First, if you believe Chinese stocks are uninvestable, no need to read further. But if like many of the HFs, you're (considering) dipping toes into overseas markets including China, pls do read on.
Note: I'm writing this due to Luckin reporting 2022Q1 ER tomorrow before market opens. I believe it will be the first qtr that it'll be overall profitable – a big turnaround!
Introduction
Luckin Coffee was the fastest company ever to go from incorporation to Nasdaq listing, and in as fast a fashion imploded and got delisted after a big fraud was exposed. But instead of rolling over and die, Luckin came roaring back by restructuring debt, paying fines and reaching agreements with plaintiffs; on the business side, it started increasingly fast expansion after a few months of freezing, and overtook Starbucks China as #1 coffee chain in China in store count. Impressively it's grown revenue 100% in 2021 and reduced its operating loss by nearly 80%. It also boasts an ever-increasing portfolio of popular drinks and more customers than ever; On capital market side, further signs suggest that it is striving to become relisted on Nasdaq.
In fact, yesterday Fortune just wrote a very long article on Luckin, following a very informative Financial Times article published earlier in the year. There's no denying that there is certainly renewed interest in this shamed company. For more background pls read these articles. I'll move on to analysis and comparison.
Business
After fraud was reported in Apr 2020, Luckin coffee did not expand and instead started closing shops soon after. Other than a short-lived huge boost of “sales” (really it's only people with coupons rushing to redeem), its sales were declining significantly. However, Jingyi Guo and his team, after shaking out the fraudsters from the company which included Lucking Founder Zhengyao Guo, CEO Zhiya Qian and COO Jian Liu, among others, methodically rescued the sinking ship, and in fact, now made it prosper. It achieved this through multiple measures: 1. Watch expenditure. It shut down shops with bad location/low sales. Did away with most of the ads expenditure in 2020. Reduced coupon % vastly. 2. More careful expansion. After initial shop-closing, Luckin expanded again, but at a more careful pace and better locations. It also reserved top and second-tier cities to its own shops, while opening 3rd- to 5th-tiers to franchisees, who helped take financial risks of expansion off. 3. Develop popular drinks. The team under Guo had been extremely good at developing popular drinks. First they came out with “厚乳拿铁 (heavy milk latte)”, then “生椰拿铁 (raw coconut latte)”, then “丝绒拿铁 (silk latte)”, and now “椰云拿铁 (coconut cloud latte)”, among many other popular drinks. The Raw Coconut Latte set a record of selling 100 million cups in less than a year! The silk latte set a one-week sales record when it came out and remained a heavy favorite among customers. The coconut cloud latte refreshed the weekly record and sold out quickly in many shops. 4. Its marketing is more nimble and smarter now. Instead of signing big names in entertainment industry, it signed younger and more promising actresses (also planting ads into popular TV/NetTV series) or promising athletes (Eileen Gu, one year before she earned two golds and a silve in Beijing Winter Olympics). It co-marketed Coconut Cloud Latte with the #1 coconut brand in China. Its ROI on marketing $ was much better now.
To see how well Luckin is doing, please look at the following tables:
| Luckin Coffee | 2019 | 2020 | 2021 |
|---|---|---|---|
| Self-owned shops | 4507 | 3929 | 4397 |
| Franchises | 282 | 874 | 1627 |
| Self shop revenue | 3.09B | 3.72B | 6.66B |
| Franchise revenue | 0.02B | 0.32B | 1.31B |
| Operating expenses | 6.24B | 6.62B * | 8.50B |
| Operating Income | -3.21B | -2.59B | -0.54B |
| Net Income | -3.16B | -5.60B * | +0.69B ** |
| Cash at hand | 4.87B | 4.81B | 8.38B |
| Liabilities | 4.62B * | 6.60B * | 7.17B * |
* Numbers included cost of restructuring and notes/fines/settlements
** 2021 Net Income included SEC fine added back (due to class action settlement), thus positive. Operating income more important
Comparison of 2021Q4:
| Luckin Coffee | StarBucks China | Dutch Bros | Nayuki (2021 Full Year!!) | |
|---|---|---|---|---|
| Revenue | 2.43B (80.7%) | $0.9B (-2%) | $0.14B (55.8%) | 4.3B (40.5%) |
| Operating Income | -0.12B | ? | -$0.01B | will update |
| Self-store # | 4397 (12%) | 5557 (14%) | 241 (54%) | 817 (66%) |
| Franchise # | 1627 (86%) | 0 | 262 (2%) | 0 |
| Same-store Rev | 43.6% * | -14% | 10.1% | <10% |
| MC/ Sales ** | ～2 | ~2.5 | ~8.5 | 1.62 |
* Luckin's incredible same-store sales growth was due to highly popular and ever-expanding drinks, better name recognition, and striking a great balance between price and quality. That is despite that Starbucks China kept blaming its drop in sales on COVID – even though Luckin and Starbucks share all the cities in the top tiers and >95% overall. Luckin simply executed better, and its models survives better in the modern times.
** MC/Sales is calculated using current market cap vs 2021 full year sales. For Starbucks it's calculated using the entire SBUX, not Starbucks China only.
Sorry I can't finish writing this as I have a full schedule ahead for the next few hours. Will come back and finish this later.
A few more topics: risks, awards. Sorry will update tonight. But just want to put this out early so if you decide to trade today you could do some DD and trade.
On the amends side: it settled all its debt with creditors at 96 cents on the dollar (almost unheard of for debt restructuring), also settled with SEC (fined $180M, one of the highest for a Chinese company, probably the highest), fined by Chinese regulators, and reached agreements.
Can we trust the Luckin numbers?
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