China-based Luckin Coffee is seeing a “miracle” turnaround, nearly three years after an 89-page anonymous report launched a major fraud saga.
The person who reported this return, ironically, is the same person who made these allegations in early 2020. Hedge fund manager Sean Ma runs Beijing-based Snow Lake Capital, which acquired a minority stake in the chain, according to the Wall Street Journal. . He told the publication that he expects Luckin to overtake Starbucks in China now.
Ma reportedly released a slide presentation and 81-page report justifying the prediction, including the assertion that Luckin should be valued at $15 billion based on earnings of $390 million in 2024 and a multiple of 35 times earnings.
“I tell the world it’s a good company. I checked it. I did my homework,” Ma told The Wall Street Journal in an interview.
The Luckin controversy began in January 2020 when short seller Muddy Waters received a report alleging numerous allegations of fraud, including revenue and profit inflation. The document says that when the coffee chain went public in May 2019 with its $645 million IPO, it was a “fundamentally broken company that attempted to instill the culture of coffee drinking in people.” Chinese consumers through cutthroat discounts and free coffee.”
After an audit raised questions, the brand launched an internal investigation and found that its COO made hundreds of millions of dollars over several financial quarters. The news knocked more than $5 billion off its valuation, or 75% of the company’s market value. An independent panel, which reviewed more than 550,000 documents and interviewed more than 60 witnesses, found that revenues were inflated by $302 million in 2019 and expenses were inflated by $191 million.
The business grew even more from there. Luckin was delisted from Nasdaq and removed its COO, CEO, President and several other employees, which did not come without controversial. The SEC slapped the mark with a $180 million fineand in early 2021 the company filed for bankruptcy to restructure debt and stakeholder negotiations.
The Wall Street Journal said Luckin emerged from bankruptcy in March and is now run by Chinese private equity firm Centurium Capital, which has injected $240 million in capital in the spring of 2021. The brand made a net profit of $107 million in 2021 – the first time it has made an annual profit – and shares have risen more than 80% in 2022, placing the valuation of the company to $4.4 billion.
Luckin ended June with 7,195 stores, compared to 4,803 at the end of 2020. Same-store sales increased 41.2% in its second quarter ending June 30, and net revenue increased 72 .4% to $493.2 million. Store-level operating profit margin was 30.6% compared to 23.1% in 2021. In comparison, Starbuck’s competitors in China were down 16% in the 13-week quarter ending Oct. 2 , due to a 17% drop in transactions. Revenue was $775.6 million, down 20% from $964 million a year earlier. Starbucks had 6,021 stores at the start of October.
Starbucks blamed the drop in sales on COVID restrictions across the country. Ma said Luckin overcame those hurdles with his grip lens. The hedge fund manager noted in its report that Luckin was increasing its sales with coffee drinks and coconut milk lattes. The growth plan is to enter smaller cities, while Starbucks remains in larger markets.