Luckin Coffee (OTCMKTS:LKNCY) was once touted as “the Starbucks (NASDAQ:SBUX) of China,” but a more apt moniker now would be “the Enron of coffee.” The scandal that embroiled Luckin stock forced it from the Nasdaq composite and now LKNCY trades on over-the-counter markets.
Let’s recap. Luckin Coffee issued its initial public offering in May 2019, but the company’s lies soon caught up with it. Short seller Muddy Waters Research would blow the lid off of Luckin’s lies seven short months later, on Jan. 31.
By early April, Luckin Coffee would admit that it had fabricated much of its sales. Investors might expect changes for the better. However, in the aftermath, things are only getting worse at Luckin stock.
Luckin Punished Good People Once
The old adage goes “fool me once, shame on you. Fool me twice, shame on me.” Investors under the illusion that Luckin may have learned its lesson should beware.
Luckin is certainly at fault for what it did to investors. The accounting fraud it committed was very serious. Investors large and small lost a lot of money, and time will tell what legal repercussions befall the company.
But the shame is on Luckin Coffee. Investors trusted the company at no fault of their own. However, Luckin is under the control of the same devious management now which created the mess. So, long-term investors who want to believe Luckin’s PR releases and try to get shares while they are cheap, should avoid that temptation.
Yet, short sellers can make a pretty penny. Investors playing that game, all the more power to you. I am only interested in long-term value, and Luckin stock looks to have as much of that as a desert does rain.
That said, shares will likely move up in the short term. However, trading won’t be easy given that the company has been delisted from the Nasdaq.
Investors now considering a long-term investment in Luckin Coffee should stop deliberating. It is clear that the company has not changed its ways. Management is in crisis mode and looking to salvage what it can from the mess it created.
Business as Usual for Luckin Stock
A Luckin shareholder vote conducted within the past two weeks was another debacle. Investors should beware that all the signs point to now-ousted CEO Charles Lu attempting to set up control by proxy.
Markets would have hoped that in the wake of this scandal new management would chart a legitimate course for Luckin. It appears that not only won’t there be a new course, but that also there may not be new management at all. Lu’s heavy-handed approach has already done massive damage. Now his team is doubling down. Leaders of his ilk create terrible firms.
Unfortunately, businesses that contractually backed Luckin are dealing with unscrupulous Lu as he attempts to avoid his legal obligations. He’s already defaulted on loans. But those firms are not rolling over as Lu attempts to dictate new terms regarding share votes. According to The Wall Street Journal:
“Centurium Capital and Joy Capital, the two Chinese private-equity backers of Luckin, as well as KPMG, a court-appointed liquidator for Luckin shares owned by two other entities, have challenged the validity of the results of the shareholder vote, the people familiar with the matter said.”
Luckin’s PR Team Is Putting Lipstick on a Pig
Lu recently recommended a number of changes that could, at best, be described as ‘suspect’. According to Luckin Coffee, fraudulent accounting operations and previous problems have been rooted out. The company’s investor relations site published a news release regarding disciplinary actions and the removal of founding members.
Investors should take this information with a gigantic grain of salt. The audit was conducted internally by a so-called “special committee” formed prior to Luckin publicly admitting any wrongdoing. Public relations paints a rosy picture but that committee is a clean-up team.
Lu recommended that he be removed from the board only to appoint hand-picked replacements. This company is broken.
Stay Away from Luckin Coffee
Short sellers, get your money. Long-term buy-and-hold investors stay far away and do not consider this stock, period. I can only hope that legal proceedings can somehow return money to those who were bilked by this unscrupulous company.
Alex Sirois does not own any shares of the aforementioned stocks at the time of this publishing.