China’s relationship with tobacco is long and conflicted. The country boasts the world’s largest number of smokers (at least 300 million, or similar to the US population) and their habit puts huge pressure on the healthcare system. Yet the conventional tobacco industry, which is wholly state-owned, delivers enormous income to the government. In 2019, it contributed Rmb1.2 trillion ($185.64 billion) in taxes, 20 times more than internet behemoth Alibaba Group.
But with over a million people dying every year from tobacco-related diseases, the government is starting to embrace e-cigarettes as a less lethal alternative to old-school smoking.
The Chinese are already the world’s biggest smokers of e-cigarettes, with 10 million vapers, and the trend has turned some of the entrepreneurs in the sector into billionaires. In January, Relx Technologies, the country’s largest e-cigarette maker, launched a $1.4 billion initial public offering on the New York Stock Exchange. The IPO turned Relx’s founder Wang Ying, 39, into an overnight billionaire. The millennial entrepreneur – who goes by the English name of Kate – holds nearly 19.88% of the company’s shares and now boasts an estimated net worth of $9 billion, rendering her one of China’s richest women (the leader in this respect is Country Garden’s Yang Huiyan).
Wang, a former executive at Uber China and Didi Chuxing, founded her firm in 2018 when she submitted a crowdfunding proposal on JD.com. She managed to drum up initial investment of over Rmb38 million and within six months Sequioa China and Source Code Capital were showing interest, joining the Series A financing round.
Relx has launched sleek and showy vaping devices to appeal to younger smokers. It also sets up pop-up stores in high-end shopping malls in cities like Shanghai so that consumers can test them out with flavours like ‘Naked in Iceland’ (menthol) and ‘Hong Kong Chill’ (lemon tea). It has tapped trendy influencers to pitch its new products on social medi tooa. A starter kit, which includes the Relx device and two pods (280 to 1,300 puffs per pod, depending on how deep you draw), costs Rmb268.
By 2019, net profit was Rmb47.7 million on sales of Rmb1.5 billion. Revenue reached Rmb2 billion in the first three quarters of last year and net profit by then was Rmb109 million. Relx’s market share had reached 63% of the e-cigarette sector by last September, research from the China Insight Consultancy (CIC) claims.
Relx is benefiting from regulations in which the government does not (yet) classify e-cigarette makers as tobacco companies, which are taxed at much higher rates. As a result, China’s e-cigarette brands are making nicotine-based products but getting similar treatment from investors to tech firms, news portal Huxiu comments. By contrast, the Food and Drug Administration (FDA) in the United States decided to treat e-cigarette makers largely as tobacco companies in 2016.
Aware of the benefits, Wang has been downplaying the ‘cigarette’ part of her business and positioning her company as more of a technology play. For instance, Relx introduced a new feature called Project Sunflower, which uses facial recognition technology to make sure that only adults can purchase its products in its retail stores (the system matches customer faces with photos on identity cards).
It helps that foreign firms have found it harder to enter the China market, where there are restrictions on online sales of vaping products. Juul, the San Francisco-based electronic cigarette company, was blocked from selling its goods just days after it launched its products on JD.com and Tmall in 2019.
For sales, Relx operates its own retail stores but also partners with distributors to supply its goods to over 100,000 supermarkets and tobacco stores nationwide. It relies on OEMs to manufacture its devices and pods, although it has invested in an R&D centre tasked with improving e-cigarettes further. CIC reckons that China’s e-cigarette market will reach $11.3 billion by 2023. Of course, investors must be wary of the government changing its attitude to Relx and hitting it with more punitive tobacco taxes (see WiC474 for an instance of how the powerful state cigarette monopoly can shift the policy tone too).
Keeping track, April 1, 2021: In issue 527 we wrote that e-cigarette maker Relx Technology going public on the New York Stock Exchange, raising $1.4 billion in its initial public offering. Last week the company was in the news again when China’s Ministry of Industry and Information Technology released draft legislation that indicates that e-cigarettes and other vaping products will be treated as tobacco products, rather than electronic devices, and therefore regulated in a similar way to ordinary cigarettes. If enforced, the rule changes imply that e-cigarette makers would have to pay similar taxes to traditional tobacco companies too, prompting Relx’s shares to fall by almost half on the day that the announcement was made. “Even though the market had expected the government to eventually raise taxes and also to control the nicotine concentration [in the product], the regulations were stronger than expected. If e-cigarettes follow the regulations for tobacco products, how many they can produce and how much they can charge is also going to be subject to governmental approval,” explained ThePaper.cn. Cigarette sales generated 5.45% of China’s overall tax revenue in 2018, says Reuters, which has always made it likely that the government would intervene in the e-cigarette sector. Last November regulators banned e-commerce platforms from selling e-cigarette products online. Shares in the global unit of state monopoly China National Tobacco rose as much as 24% on news of changes in how the e-cigarette brands will be treated.
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