Two months ago, we wrote about the execution of Chinese vaping company RLX Technology, which had just gone public in the US. A particular impressive feat of this ex-Uber team was building own distribution while online channels were clipped off by regulators.

Everyone knew the regulatory risks were still there – ultimately RLX competing against State Tobacco Monopoly Administration, which controls the circulation of 40% of the world’s cigarettes. Since 2014, the STMA has been paying the State taxes and dividends of more than CNY1 trillion (US$ 154 billion) each year. Now you know how powerful the interests at stake can be.

Today (22 Mar 2021), The Ministry of Industry and Information Technology (MIIT) and STMA issued draft regulations stipulating that new tobacco products, including e-cigarettes, will be regulated as conventional cigarettes.

To summarise the key consequences:

  1. The retail stores will need to be licensed to sell;
  2. STMA will control the entire distribution;
  3. E-cigarette circulation will be controlled;
  4. Production and distribution quantity will be subject to STMA quota;
  5. Pricing will be fixed by the state too.

This is a huge blow to RLX’s high growth, high margin business model. Stickiness, frequency and brand premium will probably still be there. But without the expected growth and margin, it is difficult to sustain the valuation it currently commands.

This is a much tougher challenge for the team to deal with.