Buy the Convertible If You Can For Luckin Stock

Luckin Coffee (OTCMKTS:LKNCY) stock still trades over the over-the-counter. This is despite the delisting from the Nasdaq composite of the Luckin stock ADS (American Depository Shares) on July 1, in the filing of Form 25 with the SEC.

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

You can still buy and sell it through your brokerage firm, but the bid-ask spreads are probably very wide.

But should you buy it? Or, if you already own the Luckin stock, should you continue to hold it?

After all, the stock is trading at $3.10. This is up 33% from the end of June when it was at $2.32. Most of this gain is probably due to short-sellers covering their trades with “buy-to-cover” orders.

New Developments at Luckin Coffee

Bloomberg reported on July 5 that the company’s shareholders booted Chairman Charles Zhengyao Lu and three other directors from the board.

The company now has six directors, down from eight. This is because two new directors were elected in this extraordinary shareholders’ meeting, Ying Zeng and Jie Jang.

Buy the Convertible If You Can

On Jan. 10, Luckin issued $400 million in convertible senior notes due Jan. 15, 2025, with $1,000 as the par price. It traded recently at $34.25. This amounts to a price of 3.425% of the par value.

The first semiannual coupon payment is due on July 15. The interest rate on the note is 0.75%. Therefore, the notes have an effective yield of 21.89% on cost.

The conversion ratio is 18.3150 per $1,000 principal amount of the notes. This amounts to a conversion price of $54.60 per ADS (i.e. $1,000 divided by 18.315). So you would buy the notes for the yield, not the conversion opportunity. Luckin stock trades for just 6.8% of the conversion price.

Nevertheless, this seems to me to be a much better deal than buying the stock. Your brokerage firm might require you to certify that you are a qualified institutional buyer or you can buy Rule 144A or Reg S securities. So, everybody cannot invest in these notes. You will probably have to sign papers to say you will hold the notes for one year.

But if you can get hold of these notes, they seem to be very interesting investments. If you want more information on the issuance, read the “concurrent convertible note” section on page 170 in Luckin’s Jan. 10 prospectus.

What To Do If With Luckin Stock

If you already own Luckin stock and heard about the Nasdaq delisting, do not panic. I would keep the stock for now. Study the news releases.

After all, the company now seems to be trying to get rid of its bad apples. Can you really trust the company? Probably not. But why not wait until it announces 2019 earnings and provides an update on how 2020 is going? I suggest you have nothing to lose.

In fact, one analyst on Seeking Alpha believes Luckin still has $1.2 billion in cash. Now Luckin Coffee seems to have 2.014 billion Class A and Class B ordinary shares. The Class B have super-voting rights and can convert into Class A shares. Each ADS represents eight Class A ordinary shares. Therefore, by my analysis, the company has about 251.797 ADSs equivalent outstanding. So, its market value is $936 million.

Therefore, after deducting the convertible notes debt, the net cash is apparently around $800 million. This works out to about $3.18 per share, which is close to today’s share price.

So theoretically, without full information, Luckin stock is trading for roughly its net cash. You get the coffee business, which is probably still losing money, for just 54 cents per share or $136.7 million. This is the kind of bargain that “cigar butt” value investors look for.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide, which you can review here.

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