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Luckin Coffee Is a Cautionary Tale for Investors

The Luckin stock scandal also is a wake-up call for securities regulators in the U.S.

The now infamous Luckin Coffee (OTCMKTS:LKNCY) was a market darling but the fall of Luckin stock after facing fraud allegations was swift. Just a few years since its founding in 2017, the company earned its unicorn status and sought to take over its biggest rival, Starbucks (NASDAQ:SBUX) in China.

Four Luckin Coffee (LK) coffee cups are arranged in a row.
Source: Keitma / Shutterstock.com

By 2019, Luckin had a market valuation of $3 billion and issued an IPO in May of that year. However, things quickly took a turn for the worse when the company’s management team was accused of committing an array of financial crimes. China’s success story now faces some serious blowback as a result of its actions.

The Demise Of Luckin Stock

China-based Luckin Coffee was fairly new to the brew scene but the company grew at a blinding pace. The company hit a $12 billion valuation in January.

While the numbers pleased investors, the financial debauchery that took place within the walls of the organization exposed the ugly truth. On April 2, news broke that many of Luckin Coffee’s sales numbers were fabricated.

An investigation into the company’s financials showed that nearly 2.2 billion yuan or $310 million of its revenue was faked. This brought an immediate halt to the company’s market value, which dropped 75% on the same day. Luckin stock price now sits at about $4.79.

It was soon revealed Luckin issued vouchers worth millions of dollars that could be cashed out at companies controlled by Luckin’s chairman, Charles Lu. Although the sales generated fake revenue on paper, it gave Luckin the confidence it needed to issue an IPO.

More documents detailing Luckin’s financial actions surfaced. Among these were payments by a fictional employee worth $140 million for materials and services. The company’s long history of financial crimes was exposed in an 89-page report by Muddy Waters LLC.

The stunning fall led to the ousting of various executives at the firm, including chief executive Jenny Qian and chief operating officer Jian Liu.

Luckin Stock Receives a Delisting Notice

Following an internal investigation, Luckin stock faced suspension from trading on Nasdaq.

Luckin faced delisting after its failure to comply with two notices issued by the Nasdaq. The first notice came as a result of a public backlash and the company’s failure to disclose material information to support its numbers. The second notice came after the company refused to release its annual audit results.

While Luckin moved to appeal Nasdaq’s decision, the company soon dropped the effort.

The financial misconduct revelations triggered public backlash and a slew of terminations within the company. Luckin stock price fell by 32%.

In May, the Senate passed a bill that would effectively prevent many Chinese companies from listing shares on a U.S. exchange. Existing companies would also be subject to more audits and regulations.

Although Luckin’s activities led to numerous losses for investors, it also served as a wake-up call for financial authorities.

Luckin’s Chairman Is Ousted

In the aftermath, Luckin officials made much-needed changes to its upper management on July 5. The company ousted several directors and board members, including Lu. Several directors also lost their board position while more members were added to an independent board of directors.

The termination of a company’s founder is uncommon in China as they are considered the heart and soul of the brand. Lu’s removal comes after a substantial investigation by authorities. Many directors called for Lu’s termination.

With an almost worthless stock and Nasdaq delisting, Luckin Coffee hopes to distance itself from the scandal and its key players.

The Bottom Line on Luckin Stock

Luckin Coffee’s financial debauchery came as a shock to many investors but it is one on a long list of companies that inflated numbers. The company’s early backers like BlackRock and Morgan Stanley likely face losses. The scandal also serves as a cautionary tale for investors.

The U.S. Senate’s bill was not quick enough to save investors this time but it does put future IPOs under greater scrutiny by public authorities in the U.S.

Luckin hopes the management shakeup and internal changes will help the company weather the crisis and return to normal operations. But given the less-than-appealing stock price and tarnished image, it’s best to hold off on investing in Luckin stock at this time. 

As of this writing, Divya Premkumar did not own any of the aforementioned stocks.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/luckin-coffee-is-a-cautionary-tale-for-investors/.

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