Sometimes, it feels like I may be the only analyst in the entire world that’s speculatively bullish on Luckin Coffee (OTCMKTS:LKNCY), following the precipitous fall from grace of Luckin stock on the back of an enormous accounting fraud.

But, in my experience, playing the contrarian against all odds can sometimes pay off in a huge way.

When everyone was throwing in the towel on Blink Charging (NASDAQ:BLNK) stock back in November 2019, I said the stock could “rebound sharply.” Over the next 16 months, BLNK stock rallied almost 800%.

Similarly, when everyone was doubting the rally in Workhorse Group (NASDAQ:WKHS) stock in November 2019, I said that the “big 2019 rally of WKHS stock could be the start of something even bigger in the long-run.” Shares have soared about 800% from that point into July 2020.

And, when everyone was selling NIO (NYSE:NIO) stock in late 2019, I said, “It’s time to buy the dip in Nio stock.” The stock is up more than 500% since then.

I think LKNCY stock will follow in these footsteps.

Sure, none of those companies had huge accounting scandals, like Luckin Coffee has today. But they all had strong fundamentals. So does Luckin. And in the case of Luckin Coffee stock, I believe strong fundamentals will trump accounting scandals and bad optics.

Here’s why.

Luckin Stock and the Big Picture

The big picture bull thesis on Luckin Coffee stock rests on three major assumptions:

1. The company has sufficient liquidity to weather near-term turbulence, including potential lawsuits and fines, without declaring bankruptcy or running out of cash.
2. China’s quick-service coffee market is burgeoning, and will continue to burgeon over the next several years on the back of urbanization, Westernization and digitization trends.
3. Luckin Coffee has developed the quintessential, technology-driven business model to capitalize on growth in China’s quick-service coffee market.

If you believe those three things, then buying Luckin stock on present weakness is the right move.

Sufficient Liquidity

The first piece of the LKCNY stock bull thesis has to do with the idea that Luckin Coffee probably isn’t going bankrupt.

Yes, the company is under fire today, from all angles. The Chinese government. U.S. investors. Regulators. No one likes Luckin Coffee right now, because the company flat-out lied about a big chunk of its sales.

This company will likely be hit with a flurry of lawsuits, fines and penalties in coming months.

But Luckin Coffee has sufficient liquidity to weather this storm. According to a July update, Luckin Coffee has about $780 million in cash on its balance sheet. That’s more than enough to pay lawsuits, fines and penalties — mostly because it is more than double the dollar value of fabricated transactions in 2019 ($310 million).

So Luckin Coffee likely isn’t going bankrupt anytime soon. The company will pay off its lawsuits, penalties and fines, and then get back to business.

Burgeoning Chinese Coffee Demand

A lot of pundits doubt the strength of China’s coffee market.

They say that China has forever been a tea market, and never has been nor will ever be a coffee market. Chinese consumer demand for quick-service coffee, they reason, is overstated and will never be that robust.

That thesis lacks data and foresight.

The Chinese coffee market is growing. Very quickly. Especially in the instant coffee segment, where the coffee shop market has doubled in size since 2013, equating to a compounded annual growth rate of 18%.

So there’s no argument there. China’s coffee market is booming.

It will continue to boom, because of underlying demographic and lifestyle trends which support more ubiquitous adoption of coffee.

China has a rapidly urbanizing middle class that is quickly gaining more and more purchasing power. Many of the constituents in this middle class skew younger, and increasingly act a lot like their Western counterparts.

Partly because they increasingly value freedom and independence. And partly because the internet has democratized the spread of information and ideas, so that younger Chinese consumers have greater exposure to Western ideas and habits than their parents.

The implication, herein, is obvious. China’s consumer class is increasingly being powered by a new generation of consumers who are adopting Western ideas and habits.

One of those habits? Coffee drinking. Specifically, fast-casual coffee consumption.

To that end, I see the quick-service coffee market in China booming over the next 5 to 10 years, especially since per capita coffee consumption in the country remains a fraction of a fraction of what it is in the U.S.

Luckin Coffee’s Genius Business Model

Forget the fraud for a moment.

Luckin Coffee has engineered the perfect technology-driven, convenience-first, price-sensitive business model to capitalize on this rising coffee consumption megatrend in China.

That is, Luckin has figured out the optimal way to sell cheap, fast coffee to young, tech-savvy Chinese consumers (who are increasingly becoming the heartbeat of China’s consumer class, and therefore, the driving force of rising coffee consumption in the country).

Build small stores – typically 400 square feet – with limited to no seating space. Develop an app for mobile ordering. Have consumers order from the app ahead of time, and simply pick up their coffee in store.

Pass on the cost-savings from running smaller stores with less staff, to consumers, through lower priced coffee. Even open a few vending machines which sell ready-to-drink coffee products.

It’s a genius business model. Young people are addicted to their phones. They don’t like to wait. And they are price conscious.

To that end, Luckin Coffee is the perfect coffee shop for young consumers.

The numbers speak to this.

Even after you back out the $310 million in fabricated sales in 2019, Luckin Coffee’s sales rose about 250% in 2019. On the back of 110% store growth. Meaning that average revenue per store was up substantially in the year. Plus, even after all these issues, Luckin Coffee remains a top 5/6 food and drink app in China.

Bottom Line on Luckin Stock

I understand why everyone’s bearish on LKNCY stock.

But I think the bull thesis is actually quite compelling here.

Luckin Coffee has sufficient liquidity to weather a storm of lawsuits and avoid bankruptcy. China’s fast-casual coffee market is booming and will continue to boom for the next 5+ years.

Luckin has engineered a perfect business model to capitalize on this coffee megatrend, and is by most metrics, sustaining healthy sales trends in recent months thanks to smart biz model.

Plus, LKNCY stock is dirt cheap here.

So, when you connect the dots, there is a visible and compelling pathway here for Luckin Coffee stock to rebound significantly over the next few years.

Yes, it’s far from a “sure thing”. But I think the rewards outweigh the risks, and thus, LKNCY stock is a contrarian buy.