Vaping has many side effects, amongst them is a potential loss of returns.

On Jan. 22, RLX, China’s largest e-cigarette company, had its debut on the New York Stock Exchange — doubling on its first day of trading.

Addiction “without” consequences

Founded in 2018, RLX rapidly grew to a $35b business on the popularity of vaping — capturing 63% of the Chinese e-cigarette (vaping) market. In the first 9 months of 2020:

• Sales grew 93% to $324m USD compared to the previous year.
• Became profitable in its first year with an average profit margin of 6.7% in the past 2 years.

Despite China banning the sale of online e-cigarettes in 2019, RLX continued to grow. RLX primarily sells its products to 110 offline distributors, who supplies retail outlets across China.

Warning: Vaping can lead to serious regulations

China is the largest vaping market with over 300m smokers and the market is expected to grow exponentially over the next few years…

• According to research firm CIC, the Chinese vaping market is expected to grow from $1.5b in 2019 to $11.3b in 2023.
• 1.2% of Chinese smokers use vapes vs. 32.4% in the US.

But don’t let the growth deceive you. Vape companies have struggled to expand internationally with e-cigarettes sales banned in 41 countries including India, Brazil and Australia. Over the past 2 years, youth vaping and health concerns became major issues and e-cigarette companies were to blame.

Juul, the largest e-cigarette maker in the US, saw its value fall 73% within 2 years — from $38b in 2018 to $10b in 2020. Altria, the maker of Marlboro, saw an $11.2b write-down on its investment in Juul.

For investors… Balancing the risks and growth opportunities

If China were to regulate or ban the sale of e-cigarettes — as many countries have done — an entire industry could be shut down overnight. These regulations could come in the form of:

• Sales ban — which could destroy the company.
• Health disclosures — which would impact public perception and slow growth.
• Restrictions on marketing — which would limit their marketing reach and slow growth.

Investing in Chinese companies carries another risk — these companies have fewer financial reporting requirements that could lead to fraud.

For e-cigarette companies to succeed, they’ll have to convince health boards that the benefits of e-cigarette outweigh the costs — mainly helping smokers quit. They’ll also have to fend off lobbyists from tobacco companies who compete directly with e-cigarettes companies.