At that offer price, Beijing-based RLX would have a market capitalization of US$18.6 billion. It is selling 116.5 million shares to the public.
The offering has not taken the normal high-profile path for an IPO. The company declined to comment on its pricing, despite its shares being about to hit the market. The offering is being led by bookmakers Citigroup (C) and China Renaissance Holdings. You can see its prospectus here.
RLX and its RELX brand of vaping devices have venture-capital backing from Sequoia Capital's China arm. The company cites CIC research showing RELX is the top branded vaping device in China, with 48.0% of retail sales for closed-system e-vapor products in 2019. That share rose to 62.6% of the market for the nine months through September 2020.
The company had sales of US$324.2 million for the first nine months of 2020, generating a narrow profit of US$16.0 million. But sales are up 93.3% over the same time the previous year, and the company has turned from a loss in 2018 to a full-year profit of US$7.0 million in 2019, with the full-year figures not yet in for 2020.
Founder Kate Wang, a former executive in China with the ride-hailing services Uber (UBER) and DiDi, began RELX in 2017, motivated by her attempts to get her father to quit his habit of smoking two packs of cigarettes per day. She has said the company raised US$286 million in financing from backers such as Sequoia. It aims to use the IPO money to go global.
I'm a vaper. But I use JUUL products, the top brand in the United States, made by Juul Labs. Such products are typically called e-cigarettes, but since they heat into steam flavored liquid, normally infused with nicotine salts, they are much less like cigarettes than the heat-not-burn technology such as iQOS, from Philip Morris International PM, which actually heats tobacco to the point where it emits vapor.
While vaping is legal in China, it is illegal to import nicotine into Hong Kong without a poisons or pharmaceuticals license. So I have to be imaginative in getting any supply. While JUUL devices are now made in China, the vapor in the pods still comes from the United States.
China is the top manufacturing base for vaping products, worldwide, with 90% of the world's e-cigarettes made in China. Shenzhen, just across the border here from Hong Kong, is the tech center for product development. Besides RELX, other brands such as FLOW and Yooz have also attracted foreign funding.
After allowing the industry to operate with no regulation, vaping is now coming under political scrutiny in China, as The New York Times explains. The authorities have moved to ban the sale of vaping products online, and are attempting to enforce national standards for quality.
You might be a little confused about the outcome of the various impositions placed on Chinese stocks by the previous administration of former President Trump.
Under Trump, Congress passed and he signed into law the Holding Foreign Companies Accountable Act. That states any foreign company will have its securities kicked off any U.S. exchange if it fails to comply with audits from the U.S. Public Accounting Oversight Board for three years in a row.
That law will cover RLX. The law didn't have to mention China. But accounting companies in China have refused to allow international oversight of their audits, citing the risk that the process would reveal "state secrets." Many companies in China are at least partly owned by the Chinese government, but a "state secret" in China is whatever the bigwigs in Beijing decide they don't want you to know. It's deliberately vague.
The new U.S. law, which passed by voice vote and essentially without opposition in the House or Senate, also requires companies to declare if they are owned or controlled by a foreign government.
RLX will not be affected by other recent stock-market actions. Unless, somehow, its vaping products are secretly repurposed as weapons... worried parents of teen-agers probably argue they already are!
Last week, the U.S. Department of Defense labelled Xiaomi (XIACF) , which in Q3 2020 surpassed Apple (AAPL) as the world's third-largest maker of smartphones, as having ties to China's military, as I explained. That gave a short-term shock to the stock, although the shares tripled in value last year.
The Pentagon has now identified 44 Chinese companies as being part of China's military-civil fusion development strategy, to bolster the People's Liberation Army. Under an executive order issued on November 12 by Trump, U.S. investors can no longer buy the shares of such companies.
The order went into effect on January 11 for any purchase of securities issued by the initial batch of 35 companies covered by the Pentagon's designation. U.S. investors can continue to trade in those companies until November 11 to sell out of the securities they hold.
The order will apply 60 days after the addition of any subsequent stocks such as Xiaomi.
As a result of that order, the NYSE moved to delist China's three main phone companies, since they too were designated as having links to the Chinese military. The Big Board flip-flopped but ultimately elected to remove China Mobile (CHL) , China Telecom (CHA) and China Unicom (CHU) , which had a combined market capitalization of US$157 billion.
Those three companies said on Thursday morning here in Hong Kong that they have now applied for reconsideration from the NYSE. That suggests they are hoping for different treatment under the administration of new President Biden. The three telcos have also asked for the trading halt on their U.S. shares to be temporarily lifted.
The companies filed their requests hours after Biden took office. The new president issued 15 executive orders and two executive actions on Day 1, reversing some of Trump's policies. But the issue of Chinese listings was not addressed. Biden certainly doesn't want to look weak on China, with bipartisan support for a tough stance on the country.
Biden's nominee as Secretary of State Antony Blinken has agreed with his predecessor Mike Pompeo's decision, on his last day in office, to rule that China is committing genocide in its efforts to eliminate its Uighur minority people in its westernmost province, Xinjiang.
It is Biden's nominee as Treasury Secretary, Janet Yellen, however, who must make the calls on stock listings, if her appointment is confirmed by the Senate. It is to her predecessor, Steve Mnuchin, that Trump delegated the interpretation and enforcement of his orders.
Last year, 35 Chinese companies went public with IPOs in the United States, raising US$13.5 billion, according to data from Dealogic. So far in 2021, three smaller Chinese companies have raised a combined US$319 million on U.S. markets.
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