RLX Technology Inc. — FY2020 Form 20-F
Period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone 2020 Q4 filing; quarterly results are not provided in the supplied text. Financial statements are audited and prepared under U.S. GAAP. Amounts below are RMB unless noted; U.S. dollar translations use RMB6.525 per US$1.
Business context
RLX develops and sells closed-system e-vapor products primarily in China. It relies mainly on offline distributors and retail outlets. The company reported over 130 authorized distributors, over 10,000 branded partner stores and over 140,000 other retail outlets at year-end. Online sales were discontinued from November 2019 following Chinese government announcements restricting online e-cigarette sales.
Key financial metrics
| Metric | FY2020 | FY2019 | Change or context |
|---|---|---|---|
| Net revenue | RMB3,819.7m (US$585.4m) | RMB1,549.4m | Up 146.5% |
| Gross profit and margin | RMB1,527.6m; 40.0% | RMB580.9m; 37.5% | Margin up 2.5 percentage points |
| Operating expenses | RMB1,514.4m | RMB524.6m | Up 188.7%; FY2020 included RMB929.1m share-based compensation |
| Operating income and margin | RMB13.1m; 0.3% | RMB56.4m; 3.6% | Operating income fell despite higher revenue |
| Net income (loss) | Loss of RMB128.1m (US$19.6m) | Income of RMB47.7m | Turned to a GAAP loss |
| Adjusted net income | RMB801.0m (US$122.8m) | RMB100.5m | Non-GAAP; excludes share-based compensation |
| Operating cash flow | RMB2,589.4m (US$396.8m) | RMB338.1m | Strongly supported by working-capital inflows and noncash compensation |
| Investing and financing cash flow | Investing: outflow RMB1,812.9m; financing: inflow RMB174.9m | Investing: outflow RMB497.8m; financing: inflow RMB576.4m | Investing activity was largely cash management placements |
| Year-end liquidity | Cash, cash equivalents and restricted cash: RMB1,454.8m; short-term deposits: RMB493.3m; short-term investments: RMB1,473.3m | Combined amounts: RMB771.7m | FY2020 total of these balances was about RMB3,421.4m; some cash and investments were restricted or pledged |
| Current assets and liabilities | RMB3,866.9m and RMB2,496.6m | RMB1,182.9m and RMB619.9m | Current ratio approximately 1.55 |
| Payables and lease liabilities | Accounts and notes payable: RMB1,459.8m; total lease liabilities: RMB94.5m | Payables: RMB499.0m; lease liabilities: RMB92.8m | No material conventional borrowings are identified in the supplied filing text |
Material changes versus FY2019
- Revenue rose 146.5%, primarily from offline distributors; their revenue increased 228.5%. Device shipments rose to 10.2 million from 4.3 million, and cartridge shipments to 212.6 million from 73.8 million.
- Gross margin improved to 40.0% from 37.5%, which management attributed to greater supplier bargaining power and lower costs at scale.
- Operating income declined to RMB13.1m from RMB56.4m. General and administrative expense increased to RMB772.0m, and R&D expense to RMB299.3m, with substantial increases in share-based compensation in both categories.
- Income tax expense increased to RMB230.5m. The filing reports an effective tax rate of approximately 225% for 2020, citing permanent book-tax differences, including share-based compensation, among the factors.
- Operating cash flow increased substantially, but included a RMB960.8m increase in accounts and notes payable, a RMB360.9m increase in taxes payable and a RMB302.0m increase in contract liabilities. These working-capital movements, together with RMB929.1m of noncash share-based compensation, help explain why cash generation diverged from the GAAP net loss.
- The company recorded RMB929.1m in share-based compensation, compared with RMB52.7m in FY2019. Adjusted net income is not a substitute for GAAP net income and excludes this expense.
Outlook, commentary and risks
- Management expects current resources, operating cash generation and the proceeds from the January 2021 IPO to cover anticipated working capital and capital expenditures for the next 12 months. The IPO generated approximately US$1.55bn in net proceeds after year-end; it was not part of December 31, 2020 liquidity. No specific revenue or earnings guidance is provided.
- Management expects to continue expanding its distribution network and product offerings and to increase R&D and G&A spending in absolute terms. It also identifies supply-chain efficiency and operating efficiency as areas for improving profitability.
- COVID-19 temporarily disrupted production, offices and retail in Q1 2020. Operations gradually resumed from Q2; management reported no subsequent significant supply constraints or pandemic-related supply-cost increases through the filing period.
- A major regulatory uncertainty arose after year-end: a March 22, 2021 draft amendment proposed applying cigarette-related rules to e-cigarettes. If adopted, it could increase compliance burdens and adversely affect the business. The filing does not state the eventual outcome.
- China’s online-sales restrictions have shifted substantially all revenue to offline channels. Other key risks include potential tobacco-product regulation, health-related concerns, product liability, and reliance on a concentrated distribution, supplier and manufacturing base. One distributor contributed 17.4% of 2020 revenue; one manufacturer accounted for 78% of purchases and 83% of year-end accounts and notes payable.
- Most products were made at an exclusive production plant operated with a third-party partner. The company disclosed that, to its knowledge, the plant was not in strict compliance with environmental inspections and regulations; failure to rectify could lead to fines, suspension or closure. The plant’s lease was also unregistered as required by PRC law.
- The company uses a PRC variable interest entity (VIE) structure for restricted activities. Its control and economic rights depend on contractual arrangements rather than direct ownership, and PRC authorities could challenge the structure or its enforceability.
- Management and the auditor identified a material weakness in financial reporting controls: insufficient personnel with appropriate U.S. GAAP expertise to design period-end controls and prepare and review filings. Management also concluded disclosure controls were ineffective at December 31, 2020; remediation was underway but not assured. The auditor gave an unqualified opinion on the financial statements, while no auditor attestation on control effectiveness was required for this newly public company.
- The filing reports no material legal proceedings currently pending and no material litigation liability recorded. It also warns of potential U.S. trading restrictions if the PCAOB cannot inspect the company’s China-based auditor under applicable rules.
Most important facts for investors to verify
- Reconcile the RMB128.1m GAAP net loss with RMB801.0m adjusted net income, including the RMB929.1m share-based compensation charge and the assumptions used to value awards.
- Assess the sustainability of operating cash flow: a significant portion of FY2020 cash generation reflected increases in payables, taxes payable and customer advances, as well as noncash compensation.
- Confirm the liquidity, maturity, restrictions and credit risk of bank deposits and structured investments, including amounts pledged against notes payable.
- Track implementation of the draft e-cigarette regulatory changes and determine whether new licensing, product, sales, tax or distribution requirements apply.
- Evaluate the remediation of the material weakness and ineffective disclosure controls, and the concentration risks involving the leading distributor, manufacturer and exclusive production plant.
- Review the VIE contractual structure and practical ability to move cash from PRC operations to the Cayman Islands holding company, including foreign-exchange and dividend restrictions.