Some investors are attracted to Chinese beverage chain Luckin Coffee (OTCMKTS:LKNCY) like moths are drawn to a bright light at midnight. Investors should know better, though, and resist spending their money on shares of Luckin stock before they get burned by the hot bulb of reality.
Luckin thinks of itself as China’s Starbucks (NASDAQ:SBUX). However, the comparison is a lame one. Luckin’s concept has only two things in common with the Seattle-based coffee icon.
Item one is the company serves coffee. Item two, Luckin has a bunch of locations across China. In fact, at around 6,000 locations, it has more locations in that country than Starbucks, which wrote the book on flooding an area with shops.
But don’t let that statistic fool you. Understand that any numbers associated with Luckin must be viewed with skepticism. Why? Because Luckin boasts one attribute that Starbucks doesn’t: a history of fraud.
That’s right, Luckin engaged in fraud.
The $300 Million Scam
Luckin Coffee posted strong numbers for 2019. Unfortunately, it was fiction.
The scheme to report inflated performance figures became known in January and Luckin officials denied they committed any wrongdoing. About three months later, after an internal review, Luckin acknowledged the scheme boosted its performance by $309 million. An investigation by regulators in China found that the strategy involved people at other companies and had the goal of deceiving investors and enriching insiders.
“The China Securities Regulatory Commission (CSRC) – that country’s equivalent of the SEC – said it’s looking into the revenue misstatement scheme at the coffee house operator,” my colleague InvestorPlace Todd Shriber wrote on Aug. 25. “The hits don’t end there. China’s State Administration for Market Regulation is investigating two entities and a third party for their role in the sales inflation fraud.”
Luckin isn’t alone under the spotlight. Shriber also wrote that 156 Chinese companies listed on U.S. stock exchanges were under some form of investigation by U.S. regulators.
Meanwhile, Luckin has made changes to its C-suite. And Chinese officials recently levied fines of about $9 million in connection with the fraudulent accounting scheme.
I’ll leave it up to you to decide if that fine fits the crime.
The Impact on Luckin Stock
Of course, all this has taken a toll on the company’s shares.
Trading of Luckin stock on the Nasdaq was suspended on June 29. The suspension came about 13 months after the company launched its initial public offering. The stock was delisted by exchange officials and now is traded as an over-the-counter stock.
Over the last year, stock in the company peaked at $51.38 per share. The stock’s 52-week low was a rather anemic 95 cents.
On April Fools’ Day, Luckin stock was selling for about $26. The next day it was down to $6.40 after the company confirmed the scandal.
Currently, it is trading around $4.50.
Speaking of the company’s performance, we really can’t say what kind of earnings the firm is posting these days. The company has not reported since November 2019 – nearly a year ago. This lack of information should be troubling to serious investors.
The Bottom Line
LKNCY has recovered to the upper reaches being a penny stock. This improvement indicates bargain hunters are willing to bet that Luckin Coffee could be a profitable play.
Traders who held their noses and bought LKNCY on the bottom of the barrel gained if they timed it right – and sold. But buying Luckin Coffee really is more of a gamble than an investment. Putting money on a company with admittedly fake earnings numbers – or no numbers at all – is a fool’s errand. Moreover, remember that government oversight of investments in China is paltry at best.
Avoid Luckin stock. Luckin is a company that does not deserve even fleeting consideration until investors can get an accurate sense of the company’s performance and whether it has been reformed.
On the date of publication, Larry Sullivan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Larry Sullivan is a veteran journalist in Florida who has covered banking and finance for several years. He is a former investing editor at U.S. News & World Report in Washington D.C.