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Investor Sues Chinese E-Cigarette Maker RLX for Allegedly Misrepresenting Risks

06/10/2021 | 04:13pm EDT

By Mark Maurer

An investor filed a lawsuit against RLX Technology Inc., claiming the Chinese vaping company overstated its financials and misrepresented potential regulatory risks when it filed the paperwork for its initial public offering in the U.S.

The lawsuit, submitted Wednesday by shareholder Alex Garnett in the U.S. District Court for the Southern District of New York, alleges RLX's registration statement from last October omitted the impact of ongoing efforts by Chinese regulators to tighten sales of electronic cigarettes.

Companies under rules established by the U.S. Securities and Exchange Commission have to disclose any known events or uncertainties that at the time of an IPO caused or were likely to not represent future earnings.

Mr. Garnett's suit, which he filed on behalf of other RLX investors, comes amid increased scrutiny of Chinese companies trading on U.S. stock exchanges because of concerns about the accuracy of their financial statements. Among those was coffee-chain Luckin Coffee Inc., which last year delisted from the Nasdaq Stock Market after disclosing that some employees fabricated hundreds of millions of dollars in sales.

RLX didn't immediately respond to a request for comment.

Beijing-based RLX, which was founded in 2018, went public on the New York Stock Exchange in January. The offering raised $1.39 billion, and was one of the largest global IPOs in the first quarter, according to data provider Dealogic Ltd. Its stock price has fallen sharply since then, in part as a result of potential regulatory changes in China. RLX's shares traded at $9.15 on Thursday, down about 69% since its debut.

Chinese regulators in 2019 called on companies and marketplaces to stop selling e-cigarettes online, in an effort to curb underage vaping. Regulators then in March 2021 proposed rules that would designate these cigarettes as tobacco products, raising scrutiny on the businesses that sell them.

Although RLX sells vaping products in China, privately held RELX International distributes them abroad.

The lawsuit alleges investors purchased RLX shares at artificially inflated prices, in part because the company omitted and misrepresented information in the registration statement. As the stock price dropped, RLX investors lost hundreds of millions of dollars, the lawsuit said. Mr. Garnett bought 300 shares at a price of $27.87, according to a filing. Mr. Garnett didn't immediately respond to a request for comment.

At least two other law firms, Labaton Sucharow LLP and Schall Law Firm, in recent weeks said they are investigating on behalf of investors to determine whether RLX failed to disclose relevant information to investors. Rosen Law Firm PA and Bronstein, Gewirtz & Grossman LLC, among others, said Thursday they are seeking RLX investors who want to join a class-action suit.

RLX on June 2 reported revenue of 2.4 billion Chinese yuan, equivalent to $366.1 million, for the quarter ended March 31, up from 368.6 million yuan the prior-year period. The company booked a net loss of 267 million yuan, or $40.8 million, compared with a profit of 12.1 million yuan during the prior-year quarter.

The company's financial statements in recent months have raised questions from accounting experts. Among the issues is RLX's unusually high ratio of cash and securities to total assets, according to Jacek Welc, assistant professor of corporate finance and accounting at Poland's Wroclaw University of Economics and Business. Cash and financial assets represented 86% of the company's total assets for the nine-month period ended Sept. 30, Mr. Welc said. That percentage is higher than those of five international companies that were accused of cash-based accounting fraud since 2008, according to Mr. Welc, including Germany's Wirecard AG.

"The amount of cash on hand is kind of eye popping," said Erik Gerding, a law professor at the University of Colorado, who reviewed RLX's prospectus. "Even apart from financial fraud, there's a question of where they're going to invest this cash and why they wouldn't give it out to shareholders."

Write to Mark Maurer at mark.maurer@wsj.com

(END) Dow Jones Newswires

06-10-21 1813ET

Stocks mentioned in the article
ChangeLast1st jan.
DJ INDUSTRIAL -0.04% 33924.33 Delayed Quote.10.91%
LUCKIN COFFEE INC. 0.69% 8.8 Delayed Quote.2.82%
NASDAQ COMP. 0.26% 14287.566135 Delayed Quote.9.72%
RELX PLC -0.26% 1930.5 Delayed Quote.7.98%
RLX TECHNOLOGY INC. 2.97% 8.69 Delayed Quote.0.00%
UNITED STATES DOLLAR (B) / CHINESE YUAN IN HONG KONG (USD/CNH) 0.00% 6.4725 Delayed Quote.-0.31%
WIRECARD AG -0.26% 0.3909 Delayed Quote.22.75%
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Sales 2021 10 868 M 1 677 M 1 677 M
Net income 2021 2 659 M 410 M 410 M
Net Debt 2021 - - -
P/E ratio 2021 30,8x
Yield 2021 -
Capitalization 85 719 M 13 226 M 13 226 M
Capi. / Sales 2021 7,89x
Capi. / Sales 2022 5,42x
Nbr of Employees 725
Free-Float 69,7%
Duration : Period :
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Technical analysis trends RLX TECHNOLOGY INC.
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Income Statement Evolution
Mean consensus OUTPERFORM
Number of Analysts 4
Last Close Price 54,57 CNY
Average target price 137,30 CNY
Spread / Average Target 152%
EPS Revisions
Managers and Directors
Ying Wang Chairman & Chief Executive Officer
Chao Lu Chief Financial Officer
Zhenjing Zhu Independent Director
Mo Yang Independent Director
Long Jiang Director
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