Relx Technologies, China’s largest e-cigarette maker, is far too young to smoke. Founded just under three years ago, the young vape maker has flourished in China—the world’s largest cigarette market with around 310 million smokers and $210 billion in sales.

Despite its youth, Relx went public last Friday, launching a $1.4 billion IPO on the New York Stock Exchange. Investors quickly puffed Relx’s share price up nearly 100%, inflating the e-cigarette firm’s market cap to $35 billion.

“The success of Relx’s IPO was not a surprise at all,” says Carlton Lai, director of Hong Kong-based financial management group bank Daiwa Capital Markets. “Relx is the first major standalone vape brand to go public in the U.S., and it has 100% exposure to China, which is still a market with very low penetration and rapidly growing.”

According to the company’s own data, Relx controls 60% of China’s vape market with sales of $324 million in the first nine months of 2020 and it predicts industry-wide revenue in China will surge from $1.5 billion in 2019 to $11.3 billion in 2023.

But Relx’s growth—and the growth of China’s vape scene in general—is threatened by a hazy regulatory environment due to Beijing’s inability to decide whether to classify e-cigarettes as tobacco or tech.

Vapor trail

The world’s first e-cigarette was invented in China, by a pharmacist named Hon Lik, who was trying to quit smoking in 2003. But the electronic product was slow to take off in its country of origin. According to China Insights Consultancy (CIC), penetration of e-cigarettes in China is at roughly 1.2% of the adult smoker population, compared to 32% in the U.S. Nevertheless, the penetration rate in China has increased threefold since 2016, when CIC estimates it was at 0.4%.

As vaping became more popular in China, Beijing moved to regulate the emerging practice. In 2018, the State Administration for Market Regulation and China Tobacco—the state-owned monopoly on cigarette production in China—set the legal age for buying e-cigarettes at 18, the same as tobacco. Previously there had been no age limit on vape sales. Beijing then banned the online sale and advertising of e-cigarettes completely in 2019, as the government continued its piecemeal approach to regulating the market.

Unlike in the U.S., where the Food and Drug Administration (FDA) decided to regulate e-cigarette makers as tobacco companies in 2016, Beijing’s regulators have stopped short of issuing comprehensive rules for the vape industry and have instead treated it as just another consumer tech business.

“China is the only major market globally that does not have a clear regulatory framework on e-cigarettes. As such, we believe there’s still a lot of uncertainty over how the government would regulate the industry,” Lai says.

U.S.-based vape maker Juul was the victim of that uncertainty in 2019, when China banned the online sale of vapes days after Juul launched on China’s leading e-commerce sites. Juul was forced into a hasty retreat from China, while Relx suddenly lost its online revenue stream, which had previously accounted for 26% of its sales.

Despite the shifting regulation, Relx’s sales grew 176% in the first nine months of 2020 compared to the same period a year earlier. The company declined to comment on this article, since it is in a post-IPO “quiet period,” but last January Relx committed $77 million to open 10,000 stores worldwide by 2023.

According to the company’s prospectus, Relx already has 5,000 “brand partner stores” in China—a relationship the company says “may be deemed to be franchisees” under China law—and its products are available at 100,000 other retailers.

Coughers

Relx’s rapid growth strategy—investing millions to establish a presence across China—is a classic move in the tech start-up playbook. No wonder: Relx’s founder and CEO, Kate Wang, is a former executive at Uber China and Didi Chuxing, the local ride-hailing app that bought out Uber China in 2016.

The tech background of Relx’s founders might give credence to Beijing’s policy of treating vaping as consumer tech. Some local jurisdictions, however, have already amended municipal laws to treat e-cigarettes akin to traditional cigarettes. Shenzhen brought e-cigs under the tobacco umbrella in 2019, for instance, requiring vape shops to display signs warning that smoking is bad for your health.

“It’s difficult to say where the central government will land on e-cigarettes,” says Liu Feng, a professor at Chinese University of Hong Kong who focuses on the economics of vice habits. According to Feng, authorities are keen to discourage vaping as a trend among young people, but they’re reluctant to endure a consumer backlash by squashing the industry entirely.

However, subsidiaries of state monopoly China Tobacco have developed their own own e-cigarette line and could dominate the market if it decides to enter the fray. The state-owned giant accounts for 97% of China’s cigarette sales, according to market researcher Euromonitor.

Besides the monopoly’s broad sales network across China and its ability to regulate competition, China Tobacco is a major contributor to the state’s coffers, accounting for roughly 5% of Beijing’s tax revenues. If Beijing decides to formally regulate e-cigarettes, providing a stable outlook for the market’s growth, it won’t want its own cigarette maker to be left behind.