I have to admit, there’s something to be said for Luckin Coffee (OTCMKTS:LKNCY). The company has had an accounting scandal involving millions of fraudulent transactions. That scandal caused the removal of its CEO. As a bonus, Luckin stock dropped so low it was delisted.
And yet, like a phoenix rising from the ashes, Luckin stock continues to draw the attention of traders. Since beginning to trade again in May, shares have more than doubled and been more than cut in half. My InvestorPlace colleague, Mark Hake, makes a reasonable case that shares of Luckin stock may be priced just about right.
But then again, Hake acknowledges his back of the envelope math is not based on full information. At the time of this writing, the company has not yet offered a date for the release of its earnings. And that should give investors a bit of concern. Because right now, it doesn’t look like much has changed for Luckin.
The New CEO Is…the Old CEO?
To move on from its accounting scandal, Luckin needs to avoid even the appearance of impropriety, right? Maybe not.
In June, Haode Investments called a meeting for July 5. The purpose of the meeting was to vote off Chairman Charles Lu and three other Luckin board members. Haode Investments holds Luckin shares that Lu owns. So why would Lu allow a meeting to be called so he could be voted out?
Lu has repeatedly denied involvement in the scandal. However, he reportedly refused to hand over his laptop and phone as part of the company’s internal investigation. So it has to raise eyebrows that as part of the July 5 purge, the head of the internal investigation was also voted off the board.
And Lu has apparently replaced the other two board members with his hand-picked representatives. Which means it’s likely that Lu is still calling the shots from behind the scenes.
China Is Not a Coffee Culture
I’ve made this argument in a previous article about Luckin. The bullish argument is that young people love technology. China has a gigantic market of youths. The company has a “grab and go” model that allows customers to order via the app and then pick up their coffee at one of the over 6,000 stores the company operates throughout China.
It’s a sound model that has caught the attention of Starbucks (NASDAQ:SBUX). The coffee giant is taking some cues from Luckin in trying to compete with Luckin’s lower priced offering.
But there’s a reason there’s an idiom about “all the tea in China.” China has an established, deeply rooted tea culture. Coffee? Not so much.
I wrote about this cultural barrier in June:
According to research from the University of Southern California, per capita coffee consumption in China is just five cups a year. That’s not a misprint. In the U.S., per capita is 400 cups a year. And in some European countries that number can exceed 1,000 cups a year.
I have had concerns about Nio (NYSE:NIO) investors in the past for a different logic problem.
The narrative was that electric cars were popular in China. Therefore, Nio as a Chinese company would be a great investment. And while it’s true that Nio has made strides, for a time they were in danger of running out of cash.
But the point of that example is that Nio is leaning into an established market that has a high cost of entry to keep out competitors. Luckin is trying to compete in a market that even Starbucks is finding challenging because of the expanding competition.
In short, there are a lot of companies chasing a group of customers that may be smaller than it seems.
Luckin Stock Has a Lot to Prove
Right now, it’s probably fashionable to be negative about Chinese stocks. Luckin may turn out to be a success story. But I have concerns. Right now, despite an opportunity for a new lease on life, Luckin appears to be simply making cosmetic changes.
Until I see some actual sales figures from the company, Luckin remains a hard pass for me.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
