Executive Summary / Key Takeaways

• Phoenix from the Ashes: RLX Technology has engineered one of the most remarkable turnarounds in recent consumer goods history, transforming from a China-centric e-vapor business decimated by regulatory crackdowns (revenue collapsed 85% from peak) into a globally diversified nicotine platform generating 73% revenue growth and consistent operating profits.
• International Pivot Validates Business Model: With 70-80% of Q3 2025 revenue now from international markets, RLX has proven its ability to replicate its China playbook globally, leveraging proprietary R&D and compliance expertise to capture share in Southeast Asia and Europe while the domestic market remains 87% below its peak.
• "Big Puff" Innovation Drives Margin Expansion : The company's rapid response to the high-capacity product trend—launching 14-20ml devices versus traditional 2ml—demonstrates technological agility and has contributed to 4 percentage points of gross margin expansion, as larger format products command premium pricing while utilizing similar production infrastructure.
• Fortress Balance Sheet Enables Aggressive Capital Deployment: With $2.2 billion in financial assets and a negative cash conversion cycle, RLX has returned over $500 million to shareholders since its IPO while simultaneously funding international expansion and modern oral nicotine product development, providing rare financial flexibility in a capital-intensive industry.
• Valuation Disconnect Creates Asymmetric Risk/Reward: Trading at $2.39 with a $3 billion market cap—less than one-tenth of its 2021 IPO valuation—RLX offers exposure to a profitable, growing nicotine platform at 30x earnings despite achieving 49% revenue growth and 9% operating margins, a multiple that appears conservative if international expansion sustains its trajectory.

Setting the Scene: The Regulatory Gauntlet That Forged a Global Champion

RLX Technology, founded in 2018 by Kate Wang and headquartered in Beijing, began with a simple mission: help adult smokers transition from combustible tobacco through premium e-vapor products. The company executed this vision flawlessly in its early years, capturing dominant market share in China's closed-system pod segment and achieving a near-$35 billion valuation at its 2021 New York IPO. Peak performance delivered 8.5 billion yuan in revenue and 2 billion yuan in net income, establishing RLX as the undisputed leader in the world's largest e-vapor market.

This success, however, planted the seeds of its near-destruction. Chinese regulators, alarmed by youth vaping rates and market fragmentation, launched a comprehensive crackdown beginning in 2021 that intensified into a new regulatory framework in 2022. The rules effectively banned flavored products, restricted online sales, and imposed stringent manufacturing licenses. Revenue cratered to 1.2 billion yuan in 2023, just 14% of its 2021 peak, while an unregulated black market captured 80-90% of domestic volume. RLX's China business in Q3 2025 remains at only 13% of its Q2 2021 level, illustrating the severity of the regulatory headwind.

The company's response defines its investment thesis today. Rather than accept decline, RLX terminated its non-compete agreement in November 2023 and executed a strategic pivot to international markets. This wasn't a desperate diversification play—it was a deliberate transfer of its core capabilities in compliance, product development, and localized marketing to Southeast Asia, Europe, and beyond. The results validate this strategy: 2024 marked the first full year of international operations, with revenue surging 73.3% to 2.7 billion yuan, and Q3 2025 international markets contributing 70-80% of total revenue. RLX has transformed from a single-market operator into a global nicotine platform with multiple product categories and geographic diversification that mitigates regulatory concentration risk.

Technology, Products, and Strategic Differentiation: The "Big Puff" Revolution

RLX's technological moat centers on its in-house R&D capabilities and rapid product innovation cycle, which have proven decisive in capturing the "Big Puff" trend reshaping global e-vapor markets. These high-capacity products—offering 14-20ml of e-liquid versus 2ml in traditional devices—address consumer demand for longer-lasting, more cost-effective solutions while presenting a compelling economic proposition for manufacturers. The marginal cost of adding e-liquid is minimal, yet per-unit pricing doesn't scale proportionally, creating natural margin expansion as the mix shifts toward these larger formats.

The company's product portfolio demonstrates remarkable adaptability. In February 2024, RLX launched the RLX Prime and Spin Mini open-system series in Southeast Asia, featuring dual-flavor pods and expanded e-liquid storage that significantly extends usage time. The Spin Mini's dual-flavor system specifically caters to local preferences for variety and cost-effectiveness, while the Prime's enhanced capacity improves efficiency compared to competing products. This localization strategy—developing market-specific flavor profiles and device ergonomics—has enabled RLX to outpace industry growth rates in key Asian markets.

Beyond e-vapor, RLX is expanding into modern oral nicotine products, launching ultra-thin, fast-absorbent prototypes in Q3 2025 that received strong distributor feedback and industry validation at INTERTEC Germany. This adjacent category represents the fastest-growing segment in smokeless nicotine, and RLX's entry leverages its existing distribution infrastructure while targeting previously untapped user segments. The phased rollout beginning in Q3 2025 provides a second growth vector that diversifies beyond inhalable products and positions the company to capture share in the evolving nicotine landscape.

R&D initiatives focus on five priorities: user experience, affordability, convenience, satisfaction, and harm reduction. This framework drives continuous improvement in flavor authenticity, device ergonomics, and aesthetic design while optimizing product performance through technological refinements like steel mesh technology . The typical e-vapor innovation cycle spans three years; RLX's ability to compress this timeline and respond to regulatory changes within quarters demonstrates a core competitive advantage that smaller players without robust development capabilities cannot match.

Financial Performance & Segment Dynamics: The Turnaround in Numbers

RLX's financial results provide compelling evidence that the international pivot has created a sustainable, profitable growth engine. Q3 2025 net revenue of 1,129 million yuan grew 49% year-over-year and 28% quarter-over-quarter, marking the eighth consecutive quarter of positive non-GAAP operating profit at 188 million yuan. The non-GAAP operating margin expanded 6 percentage points year-over-year to 16.7%, reflecting enhanced operating leverage and rigorous cost management that has kept expense growth well below revenue growth.

The geographic mix shift drives margin expansion. Gross profit margin improved 4 percentage points year-over-year in Q3 2025, attributed to the consolidation of the European acquisition, a favorable shift toward higher-margin international markets, and regional margin enhancements. International markets not only contribute 70-80% of revenue but also carry superior unit economics compared to the price-sensitive, black-market-dominated China market. This mix effect provides structural support for margin improvement as international scale increases.

China's modest recovery, while small in absolute terms, validates the company's dual-market strategy. Q3 2025 domestic revenue of 320 million yuan represents significant year-over-year growth, driven by stricter customs enforcement limiting illegal product reselling and the successful launch of disposable products in late 2024. Cartridge pods are growing faster than devices, indicating existing users increasingly adopt compliant products with improving retention. While the domestic market remains challenged—revenue is still 87% below peak—management's active collaboration with regulators and focus on compliance positions RLX to capture disproportionate share as enforcement against illegal manufacturers intensifies.

Cash generation underscores the business model's quality. Operating cash flow surged to 358 million yuan in Q3 2025 from 157 million yuan in the prior year, reflecting efficient working capital management with a negative cash conversion cycle. Inventory turnover stands at 25 days, receivables at 11 days, and payables at 53 days, creating a self-funding operational model that requires minimal external capital. Total financial assets of 15.4 billion yuan ($2.2 billion) provide strategic flexibility for acquisitions, R&D investment, and shareholder returns while insulating the company from capital market volatility.

Capital allocation demonstrates disciplined stewardship. Since its IPO, RLX has returned over $500 million to shareholders through repurchases and dividends, including a $0.1 per share dividend in Q3 2025. The company has essentially returned all non-GAAP net profit to shareholders over the past four years while simultaneously funding international expansion. This capital framework balances reinvestment in growth with shareholder returns, a rare combination that reflects both management's confidence in the business and the capital efficiency of the model.

Outlook, Management Guidance, and Execution Risk

Management's forward-looking statements reveal a company entering a new phase of maturity, where success depends less on blockbuster product launches and more on refined operations, channel development, and portfolio optimization. For the second half of 2025, priorities include strengthening distribution and retail capabilities in Asia and Europe while optimizing the product portfolio to boost competitiveness. This pragmatic focus acknowledges that the e-vapor industry is maturing, with growth normalizing toward e-liquid consumption rates rather than device replacement cycles.

The "Big Puff" trend is expected to gradually stabilize by year-end 2025 as physical constraints limit further device enlargement, establishing a new baseline for healthy, sustainable growth in 2026 and beyond. Management anticipates that industry dollar value growth will align more closely with e-liquid consumption and return to a normal trajectory starting in 2026. This normalization implies that RLX's 49% revenue growth in Q3 2025—achieved while the broader Chinese export market contracted due to disposable bans—represents market share gains rather than temporary trend exploitation.

International expansion plans remain ambitious but disciplined. The company aims to enter additional European countries, selected Asian markets, and potentially another continent by early 2026, contingent on regulatory clarity and market readiness. The March 2025 investment in a premier European e-vapor company, consolidated since June, has already contributed significantly to Q3 results and provides a template for future acquisitions that enhance market intelligence and operational footprint. This measured approach—expanding only when regulatory frameworks are established and distribution capabilities are proven—reduces execution risk compared to indiscriminate market entry.

Profitability guidance is constructive. Management expects further improvement in non-GAAP operating margin as the business scales, with operating expenses projected to grow more slowly than revenue due to careful headcount management in middle and back office functions. The modern oral nicotine product launch remains prudent near-term, with revenue expectations conservative as the company builds market data and consumer adoption. This disciplined approach to new category expansion prevents the profit dilution that often accompanies diversification efforts.

Risks and Asymmetries: What Could Derail the Resurrection

The most material risk remains regulatory, specifically the persistence of China's unregulated e-vapor market. CEO Kate Wang explicitly states that the black market "remains a significant headwind distorting competition and restraining volume recovery," with domestic revenue still at just 13% of peak levels. While stricter enforcement against illegal online sales and manufacturing could accelerate compliance market growth, inconsistent implementation remains a key variable. If regulators fail to curb the 80-90% black market share, RLX's domestic recovery could stall indefinitely, limiting overall growth potential.

International regulatory tightening presents a second major risk. The UK and New Zealand have implemented disposable bans, while Spain, Mexico, Vietnam, and Kazakhstan have enacted excise taxes or outright prohibitions. These measures caused Chinese e-vapor exports to decline year-over-year in Q1 2025. RLX's ability to migrate consumers to reusable and sustainable product formats demonstrates adaptability, but a cascade of similar regulations across key markets could compress industry growth and increase compliance costs. The company's multi-market presence mitigates single-country dependence, but coordinated global crackdowns would pressure the 70-80% of revenue derived internationally.

Execution risk intensifies as the company scales. The Asia Pacific franchise retail model, while driving meaningful same-store sales growth, requires significant operational oversight. In one East Asian country, the initiative engaged over 450 partners this year, but expanding this model across diverse markets with varying consumer preferences and regulatory frameworks could strain management bandwidth. The European acquisition integration—where RLX now positions itself as retailer, distribution partner, and brand operator rather than solely selling RLX-branded products—adds complexity that could distract from core brand building if not executed flawlessly.

Competitive dynamics could shift unfavorably. While RLX's R&D capabilities and compliance track record create barriers, smaller players may achieve technological parity in "Big Puff" products, eroding pricing power. Traditional tobacco giants like Philip Morris (PM) and British American Tobacco (BTI), with vastly superior resources, could accelerate their e-vapor and modern oral nicotine efforts, leveraging global distribution networks that dwarf RLX's 15,000 points of sale. The company's current advantage stems from its focused commitment to the e-vapor segment, but this specialization becomes a vulnerability if multi-category competitors cross-subsidize market share grabs.

Supply chain disruption represents a final risk. U.S. tariffs on Chinese goods have introduced volatility, and while RLX's own e-liquid factory in Shenzhen provides some insulation, broader trade tensions could force offshore production relocation, increasing costs and complexity. The negative cash conversion cycle provides a buffer, but sustained tariff pressure could compress gross margins from the current 32% level, impacting profitability just as the company reaches scale.

Valuation Context: Pricing a Transformed Business

At $2.39 per share, RLX trades at a $3.04 billion market capitalization—less than one-tenth of its 2021 IPO valuation despite having built a profitable, globally diversified business. The price-to-earnings ratio of 29.9x appears reasonable for a company delivering 49% revenue growth and expanding margins, particularly when compared to tobacco peers trading at 15-20x with flat growth. The enterprise value of $1.86 billion represents 4.0x revenue and 56.3x EBITDA, multiples that reflect both the growth trajectory and the capital efficiency of the model.

Peer comparisons highlight RLX's relative positioning. Smoore International (6969.HK) trades at 64.5x earnings with 18% revenue growth and 46% gross margins, but faces margin pressure from its OEM business model and lacks direct consumer brand exposure. RLX's 32% gross margin and 9% operating margin trail Smoore's manufacturing scale but demonstrate superior growth and brand-driven pricing power. The valuation gap reflects market skepticism about RLX's regulatory risks, but also suggests upside if international expansion continues to compound.

Balance sheet strength provides a valuation floor. With $2.2 billion in financial assets, zero net debt, and a current ratio of 9.3x, RLX has over $1.50 per share in net cash—representing nearly two-thirds of the current stock price. This fortress balance sheet not only de-risks the investment but also enables the company to sustain its 4.2% dividend yield (24% payout ratio) while repurchasing shares. The 16.8x price-to-free-cash-flow multiple appears attractive for a business generating 49% growth and returning capital to shareholders.

The key valuation question is whether the 70-80% international revenue mix is sustainable and profitable. If RLX can maintain 30%+ gross margins while expanding into new continents, the current multiple likely undervalues the long-term earnings power. Conversely, if regulatory headwinds compress international growth or force costly product redesigns, the premium to tobacco peers may be unwarranted. The market appears to be pricing RLX as a recovering China e-vapor stock rather than a global nicotine platform, creating potential upside as the international story gains recognition.

Conclusion: A Global Nicotine Platform at a Domestic Discount

RLX Technology has engineered a remarkable transformation from a single-market e-vapor company facing existential regulatory risk to a globally diversified nicotine platform with multiple growth vectors and proven profitability. The 73% revenue growth in 2024 and 49% growth in Q3 2025, driven by 70-80% international revenue contribution, validates the strategic pivot and demonstrates the portability of RLX's core competencies in compliance, product innovation, and localized marketing.

The central thesis hinges on whether this international momentum can sustain itself as the e-vapor industry matures and regulatory scrutiny intensifies. The company's ability to capture the "Big Puff" trend, launch modern oral nicotine products, and generate eight consecutive quarters of non-GAAP operating profits suggests a durable competitive moat built on R&D and distribution. The $2.2 billion cash position provides strategic flexibility that few peers can match, enabling both defensive resilience and offensive expansion.

For investors, the critical variables are regulatory enforcement consistency in China and the pace of international market development. If RLX can grow its domestic compliance share as black markets are curtailed while maintaining 30%+ growth overseas, the current valuation at 30x earnings and 4x sales appears conservative for a business with these economics. The stock price reflects a market still pricing RLX as a recovering China e-vapor play rather than a global nicotine leader—a disconnect that creates compelling upside for those who recognize the transformation's scale and sustainability.