Returning to the capital markets, does Luckin Coffee still have a chance?

Produced by Pai Finance

By:Wang FeishuEditor: Prince of the school

Entering 2021, Luckin Coffee's 2019 financial statement was long overdue, bringing Luckin Coffee back into the media spotlight.

However, for users, Luckin Coffee seems to have never left, especially with the recent popularity of the coconut series.

Since the financial fraud scandal in April 2020, Luckin has experienced management adjustments, business restructuring, regulatory crises, and other issues. At that time, there were even pessimistic voices suggesting that Luckin Coffee might disappear, but from this reissued financial report and various information, Luckin seems to have survived the crisis and gradually returned to normalcy.

Following the release of the financial report, Luckin Coffee's U.S. stock soared by 22.08%, showing that the capital market is bullish on Luckin Coffee's return to normal. At the same time, Luckin Coffee also promised to release the 2020 financial report as soon as possible.

Investors are more concerned with whether the reborn Luckin Coffee still has a chance to return to the capital markets.

Reissuing the financial report to turn the tide.

On April 2, 2020, Luckin announced that its COO, Liu Jian, and his team falsified transactions totaling 2.2 billion yuan from the second quarter to the fourth quarter of 2019, which also means that Luckin formally admitted that all financial report data after the listing were fabricated. Luckin Coffee became the abandoned child of the capital market, with the stock price plummeting by more than 90%, and was subsequently ordered to delist by U.S. regulatory authorities.

The just-released 2019 financial report also basically corresponds to the above conclusion. The financial report shows that Luckin Coffee's net revenue in 2019 was 3.0249 billion yuan, a year-on-year increase of 259.8%; in terms of profit, the disclosed operational loss in 2019 was 3.212 billion yuan, an increase of 101% from the 1.598 billion yuan loss in the same period of 2018; the proportion of operational losses to revenue decreased from 190% in 2018 to 106% in 2019; Luckin Coffee's operational expenses in 2019 were 6.237 billion yuan, more than twice the 2.4387 billion yuan in 2018, resulting in an operational loss of 3.212 billion yuan in 2019.

While emphasizing the decrease in the proportion of losses in 2019, Luckin Coffee also updated the latest business data on Weibo. As of the end of June this year, Luckin Coffee's nationwide store count has exceeded 5,200, covering 192 cities, with millions of users on the app, cumulative consumers surpassing 75 million, and star products like Coconut Series selling over 10 million cups per month, breaking Luckin's new product sales record.

"Financial fraud will not affect my choice, the key is that the products need to match the taste." Beijing white-collar worker Zhang Yan, a long-time user of Luckin Coffee, told Paire Economic that many young friends around her drink Luckin Coffee because it is "cost-effective," has a "good taste," and offers "a continuous stream of new products."

Luckin Coffee, once predicted to disappear, not only survived but is also doing well.

According to the report submitted to the Grand Court of the Cayman Islands by Luckin's joint provisional liquidators, Luckin achieved overall store profitability for the first time in August 2020. In the first three quarters, Luckin Coffee's quarterly revenues were 0.565 billion, 0.98 billion, and 1.145 billion yuan, with year-on-year growth rates of 18.1%, 49.9%, and 35.8%, all achieving double-digit growth.

As of November 30, 2020, Luckin Coffee currently has unrestricted cash or cash equivalents and short-term investments totaling approximately 0.775 billion US dollars. According to a report from Luckin Coffee and Anmai Consultant Co., Ltd., commercial expectations indicate that the revenue for the 2020 fiscal year is expected to be between 3.8 billion yuan and 4.2 billion yuan.

After the 2021 Chinese New Year, Luckin Coffee CEO Guo Jin revealed in an internal memo. In January 2021, Luckin opened over 120 new stores; during the Chinese New Year Golden Week, more than 1,900 stores nationwide saw a nearly 5-fold increase in freshly made beverage cup volumes compared to the same period last year, with revenue nearly 7 times higher than the same period last year. As of November 2020, over 60% of self-operated stores have achieved store-level profitability.

In other words, although Luckin Coffee was delisted due to financial fraud in 2020, its operations were not severely impacted, and even showed a positive trend. The once widely criticized operating model has been validated.

Self-redemption, rebirth after Nirvana.

In fact, after the self-fabrication scandal was exposed, Luckin Coffee embarked on the road to self-redemption.

First is the executive adjustment. In May 2020, Luckin Coffee announced the adjustment of the board of directors and senior management. The board of directors terminated the CEO position of Qian Zhiya and the Chief Operating Officer (COO) position of Liu Jian; on July 5, Luckin Coffee's extraordinary general meeting of shareholders was held, former Luckin Chairman Lu Zhengyao, directors Li Hui, Liu Erhai, and Shao Xiaoheng were removed from office, and subsequently Lu Zhengyao ceased to be a board member; as of January this year, Luckin's Vice Presidents Li Jun and Zhou Bin, and other core personnel, have also left.

Next, there were legal issues. In mid-December 2020, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit in the Southern District of New York Federal Court, accusing Luckin of violating federal securities laws on anti-fraud, reporting, accounting and record keeping, and internal control provisions. Without admitting or denying these allegations, Luckin agreed to a settlement, paying a fine of 0.18 billion dollars to resolve the charges and obtained the necessary approval from the court. In mid-March of this year, Luckin reached a restructuring support agreement with key creditors. In April, Luckin revealed a new round of financing agreements totaling 0.25 billion dollars with major shareholders Centurium Capital and Joy Capital. Under specific conditions, Centurium Capital and Joy Capital can additionally invest 0.15 billion dollars proportionally.

At the same time, Luckin has been continuously optimizing its operations, taking drastic measures to ensure the health of the company's fundamentals. In terms of stores, Luckin began to close heavily loss-making stores. As of November 30, 2020, Luckin Coffee's self-operated stores decreased from 4,507 to 3,898, with an additional 894 joint-venture stores. Store closures are still ongoing in many areas. However, Luckin has now selected experimental expansion in third- and fourth-tier cities and introduced a policy of zero franchise fees.

According to media reports, Luckin is now placing more emphasis on comprehensive indicators and profitability in assessing its stores. This indicates that Luckin Coffee's strategic focus has shifted from rapid expansion to targeted expansion. Previously, Luckin Coffee planned to open 4,800 to 6,900 self-operated stores by 2023, and it seems that this target has now been achieved.

In terms of marketing strategy, Luckin has redefined the company's new strategic plan, moving from past explosive expansion marketing to refined operations. The rise of 'private domain traffic' has made Luckin more focused on the scale value of existing users, upgrading marketing methods to focus on retention and frequency of existing users, rapidly amplifying the effects of private domain and community traffic. According to reports from Southern Network, once users transition to private domain users and enter communities, the monthly consumption frequency has increased by 30%, the weekly repurchase numbers have increased by 28%, and the Monthly Active Users (MAU) have increased by around 10%.

In terms of products, Luckin is trying to delve deep into the entire industry chain starting from upstream coffee beans. In terms of supply dimension, after signing a strategic cooperation framework agreement for purchasing Ethiopian Yirgacheffe premium coffee beans in early January this year, Luckin has launched a high-end product line 'Xiaoheibei · SOE Yirgacheffe', and has already completed the purchase of 1,000 tons of Yunnan premium coffee beans for the 2020/2021 new season with its partners. In terms of processing dimension, Luckin Coffee invested 0.21 billion yuan to officially put into operation the first roasting base in Fujian, with an annual coffee bean roasting capacity of 0.015 million tons. In terms of product dimension, Luckin has established a team of chief coffee masters and built the 'product underlying professional framework' for Luckin Coffee.

It can be seen that, since the turmoil, Luckin Coffee has been continuously removing hidden dangers under its feet and has achieved certain results.This is a very positive signal for Luckin and investors. The state envisioned by Luckin Coffee is to achieve positive EBITDA (earnings before interest, taxes, depreciation, and amortization) for the first time in 2022.

If it can really achieve the above goal, does it mean that Luckin, which has the potential to become profitable after removing the mines, will choose to return to the capital markets again?

Is there an opportunity to return to the market?

Dazheng Capital and Joy Capital are the original shareholders of Luckin Coffee. After suffering huge losses in the Luckin fake scandal, they reached a settlement with Luckin due to their positive outlook on the brand value and business model of Luckin, and continued to invest 0.25 billion US dollars in it.

This account is also easy to calculate. If Luckin Coffee stops operating due to lack of money, it will be completely bankrupt. However, if Luckin Coffee is funded, it may be able to get back on track. If it can return to the capital markets, it will receive more generous returns.

In fact, as early as the beginning of the scandal, there were views that Luckin Coffee might return to the capital markets later, with US and Hong Kong stocks being the best choices. However, for Luckin Coffee, this path is not easy.

The most crucial issue is the historical legacy problem. Although Luckin Coffee has reached a settlement with the SEC, according to regulations, the settlement still needs approval from investors. Investors and law firms will negotiate the compensation amount with Luckin Coffee. If the negotiation fails, it will resort to litigation. At the end of April, Shanghai Zhengce Law Firm, on behalf of US stock investors, submitted a filing to the Shanghai Financial Court to formally initiate a lawsuit against Luckin. There are a total of 3 suing investors, with about 20 showing interest, and over a hundred others have inquired. Moreover, this data is expected to increase further.

Song Yixin, Vice Chairman of the Financial Law Research Association of the Shanghai Law Society, stated that subtracting the closing price and the highest price at the beginning of the year from Luckin Coffee on the night of the fraud revelation, multiplying by the number of shares held by shareholders that night, and subtracting around 60% of the equity held by the actual controller, the maximum amount that all shareholders may sue for can be calculated. According to this model, Luckin Coffee may face a collective lawsuit compensation of around 3-4 billion US dollars, equivalent to approximately 21-28 billion yuan.

For Luckin Coffee, which is experiencing a positive trend but has not yet achieved real self-generation, this is undoubtedly a huge burden. If such lawsuits cannot be resolved smoothly, returning to the US stock market will be extremely challenging. Moreover, initially due to Luckin's fraud, US regulatory institutions also faced severe criticism, thus, Luckin's return to the US stock market will undoubtedly face even more stringent scrutiny.

However, Luckin has now replaced the executives involved according to the regulations of the US regulatory authorities, paid a huge settlement fee, and implemented other rectification measures. If the follow-up investor litigation issues can be resolved smoothly, then a return to the US capital markets is not impossible.

Relatively speaking, Luckin's choice of a less challenging Hong Kong stock listing may be a more feasible option.

Although Luckin has actively remedied the previous scandal of falsification and made effective adjustments in personnel and operations, concerns such as investor litigation and future sustained profitability indeed exist, making the road back to the capital markets still full of challenges.(End)$Luckin Coffee (LKNCY.US)$

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