It’s tough to talk about Luckin Coffee (OTCMKTS:LKNCY) these days without discussing the latest round of bad news. Once referred to as China’s answer to Starbucks (NASDAQ:SBUX), the embattled coffee giant is now a cautionary tale, sparking memories of Enron and Parmalat.
It all started when Luckin submitted an SEC filing that said it was investigating irregularities to the tune of $310 million. As a result of the allegations, CEO Jenny Zhiya Qian and COO Jian Liu faced the chopping block.
Management subsequently decided to withdraw its request for a hearing conducted by a Nasdaq panel, in which it had the opportunity to make a case as to why shares should continue trading on the exchange despite the accounting scandal. Nasdaq removed Luckin stock from its exchange on June 29. It now trades with the ticker symbol LKNCY on the over-the-counter (OTC) market.
Even with all that has transpired, there are still some brave investors willing to test the waters, but they do at their own peril. The company is now subject to less regulation, faces enormous legal challenges in China, and could face bankruptcy in the coming months.
We all love the rogue in movies, but we are less forgiving when it comes to business. And I don’t think investors will forgive Luckin Coffee anytime soon.
The Road Ahead for Luckin Stock
It’s not like Luckin Coffee is the first company that has ever misled shareholders. We’ve seen case after case of companies embezzling money, defrauding creditors, and in some instances, poisoning their customers; I’m looking at you, Chipotle (NYSE:CMG).
But the story usually ends in either one of two ways; the company manages to change course, initiating widespread changes and regaining investor trust. In these cases, the market responds in kind, and we see a rise in prices. So even if companies suffer from scandal, they can win favor by enacting effective policies.
Unfortunately, I don’t believe that we’ll see this here. Luckin stock now sits on the OTC markets that are subject to less regulation than the big exchanges. That could potentially lead to significant regulatory risks that may be too high for investors to ignore.
Issues in the U.S. notwithstanding, the company is facing substantial fines and litigation back home in China. Meanwhile, East Asian counties, China included, are facing a second wave of the novel coronavirus. If new lockdown restrictions are imposed in several Chinese cities, the company could face a significant liquidity crunch.
The legal battle notwithstanding, it will also be tough to pacify local investors. Last Sunday, shareholders decided to take matters into their own hands and oust Charles Zhengyao Lu after an extraordinary meeting. Lu had managed to retain his position as a board member and chairman after a recent board vote.
A regulatory filing revealed that the company’s board held a meeting to decide on his fate. But the vote was not able to secure the two-thirds majority needed to send Lu packing. The move likely infuriated investors that were looking for retribution after the scandal.
With a host of key players gone, Luckin has the opportunity to change course and mark out a new path for itself. Shareholders will play a bigger part in the company’s future as they will act as a watchdog, considering the stock trades on the OTC now.
Stay Away From Luckin Stock
As my colleague Josh Enomoto pointed out, it’s unlikely the company will gather any favor from American investors moving forward. They will always be skeptical of investing in a stock that has such an ignominious past.
Shares have already lost 90% in value this year, and the plunge is far from over. Revelations are still to be made regarding the accounting scandal, and as more information trickles through, the stock will lose more value.
Any way you slice it, Luckin Coffee is a company that is best to avoid at this stage. Wait out the next few months before even thinking of investing your hard-earned money in this one.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. He does not directly own the securities mentioned above.