China’s Ministry of Industry and Information Technology (MIIT) and the State Tobacco Monopoly Administration announced today the Chinese government’s intent to overhaul rules governing the vapor and electronic nicotine-delivery systems (ENDS) market. The news started a swift downfall of shares of RLX Technology, parent to RELX, China’s largest e-cigarette brand, on the New York Stock Exchange. At 2:45pm today, RLX was down nearly 45 percent to $10.69 per share after recent high of $19.46 per share on March 19.
Draft regulations posted online by MIIT suggest it will seek to regulate these products similarly to ordinary cigarettes. The ministry is seeking public comments on the draft regulations until April 22. The implications of the draft regulations could be wide-ranging as, with an estimated 300 million smokers, China is considered the world’s largest market for tobacco product.
“In order to implement the decision-making and deployment of the CPC Central Committee and the State Council, further strengthen the supervision of new tobacco products such as e-cigarettes, and safeguard the legitimate rights and interests of consumers, we have drafted the Decision on Amending the Regulations on the Implementation of the Tobacco Monopoly Law of the People’s Republic of China,” the rule states. “The amendment is mainly to implement the requirements of the CPC Central Committee and the State Council on promoting the rule of law in the supervision of e-cigarettes , to clarify the legal basis for the supervision of new tobacco products such as e-cigarettes , and to do a good job in connecting with laws and regulations such as the Law of the People’s Republic of China on the Protection of Minors, so as to play an important role in strengthening the rule of law , stabilizing expectations and promoting the long-term.”
RLX Technology raised $1.4 billion during its initial public offering (IPO) in January this year. It sold 116.5 million shares with a target price of between US$8 and US$10 a share. Its successful market debut turned its 39-year-old founder, Wang Ying, into a billionaire overnight with an estimated net worth of $24.8 billion.
In its prospectus, RLX stated that vaping products only have a 1.2 percent penetration rate in China, compared with 32.4 percent in the U.S. According to the China-based Electronic Cigarette Industry Committee, China’s 2020 e-cigarette sales were an estimated 14.5 billion RMB yuan ($2.2 billion), an increase of 30 percent from 2019 (11.2 billion RMB yuan). According to Grandview Research, the US e-cigarette market in 2019 and was valued at $5.34 billion and is expected to reach $6.50 billion in 2020.
RELX recently announced its partnership with 110 authorized distributors to supply its products to over 5,000 RELX-branded partner stores, and over 100,000 other retail outlets nationwide, covering over 250 cities in China, according to its prospectus. Revenue for the company nearly doubled in the nine months ended September 30, 2020 to $324 million, with a net income of $16 million, the latest figures available at the time of this writing.
But tobacco companies are increasingly facing scrutiny from regulators in China. Currently, the only regulatory actions taken by Chinese authorities are in 2018, the country made it a crime to sell a vapor product to anyone under 18 years of age and then, in November 2019, an online sales ban was implemented in order to further prevent youth initiation. In 2020, the country passed the Law of the People’s Republic of China on the Protection of Minors. That law is aimed at preventing parents or other guardians from “indulging or instigating minors” to smoke or vape.
CNTC is a source of major funding for the Chinese government. Its contribution accounted for an estimated 5.45 percent of the country’s tax revenue in 2018. That amounts to 10.8 trillion yuan ($1.5 trillion), according to media reports. If CNTC were to enter the vapor market, the monopoly’s existing 5 million domestic retail outlets could present a major challenge for private vape shop owners.
Wang told Reuters in a recent news article that she’s “not worried” about the government’s impact on the sector. The products will continue to remain available, she said, “as long as there’s proof that this is a good solution for smokers.”