Luckin Coffee last went public on the NASDAQ in May 2019, and the following June was at the center of a $300m accounting fraud.
The ambitious Starbucks competitor had seen its share price soar from $17 at IPO to $50 by January 2020. But after short-seller Muddy Waters broke the news of likely corruption, the shares never recovered. It was ultimately delisted from the NASDAQ in June 2020 and agreed to a $180m SEC penalty six months later.
Luckin Coffee IPO Round Two
Now the brazen coffeehouse chain looks set to return. The relisting is simply proposed at this stage, and no prospectus has been filed.
Lu Zhengyao, Luckin’s chairman and co-founder, is no longer involved with the company.
At its previous IPO, underwriters included Credit Suisse, Morgan Stanley and two Chinese banks, Haitong International and CICC. Bank of America was slated to join them but tellingly withdrew after Luckin executives disagreed with its method for valuing the coffee chain.
At that point, it was the second-largest coffee chain in China after Starbucks.
According to a Financial Times report, Luckin is discussing a proposed relisting with investors and advisers. The company has a new management team running the show, and with recent growth evident, it could prove an attractive turnaround prospect for investors.
Although delisted from the NASDAQ, Luckin Coffee is still available on the OTC market in the US, under the ticker LKNCY. This gives it a current market cap of around $2.7bn. As it still has this listing live, the company should enjoy an easier route to relisting than an unlisted Chinese company attempting to pursue an IPO in the US.
Who is Luckin Coffee?
Luckin Coffee was founded in 2017. The company’s initial success was its disruptive attempt at enticing China’s entrenched tea drinkers to try the caffeine-laden alternative. It promotes the brand as a tech-driven retailer providing “high quality, high affordability, and high convenience to our customers.”
The company initially operated three types of store. These were pick-up stores, relax stores and delivery kitchens.
Pick-up stores are small-sized stores where customers can pick up their orders or have their orders delivered. These are located in areas of high demand for coffee, such as office buildings, commercial spaces and university campuses.
Relax stores are generally spacious and larger than 120 square meters in size. Relax stores account for a tiny percentage of Luckin Coffee’s overall store count. They were designed purely from a branding perspective.
Meanwhile, it opened delivery kitchens to achieve broader customer coverage. Delivery kitchens are set up quickly with low costs. However, Luckin Coffee has now closed its delivery kitchen network and replaced them with pick-up stores after identifying sufficient market demand.
The company launched its unmanned retail initiative, including Luckin Coffee EXPRESS and Luckin Pop Mini, in January 2020. These are unmanned machines preparing freshly brewed drinks and consumer goods. It discontinued the Luckin Pop Mini machines in December 2020, and as of July 2021, had 752 Luckin Coffee EXPRESS machines in operation.
How does Luckin Coffee make money?
Luckin Coffee makes money from selling various high-quality food and drinks, mainly freshly brewed coffee and non-coffee beverages, via its coffee shops. It also sells tea drinks, such as milk tea, cheese tea and fruit tea.
In Q3 last year, Luckin Coffee reported revenue growth of 106% year-over-year to $364.7m. This included product sales of $300.2m and revenue from partnership stores of $64.6m.
Average monthly customers in Q3 amounted to 14.7 million, up 79.2% year-over-year.
Luckin has 5,671 stores, most of which are on the Chinese mainland. This includes 4,206 self-operated stores and 1,465 partnership stores. In total, it operates around 500 more outlets than Starbucks.
Luckin’s Growth Potential
Luckin Coffee is basing its future growth strategy on the expected growth of China’s coffee industry which it claims is still in the early innings. The company is now getting set to commence the next chapter of growth for Luckin Coffee.
Risks to investing in Luckin Coffee
Luckin Coffee is not profitable and operates in a highly competitive environment. Its price-to-book value (P/BV) is 7, and its price-to-sales ratio (P/S) is 4.7. Both these metrics suggest this stock is expensive.
There’s also political contention surrounding Chinese IPOs both from China and the US.
There’s no doubt a Luckin Coffee IPO will be a speculative affair, but it won’t be plain sailing. Many investors will be attracted by its bold effort to be reborn. While many more will take a clear swerve.
Meanwhile, Kyros Law Offices is pursuing legal claims against the company on behalf of investors burnt the first-time round.
Should you invest in Luckin Coffee?
This is a highly controversial company unlikely to appeal to risk-averse investors. Those who enjoy speculative investments may consider this worth a gamble.