Although the glory days of Luckin Coffee (OTCMKTS:LKNCY) of 2019 are over, the stock is still a trader’s favorite. Shares rose 11% last week and 35.3% in the last month on no news. Luckin stock may not suit buy and hold investors but may still reward speculators who trade it.
What are Luckin’s near-term prospects?
Luckin Stock Cleans Up
In July, Luckin changed its Board of Directors and appointed a new Chairman to the Board. It added two independent directors following the extraordinary general meeting of shareholders on July 5. As a result, Ms. Jie Yang and Ms. Ying Zeng are independent directors.
Mr. Jinyi Guo, formerly the Acting Chief Executive Officer, will become CEO and Chairman of the company. The executive changes bring hope for needed changes in the business. The new executives have experience in the relevant areas as venture capital. Mr. Yang Cha acted as a venture partner for several venture capitals. He worked at non-profit organizations regulated by authorities in the United States.
Mr. Feng Liu is a professor for Accounting Studies and Xiamen University. And Ms. Jie Yang has a deep understanding of political science and law.
Headwinds
While the leadership changes may improve Luckin’s long-term prospects, its short-term troubles are headwinds for investors. The company faces a class action. After fraudulent transactions made by its former CEO, Ms. Jenny Zhiya Qian, it paid fines of just $9 million. This is despite the Special Committee finding the company made up some of its revenue figures. It inflated net revenue in 2019 by RMB 2.12 billion. It also inflated its expenses by RMB 1.34 billion in the period.
Author Todd Shriber said, “Shao’s reappointment was positive because it indicates the company, once plagued by corruption at the top, is prioritizing independence on its board.” With a small fine paid and improving leadership, this penny stock has the potential of doubling from here. Investor confidence might build from here. If that happens, the stock will attract buyers willing to bet on the turnaround of a firm once thought of like the Starbucks of China.
At the end of Q3/2019, the company had USD 775.6 million. In this filing, the company said it had cash and cash equivalents of $780 million. The company increased its cash balance by $158.8 million after selling convertible redeemable preferred shares in April 2019. Looking ahead, dwindling cash levels will threaten the company’s liquidity.
Opportunity
The strong cash balance on hand, excluding future fines and legal settlements, will let Luckin Coffee invest in the business to lower cash burn. Besides, with the class action taking at least a few years to settle, the firm may focus on growing the business.
Luckin grew rapidly by opening unique storefronts, advertising effectively, and offering discounts. Covid-19 hurt the same store sales but it is no longer a threat in the region.
On Sept. 18, Luckin Coffee appointed Marcum Bernstein & Pinchuk as its new independent auditor. Having fresh eyes on the books should help the company discover any “funny” numbers on its balance sheet. Still, chances are low that the company has any worse news to report. Looking ahead, fortifying its balance sheet, and having the checks and balances will improve investor confidence.
Risks
Over-the-counter stocks are thinly traded and get less news coverage. This will hurt stock liquidity and limit and investor’s holding size. So, go ahead and speculate on a small position. That would reduce the daily trading liquidity risks. For example, if the stock starts to drop quickly, investors may sell all shares during the trading day.
Investors who lost plenty by buying Luckin at its highs may still want to trade the stock on the bounce and sell if it dips. Speculators looking for a cash-rich firm may bet on the company turning its business around. If it ever regains compliance to listing on the Nasdaq, the stock could rise further.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
