RLX Technology Inc.

Gentlemen, thank you for standing by for RLX Technology, Inc.' 's fourth quarter and full year 2021 earnings conference call. At this time, all participants are in listen-only mode. After management's remarks, there will be a question and answer session. Today's conference call is being recorded and is expected to last for about 50 minutes. I will now turn the call over to your host, Mr. Sam Sung. Head of Investor Relations for the company. Please go ahead, Sam.

Thank you very much. Hello, everyone, and welcome to RX Technologies' 12th Quarter and Full Year 2021 Earnings Conference Call. The company's financial and operational results were released through PLA's wire services earlier today and have been made available online. You can also view the earnings price release by visiting the IELTS section of our website at IELTS.RelaxTech.com. Participants on today's call will include our co-founder, Chairperson of the Board of Directors, and Chief Executive Officer, Ms. Kate Wang, Chief Financial Officer, Mr. Chao Lu, and myself, Sam Tsang, Head of Investor Relations. Before we continue, please note that today's discussion will contain Four looking statements made under the state power provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements typically contain words such as may, will, expect, target, estimate, intend, believe, potential, continue, or other similar expressions. Four looking statements involve inherent risks and uncertainties. The accuracy of these statements may impact a number of business rates and uncertainties that could cause actual results to differ materially from those projected on anticipated. Many of these factors are beyond our control. The company, its affiliates, advisors, representatives, and underwriters do not undertake any obligation to update this forward-looking information. except as required under the applicable law. Please note that our technology's earnings press release and this conference call will include discussions of unaudited gap financial measures, as well as unaudited non-gap financial measures. Our express release contains a reconciliation of the unaudited non-gap measures to the unaudited gap measures. I will now turn over the call to Ms. Kate Wong. Please go ahead.

Thank you, Sam. And thanks, everyone, for making time to join our conference call today. As many of you might have become aware, just hours ago, the State Tobacco Monopoly Administration released an updated drug consultation paper regarding national electronics cigarette product standards. At the same time, administrative measures for electronic cigarettes have been made official, effective starting on May 1, 2022. While we didn't expect the announcement of this regulatory development to coincide with our earnings review, We welcome the finalization of these regulatory measures as it delivers certainty regarding timelines, molded transactions, product specifics, amongst others. The removal of these uncertainties and accelerated timelines will provide our organization with more concrete directions in our business operations and planning. We believe the new standards and measures will significantly improve adult smokers population's positive recognition of our product safety and the nature of harm reduction. They are confident that the lightweight restriction on flavors will not impact the core needs of our users and millions of traditional cigarette smokers for harm reduction. The experience and data from other markets supports the same view. Against the backdrop of the evolving regulatory landscape for e-cigarettes, the recurring COVID-19 outbreaks throughout 2021. We remained committed to enhancing our relations and executing our founding strategy and mission. Further, stemming our industry-leading position as a trusted program for adult smokers. We ended 2021 on a solid note, with our core strengths and fundamentals thriving. Although we faced our share of challenges during the year, our financial highlights include fourth quarter revenue growth of 17.7% year-over-year, which propelled a year-over-year increase of 123.1%, in our three-year 2021 net revenue. I will share more details regarding our financial results and underlying drivers later. With that, I'd like to start by outlining the backdrop with regulatory environment in the fourth quarter. The fourth quarter ushering in the meaningful regulatory development. for China's evapour industry. With the introduction of the draft administrative measures and the draft national standards for evapour products, the regulators have introduced an electronic filing system to provide a means for all value chain participants and composing manufacturers distributors, retailers, and supply chain partners to register their business details. In addition, all EVA programs are also required to register each of their products or SPAs, including product characteristics and specifications. We believe that As these new rules and policies take hold, the barriers to entering China's eVapor industry will become more difficult to penetrate given the substantial compliance and product development requirements. Moreover, given ongoing regulatory scrutiny of eVapor product quality and safety, Sales of counterfeit products will be further accrued, and users' rights will be better protected. In sum, we firmly believe that the new regulatory framework will support the overall evaporation industry and allow its participants to move forward confidently and embrace healthy, sustainable, long-term growth. In response to updated regulations announced in December 2021, in the fourth quarter, we proactively implemented an array of refinements across both the front and back ends of our operations. On the product and supply end, we swiftly adjusted certain features in our product suite and pipeline product based on the drug national standards, drawing on our state-of-the-art product development capabilities to enhance our child loss design, e-liquid formula, and other technical design elements. Although we embraced a more agile approach to supply chain management, prudently managing our key components and materials procurement orders according to the draft national standards, which may impact our inventory preparation. On the sales and channel management front, we adopt a new approach to managing active inventory for distributors and retailers to avoid over or under supply. In addition, we offer assistance to our distributors and retailers with the required registration on the electronic filing system and maintain active communication with them to understand their needs and track the potential impact of the new policy enforcement on their operations. Now I'd like to provide some updates on our scientific research progress. We worked diligently to improve our scientific research capabilities and are firmly convinced that scientific evidence-based communication is paramount when addressing users' and shareholders' concerns about the harm reduction efficacy of e-cigarettes. One area of particular focus for RLS is cross-disciplinary fundamental research on atomization mechanism through which we explore the long-term health effects of vaping. As China's pioneering vapor brand, we initiated China's first clinical research on vaping safety studying the acute effects of traditional cigarettes and electronic cigarettes on the human respiratory and cardiovascular systems. In February 2022, we successfully registered our clinical research on the China Clinical Trial Registry a primary registry in the World Health Organization Registry Network, further validating the strengths of our scientific research capability and underscoring our progress in advancing these studies. As China's national standards for e-cigarettes come into effect, ILS will continue to devote more resources to R&D and support a regulatory framework that's recognized these harm reduction opportunities by the small country population. Our accomplishments in 2021 positioned us for a good start as we head into the new year of 2022. I'm pleased with our achievements so far in 2022. Our strategic initiatives are designed to capture any growth potential ahead of us within a clearer regulatory regime. As we continue to improve our product performance, develop scientific research, and promote digitalization upgrades, we are poised to further grow and increase the value we bring to all of our stakeholders. With that, I will now turn the call over to our CFO, Cao Lu. He will elaborate for some of last quarter's initiatives and go over our operational and financial results in more detail. Thank you.

Thank you, Kate, and hello, everyone. I will start by sharing some major initiatives and developments from the fourth quarter, and then walk you through our key financial results. As Kate mentioned earlier, despite the backdrop of regulatory impact, we delivered quarterly net revenues of RMB 1.9 billion, up 13.6% sequentially, and by 17.7% year-over-year. reflecting the momentum behind our efforts to optimize our distribution and retail channel network, and to enhance our diversified product portfolio. Notably, we witnessed that there have been increasingly more fact-based and neutral public voices commenting on the eVapor industry and eVapor products in recent months. According to a survey, In light of the relief of the proposed draft national standards, 69% of all potential users are aware of the regulatory changes, and 87% expressed increased or unchanged willingness to purchase e-waper products in light of the national standards. As we believe that the regulations will have a positive impact on product safety and quality. Since December 2021, orders from our distributors and retailers have remained solid as end-user demand has remained strong. We have been closely monitoring the trade inventory level of our distributors and retailers and cautiously fulfilling their orders to mitigate risks related to any excess inventory in our trade channels. In addition, we continue investing in our Golden Shield program to combat sales of counterfeit products and made meaningful progress during the fourth quarter. In December 2021, we successfully assisted Shenzhen police in busting a counterfeit factory site located in the Huaqiangbei electronics market, seizing over 20,000 counterfeit products. Since launching the Golden Shield program in 2019, we have assisted the police in solving more than 130 administrative and criminal cases of intellectual property rights infringement and helped to seize more than 1.5 million counterfeit products, a testament to our commitment to protecting the rights and interests of consumers as a responsible corporate citizen. We also strove to optimize our supply chain and streamline our operations. Our efforts of cost control and active supply chain management have been effective, further reducing the unit cost of our products. Meanwhile, as we have become more agile managing our supply chain, For example, we have significantly increased the utilization rate of our logistics and warehousing facilities in recent months by closing unused or low-usage warehouses. Moreover, our distributor survey shows that in the second half of 2021, our distributor's satisfaction level with our supply chain management improved immensely compared with the first half of 2021. validating our relentless efforts to improve our supply chain capabilities and strengthen our relationship with our value chain partners. As we mentioned last quarter, we continue to strategically introduce new products tailored to various user segments with the goal of engaging new users to support our sustainable and quality growth. To that end, We launched several new targeted products during the fourth quarter and have recently seen an upward trend in our new users' retention rate, which we believe is partially attributable to our successful product strategy. Our Xiaojinzhi products targeting adult smokers with a long history of smoking complement our current product portfolio with a unique, compelling product design. Meanwhile, we also released ARTIST, a premium device line with a classy and trendy design aimed at fashion-conscious users who are willing to pay a premium for an exquisite design. We will continue to expand and enhance our product offering to cater to China's distinct user groups' differentiated preferences and price sensitivity. To further increase user engagement and build our brand equity, we also introduced accessories, including cartridge cases, device stands, and necklace lanyards, which can be purchased with cash or user loyalty program points. As a user-centric company, RLX always puts our users first. They are the core of our business. During the transitional regulatory period, we will continue to prioritize our users' needs by creating new, innovative products that comply with the national standards and can be launched upon regulatory approval. Last but not least, I'd like to share with you some updates on our corporate social responsibility initiative. RLX technology has always been committed to CSR. We believe that prioritizing and fulfilling our social responsibility is essential to corporate growth. As vaping's popularity grows, disposal of used cartridges has become a major concern for both e-waste companies and users. To solve the problem and create additional economic value, we launched China's first cartridge recycling program in September 2021, covering more than 16 cities in the program's first phase. Users can pick up special recycling bags in selected RX branded stores in China to collect used cartridges and return them to in-store recycling bins. The program has enjoyed great initial success with over 200,000 cartridges recycled to date. By enhancing ties between our X and our users, we believe that this environmentally friendly program will encourage more users to choose our products as we fulfill our corporate social responsibility and inspire eco-consciousness through our industry. In recognition of these efforts, our 2021 CSR report recently received a grade A rating from the Ministry of Industry and Information Technology, MIIT. This rating is a powerful endorsement of our work and commitment to advancing CSR initiatives nationwide. MIIT assessed our RLX's strong performance across a broad range of CSR metrics, and commended our report's clear guidance on the company's strategic planning and governance with respect to sustainable development concepts. Moving forward, we will continue to increase ILX's positive social impact with substantive work and engaging products to address industry, community, and environmental issues. I will now provide a summary overview of our financial results for the fourth quarter and for the full year of 2021. Net revenues increased by 17.7 percent to RMB 1.9 billion in the fourth quarter of 2021, from RMB 1.62 billion in the same period of 2020. The increase was primarily due to an increase in the net revenues from sales to offline distributors, which was mainly attributable to the expansion of the company's distribution and retail network. Gold's profit increased by 10.3% to RMB $765.5 million in the fourth quarter of 2021, from RMB $694.1 million in the same period of 2020. Growth margin was 40.2% in the fourth quarter of 2021, compared with 42.9% in the same period of 2020. The decrease was primarily due to, one, an increase in direct costs related to promotional activities, and two, an increase in the inventory provision. Operating expenses were RMB 231.5 million in the fourth quarter of 2021, representing a decrease of 72.8% from RMB 852.6 million in the same period of 2020. The decrease in operating expenses was primarily due to the change in share-based compensation expenses. which decreased by 93.6 percent to RMB 42.1 million in the fourth quarter of 2021, from RMB 656.1 million in the same period of 2020. The decrease in share-based compensation expenses was primarily due to the changes in the fair value of the share incentive award that the company granted to its employees as affected by the fluctuation of the share price of the company. Selling expenses decreased by 76.3% to RMB 46.6 million in the fourth quarter of 2021, from RMB 196.7 million in the same period of 2020. The decrease was mainly driven by, first, an increase in share-based compensation expenses, and second, a decrease in salaries and welfare benefits partially offset by an increase in branding material expenses. General and administrative expenses decreased by 62.6 percent to RMB 167.1 million in the fourth quarter of 2021, from RMB 447 million in the same period of 2020. The decrease was managed by one, a decrease in share-based compensation expenses, and two, a decrease in salaries and welfare benefits, partially offset by an increase in software and technical service expenses. Research and development expenses decreased by 91.5% to RMB 17.8 million in the fourth quarter of 2021. from RMB $208.9 million in the same period of 2020. The decrease was mainly driven by, first, a decrease in share-based compensation expenses, and, second, a decrease in salary and welfare benefits, partially offset by an increase in consulting expenses. Income from operations was RMB $534 million in the fourth quarter of 2021, compared with the loss from operations of RMB $158.5 million in the same period of 2020. Income tax expense was RMB $129.5 million in the fourth quarter of 2021, compared with RMB 110.6 million in the same period of 2020. U.S. GAAP net income was RMB 494.4 million in the fourth quarter of 2021, compared with U.S. GAAP net loss of RMB 236.7 million in the same period of 2020. Non-GAAP net income was RMB 536.5 million in the fourth quarter of 2021, compared with RMB 419.3 million in the same period of 2020. U.S. GAAP basic and diluted net income per ADS were RMB 0.367, equivalent to U.S. dollars 0.058. and RMB 0.363 equivalent to U.S. dollars 0.057 respectively in the fourth quarter of 2021 compared with U.S. GAAP basic and diluted net loss per ADS of RMB 0.165 in the same period of 2020. Non-GAAP basic and diluted net income per ADS were RMB 0.398 equivalent to US dollar 0.062, and RMB 0.394, equivalent to US dollar 0.062, respectively, in the fourth quarter of 2021, compared with RMB 0.292 in the same period of 2020. Moving to the full year of 2021, Net revenues increased by 123.1% to RMB 8.52 billion in 2021 from RMB 3.82 billion in the prior year. The increase was primarily due to an increase in net revenue from sales to offline distributors, which was mainly attributable to the expansion of the company's distribution and retail network. Growth profit increased by 140.4 percent to RMB 3.67 billion in 2021, from RMB 1.53 billion in the prior year. Growth margin increased to 43.1 percent in 2021, compared with 40 percent in the prior year. Operating expenses were RMB 1.37 billion in 2021, representing a decrease of 9.3% from RMB 1.51 billion in the prior year. The decrease in operating expense was primarily due to the change of share-based compensation expenses, which decreased by 76% to RMB 223.3 million in the fiscal year 2021, from RMB 929.1 million in the prior year, The decrease in share-based compensation expenses was primarily due to the changes in the fair value of the share incentives awards that the company granted to its employees as affected by the fluctuations of the share price of the company. Selling expenses increased by 17.5% to RMB $520.7 million in 2021 from RMB $443.2 million in the prior year. The increase was managed by, first, an increase in branding material expenses, second, an increase in shipping expenses, and third, an increase in salaries and welfare, partially offset by the decrease in share-based compensation expenses. General and administrative expenses decreased by 12.9% to RMB 672.7 million in 2021, from RMB 772 million in the prior year. The decrease was primarily attributable to the decrease in share-based compensation expenses, partially offset by an increase in salaries and welfare benefits, and to an increase in legal and other consulting fees. Research and development expenses decreased by 39.9 percent to RMB 179.9 million in 2021, from RMB 299.3 million in the prior year. The decrease was primarily due to the decrease in share-based compensation expenses, partially offset by, first, an increase in salaries and welfare benefits, second, an increase in software and technical expenses, and third, an increase in consulting expenses. Income from operations was RMB 2.3 billion in 2021, compared with RMB 13.1 million in the prior year. Income tax expense was RMB 631.4 million in 2021, representing an increase of 173.9% from RMB 230.5 million in the prior year. The increase was primarily due to an increase in taxable income. U.S. GAAP net income was RMB 2.03 billion in 2021, compared with U.S. GAAP net loss of RMB 128.1 million in the prior year. Non-GAAP net income was RMB 2.25 billion in 2021, compared with RMB 801 million in the prior year. U.S. GAAP basic and diluted net income per ADS were RMB 1.445, equivalent to U.S. dollars, 0.227, and RMB 1.436, equivalent to U.S. US dollar 0.225 respectively in the fiscal year 2021 compared with US GAAP basic and diluted net loss per ADS of RMB 0.089 in the prior year. Non-GAAP basic and diluted net income per ADS were RMB 1.604 equivalent to US dollar 0.252 and RMB 1.595 equivalent to US dollars 0.25 respectively in the fiscal year 2021, compared with RMB 0.557 in the prior year. Moving to the balance sheet, as of December 31st, 2021, the company had cash and cash equivalent, restricted cash, short-term bank deposits, net short-term investments, and long-term bank deposits. net of RMB 14.86 billion, compared with RMB 3.42 billion as of December 31, 2020. As of December 31, 2021, approximately U.S. dollars 1.62 billion was denominated in U.S. dollars. Lastly, turning to our share repurchase program, on December 8, 2021, The company announced that its board of directors authorized a share repurchase program under which the company made repurchase up to 500 million US dollars of its shares over a period until December 31st, 2023. The program was integral to our commitment to providing shareholder value proceeding smoothly. It demonstrates our continued confidence in our core capabilities, business growth, long-term market potential, and the further development of e-vapor industry. This concludes our prepared remarks today. We will now open the call to questions. Operator, please go ahead.

Thank you. If you would like to ask a question, please press star then 1 at this time. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And for the benefit of our participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. Today's first question comes from Louise Lee at Bank of America. Please go ahead.

Hi. Thank you, management. Thank you for your presentation. Thank you for taking my question. So my question is, could you share with us the latest year-to-date shipment and sell-through trends? Do you expect there are any significant changes from now to 1st of May and after 1st of May? So just another quick question on the newly released regulation. So according to the China National Standard File, so we see that only tobacco flavor can be sold. So if this is the case, why do you still put a list of, a positive list of ingredients? So is there any conflict? Thank you.

Sure. Thanks, Louise. So I will talk about more on the year-to-date shipment plans first, and then I will respond to your question regarding the latest regulations. So since December, we have seen a continuous improvement in multiple operating metrics, that we are confident in our commercial development, including the number of potential e-vapor users, which have been driven by the increasing willingness to consider e-vapor products by asthma course, as mentioned by Chow, a retention of new users, and the number of cartridge per user, which we think is reflecting a higher number of potential users, together with a higher user lifetime value. We believe the primary reason is that the increasing users have higher confidence in e-vapor products and our products after the release of the first draft of national standards being released in December, maximizing the benefits of harm reduction tobacco alternatives. So due to the above trends, we have gradually optimized our human level to respond to the latest developments. And regarding the latest regulations, Chief Investee was released hours ago. It will require more time for us to evaluate internally and we'd like to see how it will evolve regarding the commercial results. Thank you for your question.

Thank you. Ladies and gentlemen, our next question today comes from Lydia Ling in the city. Please go ahead.

Hi, management. Thanks for taking my questions. I have two questions here. The first one is on the regulation side. And so regarding today's regulation update, including administrative measures and also the second draft on the national standard, so can management evaluate the potential impact on your business and how to deal with involving regulation and increase the penetration among adult smokers, particularly the restrictions on the flavor part? So could you give us more color on that? And my second question is on the product side. And so in light of the new national standards, so could you share any progress on the new product launch? Thank you.

Sure. Thank you very much, Lydia. So two questions. One is on the recollections, and the other one is on how the changes to new product launches. So for today, the State Tobacco Monopoly Administration announced the administrative measures of e-cigarettes to further strengthen the supervision of next-generation tobacco products, such as e-cigarettes, to regulate the market order, to ensure the health and safety of adult smokers, and promote the legalization and standardization of the industry, which will be effective on the 1st of May. So we have two key changes when you compare with the public consultation paper being released in early December, including having a greater emphasis on underage asset prevention, dissuading miners to use e-wrapper products, retailers obtain e-cigarette retail license shall procure products from local licensed e-cigarette wholesalers, and shall not exclusively distribute listed e-cigarette products, and finally prohibits exhibition and events promoting e-wrapper products. And also, the regulators have amounts to seek for the public opinion regarding the second draft of national standards with a submission deadline of March 17. So key changes include such products should not be inducted to minors and shall not flavors and iron tobacco. But in contrast, we do see that key components in the existing product portfolio have been included. For example, WS23, the cooling agents which Relax Lab published a scientific study in the Journal of Applied Technology. So we believe such a white release will be continuously evolving with evidence shown in scientific research and through effective fact-based communication. So to echo Kate, we are delighted to see the formalized regulations, which have been significantly improving health markers positive recognition of evangelical product safety with the nature of harm reduction compared with tobacco products. And we believe that these measures could better progress the development of our industry with higher standards, higher entry barriers, and higher clarity with a promising prospect to each value chain participants. And regarding the product launches, given that it's still a draft national status, so we have to wait until the national standards are being formalized in order to have our products being approved. But throughout the process, we have been diligently to modify our products together with some potential new product launches. So first it's on product safety, so it includes the change of requirements for raw materials, including ingested and released substance, and safety requirements on electronic products, for example, factory waterproofing, anti-leakage protection, child loss, and prevention of accidental device activation. And indeed, our product safety standards have been always in line with non-hierarchical standards, including the drug national standards. For example, our standards for ingested and released substances are much higher than such requirements. Regarding child loss and the prevention of accidental device activation, we are technically fully prepared to comply with the new standards, and our product prototypes are fully ready. And next is on the illiquid solutions. So we do see that it has provided greater clarity with respect to the allowed ingredients with a list of additives that are permitted for use in the liquid. While non-listed additives will be subject to para-safe assessments. So we will continue to make modifications in response to the second draft of national standards that are released today. Thank you for your question.

Thank you.

Thank you. And our next question today comes from Charlie Chen at China Renaissance. Please go ahead.

Thank you, management, for taking my questions. I have one question. So during this transition period where you cannot extend your sales network, you cannot launch new products, so what is the main focus of your day-to-day work during this period? And can you share with us some of your major achievements or progress in your work for the past quarter?

Thank you. Sure. Thank you very much, Charlie. So I can share our progress for our last quarter in three aspects. And first of all, it's on the sales and distribution. We have been closely monitoring our partners' operating and financial performance. So we have been putting great efforts into driving single-store sales by introducing operational activities and trainings. And after the regulations and job measures being released, we do see that distributors and retailers has high confidence in the e-vapor industry and RX, which drives our robust order book. We have also launched internal trainings to equip with our sales experts with the right skill sets considering the potential change of our industry. And on the product development front, hard and modifying our portfolio as mentioned in previous Q&A, we have invested resources in developing new technology and products and they have a couple of new product headlines. So far, the process will continue to invest in developing new products and technology and expect to obtain approvals after national standards become effective. And lastly, on organizational upgrade, we have invested heavily in digitalization and optimizing work efficiency. We have been building an all-in-one digitalization system that monitors and tracks our operating and financial performance from front to back end, from the supply chain, ourselves, and distribution channels. These new initiatives could better our day-to-day decision-making and increase our operating efficiency. Thank you for your question.

Thank you.

And the next question today comes from Pei-Hang Liu with CICC. Please go ahead.

I have two questions to you. And the first one is we have noticed a shortage of certain cordage flavors in your stores. And could you provide some color on your current channel? And the second question is that how would the second product or nation stand on the effect of existing flavors?

Thank you, Peihan. So the line is not very clear. I think the first question is mainly on You have seen that some of our flavors are out of stock in our store, and the second one is on paper again, and we'll see how the national standards affecting our current portfolio. So on the first one, so after the administrative measures being released back in December, we have taken a prudent approach in lowering our trade and inventory as we considered multiple factors, including restriction on product launches and new store openings during the transition period, time required to evaluate distributors' and retailers' order sentiments, together with the fact that production capacity is more than enough to be increased again in a timely manner. Since December until now, we have seen continuous improvement in operating metrics as mentioned, including user-related metrics, and a storage matrix, for example, single-source cells. As a result, order books from distributors have been robust, and we have been cautiously fulfilling those orders. And therefore, our trade channel inventory has stood at a low level since the first quarter of last year to date. In light of the potential regulations, together with the draft national standards, we will monitor and adjust our shipment level to fulfill our distributors' and users' needs. And the second one is about flavors. So to advocate, the primary reason for adult smokers to use EF products mainly is the harm reduction effects compared with other tobacco products, mainly cigarettes. And together with other secondary factors, for example, more hygienic with no dust and flame, more convenience and have less disturbance to people surrounded based on our internal user survey. Flavors contained in cartridges are not the main reason for asmokers switching from cigarettes to evapoproducts. And also, with reference to overseas market experiences, when there is a restriction on flavors, it will only cause short-term prevalence to a trade channel, especially on existing infant treatment management and preparation, but has limited impact on the long-term trend for adult smokers switching from cigarettes to e-vapor products. We are strongly confident that China e-vapor users will continue to use Relax after the draft national standards become effective. Those affected will likely switch from their best preferred flavors to tobacco flavor. Thank you for your questions.

Thank you very much.

Thank you. Ladies and gentlemen, this concludes the question and answer session. I'd like to turn the conference back over to the management for closing remarks.

Thank you again for joining us today. If you have further questions, please feel free to contact our technologies investor relations team through the contact information provided on our website, our TPG method relations.

Ladies and gentlemen, this concludes today's conference call. We thank you for attending today's presentation. You may now disconnect your lines and have a wonderful day.