For those of you who haven’t been following the Luckin Coffee (NASDAQ:LK) scandal, LK stock has been suspended since April 7 due to the Chinese government’s investigation into the fabrication of approximately $314 million of its 2019 revenue.
Normally, I don’t agree with virtually everything that comes out of President Trump’s mouth. However, he recently told Fox News’ Maria Bartiromo that he wants Chinese companies like Luckin to follow the Sarbanes-Oxley Act if they want to list on a U.S. stock exchange.
That’s something I could get behind.
Play By the Rules
Every company that lists its shares on a U.S. stock exchange should have to live up to the same anti-fraud accounting rules that American companies live by. And if they don’t like it, they can always list in Hong Kong or wherever they think investors don’t care.
Interestingly, many non-Chinese foreign issuers do follow the rules set down by SOX. The fact that more than 100 Chinese companies listed in the U.S. don’t allow third-party audits suggests the rules need to be altered to force these companies to comply or leave.
It’s in the best interests of the entire system that the Luckin’s of the world are forced to play ball. The system, the little guy, would say, is already rigged for the 1%. It is forcing some companies to play by the rules and not others just confirm this assumption.
The fact that the Chinese government has stepped up in the Luckin situation to close the loopholes that exist in its securities regulations potentially is indicative of a country that desperately wants to play on a global stage.
Whether the world believes it will do so is another story entirely. Zhu Ning, a professor of finance at Tsinghua University, told CNBC the following on April 28: “The particular timing and particular nature of this case (will) probably become a poster child for China’s attempt to step up or improve its implementation … regarding securities law … The update to the securities law is definitely making it clear that China is trying harder to maintain the order and discipline of the market.”
Interestingly, as CNBC has reported, Luckin was the first U.S.-listed company to reach a $3 billion market capitalization in less than two years since the dotcom bubble of 1999 and 2000.
It’s only appropriate that the fastest-rising stock is also one of 2020’s biggest losers.
So What Should Happen to LK Stock?
InvestorPlace’s Ian Cooper recently suggested that if Luckin Coffee can get its house in order, it’s got a huge opportunity ahead of it:
“We also have to remember that coffee is in high demand in China. For one, China is one of the largest growing markets for the coffee shop industry, according to the Direct China Chamber of Commerce. China also expects to surpass the U.S. as coffee chains’ biggest market. And, according to Statista, revenue in the coffee segment is up to $7.2 billion this year, and could grow at a CAGR of nearly 14% through 2025.”
That’s all very true.
This is why I’ve recommended in the past that investors make a China play through Starbucks (NASDAQ:SBUX). You get a similar growth story with a company that operates around the world and under U.S. accounting rules.
As I said in my most recent Luckin article at the end of April, the situation has more to do about greed and very little to do with the Chinese.
“It’s disappointing the story has been such a letdown. This won’t do wonders for China’s image on the world stage,” I wrote April 30. “Of course, North American companies also offer investors plenty of shady opportunities. This isn’t a Chinese thing; it’s a greed thing. If you look hard enough, you’ll be sure to find trouble.”
I believe that Luckin should be sent packing no matter how many people are fired at the top of the company. As the saying goes, the fish rots from the head down.
Luckin might still be able to operate and that’s great news for all the people it employs, but it has lost the trust of U.S. investors and must be made an example of so that the Chinese government thinks twice about letting shoddy accounting run rampant in its country.
Having said this, do not consider my words anti-Chinese because that’s the farthest thing from the truth. A few bad apples do not spoil the barrel.
It’s been nice knowing you, Luckin Coffee.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.