What happened
Shares of RLX Technology (NYSE: RLX) were falling sharply today after the Chinese vaping company posted fourth-quarter earnings results this morning. Ongoing tensions around vaping regulations in China and broader fears about Chinese stocks seemed to be the primary reasons for the sell-off today.
As of 1:25 p.m. ET, the stock was down 36.8%.
Image source: Getty Images.
So what
On the surface, the quarterly results were solid. Revenue rose 18% to $298.8 million. Gross margin slipped from 42.9% to 40.2% due to an increase in promotional costs like markdowns and an increase in inventory write-down allowance.
Adjusted net income increased 28% to $84.2 million, or $0.06 a share. Analyst estimates were unavailable for the quarter.
CEO Kate Wang said: "We are pleased with our operational and financial performance in the fourth quarter, ending 2021 on a strong note. Despite the evolving industry regulatory framework and challenging backdrop of recurrent COVID-19 outbreaks, we remained focused throughout the year on optimizing our distribution and retail channels, investing in scientific research, new product development, and digitalization upgrades."
There wasn't anything in the earnings report that seemed to justify a 37% plunge. Instead, the stock's drop seems to reflect increasing jitters around Chinese stocks as this was the second day in a row that the sector fell sharply, coming after the Securities and Exchange Commission (SEC) cited five Chinese stocks for delisting by the end of the month.
For example, the Kraneshares CSI China Internet ETF, whose top holdings are Tencent Holdings, Alibaba Group Holding, and JD.com, was down 8% in afternoon trading after a 10% decline yesterday.
Now what
Chinese stocks have only become riskier in the minds of investors in recent days. The delisting of five stocks signals that more delistings for companies like RLX Technology could be on the way. Meanwhile, the war in Ukraine, which has decimated Russian stocks, has caused some to reconsider exposure into China, especially as the geopolitical shift from the war could lead to increasing tensions between the U.S. and China.
As a business, RLX may be doing fine, but the stock is rapidly becoming anathema after a blockbuster initial public offering a year ago. Shares are now down 90% since it went public.
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Jeremy Bowman owns Alibaba Group Holding Ltd. and JD.com. The Motley Fool owns and recommends JD.com and Tencent Holdings. The Motley Fool has a disclosure policy.
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