Luckin Coffee (OtherOTC:LKNCY) and Luckin stock have become a cautionary tale in the stock world. It would seem that this company might have gone to zero by now, yet it sits at $2.50 as of this writing. Speculators have bumped it up on volume related to an upcoming Sept. 2 meeting.
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Shares will likely rise on Monday and Tuesday as markets open and the Sept. 2 meeting nears. If you’re a betting man, it might make sense for you. There is going to be action there. But for investors hoping this company will miraculously turn around, there is no reason to hold onto such hope.
Board Shuffling
On Sept. 2 Luckin Coffee will hold a special meeting to reinstate Sean Shao to the Board of Directors. Though announced on Aug 3., speculators seem to believe that his reinstatement portends a reversal of fortune for Luckin Coffee. Two other board members, Jie Yang and Ying Zeng, announced their resignations from the board on the same date, Aug. 3.
Investors and curious onlookers, myself included, are having a hard time making sense of what this all really means. It seems to be a wild soap opera in any case. Such drama is best left alone.
Chinese Regulators Promising Punishment
U.S. regulators moved quickly to delist Luckin stock from exchanges soon after the scandal broke. However, no penalties or other legal actions have been imposed by U.S. regulators at this point.
China’s Ministry of Finance has promised to reprimand the company and likely impose legal measures. A bureau within the Ministry of Finance has said it will penalize two of Luckin’s Chinese subsidiaries. The U.S. Securities and Exchange Commission is also undertaking its own investigation into Luckin’s accounting fraud.
Whatever the outcome of all of the investigations, Chinese firms will continue to suffer repercussions. Calls from U.S. investors to delist all Chinese shares from U.S. exchanges of companies which refuse U.S. audits will grow louder. The Holding Foreign Companies Accountable Act has not progressed further toward law since May 22. Should the Act become law, Chinese companies will become much more transparent in the U.S.
Financials Don’t Really Exist
Investors curious to understand Luckin Coffee’s operations are out of luck. Of course markets are well aware of Luckin’s falsified sales and shell companies. But further, the company last released financial results in Q3 of 2019.
There have been three earnings quarters between then and now. In hindsight, markets should have been much more skeptical given that Luckin filed financials last so long prior to the scandal becoming public.
There is really very little with which to judge this company from a financial perspective. Investors simply know that it fabricated around $300 million in sales. The truth regarding all else is a mystery.
Luckin Will Wind Down
Luckin stock will end up worthless. Following scandals of this magnitude companies don’t simply cease to exist overnight. Rather, a period of chaos ensues while shares approach zero.
The company is in the process of being dismantled, you and I simply aren’t privy to that process. Shares are going to move around the Board of Directors noise on Sept. 2. And speculators are going to go on and on about how the company is going to turn around.
It won’t. So, dismiss it for the noise that it is.
A Return?
This company would need to do lots of things in order to get back in the good graces of market sentiment. One such catalyst for a turnaround would be listening on a major American exchange. Does that seem likely to any of you reading this? That visceral feeling in your stomach that might have just caused your head to shift back and forth as you thought ‘no’ means something.
The company would need to become a legitimate company doing legitimate business first. Then it would need to post legitimate earnings which could be believed by investors. All while avoiding dismantling, Chinese regulators, U.S. regulators, The Holding Foreign Companies Accountable Act, infighting and all of the other things we can’t see.
But those things aren’t going to come to pass.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
