The continuing saga at Luckin Coffee (OTCMKTS:LKNCY) is not over. Luckin stock has been in free fall since the accounting fraud was found out, and Chairman Charles Lu was ousted along with several other directors.
The infighting continued last week and this time it might actually help shareholders of Luckin stock in the U.S.
On Aug. 3, one of those formerly-ousted directors, Li Hui, petitioned the company to get rid of two of Lu’s supportive directors. He also wants to reinstate Sean Shao, a former director who originally investigated the founder Charles Lu.
Li Hui controls over 11% of Luckin Coffee through his company Centurium Capital. He sent a very detailed petition to the company. He filed a form with the SEC listing his concerns about the independence of the board from its founder Charles Lu, even though Lu left the board on July 5.
As a result, Luckin Coffee acted. The two women “independent” directors whom Lu supported at the time of his ouster resigned. Luckin Coffee also set up a new Extraordinary Meeting for shareholders to be held on Sept. 2 to vote on reinstating Sean Shao.
Boardroom Drama and Luckin Stock
Let’s step back a bit. First of all, NASDAQ delisted Luckin Coffee as of mid-July. Second, the stock trades only on the bulletin board. In effect, it has no requirement to file any documents with the SEC. Fortunately, it is still doing this.
This was right after the board ousted Charles Lu on July 5, although Lu seems to appointed two new directors as “independent.” These were Ms. Yang and Ms. Zeng.
Third, in early July the new board, after Lu was ousted, put Luckin Coffee into “light-touch” Joint Provisional Liquidation (JPL) in the Caymen Islands. The parent company is actually based in the Caymen Islands, even though all its operations are in China.
The board still runs Luckin Coffee under the supervision of the JPL liquidators. From what I can tell, this is the equivalent of Chapter 11, rather than Chapter 7. In other words, the JPL liquidators now control the founder’s shares (Charles Lu) and they effectively control the board, as long as the two “independent” Ms. Yang and Ms. Zeng weren’t aligned with protecting Lu’s interests.
Now on Aug. 3, Centurium Capital said he wants Yang and Zeng out. He also wants Sean Shao put back on the board. Immediately Ms. Yang and Ms. Zeng resigned. They apparently didn’t want the heat of going through an Extraordinary Shareholders meeting vote.
How This Affects Luckin Coffee
So far there are no financial results for the company for 2019. Luckin Coffee said on June 15 that it could not file its 2019 results pending the results of its internal investigation. However, on July 5, its “estimated pending unaudited cash” was $780 million. Most of that is in China, but this has not been reviewed by the auditor.
Moreover, Luckin Coffee is not in liquidation. It is in “negotiation and restructuring” of its financial obligations. Meantime it is still conducting business.
“The Company is and will continue to be committed to offering products with high quality, high affordability and high convenience to its customers,” according to a statement.
Now if Sean Shao back returns to the board on Sept. 2, there is a chance that shareholders will actually get information that is truthful. Moreover, he seems to be the only director that Centurium Capital trusts, so I suspect he will get appointed Chairman.
This means that the Luckin stock has a chance, so to speak. If the cash is still there, and the financial picture improves, maybe the stock can start to rise.
What Luckin Stock Might Be Worth
If you read my previous article on Luckin Coffee, you will see that the company has $400 million in convertible senior debt due Jan. 15, 2025. I suspect these notes are in default. After $780 million in cash, that leaves a potential value of $380 million.
But let’s be real. The company is going to pay some fines from the Chinese government, according to the Wall Street Journal. Moreover, the liquidation and boardroom turmoil probably took away a lot of financial assets from the company, including suppliers, customers, banks, lessors, etc.
Therefore, I suspect that its real value is probably less than half of the $380 million after the senior notes. Let’s call it $180 million. Since there are effectively about 252 million ADRs outstanding, that puts its equity value at 71 cents per share.
What To Do with Luckin Stock
However, I suspect the company will have to appease debt holders with new shares. That would probably raise the number of ADRs by at least 30% and could be as high as 50%. So there would be between 328 million and 378 million ADRs. Let’s call it 350 million to keep things easy. Therefore, $180 million in equity divided by 350 million ADRs puts LKNCY stock’s value at 51 cents.
Here is what I recommend. Wait for the Luckin stock to fall below 40 to 50 cents per share. That is effectively over 75% lower than today’s price of $2.12 for Luckin stock.
At that point, you might be getting a bargain. This is only an estimate, not based on solid numbers, so buyer beware. But now that a truly independent director might return to Luckin Coffee’s board, shareholders can believe the company’s numbers going forward.
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.
