When I last wrote about Luckin (OTCMKTS:LKNCY) stock, I had warned investors to stay away from the embattled Chinese coffee company. However, it doesn’t look like a lot of people heeded that advice. Almost a week after getting relegated to the pink sheets, Luckin stock more than doubled.
After admitting to fraudulent practices, the company had to make sweeping changes to its C-suite and had to face the ignominy of a delisting from Nasdaq, all the ingredients for Luckin stock to make its way to the bottom of the barrel. However, trading volumes remained solid, defying bearish expectations.
But I believe that even the most ardent of bulls may have had enough at this point. Chinese regulators are in no mood to spare the company and are readying penalties.
More importantly, we still don’t have a clear picture of where the company is heading since there is a lot of third party influence in its management affairs at the moment. That’s why it is best to stay away from Luckin stock despite any impulsive urges.
Trouble in China Spells Doom for Luckin Stock
Before the last few weeks, we had a rough idea of where things are heading for China’s version of Starbucks (NASDAQ:SBUX). Luckin faced humiliation in the U.S., but many felt that it would not have the same fate in its native country. That’s due to the perceived lax regulatory environment in China.
However, Chinese regulators are readying the swords for Luckin. The State Administration for Market Regulation has been investigating the case since April. It has already announced that Luckin has violated fair practice laws. The Chinese regulatory body said it was taking measures to deal with the unlawful conduct, but did not divulge any details regarding the penalties.
Suffice it to say, Luckin is in a lot of trouble.
The issues back home highlight the company should not hope for any reprieve from its native state. Its legal problems are only starting, as several probes are going on regarding its activities, and each one of them will have dire consequences on its future and operations.
Where Do We Go From Here?
At this point, anyone interested in Luckin Cofee will want to know what’s happening next. But with so much uncertainty regarding the company’s future, it’s hard to predict.
Only one thing is for sure; there is no easy path to profitability. If you look at the numbers in light of the accounting scandals, although store count snowballed, they did not contribute much to revenue. That means there is an inherent problem in the company’s business model.
If we hone in on liquidity, the company should have some cash leftover from its convertible note and equity offerings earlier in the year. Luckin Coffee raked in approximately $865 million from the offerings, while surplus funds amounted to $700 million in 2019 third quarter.
That is enough liquidity for the company in the short term, but there are a few assumptions here. If Luckin manages to turn it around, then shareholders have something to gain, and it will start making money before running out of it.
In the interim, the company needs to improve its business model and close unprofitable stores. If it manages to do so, then it can have a prayer of becoming profitable again.
Unfortunately, we still don’t know how much Luckin will have to pay Chinese regulators in the shape of penalties. If that is a sizeable sum, then it could lead to going concern issues. That may mean shareholders get nothing after regulators force the company to pay off corporate debt.
My Final Word
Since I last wrote about Luckin stock, things have gotten worse. Chinese regulators are in no mood to spare the company and want to make an example of this case. For too long, several countries around the globe have called out corporate malpractices in China.
As a result, the Chinese markets do not command the same level of confidence as the U.S. exchanges. The country wants to change this image. Unfortunately, Luckin will face the brunt of these efforts. If the penalties are too high, we could be staring at a Luckin bankruptcy. If there are not too harsh, the company could pay them, restructure, and live to fight another day.
In closing, there are too many unknowns at this stage concerning Luckin stock. I would suggest any investor that values their capital to stay away before things become clearer. Then again, it will take a lot to convince investors to pour capital in your company having a scandal-ridden past, with or without a turnaround.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan 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. Faizan does not directly own the securities mentioned above.